Paul Krugman: The Lame-Duck Economy

The outlook for the economy is deteriorating, yet economic policy "seems to have gone on vacation":

The Lame-Duck Economy, by Paul Krugman, Commentary, NY Times: Everyone’s talking about a new New Deal, for obvious reasons. In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum, these are hopeful times.

There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now. ...

How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. ... The prospects for the economy look much grimmer now than they did as little as a week or two ago.

Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet ... Henry Paulson ... has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff.  ...

What’s really troubling ... is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.

About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.

About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced ... to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.

Now, maybe letting the auto companies die is the right decision, even though an auto industry collapse would be a huge blow to an already slumping economy. But it’s a decision that should be taken carefully, with full consideration of the costs and benefits — not a decision taken by default, because of a political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead.

Is economic policy completely paralyzed between now and Jan. 20? No, not completely. Some useful actions are being taken. For example, Fannie Mae and Freddie Mac ... have taken the helpful step of declaring a temporary halt to foreclosures, while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition.

But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis. And it’s scary to think how much more can go wrong before Inauguration Day.

Comments

[mmckinl]

The way I interpreted Treasury Secretary Paulson's announcement a that he would not be seeking the second half of the TARP money was that it was a big FU to the all the markets and the economy in general. It seems to have worked that way.

[Pete in Pittsburgh]

This economy is really fucked up. "This sucker's goin' down". Bring on full socialism, maybe even communism, to the U.S.

[Bruce Wilder]

My sense is that the auto industry is not really threatened by the time. There may be some dramatic events in the interim; my sense is that General Motors is gradually coming round to the conclusion that it will have to enter Chapter 11 bankruptcy, just to gain the legal tools to resolve its unstable relationship with Cerberus, GMAC, and the various dealers (including Chrysler's dealers).

But I don't think there's a point of no return in the next 90 days. The auto industry would shut down for the holidays, in any case. This year, it will be a long holiday, and necessary to control inventories.

If anything, revelation of the dire state of things in the lame duck session, and its long exposure over the holidays and the early days of January, will work in the auto industry's favor, politically. The time for deliberation will be valuable.

Ford is probably not going to go bankrupt, as dicey as its financial condition may be; GM's bankruptcy and liquidation of Chrysler relieves the competitive pressure on Ford, which is in the fortunate position of being near the end of its model renewal cycle, and therefore looking forward to a favorable cash cycle. Federal aid can be injected into GM-Chrysler as debtor-in-possession financing, and into GMAC as a bank.

It's ugly, and may all play out badly, but I doubt that the short time is a critical hazard.

[Easy Money]

Q: What's worse than the great depression?
A: Weimar hyperinflation.

Just ask the Germans, and more recently, Zimbabwe.

What if a reckless spending cure is worse than the disease? Apparently, we have to take it on faith that these geniuses at the Fed that brought us the credit crisis can save us from the hyperinflation that would loom after they spend like crazy.

[Bruce Wilder]

Deflation seems to be coming on with stupendous speed. The full realization of the implications of a major business contraction is just beginning to settle in. I fear a real stock market crash -- a high volume tumble -- may be in the offing.

The Fed may have been a bit too cautious about sterilizing its rescue facilities, and a little too reticent in its recommendations regarding a fiscal stimulus.

[Bruce Wilder]

Easy Money: "What if a reckless spending cure is worse than the disease?"

The actual disease is pretty bad.

On the other hand, hyperinflation requires a remarkable degree of fiscal incapacity -- the inability or unwillingness to collect taxes -- and not just the ability to spend money. Last time I looked, the U.S. Federal government had excellent credit, and considerable untapped capacity to levy and collect taxes.

The clear and present danger is damaging and frightening enough, without imagining bogeymen in the night, as an excuse for failing to meet the real crisis.

[Dickeylee]

So what's going to be worse, the 8.1 earthquake of a GM bankruptcy, or the Tsunami that sweeps the rest of us out to sea?
Somewhere in another thread of comments it was mentioned that we're in a scorched earth policy in our zeal to destroy Detroit, and it was just too bad it happens to be our piece of Earth.
Two more months of this Goldman Sachs administration, it's Oh. My. God. time.

[Oupoot]

Even if GM & Ford fails, my guestimate is that 75% of the value adding and employment will be retained in the industry in the post-collapse era, but not necessarily at the current locations of production facilities. Whether it is Toyota/Honda increasing its US production base, or them buying GM plants and continue production at the current locations but with a smaller work force and at lower costs, or a trimmed down GM or Ford with less obligations and more competitive cars, or something else. The current business approach of GM is simply not competitive enough and needs to change. But the current management and obligations may actually be big obstacles in achieving this and a forced bankruptcy the only means of achieving this.

The actual business of producing cars for the US market will continue, and given political realisties, most of this will still be in the US.

[ECONOMISTA NON GRATA]

"... The prospects for the economy look much grimmer now than they did as little as a week or two ago..."

This is all dependent on your view. The worst case scenario has materialized and you could say that we are, in the perfect storm. It's not so much that the patient is comatose, it's that the (witch) doctors are comatose. This global economic collapse will prove to be the greatest opportunity for mankind to redeem itself on this planet.

I don't know if you've noticed, but there appears to be a total failure of the entire global institutional community, government, manufacturing, financial, servicing, religious, etc etc. What we are seeing is not a loss of confidence, it is a loss of faith and as we all know, faith is for skeptics.

Perhaps, now we can get to the business of living like human beings, instead of a viral infection on a living planet.

My best regards,

Econolicioua

[datadave]

Paul Krugman has made a good name for himself attacking the Bushwhacked economics that helped lead our nation into this crisis. I voted for Obama too but the lame-duck factor is being offset by growing disappointment that Obama's economic team is still unsure. (And I beleave Obama's caution is for good reasons.) Michael Isikoff on C-Span only a few minutes is pointing at Obama's lack of a 'team' is the reason for the market's turmoil. And I agree with Krugman that current conditions are more a lame-duck reality...but!!!

Picking Larry Summers for Treasury? The guy supported Phil Gramm! (But maybe Obama's opened his eyes about that by now..) The conservative "market" wants Summers or Mr. G. (sp?_) the two insiders of Wall Street or Paul Volker, another retread. Joe Corsine is an outlier pick being 'vetted' perhaps...but who is doing all this leaking? It's given us all headaches...perhaps due to the Clinton retreads leaking every little vetting?

Just saying! I admire Krugman but being a little too political and perhaps wrong he is occasionally. (like about enron for example.) Krugman's been soft-pedaling this 'crisus' saying we'll only have 8 percent unemployment next year. What a joke! It's already 11 percent and more if counting the true unemployment segment (those unable to get unemployment checks but unemployed none the less_).

"s**t or get off the pot" is an expression that Obama can add to his repertore.

[bakho]

Toyota and Honda will NOT buy US auto plants. US auto plants are NOT designed for the Toyota process. Toyota is already contracting with Subaru to make Toyotas.

German Parts plant bankrupt:
Getrag Transmission Manufacturing LLC said Monday it filed for Chapter 11 bankruptcy protection for its Tipton Indiana facility after Chrysler LLC pulled out of a financing options agreement and left the plant without a primary customer.
The $530 million facility was being built for the sole purpose of making dual clutch transmissions for Chrysler, so when the automaker terminated the deal last month, the German manufacturer said it was forced to stop its operations in Tipton and cancel the project.

GM Closing US plants importing Korean cars:
An all-new version of GM's Korean-made Chevy Aveo subcompact is coming, Wagoner said. GM will also build an all-new 1.4-liter turbo engine for its new compact cars. Wagoner said GM will close four truck plants, two of which make full-size SUVs and pickups. Those two plants are located in Janesville, Wis., and Oshawa, Ontario. Another plant in Moraine, Ohio, which builds the Chevrolet Trailblazer, GMC Envoy, and Saab 9-7X midsize SUVs will be shuttered as well as a medium-duty pickup plant in Mexico. Sales of the Trailblazer and Envoy—once big moneymakers for GM—are off at least 33% this year. "If the market is going away, there's no sense making the vehicles," says James N. Hall, principal of 2953 Analytics, a Detroit consulting firm.

Europe also affected:
A report issued this week by the European Automobile Association found registration for new passenger vehicles in Europe down 8.2 percent last month compared to last year. Two large auto parts makers in Germany this week announced "significant" layoffs of temporary workers, and the German auto giant Daimler said it would close its Sterling Trucks division, shuttering plants in Ontario, Canada and Oregon.

