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It is not at all clear how (or if) the investing public is going to recover from the 2008 plunge in equity markets following the ongoing plunge in home prices that began in 2006. Many were led to believe that, in a worst case scenario, stock appreciation and real estate appreciation would alternate indefinitely into the future.
If one went down, the other would go up.
If they both went up, well, that was a bonus.
No one thought too much about what it would feel like if they both went down.
About every other day now, another story comes my way about a friend or relative who says, "Yeah, I sold everything in October. I couldn't take it anymore".
It's not difficult to understand that decision making process. There are enough things in life for ordinary citizens to worry about that overcoming the "fight or flight" instinct that makes us all such lousy investors doesn't rise very high on the list.
You have to wonder how they're handling it over at Money Magazine. The perma-bull staff has toned down their rhetoric in recent months as it became clear that no quick reversal was forthcoming. Last month's cover story was about keeping your money "safe" while you're waiting for the rebound.
Unless somehow we see Dow 14,000 again sometime soon (or at least Dow 10,000), the mainstream financial media and Wall Street firms are going to have a lot to answer for as it becomes increasingly clear that the ownership society that has been thrust upon Americans has not produced the results that were expected.
This well-done piece in the Wall Street Journal tells the story of how Wall Street has failed the individual investor, a concept that more and more people are beginning to realize.With retirement accounts tumbling and millions of homeowners struggling to pay their mortgages, a realization is dawning on many Americans: The banks, brokerage firms, insurance companies and other players in the financial-services industry have failed them.
Thirty years ago, a typical consumer had a fixed-rate mortgage, a life-insurance policy, a bank account and an employer-paid pension plan. Nowadays, that same consumer may have a payment option adjustable-rate mortgage, a 401(k) retirement-savings plan, a home-equity line of credit and perhaps even a health-savings account instead of traditional employer-sponsored health insurance.
In the process, risks previously borne by big banks and employers have been placed squarely on the shoulders of consumers. Individuals increasingly bear the risk of interest-rate fluctuations, rising health-care costs, stock-market gyrations and outliving their retirement savings.Adam Gamradt, 31 years old, of Bloomington, Minn., believes the market slide has created a great opportunity to buy stocks, but he contributes only enough to his employer's retirement-savings plan to get the full company match. That's because he is dismayed by the plan's pricey investment options and lack of information on total plan costs.
"If I'm going to buy a BMW for anybody, it should be me," says Mr. Gamradt, an information-technology worker. "I wouldn't exactly say the financial-services industry is at war with your average American consumer, but it's d- close."The financial-services industry sold this personal-responsibility revolution by claiming that complex offerings like adjustable-rate mortgages and health-savings accounts would empower consumers to manage their ever-expanding portfolio of risks.
The new products created billions of dollars in fees that have powered Wall Street's growth -- even in recent years as the stock market stagnated. The financial sector's share of total U.S. corporate profits jumped to 35% in 2007, up from 10% in the early 1980s, according to investment research firm BCA Research.
Now, of course, many of the products cooked up by Wall Street are exploding -- and dragging down the financial-services industry with them. Whether the industry will return to record profit levels again is a question mark. If the public veers away from such products, the financial sector could shrink drastically.
3 comments:
Al Czervik said... "Most people probably shouldn't control the timing of their market moves."
Perhaps, but it's a pet-peeve of mine that the paternalists who run my 401-K plan don't give me as many investment options as I have in my IRA accounts. A lot of companies offer a brokerage window, but not mine.
Wall Street has been selling the "buy and hold" philosophy to the public for decades, now. Nowhere is that more evident than in the 401-K industry. Buy and hold is great in a secular bull market. It hasn't worked well over the past 10 years and it may be a long time before that is a workable strategy.
I'd like to see brokerage window options widely available to those employees with the know-how and desire to use them. And the employees who use them should be required to pay any reasonable additional costs for providing that service.
It's only fair since no one is guaranteeing me a comfortable retirement. It's my money. I earned it, I saved it and I'm going to be spending it.
Nov 21, 2008 | yahoo.com
In the aftermath of the corporate scandals earlier this decade, investor confidence was (partially) restored by a parade of "perp walks" of fallen chieftains like Ken Lay, Bernie Ebbers, and Dennis Kozlowski.
But nearly two years into the bursting of booms in housing and mortgage securities, scant few related arrests have been made — and most of those have been focused on individual mortgage brokers vs. major industry leaders.
"There is no poster child [for the housing scandal] because you need to investigate, and you need to bring cases and we haven't done either against the major players," says William Black, Associate Professor of Economics and Law at the University of Missouri — Kansas City and a former federal regulator.
Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says investigations have shown fraud incidence of 50% at (once) major subprime lenders like IndyMac and Countrywide.
But even though the FBI warned of an "epidemic" of mortgage fraud in 2004, they subsequently made a "strategic alliance" with the Mortgage Bankers Association, which serves the major industry players.
In this case, the foxes truly were guarding the hen house.
Black notes it was only this year that the total number of FBI agents devoted to mortgage-fraud investigations rose to more than 200. By comparison, during the S&L and Enron investigations in the 1980s and '90s, respectively, multiple task forces totaling hundreds of agents were employed.
"The DOJ has refused to emulate its successes in the S&L debacle, and even dealing with Enron, by creating a large task force that would take on the major fraud participants," Black said. "In this context, that would mean creating a large task force to investigate major, nonprime lenders."
Comments
Whit Chambers - Friday November 21, 2008 01:00PM EST
Perhaps it is reality when you consider: (1) Government identifies absurd Corporate salaries, yet bail out so continue their huge salary with tax dollars. (2) Senators arrogantly chastising the Big Three, yet not acknowledging massive Government debt risk to the populace is in far more troubling. (3) Government Pensions are far worse ticking time bomb, but will divert the public’s attention to credit card debt instead. (4) Government at the Federal and State Level corruptly violate the Constitution, yet give standing ovations to convicted felon Senators. Sorry folks the upside-down pyramid is in collapse.
Yahoo! Finance User - Friday November 21, 2008 01:12PM EST
Hmmm... well... we have to show some patience so that we do not end up putting a Prez in jail before he becomes ex-Prez. And then Alan Greenspan looks too old to go to jail... Agree though... that we need to start rounding the wall street crooks!
chubach47 - Friday November 21, 2008 01:12PM EST
I am reminded of the "Golden Rule" Those with the Gold make the Rules. If Wall Street wasn't such a large contributor to the political parties, would they still be walking around free?
Yahoo! Finance User - Friday November 21, 2008 01:15PM EST
Fraud? What fraud? Their armies of lawyers have made sure everything they do adhere to the fine prints of the laws. It is you -- the common people -- who are to ignorant to read the fine prints of the contracts. Welcome to America! (And wants to execute these crooks on vague charges, go to China or other non-democratic lawless counties. Those places, of course, have different problems.)Yahoo! Finance User - Friday November 21, 2008 01:15PM EST
I'm in jail for holding up a 7-11. I got $125 dollars. Damn, should have been a overpaid, useless CEO.rzeemain - Friday November 21, 2008 01:17PM EST
Think about this folks. Paulson and the current Administration is in power, then suddenly around mid-September, Paulson rushes over to the WH and Congress and says:"I need a Trillion dollars in 72 hours. Don't ask me any questions, no court or body is to audit what I do with it". But the day before, and the day before, and the week before, and the month before, no warning to the public. Ah, but Nov. 4 was only a few weeks away. Keep the lid on. Then, bam, it all came unwound. Obviously, this meltdown was long in coming. We have been conned.jpstud1 - Friday November 21, 2008 01:23PM EST
top 3 fraudsters: 1. JP Morgan Chase 2. Goldman Sachs 3. Henry Paulson Get rid of these parasites and our economy will flourish.Yahoo! Finance User - Friday November 21, 2008 01:25PM EST
They'll roll out a few sacrificial lambs as usual.. but the big boys will walk.. nothing out of the ordinary here....Grace - Friday November 21, 2008 01:25PM EST
No one is going to jail because the same people who would be convicting the Wall Street culprits are culprits themselves. Barney Frank, Chris Dodd, Pelosi, Paulson, Bernacke, Cox, etc, are all responsible for this mess.Publius - Friday November 21, 2008 01:29PM EST
Let's not get carried away with the corruption thing. I am sure some people are corrupt on Wall St. just as some people are corrupt on Main St. But the greed was not just on Wall St. People who paid ridiculous amounts of money for houses they couldn't afford thinking they would continue to appreciate in value share some blame. Real Estate people who kept claiming that housing prices would continue to climb forever, even though 25% of new homes sales were 2nd, 3rd and 4th homes purchased by speculators just before teh bubble burst. Banks are to blame for creating the pyramd scheme backed by sub-prime mortgages. They were buying this crap without even looking at it. Most of all, congress is to blame for pushing banks to lend money in ways it would never have done in the past. 90% and 100% financing of over-priced homes, affordable housing for everyone, Fannie and Freddie buying trillions in bad mortgages, etc. Its easy to point to one person and then hang that person, but the blame for this one is spread among a lot of people. Something this catastrophic required a numbers of things to happen all at the same time and those things were teh responsibility of different people. That's why putting the stuff back in the horse is so complicated now.
