TW: Populism is fun, it lets many folks blow off steam frequently without the burden of thinking too hard or reconciling those emotions to actual governance. It is also dangerous. Both political parties will try to harness its power for their electoral benefit. I assure you the Republican establishment is merely using the teabaggers as pawns as their core philosphy of what is good for Wall Street is good for them (think Chamber of Commerce) does not jive well with the teabaggers.
Many "street" pros who have spent the past year lamenting "guvmint" intervention are starting to get nervous about "populist" policies actually being enacted.
From Paul Kedrosky:
"My friend Doug Kass has out a lucid musing on the market’s Howard Beale moment. There is a populist uproar in progress, one that people overlook at their peril.
'The populist uproar is geared toward the incumbent, toward anyone in power. It does not run on party lines, nor is it focused on health care. It is the zeitgeist of dissatisfaction, a sign of the times. Maybe it's a function of high unemployment or the electorate ticked off at the wealthy and the largest institutions (especially of a banking kind). This dissatisfaction was expressed in the Democratic tsunami that brought Obama the Presidency, and it was seen yesterday in the Massachusetts Senatorial election that brought Brown the Senate seat. In other words, the mood of the country has been changing for a while, and it is being reflected in a very negative view toward those who have not suffered from high unemployment or from wayward derivative bets (and still got paid). And, as I have written before, this will lead to policies that are arguably needed but, generally speaking, are valuation deflating.
…While I recognize that historically political gridlock is generally seen as a market positive, it might not be this time as the nation needs sound direction and leadership, not legislative inertia. Given the complexity and scope of our country's fiscal problems, obstruction and the perception of continued divisive and partisan political agendas and the lack of an overall governmental community (which could thwart desperately necessary legislative solutions) might quickly be seen as a negative.' "
http://paul.kedrosky.com/archives/2010/01/the_markets_how.html
Showing posts with label Great Recession 08-09. Show all posts
Showing posts with label Great Recession 08-09. Show all posts
Friday, January 22, 2010
Saturday, December 5, 2009
Read What He Says, You Might Learn Something
TW: Obama is nuanced which apparently puts some folks off. I would strongly urge folks to actually read or listen to what he says, what he says is pretty useful, informed and correct. Folks these days conflate his fiscal policies with structural and cyclical challenges which have little to nothing to with "stimulus", "socialism", or anything else the guys has allegedly done or will do. He knows what he is doing far better than most. Why folks would wish for something else at this point continually perplexes me.
From POTUS December 3, 2009:
"We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health-care costs, Medicare and Medicaid in particular, are growing. And we've got to do something about that.
You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I mean, I think there's a misperception out there that somehow the Recovery Act caused these deficits.
No, I mean, we had -- we've got a 9-point-something trillion-dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.
So that's not what's contributing to the deficit. We've got a long-term structural deficit that is primarily being driven by health-care costs, and our long-term entitlement programs. All right? So that's the baseline.
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.
We understand that in this administration. That's not always the dialogue that's going on out there in public and we're going to have to do a better job of educating the public on that.
The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.
Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive. So we've got about as difficult an economic play as is possible, which is to press the accelerator in terms of job growth, but then know when to apply the brakes in the out-years and do that credibly."
From POTUS December 3, 2009:
"We have a structural deficit that is real and growing, apart from the financial crisis. We inherited it. We're spending about 23 percent of GDP and we take in 18 percent of GDP and that gap is growing because health-care costs, Medicare and Medicaid in particular, are growing. And we've got to do something about that.
You then layer on top of that the huge loss of tax revenue as a consequence of the financial crisis and the greater demands for unemployment insurance and so forth. That's another layer. Probably the smallest layer is actually what we did in terms of the Recovery Act. I mean, I think there's a misperception out there that somehow the Recovery Act caused these deficits.
No, I mean, we had -- we've got a 9-point-something trillion-dollar deficit, maybe a trillion dollars of it can be attributed to both the Recovery Act as well as the cleanup work that we had to do in terms of the banks. In turns out actually TARP, as wildly unpopular as it has been, has been much cheaper than any of us anticipated.
So that's not what's contributing to the deficit. We've got a long-term structural deficit that is primarily being driven by health-care costs, and our long-term entitlement programs. All right? So that's the baseline.
Now, if we can't grow our economy, then it is going to be that much harder for us to reduce the deficit. The single most important thing we could do right now for deficit reduction is to spark strong economic growth, which means that people who've got jobs are paying taxes and businesses that are making profits have taxes -- are paying taxes. That's the most important thing we can do.
We understand that in this administration. That's not always the dialogue that's going on out there in public and we're going to have to do a better job of educating the public on that.
The last thing we would want to do in the midst of what is a weak recovery is us to essentially take more money out of the system either by raising taxes or by drastically slashing spending. And frankly, because state and local governments generally don't have the capacity to engage in deficit spending, some of that obligation falls on the federal government.
Having said that, what is also true is that unless businesses and global capital markets have some sense that we've got a plan, medium and long term, to get the deficit down, it's hard for us to be credible, and that also could be counterproductive. So we've got about as difficult an economic play as is possible, which is to press the accelerator in terms of job growth, but then know when to apply the brakes in the out-years and do that credibly."
Saturday, November 7, 2009
Capital Always Wins
TW: Folks for millenia have been getting pissed off about capital screwing labor. Our nation revels in worshiping capital (and its associated derivative- credit). This go round has been especially delightful as the capital markets figured out how to absorb increasing proportions of folk's wealth through pension funds, 401Ks etc. Then crashed.
Now "Wall Street" is roaring back far ahead of the median household (which has barely moved forward for forty years anyway). There is populist anger. But the brilliant folks known as Americana are chiefly orienting their ire at those trying to initiate universal health care, maybe do some financial regulation and raise taxes on the wealthy. Things which would actually help mitigate the capital v. labor imbalance.
From Randy Forsythe at Barrons via the Big Picture blog:
“THE RISING TIDE LIFTS ALL SHIPS, but the galley slaves aren’t feeling it. They’re rowing harder than ever to make up for their colleagues who have been thrown overboard (getting rid of that extra weight improves the vessel’s efficiency).
Now, after a long spate in the doldrums, the captain has called for those still manning the oars to pick up the pace to move some cargoes, which had been notably scarce for well on a year and a half. It seems that money had been showered down like manna from heaven (this was before helicopters). That it came from a printing press or by pledging the credit of the land mattered little. Some of the money was spent, which, in turn, brought forth new orders of goods, since the storehouses had been emptied. And thus the need for the slaves to pick up their pace.
It has all put dough in the pouches of the owners and the captain of the ship, but there isn’t much for the slaves. And, no surprise, that’s caused some grumbling below. Not that there’s much the galley slaves can do about it, lest they become the next to get tossed overboard.
