Posted by rosshunter on February 26, 2009
my response to this comment on a discussion of the Jindal/Obama speeches:
“wow, susan kidder, that nails it totally. I salute your capture of this moment in our country’s life. Yes. It’s as simple as you say, and it runs as deep. This is why our hearts swell.”
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Posted by rosshunter on February 25, 2009
EzraKlein Archive | The American Prospect
KRAUTHAMMER SAYS WE’RE GOING TO NATIONALIZE.
And, to his credit, he gives a pretty sane and sober explanation of what nationalization entails. The problem, as he rightfully describes it, is that the banks are insolvent due to the toxic assets weighing down their balance sheets. But you can’t get the toxic assets out of their balance sheets because no one can agree on their value. So “what we do,” Krauthammer says, “is we acquire the whole bank. We break it up and we sell off the good stuff, and then the government ends up with the toxic assets. It creates, essentially, a bad bank.”
These “toxic” assets are not worthless. They are pieces of mortgages on real property, on which most debtors are still making payments.
What makes them toxic is that no one has determined the size of the pieces or identified the properties. This is a tangled paper trail, but the paper exists and the trail can be followed.
The only question is whose balance sheet takes the hit on the elimination of assets that have no worth.
Bankers want the public to take the hit (socialization of debt). Angry mobs of taxpayers want the banks/bankers to take the hit, even it it means death to the institutions.
The bankers will win, because bankers are good extortionists and nobody in power wants to take the risks that bankers demise will bring down the whole house of cards.
To expand on the previous comment: If you’re still paying off a mortgage, you’re still paying interest and generating income for the lender(s). It doesn’t matter whether the property has declined in value.
If you default on the mortage, the lender(s) take possession of the property. Then, while it may have declined in value, it still isn’t worthless. And the repossessor has the option of holding onto the property until its value rises.
Total $ amount of mortgages in CDOs: 6.6 trillion.
Total # of mortgages written up in the last ten years: 10 million (avg: 1 mil/year)
Risk: 10 million mortgages wrapped up in CDOs held by banks whose accurate value is zero. Hence, total risk is: 10 million x $200,000(avg home price) = 2 trillion dollars.
But there have not been 10 million foreclosures on these mortgages. There have been, according to this: http://money.cnn.com/2009/02/12/real_estate/January_foreclosures_ease/index.htm, only 1,081,395 home that have been foreclosed on since august 2007.
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Posted by rosshunter on February 25, 2009
Examining the “Liberal Media” Claim
We’ve just closed out the first month of Obama’s presidency. During that period, Obama passed S-CHIP expansion, the Lily Ledbetter Fair Pay Act, a $787 billion stimulus package that was many bills in one (including such liberal priorities as comparative effectiveness research, transit funding, Health IT funding, broadband funding, etc), and is about to turn his attention to comprehensive health care reform.
To conservatives — or at least to Victor Davis Hanson — the first month has been more about skittish markets and failed nominees. And to many liberals, it’s seemed like a lot of compromise with centrist Republicans and tapdancing around congressional Republicans and buckling to blue dogs. But actually, rather a lot has been accomplished. Behind the scenes, they’ve been constructing a health care reform proposal that will be unveiled in this week’s budget, and action is happening on the energy legislation front, and they’re still building out staff.
Meanwhile, he’s wildly popular and Republicans are increasingly marginalized from the public discourse. At this point, 56 percent of Americans say Obama should prioritize the policies he advocated in the campaign while only 39 percent say he should focus on working in a bipartisan way. Meanwhile, 79 percent of Americans think Republicans should prioritize working in a bipartisan way while only 17 percent think they should prioritize their policy agenda. However you slice it, that’s a huge PR accomplishment for the majority party.
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Posted by rosshunter on February 23, 2009
EzraKlein Archive | The American Prospect
Only events will show if the future will grant Obama the status of a historic legend for his political skill, but whether or not this comes to be, this possibility I suggest denotes the scale of the man and his game.
Well, some people take weekends, and this thread is done, but just for the record I want to offer that there may be more to Obama’s plans than simply ploys.
Of course he finessed the Republicans in the ways that all agree above. But this doesn’t have to be the end of his goals.
His long term desire may extend very far beyond simply allowing the Republicans to destroy themselves. He may in fact mean what he has said all along, and hope to restore some semblance of discussion across partisan lines, over time.
Consider that if he proves to be a greater President than both parties and all of their commentators COMBINED, then he can actually lead the nation, set the tone, and dictate the methods of political action.
If he actually creates a true climate of cross-partisan compromise and discussion, then there is no need for one of two parties to wither away. Instead, the strength of party ideology in general can diminish. This would be a vastly larger achievement, one worthy of the consummate politician that we have thought all along he is.
EzraKlein Archive | The American Prospect
It’s a shame this thread was derailed, there was a world of public policy and economic discussion possible in that chart.
I liked Craig’s observation about the swell in prosperity during the fifties, and ron’s point about how we can choose the kind of economic society we want.
And crucially, howard’s reminder that spending is different from deficit financing.
I have great hopes that over the next few years we can create a national discussion about what kind of society we want to become. I’d like to see surface the concept that we can live a lot better than we have been, at less cost, and with smaller eco-footprint.
I don’t understand the problem with government spending – it’s our government, right? Our money, right? We can direct the money where we want to, right?
The real issue (globally in fact) is getting government to act as a valuable and efficient team player in this world. And the inadequacies of government show the subversions from external money rather than any weakness in the fundamental concept of representation, I would say.
Socially we need things like political stimulus bills, which you could perhaps say was what passed during the Obama election campaign, with its successful result.
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Posted by rosshunter on February 20, 2009
Barack Obama’s foreclosure plan | Can’t pay or won’t pay? | The Economist
Now it is Barack Obama’s turn. On Wednesday February 18th he pledged $75 billion to reduce the mortgage payments of homeowners at risk of default. Lenders who help people to refinance their mortgages will receive matching subsidies from the government. These could reduce a borrower’s monthly payments to as little as 31% of their income, and last for up to five years.
Firms that service mortgages held by investors will also receive fees for successful modifications. As a stick, Mr Obama reiterated his intention to alter the bankruptcy code so that courts can reduce mortgage principal. The details will depend on negotiations with Congress.
Mr Obama’s chances of being any more successful depend on whether his team has correctly diagnosed what is driving the wave of foreclosures. Is it that homeowners cannot afford to pay; or is it that they are declining to do so, because their homes are now worth less than their mortgages, the phenomenon known as negative equity?
