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24 February 2009

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jlcg

Gotterdamerung ends happily. Wotan and the rest are burned away but the Rhine recovers the gold and the orchestra in the sublime ending suggests a new, greener, more beautiful world.
Nations and systems are concepts and concepts come and go, the flesh and the mind remain. We could quote Brunhilde in her last scene," why cry for spilled milk". I am hopeful, the props will come crashing down but mankind will remain.

Ed

It was Robert Reich that said in his blog that he believes the Republicans are against this stimulus because real measurable results won't show up until after the midterm elections.

They can then run on how the stimulus didn't work and when it starts to work after the midterms then they can claim it was due to them retaking the majority.

Crazy enough to work?

paraporker

snip--
We have not seen doctors and lawyers paid for their services with baskets of eggs and dead chickens for a long time, but that seems to be what the Democrats seem to think possible.
snip--

My father was an Arkansas doctor and he did get paid that way, you forgot the pies though, they were my personal favorite. His son, my big brother is also an Arkansas doctor who constantly rails about the evils of socialized medicine while partaking deeply of the state trough of dollars running a state clinic.

Personally, I think it is criminal stupidity to send young families and poor people to grovel from county ERs for basic medical services when we could pay a fraction of that cost to send them to a normal clinic just like you and I do with a little more dignity. Decent health care in the industrialized world IS A RIGHT NOT A PRIVILEGE.

As for the economy, brother we're doing just fine out here in the howling wilderness of Northwest Arkansas. Sure, the real estate speculators who thought they could sell thousands of McMansions got smoked, but they bet big and lost.

You all still need TP, flour, dog food, soda pop and beer. And we'll sell it to you cheap.

What is the future of our economy? I bet it is in something new.

Mass manufacturing was great, we made lots of stuff, it all looked alike, drove alike, tasted alike and cost alike.

Something new would be modular customized manufacturing that could quickly produce customized goods tuned for each consumer's individual tastes and ability to purchase.

Produced by skilled laborers who know how to do something besides perform some singularly monotonous task day in and day out.

That's where we're going.

Let the 3rd world produce mass produced crap for each other and the uncaring. I want to make a world where my friends down the street make me a custom hot rod or a stove just the way I want it with their automated machine tools.

And that will happen sooner than you think.

To be totally cliche, think outside your industrial box.

greg0

Our property's assessed market value spiked by 20% last year and yet it still had not reached the amount at which we wanted to sell. Now we are waiting to see what happens. Maybe the place will go on the market next year...
Being semi-retired has its advantages in these times. At least Social Security did not get 'privatized'! We're glad that we'd pulled a lot of pension money out of the stock market, but the rest has to wait. Personal projects are just going slower.
As far as a Gotterdammerung, we all have our metaphors for when the fat lady sings.

jamzo

the term business cycles gives financial crises says they are similar to weather, atoms, molecules, and other natural phenomena

financial crises however are essentially problems of human nature

they are better described as boom-and-bust cycles

the financial market place discovers some way to manipulate some aspect of the financial market for a quick and easy gain, knowledge of the angle spreads it draws the attention of more and more people generating a boom that eventually collapses in a bust

ISL

I see nothing normal about this recession and much that is abnormal. I also see normal fiscal responses (interest rates are zero!!! what is normal about that?), which are attempting to preserve the wealth of those who made bad financial decisions with other peoples money (and their own) and who should according to the free market religion so reverently espoused - be impoverished and bankrupted, not bailed out.

In that regards, the stimulus is a stop gap measure and a poor one at that. To stimulate the depression away and save the value of the shareholders and banks, would require a minimum (!) of 30 - 50 trillion dollars. I recently read in the independent quoting from a european bank analysis (whose name I forget) which estimated bad bank loans in Europe for current economic conditions were 15 trillion euros and the US is in far worse shape in the bad loan business.

As the recession deepens, these bad loans only multiply.