The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.
But for the laborers, it’s been another story entirely. The unemployment rate shot up to 10.2% in October, the highest since 1983, when we were coming out of what had been the worst recession of the post-World War II era. Even the doleful double-digit rate understates the joblessness; more folks are dropping out of the labor force or are among those having to work part-time involuntarily. If you add them to the army of the unemployed, you get what the bean-counters euphemistically call an “underemployment rate” of 17.5% last month, up a full half-percentage point from September.”
Now "Wall Street" is roaring back far ahead of the median household (which has barely moved forward for forty years anyway). There is populist anger. But the brilliant folks known as Americana are chiefly orienting their ire at those trying to initiate universal health care, maybe do some financial regulation and raise taxes on the wealthy. Things which would actually help mitigate the capital v. labor imbalance.
From Randy Forsythe at Barrons via the Big Picture blog:
“THE RISING TIDE LIFTS ALL SHIPS, but the galley slaves aren’t feeling it. They’re rowing harder than ever to make up for their colleagues who have been thrown overboard (getting rid of that extra weight improves the vessel’s efficiency).
Now, after a long spate in the doldrums, the captain has called for those still manning the oars to pick up the pace to move some cargoes, which had been notably scarce for well on a year and a half. It seems that money had been showered down like manna from heaven (this was before helicopters). That it came from a printing press or by pledging the credit of the land mattered little. Some of the money was spent, which, in turn, brought forth new orders of goods, since the storehouses had been emptied. And thus the need for the slaves to pick up their pace.
It has all put dough in the pouches of the owners and the captain of the ship, but there isn’t much for the slaves. And, no surprise, that’s caused some grumbling below. Not that there’s much the galley slaves can do about it, lest they become the next to get tossed overboard.
The genius of American business for doing more with less has been evident in the parade of earnings reports showing profits improving far more than the revenue that produces them. The secret: Productivity soared at a 9.5% annual rate in the third quarter, a stunning increase that was nearly half again as much as economists had projected. Business cut labor costs at a 5.2% annual rate, with total hours falling at a 5% pace. Fewer workers worked fewer hours.
But for the laborers, it’s been another story entirely. The unemployment rate shot up to 10.2% in October, the highest since 1983, when we were coming out of what had been the worst recession of the post-World War II era. Even the doleful double-digit rate understates the joblessness; more folks are dropping out of the labor force or are among those having to work part-time involuntarily. If you add them to the army of the unemployed, you get what the bean-counters euphemistically call an “underemployment rate” of 17.5% last month, up a full half-percentage point from September.”
Friday, November 6, 2009
What Do You Want?
From David Rosenburg at Gluskin Sheff:
"...President Obama is now running fiscal deficits that would have made FDR blush.
If the consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries
...But while Uncle Sam can try to stimulate spending on autos and housing and even mortgage credit via the myriad of policy measures that have been undertaken, the return to job creation is as elusive as ever. It is hard to fathom that, according to the White House estimates earlier this year, the stimulus was supposed to help cap the unemployment rate at 8.5%. Here we are today with both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%. While real GDP did manage to rebound at a 3.5% annual rate in Q3 — stagnant if not for the government incursion..."
TW: This statement frames the messed up nature of our current economic discussions. One, Rosenberg conflates "Obama" with the current deficits. The vast bulk of the current deficit (and future deficits) are structural and would have been very high regardless of the POTUS. When economies contract tax revenues contract as well and things like unemployment spending, food stamps etc. go up. The graph below portrays the relative impact of various factors.
Two, Rosenberg seemingly laments interventions in things like clunkers etc. but then mentions that BUT FOR "gov't intervention" growth in Q# would have been stagnant. This is a common utterance from Wall Street- they bitch about government intervention but then what would they prefer? Financial Armageddon? Contractionary fiscal policies in the face of a massive demand contraction? We know they do not want financial regulation, what do they want?
I realize folks just want everything magically fixed- lower taxes, higher employment, lower deficits, a smidge of inflation but not too much. Let me know if you know where the magic button is. I am highly confident it is not anywhere near the tea-bagging fools.
"...President Obama is now running fiscal deficits that would have made FDR blush.
If the consensus is correct that the recession is behind us, then what we have on our hands is the mother of all jobless recoveries
...But while Uncle Sam can try to stimulate spending on autos and housing and even mortgage credit via the myriad of policy measures that have been undertaken, the return to job creation is as elusive as ever. It is hard to fathom that, according to the White House estimates earlier this year, the stimulus was supposed to help cap the unemployment rate at 8.5%. Here we are today with both an unemployment rate and a fiscal deficit-to-GDP ratio both north of 10%. While real GDP did manage to rebound at a 3.5% annual rate in Q3 — stagnant if not for the government incursion..."
TW: This statement frames the messed up nature of our current economic discussions. One, Rosenberg conflates "Obama" with the current deficits. The vast bulk of the current deficit (and future deficits) are structural and would have been very high regardless of the POTUS. When economies contract tax revenues contract as well and things like unemployment spending, food stamps etc. go up. The graph below portrays the relative impact of various factors.
Two, Rosenberg seemingly laments interventions in things like clunkers etc. but then mentions that BUT FOR "gov't intervention" growth in Q# would have been stagnant. This is a common utterance from Wall Street- they bitch about government intervention but then what would they prefer? Financial Armageddon? Contractionary fiscal policies in the face of a massive demand contraction? We know they do not want financial regulation, what do they want?
I realize folks just want everything magically fixed- lower taxes, higher employment, lower deficits, a smidge of inflation but not too much. Let me know if you know where the magic button is. I am highly confident it is not anywhere near the tea-bagging fools.
Some Hardass Solutions
Comment from a reader on how we should address our economic challenges:
"The theoretical one is that we man up to our issues - put people [TW: those who have enabled the credit crisis] in jail, work-out the debt, stop the current BS programs [TW: some of the stimulus stuff like the housing credits] and the past stupid subsidies like the mortgage tax credit, hike the crap out of taxes, cut benefits, increase the retirement age, break-up the banks, get tough/fair on trade, transition to ANY of the 36 healthcare systems on the planet with better results ANY one of which is significantly cheaper than the one we have now, tax the shit out of carbon, start investing several trillion in infrastructure, slash the military budget, stop the "war" on drugs, eradicate Monsanto [TW: this person is not a fan of our food system], etc. The truth is you are shaking your fist at the sky. No matter how much we don't like it, the way humans solve problems is highly inefficient which is they don't solve problems until they are obviously on fire and there is no easier choice..."
