Saturday, February 28, 2009

Freedom just another word for nothing left to lose...

Jeffrey Garten's paen to free trade can be found the Journal website a the address below:

Garten extols the benefits of free trade without regard to what it really means. It's cook book economics from another time. Free trade economics as classically taught does not go down well in a world where one man's employment is another's unemployment. It works where there are jobs for all. That hardly applies to the global economy now with a savage downturn in progress, nor has it applied in recent years as China's and India's development have meant wage erosion and unemployment (disguised unemployment?) in the US. So too, until the recent plummet in house values, much of the destruction of US wealth was 'unappreciated'.

Asleep or comatose?
India and China are late-comers to the trade game and they are using their 'characteristics' and the new complacent referees (IMF and WTO) to turn the game to their advantage. I think of this in terms of a basketball game if the game is called tight the team with speed, skill and quickness will have an advantage. If hands-on and muscling is allowed then teams with size and lumbering strength will have an advantage relative to skill team. In short the referee's bias is an issue and an important determinant to who wins. The same is true in international trade and, on the currency front, the IMF has definitely been asleep to the advantage of India and China and others.

The missing link: Real and financial sectors interact
Garten's light treatment of currency values misses the central point of the problem. Looked at from a US perspective - instead of some international accusatory position- much of what has happened in the world trade in the last 20 years has involved the pillaging of the American global capital position: the US has run ever larger deficits in its balance of payments (current account) so that its demand could fuel job growth abroad and 'feed the world.' Oh, the US 'fed' itself, too, with huge volumes of imports of consumer goods at bargain basement prices. But in a rational economic system, that appetite would have been choked off by a falling dollar currency value and rising values of competitor currencies, forcing trade to re-balance. Why didn't that happen? Why did the real sector run amok with no adjustment in the financial sector?

IMF: toothless and blind or impotent?
The IMF, the exchange rate cop on the beat, has neither whistle nor gun. So the fx inmates have run the asylum, subject to an occasional outbreak of order. The IMF has been unwilling to call out any of the currency peggers/controllers and that is partly because it possessed no tools for enforcement.

The facilitators were...
We are far enough into our financial crisis that one need not counter-argue that if it was so bad for America why did so many multinational US-based corporations participate in the 'rape' of US capital? They did it for profit- their own.

The More/Better solution
While Free trade is noble it is also something that must be looked at outside of the normal economic comparative static framework. An economist will look at stage one, before free trade and stage two, after free trade, and conclude that stage two is better since more output is being created. QED. In economics the amount of output is king: More-Better.

Compensation principle: without principal?
Economists long ago discovered the 'compensation principle' to evaluate trade regimes and break what had been a an intellectual log-jam in assessing those regimes. Consider this: Bill has 2 and Gene has 4. Then, presto change-o, after free trade Bill has 6 and Gene has 2! Who can say that one state is superior to the other? Gene has just seen his position deteriorate from 4 to 2. But Bill, at 6, is an unequivocal winner! Who makes the decision on the redistribution? Well, economists use the COMPENSATION PRINCIPLE. They say that bill with 8 could - COULD - compensate Gene giving him 2 to return him to his original 4 and still leave Bill better off that before. So the free-trade state is superior. But what if Gene is not compensated? Well. my friends that is a distributional issue economists say and they do not address it. Recognize that from the VERY START that FREE TRADE is only BETTER in this HYPOTHETICAL WORLD... and it goes downhill from there.

Free Trade: The blood-letting of America
One point is that free trade does not compensate those who are harmed by it. Right now trade has driven down wages in the US and more nefariously stripped the US of wealth by building up net debt (the current account deficit represents a rise in the nation's debt or a diminution of its assets- either way it's a drop in wealth).

Why have we sold our inheritance down the river?
So why has US wealth been exploited to make growth strong in the surplus countries: Japan and China and others? Here free traders jump in to say that the US saving rate was too low and the US got these cheap goods etc. But that begs the real question. The real question is, 'why didn't the international system adjust to choke off the cheap (too-cheap?) imports?' Part of the answer is that US consumers were happy and the erosion in wages affected workers in a general sense and not specifically enough to create a counterforce to the free-trade trend. Companies like Wal-Mart had developed ties in the cheap export markets like China (Nike and others did this too) to keep the flow of cheap goods coming.