Unfortunately, Bernake seems to think the depression could have been avoided if the money supply had expanded dramatically in the US (a creditor nation at the time). However, that is exactly what Germany, a debtor nation at the time did.

EL

Look at the economic news out of Japan right now and then decide.

adam

How bad is it? Just one set of figures makes it clear. From August 1982 to 2008 we had the longest bull market in history on the Dow Jones, starting at 776 and reaching 14,198 in October 2007.

Today we hit 7,300, with lows at 7,100. That is to say it took us less than 18 months to lose half of the value equal to twenty-five years work.

Most people need at least a couple of lost weekends in Las Vegas to manage that.

How much time, work, and economic development is that lost? Well to put it this way in 1982 the first commercial CD players had just appeared. Its that long ago.

In the UK the FTSE is at 3,800, which is the value last seen post 9/11. We're currently stress-testing the banks and insurance companies for a FTSE 2,000, which is around 50% below its lowest point in the past 2 decades.

Grego,

Your are right. The US was very lucky. Italy on the other hand privatised its pensions - it was a wipe out for the poor suckers (I mean whatever brave investors is in Italian).

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aty4gEh9wups

Cujo359

I agree with rjh that housing is overpriced. I tried to explain why here. For housing prices to come down, there has to be some contraction in the value of all those mortgages the banks have (had?). That much seems clear.

So that's part of the problem. Is there more to it? Almost certainly. This NYT graph shows a lot of potential loss in commercial real estate, which is a subject I don't hear mentioned very much. There are also a lot of commercial and industrial loans that apparently aren't worth very much any more.

That's a big problem for the banks, and the banks keep our money. I don't really have much more idea than that why it's a bad thing that they seem to be collapsing, but they do, and they will if something isn't done. No banks means no loans. You either keep the banks going, or you replace them somehow if you want your economy to stay afloat.

The extent to which the world's governments manage to do that, and to keep the other important segments of their economies going is what will determine how bad things are going to be, I think.

On that score, I'm not terribly optimistic. A great many economists have said that a complete takeover of the U.S. banks needs to happen now (the big ones that are failing, at least), and from what I read of Bernanke's speech today, that's not going to happen any time soon. For the moment, count me as one of those who think things are going to get a lot worse.

Ian

The problem with stimulus is that everybody wants to be a half-Keynesian. Deficit spending in the bad times can stimulate the economy. The flip side is that when times are good, the government should be running a massive surplus. That's not just so you can pay for future stimuli, it's actually supposed to be done to deliberately cool down the economy. When the next economic downturn hits, the economy has less far to fall. Unfortunately, it's hard to convince voters that making the good times less good is a good idea.

What is needed now is a time machine.

mmeals

It's like Kedrosky says. The only left-right argument is how to repudiate the US debt. The left says do it through inflation/depreciation. The right says do it through liquidation and destruction of the public revenue base.

Nightsticker

Col Lang,

Every economy needs an "engine",something that drives it. The engine can be
exports,colonialism,technological advantage, xxx [well, you get the idea]. Ours has been "consumer spending funded by debt". That engine just broke down. I don't anticipate anyone firing it up again. This means we have to find a new economic engine.I am not sure what it might be. But until it is created I do anticipate bad economic times.

Nightsticker

curious

we are toast. A lot of those sub-prime lending has poor documentation and nearly impossible to value. And these are tied to CDO/etc.

http://www.dailykos.com/storyonly/2009/2/25/17329/6689/435/700272

* many of the big banks are deeply insolvent due to severe credit losses

* those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files

* a "stress test" can't remedy the banks' problem -- they do not have the loan files

One document uncovered shows the reply to a professional credit rater at Standard and Poor's who actually wanted to investigate the mortgage loan files he was rating. A senior manager replied:

Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

Cold War Zoomie

Wagner. Ugh.

kao_hsien_chih

Strictly speaking, I think both sides are actually very much right: this is indeed a very deep recession, at least in part brought about by business cycles (but with lots of help from banks and the government) but it can give birth to a catastrophe if it's not treated properly. Republicans pretend as if recessions are painless--that's BS. Recessions cost jobs and hurt people. Deep recessions cost many jobs and ruin lives of many people. The economy may recover--eventually--if nothing else changes, but to expect people whose lives are ruined to stick around doing nothing is absurd.