November 26, 2008 | FT.com
Angela Merkel, the German chancellor, turned the tables on her international critics on Wednesday by accusing the US and other governments of making “cheap money” a central tool of their economic management, thus planting the seeds of a similar crisis in five years.
“Excessively cheap money in the US was a driver of today’s crisis,” she told the German parliament. “I am deeply concerned about whether we are now reinforcing this trend through measures being adopted in the US and elsewhere and whether we could find ourselves in five years facing the exact same crisis.”
Comments
Nuke writes:satan writes:Satan. I kinda agree with you.
I am an engineer by trade. My first inkling that things were horribly wrong in the US economy was when my piers started leaving solid engineering and science jobs to work in real estate, finance and consulting. We are about to see a fundamental shift in our economy away from FIRE into, well, who knows.
It will be every bit as traumatic as the shift from manufacturing, perhaps worse.
Just accept that the true purpose of money is to keep the world from killing each other. Accept that debts are not repayable and periodic debt forgiveness is necessary.
First, look at these three comments on consumer spending:
From the WSJ: Data Indicate Faltering DemandSpending is declining in the consumer and capital sectors, as demand for expensive goods took its biggest spill in two years in October and consumption dropped at the sharpest rate in seven years.From Professor Roubini wrote:Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption spending, collapsing new homes sales, falling consumer confidence, very high initial claims for unemployment benefits, collapsing orders for durable goods.And from Bloomberg: Consumer Spending in U.S. Falls 1%, Most in 7 YearsSpending by U.S. consumers dropped in October by the most since the 2001 contraction, signaling the economy is sinking into a deeper recession.emphasis added
...
The biggest consumer spending slump in three decades is likely to persist as home prices fall and job losses mount, threatening the holiday sales outlook ...
Sounds pretty bad, and the numbers from the BEA were definitely ugly - but the numbers were slightly better than I expected. The monthly data is pretty noisy and may be revised significantly, but the reported numbers showed a 3.9% annualized real decline in personal consumption expenditures (PCE) from July to October (the period that matters for GDP), and that was somewhat better than 4.5% to 5.0% decline I was expecting. This is just one month of 4th quarter data - and PCE could get revised or decline more in November and December - but this suggests the more dire predictions (worse than 5% annualized real GDP decline) for Q4 GDP might be excessive.
Hey, a 5% annualized decline in real GDP is bad enough!
Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times”, citing, among other things, the government’s handling of the housing crisis.
Comments
Stop The Insanity November 24th, 2008I'm a 50 year old graduate from The Wharton School of Business. I'm one of the most capitalistic guys you'll ever find. I believe in the American free enterprise system.
However, the risk versus reward equation is skewed in this country. Our senior-most executives are paid far in excess of the value that they create. In some cases, they are NO VALUE ADDED.
I can't justify paying ANYBODY ….. and I mean ANYBODY more than $2M per year as a salary and total compensation (salary, stock, options, deffered cash) should be limited to $4M per year and should be at risk for at least 5 years.
Nobody is worth more than that. Nobody does that much good for the country or an organization that they need more than $2M. How many Ferraris can a guy buy, how many 8,000 ft2 mansions?, how large a diamond should he buy for his supermodel girlfriend that he keeps on the side?
If shareholders won't put bounds on this then the government should. It is determental to the nation's interest for these types of inequities to exist.
Honestly, CEO's making 100 times what the floor worker makes is absurd. 10-to-20 times … reasonable … 100-times-to-5,000 times …. that's IDIOTIC
Jim November 24th, 2008 10:07 am ET
A question rather than a remark denigrating Mr. Paulson or the current administration. How is it that all the people in high places in DC (economic advisors to the government) did not have any idea that these problems were on the forefront? Why are we still paying exorbitant salaries to these people and not removing them from their positions.
Relative to the bailout of "The Big 3″, why not bring back the ability of taxpayers to write off the interest on new car loans as it was several decades ago, but limit it only to those vehicles built in the US. It seems that would be more practical than just giving them 25 billion at taxpayer expense without seeing a benefit to those paying the money (the taxpayer).
It seems it might help stimulate sales of new cars and continued employment of those in the industry.
mary dale November 24th, 2008 9:54 am ET
I think this financial failure was Bush's final gift to the American people. It fits the bill - it put fear into Americans. Was there really the need to come out that Friday in September that said if we didn't come up with $700b by Monday that the whole economy would fail.
The media (like always only having one story at a time to repeat over and over and over) kept the fear growing until something really does have to be done. Paulson was just an arrogant tool used to give more money to the rich people before a sensible administration came into power.
Sam November 24th, 2008 9:52 am ET
I did vote for Obama but I am cynic (and pessimistic) enough to believe that things may get better but not by a whole lot…
That's because there are too many cooks in the kitchen and too many hands in the pot (and too many egos in the administration)…and too little time (say 18-20 months) before the next election cycle begins…
Sorry if I sound too gloomy…
I have lived in the US for three decades and I never felt as bad about state of affairs as I do now.
Leah from FL November 24th, 2008 9:47 am ET
The healing is coming - we're in the painful scabby part right now, but soon the new skin will emerge and the healing will commence! bye-bye -bush and your posse too.
A Kickin' Donkey November 24th, 2008 9:43 am ET
Elect more engineers to Congress … they think for a living …. they are trained to contemplate the bad "what ifs" and take mitigating steps. Engineers in Congress would prevent this stagnation we're experiencing.
We need some intelligence in Congress. We've got women engineers, black engineers, hispanic engineers, and white male engineers. We don't have to sacrafice diversity for brains.
All Congress does is point fingers after the fact. They don't add any value … and certainly don't worke to prevent graft, corruption, mismanagement, etc.
Indiana Steven November 24th, 2008 9:41 am ET
Quite a downfall in 2 short years: from Master of the Masters of the Universe to the most reviled man in America not in a prison.
In fairness, he cannot disclose that he has encumbered the Treasury with contingent liabilities in excess of $2 trillion and rising with each new takeover. Every takeover means that AIG, Citicorp, etc. cannot be allowed to default on any of their claims since the US has stood in.
If these failures went through bankruptcy court, there would be some severe haircuts given to the hedge funds, etc. that brought them down. Can't let that happen!
Let's see if Congress cancels the capital gains tax treatment on hedge fund managers payouts. That is a no-brainer but cuts right to the quick on how corrupt Congress is.
You can't really fault Barney Frank for wanting to drop a paltry $25 billion on the auto industry when Treasury is throwing $100 of billions out the windows.
A Kickin' Donkey November 24th, 2008 9:38 am ET
Let's drop the myth that these guys are rare geniuses that have to be given wide latitude in both their authority and the blind trust that Congress places in them.
There are thousands of highly intelligent Ivy-leagure graduates (Columbia, Harvard, Dartmouth, Wharton) MBAs with many years of experience in industry, finance …(not just banking) … that know far more than the current members of Congress and are far more trustworthy, and less selfish, than the current crop of executives on Wall Street, including Paulson.
Put a team of smart outsiders in a room and they will figure it out. With a team, any "pitfalls" will be revealed ahead of time.
Paulson is fruit of the posioned tree and is only interested in feathering the nest of his country club buddies …. we saw the same thing with Bush, Cheney and their oil-industry buddies. When will Congress wise up and expect graft & corruption FIRST from these revolving names instead of writing these blank checks?