TW: I agree with most of the prescriptions even if I agree essentially none of them will be enacted. The only value in pondering them is to ask why each of us individually would necessarily oppose a particular solution. And if by chance one does not oppose them all, which party is more likely to address them. Obviously neither party is able or willing to address them all. A common thread with the above suggestions are that they would:
1) require some level of sacrifice
2) require entrenched interests to relent relative to their particular interests
3) require a focus on the long-term rather than the short-term
This week's new meme is drop everything and focus on jobs. No health care reform, no financial reform etc. Eight months ago it was all the "stimulus" had to take effect immediately. We have been on this merry-go round forever, perhaps it will keep twirling a long. But something seems amiss.
"The theoretical one is that we man up to our issues - put people [TW: those who have enabled the credit crisis] in jail, work-out the debt, stop the current BS programs [TW: some of the stimulus stuff like the housing credits] and the past stupid subsidies like the mortgage tax credit, hike the crap out of taxes, cut benefits, increase the retirement age, break-up the banks, get tough/fair on trade, transition to ANY of the 36 healthcare systems on the planet with better results ANY one of which is significantly cheaper than the one we have now, tax the shit out of carbon, start investing several trillion in infrastructure, slash the military budget, stop the "war" on drugs, eradicate Monsanto [TW: this person is not a fan of our food system], etc. The truth is you are shaking your fist at the sky. No matter how much we don't like it, the way humans solve problems is highly inefficient which is they don't solve problems until they are obviously on fire and there is no easier choice..."
TW: I agree with most of the prescriptions even if I agree essentially none of them will be enacted. The only value in pondering them is to ask why each of us individually would necessarily oppose a particular solution. And if by chance one does not oppose them all, which party is more likely to address them. Obviously neither party is able or willing to address them all. A common thread with the above suggestions are that they would:
1) require some level of sacrifice
2) require entrenched interests to relent relative to their particular interests
3) require a focus on the long-term rather than the short-term
This week's new meme is drop everything and focus on jobs. No health care reform, no financial reform etc. Eight months ago it was all the "stimulus" had to take effect immediately. We have been on this merry-go round forever, perhaps it will keep twirling a long. But something seems amiss.
Monday, October 26, 2009
Greed Trumps Fear Every Time
TW: Despite the beliefs of libertarian ideologues and those who take Ayn Rand too literally, capitalism needs rule sets. Auditors, banks, regulations and ratings agencies are crucial to well-functioning capitalist society. Unfortunately these rule monitors have dropped the ball. Enron bared the pitfalls with auditors. The credit crisis has done likewise with the ratings agencies. Greed is always in a battle with fear. Greed usually wins hence perhaps the need for some regulations.
From McClatchey News:
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
..."The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.
After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
...Moody's was spun off from Dun & Bradstreet in 2000...Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
...Ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide gorged themselves on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages...Nobody cared about due diligence so long as the money kept pouring in during the housing boom.
...One Moody's executive who soared through the ranks during the boom years was Brian Clarkson, the guru of structured finance. He was promoted to company president just as the bottom fell out of the housing market...Several former Moody's executives said he made subordinates fear they'd be fired if they didn't issue ratings that matched competitors' and helped preserve Moody's market share.
...The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.
...Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
From McClatchey News:
"As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."
..."The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.
After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.
...Moody's was spun off from Dun & Bradstreet in 2000...Executives set out to erase a conservative corporate culture.
To promote competition, in the 1970s ratings agencies were allowed to switch from having investors pay for ratings to having the issuers of debt pay for them. That led the ratings agencies to compete for business by currying favor with investment banks that would pay handsomely for the ratings they wanted.
...Ratings agencies thrived on the profits that came from giving the investment banks what they wanted, and investors worldwide gorged themselves on bonds backed by U.S. car loans, credit card debt, student loans and, especially, mortgages...Nobody cared about due diligence so long as the money kept pouring in during the housing boom.
...One Moody's executive who soared through the ranks during the boom years was Brian Clarkson, the guru of structured finance. He was promoted to company president just as the bottom fell out of the housing market...Several former Moody's executives said he made subordinates fear they'd be fired if they didn't issue ratings that matched competitors' and helped preserve Moody's market share.
...The ratings agencies were under no legal obligation since technically their job is only to give an opinion, protected as free speech, in the form of ratings.
...Experts such as Columbia University's Coffee think that Congress must impose some legal liability on credit rating agencies. Otherwise, they'll remain "just one more conflicted gatekeeper," and the process of pooling loans — essential to the flow of credit — will remain paralyzed and economic recovery restrained.
"If (credit) remains paralyzed, small banks cannot finance the housing demand. They have to take them (investment banks) these mortgages and move them to a global audience," said Coffee. "That can't happen unless the world trusts the gatekeeper."
Monday, October 5, 2009
You Cannot Manage It If You Cannot Measure It
TW: We posted about the birth death model here last summer. The BLS continues to add jobs to their models via the model despite our being amidst a recession. Now the revisions (not solely related to the B/D model) are starting. A friend assures me the BLS is doing the best they can (and this is a non-partisan issue even though these revisions reflect activity primarily during the Bush administration). Regardless the depth of the Great Contraction as evidenced by the above graph is a post-war worst from a job perspective (note the graph is normalized to reflect population growth).From Floyd Norris at NYT:
"In early 2008, a small band of people were arguing that we were in a recession. But the conventional wisdom — including at the Federal Reserve — was that the employment numbers said otherwise.
I remember people saying things like “you don’t go into recession when you are losing 60,000 jobs a month.”
They were right. It was the job numbers that were wrong.
The Bureau of Labor Statistics said today that it now thinks the economy lost 824,000 more jobs from April 2008 to March 2009 than it had previously estimated...
I suspect that the government and the Fed would have started trying to stimulate the economy much earlier had they had more accurate job figures."
http://norris.blogs.nytimes.com/2009/10/02/recession-what-recession/
Thursday, October 1, 2009
Comparative Job Creation And Loss
TW: Folks have troubles putting this recession into context. This chart helps. It shows not only the recent job losses but also the relatively tepid job creation since the prior recession in 2001-2002. On a net basis the U.S. economy has not created any new jobs since the late 1990's despite a growing population. The great American jobs machine of the '80's and '90's has lost its mojo.From the Big Picture blog:
"The Great 2007–2009 recession is the worst employment setback in the United States since the Great Depression.
• In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs...
• As of August 2009, the nation had 1.3 million (1,256,000) fewer private- sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.
• From 1980-2000, the US gained a 35.5 million private-sector jobs. During the current decade, America has lost more than 1.7 million private-sector jobs..."
http://www.ritholtz.com/blog/2009/10/post-recession-employment-arithmetic/
Tuesday, September 29, 2009
Debt Is Relative
(click on image to enlarge)
TW: This graph frames the relative size of various sources of debt for the U.S. Two things should pop out. "Government" including state, federal and gov't agency debts in sum are smaller than private debts. While federal debt is rising rapidly the other two government debts are not. Concurrently with private debt plummeting total debt growth is slowing quickly. Without federal debt growth (e.g. income stabilizers like unemployment insurance, social security/medicare payments, stimulus etc.) debt would have turned negative. With negative debt growth amidst a demand contraction a depression would almost certainly occur. Food for thought for those "demanding" Hooverian spending policies.