Both factors play a part, but economists are divided on their relative importance. One school thinks that, even in cases of negative equity, most homeowners will not default if they can afford the payments—not least because defaulting will wreck their credit records. A second school believes that once the home is worth less than the mortgage, homeowners have a significant incentive to walk away even if they can make the payment, since in many states lenders cannot then pursue them for the shortfall.
f negative equity is the real problem, principal will have to be reduced to stem the foreclosures. But lenders are reluctant: they worry that many homeowners who can afford their payments will choose to default, or that investors in the loans will sue them. With house prices still falling, many borrowers would soon have negative equity again. And the write-downs, whether voluntary or court-ordered, could destroy the lenders’ capital. Aggregate negative housing equity is thought to top $500 billion. The government could absorb some or all of this, but at an astronomical and politically unpalatable price.
In truth, both lower payments and lower principal would help reduce foreclosures. At present, banks aren’t doing much of either.
Greenspan backs bank nationalization – BloggingStocks
Mr. Greenspan stated: “It may necessary to temporarily nationalize some banks in order to facilitate swift and orderly restructuring.” He also said: “I understand that once in a hundred years this is what you do.”
Sen. Graham says bank nationalization an option | U.S. | Reuters
No Confidence: Un-Bear-Able Dow Closes At Six-Year Low
“The corporate managers who took ‘extraordinary risks’ by leveraging companies too highly” are to blame, said Peterson, the co-founder of private equity investment giant Blackstone Group.
And it appears that leveraging at the banks is now what has investors most worried.
ABC News: Economy Fix: Playing the Financial Crisis Blame Game
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Posted by rosshunter on February 20, 2009
Obama’s Triangulation Squares With Public | The Cook Political Report
Indeed, it would be hard to see how Republicans think they are helping themselves these days, other than trying to feel better about themselves, even if no one else does.
But Democrats in Congress seem almost as out of touch with the public mood.
With an economy that is certainly as bad as it has been since the Great Depression, Americans are looking for their leaders in Washington to rise above partisanship to address the nation’s problems. Unfortunately, many in Congress seem oblivious to the message voters sent.
If voters had wanted more of the same, it’s a pretty safe assumption that Obama would not have won the Democratic nomination or the general election. The simple fact that voters did something that very few would have anticipated just a year or two earlier should be evidence enough that things have changed. But for the congressional leaders, perhaps this is not the case.
Michael Tomasky: Yes we can be bipartisan! | Comment is free | guardian.co.uk
The standard criticism of Obama’s bipartisan outreach goes like this. He met with Republicans on Capitol Hill. They stiffed him. They showed that they’re impossibly troglodytic. Why should he waste any more time on these people? Just crush them.
But here’s the thing. This criticism, and this entire debate about the efficacy of his bipartisan overtures, presumes that Obama’s audience for his bipartisan talk is the Republicans in Congress and the conservatives in Washington.
But that is not his intended audience. His audience is the country.
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Posted by rosshunter on February 18, 2009
The Blow the Working Class Saw Coming
Last week, General Motors announced 10,000 job cuts, Wal-Mart 800, and Nobel Prize-winning economist Joseph Stiglitz told an interviewer that in some ways, the current crisis is worse than the Great Depression. But this time around, we appear to have a class of individuals who think that they should not have to suffer with the rest. Circuit City, currently liquidating all its stores and laying off thousands, asked a bankruptcy court judge to let it give bonuses to executives to convince them to stay for the “wind-down process.” The New York Post reported on a disgraced financial executive who transferred property to his wife to protect it from legal action.
It is this type of behavior, rather than economics, that the working poor don’t understand. I earned $3.35 an hour at my first job washing dishes in 1981, and today, 28 years later, the minimum wage has barely doubled. Congress voted not to raise it for nearly 10 years, while members awarded themselves pay raises on a nearly annual basis. And during the years that the minimum wage was stalled, the pay of a CEO swelled to hundreds of times the wage of an average worker, according to the Economic Policy Institute.
The Stimulus Plan: A Detailed List of Spending – ProPublica
Feb. 13, 10:55p.m.: This post was updated to reflect that the Senate voted for the stimulus package.
The House approved the economic stimulus plan Friday afternoon with a vote of 246 to 183, followed by the Senate with a vote of 60 to 38. Want to know what’s in it? You could read the 1,071-page gorilla that passed today. Or you could let us do the work for you. We’ve dissected the beast in two charts – one for spending below, and one for taxes.
The appropriations section of the bill details spending in excess of $311 billion for programs ranging from Pell grants for college students to clean water in central Utah to nearly $100 billion in new transportation and infrastructure projects.
Here’s our earlier chart comparing the differences between the House, Senate, and conference versions of the bills.
To see a certain category of spending provisions, click on one of the following: Accountability | Aid to People Affected by Economic Downturn | Aid to State and Local Governments | Business | Education | Energy | Health Care | Other | Science and Technology | Transportation and Infrastructure
EzraKlein Archive | The American Prospect
. Emerging economies had learned in recent years that running current account deficits triggered massive currency crises. So they stopped running deficits. They kept their currencies at low levels to stimulate exports. The policy worked and they ran large surpluses. But that money had to go somewhere. And it largely went into the U.S, which Wolf argues became the global bank of last resort. He estimates that American consumer spending absorbed 70 percent of the global savings glut. That money had to be spent, and so the financial industry set about figuring out how to make consumers more willing to spend it.Climate Change: Climate Basics
EzraKlein Archive | The American Prospect
This new strategy is what Obama implied and sometimes described on the campaign trail, as early as Iowa. That’s around the time his notion of amassing a “working majority” for change really took off. He said:
“Let me tell you something, when you have a working majority you can afford to be polite. You can afford to be courteous. Because you’ve got the numbers. You’ve got the votes. When I’ve got the American people behind me I will say yes ma’am and no ma’am. But if the insurance companies get in my way, we’ll just push them aside very politely and go ahead and do what’s right for the American people. That’s how you bring about real change.”
I think he’s now going to play it that way, while obviously working a bit more earnestly for a few Republican votes in the Senate each time.
EzraKlein Archive | The American Prospect
this does seem to be the plan. Geithner’s devloped an array of options to cover all eventualities, which performs good economic service for the country, and good political service for his boss Obama.
This sounds pretty much just like the Geithner plan to me. Which is why I don’t understand the scorn it has drawn. How can you identify the zombie banks without a “stress test” as Geithner proposes? And if putting one bank in receivership (nationalizing, if you prefer) is enough to undermine all banks, then the same thing would happen if Geithner had announced flat out that “banks that fail the stress test will go in receivership.” I think he expects smart people to figure that out — and not all of them have.
To be clear, I understand the dismay the plan has caused to the markets: Geithner has not offered a pot of money to save shareholders; hence a big sell-off of financial stocks.