The French Revolution started out as a fairly routine debt crisis, too. By the time it was over, the financial credit-worthiness of the French monarchy was not exactly the central question of the day.

MRW.

I'm far more simple-minded. I dont have an economist's brains. I only know this:

My ex-party, Republican, ruled Congress from Jan 1995 to Dec 1996, 11 years.

* It dismantled the social contracts in place since 1933 to protect the banking system.
* It reintroduced what allowed the Roaring 20s to roar until 1929.
* It refused on Dec 15, 2000 to allow the Credit Default Swap (CDS) or derivative market to have any regulation; in fact, it passed a law forbidding it.
* It gave anyone who took their business overseas an almost non-existent federal tax, so that foreign governments got our tax money.
* It crushed any attempt to stop predatory lending, campaigned against it as well.

House prices have plummeted.
Foreclosures are at record highs in the history of the US.
The US and global stock markets have lost 1/2 their value in one year.
Credit markets have seized.
Job losses are at 10% of the population.

And these Einsteins want me to believe they have a plan to fix it, when they ruled over the body that created it? They dont even understand what they did, much less have any standing whatsoever to bring up the rear with the same songs they sang in '95 to get us into this mess.

To add insult to injury, now I'm not allowed to swear.

zanzibar

While we are distracted by the rhetorical battles around capitalism and socialism; deflation vs inflation; bailouts and bonuses - a very important economic point is being lost. It is best expressed by Steve Ballmer, Microsoft's CEO:

"In my view, what we now have will be a fundamental economic reset," he said. "The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate."

The point is that the increased growth rate of debt relative to our GDP growth meant that our economy was pushed to a level that is no longer sustainable and we have to now reset lower to bring our economy closer in line with our real incomes - the productivity of our capital and labor. Consumption will have to reset to a lower level. Private sector debt/GDP ratio will have to come down and household savings from income will have to rise. This balance sheet repair process in the household and non-financial sector is already underway. Household debt growth which was running at $350 billion/qtr in 2007 has reduced to the point that households only added $14 billion in new debt in the 3Q2008. We may even see that households will start to actually pay down debt in quarters ahead for the first time since 1975. When household and business balance sheets are sufficiently strengthened then growth will once again resume. A credible, fair and transparent plan of restructuring the private sector balance sheet is what needs to happen quickly. Additionally in order to re-establish trust in our system there must be a commitment to enforce the rule of law. That means malfeasance and fraud must be prosecuted wherever it may lead including our Capitol building.

The Bernanke Fed and Tim Geithner's Treasury Department are like generals fighting the last war. They are still applying the failed nostrums of asset reflations that were among the primary causes of this credit bubble. The actions to date from the Fed's ZIRP and alphabet soup of lending facilities to the Treasury's TARP and now CAP capital injections to insolvent Wall Street banks are all focused around the concept that many of the dodgy assets will recover their old glory values in the near future. At least that is what they tell us taxpayers whose future income streams these fine gentlemen are garnishing. In the mean time taxpayer capital infusions into Wall Street banks are running out the door to pay interest on the preferred stock held by not only our Treasury but also the governments of Singapore, China, Kuwait, Abu Dhabi and of course a prince in the deserts of Saudi Arabia. And not to mention to keep the managerial "talent" from jumping to greener pastures by providing them generous bonuses while they have driven their businesses into the ground. Michael Hudson's insight into the Language of Looting is well worth a read.

While our political and financial elites spend their time on how to stealthily pass the turd to us - the Chinese are busy acquiring long term access to natural resources at bargain basement prices. As this Stratfor report details the Chinese are getting a long term oil deal from a desperate Russia at $11.40/bbl. That's real economic stratagery - converting their large collection of paper dollars to a tangible strategic resource. Economic historian Niall Ferguson in this interview provides a nice frame to think about the "Chimerica" metaphor.