[Lars]

There is a lot Obama can do in the next two months. If he wants to live up to the high expectations his supporters see, he could announce his intentions to help with the financial crisis by pledging to hold off raising taxes for a year or so to evaluate and set in place whatever his "team" deems necessary to address the situaton. Lay out some sort of positive steps which could go a long way to bridge the lame duck period and give people and markets hope that help is on the way rather than more uncertainty.

Just because the current lame duck administration can't calm the waters doesn't mean the next one can't do something now to help.

We need leadership to work through the problems we face.

[bakho]

Riddle me this? IF the Big 3 go under, what will happen to the infrastructure and economy in those cities and towns that make parts for Big Auto?

In many cases these companies are the largest employers in a county. If there are no jobs, the housing market in those places will collapse as will the service industry. That will mean further loss of revenue by cities and towns and they will be strapped to pay for increased social costs associated with high unemployment. If those jobs need to go, a restructuring is necessary. The transition costs have to be paid. Is the alternative a 21st century version of Grapes of Wrath?

[ken melvin]

"it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall).

Did the Japanese economy contract to its actual size? Is that a good part of what is happening in the US now? A lot of what we've been calling economy wasn't.

[Credit Where Credit is Due]

Paul..."In particular, panic has returned to the credit markets..."

This is the main issue, and it is not being addressed. Overseas savers were not paid back by private borrowers, and now they won't loan any more to private borrowers. Only public borrowing, or public guaranteed borrowing, is still taking place in significant amounts.

To date, no organized effort has been made to reassure overseas savers that private borrowers will pay them back in the future. Instead of being reassured, overseas savers won't even loan very much to private overseas borrowers. Credit markets don't work unless repayment of loans is tendered. Savers won't loan to people who don't pay them back. Especially at interest rates so low that they can't possibly cover the expected default rate.

[im1dc]

Our Profession Krugman is at the Pinnacle of his Profession precisely b/c of his clear insight into this economy as shown by today's Editorial.

It is another in his lengthening series that are brilliant, prescient and cause me to literally cling to every word, sentence and paragraph.

Paul Krugman is much too nice to come out and say what is crystal clear to him and to many of us on this blog: Obama is thus far failing his first challenge as leader of ALL THE PEOPLE.

Specifically, Obama's failure to act publicly and privately to guide and put his signature on this economic crisis is the first failure of his tenure and it is a MAJOR failure that will impact millions of Americans and perhaps millions of others around the globe and who knows for how long (Krugman suggests a decade in the editorial).

Obama must come out of his 'undisclosed location' and LEAD the nation morally, ethically and with political certainty, i.e., he will have to take a RISK with his name on it.

That is what, imo, Our Professor Krugman is telling America today in his Editorial.

In effect, PK writes that Obama's first act as President-elect should be to make a call to Majority Leader S. Reid and Speaker Pelosi to rally the DEMS and like minded Republicans around an immediate rescue plan for the Auto Industry, no more waiting, ACT.

Borrow from FDR's words to his economic team: DO SOMETHING, ANYTHING.

Also, Krugman is advocating that Obama's second act should be to publicly voice his support for an Auto Industry bailout using $25Billion of the $700Billion bailout funds, thus forcing the Bush Administration and Congress into taking action, i.e., money is available just not the political will to use it.

Barring those two immediate moves Obama will have failed his first crisis as President.

Not a good omen. And it will have lasting devastating effects upon the American economy.

Metaphorically, the Bushies tossed Obama a high inside fastball and Obama has not swung at it. He's not struck out yet but the count is 2 balls and 2 strikes. Obama will get a couple more pitches to look at, but he has to take a swing b/c its the bottom of the ninth with two outs, game over if he strikes out.

That is what I believe Nobelist Krugman is telegraphing to the Obama camp, America and the world.

I sincerely hope Obama's team will listen to PK. Let's pray Obama does not go into his 'let's talk it over and come to a compromise' mode b/c as President he must ACT not fiddle.

I believe Obama will do the right thing in a timely fashion. That is what I voted for anyway.

It may involve extracting QUID PRO QUO concessions that sting from the Auto Makers (sell the Executive Jet fleets, slash CEO salaries to $5 Million, etc.) and the UAW (wage and benefit cuts NOW for retirees and full wage workers to the level of new hires to keep their jobs) that have not yet been offered or discussed, but I do believe a deal can be struck. Indeed the deal may have to be structured, i.e., you get this much for doing A and some more for doing B and all of it for doing C, but you must do A, B and C to get the money, if not then your fate awaits.

Remember from the Chrysler bailout of decades ago if the auto makers repay the Fed Govt loans they can and WILL buy Executive jets again and the UAW can always demand a return to their previous benefit and salary levels.

[lonesome moderate]

datadave: Paul Krugman has made a good name for himself attacking the Bushwhacked economics that helped lead our nation into this crisis. I voted for Obama too but the lame-duck factor is being offset by growing disappointment that Obama's economic team is still unsure. (And I beleave Obama's caution is for good reasons.) Michael Isikoff on C-Span only a few minutes is pointing at Obama's lack of a 'team' is the reason for the market's turmoil. And I agree with Krugman that current conditions are more a lame-duck reality...but!!!

Picking Larry Summers for Treasury? The guy supported Phil Gramm! (But maybe Obama's opened his eyes about that by now..) The conservative "market" wants Summers or Mr. G. (sp?_) the two insiders of Wall Street or Paul Volker, another retread. Joe Corsine is an outlier pick being 'vetted' perhaps...but who is doing all this leaking? It's given us all headaches...perhaps due to the Clinton retreads leaking every little vetting?

Well, who are the alternatives? Barney Frank? Ben Bernanke? Mark Thoma? If there's a perfect candidate hiding somewhere then I'd love to hear about it, and probably Obama would too. We need someone who's extremely savvy and trusted about both economics and politics, in Washington, Wall Street, and Main Street. Oh, and (s)he needs to be able to invent a whole new system of finance for this country, since the old one doesn't work anymore, and do it fast, and get it through Congress fast. I've seen a lot of criticism of Treasury Secretaries past and present here in the past few days, but I haven't seen anyone who's been brave/stupid enough to suggest their own choices. The only candidate who has inspired any enthusiasm at all is Geithner.

[anne]

http://krugman.blogs.nytimes.com/2008/11/20/california-energy-memories/

November 20, 2008

California Energy Memories
By Paul Krugman

An interesting twist in the Treasury Secretary story: people are bringing up the fact, which I'd forgotten, that Larry Summers assured Gray Davis, late in December 2000, that market manipulation was not an important factor * in the California energy crisis.

In fairness to Larry, this was very early on, and the famous Enron tapes didn't surface until years later. On the other hand, by early December 2000 I was already writing columns ** suggesting, based on economic logic and circumstantial evidence, that market manipulation was indeed a major factor in the power crisis. Why wasn't Larry paying attention to the same evidence? (Actually, diagnosing market manipulation in electricity was one of the best defying-the-mainstream calls I've made in my time at the Times, right up there with getting it right on the housing bubble and the dishonest case for war.)

* http://www.thedailybeast.com/blogs-and-stories/2008-11-12/larry-summers-and-enron/

** http://query.nytimes.com/gst/fullpage.html?res=9506E1DD163FF933A25751C1A9669C8B63

[Patrick]

im1dc: You *do* realize that Obama has no power or ability to do anything until after inauguration, right?

If anything, he's smart to keep his mouth shut because whatever plans he might pre-announce are sure to be the subject of sabotage attempts by the outgoing administration.

As we saw with Paulson yesterday, the Bushies intend to flip us all the bird on the way out the door.

says...

bakho

"Toyota and Honda will NOT buy US auto plants. US auto plants are NOT designed for the Toyota process."

Can you provide some specifics? We agree completely that US automakers are defective on many levels. The assembly plants of the big 3 are not the problem, though, they are up to snuff. Why are the big 3 assembly plants physically incompatible with lean manufacturing?

[anne]

Lawrence (can I call you Larry?) Summers, is myopic and abrasive enough to have methodically insulted African Americans and women at Harvard, let alone to have failed to understand energy market manipulation when the manipulation should have been self-evident or Paul Krugman and Frank Wolak could have been read. Beyond that, Larry's my guy (sort of).

[robertdfeinman]

What is going on now is not a parallel of 1929-1933. Trying to fit the events into this scenario is blinding us to what is really happening.

I don't know what this might be, but there are a few clues. The most important one, I think, is the price of oil. Demand seems to have fluctuated by about 5% on a worldwide basis, but the price has fluctuated by 100%. Theories of price inelasticity don't seem to be adequate to explain this degree of change. There must be some other mechanism at work. Perhaps it is market "manipulation", perhaps the amount of oil on the world markets is being misreported, or perhaps there is something else going on.