Saturday, September 5, 2009
The Employment Challenge
TW: I have posted this before but this one is updated (click on it to enlarge). It is the best, most succinct chart of what I believe is going on with the economy. One can note the last three recessions have been characterized by long, slow recoveries. The difference with the latest or current contraction being the depth of the decline, which while slowing has by no means ended and shows every sign of taking the long way back towards growth as opposed to any kind of "V" shaped rebound.There is something wrong with the American economy. I wish I knew exactly what it (I have my suspicions) was as the recoveries from the 2001 recession took place while blowing the real estate bubble. Jobless recoveries are nonsense, either you have employment growth or you do not have a real recovery.
Monday, August 24, 2009
Sorry Those Social Security COLAs Should Stay Flat
TW: We are experiencing deflation. Therefore, social security recipients are scheduled to receive no cost of living adjustment in their benefit for 2009 and perhaps 2010. This fact is starting to percolate into public view. I would bet you a bunch of COLAs that Congress (with POTUS support) will ignore the model and vote some sort of COLA increase. That would be wrong and grossly unfair to the rest of the country.
SS recipients booked a 5.8% COLA this past January to reflect the incipient inflation that ultimately reversed course rapidly into deflation. No one complained about that one. More importantly for those working, very few folks received anywhere near a 5.8% increase. In many cases folks were and are taking pay cuts.
The headline to the Huffington piece itself was misleading "Millions of older people face shrinking Social Security checks next year", their checks cannot shrink by law. They will face slightly higher co-pays on certain Medicare treatments, just like all of other Americans will face increases on certain goods. Also like other Americans in a deflationary environment they will enjoy lower costs on other goods.
Times are tough, the pain should be shared as equally as possible. Yet I suspect Congress in a bi-partisan manner will approve a COLA, why? Because seniors vote in big numbers. This would be wrong. This epitomizes why our fiscal future has been and continues to be under very serious stress.
From Huffington Post:
"Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.
By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.
...Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.
"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses."
...All beneficiaries received a 5.8 percent increase in January, the largest since 1982.
More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration."
http://www.huffingtonpost.com/2009/08/23/millions-face-shrinking-s_n_266404.html
SS recipients booked a 5.8% COLA this past January to reflect the incipient inflation that ultimately reversed course rapidly into deflation. No one complained about that one. More importantly for those working, very few folks received anywhere near a 5.8% increase. In many cases folks were and are taking pay cuts.
The headline to the Huffington piece itself was misleading "Millions of older people face shrinking Social Security checks next year", their checks cannot shrink by law. They will face slightly higher co-pays on certain Medicare treatments, just like all of other Americans will face increases on certain goods. Also like other Americans in a deflationary environment they will enjoy lower costs on other goods.
Times are tough, the pain should be shared as equally as possible. Yet I suspect Congress in a bi-partisan manner will approve a COLA, why? Because seniors vote in big numbers. This would be wrong. This epitomizes why our fiscal future has been and continues to be under very serious stress.
From Huffington Post:
"Millions of older people face shrinking Social Security checks next year, the first time in a generation that payments would not rise. The trustees who oversee Social Security are projecting there won't be a cost of living adjustment (COLA) for the next two years. That hasn't happened since automatic increases were adopted in 1975.
By law, Social Security benefits cannot go down. Nevertheless, monthly payments would drop for millions of people in the Medicare prescription drug program because the premiums, which often are deducted from Social Security payments, are scheduled to go up slightly.
...Advocates say older people still face higher prices because they spend a disproportionate amount of their income on health care, where costs rise faster than inflation. Many also have suffered from declining home values and shrinking stock portfolios just as they are relying on those assets for income.
"For many elderly, they don't feel that inflation is low because their expenses are still going up," said David Certner, legislative policy director for AARP. "Anyone who has savings and investments has seen some serious losses."
...All beneficiaries received a 5.8 percent increase in January, the largest since 1982.
More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration."
http://www.huffingtonpost.com/2009/08/23/millions-face-shrinking-s_n_266404.html
Friday, August 14, 2009
Knife Grabbers (cont.)
TW: I remain highly skeptical about the economy and the markets. Recall personal consumption exceeds 70% of the total economy, if it is declining 5%ish then the recession will continue.
In addition to being concerned about the markets I am very concerned that the political environment will get extremely difficult if the economy continues to splutter and perhaps locks up again over the winter. We cannot seem to get any rational governance now, what would happen in that circumstance I do not even want to contemplate.
From Floyd Norris at NYT:
A good measure of retail sales growth, or lack thereof, is total retail sales less spending at gasoline stations. Here are the year-over-year figures for that measure, starting last September, the month the economy started to plunge.
September, 2008, -4.3%
October, -6.6%
November, -7.5%
December, -8.7%
January, 2009, -7.0%
February, -6.3%
March, -7.6%
April, -8.0%
May, -7.7%
June, -6.8%
July, -5.9%
You can take encouragement from that, if you want to do so. The year-over-year decline is the smallest since September. But it turns out that all of that improvement comes from a modest increase in auto sales, caused by the “cash-for-clunkers” program..."
http://norris.blogs.nytimes.com/2009/08/13/consumers-arent-spending/
In addition to being concerned about the markets I am very concerned that the political environment will get extremely difficult if the economy continues to splutter and perhaps locks up again over the winter. We cannot seem to get any rational governance now, what would happen in that circumstance I do not even want to contemplate.
From Floyd Norris at NYT:
A good measure of retail sales growth, or lack thereof, is total retail sales less spending at gasoline stations. Here are the year-over-year figures for that measure, starting last September, the month the economy started to plunge.
September, 2008, -4.3%
October, -6.6%
November, -7.5%
December, -8.7%
January, 2009, -7.0%
February, -6.3%
March, -7.6%
April, -8.0%
May, -7.7%
June, -6.8%
July, -5.9%
You can take encouragement from that, if you want to do so. The year-over-year decline is the smallest since September. But it turns out that all of that improvement comes from a modest increase in auto sales, caused by the “cash-for-clunkers” program..."
http://norris.blogs.nytimes.com/2009/08/13/consumers-arent-spending/
Sunday, August 2, 2009
So You Want To Buy Stocks...
TW: Literally as I was punching out this post (Saturday) a feed came across from Barry Ritholz's blog quoting a Barrons piece quoting the same Rosenburg stuff I have below. Funny how the blogosphere works. But we pay more attention to Rosenburg than any other analyst. He used to be at Merrill Lynch before Bank of America gutted the place and replaced him with some happy talkers. Time will tell who is right.
