Saturday, April 11, 2009

Trickle Up, NOT Trickle Down!

"Trickle up, not trickle down!" For those who like soundbites, that’s the key to fixing the recession. Giving money to the rich does not stimulate the economy when the rich are already gobbling up a rapidly rising proportion of the world’s total wealth.

[SMALL PRINT: Sorry for being flip. If you honestly read Roubini, Reich, Stiglitz, and Krugman beginning to end every day, you really do not need to read my comments on the economy. Otherwise, here’s my analysis and some predictions.]

Are we making progress?

Recession Scorecard

I. Housing: D

II. Banking: D

III. Living Standards: F


Housing: not only is it still getting worse but the government is actually trying to make it worse

The Government acts as though propping up the pernicious housing bubble is the goal; to me, gently falling back roughly to 2000 prices is the goal. Why should a bubble that makes housing and vacation property unaffordable (except to Wall Street executives) be a goal? (PS: I know the answer, but you go ahead and tell me anyway.) People who speculated on the bubble should be moved gently into cheaper housing. People who lost their jobs should be helped to keep their homes. Crooked refinancing wherein sly banks trick victims into more expensive mortgages should be minimized. The Federal Government is still moving in the wrong direction, trying to prop up artificial home values to help Wall Street rather than the people.

Banking: confusion, bad priorities so despite efforts, little visible progress

Good banks should be distinguished from bad banks. CEOs of the good banks, who focused on making loans to people and businesses, should be supported. CEOs of bad banks, who focused on financial manipulations unrelated to actual production of goods, should be fired, impoverished, and whipped. Transparency should be the name of the game. I still do not see any of this happening.

Living Standards: insufficient efforts; still getting worse

The living standards of the bottom should be supported; the living standards of the rich should be, well, lowered. Jobs are disappearing, unemployment insurance is slow arriving. Obama is trying, a little, but is still focusing on helping the rich; we are still getting farther behind.

Latest Warnings

Robert Reich on April 10 warning of continuing trouble:

Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent. Adjusted for inflation, this made money essentially free to large lenders. The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.

Robert Reich on April 9 with the bottom line:

Don't count on the bank bailouts to stimulate much of anything except fat paychecks for bank executives and directors. Unless or until Americans get their jobs back and feel more secure about the future, they won't borrow.

The Gory Details

With the economic experts outside of the Government/Wall Street “foxes who found religion” faction (i.e., those who created the recession with their self-serving devotion to deregulation but who now profess to believe in the opposite) deriding almost every arcane detail of what that insider “fox faction” is doing related to the recession, it is almost a fool’s errand trying to make sense of all this. But if you choose not to accept my Recession Scorecard at face value, then here's some ammunition. To cut to the chase, what do we know that will provide clues about the broad path that the recession seems likely to follow?

First, the good news:

  • U.S. Secretary of Labor under the Clinton Administration Bob Reich predicts a U.S. recovery by mid-2010, provided that Obama provides enough stimulus. The size of the stimulus may be less important than how it is done, however. Handing monstrous bailouts to the Wall Street foxes and tiny bailouts to every American family (whether $800 checks or permission to postpone foreclosure) not only poses serious moral hazard temptations but also amounts to being given a fish to eat rather than being taught to fish.
  • Consumer spending, consumer sentiment, and housing starts have at least momentarily turned positive in the U.S. (in contrast to Europe, where consumer confidence continues falling.
  • The number of Americans filing new unemployment claims seems to have stabilized.
  • Although planned U.S. layoffs continue throughout the economy, they were less severe in March than in recent months.
  • Surprising hints of recovery are apparent for the Chinese economy.
  • Japanese unemployment remains low (though rising) in comparison to the U.S. rate, and some large developing countries—Egypt, Brazil--still have stable rates (though perhaps because recession impact is lagging there).

However, those slight up-ticks in a few indicators in recent weeks pale beside the fundamental impression that Western elites are still in denial about the need to redesign the global economic system (at their own expense).

Domestically in the U.S., despite the encouraging regime change, it is once again really the same old elite in charge, and here as well change is mostly at the margins. Reformers have not been brought in and empowered to throw the rascals out; au contraire, we are to believe that the foxes who ate the hens they were guarding have now lost their taste for chicken. OK, the integrity to admit that you were fundamentally misguided and the strength to move in the opposite direction is undoubtedly the mark of a true professional, and if the leaders of Congress under both Clinton and Bush, the leaders of Federal regulatory agencies under those presidents, and the leaders of Wall Street financial firm Goldman Sachs and the like are not professionals, then pray tell what are they?

