[blog commentary] It's the Stupid Economy

[J]

Link from TAE

November 21 2009: It's the stupid economy

Ilargi: At times it seems overwhelmingly necessary to call spades spades, put some people in their rightful places, and subsequently flush them down. There are such copious amounts of half-truths, full-blown lies, carefully concocted spin and other forms of fantasy flying around the ether and other media channels that it must be impossibly hard for many to tell reality from garbage.

And I don't even want to go into the fellow finance writers who choose to put their entire credibility on the line with extremely poorly guided forays into climate science, spurred on as they are by a bunch of hacked emails, and concluding that "global warming is a scam". It may get them new fans, but they won’t be of the thinking kind, while those who are must now think twice when reading their words on other topics. By all means, guys, be my guest. But being unburdened by knowledge does not give you a license to speak. Not you, nor Palin nor Beck.

I would like to stick to the economy, with an inevitable side step into politics. It took less than a year for President Obama's approval numbers to fall below 50% for the first time, and that number -which finds its origin in a deteriorating economy- will increasingly shape policy, and to an extent not seen for quite some time.

Don’t be surprised if Tim Geithner is sacrificed unceremoniously and without much further hesitation. Not to thoroughly change economic policies or anything of that kind, don't be a fool. The pollsters are simply, as we speak, working overtime to see what Geithner's departure, combined with the potential nomination of one of a number of possible new candidates for his post, would do for Obama's popularity. Simple and cold calculation. It won’t be easy to find a candidate who would lift the poll numbers substantially. And policy wouldn't change anyway, since the Geithner Goldman clan will maintain a firm grip on the Treasury. One obvious candidate, Paul Volcker, seems to have disqualified himself with his resistance to the very popular Audit the Fed movement. No-one with a Goldman past has a shot.

But these are still all things that are out in the open, that we can see. We need, I think, to look much more closely at the reality of where the economy stands. ”It's the stupid economy" can have more than one meaning. Not unlike "It’s the stupid climate", for instance. It's very much an economy defined, shaped, presented and experienced by the stupid. And as long as that situation lasts, the select few fat fingers that are capable of actual thought can have their way with everybody else's wealth. As Dylan Ratigan aptly puts it: Why would banks use taxpayers’ money to do lending when they can take it and speculate in dark markets, and are allowed to do so by the government, where the profits are theirs and the losses can be returned to the taxpayer?

What we have seen in the first 11 months of the present administration is not just that those responsible for the mess have not been punished for their illegal acts, or that trillions in taxpayer money have "somehow inadvertently" ended up in the wrong hands. 2009 so far has seen a concerted and highly successful effort by those responsible for the crisis to get a much tighter grip on government finance, make legal what wasn't, free up unparalleled amounts of public money, and make sure it flows into their pockets. It's the simple and complete gutting of the entire US economy and, in its wake, American society.

It started -if we forget Alan Greenspan and Robert Rubin for a moment- in 2008 under Hank Paulson, with Geithner in a prominent role (which he now seeks to hide) at the New York Fed, and it grew exponentially once Geithner and Summers had been cemented into their places by the president. There is nothing accidental about this, it's not a question of mistakes due to wrong ”accents" or incomplete information, as many like to claim. Paulson and Geithner's TARP, as Elizabeth Warren says one again, had the specific and explicit purpose of boosting lending to small businesses. A year later, that lending is down. Need we say more?

The government suggests that the unemployment situation is improving, and is doing so because of its efforts. But while the Bureau of Labor Statistics' Non-Farm Payroll Survey claims that job losses have improved from minus 741,000 in January to minus 190,000 in October, the U3 unemployment rate has gone up relentlessly, from 7.6% in January to 10.2% in October. It has, moreover, done so in increments that don't have any apparent connection with the non-farm job loss numbers. How is that possible? The unemployment rate is based on a separate BLS survey, the Household Survey. In short, job losses are not coming down, or if they are, in much smaller numbers than it pleases Washington to publicly tout.

And we have talked enough about the difference between U3 and U6 numbers. Using U3 is just another method for Washington to make things look better than they really are. It seems that if you haven't called to say you have no job in the last 5 minutes, you’re no longer counted as jobless. It is then assumed that you either have become so discouraged you've decided to lay down and die, or, alternatively, you've discovered you're independent wealthy after all.

Which takes us to the next bit of rubble: the "success" of the stimulus package in creating jobs. Whatever you hear or see about that, rest assured: it's an unmitigated disaster. So much so that it's nigh impossible to believe that is accidental. The government resorts to downright lies about the program, 30,000 jobs in a district that doesn't even exist, a school that saves 600+ jobs where it only has 300 to begin with, it's a long list. Really, if the program were even a modest success in reality, you wouldn't hear these things, the spin doctors would make sure numbers would come in clean.