Cieran

I'd suggest that both parties are correct, because this economic slowdown is composed of at least two separate problems, which gives each party something to argue about... and let's face it: arguing instead of solving is what our current political system is all about.

The housing mess is what the GOP likes to point at, and that problem represents something like a normal cyclic slowdown. Foreclosures are a serious problem, but those are primarily confined to California and Florida at the worst end of the mess, with plenty of damage elsewhere but nothing of a magnitude like we haven't seen before. We know how to fix that, and the price tag for the cure doesn't have to run into the multiple trillions of dollars range.

The infinitely larger and more uncertain mess is the disaster caused by excess leverage and clueless risk-management on Wall Street. That's the problem that the Obama administration is trying to fix, because it's locked up the credit markets, and the engine of economic activity is seizing up as we watch. In a tightly-coupled global economy run via computers, this is unprecedented, so we're not completely certain what to do next.

The collateral damage from that bigger mess is fast spreading far and wide in the real economy, and there's complete uncertainty about how bad this problem is (hence the upcoming "stress tests" for banks) and where it was show up next, so that half the electorate is now seriously worried about becoming unemployed. And that percentage will likely grow as unemployment rises and the stories of loss strike closer to home.

I read this choice of "which of these messes are you talking about, anyway?" as a big political loser for the GOP, because once half the citizenry fears losing the ability to put food on the dinner table, responding to this concern with little more than political obstruction towards fixing either problem is just not a winning strategy.

As in "don't just stand there... do something!"

Personally, I don't think either party has quite figured out the feasible downside risk yet, but at least the new administration seems to be talking about it, instead of merely asserting (a la Bush and McCain and Gramm) that "the fundamentals of the economy are strong".

Acceptance of the existence of a problem is a necessary step towards its effective solution.

JerseyJeffersonian

Zanzibar,

Thanks for your comments and links, particularly the one to Michael Hudson's post at Counterpunch. It's a good reminder of the value placed upon disinformation by our elites.

Arun

From the library, I read an article from 2006, analyzing the structure of the subprime mortgage backed Collateralized Debt Obligation (CDO). The summary is that the CDO investor would lose money if housing prices did not appreciate by more than 4% in two years; and would be mostly wiped out if housing prices stagnated or fell.

Why I trust that analysis is that it was published in 2006 and is not therefore, 20/20 hindsight.

I simply do not see how the government or Congressman Barney Frank or Ben Bernanke or anyone else could induce anyone to take such risks with their own money. The information about the risks was out there; investors, financial firms all chose not to see it.

If the market cannot price risk correctly, then that wipes out any reason to be a free market fundamentalist. It is reasonable to be skeptical about the market's ability to straighten itself out in timespans short compared to our lifetimes.

As long as the stimulus consists of spending that will sunset, it cannot do us any permanent harm, and might even do us some good. Things like tax cuts which may not automatically sunset, and which also not very good as stimulus will do us no permanent damage either. (It is probably easier to raise taxes than it is to curb spending once a long-term commmitment has been made.)

curious

"Business Cycle" or "Gotterdammerung?"

----------
From global economy point of view, I think we are now in different era. We are not in "post WWII" economy anymore.

Of course everybody will recover, but what is the pecking order after the dust settle?

If one look at GDP, and label WWII style us vs. them. We are definitely back to pre WWII order. Japan, Germany, China, (Russia is growing fast) are more or less the same world top economies at the eve of WWII.

The post WWII world order is changing fast. The global geopolitics is about to get very complicated. Flow of goods, wealth, people and knowledge will change.