The same thing is true of the drop in the world's stock markets. David Leonhardt has a posting on the Economix blog (http://economix.blogs.nytimes.com/2008/11/20/stocks-and-earnings-racing-to-the-bottom/) where he says stock prices are tracking corporate earnings and are therefore not really cheap.

But sharp earnings drops like this don't usually persist for that long. Eventually the world will start needing steel, aluminum and grains. Markets should be able to anticipate this, but are acting as if the only thing to be considered is the prospects for the next quarter. This seems to indicate that program trading and some sort of squeeze in the assets of the big trading firms is causing them to have to dump their positions.

Like oil, the root causes need to be investigated better. The average investor can panic or be swayed by "sentiment", but this can't be the whole story for the big players. Knowing what is really driving prices is necessary if the appropriate steps are to be taken to counter the problems they are causing.

Lazy reporters and business analysts aren't doing their jobs.

[anne]

http://krugman.blogs.nytimes.com/2008/11/21/pushing-on-a-string-2/

November 21, 2008

Pushing On a String
By Paul Krugman

A case study in ineffectuality [Tightening]

Bernanke’s problem, and ours. This picture shows the target Fed funds rate, the usual tool of monetary policy; the 10-year Treasury rate; and two rates that actually matter to the private sector, the mortgage rate and the rate on Baa-rated corporate bonds. The Fed has had no success in reducing mortgage rates, and corporate borrowing costs have gone up, not down. Add in falling expectations of inflation, and in real terms monetary policy has gotten tighter, not easier.

[anne]

http://krugman.blogs.nytimes.com/2008/11/20/dont-panic-about-the-stock-market/

November 20, 2008

Don't Panic About the Stock Market
By Paul Krugman

Panic about the credit markets instead. Interest rate on 3-month Treasuries at 0.02%; interest rates on high-yield (junk) bonds over 20%.

This is an economic emergency.

[save_the_rustbelt]

bakho

"Toyota and Honda will NOT buy US auto plants. US auto plants are NOT designed for the Toyota process."

Can you provide some specifics?

Some of the Big 3 plants are state of the art, and some are older (most of the really old stuff has been shut down).

Toyota and Honda want plants where there are few union workers, and the demise of the UAW will allow the transplants to take a very harsh approach to the work force.

The existance of the UAW has kept the transplants more honest in order to avoid organizing drives. If the UAW goes away the transplants have a different playing field.

[quack]

Who stepped on the duck? What was the walking duck, pre-lame duck, economic policy? There was no coherent, comprehensive economic policy.

There was and is ideology and incompetence, but no economic policy by the walking duck or the lame duck. For the love of god, somebody Save Our Ducks!

[calmo]

I see ...dc's clinging, results in a different grab on clingee PK:It is another in his lengthening series that are brilliant, prescient and cause me to literally cling to every word, sentence and paragraph. [I'm of course not literally clinging to every word, but I'm payin attention...to this person who was one of the most forceful critics of Obama, yes? and to each of you who take the time to post here...to find my bearings and make adjustments. ]

Paul Krugman is much too nice to come out and say what is crystal clear to him and to many of us on this blog: Obama is thus far failing his first challenge as leader of ALL THE PEOPLE. [Recall the piece regarding/questioning the outmoded? transitional period...and Obama's first post-election speech noting that there is only 1 POTUS...and that many positions nonetheless have been declared (on schedule, yes? carefully, not impulsively)...and that people-adjustments to the existing power structure implementing/enabling much of the disaster may not be the kind of people you want helping in the transition even if they were competent, "trying to be helpful".]

Specifically, Obama's failure to act publicly and privately to guide and put his signature on this economic crisis is the first failure of his tenure [this is hardly "specific" dc, this is "windy"...and I need to blow back and let you know it, see? Ok, maybe you do us the service of putting a Mach line around PK's piece...letting us see that clingee PK, too, is a little over the top...waiting for the Obama Miracle...but it is us we have to wait for, yes?] and it is a MAJOR failure that will impact millions of Americans and perhaps millions of others around the globe and who knows for how long (Krugman suggests a decade in the editorial).
Ok, clinging on with all the rest of the clingers...

[Credit Where Credit is Due]

Paul..."Panic about the credit markets instead."

Yes, that is the problem. Overseas lenders won't lend to private US entities because recent loans were not repaid. Trust in US banks, rating agencies, and private citizens is gone. Trust must be restored, or foreign lending to US private entities will not resume.

Foreign entities blame the US for this crises. Foreign nations are desperately trying to purge the bad US debt out of their systems. Overseas banks are highly leveraged, and bad US debt has brought them to the brink of insolvency.

We need to establish credit standards that the world has confidence in, and soon. The US has made itself completely dependent upon foreign loans, and is now very vulnerable. This really could be the big one, if the behavior of savers (public and private) is not incorporated into policy models.

Lowering short interest rates will not restore trust. Lowering credit standards to "stimulate" the economy will not restore trust. We cannot "stimulate" our way out of this situation by encouraging borrowers to borrow more with lower rates and lower credit standards. No one will loan to them under those conditions. The only hope is to restore credit to credit worthy private entities at interest rates that cover default/inflation risk.

[calmo]

Nice quack job, q...and ah, who was you before someone stapled those bills to your pre-quack face?
We can be Saved...just try us...throw us another line...we'll get it.
We must.

[The Baron]

robertdfeinman nice link. If you read it though the P/E annualized is still about 16 for the S&P 500, and the 10-yr P/E is only down to about 13. While historical trends hover around 16, looking at the last two big downturns saw P/Es drop to about 5.

If that holds true for this time, and as far as I can tell no one sees any reason for it to be different, and a lot of reason for it to be as bad/worse, then we might expect a bottom around 300 for the S&P 500 and 3,000 for the DOW.

If that doesn't scare you I don't know what will.

[dirtyal]

Two generally unrelated comments:

1) GM is already bankrupt. Look at the numbers. They have not earned any money in the last (almost) four years. They have a negative net worth (look at their balance sheet) of around $50 billion. They have a model that is totally broken and their leadership thinks they are the ones who should show us the new business model? Let's get real with that one.

2) The Fed has other tools available besides lowering the discount rate to zero. They can create money out of the air. They need to tell everyone that they are going to use that tool and not do it on the "stealth" basis that they are already using. If they start to say that deflation is a key concern and that they are going to deal with it, the fear will go away. Sooner or later, IMHO, it will be replaced by an even bigger fear of the appearance of inflation. And that will mean more hard times for most of us. But we need to get beyond the immediate crisis before we worry about the next crisis.

Can January 20 please get here without any more malfeasance from the Bushies?

[Denis Drew]

My answer to the domestic auto manufacturers' financial crisis (the same answer I have for everything) is to legislate the French-Canadian "lite" version of sector-wide labor agreements in the USA. Non-unionized firms (we can begin with just a few industries like auto, airline and supermarket) would be mandated by law to operate under the terms worked out with unionized firms.

If we had had some version of sector-wide in place here, as they do in most modern OECD labor markets and even in many second-world (Argentina) and even some third-world (Indonesia!) markets, the big 3 would never have been in serious finacial trouble in the first place.

You don't see Japan opening factories in Germany with sharply lower paid workers. Here Japan even gets to put much of its medical and retirement costs off on the Social Security system. Japanese and European firms for the most part would have willing paid the same wages and benefits as the pay THEIR OWN DOMESTIC WORKERS (oh, and Detroit's) not to have to ship their autos here -- also because its easier to keep in touch with a market you manufacture in.

[Bruce Wilder]

rdf: "Demand seems to have fluctuated by about 5% on a worldwide basis, but the price has fluctuated by 100%. Theories of price inelasticity don't seem to be adequate to explain this degree of change."

Actually, I think the theory is adequate, and points to the obvious: Hubberts' Peak, aka Peak Oil.

Physical oil throughput is near its all-time (literally, and for all historic and future time!) high, and there's no economic incentive to add or, even maintain, either slack or inventory in the oil processing and distribution net. So, as world consumption (demand) nears this hard ceiling, prices spike.

There's a relationship between petroleum and food production, and we are pushing hard on the available agricultural capacity of the world, as well. And, there are other key mineral resources near their ceilings, as well.

This commodity ceiling is a new economic reality of critical importance. Worldwide economic expansions will tend to bump into this ceiling again, with predictable spikes in relative prices.