My take, with the help of someone elses interpretation, is that Geithner plans on giving the stress test to the 20 or so biggest banks, which have the lions share of assets held by US banks. Those that fail will be put into receivership by the FDIC, while the rest would be declared financially sound.
If this is what he plans, then it seems he is in tune with Roubini, except he would be acting before any further meltdown. The smaller banks which fail could then be safely dealt with as they fail.
Seems like this is the same as what FDR did, IIRC. Seemed to work rather well, so the history books say.
Bill Moyers Journal . Printable Page | PBS
brilliant, hat tip to dean baker
BILL MOYERS: Let’s not leave our public in despair, here at end, Simon. I’ve read everything you wrote this week, and it comes down to this. We must break the power of the banks and their lobbies. How do we do that?
SIMON JOHNSON: I think it’s quite straightforward, in technical or economic terms. At the same time I recognize it’s very hard politically, okay? What you need to do is the stress test that, actually, Secretary Geithner outlined in his speech on Tuesday.
That’s where you go and you check the bank’s books, and you say, okay, not only do we use market prices, not pretend prices, not what you wished things were worth, what they’re really worth, okay, in the market today. We use that to value your loans and the securities that you have, your assets, right?
And we also assess what will happen to the value of the things you own if there’s a severe recession. So that’s the idea, it’s a stress test, like when you go to see the doctor, they put you on a treadmill, and make you run to see how your heart is going to behave under stress.
So you’re looking at how the bank’s balance sheets will look under stress. And then you say to them, “This is our assessment of the amount of capital you need to cover your losses, and to stay in business, and be able to make loans, through what appears to be a severe recession.”
We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. They managed IndyMac, the closure of IndyMac, beautifully. People didn’t lose touch with their money for even a moment. But they can’t do it to big banks, because they don’t have the political power. Nobody has the political will to do it.
So you need to take an FDIC-type process. You scale it up. You say, “You haven’t raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone.” Okay? Because the bank has failed.
This is a government-supervised bankruptcy process. It’s called, in the terminology of the business, it’s called an intervention. The bank is intervened. You don’t go into Chapter 11 because in that’s too messy. Too complicated. There’s an intervention, you lose the right to operate as a bank. The FDIC takes you over.
Now, it might take three months, it might take six months. It’ll depend on the overall macro economy turning around. But there’s a lot of private money out there. Let’s call it private equity.
These people would like to come in and buy these re-privatized banks. You would attach antitrust provisions to this, so the banks are broken up as part of this transaction. Senator Sanders has a great saying. He says, “Any bank that is too big to fail is too big to exist.”
BILL MOYERS: Splitting this one powerful interest group into competing factions, and taking them on one by one.
SIMON JOHNSON: That is classic oligarchy breaking strategy. Now I do admit that once you’ve done that, you have to worry about the new oligarchs. That’s why you’re breaking up the banks. You don’t want to just change the owners of banks that are too big to fail, because they’ll be coming around in five years for another handout.
The structure or banking system, the concentration of power in big financial institutions has to change. There’s a lot of appeal to FDR and what he did in the Great Depression.
I would go back to Teddy Roosevelt 100 years ago, and think about trust busting. Okay? Now, the banks don’t violate existing antitrust laws. That’s ’cause our antitrust laws are 100 years old and need to be changed, okay? We need to break them up for exactly the same reason that Rockefeller and the oil interests, standard oil, at the end of the 19th century, was too powerful, economically and politically. And it had to be broken up. And breaking it up was the right thing to do. That’s where we are with the banks today.
Foreign Policy: Counterinsurgency Field Manual: Afghanistan Edition
Two myths persistently hamper U.S. policy in Afghanistan. First is the notion that the notorious border region between Pakistan and Afghanistan is ungovernable. The area, whose terrain resembles the front range of the U.S. Rocky Mountains along a border roughly the distance from Washington to Albuquerque, New Mexico, is home to the international headquarters of al Qaeda as well as much of the Taliban insurgency. However, the absence of a Western-style central government there should not be misconstrued as an absence of governance. The Pashtun tribes along the border have a long history of well-developed religious, social, and tribal structures, and they have developed their own governance and methods of resolving disputes. Today’s instability is not the continuation of some ancient condition; it is the direct result of decades of intentional dismantling of those traditional structures, leaving extremist groups to fill the vacuum. Re-empowering local leaders can help return the border region to an acceptable level of stability.
Second, Afghans are not committed xenophobes, obsessed with driving out the coalition, as they did the British and the Soviets. Most Afghans are desperate to have the Taliban cleared from their villages, but they resent being exposed when forces are not left behind to hold what has been cleared. They also cannot understand why the coalition fails to provide the basic services they need. Afghans are not tired of the Western presence; they are frustrated with Western incompetence.
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Posted by rosshunter on February 14, 2009
We are interested in linking to organizations that share a geolibertarian perspective. Right now we are focused on the land monopoly issue, where we have the most expertise. However, we will soon be linking to organizations with geolibertarian positions on other fundamental monopolies, including money and banking, education and information monopolies, and pseudo-democratic processes that create governing monopolies.
The Earthsharing site examines land tenure issues from a geolibertarian perspective, with more emphasis on Green values
The Democratic Freedom Caucus promotes geolibertarian ideas within the Democratic Party.
The Banneker Center for Economic Justice Is a pleasantly entertaining site with interesting materials on economic policies as they relate to land use and taxation.
The Henry George School Gopher Site has a wealth of economic materials about land value taxation and free trade.
The Henry George Institute conducts courses on fundamental economics and free trade issues by mail and by e-mail. It’s basic courses are quite good, although it sometimes takes positions that are more geoliberal than geolibertarian.
The History of Economic Thought site is a great source for tracts by economists and economic philosophers.
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Posted by rosshunter on February 14, 2009
News Analysis – Ailing Banks May Require More Aid to Keep Solvent – NYTimes.com
see Dean’s comment onthis article, next above
Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been both pessimistic and prescient about the gathering credit problems. In a new report, Mr. Roubini estimates that total losses on loans by American financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.
Of the total, he calculates that American banks face half that risk, or $1.8 trillion, with the rest borne by other financial institutions in the United States and abroad.
“The United States banking system is effectively insolvent,” Mr. Roubini said.
Beat the Press Archive | The American Prospect
pair with the NYT piece below
The Banks Need Capital: But Are Their Shareholders Wiped Out?
Somehow this question never appears in an otherwise informative article that considers the possibility that the banking system is insolvent. The article concludes by suggesting that the most efficient solution may require that government take possession of the banks’ bad assets.
While this is true, the key question is whether this is done after the shareholders are wiped out, which would effectively be allowing the market to run its course, or whether the government buys the bad assets at above market prices. This is effectively a huge taxpayer subsidy to the banks’ shareholders and their managers. This question is never discussed in the article.