When confronted with doubts such as these, politicians et al. routinely claim that only a fraction on the allotted money has been spent, that it will all fall into place in 2010, and that they're on course to create the 3.5 million jobs Obama promised way back when. Well, if we may be so bold as to guesstimate that less than half of the jobs claimed as having been saved or created so far are real, then the total of some 300,000 created in the first 10 months of the program will just about have to be equaled every single month for the next 11 months. And lest we forget, Obama also claimed way back when that the stimulus would make sure the unemployment rate wouldn't rise beyond 8.1%. Yes, but we didn't have the data, yes, but nobody could have foreseen how bad it would get. Yes, yes. Call me.

It's interesting to note that no matter how hard it is to gauge how much has been spent on the job stimulus, what seems very clear is that the total amount Obama has delivered towards employment creation will by year end in all likelihood be less than the total amount in bonuses projected to be paid by Wall Street's main financial institutions. The total amount in Wall Street bonuses is set to exceed $162 billion, according to MSNBC, and if you ask me, that fact alone should be enough to bring down the president's poll numbers below the freezing point. By the way, MSNBC also estimates bank profits through Q3 ‘09 at $22.5 billion. $139.5 more in bonuses than in profits. Yes. Call me for that too.

So how do the media and their experts see all this? Here's for a last batch -for now- of spades called spades. The New York Times reports: New Consensus Sees Stimulus Package as Worthy Step. There are some gems here, on the topic of a second stimulus package, something I've long qualified as inevitable, and just as inevitably to be presented under a different name.

"It was worth doing — it’s made a difference," said Nigel Gault, chief economist at IHS Global Insight, [..] "I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’"

"The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded," said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.

[..] Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy. "There should have been more direct federal spending that would have added to aggregate demand," he said. "Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending."

Among Democrats in the White House and Congress, "there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument," said Mark Zandi, chief economist of Moody’s Economy.com and an occasional adviser to lawmakers. Even so, "the stimulus is doing what it was supposed to do — it is contributing to ending the recession,"

Christina D. Romer, chairman of Mr. Obama’s Council of Economic Advisers, said attention to that too-rosy projection [Obama's claim that unemployment would halt at 8.1%] "prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating."

Economists said Republicans’ recent proposals to rescind unspent money would be a mistake. James Glassman, a senior economist at JPMorgan Chase & Company, said: "If we could be absolutely convinced that the growth we’re getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can’t be certain of that."


These people don't live in America, these people are clowns that make up stories that fit their jobs and the worldviews connected with them.

The problem is not that the stimulus was too small, or that circumstances unpredictably deteriorated, or that too much went into tax cuts and not into spending.

The problem is that the government in 2009 has spent many times the amount spent on unemployment to hand out to banks.

The problem is that there still isn't even a actual plan, or a vision for that matter, for the future of America's people and their jobs. Or, if there is, it's not known, and likely for dark reasons. Perhaps the millions that lost their jobs this year and the millions more that are bound to follow them soon have already been written off as unnecessary hindrances to the greater glory of some. Why should we continue to feed those who can no longer produce additional profits for us?

The real problem for America is that the administration hasn't even tried to solve or mitigate or alleviate what is hurting American citizens. On the contrary, the average American is much worse off now than they were a year ago. They just don't know it yet. They will soon enough.

The problem, also, is that there's no way back. The trillions handed to the banks and the mortgage industry will not be returned, and neither can the government, whether it's this one or the next, spend as much again, not without doing -additional- irreparable damage to America's economy and society.

The last bolded part is key, we had FDR's New Deal in the Great Depression, there was a vision and a plan to pull the country out of the economic disaster as well as the laws & regulations to make darn sure another depression wouldn't happen. Now, we have hope, happy feelings, and ummm...not much else.

[CarsonPalmer]

I think what's sad about this is that FDR didn't even really have a plan with the New Deal in the sense that he had an outline of steps to save the economy; he had a bundle of ideas that he was willing to keep trying until something worked to alleviate the economic crunch. So the bar is even lower than having a plan to save the economy; its having a willingness to take the bull by the horns, admit that there's a crisis and try, try, try solutions. Instead, everybody wants to plug their headphones in and think happy thoughts. We can't even meet the standard as low as "admit something's wrong and go after the damn thing".

[KrauserKrauser]

Every time I hear the rosy predictions of the future coming from the Fed/Geithner and have that tiny kindling of hope I have to make sure to smash it ASAP because most everything coming out of them is a bunch of fucking lies.