We need a bunch of early 40 somethings that are unknown to the popular press but that are brilliant and we need to incentivize them with a life long pension for 12 years of good work. Give them the kind of golden parachutes that Congress has. In exchange for that, we can get them to leave their Vice President & Director level jobs at America's best run corporations.
Pat in Atlanta November 24th, 2008 9:24 am ET
Much of the financial mess has come from financial executives misleading others until no one has faith in anything. Unfortunately, the ever shifting bailout looks like more lies and misrepresentations
The total failure of leadership from the administration is frightening. Lame duck yes, but it doesn't have to be this lame.
Secretary Paulson makes a fine target for our frustrations, but he does have a boss, somewhere. Has anyone seen George W. Bush around?
Over it November 24th, 2008 9:12 am ET
I agree the Paulson is bad, but what about Congress? They didn't require anything of him.
It's ultimately their responsibility what is done with our tax money. Quit bashing Bush…what about Reid and Pelosi who did not require any plan from Paulson and will still be there after January 20th??
Are you still gonna blame Bush for it???
Ken in Dallas November 24th, 2008 8:57 am ET
The ridiculous thing about this exchange is that Forbes and Paulson are both trying to live out the same laissez-faire magic-market fantasy as got us into this mess in the first place. Make no mistake, this is another vivid example of Republicans eating their own.
The truth is that neither one of these clowns understands markets. They ignore the fact that there's an essential tension in the market system, that "free markets" are always an ideal and never an actuality. If you don't regulate the operation of markets, especially in regard to anti-trust actions, economies of scale will tempt market players to consolidate, until a small number of players controls the market. Either you compromise market freedom a little by regulation, or you end up with a private player, accountable to no one, in control of the market.
Consolidation is also a trade-off. It enables players to gain strength and efficiency, but it also consolidates risk, and raises the prospect of individual players growing so essential to the market's operation that they are de facto public trusts, companies like AIG, Lehman, and Citi that can take the whole economy with them if they fail. When we allow such de facto public trusts to exist without being recognized, we fact the worst of all possible outcomes: corporations enabled to hold the government hostage
It's too late to rail about the unfairness of it all, the mistakes have already been made, the blind eye already turned. There's nothing left to do but put in the hard work it will take to fix this. We might at least hold our leaders responsible for learning from this fiasco, though.
John Brock, New York November 24th, 2008 8:38 am ET
I and anyone that has left a comment on this article, in all probability is unqualified to properly judge how any person in the position of secretary of the treasury manages the position, especially in financial times such as these. So please do readers a favor, and focus on solutions instead of bashing. Everyone knows how poor of a leader Bush is. Get over it. It's time the country stops acting like an abused ex-spouse, constantly living life vicariously through the very person that made one miserable.
ed November 24th, 2008 8:28 am ET
Steve Forbes is a fanatical proponent of the free-market religion that has, as it was practiced, failed our nation and the world so miserably, He has real guts to surface as a reborn critic of Paulson, a saint of his former Wall Street religion. It is time for silence on his part and on the parts of others who have fostered the ridiculous idea that business should be left to do whatever it wants, with no input from the societies in which it flourishes. I guess the system is only imperfect when Forbes loses money. This is not the time for belated recognition that the Bush administration has been staffed by incompetents who poked fun at anyone who thinks. Forbes should express his support for the Obama administration, which will have to confront the train wreck created by people wjho share his beliefs. Name-calling seems to be a hard habit to break; it's easy, while finding solutions is difficult.
Peter Thatcher November 24th, 2008 8:08 am ET
Forbes gives Paulsen a very bum rap. It is only because of Paulsen's steady hand in dealing with this totally unprecedented series of financial events (the "Perfect Storm" of financial phenomena?) that the World is not in total chaos. The team in place, Paulsen, Geithner, Bernacke, but particularly Paulsen and his very personal clout, make a positive outcome of these terrible events possible and likely.
Bad guy: Rubin. Best guy: Paulsen. I've never met an unimpressive Goldman Sachs guy.
charlie in maine November 24th, 2008 8:06 am ET
That's a little like the captain of the Exonn Valdeze accusing the captain of the Titanic of being a bad driver. I have a timeline to offer for things to start getting better…. in 57 days 3 hours and 55 minutes we get another chance. I used to think of 01-20-09 as Bush's last day and that gave me some joy.
But now I see it as Obama's first day and I can't wait.
Ernie November 24th, 2008 7:52 am ETI disagree with Forbes and most of the postings here. Paulson has been Treasury Secretary for just over 2 yrs. This mess has been brewing for decades. There have been many more recent contributors to the current problems who have played a much bigger part. How about Reagan, Clinton, Greenspan, and Lil' Bush? Paulson has always believed in reigning in free market cowboys as opposed to the Bush admin where free market is a mantra but that's certainly something he didn't have the time or authority to pursue.
I do agree that Paulson needs to be more transparent with his actions, his rationale for those actions, and the long term plan.
lieNoMore November 24th, 2008 7:48 am ETSteve Forbes is just plain full of it and just as WRONG about the economy as Bush, Paulson, and their hero Reagan was. Forbes supported and indeed advocated for most of the policies that have gotten us here.
We have had 30 years of the wealthy getting wealthier (like Forbes) while American industry has been frittered away on junk bonds, S&L, dotbomb, Enron, and now banking bomb paper pushing/manipulation.
Meanwhile, increasingly Americans have come to devalue industrial and productive work and take part –along with so-called leaders like Forbes– in the drift toward phony paper nation…
Amber November 24th, 2008 6:09 am ETPaulson is one of the main people responsible for the banking meltdown. He should absolutely be investigated and ultimately be behind bars. He told everyone that Fannie and Freddie were fine and that no oversight was needed. He didn't want the audit (money) trail to lead to him and his cronies. Despicable! He's a fox in charge of the hen house. You watch, when the time is right he'll pick up residence in a foreign country somewhere. What a slime ball.
The following is an abridged text of an open letter [PDF] by John Maynard Keynes to the US president.
Dear Mr President,
You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office. This is a sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge.
At the moment your sympathisers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer. If we are disconcerted when we defend you, this may be partly due to the influence of our environment in London. For almost everyone here has a wildly distorted view of what is happening in the United States. The average City man believes that you are engaged on a hare-brained expedition in face of competent advice, that the best hope lies in your ridding yourself of your present advisers to return to the old ways, and that otherwise the United States is heading for some ghastly breakdown. That is what they say they smell. There is a recrudescence of wise head-waging by those who believe that the nose is a nobler organ than the brain. London is convinced that we only have to sit back and wait, in order to see what we shall see. May I crave your attention, whilst I put my own view?
You are engaged on a double task, recovery and reform - recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range recovery, that you will have the driving force to accomplish long-range reform. On the other hand, even wise and necessary reform may, in some respects, impede and complicate recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.
My second reflection relates to the technique of recovery itself. The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, and increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.
Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices. Rising prices are to be welcomed because they are usually a symptom of rising output and employment. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turn-over. But there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation's purchasing power.
The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new loan expenditure during your first six months of office. The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.
I am not surprised that so little has been spent up-to-date. Our own experience has shown how difficult it is to improvise useful loan-expenditures at short notice. There are many obstacle to be patiently overcome, if waste, inefficiency and corruption are to be avoided. There are many factors, which I need not stop to enumerate, which render especially difficult in the United States the rapid improvisation of a vast programme of public works. But the risks of less speed must be weighed against those of more haste.
The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the quantity theory of money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.
It is an even more foolish application of the same ideas to believe that there is a mathematical relation between the price of gold and the prices of other things. It is true that the value of the dollar in terms of foreign currencies will affect the prices of those goods which enter into international trade. In so far as an over-valuation of the dollar was impeding the freedom of domestic price-raising policies or disturbing the balance of payments with foreign countries, it was advisable to depreciate it. But exchange depreciation should follow the success of your domestic price-raising policy as its natural consequence, and should not be allowed to disturb the whole world by preceding its justification at an entirely arbitrary pace. This is another example of trying to put on flesh by letting out the belt.
These criticisms do not mean that I have weakened in my advocacy of a managed currency or in preferring stable prices to stable exchanges. The currency and exchange policy of a country should be entirely subservient to the aim of raising output and employment to the right level. But the recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.