[Bruce Wilder]

Maybe, if the Presidential transition becomes enough of a crisis, there will be talk of Constitutional reform, in the direction of establishing a Parliamentary system.

[calmo]

anne, a pillar at this site and a poster I've read for years even before Economisty was born, I do not respond to enough...well, time's up:Lawrence (can I call you Larry?)[can I call you Annie? ] Summers, is myopic and abrasive enough to have methodically insulted African Americans and women at Harvard, [absolutely...and yet Obama...wears it] let alone to have failed to understand energy market manipulation when the manipulation should have been self-evident [so a facade of ignorance by ...Larry the Cunning ] or Paul Krugman and Frank Wolak could have been read. [but only the Executive Summaries maybe...or if the Whole Thing, read at the end of the day, comprehending zip...or if comprehended, not disclosed], Beyond that, Larry's my guy (sort of).[like Larry could be Obama's guy...inspite ofitall...]I am so missing the birds, you know?

[robertdfeinman]

Japanese auto firms are laying off 30-50% of the "temporary" workers. These workers have accounted for an ever larger proportion of the workforce since the stagnation of the 1990's.

This is, I guess, what the goal is for the US. To bring Japanese-style job insecurity to their US facilities. People don't understand the free-rider issue with unions. Even having a small fraction of workforce that is unionized can force other firms to be competitive. The Japanese and the union-busting GOP understand this, that's why the commentators on Fox and the like are all blaming the current problems at the big three on the UAW.

Stephen Colbert got it exactly right the other night:
http://www.colbertnation.com/the-colbert-report-videos/210798/november-19-2008/the-word---mad-men

In response to a critic who said the UAW was a barnacle on the auto industry he said, "right when a ship goes aground we always blame it on the barnacles". Watch the whole thing, it's about six minutes long.

[anne]

"This is, I guess, what the goal is for the US. To bring Japanese-style job insecurity to their US facilities."

What rubbish, the whole point of Japanese economic policy, however much criticized from 1994 being to protect workers and being remarkably successful at that.

[realpc]

"an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. "

It can't be that simple -- when Republicans are in charge for a long time, with their free-market ideology and their low IQs, things eventually go to hell.

If that were true, there would be no Republican party. Well, in Krugman's mind, I guess the Republican party continues to exist only as a haven for morons and religious fanatics.

He seems to be unaware that free-market ideology, mixed with some degree of socialism, has become the accepted norm. Clinton believed in free markets and so does Obama.

Krugman's simple-mindedness is unfailing and persistent. He never wanders off his track for a moment.

[lonesome moderate]

Soooo calmo, who's YOUR guy?

Is this country really so short of talent that Summers is the best of all possible Treasury Secretaries?

[Denis Drew]

Did not Ronald Reagan of all hard headed conservative not go out of his way to lean on Japanese auto firms to ease up the last time American firms were in trouble -- post the late 1970s oil crisis. Where is that common sense motive today? Why can some many people -- even Krugman! -- calmly contemplate killing off America's flagship industries -- especially given that they are being undercut by lower paying Japanese companies who get to foist much of their health and retirement costs off on Social Security which our Big 3 cannot -- NEITHER OF WHICH ANTI-COMPETITIVE CONDITION COULD EVER HAPPEN IN EUROPE OR JAPAN!

[im1dc]

Patrick says...im1dc: You *do* realize that Obama has no power or ability to do anything until after inauguration, right?

Yes, of course, I understand the LEGAL aspects of our transition between US Presidents. BUT, the post was not related to the legal aspects, it was related to the Ethical, Moral and perceived Political aspects of transition in the time of crisis.

Incoming President's have perceived POWER (no sane person wants to incur the wreath of the incoming most powerful person on the planet) and besides President-elects do have the POWER of persuasion, if they choose to use it.

I have read that President-elect FDR and other FDR Administration types looking back at the transition of 1932 felt he should have spoken out and done more sooner to counter and distance himself from Herbert Hoover's then ongoing and public CAMPAIGN to force FDR into supporting the Hoover Plan for US economic recovery from the Depression. I won't bore you with that however b/c RDF has rightly posted above that today's crisis "is not a parallel of 1929-1933."

Sorry if I confused you.

Directly on point however is a newsflash I just saw on CNBC 30 minutes ago: "Speaker Pelosi says doing nothing is not an option for the Auto makers bailout."

It seems Speaker Pelosi got Our Professor Krugman's Editorial message.

Next up Majority Leader S. Reid.

Hopefully followed by President-elect Obama's PUBLIC statement that doing nothing is not a option, bailing out the Big Three will happen ASAP with advise and consent from CONGRESS. (I can hope!)

That will put the ball squarely at 43's feet and Conservative Republicans feet. Their failure to ACT will be seen as a betrayal of American Capitalism, if not treason.

After all allowing the Big Three to go under could LOWER GDP by 4% (the estimate flashed on the screen by Bloomberg, MSNBC or CNBC).

That would be B-A-D.

[calmo]

Credit Where Credit is Due (I cannot tell you how far back your tag swings me...are you an Ancient One, or merely posting from the Old Folks Home?) writes [and I respectfully respond somewhat nervously like so]
Paul..."Panic about the credit markets instead."

Yes, that is the problem. [Uno momento. It B a joke...and we need to pause and digest it, harvesting its nutrition (don't tell me you are havin enough fun, you ain't).......(ok, and chewed a little: recall the Python 'Charge!' and 'Runaway, runaway!' skits)...(last chew: the imperative, "Panic...", cannot B executed without wry smiles allround ...in a similar way that the execution of 'This is a lie.' fails somewhat delightfully...for those of us humor desperados, you know?). Ok momento ova.]
Overseas lenders won't lend to private US entities because recent loans were not repaid. [So a distinction between foreign and domestic lenders...but private and public, not so much...and between HFs and CBs? ] Trust in US banks, [but no runs on banks yet ] rating agencies, [ok, definite erosion here ] and private citizens [careful here...while I suppress impulses to chase down particular citizens (Hank Paulson, Ben Bernanke, Michele Obama Credit where credit is Due..) ok, a gold mine here with that juxtaposition that I must come back to when I regain my composure.] is gone. Trust must be restored, or foreign lending to US private entities will not resume. Ok, Credit, I am somewhat quacked up so don't mind me irreverence if indeed you are 92 and dexterous...I am no pro (see if you can walk straight after a q post...I defer to stronger legs gravity defiers).
China has just shunned the Agencies (setser) for Treasuries...this is the 1st or 2nd largest CB on the planet...fuggetabout private citizens. If you cannot, think about HFs and "unwinding" (ops exp today btw...expect volume)...and know restoration iz so pastit.
Or you B a citizen tiptoe i n g
Around looking for your next step
So different from JDH's (econobrowser)
Next investment.
Tis

[im1dc]

CORRECTION

wrath not "wreath"

[im1dc]

Denis Drew says...Did not Ronald Reagan of all hard headed conservative not go out of his way to lean on Japanese auto firms to ease up the last time American firms were in trouble,

YES, absolutely.

says...

Even if or when labor and health care costs are the same for Japanese and US automakers, the Japanese will still eat the big 3 for lunch.

They spend much much less money to buy parts from suppliers, parts from suppliers constitute 70% of the cost of a car, and they produce higher quality cars. Call it supply chain management, the way, lean production, what have you. Under current operating conditions, the big 3 cannot compete regardless of labor costs.

[Jack]

Personally, I'm suspecting that the current admin is trying to do as much damage to the economy as possible so as to tie the hands of the new admin, as well as potentially be able to blame them for the troubles in a few years time.

Basically, they're working against the interests of the US, imho.

[im1dc]

The Baron says...If you read it though the P/E annualized is still about 16 for the S&P 500, and the 10-yr P/E is only down to about 13. While historical trends hover around 16, looking at the last two big downturns saw P/Es drop to about 5.

If that holds true for this time, and as far as I can tell no one sees any reason for it to be different, and a lot of reason for it to be as bad/worse, then we might expect a bottom around 300 for the S&P 500 and 3,000 for the DOW.

If that doesn't scare you I don't know what will.

Well, I don't now about RDF but it scares me.

I'm hoping the DOW INDU bottom is 6600, assuming: 1) an AUTO Maker bailout, 2) containment of the mortgage mess via the prescription "FDIC Loan Modification Program Guide – "Mod in a Box" by the Chairwomen of the FDIC Sheila C. Bair, and 3) a come to Jesus moment by the banks and bankers who took the $290 Billion bailout thus far from SoT Paulsen (i.e., they lend again).

Link: http://www.fdic.gov/

says...

