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Creating Higher Unemployment
Tweet Share on Facebook November 19, 2008 Comment (7)Just because you call something stimulus doesn't mean it's really stimulus. This from the Heritage Foundation: "Workers stay unemployed longer when the government pays longer unemployment benefits. The Congressional Budget Office estimates that a 13-week extension of benefits causes the typical workers to stay unemployed two weeks longer. Not coincidentally, the Bureau of Labor Statistics reports that the average duration of unemployment increased by 2.2 weeks since Congress lengthened UI benefits. The unemployment rate has also risen by 1 percentage point."
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Cheap Gas vs. Recession
Tweet Share on Facebook November 19, 2008 Comment (1)Will the $140 billion "tax cut" from lower gasoline prices save the economy? Nope, but they help. I think economist James Hamilton may be right on this: "How severe the financial bankruptcies and mortgage defaults ultimately prove to be will depend directly on how far real estate prices decline. The magnitude of the price decline will be bigger the more severe a recession we experience. The economy was continuing to putter along with positive growth despite a dismal housing sector for two years. That by itself wasn't enough to cause a recession. But when you put the depression in housing together with the negative effects of the oil price shock, it proved to be a potent combination.
My view is that we were teetering on the edge of a cliff last summer, and the oil price shock may have been just enough to tip us over the edge. As we did so, the financial disaster that had always been a potential became a reality. The trouble is, now that the economy is in free fall, it's going to take more than $2 gasoline to pull us back up."
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Obamanomics and Uncertainty
Tweet Share on Facebook November 19, 2008 Comment (1)One reason the economy didn't return to prosperity during the Great Depression seems to be the great amount of anxiety and uncertainty FDR created with all his economic experimentation and anti-business attitude. Russ Roberts has the numbers about plunging business investment, and Amity Shlaes has the analysis: "Negative net domestic private investment in human language says: 'we have no hope.' And that was the attitude of business in much of the 1930s. Those New Yorker cartoons of people crying into their drink at their second home were accurate. They were not creating jobs."
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Rebuilding the Right
Tweet Share on Facebook November 18, 2008 Comment (4)Club for Growth or Sam's Club? What should be the direction of the conservative movement and the GOP? Let me add this: They might want to choose a candidate who could actually explain his own healthcare plan at least as well as his opponent could explain it. That wasn't the case in 2008.
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The Chances of a Depression
Tweet Share on Facebook November 18, 2008 Comment (2)Now according to Intrade, there is a 12.9 percent chance the economy will tumble into a depression next year, defined as a cumulative GDP drop of 10 percent or more over four consecutive quarters. To put that into some perspective, the betting markets think there is a 13.7 percent chance of Osama Bin Laden being captured or killed by next summer, an 11.6 percent chance of Sarah Palin being the GOP nominee in 2012, and a 13 percent chance of the 2016 Summer Olympic Games being held in South America. So there you go.
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The Economy: How Bad Will It Get?
Tweet Share on Facebook November 18, 2008 Comment (1)Well, Goldman Sachs says the economy could shrink 3.5 percent (most likely), 6 percent (possibly) or 7.8 percent (Eeek!) this quarter. Economist Lyle Gramley of the Stanford Group now thinks a 5 percent drop is likely.
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Worst Economy in a Generation
Tweet Share on Facebook November 17, 2008 Comment (1)The latest forecast from Macroeconomic Advisers predicts a 3.9 percent GDP drop in 4Q, the worst decline since the first quarter of 1982 when the economy shrank 6.4 percent. (Remember, these are annual rates.) I think it is time to hike taxes, yes?
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The G-20: What Happened
Tweet Share on Facebook November 17, 2008 Comment (1)The econ team at IHS Global Insight sees these as the outcomes from the G-2- meeting:
1) Further monetary policy action - possibly co-ordinated - including reductions in key interest rates in the U.S., Britain, the euro-zone and other industrialized countries.