You may be feeling by now, Mr President, that my criticism is more obvious than my sympathy. Yet truly that is not so. You remain for me the ruler whose general outlook and attitude to the tasks of government are the most sympathetic in the world. You are the only one who sees the necessity of a profound change of methods and is attempting it without intolerance, tyranny or destruction. You are feeling your way by trial and error, and are felt to be, as you should be, entirely uncommitted in your own person to the details of a particular technique. In my country, as in your own, your position remains singularly untouched by criticism of this or the other detail. Our hope and our faith are based on broader considerations.
If you were to ask me what I would suggest in concrete terms for the immediate future, I would reply thus.
In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of loan-expenditures under government auspices. It is beyond my province to choose particular objects of expenditure. But preference should be given to those which can be made to mature quickly on a large scale, as for example the rehabilitation of the physical condition of the railroads. The object is to start the ball rolling. The United States is ready to roll towards prosperity, if a good hard shove can be given in the next six months.
I put in the second place the maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest. The turn of the tide in great Britain is largely attributable to the reduction in the long-term rate of interest which ensued on the success of the conversion of the War Loan. This was deliberately engineered by means of the open-market policy of the Bank of England. I see no reason why you should not reduce the rate of interest on your long-term government bonds to 2.5% or less with favourable repercussions on the whole bond market, if only the Federal Reserve System would replace its present holdings of short-dated Treasury issues by purchasing long-dated issues in exchange. Such a policy might become effective in the course of a few months, and I attach great importance to it.
With these adaptations or enlargements of your existing policies, I should expect a successful outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole World, but in comfort to men's minds through a restoration of their faith in the wisdom and the power of government!
With great respect,
Your obedient servantJM Keynes
Originally published as "An open letter to President Roosevelt" in the New York Times, December 31, 1933.
Biggs also offers advice on portfolio diversification, keeping some gold and jewelry, some farmland, as well as currency diversification. He also analyzes what worked and didn't work for survivors of World War II.
Mostly it was luck, coupled with healthy paranoia. Those who didn't believe that things would get worse oftentimes stayed back and perished. They were too greedy, or reluctant to leave healthy businesses, or to sell at a loss, ended up losing everything, including their lives.
In some sense this is the same behavior people face in a bear market.
Only in the case of war, invasion and occupation by an enemy, history has shown that those who were willing to cut their losses and escape to a safer country, even with the loss of most of their wealth, were able to survive whereas those who dawdled or were in denial, lost everything.
naked capitalism Willem Buiter is never one to mince words, and today his message is that the financial system is not operating:In a decentralised market economy, financial intermediation between economic agents with financial surpluses and those with financial deficits (or, more accurately, between economic agents who would like to run financial surpluses and those who would like to run financial deficits) is an essential economic activity. If this task if not performed effectively, it will still be the case that, ex-post, the sum of all realised financial surpluses equals zero, that is, realised saving equals realised investment - accounting identities are very insistent - but both are likely to be far from their optimal levels. In addition to channelling resources from financial surplus units to financial deficits units, the financial system performs, through risk trading, a significant part of the total risk sharing that takes place in a society. It also performs the portfolio management of much of the stock of financial wealth in existence.Buiter does not address this issue, and I do not recall seeing it parsed anywhere, but it also seems that a disproportionate amount of effort in the financial system has been devoted to portfolio management, with effects anticipated by Warren Buffett in his stories about the Gotrocks.The .... last two tasks of the financial system (risk trading and portfolio management) are being performed abysmally, and the first, the intermediation of financial surpluses and deficits, has effectively ceased...Financial intermediation has all but ground to a halt....Yves here. That point is essential and seems to be lost in most commentary. Back to Buiter:
We have no longer just a crisis in the financial system....The western (north-Atlantic) financial system we knew has collapsed. If I may paraphrase that great ensemble of Nobel-prize winning financial wizards, Monty Python’s Flying Circus:“This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!”Getting financial markets for illiquid assets going again will require public intervention...It makes no fundamental difference whether this happens along the lines originally proposed for the TARP, or by the government insuring the value of illiquid assets, as the US Treasury has now agreed to do for Citi Bank. In both cases the government and the current owner of the illiquid asset have to agree on a price or a valuation. The main practical ‘advantage’ of the insurance proposal over attempts at price discovery through auctions and similar mechanisms, is that the insurance plan hides the problem of valuing the illiquid assets behind non-transparent bilateral negotiations about the insurance premium paid and the level of the price guaranteed in the insurance contract. Opaqueness and lack of transparency are obviously at a premium when tax payer resources are being funnelled into the black holes that are our leading banks and other financial instutition.
Getting banks to lend again is even more essential than getting primary and secondary markets for illiquid structured financial products going again. It may be even more important than getting the regular commercial paper market going again, important though that is. Small and medium enterprises rely overwhelmingly on banks for external finance. Without access to bank loans, credit lines and overdraft facilities, countless SMEs that would be perfectly viable with a functional financial and banking system are threatened with bankruptcy. Without working capital, businesses go out of business. Banks are essential. But they are not lending. Why? A number of possible explanations suggest themselves.(1) Normal commercial prudence has finally resumed its rightful place, after many years of excess. Sound commercial judgements, made on a case-by-case-basis, produce the right supply of credit for each particular risky venture requesting financing. These individual lending decisions aggregate into an entirely appropriate volume of economy-wide lending that happens to be very low. Don’t blame the banks. Blame the entrepreneurs for not coming up with more creditworthy projects.I would put zero weight on (1) and roughtly equal weights on the other four possible explanations.
(2) In a world with multiple and quite different self-fulfilling equilibria, we somehow have ended up in the lousy equilibrium. Here each bank, believing the state of the aggregate economy to be lousy, decides not to extend credit to a would-be borrower that would be viewed as an acceptable risk, but for the dim view the bank takes of the aggregate economy. When all banks act this way, they will, by severally and jointly witholding credit, produce the lousy aggregate economic environment that they assumed/feared when they individually turned off their credit spigots. We just have to find some way of changing the focal point that coordinates individual banks’ actions to the good equilibrium. In the favourable equilibrium each bank, believing the state of the aggregate economy to be good, decides to extend credit to a quite reasonable would-be borrower the bank would not have lent to had it believed the state of the overall economy to be lousy.
(3) After years of excess and anything goes, the bean counters and risk controllers now rule supreme in the banking world. There is little upside to lending and taking a risk, but a lot of downside. Rolling over an old loan or extending a new one won’t help your bonus and it may cost you your job.
(4) Blind fear and panic rule the roost in the banking sector. Bankers are shell-shocked and paralyzed. More Prozac please.
(5) Banks hoard cash and liquidity to retain or regain their independence... Banks where the state has acquired a preferential equity stake or another equity interest are often subject to dividend limits and restrictions on executive remuneration. Paying down these government capital injections to regain full discretion over dividend payments and executive remuneration is a key pre-occupation. Banks seek out new private investors, trampling the pre-emption rights of existing shareholders and at higher financial cost to the bank than would have been attached to a capital injection by the government. All this just to retain their independence. Whose interest is being served you may ask? Not the existing shareholders. Not the other stake holders, the banks’ customers or creditors. Not the tax payers. Could it be the incumbent top management? Surely not!
What is to be done? Banks that don’t lend to the non-financial enterprise sector and to households are completely and utterly useless, like tits on a bull. If they won’t lend spontaneously, it is the job of the government to make them lend. Banks have no other raison d’être.I can think of three ways to get them to lend using the coercive powers of the state.(A) All domestic non-financial enterprises that currently have access to bank financing and whose loans, overdraft facilities, credit lines or whatever other financial arrangements expire during the coming year, have the right to an automatic one-year extension of the expiring arrangements on the same financial and non-financial terms as the expiring arrangements. This mandatory ‘creditor standstill’ helps existing borrowers by providing them with a breathing space. It does, however, do nothing for new enterprises or enterprises that are not currently borrowing.It would have to be made clear that state ownership of a bank does not mean that the bank’s existing or new debt is sovereign-guaranteed. Limited liability applies even when the state is the only shareholder. Whether existing or new bank debt of state-owned banks benefits from the full faith and credit of the sovereign government can be decided on a case-by-case basis.
(B) Aggregate lending targets for lending to the domestic non-financial business sector are set by the government for each bank (last year’s total plus five percent, say). The banks themselves can decide who to lend to and on what terms. Any shortfall of actual lending from the target is translated pound for pound into a Deficient Lending Tax. Since not meeting the target amounts to throwing money away, the banks will lend.
