A notice was in my box a few days ago from Lupin management, in which they congratulated themselves on really not very much. It was essentially a self-justification and an appeal for support against declining attendance at a naturist club that has had one good month this year. They’re worried, of course, about the present economic crisis and mentioned that the club was originally founded “in the depths of the Great Depression,” but apart from their own mismanagement, the economy will surely hit the club hard.
There are a bunch of articles on various aspects of the economy that caught my eye today, and to sum them up, it is clear that the economy is going down, hard, with corporate “America” very much appearing to be on the ropes in an economy they have hollowed out in such a way that it is virtually impossible to conceive how consumer spending can rise again. But Bob Herbert almost summed it up well, writing, “The fat cats who placed the entire economy at risk with their greed and manic irresponsibility are trying to lay claim to every last dime in the national Treasury. Meanwhile, we’re nowhere close to an economic recovery program that will help the people who are hurting most.” What he neglects is that there are no dimes left in the national treasury.
We can’t just blame that on the Bush administration. Paul Craig Roberts asks, “If the change President-elect Obama has promised includes a halt to America’s wars of aggression and an end to the rip-off of taxpayers by powerful financial interests, what explains Obama’s choice of foreign and economic policy advisors?” Roberts neglects the lack of dimes in the national treasury as well.
Paul Krugman argues that the problem with Franklin Delano Roosevelt’s New Deal was that it didn’t go far enough. He writes,
FDR did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the MIT economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”
One thing that is clear is that the Bush administration’s top-down approach, which appears likely to be continued in one form or another by the Obama administration, is rapidly being outpaced. The Wall Street Journal reports, but perhaps dares not to measure, the widening conflagration.
The Associated Press reports that the latest plan to help mortgage-holders “focuses on loans Fannie and Freddie own or guarantee. They are the dominant players in the U.S. mortgage market but represent only 20 percent of delinquent loans.” Many of the remaining mortgages have been carved up into securities held by numerous investors, any of whom can prevent restructurings. One would hope they wouldn’t, but a correlation between stupidity and greed should never be underestimated. If too many hold out to try to further minimize their losses, they may force more defaults in either the short or the long term and lose their investments entirely. If some saw the subprime crisis as a tsunami, I wonder what they’ll call what’s coming.
So if you take away financial services and you take away the automotive industry, what is left in this economy? A bunch of fast food joints and Wal-Marts?
Actually, there’s the defense industry, but Roberts writes,
How much more can the government borrow? America’s foreign creditors are asking this question. An official organ of the Chinese ruling party recently called for Asian and European countries to “banish the US dollar from their direct trade relations, relying only on their own currencies.”
“Why,” asks another Chinese publication, “should China help the US to issue debt without end in the belief that the national credit of the US can expand without limit?”
This is a challenge to the status of the US Dollar as the world’s reserve currency. Without that status, and without loans from overseas, more money creation translates directly into inflation, and given the increasing magnitude of the crisis, possibly hyperinflation. The Chinese have made noises before, but for as long as they can hold the yuan relatively stable against the dollar, they can fib about the book value of their vast holdings of US debt and save face. I would not want to be whoever it is that has bought and held all this debt when that exchange rate becomes seriously untenable.
Bloomberg News is reporting that “the Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral,” and suing to force disclosure.
“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”
There are two explanations for the Fed’s secrecy: 1) the Fed may be seeking to protect recipients from embarrassment and loss of confidence, or 2) disclosure would damage confidence even more than lack of information. When they say the taxpayer is making these loans, however, they neglect that “the taxpayer” in fact is borrowing the money to cover those loans, from, among others, but significantly, the Chinese. And if they’re afraid to identify the recipients and the collateral for these loans, one has to suspect that it might be because these aren’t an appetizing credit risk.
There’s another problem. The money to pay back all these loans is nowhere in sight. As Herbert writes,
This is no ordinary recession. With brokerage houses, banks and a mammoth multinational insurance company depending on the Treasury for resuscitation, and with automakers like General Motors staring bankruptcy in the face, it has the feel of a monster downturn, a recession on steroids.
Indeed, Reuters reports that “Merrill Lynch & Co Chief Executive John Thain said the global economy is in a deep slowdown and will not recover quickly, and the environment recalls 1929, the advent of the Great Depression.” And here’s something that sounds a lot like what I was hearing before the $700 billion bailout:
The rescue efforts are “evolving in ways that I don’t think anyone anticipated,” said Camden Fine, president and CEO of the Independent Community Bankers of America, a trade group. “Things are just hitting them from every single direction, every day, and I don’t think they know whether to spit or go blind.”
Ideology is clearly a part of the problem. Krugman writes:
Now, there’s a whole intellectual industry, mainly operating out of right-wing think tanks, devoted to propagating the idea that FDR actually made the Depression worse. So it’s important to know that most of what you hear along those lines is based on deliberate misrepresentation of the facts. The New Deal brought real relief to most Americans.
Two articles on the Motley Fool today argue for letting the auto companies go bankrupt, blaming them for high labor costs and outdated products. Among them, Bill Mann writes:
But economic growth only comes when capital is allowed to flow to its most productive uses. I am very sorry, but propping up Detroit’s dinosaurs is not productive. They have destroyed capital for a generation. They have too much debt, they have above-market labor costs, they have shown minimal aptitude at developing automobiles that people want to buy at prices that allow the companies to turn a profit. They are losing to Toyota and Honda (NYSE: HMC). Their parts suppliers are, as a group, collapsing, with Dana Holding Corporation (NYSE: DAN) and Visteon (NYSE: VC) teetering on the precipice.
Funny, nobody accused them of “minimal aptitude” when so many soccer moms were buying SUVs that felt “safe” but sucked gasoline and every yuppie male had to have a Hummer. And those labor costs translate to money in workers’ pockets that can be spent in this economy on products and services. When the auto makers go bankrupt, which might happen even with a haphazard bailout, they’ll take out a huge chunk of this economy’s remaining real production.
Wal-Mart jobs don’t pay rent, they don’t buy houses, they don’t buy cars, and they barely pay any taxes. And if they don’t pay taxes, and they don’t generate the kind of business that pays taxes, there’s no money to pay off all those foreign creditors. Sooner or later, China and other foreign creditors going to figure this out. But Obama’s early picks recall the very Clinton administration that was gung ho on the globalization that has hollowed out the economy, leaving us with all those Wal-Mart jobs.
Herbert argues for jobs, writing, “The naysayers will claim that all of this is too expensive, that we can’t afford it. Where were they when we invaded Iraq? And how do they feel about the staggering amounts being funneled, with nothing like the proper oversight, to the banks and Wall Street?” He’s right, but there’s another part to this. The jobs can’t just be jobs. They have to be well-paying jobs.