It seems that much taxpayer money has actually landed in the hands of Wall Street to compensate them for their excesses, but we are to believe that this creates no moral hazard, i.e., that they will in the future be so grateful for this undeserved trust that they will do everything in their power to clean up their act. Why, they will become so dedicated that we won’t need regulation at all!

Despite all the government generosity to the financial foxes, economists Roubini and Krugman both foresee additional bank takeovers as the bailouts prove insufficient and, I hasten to add, improperly used. As summed up by economist Adam Posen,

A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.

Posen foresees that a year and a half from now, “the U.S. government will still have to put capital into the banks, because credit markets will break down again, with many banks again under water.” Failure to make tough choices now will end up costing us more and postponing the recovery.

A for the so-called “good news” of the March stock market rally, Roubini dismisses it:

I see the latest rally as another bear market rally as over the next few months news will be worse than expected by the consensus: macro news, earnings news, financial news, corporate default news, financial firms insolvency news, etc.

What I have not noticed is much evidence of remotely comparable levels of taxpayer money actually landing in the hands of needy working people. Indeed, the latest buzz is that the unemployed are finding it difficult to get their unemployment checks at all! U.S. unemployment continues rising at a linear rate, with the number being forced to accept part-time employment also rising rapidly. The amounts being set aside to help poor Americans does not come close to balancing the unemployment rate and is also minimal compared to the bailout of the handful of monstrous financial firms (e.g., Citi, Wells Fargo, Bank of America, Goldman Sachs) that have been gambling the world’s well-being through credit default swaps.

Asking or even paying (!) credit card customers to relinquish their cards hints at the rumored coming credit card crisis. The American credit card debt reached a record $951 billion in 2008, with one-third held by high-risk customers. Needless to say (well, given the attitude of Washington toward Wall Street abusers, I guess it does need saying), bailing out irresponsible credit card abusers would create an enormous moral hazard problem. According to James Surowiecki in the New Yorker,

between 2000 and 2006, even as Americans’ real income was essentially stagnant and their savings rate negligible, credit-card borrowing rose by about thirty per cent. Our willingness to spend beyond our means served the credit-card companies well: their profits jumped forty-five per cent between 2003 and 2008. But while making borrowing easier boosted the companies’ profits, it also increased the risks they faced, risks that started to hit home once the economic slowdown began. According to Fitch Ratings, credit-card chargeoffs—debts that companies determine they will not be able to collect—rose to almost 7.5 per cent in December, up forty per cent from a year earlier.

As the author concludes, it may make sense to get people off their consumption addiction, but if all irresponsible credit card users are refused credit simultaneously, it will come as a real jolt to the economy. But the situation is actually much worse: Wall Street has bundled credit card junk debt just as it did junk mortgages! “Securities backed by credit-card debt is a $365 billion market.” It’s even worse than that – credit card companies are already getting Federal bailout funds: we aren’t bailing out consumers with credit card debt; we are bailing out the companies charging those rising interest rates! The American population may not be too big to fail, but apparently the big-time credit card loan sharks are.

Internationally, the superficial nature of the G20 one-day boondoggle says it all. Alan Blinder’s call for IMF reform, commitment to a green recovery, and a focus on poor countries got short shrift in the G20 statement. Walden Bello enumerates a concise checklist of the mistakes the ruling global elite made that need to be corrected:

Among the mantras they thus legitimized were that capital controls were bad for developing economies; short-selling, or speculating on the movement of borrowed stocks, was a legitimate market operation; and derivatives — or securities that allow betting on the movements of an underlying asset — "perfected" the market.

If there is little inclination to correct these mistakes, perhaps it is because the folks still in charge thereby enriched themselves. We are wasting valuable time trying to teach old dogs (foxes? sharks?) new tricks.

Meanwhile, whatever boost in American confidence may have resulted from the election of a president who seemed to care, the longer the recession continues under his watch and the more glaring his errors, the faster that invaluable confidence will dissipate. Obama’s list of errors is getting quite long:

  1. allowing bailout funds to be given to the guilty as bonuses
  2. failing to fire Wall St. CEO’s as he did GM’s CEO
  3. evading the restructuring of Wall St. firms under bankruptcy laws
  4. allowing the scandalous failure to track TARP funds that began with Bush to continue.

Hope does spring eternal, and this spring it will be the hope of being able to pick up some property for 1995 prices. Why not? What logical reason does anyone have at this point for spending Bush Bubble prices for anything?