(C) Nationalise the banks (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets. With 100 percent share ownership by the state, there is no risk of lawsuits about the executive or board of the bank not meeting their fiduciary duty to the shareholders....
With both Alistair Darling and Mervyn King hinting darkly at the possibility of nationalisation of the remaining privately owned banks as a possible remedy for the bank lending strike, these proposals cannot even be considered radical.
Things are critical. Unless the banks start lending in normal volumes very soon, this recession could indeed become another Great Depression. We cannot wait for the banks to find their juju. The government may have to take it to them.Comments
Why are we in the mess we are in? There are lots of proximate causes: overleverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. Readers can no doubt improve on that list.
But these still are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.
I will confess to not having addressed this particular line of thought directly, even thought it has crossed my mind plenty of times. Many readers have noted, and I agree completely, that the financial sector has become too large relative to the real economy. But many commentators, your humble blogger included, have failed to probe deeply how such a distorted economy came to be seen as a good policy outcome.
In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do (aside: I had a lawyer from an entrepreneurial family who was refreshingly aware of that issue, and would write off hours before sending bills to clients, recognizing that the amount of time her firm had spent on certain matters simply wasn't worth it from an economic standpoint to the client). It is ironic that free market fundamentalists have so vociferously argued for unfettered markets, without understanding (or perhaps understanding all too well) that the house always wins.
When I was a kid and had my first serious jobs on Wall Street, there was no explicit formulation of that conundrum, but the firms understood their place. You could make a very very nice living on Wall Street. The barriers to entry were high enough to allow for oligopoly pricing, but that meant for rich pay packages rather than an easy life. You do not know how hard you can work, short of slavery, unless you have been an investment banking analyst or associate. It is not merely the hours, but the extreme time pressure. Priorities are revised every day, numerous times during the day, as markets move. You have numerous bosses, each with independent demands and deadlines, and none cares what the others want done when. You are not allowed to say no to unreasonable demands. The time pressure is so great that waiting for an elevator is typically agonizing. If you manage to get your bills paid and your laundry done, you are managing your personal life well. Exhaustion is normal. One buddy stepped into his shower fully clothed.
And exhaustion and loss of personal boundaries is an ideal setting for brainwashing, which is why people who have spent much of their career in finance have such difficulty understanding why their firm and their world view might not be the center of the universe, and why they might not be deserving of their outsized pay.
But I digress. There is a remarkable failure to acknowledge a key element of the task before us, that is, that the financial system HAS to shrink. Its current size is based on an unsustainable level of debt, a big chunk of which will go bust or be renegotiated. Yet rather than trying to figure out what a new, slimmed down version of banking ought to look like, to ascertain which pieces should be preserved and which jettisoned, the authorities are instead reacting in a completely ad hoc fashion, rushing to put out the latest fire. And in the process, they keep trying to validate overly inflated asset values (a measure straight out of the failed Japan playbook) rather than try to ascertain what their real value might be so as to determine how much recapitalization might ultimately be needed (if you doubt me, Exhibit One is the pending Citi bailout, in which lousy assets will be guaranteed at phony values). Is this denial? Do the authorities fear that if they work up this analysis, it will leak out and the markets will panic? This seems to be the first, most important order of business, yet here we are more than a year into the crisis, still tip-toeing around one of the very biggest issues.
And why is that? Back to the cult issue. Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued? A GM bankruptcy would be at least as catastrophic as a Citi failure. but GM elicits attacks for the incompetence of its management and the supposedly unreasonable posture of the UAW (the same free market advocates recoil at a deal struck by consenting adults). The particular target for ire is the autoworker pensions and health plans, as well as their work rules. But the pension plans being underwater is the fault of GM management for not providing for them in the fat years; I personally have trouble with the idea that health care should vary by class; and for the work rules, German and Swedish automakers have strong unions and yet can compete. I see the UAW as having correctly seen GM management feeding at the trough and doing a good job at extracting their share.
And yet the specter of incompetent, and worse, DISHONEST management elicits far less anger. GM may not make the best cars, but Citi and other banks sold products that were terrible, destructive, that resulted in huge losses and are wrecking economies, damage crappy cars could never inflict (environmentalists might quibble, but never has so much seeming wealth evaporated in so little time, and with the main culprits readily identified). They paid huge bonuses, yet their 2004-mid 2007 earnings have been wiped out by subsequent losses. But while UAW workers will have to give up on deals cut earlier, in terms of health care and pension promises (entered into, by the way, to bridge difference over wage levels), I guarantee no Wall Street denizen of the peak years will have to cough up one penny of his bonus from those days.
I don't know how to convey a sense of how deeply indoctrinated we all have been. This Independent story may give a sense of how banks have completely lost sense of their place.:
High-street banks are continuing to hit businesses with punitive interest rates for loans and overdrafts and are resorting to more severe measures to ensure they are paid.There are several issues conflated in this story that need to be picked apart. One is that there were a lot of loan made in the frothy years that were not sound. Some people who had access to a lot of credit will correctly have a lot less, and that on dearer terms. But there are also perfectly worthwhile businesses and individuals who are also caught in the meat grinder of indiscriminate reduction of loan balances. And because government support has been extended with the explicit understanding that banks would make loans, the punitive treatment of high quality borrowers is indefensible.Some are demanding that owners of small businesses put up personal assets as collateral in return for a business loan. Others are changing conditions of loans by sending emails rather than meeting in person, and giving borrowers just 48 hours to comply with unilaterally-rearranged overdraft and lending agreements.
The Business Secretary, Lord Mandelson, said he was alarmed by the banks' behaviour: "That is not the sort of constructive relationship that is sustainable between banks and businesses...
Paul Cox, from Surrey, was also asked for his personal property to be put up as collateral against a business loan by the Royal Bank of Scotland just last month – despite an excellent record with the bank. "I'm fortunate – I could walk away," said Mr Cox. "Others have to accept punitive terms." RBS received the biggest slice of the Government's bailout deal – up to £20bn.
The Federation of Small Businesses (FSB) said that when some members approached banks to discuss loan agreements, their accounts were reissued under harsher lending terms.
Chief executives of Britain's big banks, who have been regularly meeting with the Government and small business groups, have all made positive noises about ensuring viable small businesses have the access to finance that they need. But branch managers are often reluctant to return to relaxed lending policies which may put their branches in a perilous position.
But those are not my main focus. What stuck we was the subtext of the piece: times are bad, and any efforts to extract more revenues from customers, even if it is blood from a turnip, or worse, even if it puts a viable business under, is warranted. The idea that the needs of the financial sector can trump those of the productive sector are dangerous and destructive to our collective well being, and need to be combatted frontally.
Comments
- Anonymous< said...
- Kevin Phillips wrote extensively about the outsize influence of finance in powerful developed economies as they begin their decline (he calls this the "financialization" of the economy). He covered this concept extensively in his book Wealth and Democracy.
http://en.wikipedia.org/wiki/Kevin_Phillips_(political_commentator)
- PeakVT said...
- Good rant, though I disagree with this:
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy
I wouldn't call it a tax. Finance adds value by acting as an intermediary in various ways, thus connecting capital and investments in ways that wouldn't happen otherwise. But what has happened is that finance has become WILDLY overcompensated compared to value it adds because it controls of the flows of money. The over-compensation IS a tax. And the specialists haven't bothered with sober reviews much lately. The over-concentration of finance in New York and London has added to the problem by allowing finance to withdraw into its own self-referential world.
Kevin Phillips has been talking about late capitalism and the financialization of everything (think GM and GMAC) for a while. Reading at least one of his books is worthwhile.
- Yves Smith said...
- I am deliberately taking an extreme position on the value of the finance function precisely because it is so seldom questioned in our society.
The Japanese see the financial function as a frictional cost on the productive elements of society, and banks being highly profitable is not seen as a good thing.
- Yves Smith said...
- Anon of 12:48 AM,
Thanks for the vote of confidence re TV. Various people have been trying to get me on TV in a serious way since 1999, and it never gelled (some of it was timing: no one wanted skeptical commentary in the dot com bubble, and when it burst, there was no money for new programming).