The worst part of the piece centered on mortgage loan servicing agents. They are a substantial part of the foreclosure problem. Those agents (together with related entities) stand to collect substantial fees from investors in the event of foreclosure but bear the costs of negotiating with at-risk homeowners. Moreover, the investors bear the ultimate loss when foreclosed homes are sold for less than the amount owed.
NPR pointed out that loan service agents fear suits by investors who loose money as as results of mortgage restructuring. But, as always, NPR fails to report that those investors have no recourse against the mortgage servicing agents for failing to reduce the investors losses by negotiating restructured mortgages.
Therefore mortgage service agents (such as TCF, Wells Fargo) have no incentive to negotiate with at-risk borrowers or to reduce the foreclosure rate.
Treasury under Paulson failed and refused to recognize and deal with this perverse incentive system. Instead, it relied on the voluntary efforts of mortgage service agents to reduce the foreclosure rate. Obama and Geitner have not revealed their plans.
Meanwhile, foreclosures continue unabated.
Beat the Press Archive | The American Prospect
Differences Between Japan and the United States
The NYT seeks to find lessons for the United States in Japan’s efforts to recover from the collapse of its stock and housing bubbles in 1990. It argues that Japan’s economy did not finally recover until it cleaned up the books of its major banks, which led several to be nationalized or go out of business.
While there are undoubtedly many lessons for the United States from the Japanese experience, it is important to note that banks play a much less central role in providing capital in the U.S. economy. For example, most mortgages are financed through securitized mortgage pools. The same is true of car loans and other types of consumer debt. Large corporations typically obtain short-term capital by selling commercial paper on the market.
The Fed and Treasury have taken steps to ensure that this route of obtaining capital is open, which means that the problems of the banks will have less consequence for the U.S. economy than was the case for Japan. While it would still be desirable to repair the banking system as quickly as possible, the need is not as urgent as this article implies.
–Dean Baker
One would think that the first thing to do is find out how much bad debt there is and where it is. Instead of doing this, throwing money at banks has allowed them to cover things up more deeply.
The alternate financing that Dean describes has superceded banks partly because it is subject to less regulation. Supporting this structure as it now exists is probably even worse than supporting banks as they now exist.
So far there has been little evidence of real repair, just shoring up of flimsy and obviously defective structures built by those who have little personal stake in long-term outcomes.
Given the securization of debt, what do commercial banks actually do ? Their roles seem to be:
–loan origination;
–loan servicing;
–take deposits (i.e., buy Treasury bonds & sell CDs);
–provide checking accounts;
–issue credit cards.
However, the actual funds for lending come from the investment banks.
Is the commercial banking v. investment banking separation (i.e., restoring Glass/Steagall) relevant ?
Shouldn’t regulation focus on function (depositary institutions — including brokerages, mutual funds; loan origination; trading; etc.) instead ?
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Posted by rosshunter on February 13, 2009
Manage my account | The Economist
I like this guy – commenting multiply on the Economist’s leader (beoaning the stimulus inadequacies and Geithner’s vaguesness – Feb 12th 2009)
And again, I think you are confusing what I am saying…when I say seize the toxic assets, I just mean the govt should take it off the balance sheet of the banks and own it itself. The only thing the govt seizes is ownership of the bank.
I’m not talking about nationalizing the ENTIRE banking system, there is only a list of about 10 banks that would need to be nationalized and those are only the large ones with serious insolvency issues. Nationalizing those would help the others and FDIC can handle it from there.
Yes, because the shareholders are betting on a bailout. These banks are insolvent, as evidenced by their actions (they aren’t lending), not by their market cap (which will always be priced as a call option on the chance for a government handout to shareholders). From a strict accounting perspective, these firms are worthless and if they marked everything to market their equity value would be negative.
As Sweden did in 1992, they forced banks to write down all their bad assets, which then indicated that they were worthless, and then the government injected equity in exchange for virtually 100% ownership. You are having a problem with circular reasoning: you think nationalization would be a violation of property rights because the shareholder won’t sell for zero, but the shareholders won’t sell for zero because they think they can get money from the taxpayers for free.
Changes in asset valuations can never cause depressions, but excess leverage and insolvency of the banking system does.
1) Nationalize the largest banks and wipe out all existing shareholders
2) Seize the bad assets and put them into a separate govt holding fund
3) Print $500BB of currency to put cash on their balance sheets and pay down their debts to achieve 8:1 leverage ratio.
4) Create new board of directors with at least one director from the Fed/SEC
5) Immediately IPO the now healthy bank on the open market, allowing the government to recover most of its capital injection/money printing
6) The IPO proceeds should be eliminated from the money supply to preserve Fed’s control over monetary policy and to avert massive inflation
7) The Govt then just runs off the bad assets, likely retiring the investment proceeds recovered from the money supply in order to avoid inflation.
Even though this looks like a lot of cash, it would mostly be free to taxpayer as long as our monetary policy can still avoid inflation. Since the we would just print the money and then retire it after the IPO, we really wouldn’t be printing it over the longer term…the govt would just be acting as a broker between the private markets, who can’t coordinate the massive recapitalization of these banks that would be required, and the banks who are stuck in a downward spiral until they do. Effectively the only money that would be printed would be limited to the level of insolvency of the banks at the time of nationalization, but this could be easily mopped up by monetary policy going forward.
Of course, TORP-WEBUBOCG will never be passed because it is too damn obvious and our government is captured by the banking system that it is supposed to regulate, which doesn’t want to see its equity wiped out entirely. I say too bad, this is capitalism.
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Posted by rosshunter on February 12, 2009
Obama on nationalization – Paul Krugman Blog – NYTimes.com
EzraKlein Archive | The American Prospect
nice discussion of capital in a capitalist system
I learned in law school that “insolvent” means unable to pay your debts when they come due. It is possible for your net worth to be negative and not be insolvent. This idea of ‘insolvency” which is what you have to be to seek bankruptcy protection is different from older ideas of bakruptcy. In the first third or so of the 20th century, a corporation could be taken into receivership if its capital was “impaired” when meant that its net worth was less than its liabilities. That seems to be what we are talking about although the banks could be insolvent as well.
It’s worth noting that during the Great Depression, many corporations and businesses and banks did not go into bankruptcy but went into receivership, and continued to pay among other things, huge fees to their attorneys and to attorneys for the creditors, as attorneys for “creditor protection committees”. The cleanup of this sort of abuse was one of the reforms of the much maligned New Deal.
How to deal with straightening out these banks and other business entities whose financial statements no longer reflect reality is one of the challenges of our new administration.
I lend you my last $100 in exchange for a $10 payment at the end of the year and an IOU.