It'll be interesting to see Nobel prize list, olympic medals, large scale construction, biggest banks, 2 decades from now.

http://en.wikipedia.org/wiki/List_of_countries_by_future_GDP_estimates_(nominal)

Jonathan Goff

Pat,
In answer to your question, I kind of split the difference between the two camps (being a libertarian sort). I do think that the downturn this time around is fundamentally more severe than most we've seen since the Great Depression. In many ways, the dislocations and unreality that led up to this collapse are possibly even more severe than the stupidity that went into the GD. So, I definitely do agree with those on the left that if nothing is done, this is going to be a messy several years.

Where I part ways with them is that I don't think there is anything the government can do to avoid that. Especially repeating the vary policies that got us into this mess (encouraging people to spend beyond their means, encouraging banks to loan to people who shouldn't be getting loans, trying to prop up the housing market and prevent the market from bringing houses back down to their real value), and then slopping a massive concentration of new government programs on top of everything. Quite frankly, I expect that the attempt to "save the village" that Obama's team is making is going to end up destroying it...or at least dragging out the recovery much longer than needed.

So, while I agree that doing nothing will likely mean a severe several year recession/depression as all the economic stupidity unravels itself, I think that's likely the *best* result we can expect. You can't undo the damage of 20-30 years of economic stupidity (bipartisan) by piling on even more of the same. But you can make things a lot worse in the attempt.

~Jon

optimax

The FBI warned of massive mortgage fraud in Sept, 2004. Huffington Post:
http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html

Bush knew, did nothing, in fact, underfunded the FBI.

I remember Greenspan at one time saying we were in a housing bubble. The White House got him to recant. Anyone familiar with "Atlas Shrugged" should understand the dangers of crony-capitalism.

Paulson and Sumners were warned early that the derivatives market needed to be regulated and wanted permission to do so in her department that regulated commodities. P and S told her she didn't know what she was talking about.

I read an article by a Princeton grad who went to work at Goldman Sachs as an investment banker at the beginning of the bubble. Said he didn't know anything about investment banking but soon realized the sub-prime loans they were bundling and he was instructed to sell were dynamite. Eventually his boss told him to start shorting the sub-prime market while they were still bundling sub=primes and selling them to clients.

Goldman Sachs and the company Greenspan now works for made a bundle shorting the sub-prime market. Plenty of bankers who helped inflate the housing market and bundled the sub-primes into toxic paper, knew what they were doing and will in a likelyhood end up big winners in what some describe as economic warfare.

Also, Eliot Spitzer tried to stop predatory lending in NY when he was AG and Bush's Justice Department blocked him. We know what happened to him.

What happened is criminal and any AG who isn't a coward should have enough evidence to go after these people. But then he's the same guy who oked the pardon of Mark Rich.

curious

The santelli case is hot across the political blogs.

http://www.dailykos.com/story/2009/2/28/202318/053/640/703118

And the coordination is now expanding to business interests that are opposed to Obama's programs:

Industries from health care to agribusiness to mining that stand to lose under President Barack Obama's policy agenda are ramping up lobbying campaigns to derail or modify his plans.

The day after Mr. Obama formally laid out his policy goals in his first address to Congress, the former chief executive of HCA Inc. unveiled a $20 million campaign to pressure Democrats to enact health-care legislation based on free-market principles.

curious

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/28/AR2009022801972.html?hpid=topnews

As banks stop lending amid the global financial crisis, the likes of Mauro are increasingly becoming the face of Italian finance. The Mafia and its loan sharks, nearly everyone agrees, smell blood in the troubled waters.

"It's a fantastic time for the Mafia. They have the cash," said Antonio Roccuzzo, the author of several books on organized crime. "The Mafia has enormous liquidity. It may be the only Italian 'company' without any cash problem."

At a time when businesses most need loans as they struggle with falling sales, rising debt and impending bankruptcy, banks have tightened their lending to them.

..
Many experts say organized crime is already the biggest business in Italy. Now, Fara said, the untaxed underground economy is growing even larger. "Certainly I am worried," he said. "The banking system doesn't work, and the private one that is operating is often managed by organized crime."

The consequences for Italy and its 58 million people are huge, Fara said: "Stronger organized crime means a weaker state."

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