Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Financial Crisis Page 7 of 12

Catching Up with the Obama Dilemma

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On June 21, 2010

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I haven’t had much to say the last bit, because the rest of the blogosphere and even mainstream pundits are catching up to where I was a while ago.  Let’s see where we are, and where we’re going.

To recap:

1) the stimulus bill was neither big enough, nor well enough put together to do the job.  However many jobs it “saved and created” they weren’t enough.

2) Obama is not in the least interested in doing progressive things unless great pain is inflicted on him, personally.  This is most likely because he is not a progressive.

3) On civil liberties, Obama is probably actually worse than Bush.  Yes, that’s quite an accomplishment, but there you have it.

4) He’s an incompetent leader, who over-centralizes decision making, refuses to delegate, then makes decisions slowly and badly.

5) His courtiers are not the problem (although they’re almost all scum), he is the problem: he chose them.

6) The spring job recovery is already petered out, and around the world virtually every major economy other than China is turning to austerity, including the US.  US cities and States are in a horrible state, gross income is down, and bank lending is still not recovering.  The US economy has become more oligopolistic and more sclerotic than ever before, with the major firms who run the economy making their money by squeezing little people who have nowhere to turn.  Thanks to Bernanke, Paulson, Geither, Bush and Obama’s bailouts, and refusal to engage in meaningful restructuring of the economy or the financial industry, their profits have recovered.  That means, to them, that the crisis is over.

7) Election results in the midterms are looking really bad.  I was warning about this in beginning of 2009, because if Obama’s economic policies didn’t work, and if he continually alienated the base, it was going to cause problems.  The only thing Obama and Congressional Dems have going for them is how bloody awful the Republicans are.  But being the lesser evil isn’t always enough.  Liberals and progressives can’t vote Republican, but they can refuse to donate, not volunteer, and in many cases, not vote.

Going forward Obama is faced with a choice.  He won’t do enough to make the base happy, because he genuinely doesn’t believe in any progressive ideals.  What he can do, however, is goose the economy. He has most of the TARP slush fund to play with.  He could dump it into the economy post-haste in order to rescue the mid-terms.

Whether to do so is a dilemma for him.  On the one hand standard methodologies are still showing that the Dems (barely) hold onto the House, and keep the Senate.  But it isn’t much of a stretch for the Republicans to win the House.

If they do so, Obama’s presidency is effectively over.  The Republicans will Clintonize him, tying him down in a blizzard of subpoenas and fake scandals.  He will get nothing done for the next two years, and will probably lose re-election.

On the other hand, if he spends the money in 2010, it won’t be there in 2012, and after all, Dems might squeeze through without it.

Choices, choices…

I’d feel sorry for him, but he’s made clear that he isn’t a Democratic president, and he isn’t a liberal or a progressive, so I see no point in wasting any angst on personal problems he himself created.  All of this was totally predictable, and was, in fact predicted by multiple people.

Obama never made a sincere effort to fix the economy, to end the wars, to stop civil liberties abuses or to revamp the financial industry.

As he reaps, so he sows.  It is unfortunate Americans have to suffer even more than he does (he’ll be taken care of after he leaves the Presidency, never fear), but such is life.  Maybe it’s time to stop voting for people who say they love Reagan and that they don’t believe in Democratic solutions to problems.

Coming up…

We’re still in a Depression

and

Why it is never in Congress’s interests to look after Americans

Crunch Time: Two Economic Scenarios for the rest of the year

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On May 21, 2010

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Ok, we’re in crunch time.  Bernanke is pulling a strong dollar play and trying to unwind as much of what was done in 08 and 09 as he can.  Meanwhile, across the Western world, we have a wave of Hooverism, everyone wants to cut, cut, cut spending.  And China isn’t looking as healthy as it once did, which is bad, because basically China is keeping the actual (as opposed to financial) world economy afloat.