In the mean U.S. employment is in very poor shape, maybe China is miraculously better managed than everyone else lets hope so or else that bubble will pop, and our banking system remains shattered with little consensus on how to fix it. Meanwhile our government remains split between those who would implement Hooverian policies and those who are more broad minded but very beholden to other interest groups (i.e. unions, pensioners etc.).
From David Rosenburg at Gluskin Sheff:
"...It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands. The end of the recession and the onset of a sustainable recovery, as we saw in 2002, are not the same thing. So this could still end badly but we will await confirmation signs that this is more than a very flashy bear market rally before shifting gears. As we said...yesterday, the cost of missing out on the first leg of a bull market, between the lows in the major averages and the lows in employment, is 20% — the price to pay to sleep at night. If we are late, and we do not intend on being too late or staying excessively bearish, we will know once the most important component of the business cycle, the engine that keeps the motor turned on, otherwise known as employment, begins to turn around on a discernible basis. We shall wait for that event, then make up our minds, and if this is the real deal, which at this time seems unlikely in the context of an ongoing credit contraction, then we will at least have 80% of the bull market to participate in … that is, if historical experience can be used as a guide.
...Something tells us that the marginal buyer of equities today at that price may well be the same person who was loading up on real estate during the summer of ’06..."
In the mean U.S. employment is in very poor shape, maybe China is miraculously better managed than everyone else lets hope so or else that bubble will pop, and our banking system remains shattered with little consensus on how to fix it. Meanwhile our government remains split between those who would implement Hooverian policies and those who are more broad minded but very beholden to other interest groups (i.e. unions, pensioners etc.).
From David Rosenburg at Gluskin Sheff:
"...It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands. The end of the recession and the onset of a sustainable recovery, as we saw in 2002, are not the same thing. So this could still end badly but we will await confirmation signs that this is more than a very flashy bear market rally before shifting gears. As we said...yesterday, the cost of missing out on the first leg of a bull market, between the lows in the major averages and the lows in employment, is 20% — the price to pay to sleep at night. If we are late, and we do not intend on being too late or staying excessively bearish, we will know once the most important component of the business cycle, the engine that keeps the motor turned on, otherwise known as employment, begins to turn around on a discernible basis. We shall wait for that event, then make up our minds, and if this is the real deal, which at this time seems unlikely in the context of an ongoing credit contraction, then we will at least have 80% of the bull market to participate in … that is, if historical experience can be used as a guide.
...Something tells us that the marginal buyer of equities today at that price may well be the same person who was loading up on real estate during the summer of ’06..."
Monday, July 27, 2009
China Is Blowing the Next Great Bubble
TW: The "recovery" such as it is, is premised upon a couple of predicates: 1) inventories are being worked down and 2) places like China are still growing fairly rapidly. The first point is true but at best would mean the economy stops shrinking and either flatlines or grows very tepidly.
The second is really the basis for most of the commodity and stock market increases. As the pieces below mention, the continuing high single digit growth in China may prove ephemeral. Their banks directed by the national government are lending funds like drunken sailors whilst many of those funds are being directed towards investment- either materials or additional production capacity. Domestic consumption within China is not growing particularly well. For what purpose will all of those materials and additional capacity be needed in six months? The world is awash in production capacity, providing more only feeds the deflationary risk.
As for the loans drunken sailors end up hungover, drunken sailor loans end up as un-repaid loans (something we Americans have considerable experience with in the recent past).
From Michael Pettis' blog:
"...Hu Shilu, editor of Caijing...recently made a strong case against continuation of the current fiscal program when she wrote in an editorial this week that “a policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path.”
'Various signals suggested China’s economy had returned to a stable track by the end of the second quarter, giving us an opportunity to reassess macroeconomic policy. Data released by the National Bureau of Statistics showed that China’s GDP rose 7.1 percent in the first half of the year, and 7.9 percent in the second quarter alone. Apparently, China’s economy has bottomed out. These achievements could intoxicate Chinese policymakers. But we see no miracles here. In fact, economic growth recovery in China is being driven by investment. Some 6.2 percent of the country’s first half GDP growth rate can be credited to investment, while consumption accounted for 3.8 percent. The net export business contributed a minus 2.9 percent to the growth rate figure.'Hu makes the point that the “surprisingly high” Chinese growth is neither surprising nor cause for celebration. It is the automatic outcome of a huge stimulus, and the real question, as I have argued many times, is not whether high current growth indicates that China has turned the corner on the crisis (it most certainly has not, in my opinion), but whether the cost of achieving this growth is excessive and will lead to more difficult conditions in the future..."
http://mpettis.com/2009/07/more-public-worrying-about-the-chinese-stimulus/
From John Mauldin at Barry Ritholz' blog:
"...If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?
That is the equivalent of what China is now doing. The volume of credit that is flowing into China isequivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame..."
http://www.ritholtz.com/blog/2009/07/the-statistical-recovery/
The second is really the basis for most of the commodity and stock market increases. As the pieces below mention, the continuing high single digit growth in China may prove ephemeral. Their banks directed by the national government are lending funds like drunken sailors whilst many of those funds are being directed towards investment- either materials or additional production capacity. Domestic consumption within China is not growing particularly well. For what purpose will all of those materials and additional capacity be needed in six months? The world is awash in production capacity, providing more only feeds the deflationary risk.
As for the loans drunken sailors end up hungover, drunken sailor loans end up as un-repaid loans (something we Americans have considerable experience with in the recent past).
From Michael Pettis' blog:
"...Hu Shilu, editor of Caijing...recently made a strong case against continuation of the current fiscal program when she wrote in an editorial this week that “a policy that encourages loose lending and investment is driving China’s economic engine down an old, unsustainable path.”
'Various signals suggested China’s economy had returned to a stable track by the end of the second quarter, giving us an opportunity to reassess macroeconomic policy. Data released by the National Bureau of Statistics showed that China’s GDP rose 7.1 percent in the first half of the year, and 7.9 percent in the second quarter alone. Apparently, China’s economy has bottomed out. These achievements could intoxicate Chinese policymakers. But we see no miracles here. In fact, economic growth recovery in China is being driven by investment. Some 6.2 percent of the country’s first half GDP growth rate can be credited to investment, while consumption accounted for 3.8 percent. The net export business contributed a minus 2.9 percent to the growth rate figure.'Hu makes the point that the “surprisingly high” Chinese growth is neither surprising nor cause for celebration. It is the automatic outcome of a huge stimulus, and the real question, as I have argued many times, is not whether high current growth indicates that China has turned the corner on the crisis (it most certainly has not, in my opinion), but whether the cost of achieving this growth is excessive and will lead to more difficult conditions in the future..."
http://mpettis.com/2009/07/more-public-worrying-about-the-chinese-stimulus/
From John Mauldin at Barry Ritholz' blog:
"...If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?