2) Further fiscal stimulus measures, particularly in the U.S., but also in Britain, Europe, Canada, other industrialized countries and the BRICs.
3) Stepped up efforts by central banks and monetary authorities to provide liquidity, bolster capital in the financial system, and unfreeze the credit markets.
4) The IMF will expand its role in terms of providing liquidity to emerging countries and other industrialized countries.
5) Substantially more regulatory scrutiny of off-balance sheet activities, risk management processes in banks, and credit rating agency processes.
Me: I think Thomas Barnett got it right: "The non-G8 members of the G-20 are getting tired of just advising at the ministerial level and being excluded from the adults’ table." From now on, they get to eat turkey with the adults.
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The 11 Blunders of Hank Paulson
Tweet Share on Facebook November 17, 2008 Comment (8)Strategist Ed Yardeni says that "everything that [Hank] Paulson has done or endorsed has worsened the credit crisis and sent stocks reeling." Like what, for instance? Like these, and I quote:
(1) Paulson's Super-SIV proposal was a distraction that went nowhere. It was the first clue that he likes half-backed schemes that are hard to implement.
(2) The vaunted "Teaser Freezer" hasn't worked. Neither has the Hope Now Alliance. Indeed, many borrowers who've been foreclosed never even heard about these new outreach programs to keep them in their homes.
(3) Letting investment banks borrow from the Fed's discount window just after Bear Stearns failed suggests that letting the firm go was done as a risky gesture to the principle of avoiding moral hazard, which has subsequently been thrown out the window.
(4) The government's unwillingness to provide transparent rescue plans started with the mysterious $29bn Bear Stearns portfolio acquired by the Fed.
(5) After multiple assurances that Fannie and Freddie were solvent, they were seized and put into conservatorship. Stiffing owners of their preferreds opened an estimated $25bn black hole in the capital of regional banks that owned these securities. It also seized up the one market that financial firms had for raising capital.
(6) Refusing to support the suspension of mark-to-market accounting was Paulson's second biggest mistake.
(7) His biggest mistake was letting Lehman go under. Dick Fuld should have been forced out, and Lehman should have been rescued. A guy who ran GS and all the MS advisors around him should have known that letting Lehman go under would blow up money market funds and the commercial paper market. It also blew up the prime brokerage business and massacred the hedge fund industry, which sent stock prices into a free fall.
(8) When AIG was seized, the terms of the government's rescue package were punitive. They've been recently eased, but the firm can't raise funds by selling only 49% of its various non-core assets, as required by its "bailout" deal.
(9) TARP was a really bad idea that was sold to Congress and the public by inciting a panic, and sending the global economy into a tailspin. Claiming that the Treasury could purchase one-of-a-kind troubled assets in reverse auctions made no sense. The RTC solution to the S&L crisis of the early 1990s won't work to end this crisis.
(10) The Capital Purchase Program of TARP, started on October 14, is providing capital to banks that probably should be forced to fail and to those that don't even need it. Hopefully, Congress won't give the second $350bn installment of TARP to the Treasury.
(11) Paulson has been aiming to kill "bad" hedge funds. The result of his disjointed fixes has been a massacre of innocent bystanders, including long-only investors getting killed in all the stocks that hedge funds are being forced to sell.
My take: I think Paulson's credibility with the financial markets has been exhausted. Now I am not sure what the magic solution was. Maybe some recapitalization of key players plus an Uncle Sam-led home refinancing plan. Or maybe a) suspending mark to market, b) a zero capital gains tax for the next five years, and a corporate income tax holiday. But I will give this to Paulson: He does strike me as a guy who is working himself near death to deal with an amazingly tough problem.
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Obama: Reagan Was Right After All
Tweet Share on Facebook November 16, 2008 Comment (9)This is the sort of talk that would have made Hillary Clinton the Democratic nominee. Barack Obama on 60 Minutes: "And whether it's coming from FDR or it's coming from Ronald Reagan, if the idea is right for the times then we're gonna apply it. And things that don't work we're gonna get rid of." Really?
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