Also, Japanese companies pay high corporate taxes, which goes towards health care and social security in Japan.

Japan employs a worldwide tax system in which all income companies earn, whether at home or abroad, are subject to the country's effective corporate tax rate of roughly 40 percent.

[calmo]

O lonesome!
U guys are my guys.
You is.

How come you is not quacked up?
How can a real quacker, quack only once?
I call foul!
Twas a mighty post...perhaps the re-load is mightier, and takes that extra time...that B it: quack is training us, preparing us...By the time it gets here we'll be ready for anything.
The great Quack teaches us....patience...not like Krugman who thinks we can just jump to "Panic...about...this."
See?
I'm onto quack...and can just wait him out.
....I could memorize the post while I practice...waiting.
Ok...but time is not up.
I can make Godot look like an amateur, you?
I am a pro waiter...
Not like this...yet...
So......any sightings yet?
It's early...and never too late
Somewhat promising don't you think?
We'll see...
Quackers Up...I just know it!

[kthomas]

Jack, I fully agree.

[Bruce Wilder]

Jack: "Basically, [the Bush Administration are] working against the interests of the US, imho."

And, you first noticed this, when?

[calmo]

Dang.
Jack, but no quack...
...yet..

So, kt (possible proxy quacker) whatof the implication that there was a non-lame duck before Obama (or even before 2006?) is naive (sub-quackable)[dizzzpicable IIRC, you?) is...at the very least, ideologically corrupt...corrupted.... and corrupting?

Ok...still honing my waiting skills, you?
Ok

[Denis Drew]

Says,
Unless you think the car market is some kind of musical chairs game with only one winner allowed at the end, Detroit doesn't have to be the best to sell enough to buyers who want what they are selling to make a profit. Think 1950 Japanese cars and original VW Beetles.

Remember, our international competition had a free ride on US defense technology which used up our best engineers (think SR-71, useless space station, next gen fighters with nobody to fight), while they turned their best people to engineering consumer goods. Maybe now with Obama we can finally turn our swords to plowshares a bit late.

Also take note that battery electric technology which will take over the auto market place over the next decade is much easier to design -- compared with gas engine and transmission technology -- its almost like designing digital compared to analog; which electric motors are inherently as reliable as jet gas engines -- and which are expected to yield 100+ mpg. So there is no reason to snatch defeat from the jaws of (high tech luck?) victory now.

[Bruce Wilder]

By the way, has anyone noticed that Citigroup has fallen to the canvas, and may be out for the count?

Looks like there's a high probability of another late Sunday edition of the Hank and Ben show! with a special appearance by Sheila Bair!

[esb]

The word over at GS today is that Paulson altered the operation of the TARP so that everything can find a clearing price before January 20, allowing the new President the gift of clarity from day one.

It certainly looks like everything is moving in the direction of clearing now, even if the clearing numbers are zero in many instances.

(The reason it is a gift is that the new administration will not need to waste time attempting to oppose the clearing paroxysm and can reconstruct from day one.)

The attempt to keep the dead alive has ended.

[hari]

I was just posting ...Citigroup will either merge...or Ch.11 will become inevitable.

[calmo]

I am in love with this honesty, diligence, bald-headed boldness: im1dc says...

CORRECTION

wrath not "wreath"

George the Shorter, famous for so many things literary, appraised Steinbeck's book in a mercifully short essay as "Corny"...another not only self-fulfilling prophecy but self-reflecting one...but were we payin attention?
But quack was...apparently.

[kthomas]

BW, not only have I noticed, I am buying C next week. I'm debating how much to buy though, because I want to use some of my largess to buy a new home in Walnut Creek, CA. The drop in home prices is mind-boggling.

Citi stock is an incredible bargain right now. Last time I saw prices like that, I think I was 12 years old (yes, I tracked stocks then). I remember it well....'82, BAC and C were at 8 and 10 respectively. I called my grand father and said, "Hey! Buy." Now the ole bugger is sitting high and mighty at Dell Webb. Buying oppurtunities like this happen every 20 year or so.

[esb]

WFC is the better position if you can get your price.

[calmo]

The gods are chuddling with Bruce I see:with a special appearance by Sheila Bair!Whooo Hooo...and who could remain composed in circumstances like that?

quack is who.

[hari]

kthomas - walnut creek was my home (away from home) 1956-59. Hope the creamery (greyhound station) still there in centre of main street.

[esb]

Someone above mentioned a high volume crash.

In such an event, stink bids (limit buys touched by the loving fingers of market sells) produce fortunes one year out, sometimes even one week or one day out.

[robertdfeinman]

Anne:
Your overuse of the word rubbish doesn't do much for the quality of the discussion, especially since you, apparently, having been reading the news.

Japanese carmakers continue downsizing
Japanese carmakers plan further downsizing to cope with the financial crisis, with Toyota cutting 3,000 temporary jobs and Honda reducing its global production, officials said Friday.
...
Mazda, Japan's fifth largest carmaker, said Thursday it would scrap 1,300 temporary jobs, while Isuzu said it would axe 1,400 domestic posts.

Nissan Motor has decided to cut production and axe 3,500 jobs worldwide.

Also this:

Toyota Will Cut 3,000 Jobs in Japan as Car Sales Fall

Japanese companies, which focused on hiring easy-to-fire contract workers during the 15 years of lackluster economic growth that followed the bursting of the bubble economy in 1990, are now shedding them as the global recession cuts demand. Temporary and part-time workers make up 33 percent of Japan's workforce, up from 20 percent in 1991, according to the Labor Ministry. [my emphasis]

Now tell me again about the favorable labor policy in Japan.

[btg]

"2) The Fed has other tools available besides lowering the discount rate to zero. They can create money out of the air. They need to tell everyone that they are going to use that tool and not do it on the "stealth" basis that they are already using. If they start to say that deflation is a key concern and that they are going to deal with it, the fear will go away. Sooner or later, IMHO, it will be replaced by an even bigger fear of the appearance of inflation. And that will mean more hard times for most of us. But we need to get beyond the immediate crisis before we worry about the next crisis."

The Fed should be creating money out of thin air, and using it to buy up anything liquid - stocks, gov't debt, corp. bonds, foreign currencies (and hence foreign stocks & bonds) as a way of getting cash into the system - these things might even increase in value and turn a profit once the crisis is over...

creating "unsterilized" cash now would do wonders - as for future inflation, the process can reversed - sell the securities and then cancel the new money that was created, as a way of preventing inflation...

M x V = P x Q doesn't the velocity of money decrease in a crisis? meaning increasing the money supply is crucial to prevent deflation.

[anne]

"This is, I guess, what the goal is for the US. To bring Japanese-style job insecurity to their US facilities."

There is the comment and this is surely rubbish.

[anne]

http://www.tradingeconomics.com/Economics/Unemployment-rate.aspx?Symbol=JPY

October 31, 2008

Japanese unemployment in September was 4% and has held fairly steady from 2006. This may change, and may even be changing just now, but this will result in enormous pressure on the government to limit the change.

[im1dc]

The best investor of our age, Warren Buffett, says the same thing I said about a potential Auto Maker bailout. Surprise!

Geez, that puts me in good company for a change. See:

Buffett: Unemployment will hit "New Heights"

by CalculatedRisk on 11/21/2008 01:48:00 PM

Here are some excerpts, via the U.S. News & World Report, of a Fox News interview with Warren Buffett to be aired this afternoon.

On unemployment:

“There are going to be more people unemployed ... Five months from now ... it will be considerably higher ... It will happen eventually [surpassing 8%], and we will go on to new heights, but it will not turn around by mid-year next year.”

On the potential auto bailout:

“I would drive a deal like I would drive myself if I were buying a business. And I think, I would say there's plan A or plan B. And if you don't want to do it this way, you know, then...take bankruptcy.

I would make the CEOs buy in. I would say, you know, the United States government is willing to put in X dollars, but we're going to have you put in a certain percentage of your net worth right along with us. We'll give you more upside, but you're going to lose if we lose.”

http://calculatedrisk.blogspot.com/

Wow.

[im1dc]

calmo says...I am in love with this honesty, diligence, bald-headed boldness:

im1dc says...

CORRECTION

wrath not "wreath"

George the Shorter, famous for so many things literary, appraised Steinbeck's book in a mercifully short essay as "Corny"...another not only self-fulfilling prophecy but self-reflecting one...but were we payin attention?
But quack was...apparently.

Be silent, can't you see I have begun to CHANNEL the Great One, Warren Buffett?