Who were the chief advocates? (ps don't even bother blaming Republicans)
And we all know the political strength of the corporate lobby and the powerful intellectual support 'Free Trade' has from the likes of Mr. Garten (... and Mr Clinton and his Treasury Secretary, Mr Rubin). All US banks and investment banks (Mr Rubin was one of these both BC and AD Clinton) want freer trade. They want freer - not just free - trade in fact since financial services are one of the last industries to open up. They must press for free trade in order to get their reward. Now that seems much less likely given what the financial sector has wrought.

Can't argue with RELIGION
People would have you believe that free trade is not only 'free' but 'good' and its one thing all economists agree on. It's like a religion. So after all it must be true. But for the trade side to work properly it must interact with a functional currency side...and that has not been the case

Garten waxes eloquently about all the poor people creating a new New York 'every two months.' Is that a good thing - Jeffrey? Environmentalists have looked at the way we live in the US, India and China and concluded that India and China cannot raise their 'standard of living' (or we can use the word 'consumptiveness') to levels enjoyed in the US without creating world-destroying ecological damage. Our new president is finally going to recognize the impact that carbon emissions have on global warming. So, hey, maybe MORE IS NOT BETTER ANYMORE?

Survival of the 'whatest'?
When the global economy heads into recession there is suffering and Mr Garten would have you believe that we should sit by and let free trade determine who survives. Why? Why should the cheapest car producer get to fill all the demand over the next 12months when demand is so low leaving nothing for higher cost producers? Why should the higher cost producers be run out of business when demand shuts down for A SHORT PERIOD OF TIME? Why should we not as a nation have right to protect our market our companies and our jobs from a temporary drop in OUR demand? Why should we ignore the welfare impact, considering the years to come and base our consideration on a too simple 'point in time' comparative static assessment?

It's really stupid. This sort of "free trade talk." It is really very naive and, in the end, STUPID.

Burden-sharing is NOT protectionism
Sharing the burden when economic slack appears makes sense. The truly badly run companies should go out of business but the salvageable companies are a different case. I'll not waste breath here defending the US auto industry but clearly it has made some real mistakes and at the same time it has some cost issues that foreign companies do not have because of the special case of the health care system in the US. Should GM fail because of the burden of legacy and current health care costs? Does that make sense? And what of the competitive advantage the foreign transplants get in the South because of deals they cut for tax abatement and other cost reductions in 'right-to-work states?

The Black and White of it
So as we peel the various skins off the Free Trade onions we find that many truths lurk below that seemingly pristine white surface where trade is white and protectionism is black.

See trade in Technicolor
But it is not that way. Moreover, if other parts of the world want to create the equivalent of a New York every two months, they should have a plan to support that 'city' without expecting to run down of wealth in the US.

Don't you think so?

Game, set, match
Look at who wants free trade! The fast-developing export-scamming low income countries and the export oriented economies of highly developed Germany and Japan. They are screaming the loudest because for their cozy little game, the jig is up.

Thursday, February 26, 2009

Clueless in America meets desperate to do something

So, can you believe this?

In an effort to do something there is now a WHITE PAPER that describes the Treasury's new bank capitalization plan. Finally we are going to see some of the details that Treasury has been working on so hard behind the scenes.

And here it is: banks are going to EXAMINE THEMSELVES!

The Treasury 'white paper' says it all.

go to

The White Paper clearly states that Treasury will impose a scenario on the banks that they must use to assess their performance under the criteria set forth by the treasury. But isn't this the sort of self-regulation that got us into this mess?

Indeed, credibility aside, how does this address the problem?

read on....

...let's think deeply on the issue of securities that banks have on their balance sheets now, that they cannot value. Isn't this a core problem that has been around since Hank and Ben testified that they wanted $700 bln in no oversight non recourse monies to get some auctions going to discover prices?

...soooo if banks can't evaluate securities under conditions of reality, how will they evaluate them under conditions of 'scenario'?

Knock knock?

whose there?

whose there?? Hey, whose there!

Just as I suspected- nobody home.

It's not a 'knock knock' joke- it's just a knock- no joke.

That's right no one could really be stupid enough to let banks self-test and to assume that they had any idea what their currently 'unmarkable' assets would do under any scenario could they?

What a bankrupt plan.