That is the equivalent of what China is now doing. The volume of credit that is flowing into China isequivalent to one-third of their GDP. Banks that already have large problem-loan portfolios are now lending even more, in a very short time frame..."
http://www.ritholtz.com/blog/2009/07/the-statistical-recovery/
Thursday, July 23, 2009
Cut State Budgets, Let the Feds Run Deficits
TW: The majority of states are facing significant budget deficits with CA being the poster child. As we have mentioned before, if the states cut spending or raise taxes it is pro-cyclical into the face of the demand contraction, which only makes the demand contraction worse. Unlike the federal government states are constrained on their ability to run deficits so either the taxes or cuts must be enacted.
I am coming the conclusion that states biting the fiscal bullet and initiating their contractionary measures and letting the feds sort out the necessary deficit funding to prevent the Great Recession from evolving into the GD 2.0 is inevitable and necessary. I would add increasing state level taxes in those states with relatively high taxes should not be the approach either. Service cutbacks are the answer- pensions, fire/police/prisons/groundskeepers/clericial everything and anything except maybe infrastructure.
Folks will suffer to a degree but it has to happen. Below from a lefty CA site whines about their cuts. But as one can see the cuts are not even covering most of the gap, much of the gap is covered with accounting gimmickry and grabs from local government. And of course as seen by the second article the "agreed upon" cuts are already raising a ruckus. Americans need to start making tough choices. The states are metaphors for the federal government. But implementing a federal belt tightening amidst the Great Contraction will raise the odds of GD 2.0. There will be time enough for the federal cuts (and taxes) later.
From Calitics:
"...$15 billion in cuts, no new taxes, $11 billion in gimmicks and borrowing $4-5 billion in local government raids only an $800 million reserve (initially the talks were for a $4 billion one)
$6 billion in reductions to public schools...
$1 billion assumed for the sale of the State Compensation Insurance Fund, which is not only unlikely but would really crush small businesses if sold
...three furlough days a month for some state employees still in place for the rest of the year $500 million in cuts to Cal Works smiles all around from Dem leg. leaders as they cheer that "we did not eliminate the safety net for California." Poking a big hole in it, apparently, qualifies as A-OK. ...
we're also cutting $1.2 billion to corrections without releasing any prisoners, as per the actual politics as usual. The only way you can do that is by cutting every treatment or rehabilitation program in the prisons, or eliminating overtime for corrections officers. In other words, we're turning prisons into Public Storage units."
http://calitics.com/diary/9432/yay-deal-by-David-Dayen
From LA Times:
"...Less than 24 hours after Gov. Arnold Schwarzenegger and legislative leaders announced a plan to close California's massive budget deficit, Los Angeles County officials moved to sue the state, a union for government workers said it might strike, and Republicans threatened to back out of the deal over a provision to cut the number of prison inmates by 27,000.
I am coming the conclusion that states biting the fiscal bullet and initiating their contractionary measures and letting the feds sort out the necessary deficit funding to prevent the Great Recession from evolving into the GD 2.0 is inevitable and necessary. I would add increasing state level taxes in those states with relatively high taxes should not be the approach either. Service cutbacks are the answer- pensions, fire/police/prisons/groundskeepers/clericial everything and anything except maybe infrastructure.
Folks will suffer to a degree but it has to happen. Below from a lefty CA site whines about their cuts. But as one can see the cuts are not even covering most of the gap, much of the gap is covered with accounting gimmickry and grabs from local government. And of course as seen by the second article the "agreed upon" cuts are already raising a ruckus. Americans need to start making tough choices. The states are metaphors for the federal government. But implementing a federal belt tightening amidst the Great Contraction will raise the odds of GD 2.0. There will be time enough for the federal cuts (and taxes) later.
From Calitics:
"...$15 billion in cuts, no new taxes, $11 billion in gimmicks and borrowing $4-5 billion in local government raids only an $800 million reserve (initially the talks were for a $4 billion one)
$6 billion in reductions to public schools...
$1 billion assumed for the sale of the State Compensation Insurance Fund, which is not only unlikely but would really crush small businesses if sold
...three furlough days a month for some state employees still in place for the rest of the year $500 million in cuts to Cal Works smiles all around from Dem leg. leaders as they cheer that "we did not eliminate the safety net for California." Poking a big hole in it, apparently, qualifies as A-OK. ...
we're also cutting $1.2 billion to corrections without releasing any prisoners, as per the actual politics as usual. The only way you can do that is by cutting every treatment or rehabilitation program in the prisons, or eliminating overtime for corrections officers. In other words, we're turning prisons into Public Storage units."
http://calitics.com/diary/9432/yay-deal-by-David-Dayen
From LA Times:
"...Less than 24 hours after Gov. Arnold Schwarzenegger and legislative leaders announced a plan to close California's massive budget deficit, Los Angeles County officials moved to sue the state, a union for government workers said it might strike, and Republicans threatened to back out of the deal over a provision to cut the number of prison inmates by 27,000.
Friday, July 17, 2009
Watch Real Estate Inflate Then Deflate
TW: Graphical depications are always fun. This does a great job of showing how the real estate market ballooned then has now deflated. The data starts in 1987 then proceeds through the present, note the benchmark median income green bar on the left. As one can see, median income has barely budged on an inflation adjusted basis during the past 20 years.
Thursday, July 2, 2009
Yes This Is a Great Recession
TW: I will not digress into the tedious memes now circulating. The "green shootists" (the happy talk about economic stats usually based on the dreaded 2nd derivative or rate of change improving) are being overtaken by the "brown weeders" (the grumpy talk about the economic stats in absolute and other terms still being quite nasty).The above graph though portrays in one (relatively) simple graph the depth of this Great Recession. As one can see, the duration and depth of the plunge in employment (in % terms not absolute so the population growth over the past 60 years is equivalized) during this recession is the worst since WWII or more specifically since GD 1.0. One can also see that the declines will almost certainly continue. One does not need to understand calculus (i.e. 2nd derivatives) to eyeball how the lines on the graphs for employment do not just turn on a dime, they change gradually. The current line has a while to run yet.
Btw, I posted last month on how the birth/death model is softening the job loss number. The BLS threw in +185K jobs this month. The real numbers are likely at least that much worse.
Thursday, June 25, 2009
Should California Be Bailed Out? NOOOO!!
TW: California is barreling towards its July 1 fiscal deadline without resolution. This should be interesting. California is a partial metaphor for the rest of the nation's fiscal situation. This piece's core point- "The [CA] public imagined that they could have world class government services with extraordinarily low levels of taxation" is applicable to the balance of the nation.