LOL

[jalrin]

Anne,

I think we are talking about two different things. You are quite correct about the efforts that the japanese are taking to protect jobs at home. What the other posters are saying however, is that the Japanese automakers are laying off workers at their plants in the U.S.. This makes sense because it is in keeping with what you correctly identify as a goal of most Japanese economic leaders, the protection of their domestic (in Japan) workforce.

[im1dc]

Bruce Wilder says...By the way, has anyone noticed that Citigroup has fallen to the canvas, and may be out for the count?

Yes, I have. You should look at GE too. Incomprehensible.

[im1dc]

Here is 40% GOOD NEWS from the mortgage front.

(CalculatedRisk is a bona fide treasure chest of info today)

Kedrosky: The Option ARM Non-Bomb?

by CalculatedRisk on 11/21/2008 12:14:00 PM

Paul Kedrosky writes: The Option ARM Non-Bomb? (hat tip Brett)

I just had someone email me something interesting today about their adjustable-rate mortgage resetting –- but to considerably lower levels. How widespread is this phenomenon? Or, asked differently, what percentage of ARMs are tied to Treasuries, as opposed to Libor, etc.?

The answer from American CoreLogic, via Sue McAllister at the Mercury News, is 60% of ARMs are tied to a LIBOR index, about 25% to various treasuries, and the remaining 15% to the 11th District Cost of Funds Index (COFI -popular in California).

[A2P2 Spread graph available at the link]

This graph shows the 11th District Cost of Funds Index.

It appears ARMs tied to the COFI and treasuries will be non-bombs. The other 60% of loans tied to LIBOR might reset at a higher rate, although with the 3-month LIBOR down to 2.16% (it was 5.02% one year ago), even these 60% aren't bombs.

But we have to remember a higher interest rate is only one problem. Many of these borrowers had Option ARMs and were choosing the negatively amortizing or interest only options. When these loans recast, the borrowers will be required to pay the amortizing payment - and that could have a much larger impact on the monthly payment than the change in interest rates.

Remember "Reset" refers to a rate change. "Recast" refers to a payment change. See Tanta's Reset Vs. Recast, Or Why Charts Don't Match

http://calculatedrisk.blogspot.com/

[im1dc]

The NYSE is soaring. It began shortly after 3 pm EST when NBC sources confirmed that Obama will pick NY Fed Bank Chairman Geithner as SoT and that President-elect Obama will personally annouce his Economic Team tomorrow.

Define 'soar' = The Dow Industrials are up over 300 points as I type.

[anne]

Jalrin:

"I think we are talking about two different things. You are quite correct about the efforts that the Japanese are taking to protect jobs at home. What the other posters are saying however, is that the Japanese automakers are laying off workers at their plants in the U.S.."

Yes; but this has nothing to do with bringing supposed Japanese-style job insecurity to American facilities. The typical American criticism of Japan for years was that there was too much concern with protecting domestic workers. We have not showed such concern. Japan in American is acting as American norms dictate. American companies in Japan act according to Japanese norms.

[im1dc]

Pay particular attention to the BOLD FACED.

posted by Juan Cole @ 11/21/2008 12:34:00 AM

Friday, November 21, 2008
Dubai: Party on, Dude

Even though Dubai's boom has turned to bust, the emirate known for its gaudy exuberance, which comedian Jon Stewart once called 'what happens when Saudi Arabia and Las Vegas have a baby,' couldn't restrain itself from yet one more big bash.

South African casino owner Solomon Kerzner spent $20 million on fireworks and other party notions to celebrate the opening of his new Atlantis resort on Dubai's Palm Island, at an event bedecked by celebrities such as Robert DeNiro and Charlize Theron. As soon as the fireworks ended, Atlantis "goddess" Priyanka Chopra called for partying to begin, and Kylie Minogue led the way.

Still, real estate prices on Dubai's Palm Jumeirah island have fallen by 40%, since prospective buyers can no longer easily get loans, given the credit crunch.

You have to wonder whether the world's first "dynamic building" is still going to get built.

Our pain is worldwide affecting everybody.

[im1dc]

Sorry, I forgot the link for the above.

http://www.juancole.com/

[im1dc]

For those here who still believe they can use tried and true 30 year rear looking analyses to calculate what moves to make for what we are currently experiencing economically here is a question Greg Mankiw is asking of Macroeconomic teachers:

[anne and bjfeng that means you.]

For those of you who teach macroeconomics, here is a question to spark class discussion.

You observe an economy sinking in recession. As this occurs, real interest rates are rising, and the currency is strengthening. What shock, or set of shocks, could have caused these events?

http://gregmankiw.blogspot.com/

[Bruce Wilder]

btg: "creating "unsterilized" cash now would do wonders - as for future inflation, the process can reversed - sell the securities and then cancel the new money that was created, as a way of preventing inflation..."

As both Krugman and Mankiw have pointed out in recent days, it is that expected reversal of process, which could be the rub. "unsterilized" cash is, or has to be a committment, in at least the medium-term, to a higher inflation rate; I think one could sensibly argue that "unsterilized" equals committment-to-higher-inflation-rate.

But, I actually think a higher inflation rate is what is called for in the circumstances. The Fed should be committing to tolerating an inflation rate of at least 3% to 5%. It is a dangerous game to be sure, as Treasury debt service will rise, but if played well, a lot of Treasury debt could be issued now into the flight-to-quality at very low rates, and the Federal government would reap a significant inflation tax to offset rising service costs. Come to think of it, a lot of Treasury debt has been issued into the flight-to-quality; I see opportunity knocking.

The economy is demanding some huge adjustment in flows -- a shift from by U.S. households from a a negative savings rate to a positive savings rate, for example. There's no point in resisting that adjustment. (The Austrians are right about that much.) In embracing the adjustment of savings rates and current account balances and the restructuring of banking, inflation is our friend. Embrace reality, and give inflation a loving hug. It's the right thing to do.

The Fed's committment to higher inflation would be a well-deserved slap in the face to the banks and to the financial markets. You want to encourage lending; make the financial world into a debtors' paradise.

[erewhon]

I get a lot from this blog- MT’s selection of stories and his comments plus many valuable comments from readers.

However, if forced to choose between no drama Obama and the commenters, who may be interested in Lithium or Depend underwear, driving the bus, I’ll take the big O. He can make a general statement such as I believe that the Congress must develop a loan plan for some of the big three companies with enforceable requirements for their executives to also invest significant sums and do this soon. If he announces specific policies such as tax plans now, the situation may be very different in one month, let alone two- then when he says “developments compel me to change my plan” he will have shot himself in the foot, and will make it easier for conservative idiots to blame the mini-depression (that’s what we’re cruising into) on him.

As a former Harvard faculty member and critic of Greenspan, Rubin, Summers and Bernanke, I hope that the big O continues to listen to the last three plus Buffett and PK but picks someone else as treasury sec’y and lets B know quietly that he will not be reappointed.

The Ted spread has improved, this is not 1932 and I bought stock today- 50K as I’m a small investor. About half of it was BIG with P/E of 7.8. I’m no fan of Bernanke & Paulson, but I think that their guaranteeing money market funds and increasing the FDIC limits will someday be thought very good, in contrast to many of their other moves. How much of these last minute surges and drops in the market are due to government actions? I can see the plunge protection team buying futures; I’m sure that all governments manipulate the market to some extent. How can I blame the sudden last hour downs on any government?

I don’t know when the economy will improve or whether Obama will be a successful President. I know that most of us have seriously underestimated him.

[Tony]

Why is deflation bad? I keep on hearing economist say this, but never hear a reason why. It seems like if it was across the board deflation, that would be great for most people's. Cheaper homes, cheaper energy, cheaper cars. I've heard that there's a global re-evaluation of assets, and that easy credit has driven up prices on a lot of goods. If there's less credit & market contraction, doesn't deflation have to occur? Couldn't this be a good thing?

[im1dc]

BJ Feng says...

IMHO, time is the unknown and unknowable variable in both of our analyses.

[robertdfeinman]

The point of the two stories I cited was that the proportion of conditional workers has risen in Japan over the past 15 years.

If this doesn't lead to less job security then why is it being highlighted in these articles?

The same thing has happened in the US. We have a new set of intermediary firms to deal with account-temps. Many firms use these workers, not to adjust for short term peaks, but as a way to distance themselves from the need to pay benefits and to make it harder for workers to organize. Microsoft was involved in a fairly ugly (but typical) case where such people were really kept employed for long periods of time.

When firms make a commitment to hire people directly they incur a cost with this: recruitment, startup and training. This makes them consider these employees as a valuable resource and treat them better.