So what was the REAL idea? Was it to make us think they really did this? That by having banks assess themselves under conditions so bad (the treasury's scenario) that no one expects to occur and yet to survive, public morale would be boosted? To find that banks are still solvent without new capital under draconian conditions would throw off the yoke of pessimism? Everyone could then conclude that BANKS ARE SOLID! Everything is fine. No one needs any new capitalization. Problem solved.

Who though we were/are stupid enough to fall for that?

What a God-awful plan.

Thanks Tim for being, as always, clueless in Washington. Republicans did not corner the market on stupid ways to fix the economy.

Maybe David Letterman could have a new spot for Stupid Administration tricks you could propose this one for...

Who's crisis is it anyway?

link to my CNBC appearance:

I get the second two-minute segment 'to save the world' in Joe Kernan's words....

My point is that we are all in it together and all are responsible.
Stop the blame game and DO SOMETHING!

Doing nothing never fixed anything.

Tuesday, February 24, 2009

Was it an Agenda Bill or a Stimulus bill?

Few who talk about the 'stimulus bill' say it is going to produce a spurt in growth. If it is possible to have stealth stimulus bill that is nearly one trillion dollars in size, this was it. So what was it really? We are about to find out...

The Agenda Package strikes back
So now the rubber hits the road again as the President has his first year's budget. At the time of the stimulus package I called that legislative effort a white elephant, a bill that had three parts: it had Stimulus, Agenda and Cushion. Now that the President has his regular budget to put forth we'll see what happens. Much of what I would expect a new president to do in his first budget is to fund his agenda. But that that has already largely been done in the massive AGENDA bill that some refer to as a stimulus bill. How will that fact impact the President's first budget?

From obesity to anorexia
Will the budget be less expansive than it otherwise would have been because the stimulus package is already so large? If so then some of the punch from the stimulus bill will be eroded. Will Republicans use this as a wedge to fight to reduce deficits long term - their new-found religion? That is supposed to be a theme for the President tonight- long term budget deficit reduction.

Challenges for the President
Am I the only one who finds this focus by the President on budget reduction odd as a nearly one trillion dollar stimulus package has been passed and is still coursing its way though the system? And that is a package that most see as not a having had a laser beam focus on the 'objective' of stimulus. And what about our still not having a financial sector plan? Is that on the table for tonight? The President needs to know that governing is not about soaring rhetoric. It is about making the economy fly.

Yes I can! Meets mother may I?
Barack Obama ran for office arguing that HE could better run the economy than John McCain. Can he? Is HE willing to step out from behind the 'I inherited this mess' slogan and take a stand? HE ran for office because he WANTED TO INHERIT THIS MESS, let's remember that. How long will his administration have a plan to have a plan? When will it implement one? It's time for the President to set his jib and sail in an actual direction instead of being buffeted hither and thither by the financial storm 'set in motion by others.' Pick a direction Mr President. You do not need permission. And you can't spend your entire term hiding behind the skirts of past Republican incompetency. You can't do that, in part, since Democrats have been running the two key financial committees in the House and in the Senate for some time. Dodd and Frank are as much a part of this mess as Bush - like it or not. This is not a Republican problem, it is national problem. If every president took no action on the legacy of issues he inherited in office we would be in a real fix.

It's budget time Mr. President and it is time to have your dollars make some sense.

Monday, February 23, 2009

A plan for a plan for a plan... or still waiting

I feel a little bit like I am watching two doctors debating the merits of two different surgical techniques while the patient continues to slip away unattended on the operating table.

(1) Is this a new plot on Gray's Anatomy? (2)Is it a farcical episode of Scrubs? Or, (3) is it a parody of the administration's ongoing approach to its financial sector problems?

Try (3).

While the Monday meltdown in the stock market did not have the financial sector as its epicenter, it was financial-related at its core. Bank shares ended last week so weak -especially - Citigroup, many rumors swirled about some bailout or support package being arranged for Citi and perhaps others over the weekend. But that weekend came and went. There was no help. There were some statements made to the effect that the administration does not want to nationalize banks. Still, some, outside of the Administration, continue to call for nationalization.

Returning to our doctor analogy, it's like the two bickering doctors agreeing not to try a third procedure, but still not being able to agree what to do. It's good that the Administration has eliminated one course of action but it needs to embrace a course of action. And it needs to embark upon that course of action as well. And it needs to do it NOW!