It's not like either party can be said to be better on this either, we're fucked on both sides. Third party isn't really the solution either as they all go more kooky the further you get from the two majors and I wouldn't trust them to resist Wall Street's influence if they did actually win an election.

Maybe after Hoov-Obama completes his term we will get someone with a spine but I doubt it. Probably a higher chance once the other shoes falls but that won't happen until Obama and Co. have tried every trick in the book to make it look like we have clothes on.

[K. A. Pital]

I wouldn't trust them to resist Wall Street's influence if they did actually win an election

I would even say that unless the Wall Street so wants, these "third parties" would never come close to winning anything in American elections.

[TheKwas]

The author seems to have trouble making a distinction between what is/was stimulus policy and what is/was bailout policy. The Bailout was poorly done by just about any standard (although, a bailout was certainly needed), but the entire article basically reads as "The stimulus failed, look at how bad the bailout was" without actually bringing forth any real substantial criticism of the stimulus.

Also, it's pretty clear the author is more interested in venom than substance right when he calls a bunch of extremely well-respected economists as 'clowns', and then rather than crictize their statements or argue that the stimulus was actually worthless, he states that the problem with the stimulus is that the bailout was too big.

He might as well argue that the problem with universal healthcare is that the bailout was too big.

I think what's sad about this is that FDR didn't even really have a plan with the New Deal in the sense that he had an outline of steps to save the economy; he had a bundle of ideas that he was willing to keep trying until something worked to alleviate the economic crunch. So the bar is even lower than having a plan to save the economy; its having a willingness to take the bull by the horns, admit that there's a crisis and try, try, try solutions. Instead, everybody wants to plug their headphones in and think happy thoughts. We can't even meet the standard as low as "admit something's wrong and go after the damn thing".

The problem is that FDR basically had the houses generally playing along with his administration, whereas Obama is facing people in the houses who seem dedicated to making the Obama Administration fail at everything even if it causes harm to America.

[J]

The author seems to have trouble making a distinction between what is/was stimulus policy and what is/was bailout policy. The Bailout was poorly done by just about any standard (although, a bailout was certainly needed), but the entire article basically reads as "The stimulus failed, look at how bad the bailout was" without actually bringing forth any real substantial criticism of the stimulus.

For most effective purposes there isn't really a distinction between the two. Of the $787 billion in the stimulus package, only $200 billion or so is earmarked for infrastructure, research, and energy projects, which is quite a bit less than the nearly $300 billion in tax cuts in the package. The people who wrote up the bill are still stuck in the Reaganomics age where tax cuts = a better economy for everyone. A proper stimulus bill would have most of the spending on infrastructure, energy, and research with the remainder going towards social support services. Spending that actually creates a manufacturing & technology base with lots of sustainable, skilled, high paying jobs.

Also, it's pretty clear the author is more interested in venom than substance right when he calls a bunch of extremely well-respected economists as 'clowns', and then rather than crictize their statements or argue that the stimulus was actually worthless, he states that the problem with the stimulus is that the bailout was too big.

Well, they are. Their "predictions" were completely off, I noted back in February that unemployment would break the claimed 9% peak within 4 months. It did so in May. Their models & predictions were hopelessly optimistic to begin with, and they never saw any of the problems coming. The blog writer, myself, and others did, some of us made dead accurate predictions months or even years in advance.

But more importantly, they do not understand the difference between a credit led recession and an inventory led recession, one can stimulate and spend their way out of the latter but very rarely the former. A credit led recession occurs when people can no longer borrow enough to consume the supply of goods and maintain their spending capacity, there's too much debt relative to the carrying capacity of the economy so people must pay down or default their debts and save before they can spend again. This is why consumer credit is falling for the first time since 1951 despite everything the government tries to do.

The statements from the quoted economists make it clear they still believe this is an inventory led recession, where if only we could stimulate demand and make people spend we'd be cured and start a recovery. Nowhere do they mention that the problem is excessive debt and debt service costs along with deflating income and assets which makes it even harder to carry the existing debts, let along taking on new ones. The entire stimulus can be summed up as "make house prices go up and make people spend", it cannot, will not, and does not work. People cannot and will not spend until their debts are paid down to a manageable level. The government can speed this along with mortgage cramdowns & principal reductions where the amount outstanding is reduced to 3x annual income and the yearly payments to no more than 1/3 annual income. But they can't do that since it would make every big bank insolvent overnight, yet this is the fastest way to get people spending again.