The California situation frames numerous issues:
1) Fiscally speaking Californians mouths are bigger than their stomach's and their system is good at feeding the mouth without digesting properly. The governance structure in CA can relatively easily initiate new spending programs (via referendums) but cannot raise the commensurate taxes (need 2/3 majorities for that and the state districts are gerrymandered to elect strident partisans from both sides).
2) CA creates systematic risk for the rest of the country. If CA were to default on its bond obligations, we would be talking about another cascading financial crisis as other muni bonds across the nation would come under new scrutiny (rates would rise etc.). A CA default is highly unlikely as I believe the bondholders are ahead of just about every stakeholder in CA but for education. In other words CA would have to stop paying firemen, police, health care expenses first before defaulting on the bond payments.
3) CA symbolizes the challenge of variable revenues amidst a demand contraction. As CA (or any other state) contracts is spending in line with its contracting tax revenues, it feeds the downward cycle of overall demand. States unlike the Federal government do not have the leeway to deficit spend to counter the overall demand contraction.
4) But for the federal government to "bailout" CA creates a major moral hazard. If states think Washington will ultimately bail them out then their incentives to address their own problems is greatly diminished.
5) Would the rest of the country support "bailing out" CA?
For these last two reasons, I do not believe Obama will "bail out" CA. The political support issue is important but should ultimately be secondary. The moral hazard issue should be paramount. There are ways for that issue to be overcome (i.e. by CA initiating governance reforms to prevent the deficit from recurring) but the only way those reforms will happen will be through a game of chicken with the federal government. While I support playing the game, these games are how disasters occur and depressions are created. Things should never get to this point.
From Economist:
"...NPR interviewed two mayors from California cities—San Diego and Santa Anna—on the subject of the state's budget crisis and the state government's efforts to close the yawning gap between revenues and expenditures by taking or borrowing money from metropolitan budgets. The mayors were obviously not very pleased with this approach, but what surprised me was how sanguine they seemed about the crisis in general, and how unable they were to discuss the actual issues involved. The mayors appeared to believe that so long as their local budgets were sound, no amount of state level cuts would much affect them. They also stood firmly in the belief that California voters were entirely in the right in placing strict constitutional limits on tax increases, and they declared that the "literally bloated bureaucracy" needed to live within its means.
It's all well and good to talk about a bloated bureaucracy, but state legislators could cut government employment in Sacramento to the bone without making much of a dent in the budget crisis. It isn't the pencil pushers spending the money, it's the demands of the public, expressed through their elected representatives but also directly, in statewide ballot initiatives.
The public has imagined that they could have world class government services with extraordinarily low levels of taxation. This is a fantasy, and one is sorely tempted to let the state figure this out for itself. Presumably, after the sudden release of thousands of prison inmates has spurred a spike in crime, drastic cuts to top universities generate mass academic brain drain, and shortfalls in key social services lead to a wave of well-publicised suffering, Californians will begin to get the picture—you get what you pay for.
For now, the administration seems inclined to take this approach...presidential advisors have determined that California is not yet at the brink and ought to work harder to close its budget gap by itself. Obama officials are also nervous that a California bail-out will lead to a wave of requests from other states
...Structural budget problems in California and elsewhere are a major roadblock, and no aid should be forthcoming until binding negotiations have taken place between state and federal officials, establishing a path to long-run budget stability. But this is the wrong place to hold a line against bail-outs.
For one thing, countercyclical aid to states is entirely appropriate. Most state constitutions prevent their governments from running annual budget deficits. This means that in recessions, pro-cyclical tax increases and service cuts are necessary. There should be a federal aid automatic stabiliser in place to prevent this (accompanied by a "tax" on state budgets during boom times).
...But it is also clear to me that this is the next Lehman. This is the domino you can't let topple. There are no good options available. A default would roil municipal debt markets and could seriously harm both state budgets and financial markets. Solving the budget crisis without addressing the constituional issues would involve pro-cyclical and economically destabilising budget cuts. Solving the crisis while addressing the constitutional limits on tax increases would prevent dangerous cuts to services, but would still be pro-cyclical, and is at any rate impossible in the necessary time frame.
The downsides to intervention are clear—moral hazard, growing demands from other states, the risk that California may not fix the underlying issues, the use of scarce political capital to obtain funds from Congress, and so on. But the adminstration has gone to great lengths to put a floor under this economy, guaranteeing that no major financial institutions would fail and racking up a trillion dollar deficit. Letting California go would throw much of that work out the window. How one observes the failure of a middling investment bank creating global financial havoc and then allows the world's eighth largest economy to crater over a matter of $24 billion is beyond me. I remain convinced that the adminstration will not allow it to happen"
http://www.economist.com/blogs/freeexchange/2009/06/slipping_into_the_sea.cfm
The California situation frames numerous issues:
1) Fiscally speaking Californians mouths are bigger than their stomach's and their system is good at feeding the mouth without digesting properly. The governance structure in CA can relatively easily initiate new spending programs (via referendums) but cannot raise the commensurate taxes (need 2/3 majorities for that and the state districts are gerrymandered to elect strident partisans from both sides).
2) CA creates systematic risk for the rest of the country. If CA were to default on its bond obligations, we would be talking about another cascading financial crisis as other muni bonds across the nation would come under new scrutiny (rates would rise etc.). A CA default is highly unlikely as I believe the bondholders are ahead of just about every stakeholder in CA but for education. In other words CA would have to stop paying firemen, police, health care expenses first before defaulting on the bond payments.
3) CA symbolizes the challenge of variable revenues amidst a demand contraction. As CA (or any other state) contracts is spending in line with its contracting tax revenues, it feeds the downward cycle of overall demand. States unlike the Federal government do not have the leeway to deficit spend to counter the overall demand contraction.
4) But for the federal government to "bailout" CA creates a major moral hazard. If states think Washington will ultimately bail them out then their incentives to address their own problems is greatly diminished.
5) Would the rest of the country support "bailing out" CA?
For these last two reasons, I do not believe Obama will "bail out" CA. The political support issue is important but should ultimately be secondary. The moral hazard issue should be paramount. There are ways for that issue to be overcome (i.e. by CA initiating governance reforms to prevent the deficit from recurring) but the only way those reforms will happen will be through a game of chicken with the federal government. While I support playing the game, these games are how disasters occur and depressions are created. Things should never get to this point.