While Monday Feb 23rd, was more of a day of meltdown in material and industrial stocks, they are playing catch up. The financial sector is down by over 80% from its recent highs. The rest of the market has come under new selling pressure, too. And the financial sector was pressured as well on Monday. Large banks escaped the selling because the market interpreted the Administration's comments on nati0onalization to apply to large banks. Small and medium -sized banks may still be on the hook and at risk to the new stress tests that Treasury Secretary Geithner spoke of a week ago.

Having stocks at an 11 year low regardless of the percentage drop is a shocking development.



Many people like to draw the parallel with Japan. I don't think it applies very closely. Japan's lost decade came after an enormous stock market and property bubble in Japan. We had our stock bubble at the turn of the millennium - it is now 2009. We currently are unwinding a residential property bubble. Stocks are not coming off the bloated highs (as the Nikkei did) at the same time that whole property market burst. The US bubble is mainly residential while Japan's included everything. Moreover, in the US the residential price declines appear to have been mostly accomplished. In short, financial and property market conditions are different in the US. It's different for inflation, too, since Japan suffered deflation, while it is not clear that the US will. The US authorities have been much more aggressive and innovative than their Japanese counterparts were in trying to stave off recession/deflation. But like Japan the US authorities are having trouble deciding what to do with the banks.

That they have in common.

Sunday, February 22, 2009

Europeans tell us to eat our spinach; their recipe

European rhetoric soars but fails to fly...

The European leaders of the G-20 have met in Europe and spun a fine tale of what they are doing and sung their own version of , "What the World Needs Now."

It's not 'love, sweet love.' or even 'Love, tough love.' It's some version of Euro-smackdown.

The Europeans have peppered their communique with the usual boiler plate. You can tell it's pie in the sky since they start by congratulating themselves for timely action. Right. Remember that Chancellor Merkel who headed this Euro love-fest was the one that chided the various stimulus plans initially, saying that 'stimulus was not a contest.' She eventually came on board with a second round of stimulus herself for Germany.

In fact, Europe has been slow. The ECB has dragged its feet in cutting rates and only joined the first round of central bank rate cuts using cooperation as cover. It was still apoplectic over its then ongoing inflation overshoot. Only the UK authorities have been quick and arguably that is because the UK financial sector is so large. So when the European G-20 ministers (E-G-20) start patting themselves on the back you know it must have to do with the need to burp instead of being an authentic act of congratulations.

The Euro-leaders agreed that "the banks ought to create additional buffers of resources in good times, so that they are better equipped for any bad times the future may bring."

Good idea - except how does that work? Banks that do stockpile capital in good times will find their financial results under perform in good times when the rest of the world is booming. What incentive will banks have to add to capital and reduce their return on capital (and assets) when times are good and when they 'think' they don't need as much capital? The Maastricht agreement was supposed to get European countries to do the same with their national debt and it has been unsuccessful. So the E-G-20 members said, let's take that same failed model and apply it to banks where the competitive pressures will make such a thing appear ludicrous! Good idea!

The E-G-20 has also said that protectionism should not used. Yet within Europe there has been a good deal of controversy about the stop-gap measures used to prop up industry. Europe was angry with Ireland at the outset of the financial mess for guaranteeing bank deposits. More recently France has been criticized for its support of the auto industry. Europe does not have its own house in order yet its proclaiming virtue for the world audience.

The E-G-20 "want to devise sanctions to safeguard ourselves better against dangers emanating from uncooperative jurisdictions, including tax havens." In view of the troubles that the US is having with UBS this makes me wonder if Switzerland is 'on board' with this. Swiss bank secrecy certainly seems to be one thing that is on the outside of this declaration.

Europeans having already ceded a lot of their authority to supra-national bodies are more willing to concoct new powers for new international agencies. I don't think that the US experience with WTO has been good enough to make that a plan that the US will embrace. The IMF is an institution that is particularly toothless and one whose programs of 'conditionality' have fallen prey to criticism. While it is clear that more international cooperation will be needed, it is unclear how far the US will be willing to go in that direction.

The communique also makes reference to reviving Doha. There is clearly a lot of angst over the ongoing failure at Doha. But Doha has been dead for some time. Doha has nothing to do with the financial crisis. Yet here it appears in the communique, as does a reference to climate change. Everyone's pet rock of a project gets mentioned. That is hardly a good sign.

Europe did endorse more resources for the IMF. That is one provision likely to get more support.