[TheKwas]

The author seems to have trouble making a distinction between what is/was stimulus policy and what is/was bailout policy. The Bailout was poorly done by just about any standard (although, a bailout was certainly needed), but the entire article basically reads as "The stimulus failed, look at how bad the bailout was" without actually bringing forth any real substantial criticism of the stimulus.

For most effective purposes there isn't really a distinction between the two. Of the $787 billion in the stimulus package, only $200 billion or so is earmarked for infrastructure, research, and energy projects, which is quite a bit less than the nearly $300 billion in tax cuts in the package. The people who wrote up the bill are still stuck in the Reaganomics age where tax cuts = a better economy for everyone. A proper stimulus bill would have most of the spending on infrastructure, energy, and research with the remainder going towards social support services. Spending that actually creates a manufacturing & technology base with lots of sustainable, skilled, high paying jobs.

Uhhh... tax-stimulus still doesn't count as bailout policy. As a more traditional Keynesian, I agree that more of the stimulus should have been spent directly on infrastructure, but taxes can also act as a form of stimulus. Furthermore, they have no relation to the bailout.

Well, they are. Their "predictions" were completely off, I noted back in February that unemployment would break the claimed 9% peak within 4 months. It did so in May. Their models & predictions were hopelessly optimistic to begin with, and they never saw any of the problems coming. The blog writer, myself, and others did, some of us made dead accurate predictions months or even years in advance.

All the economists in the article were talking about whether or not the stimulus was worth it in the first place. Many of them already mentioned that they were too rosy on the predictions and thus the stimulus was too small, but too small is still better than none at all.

I'm not going to go into a huge debate about credit-vs-inventory recession, but needless to say that inventory remains an issue and thus increasing demand WILL reduce the effects of the recession in the short run. There will be pressure on the consumer in the future due to this, but the pressure is less than what would exist if we allowed the thrift paradox to result in a downward spiral.

[Big Orange]

How can these Neoliberal numbnuts think they can carry on making money after they've furiously pissed into the America's labour/resource/consumer pool, potentially fouling it up for everybody for decades?

[starfury]

How can these Neoliberal numbnuts think they can carry on making money after they've furiously pissed into the America's labour/resource/consumer pool, potentially fouling it up for everybody for decades

They may not be thinking that far ahead, as we heard these common themes before, good business in a short-sighted narrow sense for the CEO and Shareholders for the time, they will be long gone by the time the actual consquences of said actions will be felt by the company.

[KrauserKrauser]

As a low level management person of a mega-corp that has recently gone public I've seen more and more short sighted planning coming from upper management. Pleasing Wall Street means what have you done for me lately, not what can you do for me 5-20 years from now.

I for one blame the increase in Day-trading and the increasing frenetic and short sighted nature of investment in America.

[Big Orange]

Neoliberalism was put into effect in 1980s when US/UK multinational companies were still largely managed by executives and chairmans from the 1940s/1960s who were in some ways more careful and less like vultures, unlike the executives and chairmans who took over since then. Also technology is a factor for the ever contracting employment pool, you need less and less people to manufacture goods or provide a service, and also we had improvements with international telecommunications and shipping, so the Anglo-American corporations arrogantly assumed there would be less trouble when exporting our jobs to Asia.

[J]

All the economists in the article were talking about whether or not the stimulus was worth it in the first place. Many of them already mentioned that they were too rosy on the predictions and thus the stimulus was too small, but too small is still better than none at all.

How can they make that pronouncement when they don't even know what's wrong with the economy in the first place? That's like me walking into an operating room and saying the doctors need to put more blood into the I.V. bags and pump the patient full of blood. I don't know what's wrong with the patient, I can't begin to figure out his problems, yet I'm suggesting advice? Absurd. Yet that's what these economists are doing. They haven't a clue of what's wrong and there they are arguing about "cures".

I'm not going to go into a huge debate about credit-vs-inventory recession, but needless to say that inventory remains an issue and thus increasing demand WILL reduce the effects of the recession in the short run.

Not really, the raw inventory numbers for goods are lower than they've been in many years and the inventory to sales ratio is only a bit above the 20 year average, which is as far back as I can find data for at the moment.

Now if we're talking about the inventory of homes then yeah, we have a serious serious inventory problem. Which we're making worse with more cheap credit since this keeps the prices artificially high and unaffordable. If home prices were allowed to correct to what the market will organically support it would go a long way towards correcting the supply issue as people would actually be able to take out a mortgage a buy a home without going underwater within months as they are now. But this would make all the big banks insolvent so we can't do that.

There will be pressure on the consumer in the future due to this, but the pressure is less than what would exist if we allowed the thrift paradox to result in a downward spiral.

It doesn't matter if the consumer can't spend anyway. Either way leads to a deflationary deleveraging spiral.