As for pressure. I actually do have to beg to differ, I know residents put in brutal hours, but one of the distinguishing features of the Wall Street sweat shop is the extraordinary time pressure, as in multiple intra-day deadlines that change as the day goes on. You are expected to get a ton done, for multiple masters, in response to changing market conditions and clients priorities. I don't know what it is like today, but I had 30+ clients. On each client, there were at least 2 people who could ask me to do stuff, plus clients would sometimes call directly if they couldn't reach the senior guy right away. That meant I had 100 people who could give me work, and they didn't care what the other 99 wanted me to do.
Waitressing, particularly short order waitressing, is consistently found to be one of the highest stress jobs because of the constant demands and lack of control. Now add that the job is error-intolerant. Errors, even seemingly trivial mistakes in client communictions are career limiting events.
I am not saying that these guys deserve sympathy, they are hugely well paid, but I am trying to get you to appreciate why they think they deserve it. The work is actually quite miserable until you get to be very senior.
Nov 19, 2008 | MarketWatchBy 2011? No recovery? No new bull? "Hey Paul, why do you keep talking about a bigger crash coming by 2011?" Readers ask that often. So here's a sequel to my predictions of 2000 and 2004, with a look three years ahead:
First. Dot-com crash
We pinpointed the dot-com crash at its peak, in a March 20, 2000 column: "Next crash? Sorry, you won't see it coming." Bulls-eye: The dot-com bubble popped. The economy went into a 30-month recession. The stock market lost $8 trillion.
And today, over eight years later, the market is still roughly 40% below its 2000 peak.
Factor in inflation and the average stock has lost well over 50% of its value. Stocks have proven to be a very big loser, a bad investment for Americans, thanks to Wall Street's selfish greed, plus the complicity and naiveté of politicians, press and public.
Second. Subprime meltdown
We reported on warnings of another crash coming as early as 2004, wrote a sequel, also titled "Next crash? Sorry, you won't see it coming." Yes, we were early, but in good company. We wrote many more warning columns. Few listened.
Subsequent events, notably former Fed Chairman Alan Greenspan's admission of his failures in congressional testimony, prove that if he and other Reaganomic ideologues weren't so myopic and intransigent about proving their free-market deregulation theories, they could have acted earlier and prevented today's colossal mess. Instead, their ideology kept the bubble blowing, delayed the pop, making matters worse.So once again, as history proves over and over, ideology trumps common sense, reality and the facts. Greed drives ideologues to blow bubbles. They pop. Crashes happen. The public is collateral damage.
Third. Megabubble cyclesWe also detailed the broader, accelerating macroeconomic sweep of cycles last summer in columns like "20 reasons new megabubble pops in 2011." We summarized a long list of major warnings from financial periodicals -- Forbes, Fortune, the Wall Street Journal, Economist -- and from the voices of Warren Buffett, Bill Gross, a sitting Fed governor and a former Commerce secretary. Multiple warnings "hiding in plain sight," beginning with a Fed governor warning Greenspan in 2000 about subprime risk.
But the big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy."Yes, they knew. And still both Paulson, a Wall Street insider, and Greenspan's successor, Ben Bernanke, a Princeton scholar of the Great Depression, stayed trapped in denial and kept happy-talking the public for months after the meltdown began in mid-2007. Get it? While they could have put the brakes on this meltdown years ago, our leaders were prisoners of their distorted, inflexible views of conservative Reaganomics ideology.
As a result, once again the "best and the brightest" failed America and now they and their buddies in Washington and Corporate America are setting up the Crash of 2011.Now it's time for my 2008 update, a look into the future where things will get far worse during the next presidential term. And given human behavior, especially in the deep recesses of Wall Street's "greed is good" DNA, it seems inevitable that no matter how well-intentioned the new president may be Wall Street and Washington's 41,000 special-interest lobbyists will drive America into the Great Depression 2.
30 'leading edge' indicators of the coming Great Depression 2Every day there is more breaking news, proof Wall Street's greed is already back to "business as usual" and in denial, grabbing more and more from the new "Bailouts-R-Us" bonanza of free taxpayer cash and credits, like two-year-olds in a toy store at Christmas -- anything to boost earnings, profits and stock prices, and keep those bonuses and salaries flowing, anything to blow a new bubble.
... ... ...
Perhaps some of the first 29 problems may be solved separately, but collectively, after building on a failed ideology, they spell disaster. So listen closely to "leading indicator" No. 30:
At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government."
Reuters concludes: "Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.'I just want to get people thinking about this, and to realize this is a road to disaster,' said Whitehead. 'I've always been a positive person and optimistic, but I don't see a solution here.'"
We see the Great Depression 2. Why?
Wall Street's self-interested greed. They are their own worst enemy ... and America's too
Nov. 21 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said the economy could begin a recovery in 2009 as low interest rates, falling energy prices and a diminished drag from housing shore up spending.``Many analysts expect the U.S. economy to regain positive momentum sometime in 2009,'' Lacker said today in a speech in Bethesda, Maryland. ``That strikes me as a reasonable expectation.'' The economy will probably contract this quarter, Lacker told reporters afterward.
Inflation Outlook
``Inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery,'' Lacker said. ``It is crucial that we not allow expectations of future inflation to creep higher during this recession.''
November 22, 2008 | NYT
This is the real “Code Red.” As one banker remarked to me: “We finally found the W.M.D.” They were buried in our own backyard — subprime mortgages and all the derivatives attached to them.
Yet, it is obvious that President Bush can’t mobilize the tools to defuse them — a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets and, most importantly, a huge injection of optimism and confidence that we can and will pull out of this with a new economic team at the helm.
The last point is something only a new President Obama can inject. What ails us right now is as much a loss of confidence — in our financial system and our leadership — as anything else. I have no illusions that Obama’s arrival on the scene will be a magic wand, but it would help.
Right now there is something deeply dysfunctional, bordering on scandalously irresponsible, in the fractious way our political elite are behaving — with business as usual in the most unusual economic moment of our lifetimes. They don’t seem to understand: Our financial system is imperiled.
“The unity seems to be gone. The emergency looks to be a little less pressing,” Bill Frenzel, the former 10-term Republican congressman who is now with the Brookings Institution, was quoted by CNBC.com on Friday.
I don’t want to see Detroit’s auto industry wiped out, but what are we supposed to do with auto executives who fly to Washington in three separate private jets, ask for a taxpayer bailout and offer no detailed plan for their own transformation?
The stock and credit markets haven’t been fooled. They have started to price financial stocks at Great Depression levels, not just recession levels. With $5, you can now buy one share of Citigroup and have enough left over for a bite at McDonalds.
As a result, Barack Obama is possibly going to have to make the biggest call of his presidency — before it even starts.
“A great judgment has to be made now as to just how big and bad the situation is,” says Jeffrey Garten, the Yale School of Management professor of international finance. “This is a crucial judgment. Do we think that a couple of hundred billion more and couple of bad quarters will take care of this problem, or do we think that despite everything that we have done so far — despite the $700 billion fund to rescue banks, the lowering of interest rates and the way the Fed has stepped in directly to shore up certain markets — the bottom is nowhere in sight and we are staring at a deep hole that the entire world could fall into?”
If it’s the latter, then we need a huge catalyst of confidence and capital to turn this thing around. Only the new president and his team, synchronizing with the world’s other big economies, can provide it.
“The biggest mistake Obama could make,” added Garten, “is thinking this problem is smaller than it is. On the other hand, there is far less danger in overestimating what will be necessary to solve it.”
Conventional wisdom says it’s good for a new president to start at the bottom. The only way to go is up. That’s true — unless the bottom falls out before he starts.
So much dialogue to many places by so many people (myself included!) and yet this sums it up. Those in the know say this 50 different ways or hint at it for the people with weak stomachs, but why? Why report the daily headlines? How about if we all just report the generational-headline because it's the only one that matters.
Deflation vs. inflation are two-sides of the same wooden coin and the end result is the same - default which will make that coin good for nothing but firewood.
Note that the report itself argues that the US will have a "contained" depression, with deep recession conditions for a protracted period and an anemic recovery. It does not believe the zero operating profits pattern of the Great Depression will be repeated.
Comments
- That's a nice little counterpoint to the clowns who are screaming, "We've never seen P/E ratios this low in...in... TEN YEARS!!!!! Buy! Buy!"
- I'm beginning to worry our policy responses are totally broken and doing more harm than good.