Based on that IOU for $110 payable at the end of the year. To cover my expenses until you pay me back, I borrow another lender’s last $90 promise to pay back $95 at the end of the year.
That lender then to cover their expenses, borrows $80 and promises to pay back $82 at the end of the year.
So, based on initial loan of $100, $287 is floating around. A ratio of 2.87 to 1
Now let’s say you lose your job, declare bankruptcy and won’t be able to repay. I’ve lost my expected $110. And because I can’t repay, the guy I borrowed from lost his expected $95. And because he can’t repay, the gal he borrowed from lost her expected $82.
There are estimates that that some banks were leveraged at a ratio of $30 (money they borrowed for every $1 dollar in assets (money they lent)
That’s where the money went. It wasn’t primarily lost in bonuses or luxury yachts(although that culture of ridiculous pay for shuffling $$$ from place to place is obscene). Because if it was it could simply reclaimed. Those things have value. It is simply that the entire lending structure was being built on shaky foundations once lenders lost their damn minds. The banks are left holding a huge IOU which the borrower can’t pay. And because the borrower can’t pay, the bank can’t pay anyone it borrowed from, and so on…And to make things worse, the original asset that is the basis for the loan is not worth the value on the IOU so you can’t even sell it without taking huge losses. If they did they’d owe the difference between the IOU and whatever amount they borrowed against it. AKA Insolvency!
EzraKlein Archive | The American Prospect
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Posted by rosshunter on February 11, 2009
IMF Survey: IMF Outlines Dire Consequences if World Fails to Act on Banks
IMF advice to everybody including US
He said the task for governments was to push the bank restructuring process forward—with an emphasis on cleansing balance sheets—using its authority to:
• Re-examine bank balance sheets on a worst-case basis, determine the viability of various institutions, and restructure them if required. Authorities need to be ready to respond as needed, including full-fledged intervention.
• Provide public support where necessary to banks that can be rehabilitated, in the form of capital, bad asset carve outs, and guarantees.
• Sell or wind-up insolvent banks quickly, depending on whether any franchise value remains.
• Establish new public resolution agencies to manage “bad assets” to maturity or sale.
The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money.
“Even with these measures, it will take time to restore credit growth. They will also be expensive for governments. But you know very well that the costs of banking crises increase if problems are not addressed quickly. This is not the time for hesitation,” Strauss-Kahn said.
EzraKlein Archive | The American Prospect
this is a great observation by a commenter on Ezra’s blog.
I think the banking system issue is ultimately more important and more fundamental.
Yes, this is correct.
Except beneath that, the real economy is what’s the problem, here. Essentially we’ve had 30 years of sending more and more GDP to the wealthy, which means sending it to wall street (since the wealthy don’t invest it in their mattresses).
In fact, we’ve actually had the Treasury borrow money to pay for tax cuts and for spending (on military, mostly) that fed GDP which, in turn, went to Wall Street.
Because wages have stagnated, the normal economy hasn’t grown with Wall Street.
And because government has been spending its money on tax cuts instead of infrastructure, the only investments we’ve made have been Wall Street’s capital investments.
So, we’ve ended up with the bizarre spectacle of bridges falling down in the Midwest while consumer spending is propped up by insanely cheap credit which is itself made possible because Wall Street is willing to invest in a huge bet on whether or not strapped consumers will be able to make their mortgage payments. And before that, they were investing in dot com “underpants gnomes” business plans. There’s a reason we keep bouncing from tricked-out bubble to tricked-out bubble.
So, yes, we have to deal with the insolvency of so much of Wall Street. And we have to deal with the impact this has had on the real economy.
But we also have to deal with the distributive issue that has led to both those calamities. Regulation is nice, but the problem simply isn’t that we lacked a regulation to prevent Wall Street from making an insane bet. It’s that Wall Street knowingly made an insane bet. Because they had too much money, and there was nothing else to invest in.
You’ve got to get less money trickling up, and more trickling down. You’ve got to get government making sane investment. Then a lot of this stuff will sort itself out.
EzraKlein Archive | The American Prospect
we kept looking for ways to extend the credit. We simply ran out of ways. This is the unraveling of that.
What the economy collapsing means is that buying and selling freeze up because if the banking system implodes there is no credit–and we aren’t set up to use cash for most transactions anymore. A check, credit or debit card won’t be accepted if the person on the other end of the transaction thinks the issuing bank may not have any money. The ATMs would empty out in about 10 minutes and then commerce would pretty much freeze up.
Obviously, you could work around this for simple transactions like that pretty fast–you just nationalize the banks. But the government would have to decide to actually do that, and then it would take a while to restablish real borrowing, and in the meantime production and distribution would basically stop.
These kind of panic situations have happened before, but we’ve never been as dependent upon non-cash transactions as we are now, so we are probably more vulnerable to really screwing everything up.
And yes, this is a recession, but it is not like any recession in the US since the Depression, and thinking of it as a recession is likely to lead to confusion. It definitely won’t end like a typical recession–typical recessions end when the Fed eases, interest rates fall, and investment picks up. Since interest rates can’t really fall now, that isn’t what is going to happen.
This make feel like a recession to one of the so-called Elite like Ezra, but this doesn’t feel a thing like 2001-2002.
It’s hard to be optimistic here. We’ve barely started the job losses, we’ve already lost twice what we did then. There are what? Half a dozen more shoes left to drop? Banks haven’t even faced their own insolvency yet. We’ve got the people who will face foreclosure as the result of job loses, and that’s going to be a much more serious problem than a bunch of buy-and-flippers have been. A lot of people who have no jobs now have been running on credit-card supplied fumes for over a decade, what happens when they all default on that? We’re looking at the result of 30 years of the so-called ‘elite’ ripping us off en masse. That’s not going to pass mildly.
I really expect the next 2-3 Presidents to be one-termers. Obama has already proven he is too ideologically beholden to the conservatives and centrists to do what must be done. Do you really think the Republican that will replace him in 2 years will do well? We can hope the Democrat after him does well, but if Obama is fiddling while the country burns, why should we trust that?
No. We’re well and truly fucked, Ezra’s ivory tower is just too high and his job is just too secure.
Why Obama’s new Tarp will fail to rescue the banks
By Martin Wolf
Published: February 10 2009 18:06 | Last updated: February 10 2009 18:06
op
Has Barack Obama’s presidency already failed? In normal times, this would be a ludicrous question. But these are not normal times. They are times of great danger. Today, the new US administration can disown responsibility for its inheritance; tomorrow, it will own it. Today, it can offer solutions; tomorrow it will have become the problem. Today, it is in control of events; tomorrow, events will take control of it. Doing too little is now far riskier than doing too much. If he fails to act decisively, the president risks being overwhelmed, like his predecessor. The costs to the US and the world of another failed presidency do not bear contemplating.