However, the good news is the drop in oil prices.  High oil prices (and yes, $80 is high) had led to, essentially, only a few half decent months of job growth.  Oil had to be gotten under control.

This is, in essence, the same play Bernanke tried to perform in 08.  He crashed out oil prices, and took the world financial economy with it.

To understand why you need to understand the contradiction at the heart of the modern neoliberal world economy.

There is a lot of hot money in the world economy, more hot money than there are truly safe investments.  The financial bubble and collapse could be summed up as “trying to get AAA security with higher than AAA returns”.  The paper was almost all produced in an attempt to get better than Treasury bond returns while claiming to be as secure as Treasury bonds.  Obviously, the paper wasn’t, and it all crashed out.

There is still too much hot money which wants AAA security, and better than AAA returns.  They demand that governments find a way to give it to them.  One way is for the Fed to give them free money, then borrow it back from them (we’ll lend to you at zero, you lend back to us at 3%.  Free money!)  But there are limits to these sorts of games.

Why?  Well, that’s the contradiction.  Because the hot money is both scared by the prospects of high deficits (government defaults) and by the economy itself crashing out because, well, there isn’t enough stimulus.  If you’re scared of too much stimulus and you’re scared of too high deficits, well, you’re caught between the proverbial rock and a hard place.

Currently the pressure is mostly on the austerity side, with an IMF style crackdown in both Greece and Spain, with a healthcare bill in the US which “saves money” and so on.

The problem is that actual private income in the US, for example, is about 500 billion lower than it was pre-crisis.

The economy breathes fine, as long as we don’t unplug the life support.

And unplug the life support is what everyone except the Chinese seem to want to do.

The US dollar getting higher and commodities getting lower, if it doesn’t crash out the economy when added to global austerity, means that a relatively small amount of money can reorient the economy.  This is the Rubin play, and when Rubin did it for Clinton, it worked.  The thing is, back then, the internet boom was waiting to happen.  I don’t see what Obama and Bernanke will reorient the US economy towards: I don’t see the next big boom (oh, I see some things it could be, but I don’t think they want any of those things.)

The next few months will tell the tale.  Will global austerity throw the world into a second downleg of this depression?  Or will global austerity and Bernanke’s strong dollar play crush commodity prices without crushing the real economy?  And will investors freak out, caught between their twin fears of deficits (don’t want to be in bonds) and lack of stimulus (don’t want to be in stocks), and go on strike again, causing another financial contagion?

Who knows.  I’m coming down on the downside right now, mainly because I believe that when you’re given a choice of betting for or against Bernanke, you should generally bet against.  (Not directly or in the short run, though, he’s still the player with the biggest stack on the table.)

Obama, Congress and Bernanke did not save the world from a Great Depression

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On May 14, 2010

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Sorry, they simply did not. The baseline IMF forecast before the bailouts and before the stimulus bill tracks almost exactly what happened.

The bailouts were an actual net drag on the economy.  Instead of cleaning up banks balance sheets, they allowed zombie banks to continue to exist, banks which are crippled when it comes to lending.  In order to make sure these banks can pay down their bad debts, the Fed not only had to take on huge amounts of their paper at par when it was worth 20 cents at most, it has had to lend to them at concessionary rates, pay extra interest to them, and let them leverage that to make obscene profits from what lending they are doing (why did your credit card rate go up, that’s why?) and from trading on a captive market.

As best I can figure the stimulus was large enough to counteract the negative effect of the bailout.

The net, is a wash.

Furthermore, there were far, far more intelligent things which could have been done.  The crisis was, as the tired phrase goes, also an opportunity to break the power of monied interests, so that ordinary Americans could prosper again and could reclaim their government.  The stimulus was an opportunity to restructure the US economy to allow real, widespread growth in the future.

Both those opportunities were wasted, and they were wasted by Obama.  TARP would not have passed without him, and once he was in power he could have demanded that Bernanke do as he commanded (break the banks) or step down, if Bernanke wouldn’t, he could have easily impeached him.  The stimulus was his stimulus.