So far, the recession has been “made in America.” (And they said we couldn’t make anything anymore!) But bailing out Wall Street doesn’t sound like the way to help increasingly beleaguered ex-trade partners of an America that is no longer partying. As a strong advocate of cleaning up our behavior, I certainly am not advocating a return to consumption madness. But it is nevertheless true that the sudden drop in America’s gluttony is causing real economic harm around the world. Now there is a second wave recession in the rest of the world.

  • OECD recession is expected to deepen throughout 2009, with Europe and Japan getting hit even harder than the U.S. Large but more vulnerable countries such as China, Russia, and India are expected to have still greater slowdowns, and the IMF is forecasting that 2009 will see the first global year of negative growth since World War II.
  • The U.N. commission of experts’ plan for reforming the global economic system warns that the recession could drive 200 million people into poverty.
  • Chinese unemployment is already over 9%, according to the Chinese Academy of Social Sciences – not including chronically job-scarce rural China, where unemployment levels cannot even be measured.

How that may blow back on the U.S. remains unclear but is something for which Washington should be making plans. World War II was caused by depression in Germany that enabled extremist Hitler to win a democratic election. Rich trading partners in recession is bad enough, but negative growth rates around 5% for Russia, China, and India suggests the imminence of significant social instability on a scale that may require U.S. bailouts on the scale of Bush’s war spending.

  • Given the tensions between nuclear powers India and Pakistan rooted in Indian intransigence over Kashmir (which had been promised the right to independence by Nehru) and exacerbated by Pakistani terrorist tactics, collapse of democracy via social protest resulting from the recession is a real threat to U.S. security.

  • Beijing has long been conscious of the threat of social chaos from its dangerously unstable class of young urban workers separated from families living in the countryside. It would not take the unemployment of many of these isolated young men to generate severe violence in China, and they have been living off exports to the U.S. Beijing, as America’s most faithful banker, could quite reasonably ask for a U.S. bailout to replace their incomes.

Unfortunately for the expanding ranks of the world’s poor, in 2009-2010, the U.S. is not going to have as much excess money (for food aid) as it did under Bush (to build bombs). And so far, there is absolutely no evidence that any determination to help the world’s poor exists in Washington on remotely the scale of the Bush-Cheney determination to bomb those same poor. The Stiglitz commission report has now provided the world with a roadmap for preventing global chaos (e.g., increased foreign aid, a new international credit facility, attaching fewer strings to foreign aid, more export opportunities for the poorest countries, reform of corporate governance, greater corporate transparency, a new global reserve system, reform of international financial institutions, establishment of a global financial regulatory institution). Unfortunately, it is far too generous and detailed to be cool and steps on the toes of every powerful person on earth, so it seems likely to be ignored until the crisis gets so bad that the current reform window may already have closed. For al Qua’ida, 2010 should be a good year.

Paying financial institutions that have truly proven themselves to be too big for us to afford and putting reform of those institutions into the background sounds way too much like the late Soviet (remember Chernenko?) and post-Cultural Revolution Chinese strategy – keep everyone “employed” (regardless of whether or not they produce anything) to avoid social chaos at the expense of maintaining an outmoded and wasteful industrial system. The difference is that in our far more advanced 21st century American system, it is outmoded and wasteful financial system that we are paying so much to maintain. Note the key distinction: instead of paying vast taxpayer sums to keep those same taxpayers employed, the money is being used to maintain employment of millionaires! Ain’t life beautiful?

The strategy of buying our way out of the recession is setting us up for serious inflation. The inflation wave will probably hit just as folks are working their way out of the recession, happy to have any job and therefore already working at depressed wages, which are highly unlikely to keep up with a sudden and vicious wave of inflation.

Meanwhile, despite several tentative steps toward reason, Washington remains essentially committed to a very expensive, militaristic foreign policy that strikes an increasingly discordant note in a socio-economically dysfunctional world. Obama confirmed Washington’s commitment to the extraordinarily dangerous Bush outpouring of military aid to Israel; the Iraq war continues; the bill for the Afghan war, currently costing $2 billion/month, is scheduled to increase sharply; Pakistan’s anti-democratic army with its suicidal obsession with India will evidently get billions in additional aid. Obama is already planning a supplemental military appropriation to further fatten the grossly overinflated military budget inherited from Bush. The contrast with the calls of the Stiglitz report for reforming global governance could not be more stark.