What is needed? The answer is: focus and ferocity. If Mr Obama does not fix this crisis, all he hopes from his presidency will be lost. If he does, he can reshape the agenda. Hoping for the best is foolish. He should expect the worst and act accordingly.
Yet hoping for the best is what one sees in the stimulus programme and – so far as I can judge from Tuesday’s sketchy announcement by Tim Geithner, Treasury secretary – also in the new plans for fixing the banking system. I commented on the former last week. I would merely add that it is extraordinary that a popular new president, confronting a once-in-80-years’ economic crisis, has let Congress shape the outcome.
The banking programme seems to be yet another child of the failed interventions of the past one and a half years: optimistic and indecisive. If this “progeny of the troubled asset relief programme” fails, Mr Obama’s credibility will be ruined. Now is the time for action that seems close to certain to resolve the problem; this, however, does not seem to be it.
All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.
Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.
Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.
Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so. But this is not the heart of the matter. That is whether, in the presence of such uncertainty, it can be right to base policy on hoping for the best. The answer is clear: rational policymakers must assume the worst. If this proved pessimistic, they would end up with an over-capitalised financial system. If the optimistic choice turned out to be wrong, they would have zombie banks and a discredited government. This choice is surely a “no brainer”.
The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.
Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.
Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.
If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.
The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic.
By asking the wrong question, Mr Obama is taking a huge gamble. He should have resolved to cleanse these Augean banking stables. He needs to rethink, if it is not already too late.
martin.wolf@ft.com
More columns at www.ft.com/wolf
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FT.com / Columnists / Martin Wolf – Why Obama’s new Tarp will fail to rescue the banks
Martin Wolf’s analysis is perfect, and I believe it. The problem that he fails to understand (or at least doesn’t treat in his article) is the thickness of delusion in the American political system (and perhaps indeed culture), and its conservative-sponsored media, as the nation comes to terms with the realities of the situation.
Understanding and responding to the economic situation is really just a matter of scale: Obama is doing more than Congress in terms of accepting the reality, and he’s pushing as fast as he can. Read some of the commentators like Limbaugh, and the stimulus fights in the Senate, to see how slowly we’re rising to the data, yet we’re catching up as fast as we can.
Martin says we can’t afford a second failed presidency. See soullite’s comment on Ezra’s blog, expecting one-termers through at least three presidents as we evolve through our denial into acceptance.
FT.com / Columnists / Martin Wolf – Why Obama’s new Tarp will fail to rescue the banks
FT.com | Willem Buiter’s Maverecon | Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer
all in favor of starting a new finacial system say aye
The various proposals differ in detail. Romer’s proposal is essentially the same as my own. Stiglitz argues, according to the British Daily Telegraph that “the government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice”.
Soros proposes not to remove the toxic assets from the banks’ balance sheets (which would require them to be valued, which is not possible) but instead put them into a “side pocket”. The necessary amount of capital – equity and unsecured debentures – would be sequestered in the side pocket. Soros’ ‘side pocket’ is effectively the same as my ‘legacy bad banks’. Soros notes that about $1.5 trillion is likely to be required to recapitalise the existing banks properly. This money could be leveraged a lot more effectively if most of it were injected into the new good banks, unencumbered with the toxic waste of the existing banks.
Especially in the US, the disdain for moral hazard displayed since the beginning of the crisis by regulators and by the fiscal and monetary authorities has been shocking. It has been justified with the claim that you cannot afford to worry about medium- and long-term incentives for appropriate risk taking when your house is on fire. That argument is logically flawed.
Two things are systemically important. The first is to restore the operation of key financial markets that have become illiquid. The Fed is doing a reasonable job in that regard. The second is to restore bank lending to the real economy. Neither objective requires that the existing banks be saved, let alone that their existing shareholders and creditors receive any financial support from the state. We can save banking without saving the banks or the bankers. The ‘good bank’ proposal demonstrates how to do this.
Conclusion
By focusing scarce fiscal resources on supporting flows of new lending and new funding to support new lending, rather than on supporting stocks of existing bad assets and/or toxic assets assets and on guaranteeing or insuring stocks of existing liabilities, the state meets its three key objectives. First, its short-run economic stabilisation and crisis-fighting objective; second, its medium and long-term banking sector incentive-enhancing, moral-hazard-minimising objective; and third, its fairness objectives: the polluter pays or, you break it, you own it.
Establishing legal and institutional clear water between the legacy bad banks and the new good banks is a necessary condition for fulfilling the economic imperative to support flows of new lending and borrowing rather than to protect existing stocks of toxic assets and their owners.
EzraKlein Archive | The American Prospect
CNBC’s panel of indistinguishable market-boosters hate Nouriel Roubini and Nassim Taleb. Hate them. It could hardly be more obvious: It’s present in their questions, in their tone, on their faces. They call the two men “Dr. Doom and the Black Swan,” as if giving them comical nicknames would make their pronouncements less serious and their predictions less accurate. They joke about them being bears, as if this were a year ago and some still thought Roubini’s analysis the product of a characterological pessimism rather than an accurate assessment of the situation. They wonder — aloud! — if the fact that Bill Gates and Michael Dell attended a lecture given by Taleb and Roubini doesn’t suggest that they have peaked and their analysis has lost its force. They call this a “data point,” misunderstanding entirely the meaning of the word “data.”
They hate them for good reason: They fear them. CNBC exists parasitically atop stock market expansion. They feed off excitement about the market. They need to offer actionable information. Towards the end of the interview, they ask Roubini and Taleb for stock tips. Both men demure. “We’re going to change the system,” says Taleb, “I’m not here to give immediate investment advice.” The CNBC anchors explode: They all begin talking at once, begging, demanding. It’s as if Roubini and Taleb have broken a rule. And in a way, they have: They’ve just implied that the raison d’etre of CNBC is farcical. It’s a network dedicated to making its viewers money at a moment when few are making any, and when those who lost the most were, well, loyal CNBC viewers. Indeed, CNBC, and most everyone of that stock-peddling ilk, increasingly looks like nothing so much as a get rich quick scheme. The fact that it was a network rather than an infomercial simply made it seem more legitimate.
This little segment really captures the stupidity of the moment doesn’t it. Illusion meets Reality and Illusion has a hissy fit meltdown on camera, while Reality politely keeps it together.
It is not these people but the culture that is the problem. CNBC is not a cause of the overleveraging of the banks and greed generally, but a product of the wealth created by it and the hordes of people who wanted to capture some of that wealth for themselves. The problem is deep within the country and won’t be solved by CNBC politely listening to critics of the system like Roubini or even Obama using them to help craft policy.