On balance we know that a consistent global approach to regulation will be needed. The previous BIS rules had seemed adequate at the time - they were comprehensive -but the capital they required was not enough. Our measurement of the degree of risk and its cross correlations was poor. Partly this failure is a technical failure of measuring key ingredients improperly and assessing risk correlations incorrectly. But the failure here is more than technical. On closer look there were was just too much willingness to unleash more risk by stripping the system of safeguards that had been in place for well over 50 years. Financial engineering was applied even where it was know to be flawed. We had a small scale melt down of LTCM and failed to learn from it. The entire system overused leverage to boot.

It is not clear even now what lessons have been learned. Few on Wall Street seem to be deeply repentant for what they have done. The eventual remedies probably will involve more emphasis on changing the structure of banking than on who does the regulating. But getting everyone on broad will also be very important.

Thursday, February 19, 2009

Make a new plan, Stan

The President announced a new plan to help homeowners. In addition to last week's stimulus plan's $8,000 tax credit restricted in various ways to new home purchases, this new plan is intended to help people who own houses and have gotten into trouble through no fault of their own. It is mainly being sold as giving them access to lower rates they are not able to access.

It is not clear how you restrict the universe to that group of people since many did buy homes they could not afford but let's set that aside.

The President's examples of who this will help centers on people with 30-Yr fixed mortgages who now see lower market rates but can't refi because their house prices have fallen and they no longer have a 20% or better equity stake in the house- a typical refi requirement.

But the larger group of people in trouble involves those who took on variable rate mortgages and found the formula rate rise beyond their means as banks pulled the rug out by not letting them refi again into another teaser rate.

At $75bln this plan is estimated to be able to help some 9 mln homeowners; that amounts to $8333 per home or about the same as the new house subsidy (tax credit) in the stimulus package. In addition the administration wants to use Fannie Mae and Freddie Mac portfolios to bring further help. That may be the more useful assistance.

The plan is still sans-details but there is plenty of intent that has been made clear and we can use that as a partial guideline to where we are headed.

In short there is a lot of help that can be extended to the new and existing housing markets. But the constraints on income will bite. Also the provision to try and help only those who are innocent victims could muddy the waters since many used variable rate products to buy more house than they could afford. Are these people going to be helped or thrown under the bus? And interestingly, there is no clear answer on what to do since many taxpayers do not want to help people like that yet other tax payers are those very people and they still view themselves as victims. This is why housing remains a mess that is hard to clear up.

There is also the issue of 'cram downs' that banks don't like. In a bankruptcy proceeding, a judge can just 'cram down' the value of the mortgage (and/or its rate) based on what person could afford to pay. Banks are worried about what happens to second mortgages or even to first mortgages. How will people cooperate and bargain under the new Obama plan if they could get even more relief under a cram down? This question has not been adequately addressed.

As 'we' begin to tinker with the different rules we create a welter of opportunities. People will react to what works best for them. And now so many people owe so much money that is so poorly collateralized that it is the banks that are in trouble. People can walk away from their no recourse loans and banks then have a complete loss and an asset with a negative cash flow to maintain.

Lending needs to have standards. Asset prices are what they are partly because of these standards. The barrier to entry in housing is one of the things that protects house prices.

Thursday, February 12, 2009

Maybe we can??? Yes, we might...

Yes we CAN!' meets and fails a reality test?
Mr Obama as a candidate made 'Yes we can' his signature motto. What happened? Once elected this voice of hope has tuned to the rhetoric of despair. In an attempt to keep expectations down when Tim Geithner, Treaury Secretary, announced his new plan for banks and for finanicial sector help he warned that it would take time and that they would make mistakes and....

'Well, we might!'

That's a few notches lower than, 'Yes we can." Isn't it?

No divide and conquer
In the modern economy you can't do these two opposite things at once and get away with it. You can't 'be positive and urge people on while at the same lowering expectations for success so people won't get disappointed if the results aren't stellar. It's show time!

As always: the blame game
The President and his team are supposed to be positive forces for the economy. Yes, we understand that President Obama inherited a clunker of an economy from George W. Bush AND from the Democrat-controlled Congress. It's important to remember that, since the economy is not run by presidential fiat as we are now being reminded. Democrats have chaired the two key financial committees in the House and in the Senate. In the Senate, Dodd is a long time opponent of reform at Fannie Mae. He is also a huge recipient of funds from the financial lobby as was George W Bush (Barney Frank, who heads the House Financial Services Committee is also a recipient, to a lesser extent). There are all sorts of uncomfortable sound bites of Democrats saying things about the housing boom and about what they did to try to help lower the hurdles to get people into houses. One man's hurdle is another man's safeguard- in retrospect. Looking back, that does not play too well for those who want to blame the financial mess on Bush. He gets his share but be careful how you play this blame game. There is plenty for everyone.