Even universities aren't immune from the trend as the high number of adjuncts now shows. There is plenty of evidence that this produces a poorer educational experience for the students, but saves the schools money and weakens the strength of the tenured teachers to affect academic policy.

When workers are treated as disposable they start to treat their employers with a similar amount of indifference. This is not the way to create productive and efficient businesses.

[BJ Feng]

Jalrin, a read a recent story that said Toyota was transferring workers into a job education program instead of laying them off. These workers spend all day learning and thinking of new ways to increase productivity and save money. They then present their ideas to management and current workers so that the best ideas are implemented.

Perhaps the downturn is so bad that they've had to layoff these workers, which are probably classified as part-time or temporary workers, but were once full time.

At some time, you have to cut excess production and can't keep thousands of idle workers around, even if they are in education and thinking of how to improve the product. I'm sure new ideas slowed drastically after the first few months. The advantage the Japanese have is that they don't have the dumb jobs bank where workers are paid to sit in a room and do nothing.

Citigroup has been one of the worst managed companies for years now. If there is any way to sell them off piecemeal or to allow them to go under without hurting the current situation (unlikely) then we should wave goodbye. There are too many semi-independent operations, too many people fighting for power, too many heads trying to control their own division without being influenced by the CEO.

[Denis Drew]

More of what's America's virtually unprotected by modern (sector-wide labor agreements) third, second or first world standards American labor market produces instead of cars:

In 2007 our Wall Street money farm handed out $34 billion dollars* in bonuses to their gamblers: $180,000 apiece to 180,000 gamblers -- on top of their $120,000 average gambler salaries. In 2008 that is expected to drop down to $26 billion** ($147,000 apiece)to the same 180,000 losing gamblers who at least don't seem to be losing their jobs!

GM has what, 266,000*** highly productive assembly line employees? Earning what?

* http://money.cnn.com/2008/11/04/news/companies/wall_street_bonuses/index.htm
** http://www.bloggingstocks.com/tag/FinanancialCrisis/
*** http://www.hoovers.com/general-motors/--ID__10640--/free-co-factsheet.xhtml

[calmo]

I'm weakening ..dc [Did you know there is no "l" in "Blair"? Ut-oh.]
and now accepting any quack proxies...you hear me?

Ok, and glad you are givin the horde (seriously, there is a number way less than the hundreds at CR, when the discourse is reduced to entertainment performance ) room to bellow...about their past, present and future plays.
The fact that they are dillydallying there and not with their plays says something...only to some of us....you hear me?

Buffet is spun as something of a folk hero (quack where are you man?), but the reality is the "folks" don't really have a stake in the market. Not now, but not before the crash either...and although the market rallies today (on the Obama appointments?), the underlying economy is weak (ok quack can do this mo betta I knows it).
Me and quack are here to keep the market chatter to a minimum...you hear me?

bello no mo

Quack me up

[Bruce Wilder]

I assume this widely reported analysis, released on Wednesday, is what has had the market worried.
However, FBR's Miller said in his note dated November 19 that the only solution for the global crisis was injections of true tangible common equity. "Debt or TARP capital is not true capital. Long-term debt financing is not the solution."

Eight financial companies -- Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz), Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz), JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz), American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) and GE Financial -- are in greatest need of capital, Miller said.

Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4 percent, the analyst said in his note to clients.

Miller said these institutions need somewhere between $1 trillion and $1.2 trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.

I don't endorse this scare-mongering. And, I, personally, am inclined to believe that Felix Salmon is the voice of reason here: This is Not Financial Meltdown: ". . . once the common is eroded, the bank belongs to its preferred stockholders. It's not the end of the world if Citi stock goes to zero . . ."

[Bruce Wilder]

rdf: "When workers are treated as disposable they start to treat their employers with a similar amount of indifference. This is not the way to create productive and efficient businesses."

It is a fair point. So, when the custom in the U.S. is to offer CEOs (not to mention hedge fund managers) bonuses large enough to induce a saint to fry his grandmother, why are we surprised when other claimants on the corporate golden goose are thrown to the curb? (Is that enough metaphors for one sentence?)

[The Baron]

Bruce Wilder and Tony:

I think we need to refine which definitions of 'inflation' we are using when we talk about trying to implement a recovery. When an economist says 'inflation' he is talking about one of two things. If he is saying it's bad, then he's talking about wages. If he's saying it's good, i.e. moderate inflationary economic policy is good, he's talking about prices, or CPI.

Now this is opposite of what the man on the street thinks of things. But some truth comes to light when the economist says that deflation is a bad thing, because he is saying falling wages are a bad thing, which is something I think we can all agree on. But the common man thinks he is hearing that falling prices are a bad thing, and wonders why. (Yes, I know that wages and prices are not independent, but there are also many other variables which determine each of those separate from the other.)

Now I think what Bruce Wilder would advocate is accepting moderate to high wage inflation to stimulate the economy. This would be a good thing. If the stimulus could be implemented to increase wages at the low and middle regions, we could accept rising prices until we got the economy stabilized. Unfortunately, the current response has been all about pushing money into the upper income range, which will drive prices up (Inflation is a monetary phenomenon. More cash out there, the higher prices will go.), while keeping general wages stuck. This as you can extrapolate will drive the economy into dust. If we can turn it around and raise low to medium wages, with minor CPI increase, we might still save things.

I don't hold much hope though.

[anne]

Robert Feinman:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aYTDkEfkwqg4&refer=home

November 21, 2008

Toyota Will Cut 3,000 Jobs in Japan as Car Sales Fall
By Makiko Kitamura

Japanese companies, which focused on hiring easy-to-fire contract workers during the 15 years of lackluster economic growth that followed the bursting of the bubble economy in 1990, are now shedding them as the global recession cuts demand. Temporary and part-time workers make up 33 percent of Japan's workforce, up from 20 percent in 1991, according to the Labor Ministry....

[I will ask carefully about this, but the interpretation is almost certainly wrong and what this interpretation actually represents is the work status of many women who will come and go in the workforce. Women have however increasingly been working for a time since 1991. I know of no weakening of the status of Japanese workers in general, nor has meaningfully increased unemployment been found so far. Should unemployment shows signs of rising with any steadiness beyond 4%, there will be concerted pressure on the government for a meaningful spending stimulus.]

[Bruce Wilder]

Tony: "Why is deflation bad?"

Because deflation makes "investing" in money, as opposed to real productive assets, profitable.

If people expect prices, generally, to decline, then holding onto cash is a risk-less "investment", because your cash will buy more in the future than it will today. This sort of behavior can be lethal for the financial system, which is supposed to channel money into real investment, by offering a choice between financial securities and real assets, in which real investments offer a higher rate of return.

Ideally, we want the financial system to take up and fund all real investments, which have an expected positive net present value at a real interest rate, which approximates the collective base discounting of future income (guestimated at around ~1.5% to 2%, risk-free).

Risk-free, readily-marketable government debt forms the benchmark or reference yield curve for the financial system as the financial system seeks to intermediate between people saving money and people seeking money to fund real investments. The Central Bank is charged with managing that national debt in such a way that that risk-free base remains risk-free. We don't want purely financial or monetary risk clouding the picture. So, in general, the goal is a steady, low rate of monetary inflation, in which the value of money relative to real goods, declines at a low, but steady and readily expected rate, so that people are comfortable saving, but, generally, feel some pressure to make their transactions balances available to the financial system for intermediated, real investment.

We don't want people "wasting" their savings by "investing", say, in gold bullion or stuffing currency into a mattress. We want banks to be able to borrow short and lend long, with minimal risk beyond the capacity of the bank to manage its due diligence in intermediation. So, the Central Bank is there as a lender of last resort, to backstop the banks. And, the Central Bank keeps the markets for full-faith-and-credit securities always liquid at administered interest rates.

Deflation would be heck on the banks' project of lending long, because it makes it rather expensive to be a debtor. Even an investment that was productive in real terms might become financially infeasible, due to the deflation premium placed on the nominal terms of the debt. And, there's no way to contract around this, because all lending takes place in the context of a choice, where there's an opportunity to lend to the government, by holding currency or treasury securities. (And, of course, deflation is very hard on taxpayers and their government, which is the biggest debtor of all.)

A low rate of inflation, on the other hand, provides a cushion for the banks' carry trade, as the accumulated expectation of inflation eases the task of long-term debtors expecting to re-pay from the returns on real investments. And, even a modest inflation rate pushes people, holding cash, to put the money "to work", depositing it, say, in low-interest-rate accounts at banks, or buying short-term financial securities. So, borrowing short and lending long, which is an essential function of a banking/financial system benefits from a low, steady, but nevertheless positive rate of inflation.