Hm, I guess I’m odd. I like Roubini and Taleb, and I didn’t see hatred here at all. The nicknames are the common way that these guys are referred to. The FT features a Roubini piece today, and they call him “Dr. Doom” on the front page. I think these CNBC people are clowns, to be sure, and they always talk in manic/panic voices (including to each other). But given those givens, they let these two speak at length and pretty much make their points. I don’t think it was hostile to press them for immediate investment advice for people wanting to sock money away from their kids–and they got back the answer “cash,” which is fairly instructive.
As cable news goes, this seems pretty above average, compared to Fox, MSNBC, or the wretched Situation Room.
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Posted by rosshunter on February 10, 2009
Media Matters – Right on cue, the White House press awakens from its Bush slumber
Senator calls for investigation of Bush officials – Los Angeles Times
“We can’t just move on. I really believe as the dust settles that the only way to prevent abuses of power from happening again is to name them as crimes if they are crimes,” Karen Greenberg, director of the New York University Center on Law and Security, said of Leahy’s proposal. “I think that it’s probably a good baseline for what we can hope for: knowing what happened and, even if you don’t prosecute, attaching names to policies that violated the law or moral and ethical standards.”
Media Matters for America – If It’s Sunday It’s Still Conservative
Every Sunday morning, some of the country’s most
powerful and influential figures enact one of the most hallowed rituals in
American politics: policymakers, government officials, journalists, and other
newsmakers appear as guests on the network talk shows to hold forth on the
pressing issues of the day. The shows — ABC’s This Week, CBS’ Face the
Nation, NBC’s Meet the Press, and
Fox Broadcasting Co.’s Fox News Sunday
– serve as an invaluable forum for the nation’s agenda-setters. It is on these
Sunday shows where conventional wisdom is formed and the terms of debate are
set.
In order to assess the balance of voices on these
programs, Media Matters for America
classified every guest appearing on these programs during 2005 and 2006 (over 2,000
appearances in all) by their party affiliation and ideology (see Methodology
section for details). This report follows on a previous study Media Matters released a year ago that
analyzed the Sunday shows dating back to 1997.
The results show that the right has a distinct advantage
in determining the shape of the debate on Sunday morning.
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Posted by rosshunter on February 7, 2009
EzraKlein Archive | The American Prospect
At the risk of sounding unreasonably reasonable, most of the people who aren’t economists (Obama etc), just don’t understand the voodoo – eyes glaze. So from their point of view, there’s the thought that a bunch of “liberal economists” might just have some wrong ideas, if not tempered by argument from the other side.
I have my favorites also, that I’d love to see just take the reins and fix everything. But watching a leadership of non-experts harness the skill of nominal experts (to defeat a disaster created by yet other experts), is a study in balance.
Viewed purely as a management exercise, it still looks admirable to me. Results will tell Obama much, and rapidly, and then we’ll see more of his magnificent managerial skill, I think.
For Obama And GOP, Questions Of Perception | The Cook Political Report
Here are two questions to ponder over the table in the Rayburn Cafeteria. The first is whether, over the next couple of months, President Obama’s job approval numbers are tethered to successes and failures, or are they more conceptual — such that two-thirds of Americans are either optimistic or hopeful about his presidency and are likely to give him the benefit of the doubt.
The second question is whether the strategies employed by congressional Republicans will help or further isolate them from swing voters.
A decent bet might be that we will begin to see Obama utilize his own variation on triangulation, setting himself and his administration as equidistant between Republicans on the far right and Democrats on the far left. This would allow him to score points at the expense of each side’s more extreme elements by inviting lawmakers to join him in the middle. With few congressional Republicans left from swing states and districts, that center ground will necessarily be made up of more Democrats than Republicans, but he will work hard to ensure that there are just enough from the GOP side to show compromise.
There is no doubt congressional leaders of both parties will mock this scenario, and the Obama White House will be scoring points at their expense.
America’s mortgage misery spreads | Move over, subprime | The Economist
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Posted by rosshunter on February 6, 2009
About that deflation risk – Paul Krugman Blog – NYTimes.com
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Posted by rosshunter on February 5, 2009
EzraKlein Archive | The American Prospect
crack: Leverage ratios matter, but so does absolute size.
ding ding ding, we have a winner!
New mottos for the DOJ: No firms too big to fail. No leveraged buyouts. No compensation above $500k/yr that isn’t deferred 5-10 years and is conditional on performance. Bring back the trust busters.
Rich C: most shareholders do have a long term interest in the companies they own
Have you actually checked the percentages of stock ownership of major corporations? Institutions are majority holders of stock and stock is owned to be traded with short term cycles.
“If …we’re in a space where we don’t know how to impose the consequences”
Consequences won’t work, for a variety of reasons, chief among them being that nothing illegal happened. And that’s important to remember, mostly, this occured within the rules.
What we need are better rules, with actual enforcement. We used to have both. The kind of leverage that brought down the house used to be against the rules, and the enforcement agencies used to call companies on it. The exotic financial instruments (mortgage default swaps, credit default swaps, collateralized debt securities, etc) were then exempted from regulation–and we see where that led. We need better rules and we need real enforcement of those rules. Or we’ll get to do this all over again.
RealClearPolitics – Articles – Obama Announces Executive Compensation Limits
Beat the Press Archive | The American Prospect
Beat the Press Archive | The American Prospect
“More fundamentally, government spending is a zero-sum game. The only way the government can spend a dollar to stimulate the private sector is by taking a dollar out of the private sector. That can be a good idea only if one believes that politicians and bureaucrats know better how to invest that money than do consumers, businesses and entrepreneurs.”
This is exactly wrong. The whole point is that the economy has a vast amount of idle labor and capital right now. If the government doesn’t spend the money no one will spend it. We will simply have higher unemployment. This is the thinking that Keynes and Roosevelt had to combat to get the economy out of the Great Depression.
I had been telling people that we need not fear a depression, but if views like those expressed by the Columbus Dispatch are common, then we might. The economy is in a free fall right now. If the government is not prepared to spend lots of money (ideally on useful projects) then we can see a very deep and long downturn.
OpenSecrets | TARP Recipients Paid Out $114 Million for Politicking Last Year – Capital Eye
beautiful illustration of market forces rewarding the best given by Donald Straszheim
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Posted by rosshunter on February 4, 2009
Beat The Press | The American Prospect
This piece should have been ridicule. Spending that is not stimulus is like cash that is not money. Spending is stimulus, spending is stimulus. Any spending will generate jobs. It is that simple. There is a question of whether the spending will go to areas that will provide benefits, long-term or short-term, to the economy, but there is no question that money that is spent will create jobs and therefore is stimulus.