It ain't me, babe
But we do know that whoever you blame, it's not Obama.

That's the fact Jack
That's a fact. And Barack knew the sad state of the economy when he ran for office. He ran as a more capable candidate on the economy than John McCain. So where is that guy? He knew that his job would be to turn this thing around and his reply was, "Yes we can." So where is that positive 'can do' attitude? It will be hard to have success without it.

As always, parties at loggerheads
Of course there is still a political battle raging over the form of the stimulus package and bank aid. I'd sure would like to have seen more support from Republicans but the battle lines are drawn. Democrats are of the opinion that they offered up a plan that was bipartisan in spirit. Republicans did not see it that way. So now the plan has been passed mostly with Democrat votes. Republicans had some impact on it. We'll see if it works. I am waiting for the scoring from the CBO to see what the timeline is on funds to be spent and the estimated impact on the deficit.

Some positive economic news?
Meanwhile the economy is not looking as grim. This is something I have felt for a while and it's not clear if I'm right or not, but what if we have not fallen into a black hole? Democrats have cast everything in the worst possible light to try and push through the stimulus plan.... What your mother is sick? See, that's why we need a stimulus plan...and so on. This has helped to color perceptions about how the economy is doing. The recession is in some ways severe, but not in all ways.

Yes, positive news!
In fact retail sales jumped by 1% in a surprising January result. Let's not try to extrapolate that trend. But it is good news for retailers since it suggests that they were able to make some real progress with inventory reduction. The SALE is the only way for them to do that. Firms can cut or halt orders for new merchandise, but inventories don't decline unless consumers are taking goods off the shelves. So the retail sales report - to me- more than being a signal of a strong consumer, is a sign that inventories are not going to continue to bloat. The rise in sales also helps the inventory-to-sales figure look better, a key gauge of inventory adequacy. In the report nondurable goods spending was quite lively but durable goods spending is still spotty.

Reason to be upbeat?
In a research piece I sent out earlier in the day, I pointed out that in the two previous long recessions it was about at this point in the cycle when retail sales stopped dropping. Remember that while unemployment is growing MOST people still have jobs and the population is still growing as well. Retail sales are 10% lower in real terms than their level at the threshold of recession. There has been a lot of adjustment, a lot of damage and consumers have postponed a lot of spending. It's a good time to recognize that the coming stimulus should tilt the odds of an improvement continuing. How much and how fast the economy improves depends on the profile and speed of the spending in the package.

Other positive signs, events?
Consumer confidence has also showed some signs of bottoming, in at least one the major monthly surveys. While the job losses have been severe, jobs are being cut faster than hours-worked. Moreover, the severe phase of job loss in recession is usually not a long one- especially if there are flashes of positive events like a consumer spending picking up and a stimulus package. Interestingly in the retail report auto sales rose; the weakness in m/m auto sales previously released had a large component of weak sales to corporate customers.

Comparing recessions: this one is weak and strong, but not yet over
When we look at this recession compared to others the things that really stand out are how weak imports are in this cycle and how strong productivity has been. Along with exports, that had been very strong, but now are falling sharply, we can identify the three mains reasons that GDP in this recession is the strongest after five quarters of recession compared to any previous post 1960 recession that lasted that long. That's right- the STRONGEST. While there is commentary about how bad this recession is, let's realize that most of this weakness is from labor market gauges. Job losses are severe and the rise of the unemployment rate from its cycle trough has been faster in this recession than in any other since 1960.

Wave the pom-poms
We can take the attitude that things are weak and troubled and say 'yes we might'. Or we can take the high road and be optimistic that our economy with a stimulus package, help from the treasury in spending its special funds and assistance from an active Fed mean 'Yes we can'. Let's see if the administration can bring itself to take a more positive view and try to encourage workers instead of depressing them.


Tuesday, February 10, 2009

One plan, two plan, old plan.... same plan man?

While I am still digesting the Geithner plan let me offer a few quick comments.