It is helpful, if you can distinguish in your mind, between a purely monetary inflation rate (which is the value of currency relative to all goods), and changes in relative prices (the cost of gasoline and food rising relative to wages, for example). People use "inflation" to name both, which is unfortunate, and leads to lots of confusion.

[anne]

http://krugman.blogs.nytimes.com/2008/11/19/corporate-cost-of-borrowing/

November 19, 2008

Corporate Cost of Borrowing
By Paul Krugman

Aaa 4.8%
Baa 7.2%

It's the real thing.

The figure above shows the real interest rates on corporate bonds, with the expected rate of inflation from the spread between 20-year TIPS and 20-year Treasury rates. All data monthly, from St. Louis Fed. *

The surge in real borrowing costs reflects the combination of rising risk spreads — even for AAA borrowers — and falling expectations of inflation. This is why deflation is a problem.

And the high cost of capital is going to be one more reason for enormous downward pressure on the economy.

This just keeps looking uglier.

* http://research.stlouisfed.org/fred2/

[anne]

Japanese unemployment has been as high as 5.5% in 3 months since January 2000, and as low as 3.6% in 1 month. Unemployment has been at 5% in 30 of the 105 months between January 2000 and September 2008. Unemployment has been below 4% in 11 months. *

http://www.tradingeconomics.com/Economics/Unemployment-rate.aspx?Symbol=JPY

[brian holt]

RDF said:
--------
The same thing has happened in the US. We have a new set of intermediary firms to deal with account-temps. Many firms use these workers, not to adjust for short term peaks, but as a way to distance themselves from the need to pay benefits and to make it harder for workers to organize. Microsoft was involved in a fairly ugly (but typical) case where such people were really kept employed for long periods of time.

[snip]

Even universities aren't immune from the trend as the high number of adjuncts now shows. There is plenty of evidence that this produces a poorer educational experience for the students, but saves the schools money and weakens the strength of the tenured teachers to affect academic policy.

When workers are treated as disposable they start to treat their employers with a similar amount of indifference. This is not the way to create productive and efficient businesses.

---------

At my community college, we have about 95 full time instructors, and about 230 part time instructors.

We are unionized, but I wouldn't say we are organized. And the effect of having this sort of workforce is that everyone is overworked and can not help with 'running the college.'

Part time faculty have to spend a lot of time traveling to different schools to maintain a living workload, while that leaves committee work and oversight to the full timers, who are not numerous enough to competently do it all.

Our administration can't even get basic things right: payroll, accurate rosters, marketing; much of these things are put onto instructors.

I know one faculty member, currently under tenure review, was basically told, get enrollment up or you are out. Never mind that getting enrollment up, short term, is based on effective marketing. Anyone can do that, right?

Off topic, why aren't the html tags working? I've used the quote tags, and they aren't showing up, but the material isn't quoted, either.

[anne]

Conveniently, I am told that Japanese part-time or temporary work is overwhelmingly women who are increasingly working but still working as has long been the case for limited times unlike women in America or Europe.

[Ninja Zombie]

Robertdfeinman: "Even universities aren't immune from the trend as the high number of adjuncts now shows."

This is a completely different phenomenon.

The job of a real professor is to do research, with some teaching on the side mainly to keep up appearances. For some reason, our culture believes that research and teaching should be done by the same group of people.

The job of an adjunct is to teach. Most adjuncts are either older graduate student, or Ph.D.'s who failed in their research career.

The fact that both researchers and teachers are employed by universities, and both have the same word 'professor' in their title is a quirk of history. Once upon a time this made sense, now it does not.

Incidentally, tenured profs love it since it lowers their teaching load.

[craig tindale]

"Because deflation makes "investing" in money, as opposed to real productive assets, profitable."

The longer the inflation continues the greater the risk of inflation causing speculative investment in non productive assets , Minksy spent allot of time peggig out this territory, lets also distinguish between real inflation and debt based expansion, if an economy grows due in the majority to debt expansion, then some of the expansion should be netted off the true inflation rate as the debt is like a deflation postponement rent that must be repaid from future incomes, this postponement risks the mother of all foreclosures when income to reaches unsustainable ratios with income, this is roughly were we are now, inflation targeting (or "cheap talk" as Bernanke refers to it)is impossible to deliver over the long run because we lack the insight into the complexity we are trying to manage, planned consumption is just as futile as soviet style planned production, sustaining it through debt expansion lacks foresight and feeds the politically based fiscal moral hazard .

[Ninja Zombie]

Anne: "Lawrence (can I call you Larry?) Summers, is myopic and abrasive enough to have methodically insulted African Americans and women at Harvard,"

Anne, asking an African American to show up for work and do his job is not "insulting African Americans". And making a hypothesis about the statistical distribution of math ability (a hypothesis that has been validated, as you yourself pointed out) is not insulting women.

Why do you keep lying?

[robertdfeinman]

Ninja:
Your understanding of how universities work is off the mark.

There are a group of large "research" universities which do focus on their faculty getting grants to bring in money to the school. Some, like Harvard and Princeton make a point of having even the most senior faculty teach.

The bulk of "universities" don't fall into this class. They have some of the faculty who does research, but most don't.

Then there are the regular colleges and community colleges where the focus is on teaching. Even in these schools the number of adjuncts has risen compared to tenured (or tenure-track) faculty.

Many schools now use a revolving door system to keep new faculty for a few years and then turn them down for tenure and start afresh. This ruins the idea of an academic community, lessens the institutional memory, and is a disservice to students who might need a recommendation some years later. It does save the administration money.

Finally, the ratio of administrators and non-faculty jobs to faculty has been shifting over the decades. This raises the overhead and does little to improve the quality of instruction.

[Bruce Wilder]

ct: "The longer the inflation continues the greater the risk of inflation causing speculative investment in non productive assets . . ."

I don't know what the mechanism could be. As long as the inflation is modest in magnitude, "monetary" and managed, and therefore well expected and non-accelerating and not volatile (a lot of conditions, but, then, that's why a well-managed fiat money is superior to the alternatives), monetary inflation is not going to do anything to encourage investment with a negative, real present value, since the nominal terms of lending contracts will be adjusted for expected inflation.

(My interpretation of recent events is that a failure to regulate intermediation can permit fraudulent lending practice. The remedy for that is effective regulation and policing, not deflation.)

Minsky's theory is about a sequence of behaviors associated with evolving expectations for real returns, and a tendency to falsely discount real risks, based on recent experience within phases of the business cycle. Minsky's thinking is particularly apt to the case of the Central Bank deliberately inverting the yield curve to induce a recession. If some inversions are necessary, and why they might be necessary, is certainly a topic worth exploring.

In regard to deflation, it should be pointed out that deflation is always an inversion of the yield curve. The central bank should want to avoid deflation for the same reason that it ordinarily wants to avoid yield curve inversions: the consequences for the level of real economic activity are adverse.

Maybe business cycles do get old, a la Minsky, but it is easy to see why longer expansions and shorter, less frequent contractions are desirable. And, post-WWII experience has shown that goal is achievable. To whine seems masochistic.

[Ninja Zombie]

Robertdfeinman, I'm a former professor. I have some idea how the academic system works.

All universities make professors do some teaching. For instance, NYU currently requires 1 class/semester (about 3-4 hours/week) for most semesters. We don't make researchers teach because they do a good job of it; it just looks good in a college brochure to say "Physics 101 taught by a Nobel prize winner".

Teaching labor is a commodity. As long as teachers meet the minimum standards, they are basically interchangeable. Getting teaching labor as cheaply as possible lowers costs, and that's a good thing. Do you really want college to be more expensive?

At teaching schools, the "revolving door" makes sense as a way to workaround the tenure system and just get ordinary employees.

As for bloated administrations, I agree 100%. This is a problem, but it's independent of the issue of who provides the teaching labor.

[lonesome moderate]

Jalrin:I think we are talking about two different things. You are quite correct about the efforts that the japanese are taking to protect jobs at home. What the other posters are saying however, is that the Japanese automakers are laying off workers at their plants in the U.S.. This makes sense because it is in keeping with what you correctly identify as a goal of most Japanese economic leaders, the protection of their domestic (in Japan) workforce.

Perhaps this is the article to which B.J. Feng was referring. A Toyota plant here in the Bay Area just cut its second shift, but has said that Toyota has a no-layoff policy, so the idled workers will do "cross training and maintenance". http://www.mercurynews.com/cars/ci_10985146