* Protectionism, particularly abroad
* Fed's balance sheet is full of garbage, and likely insolvent, especially factoring in decreased seigniorage with interest paid on deposits
* Intervention in markets wiping out, competing with, and discouraging private asset holders
* Dramatically increased government spending further raising real interest rates, potentially making the liquidity trap that much deeper
* Dogged protection of unprofitable industries and companies
* Inconsistent rescue of and abandonment of companies based on unclear, possibly personal criteria
* Faith lost in bankrupt Fed, Treasury, Gov't as they vacillate in policy responsesI am not at all convinced that Mellon and Samuelson were wrong. I don't think there is a policy response that will help at this point. We just keep chaining our lifeboats back up to the Titanic in hopes that, together, through all their buoyant power, they might keep it afloat and save everybody.
- Richard Kline said...
- We will have depression in some parts of the country and recession in most others. Whether depression is 'contained,' a mysterious designation, likely depends upon which areas are depressed, and whether their extent is limited. Industrial Midwest, Florida, Gulf Coast, SoCal, Greater Arizona (including S Nev) get Depression; start worrying, I suppose, if that list lengthens noticably. Even making that analogy has an odious flavor of 'quarantine zones' left to the zombies. *blecchh*
I suspect that the crowding out of private lending by Fed 'asset' swaps will become an issue much studied as an example of unintended consequences. In this case, of abject failure, since the Fed's stated policy goal from this kind of action and the innovative facilities involved was to 'promote liquidity;' exactly the opposite has resulted.
The other Great Mistake of the crisis response to this point in my view has been the wasted time and effort in propping up insolvent moneycenter financial shops. It is easy to see why this was tried---they are Politically Powerful---but the results have been delaying the inevitable at the cost of choosing a softer spot and way to land. The economy is like a thin window washer with a fat plutocrat on his back, plummeting toward the pavement from the 35-to-1 floor. The plutocrat is banking on only breaking a leg, using the window washer as a cushion---and Tres & Fed Co. have done everything to make that possible. Spending the Guvmint's spending power rushing money into flaming insolvent citadels will be condemned in hindsight by everyone who doesn't profit from it, meaning everyone who has no voice in the effort.
I am also of the view that an active policy nets more than doing nothing. If we 'do nothing' where the financial system is now, has been for a year and a half, and his heading, then, yes, we get deflation. That is not going to be the outcome because policy will be active going the other way. We have deflat_ing_ bubble prices to this point. We have not entered surging unemployment and consumption collapse, which are demand-suppressive, and in that respect the first fully deflationary vector of change. Also, and example of 'doing something' with regard to failed money centered banks would look more like seize-and-section, while an example of 'doing nothing' is a whole lot more like More Easy Swaps, i.e. what is being done. Nothing may prevent severe economic disruption, and in many cases economic contraction. How much we get, and what the outcome looks like matters a very great deal, and those levels are impacted by active response.
There are no perfect solutions, probably, but some solutions are more imperfect than others. If you know the analogy, you know which ones and why. Follow me the other way, sez I!
- john bougearel said...
- ndk,
I like your analogy of lifeboats chaining themselves to the titanic.
Positionally, that is about where we are. The displacement of the Titanic actually sinking has led to RK's surging UE rate and consumption collapse.The fact is the size of the displacement of the Titanic was aided and abetted by the series of missteps coming from our lawmakers and the Treasury in the past two months.
It was not inevitable that the stock market had to crash the way that it did. It could only have happened by the mishandling of LEH, AIG, TARP, and the latest 'failure to act' with regard to the automaker crisis. These missteps actually accelerated the loss of investor confidence in the market. The utter and total collapse of the stock market is a strong signal that really shines the light on there being a total absence of strong capable leadership throughout the country, not just at the Treasury and Capitol Hill, but a priori amongst the top execs of our biggest companies and financial institutions. We are in shit shape folks.
As a student of stock market history, this crash models the 1973-1974 stock market collapse. But in economic terms, we are smack dab in the early 1930's. Like the 1930's, there were a series of missteps by policymakers that made the outcomes far worse than they had to be.
It would take another 8 years beyond 1974 and the measures of the Volker Fed to arrest inflationary pressures, right the economy and thus the stock market.
But in economic terms, where are we in the 1930's. There are three options to ponder. We could be in 1930, 1932, or 1938. 1932 would be a political correlation because of the regime change from Hoover to FDR and Bush to Obama. But, the political correlation seems weak. A much stronger correlation can be made for 1930, when everyone began to realize the real economy was imploding, the UE rate was accelerating, so that by 1931 the guess was that the national UE rate was something like 16% and still rising. And the deflationary spiral in 1930, like now, only compounded the woes.
1938 was like a second-round effect of the Great Depresssion. We can't possibly 1938, yet.
That’s as in “news interpreted negatively,” according to the strategy team at Goldman Sachs.
We get the sense that sentiment is so bad that many market watchers have all but given up on dispensing investment advice.
Here’s the latest snap commentary from Gerald Moser, Peter Oppenheimer, et al:
Equity markets continue to face a steady stream of bad corporate and macroeconomic news. What is worse, the market still sells off on such news, suggesting that it is not all in the price. We would wait until the market stops falling on bad news before we turn positive.
Bloomberg
In a research note released this morning, Goldman Sachs slashedg article) that unemployment will rise to 6.8% in November with 350,000 in reported job losses.
This isn't quite the "just awful" scenario, but it is pretty close.
Comments
blackhat writes:With half of stocks being driven by institutional investors, and the other half by robo-buying 401ks and Simple IRAs, we will see the roof and floor decompose into the stock-market sinkhole as the unemployment numbers radically accelerate upward. Less robo-buying without jobs, less capital going into markets, less institutional investors getting their fees--it will be vicious, as though it has not been already.
As an earlier observer noted, the bear has broken the leash...and that bear now has a taste for man-meat and is in pursuit.
I can see markets sizzling up like the electrocuted blackcat, smell of burning fur and all, but the cat will fall when the utility finally cuts off the power after the final delinquency notice has been served...
comrade swan writes:
Government Sachs is calling for 2009 S&P earnings to be $65.Overlaying this earnings forecast with previous bear market bottoms results in:
1974 low of 7.9 P/E returns (2008/2009)+ S&P low of 514.
1982 low of 6.6 P/E returns (2008/2009)+ S&P low of 429.
1932 low of 5.6 P/E returns (2008/2009)+ S&P low of 364.
comrade swan | Homepage | 11.21.08 - 9:29 am | #
Nov. 17, 2008 | The Washington Post
Conservatism's current intellectual chaos reverberated in the Republican ticket's end-of-campaign crescendo of surreal warnings that big government -- verily, "socialism" -- would impend were Democrats elected. John McCain and Sarah Palin experienced this epiphany when Barack Obama told a Toledo plumber that he would "spread the wealth around."
America can't have that, exclaimed the Republican ticket while Republicans -- whose prescription drug entitlement is the largest expansion of the welfare state since President Lyndon Johnson's Great Society gave birth to Medicare in 1965; a majority of whom in Congress supported a lavish farm bill at a time of record profits for the less than 2 percent of the American people-cum-corporations who farm -- and their administration were partially nationalizing the banking system, putting Detroit on the dole and looking around to see if some bit of what is smilingly called "the private sector" has been inadvertently left off the ever-expanding list of entities eligible for a bailout from the $1 trillion or so that is to be "spread around."
The seepage of government into everywhere is, we are assured, to be temporary and nonpolitical. Well.
Probably as temporary as New York City's rent controls, which were born as emergency responses to the Second World War, and which are still distorting the city's housing market. The Depression, which FDR failed to end but which Japan's attack on Pearl Harbor did end, was the excuse for agriculture subsidies that have lived past three score years and 10.
The distribution of a trillion dollars by a political institution -- the federal government -- will be nonpolitical? How could it be? Either markets allocate resources, or government -- meaning politics -- allocates them. Now that distrust of markets is high, Americans are supposed to believe that the institution they trust least -- Congress -- will pony up $1 trillion and then passively recede, never putting its 10 thumbs, like a manic Jack Horner, into the pie? Surely Congress will direct the executive branch to show compassion for this, that and the other industry. And it will mandate "socially responsible" spending -- an infinitely elastic term -- by the favored companies.
Detroit has not yet started spending the $25 billion that Congress has approved, but already is, like Oliver Twist, holding out its porridge bowl and saying, "Please, sir, I want some more."