Obama, Congress, Bernanke, Geithner, Paulson—none of them saved anybody except the banks and the rich from apocalypse.  I understand that partisan Democrats want to pretend Dems saved the world, but they did no such thing.

(Addendum. See Rosenbert here (h/t Sean-Paul):

There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits . . .

Real consumer spending is up $200 billion over the past 16 months and everyone believes we have a sustainable recovery even though organic income is down almost $500 billion. Think about that for a second because once the stimulus wears off, and with a 10% deficit-to-GDP ratio and concerns surfacing everywhere about sovereign credit risks, there is little out there to support future growth in consumption.)

Actual Good News

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On May 13, 2010

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The reform of the credit agencies, which creates an office in the SEC which assigns securities to the agencies to be rated, rather than the security issuer choosing (and paying) who rates them, is an actual good reform.  The Fed audit, while it is more limited than I would have liked, if done properly, should be very interesting.  Financial reform is still far from sufficient, but some intelligent good stuff is being passed.

Clarifying The Dow Drop And Its Consequences

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On May 8, 2010

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Some folks seem to misunderstand what I wrote (which indicates I wasn’t clear enough.)  I do not know if the huge drop was a message, it certainly may have been.  But whether it was deliberate or not, it indicates that the big money CAN crash the market whenever it wants.  This is a sharper demonstration of what the 2008 crisis showed—that the hot money can crash the markets and the economy any time it wants.

The lesson of 2008, as understood by political elites, was that this hot money MUST be appeased.  The money wants high, risk free returns, and if it doesn’t get them, it will make everyone hurt.  This is why, instead of taxing the rich, which is where the money is and which has essentially no economic costs (a 20% tax on purchases of luxury goods or services over 1.5 million would have essentially zero cost to the real economy) what is happening instead is talk of slashing entitlements, or in edge economies like Greece, austerity.  (Britain will soon be getting cuts at their national level  and States and Cities have already had cuts in the US.)

Instead of appeasement, the 2008 crisis offered an opportunity to break the rich, by forcing them to recognize their losses, by refusing to bail out the financial institutions so that shareholders AND bondholders got smashed.  At the same time, to reduce the effect on the real economy, either the FED could have loaned directly to businesses and consumers or the FDIC could have taken over major banks which were dead, like Citigroup, and pushed out Fed money through the newly nationalized banks.

The end result would have been the power and wealth of the rich broken, and the real economy in not much worse shape, but able to recover much better, since the recovery wouldn’t be hobbled by the need to prop up insolvent banks, by crippled lending by effectively insolvent banks and by the need to provide above market returns to banks and the hot money rich.

This is explicitly what I was proposing in 2008, but of course, it didn’t happen.  So, instead, we get a decade of suck, if we’re lucky, the EU gets multiple failed economies and austerity plans, and the rich get 80%+ of the profits of the coming economic cycle.  If we’re unlucky (or maybe if we’re lucky) it crashes out sometime before then, since it is teetering on the edge.

Here is the basic thing you need to understand:

You can have lots of rich people, or you can have widespread prosperity.  You cannot have both.

Greek Mistakes, European Misery and the Coming Decade of Suck

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On May 7, 2010

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1) killing bankers isn’t what’s needed.  The people who need to be scared are their own rich, and their own politicians, who voted for the cram down instead of deciding to end tax evasion, primarily by the rich, and which by itself is enough to close the gap and avoid austerity measures.

2) Voting in right wing governments.  You get what you vote for.

When you refuse to tax the rich, the only other option is to soak the middle class and the poor.

Meanwhile the Brits have voted for cuts, cuts, cuts.  They too are about to get what they asked for.  Austerity.

This contagion is going to spread, because Europe is fundamentally in the same mode as the US: spare the rich, cram down the middle class.  The lesson taken by the elites from the crisis was that the rich must be appeased at all costs, because if they aren’t, they will go on strike, and crash the world economy.