From Economist:
"...NPR interviewed two mayors from California cities—San Diego and Santa Anna—on the subject of the state's budget crisis and the state government's efforts to close the yawning gap between revenues and expenditures by taking or borrowing money from metropolitan budgets. The mayors were obviously not very pleased with this approach, but what surprised me was how sanguine they seemed about the crisis in general, and how unable they were to discuss the actual issues involved. The mayors appeared to believe that so long as their local budgets were sound, no amount of state level cuts would much affect them. They also stood firmly in the belief that California voters were entirely in the right in placing strict constitutional limits on tax increases, and they declared that the "literally bloated bureaucracy" needed to live within its means.
It's all well and good to talk about a bloated bureaucracy, but state legislators could cut government employment in Sacramento to the bone without making much of a dent in the budget crisis. It isn't the pencil pushers spending the money, it's the demands of the public, expressed through their elected representatives but also directly, in statewide ballot initiatives.
The public has imagined that they could have world class government services with extraordinarily low levels of taxation. This is a fantasy, and one is sorely tempted to let the state figure this out for itself. Presumably, after the sudden release of thousands of prison inmates has spurred a spike in crime, drastic cuts to top universities generate mass academic brain drain, and shortfalls in key social services lead to a wave of well-publicised suffering, Californians will begin to get the picture—you get what you pay for.
For now, the administration seems inclined to take this approach...presidential advisors have determined that California is not yet at the brink and ought to work harder to close its budget gap by itself. Obama officials are also nervous that a California bail-out will lead to a wave of requests from other states
...Structural budget problems in California and elsewhere are a major roadblock, and no aid should be forthcoming until binding negotiations have taken place between state and federal officials, establishing a path to long-run budget stability. But this is the wrong place to hold a line against bail-outs.
For one thing, countercyclical aid to states is entirely appropriate. Most state constitutions prevent their governments from running annual budget deficits. This means that in recessions, pro-cyclical tax increases and service cuts are necessary. There should be a federal aid automatic stabiliser in place to prevent this (accompanied by a "tax" on state budgets during boom times).
...But it is also clear to me that this is the next Lehman. This is the domino you can't let topple. There are no good options available. A default would roil municipal debt markets and could seriously harm both state budgets and financial markets. Solving the budget crisis without addressing the constituional issues would involve pro-cyclical and economically destabilising budget cuts. Solving the crisis while addressing the constitutional limits on tax increases would prevent dangerous cuts to services, but would still be pro-cyclical, and is at any rate impossible in the necessary time frame.
The downsides to intervention are clear—moral hazard, growing demands from other states, the risk that California may not fix the underlying issues, the use of scarce political capital to obtain funds from Congress, and so on. But the adminstration has gone to great lengths to put a floor under this economy, guaranteeing that no major financial institutions would fail and racking up a trillion dollar deficit. Letting California go would throw much of that work out the window. How one observes the failure of a middling investment bank creating global financial havoc and then allows the world's eighth largest economy to crater over a matter of $24 billion is beyond me. I remain convinced that the adminstration will not allow it to happen"
http://www.economist.com/blogs/freeexchange/2009/06/slipping_into_the_sea.cfm
Tuesday, June 23, 2009
1930 Flashbacks
TW: There is a site for everything on the web. Have come across one that summarizes the Wall Street Journal day by corresponding day for 1930. I like historical snapshots of contemporary media. They can be instructive, these are from June, 1930.
From http://newsfrom1930.blogspot.com/:
"Market students have been encouraged by the general gloom for the past two weeks. This contrasts with the “new era” thinking of last summer when no end was seen to the rise in stock prices and margin debt was hitting a record every week. History says the current gloom is just as mistaken as last summer's unjustified optimism. Historically there has been no case in this country since 1900 when business failed to turn upward the year following a [recession].
Harvard Economics Society says the recent market weakness reflects pessimism and uncertainty, but sees no change in the fundamentals, forecasts “an early improvement in business.”
Miami's population grows from 29,571 in 1920 to 110,025 in 1930
Economists feel the current situation in commodity markets is starting to look like a bottom; a combination of underproduction and easy credit at low rates should work as usual to correct conditions.
Maurice S. Benjamin of Benjamin, Hill, & Co. predicted two months ago that the market would have to undergo a severe pullback before reaching new highs. He then sailed for Europe. Following that correct call, he now says the decline is over and predicts a quick improvement in business, stock prices much higher by fall, and still higher by next spring [TW: making one correct call is nice, being able to make the next...not so easy hello Mr. Roubini...]
Front page above the fold editorial: “This is America. Piffling talkers would turn back the calendar to the nineties and destroy the economic progress of thirty years. Vicious rumors spread for selfish purposes; flippant predictions of a five-year slump in business; wholesale demands for the cutting of wages are unworthy of American intelligence. Credit is super-abundant. Business is no worse than three months ago. Twelve months of declining volume is behind us. Many adjustments have been all but completed. Engineering and marketing brains are as fertile as ever. Problems there have always been. To proclaim their insurmountability is childish.”
From http://newsfrom1930.blogspot.com/:
"Market students have been encouraged by the general gloom for the past two weeks. This contrasts with the “new era” thinking of last summer when no end was seen to the rise in stock prices and margin debt was hitting a record every week. History says the current gloom is just as mistaken as last summer's unjustified optimism. Historically there has been no case in this country since 1900 when business failed to turn upward the year following a [recession].
Harvard Economics Society says the recent market weakness reflects pessimism and uncertainty, but sees no change in the fundamentals, forecasts “an early improvement in business.”
Miami's population grows from 29,571 in 1920 to 110,025 in 1930
Economists feel the current situation in commodity markets is starting to look like a bottom; a combination of underproduction and easy credit at low rates should work as usual to correct conditions.
Maurice S. Benjamin of Benjamin, Hill, & Co. predicted two months ago that the market would have to undergo a severe pullback before reaching new highs. He then sailed for Europe. Following that correct call, he now says the decline is over and predicts a quick improvement in business, stock prices much higher by fall, and still higher by next spring [TW: making one correct call is nice, being able to make the next...not so easy hello Mr. Roubini...]
Front page above the fold editorial: “This is America. Piffling talkers would turn back the calendar to the nineties and destroy the economic progress of thirty years. Vicious rumors spread for selfish purposes; flippant predictions of a five-year slump in business; wholesale demands for the cutting of wages are unworthy of American intelligence. Credit is super-abundant. Business is no worse than three months ago. Twelve months of declining volume is behind us. Many adjustments have been all but completed. Engineering and marketing brains are as fertile as ever. Problems there have always been. To proclaim their insurmountability is childish.”
Wednesday, June 17, 2009
Bah Humbug
(click on graphs to enlarge) TW: These graphs via the Big Picture blog, hit two of our themes. One, earnings generally suck and two the "reported" earnings are particularly bad. For those concerned about inflation and still talking about V-shaped rebounds and return to normalcy, I say "bah humbug". Earnings have cratered, much of what has passed for "earnings" year-to-date are accounting gimmicks related to mark-to-market etc.
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