McCain and Palin, plucky foes of spreading the wealth, must have known that such spreading is most what Washington does. Here, the Constitution is an afterthought; the supreme law of the land is the principle of concentrated benefits and dispersed costs. Sugar import quotas cost the American people approximately $2 billion a year, but that sum is siphoned from 300 million consumers in small, hidden increments that are not noticed. The few thousand sugar producers on whom billions are thereby conferred do notice and are grateful to the government that bilks the many for the enrichment of the few.
Conservatives rightly think, or once did, that much, indeed most, government spreading of wealth is economically destructive and morally dubious -- destructive because, by directing capital to suboptimum uses, it slows wealth creation; morally dubious because the wealth being spread belongs to those who created it, not government. But if conservatives call all such spreading by government "socialism," that becomes a classification that no longer classifies: It includes almost everything, including the refundable tax credit on which McCain's health care plan depended.
Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning. This is the only major industrial society that has never had a large socialist party ideologically, meaning candidly, committed to redistribution of wealth. This is partly because Americans are an aspirational, not an envious people. It is also because the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings.
In America, socialism is un-American. Instead, Americans merely do rent-seeking -- bending government for the benefit of private factions. The difference is in degree, including the degree of candor. The rehabilitation of conservatism cannot begin until conservatives are candid about their complicity in what government has become.
As for the president-elect, he promises to change Washington. He will, by making matters worse. He will intensify rent-seeking by finding new ways -- this will not be easy -- to expand, even more than the current administration has, government's influence on spreading the wealth around.
Nov 20, 2008 | TelegraphMarkets are spooked by three “Ds”.
Deleveraging, deflation and depression are feeding one another in a potentially vicious manner. With banks facing strain again, governments must rapidly complete existing recapitalisation plans and probably take further steps to prevent excessive belt-tightening.The most recent downward lurch in the markets has been driven by news of inflation turning negative in the US and fears that the main industrialised economies could face a depression rather than just a severe recession. Worries have also resurfaced about the banks. Citigroup’s shares dived 23pc on Wednesday, while spreads on bank credit default swaps – which measure the market’s view of the likelihood of going bust – have started to rise again.
A key component in this tangled story is deleveraging. Unfortunately, so much debt was built up in the good times that the deleveraging story has a long way to go. Between 1983 and 2007, the ratio of private credit to GDP in the Group of Seven large industrial economies plus China rose from 92pc to 155pc, according to a Nomura Securities calculation.
There are two main feedback loops between deleveraging and recession/depression.
- First, as banks cut lending, the prices of assets that have been financed
In this respect, never does Buiter address the most crucial issue: for what purpose would such lending/borrowing take place? Conceiving of the problem as one in which more lending/borrowing is needed to produce and consume more, is to miss the larger context, one in which the problem is that production and consumption are based on a fundamental - and global - system of inequality (that is, too much of the labor of production is limited to those who produce cheaply, and the consumption to those who consume too richly). It cannot be overcome by producing and consuming more in the same system of inequality.
In the end, other than the temporary nationalization of the financial system, all that Buiter proposes is to re-start the system as it is, that is, attempting to kick start the economic system without any truly significant change in that system of global inequality of production and consumption.
As for nationalization, should it materialize, then why, I wonder, should we (the public) accept that it be done so to bring about a temporary state whose aim is to eventually take us back to a system of intermediation being privately owned. Why not ensure that it remain publicly owned, and the service provided by intermediation be in the public interest, rather than in the interest of private capital accumulation?
November 26, 2008 1:24 AM
Yell away, this guy is so burned out that he can't understand a word you're saying.
November 26, 2008 1:31 AM
November 26, 2008 1:42 AM
November 26, 2008 1:48 AM
The moment we dropped down the bailout rabbit hole was when it was clear how fascist the government has become. We are seeing America bankrupted before our eyes.
Why doesn't the govt promote some regional banks or smaller that are not derivatoxicated into bigger versions that are not guided by the stupidity that derivatoxication brings. These banks would be comparably easy to push funds through to deserving borrowers.
November 26, 2008 1:49 AM
If they can't make money lending then they won't do it.
If there is so much money to be made lending, to the extent that banks are foolishly overlooking this opportunity to make money, surely others would rush in to capitalize on this market need?
To put it another way, if you had billions in cash would you be lending it?
If lending is 'vital' to capitalism as we know it then why are we leaving this vital function in the hands of privately held enterprises?
Could it possibly be that they know more about lending than the government?
Banks lent recklessly in the last few years, but why wouldn't they? With the GSE's buying up mortgages, there is no risk to lending. The government created this problem in the first place.
November 26, 2008 2:13 AM
Yes, unions. If the rate of unionization were to rise from it's current lower-than-the-1920's level - caused by a government enthralled and captive by neo-liberal ideology - you'd see the reflation of the economy.
By the way, you'd also see a resurgence in democracy, since ordinary people would become re-engaged in the nexus between economics and politics. I know it's a terrifying thought for some, since it would mean a smaller percentage of the national income going to finance capital, but it would work.
Just imagine what it would mean if Walmart were to become a union shop and the billions of dollars that are currently flowing to members of the Walton family - some of which is funding their foundation-led effort to privatize public education and further constrict democratic practice - were instead redirected to lifting the employees of the country's largest private employer above poverty level.
Unions improve lives, and not just for their own members; they raise the tide for all workers in the respective industries, to use a Reagan-era cliche
Black Swan Goosed? That ought to do the trick.
Banks and others aren't capable of valuing the paper because of effect on shareholders, effect on balance sheets, maintaining face.
Therefore someone or something else has to. Bankruptcy court is the fairest way. It ought to protect owners and others including tax-payers from seeing their interests destroyed through what looks more and more like fraud and cronyism and probably worse.
November 26, 2008 5:46 AM
When the deleverage tails off in a few months all Western Governments will look at their balance sheets and weep.
There is too much debt to repay. There is only one solution; inflate it away.
0% interest rates, lack of currency support, consumption tax cuts, forced lending - it all points in the same direction
For all those who are calling for full nationalisation of the banks then what do you think will happen to the shares in the banks and what happens to your pension fund which holds those shares. What happens to foreign banks when the credit default swaps need to be settled, do you honestly think the rest of the world will continue to trade and play ball with the US.
On the assumption that banks will not lend and quite frankly looking at quarterly statements that is not clear, then the easiest solution might be to resurrect the first domino to fall. The simplest solution from my point of view would be for the US government to act as a monoline insurer. This transfers risk to the government from the banks at a cost to be determined by the government. The treasury would of course have to stop paying interest on deposits at the same time. This all started with the threatened ratings downgrades on the monolines what better place to start to fix things.
Spare some change: "If lending is 'vital' to capitalism as we know it then why are we leaving this vital function in the hands of privately held enterprises?" Because we're stoopid in this country. Supposing that we follow through on Buiter's C, we try the alternative for a time.
Michael Fiorillo, I'm with you; unfortunately the American sheeple don't think collectively, they just watch TV concurrently. Walmart should have been unionized yea long since, but then they wouldn't be the cheapest game in town.
As far as sinking the Guvmint's full-faith-&etc. by nationalizing the banks, that's true only if the obligations of those banks are paid off at face. Guvmint: "I'm the sovereign; you're the mark; here's the mark to market; deal, baby, and the squealing is optional." If we _buy_ the banks, the government's bust. If we seize the banks, the capitalists are bust, but the country's economy has a floor under it. Quite a few stories lower, but a floor. Every dime we waste paying into the pockets of financial system plutocrats, and attempting to prop up nonsensical face prices on financial assets is wasted, aggregate burnt offerings to Mammon the Dead, not even non-solutions, but dys-solutions on the path to dissolution. CUT OUT THE FAILED INTERMEDIARIES, and row hard for the nearest shore.
It's impolitic to say so, but I for one and damned glad that the financial system we know it is _dead_. The last fifteen years have been excruciating. There is no guarantee that we get a better society out of crisis, and our transit through fascism may be more prolonged and injurious than a best case scenario, but the Cocaine Economy has sucked for anything of lasting value in this country and this world. If we can't turn the page, then burn the page, and write a new one. The sun still comes up; children still get made and mostly fed; the blackbird whistles, the crows cart off the carrion. It's illusions which have died more than anything---so far.