On the fly...
Until very recently the Treasury was telling people that a bad bank might be in the offing. Suddenly this is off the table. It is unsettling to see this sort of switching so late in the game. The Treasury is still going to and fro on what to do.

Another giant SIV (or Sieve) with public money?
Treasury Secretary Paulson tried to set up a giant SIV to hold assets but that failed based on problems in pricing. As far as I can see that issue is still there.

Identity crisis?
So now a new public-private entity is being suggested with government seed money in use. It is still not clear how this will work and how much cushion public money will provide and if it will involve any guarantees. I do not begin to understand how this private/public plan will work. Moreover, Fannie Mae and Freddie Mac failed precisely because of their public-private identity crisis.

Other steps...
The plans to bring the Fed in to help with asset-backed lending are good. The stricter stance toward banks that get restrictions on dividends, strictures against M&A, and stock buy-backs and limit compensation are an improvement of sorts. The plan envisions audits to determine that the new funds are well used and stress tests to see what banks are healthy to start with. The plan may work. These are still significant intrusions into the private sector and are not the sort of things to which any good bank will want to subject itself...

Experimental economic medicine: Voodoo Bail-o-nomics
Moreover, there are more mainstream things that could have been done instead of adopting this new public-private entity or fund. Mark to market could have been suspended with increased oversight to stop the cascading pressure on banks. Banks could have been seized and handled in the old fashioned way using the FDIC. Banks could have been nationalized- they are being interfered with as it is. Instead, the Treasury has opted for something that is untested and is even unexplained! This is where Bernanke and Paulson started months ago. It's as though we are back at square one, with a new name and the same problem right there at ground zero - on top a pile of still-toxic assets.

Monday, February 9, 2009

Krugman's and other rants

Paul Krugman is decrying the Republican attempt to contain spending in an overly lavish Senate bill. His take on it and his tact in arguing are both interesting and curious.

The Blame Game... or the good is the enemy of the best...
He comes to the conclusion -- ( in today's NYT, 02/09/09) at -- that the net result of Republicans stonewalling the bill was to take some of the more useful stuff out of it. He blames the results on 'centrists'. Now the Senate bill was constructed by Democrats, but to get the plan though some Republican votes were necessary. As a result the Democrats have- after the fact - courted THREE Republicans who now are apparently to bear the blame for this 'disaster'.

Supply AND Demand
Let me explain to Mr. Krugman something about supply and demand. I do not know the details of this closed-door process that produced the current 'compromise result' but it is clear that the Republicans 'demanded' some reductions in the planned spending and Democrats 'supplied' them. To think that THREE Republicans did such damage all by themselves is ridiculous. They wanted less spending and these are the compromises that were struck, partly reflecting what the Democrats would part with and what they would not part with - it's supply and demand.

So this change also reflects where Democrat priorities lie.

Next step: Pass and reconciliation; then a real budget
We are not done. There will still need to be a Senate/House reconciliation when (if) this bill passes and then Mr Obama will have ANOTHER crack at his regular budget, which is different from a stimulus plan. The stimulus plan is not the end of it, only the beginning. Democrats still have a huge majority and many budgets to come. Let's not lose sight of the fact that this plan was about STIMULUS.

Spend, spend, spend, spend!
Let me say this once again; that the Democrat penchant is for spending. This spending is not even to be executed IN TOTAL all that quickly. The choice is a reflection that they opt for control. When you spend instead of cut taxes you, the government, decide where the monies are spent. Tax cuts give the people the choice where monies will be spent. While the multiplier on spending is higher, the chosen spending programs take so long to queue up that a full menu of tax cuts WOULD HAVE WORKED FASTER and provided more immediate stimulus. Would have... Now of course I know there are poor for whom tax cuts are no help and so there is plenty of reason for spending and other programs to help those on the bottom-most rung of economic life. But the Democrat spending plan goes far beyond that. I am not talking about spending that mostly benefits the poor; it's the other spending.

Too compromising? Not GREEDY enough (in a partisan sense)?
So Krugman is unhappy with the (pending) results. He blames Obama for being too conciliatory; for being too much of team player to start. It's an interesting point of view since the team playing got none from the other side to join in. That was to much? None? I find that on the face of it, Krugman's is a hard conclusion to justify. It still might be right, but it is not the only conclusion available given the facts.