Any reporter who does not understand this fact has no business reporting on the economy.
Beat the Press Archive | The American Prospect
Roosevelt’s New Deal Agenda lowered the unemployment rate from 25 percent in 1933 to 10 percent in 1937. None of us would be happy with 10 percent unemployment, but it is difficult to complain about policies that reduced the unemployment rate by an average of almost 4 percentage points a year. The annual growth rate over these four years averaged 13.0 percent. It is always possible that the magic of the market would have done better, but there is no reason that we should believe so.
Schlaes is correct in pointing out that things turned bad again in 1937. The Blue Dogs of the Roosevelt era won sway and got Roosevelt to cut spending and raise taxes. This threw the economy back into a serious recession, just as any good Keynesian would have predicted.
1932 2.2% 1933 1.3%
1933 23.7% 1934 10.8%
1934 34.2% 1935 8.9%
1935 1.7% 1936 13.0%
1936 51.0% 1937 5.7%
1937 -10.0% 1938 -3.4%
1938 10.4% 1939 8.1%
1939 7.2% 1940 8.8%
1940 12.0% 1941 17.1%
This is annual data (obviously quarterly would be better) and clearly monetary policy and other factors played a role, but it is pretty hard to look at this data (available at www.bea.gov) and not see a relationship between government spending and GDP growth.]
Beat the Press Archive | The American Prospect
It might be helpful to tell readers that the collapse of the housing industry has lead to a $450 billion falloff in the pace of annual residential construction, the loss of $8 trillion in housing wealth will reduce annual consumption by around $450 billion, with the loss of $8 trillion in stock wealth leading to a further decline in annual consumption of $250 billion. In addition, the collapse of the non-residential real estate bubble will likely reduce annual demand by another $200 billion. This gives us a total decline in annual demand of around $1350 billion or $2,700 billion over two years.
Next to a demand loss of $2,700 billion, an $825 billion stimulus package seems rather small.
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Posted by rosshunter on February 2, 2009
This is a brilliant and core analyisis – mark well
With Bush, congressional Republicans knew they had an ideological comrade in the White House. But they also knew he was confined by the (minimally) moderating desire for re-election and the (even more minimally) moderating limits of his national office. So, to reach their goals, conservatives had to compel their presidential friend to do what they wanted – and compel him they did. When Bush’s tax cuts and deregulatory schemes hit the Capitol, Republicans inevitably expanded them to fully achieve the right’s objectives.
Of course, that triumph was the country’s loss, as Republican policies thrust the political center off a conservative precipice and America into an economic freefall. And as we plummet, we are desperately groping for a lifeline.
EzraKlein Archive | The American Prospect
long game, we shall see
Looks like I’m late to this thread, but I love Neil and David’s theory, I hope it’s true. Three thoughts:
1. the only goal of the stimulus is to prevent the BIG bust, if possible, by restoring confidence in the credit system, so buyers will borrow, and capital holders will lend. We keep pumping in until this happens, or until we run out of Fed credit trying, at which point it’s the big bust anyway (which conservatives would allow to happen unchecked now if they could). So it’s damage limitation.
2. since the collapse of the Cold War it has been disastrously costly to our economy, social weal, and indeed planetary climate, for our nation’s political system to be locked into a zero-sum ideological face-off between two extremes that have not been able to talk to each other and find win-win, middle ways to move the country forward in this rapidly realigning world. The party system has been killing us.
3. Obama’s actual platform seems to contemplate a return to bi-partisan at worst only. At best, and really, a NON-partisan working relationship is the full fruition of the vision.
Your thoughts?
Wind jobs outstrip the coal industry – Green Wombat
Climate Change Denial: Nothing but Lies and Frauds « Greenfyre’s
Joe Romm found this good blog
Unless you folks know of something.
So there it is folks; have the Deniers actually got something squirreled away in some secret lair? Some actual evidence? even a single fact jealously guarded by a select Council of the Immundati? Let’s find out once for all if the Deniers have even a single scrap of reality to their stance, or if it’s all just lies and frauds.
comment on JR blog
Climate Progress » Blog Archive » Who got us in this energy mess? Start with Ronald Reagan
Those of you with keen memories may recall that the energy crisis is not new. In 1977, Jimmy Carter called it the “moral equivalent of war.” In the sort of speech a politician rarely delivers, he told a not-particularly-grateful nation that his energy program was going to hurt, but “a policy which does not ask for changes or sacrifices would not be an effective policy.” The core of his initiative was conservation. Carter had earlier asked us to lower our thermostats and wear sweaters. He wore one himself.
Reagan, who succeeded Carter in the White House, wore only a smile. For him, there was no energy crisis. Whereas Carter had insisted that only the government could manage the energy crisis, Reagan, in his first inaugural, demanded that government get out of the way. Speaking of general economic conditions at the time, he said, “Government is not the solution to our problem.” He went on to call for America to return to greatness, to “reawaken this industrial giant,” and all sorts of swell things would happen. It was wonderful stuff.
@ Wilmot McCutchen I don’t think it ever said it was about anything except the economy. The unspoken fear running through all this is that it takes a feat of sheer user confidence to run this massively over-leveraged economy we have. If it falls all the way to fundamentals – and it’s barely begun this fall yet – then it will be a terrible time for everybody. If smoke and mirrors can restore confidence, then at least we have something we can work with to change into sustainability.
this whole thing is about politics now. Climate recovery is never going to happen without understanding and influencing this key part of the process.
@ Russ I’m an optimist but I don’t believe it’s a character flaw, I believe it’s Obama’s way of bringing bi-partisanship to the national debate table without being on the wrong end of it – count on the republicans to do the heavy lifting for him there.
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Barack Obama uses that term to describe not simply an agent of “the People,” but rather our amplified voice, the collective extension of our individual efforts, the expression of our will, and the means to implement our values in concrete ways that benefit both the individual and the whole. In short – The People and The Government are inseparable. Government is not something alien or apart from the citizens of this country – rather it is the citizens of this country. I believe this is what our Founding Fathers intended when they designed a form of government under which they wanted to live, and for which they were willing to die.
For Bobby Jindal, that’s not true. Instead, Government is some faceless, irrational collection of bureaucrats operating under an insane system of rules and regulations, and standing in the way of our “individual freedoms.” It’s something foreign to be feared, limited, and resisted. And the most profound irony of all is that for me, and I suspect the majority of this country, that was exactly how we felt during the Bush administration. But now, for the first time in as long as I can remember, I believe that we’re finally in the process of beginning to feel that we own our Government. That’s a profound shift into a shared sense of individual and collective responsibility – and an accomplishment more than sufficient to make Barack Obama’s first 100 days in office an unqualified success.