Prolonged Consumer Caution. Unless you are the trusting kind, you are probably not going to increase personal spending on the basis of talk from Washington. And after what we have all learned about our public officials and their Wall Street friends, I’m just guessing that there are no longer very many left of the trusting kind.

Since the rich are getting theirs first, it may take a while for significant real benefits to trickle down to Main Street. This approach may turn out to be shortsighted even from the perspective of the rich, who, as Henry Ford famously realized, need to let the poor earn enough to buy the products they produce. (Oh, I forgot, that’s outmoded industrial age thinking. The rich no longer produce; now they speculate.)

So it looks like a number of months of further consumer caution, leading to more business cutbacks, leading to further increases in unemployment. That trend will clash with the rising government spending on infrastructure development, so some ground for optimism does exist. Nevertheless, the image that comes to my admittedly pessimistic mind is trying to sweep the incoming tide out to sea.

Inflation. An inflation wave may well cut short whatever near-term recovery begins. To be more precise, inflation is really no problem since it will just increase the nominal value of your mansion and portfolio. Of course, for those who don’t own mansions and who live off wages, well…yes, for them, the inflation will admittedly hurt.

Poor Boomers. The very comfortable baby boomers retiring with their fat 401Ks to power the economy with their leisure spending for the next 20 years are now suddenly on the edge of needing welfare. I guess they will have to move back in with the kids who until recently were still living with them for a couple extra years after graduating from college just to save a bit before declaring independence. Only problem is, the kids are now underemployed and have no benefits, and there really isn’t room for Mom and Dad. Not to turn this into a soap opera, the analytical point here is that this is going to depress the economy for a very long time.

More Trouble on the Horizon. Since compensating the guilty is trumping reform (which is hard for Washington to implement because the officials are in great part the very same individuals who caused the recession in the first place), we can expect further waves of financial chaos: Wave #1 (spring 09) = new wave of foreclosed homes to hit the market; Wave #2 (mid-09)= new group of bank failures & government takeovers; Wave #3 (late 09) = credit card default crisis; Wave #4 (2010-11) = inflation.

Global Suffering & Tensions. The U.S. might manage a quick recovery: given strong U.S. fundamentals (educated population, degree of wealth facilitating putting up with cutbacks, strong resource base), this scenario is possible. However, it is hard to see how the world as a whole can follow suit. A recovering U.S. island in a sea of unemployment, starvation, and political chaos caused by U.S. irresponsibility in the first place is not a recipe for international cooperation, peace, and progress.

During the U.S. presidential election, selfish conservatives fearful of any loss of personal profit made a big noise about the idea of “income redistribution,” a concept of reorienting government to serve first those who need it most, rather than the current system of serving the rich and letting crumbs trickle down to everyone else. We may be reaching the point where a stiff measure of global income equalization will be the only way avoid chaos.

Unfortunately, there are many very powerful people who would far rather see chaos than a global socio-economic reform program that would deliver a safety net to all at the expense of their personal privileges.

What Can Be Done?

CEO Recall!

Back in a previous reform era a century ago, the idea arose of allowing votes to enable citizens to recall corrupt officials from office. That was instituted in some states where democracy was taken seriously. I propose expanding this right to the Federal Government (both politicians AND appointees) as well as extending it to all CEOs of corporations that accept bailout funds or tax breaks.


Spring 2009 – mini-bubble

Obama is very smooth, and we all desperately want to believe that human decency has returned to the White House. Anyway, it’s spring.

Summer 2009 – mini-crash

Obama is exposed as just a bit too smooth. As the emerging scandal of the TARP welfare-for-the-rich theft of taxpayer funds explodes, intensified public distrust of “our leaders” will burst the spring bubble, the DOW will drop below 6,000, and demands for actually doing something (kicking the foxes out of the henhouse, punishing the foxes, and fixing the henhouse to keep the foxes out) will get ugly.

Key Variable: Will Obama listen to the Stiglitz report arguing that we (i.e., all mankind) are all in this together and must enact fundamental systemic reform or will he remain in awe of the oh-so-cool foxes intent on guarding their privileges?

Winter 2009-2010 – global tension

It will be a long winter, with global recession dragging down the U.S., the world demanding America share resources in payment for all the trouble it caused, and al Qua’ida on a comeback.

Key Variables: Will Obama muzzle Netanyahu, reform Washington, redistribute wealth to the world’s poor effectively enough to prevent a level of chaos that could put Constitution-contemptuous neo-cons back in power in the U.S. and answer all of Osama bin Laden’s most cherished nightmares?

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