What happened yesterday on the stock market proves it–nearly a 1,000 points off the DOW in seconds.  The stock markets are no longer free markets, their movements are controlled by a relatively small number of actors with very deep pockets, who can make them go up or down whenever they choose.

There was an opportunity to break the power of these folks—to wipe them out, but it required calling their bluff, not caving to them.  That opportunity has now passed.  While the world economy remains very fragile and could go into a tailspin any time if anything goes wrong, best guess is we have another really lousy recovery and economic cycle to look forward to, if austerity measures don’t crash it out entirely.  Over 80% of any gains will go to corporate profits, virtually nothing to ordinary citizens, and we’ll have another lost decade in which for virtually everyone the economy sucks.

There are solutions, but it’s clear that the elites in most countries aren’t willing to do anything about it, and frankly the population keeps voting for right wing governments (whether called that or not), so they’re getting what they vote for.  (Say what you will, Obama was the most right wing of the major Democratic candidates.)

So, get ready for another era during which the deep liquidity, the hot money, is completely catered to—even more than it was in the last era.  And get ready for an era in which, to paraphrase George Bush “who cares what you think? is the unofficial motto of government when dealing with ordinary people.

Notes on the Fiscal Sustainability Conference

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On April 29, 2010

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Mandos attended and took some notes. For those who couldn’t make it, worth reading.  Read in particular the section on the problems of the Euro—this is why Portugal, Ireland, Italy, Greece and Spain are looking to get their clocks cleaned, and maybe bring down the world economy with them.

Greek and European Insolvency

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On April 28, 2010

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Haven’t commented much on this, but let’s cut to the chase.  Greece is going to default.  Period.  The only question is when.  The Europeans can hold it off a year or two if they get their act together.  All of the PIGS (Portugal, Italy, Greece, Spain and arguably Ireland) are probably going to default eventually unless the rules by which the Eurozone, which state you can’t run too high deficits, are overturned.  All of the countries in the Eurozone, all of them, have been playing shady financial games to hide the real state of their budgets.  Every single one.

Oh, and Germany needs to put a cork in it.  Trade and balance of payments are ZERO SUM.  Every nation cannot run surpluses, it is mathematically impossible.  The more countries that do, the less Germany’s surpluses will be.  Germany’s surpluses are only possible because other countries run deficits.

When the Greeks get crammed down, hard, either through readjustment packages or because they go off the Euro and default (what I would do, but my by European friends inform me this is unthinkable to all good Eurocrats), when Spain, Ireland, Italy and Portugal get crammed down, that’ll lead to a nice demand collapse, which means less imports and worse balance of payments.  Which will make things worse for everyone else—because while balance of payments and trade are zero sum games in the sense that it has to come out to zero, prosperity is not.  If overall demand drops or grows very slowly, everyone is hurt.  Refusing to deal properly with these problems by putting Europeans and American to work by using deficit financing properly (as opposed to wasting it on tax cuts, bank bail outs and badly designed “stimulus” measures) would help everyone and pay itself back, as long as it was done in a way which also dealt with the oil bottleneck at the same time.

But that ain’t happening.  So at best we get a lousy few years economic cycle where over 80% of productivity gains go to corporate profits, wages stagnate and unemployment doesn’t recover anywhere near pre-crisis levels—or we get a second downleg of this financial crisis when China and Europe both crash out.  (It ain’t about America, babes.)  I’m waiting till the end of the summer to see where I’ll put my money (literally).  In the meantime, hold on tight.  I’d tell you to pray, but I’m not sure if crashing out or stumbling around with a bloody bandage on the stump is preferable.  I suppose the bandage.  I doubt even a second crash would be enough to make the powers that be understand they need to make fundamental changes.

Meanwhile, in the US, the strongest part of the recovery comes in medical, insurance, finance and construction.  As I said long ago, the fundamental Obama play was to try and reboot the bubbles.  Yay.

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