Who went which extra mile for whom?
Maybe the President did go the extra mile and the Republicans were still obstreperous and refused to join in, isolating House and Senate Democrats. I don't know how you tell the difference between that and the conclusion that there was not enough compromise to draw the Republicans in to start. Who to blame? The conclusion depends on your perception of the 'proper' ideology. There are the obvious nut cases like Rush Limbaugh who wish the President to fail. I realize politics is a constant battle. But I also somehow believe if there had been a bit more compromise in the initial Democrat deal ALL REPUBLICANS would not have hung the Democrats out to dry. As we can see, Democrats have drawn three Republicans in with some added compromise. So I find Krugman's assertion on this subject somewhat crankish and self-serving.

Also on the crank side of things is Janet Yellen, President of the San Francisco Fed with a comment over the weekend that those worried about inflation are being "ludicrous' - and that is her word, 'ludicrous'.


Yellen's Folly
Yellen is a democrat. She was one of the first to break with the use of rhetoric endorsing some sort of inflation targeting/referencing at the Fed. She has been mentioned as a possible successor to Bernanke. But we can see in her stance here is a very partisan disposition. Should she become Fed chair at some point and she is not likely to be the same sort of consensus-builder as Bernanke. She has the Alan Greenspan gene only with a Democrat twist.

Right way and wrong way
I have no problem with Yellen asserting that the Fed knows what it is doing or trying to convince us that it has the know-how to pull stimulus out before inflation strikes. I may not agree with that but I would call that sort of comment 'appropriate' for a Fed President. The fact is that excess money supply growth (or Fed balance sheet expansion) is a well known risk to inflation. Many economists are worried about it, Europeans and those at the Bundesbank in particular hold such views. Are they ludicous? They are real reputable hard-money types. Also folks like Bill Poole a well known academic economist and former President of the St Louis Fed are concerned. He has been complaining of the lack of an end game plan for the Fed's application of stimulus and the risk for inflation. Now Yellen can disagree with this, but to call a respected and sane opposition view ludicrous is ,well, ludicrous itself.

So this is the problem: Lack of respect for legitimate opposing views. We can argue about policy and disagree about what is best, but by pretending that a legitimate opposite view has no merit we do the state of discourse harm.

Krugman wants all the blame for the modified stimulus plan to fall on the President for being too conciliatory and on Republicans for diverting the plan more toward to middle of the road. In fact Krugman is simply arguing for the Democrats to be more obstructive and less bipartisan. LESS! Yellen wants to dismiss any notion that we are being too stimulative in any way. The Democrat jingoism is that there is a real and pressing need for lots and lots of stimulus of all sorts and that Democrats alone should decide what it is. There is no inflation risk and spending is the way to do it. The Democrats want to calibrate this spending for their constituency.

Krugman even pans a part of the plan to provide some relief to homeowners, calling it a sop to the rich. I guess in his mind anyone who owns a home is rich. That's some view of America isn't it?

Fortunately Krugman did not earn his Nobel Prize for his views on class warfare.

Sunday, February 8, 2009

Attack of the dunderheads...

I must say that I am overwhelmed by the comments I have had and the sorts of thin reeds people seize on to size me up. I have been in the public eye doing TV, radio and being quoted places since 1982, when I left my job at the NY Fed. I usually appear on TV somewhere each week plus I do radio interviews and provide wire service quotes and the like So what I say and think are pretty much out there in the public domain. There are going to be things I say that you like and things you don't like. I'm going to make some good forecasts and some bad ones. That's the risk of commenting and providing forecasts.

Imagine how surprised I am to be called a Republican and an Obama-hater. In fact I have voted in both Republican and Democrat primaries since I have been a registered member of each party at different times in the past. But I have not voted in a Republican primary in over 20 years; same is true of Democratic primaries. For those that want to jump to groundless conclusions based on some of my stylistic writing preferences, let me point out that it has been my habit to refer to Fed chairmen, Fed governors, Fed bank presidents and the like by last name only. That goes for presidents too. I have tried to stretch a bit to call Obama 'Mr Obama' and to be sure he has had the benefit of some honorific. But that practice is not iron-clad. I have not withheld the title that so obviously is his. Someone is reading too-much between the lines.

Comparison to Rush Limbaugh is disgusting. He is no role model. I really dislike ideologues on both sides. I may use some rhetorical flourishes (or mild insults) in this BLOG ( IT'S A BLOG after all!!!) but I do rely on facts and I do present them and do not rely on put-downs to make a point. But you have to admit sometimes it's fun.

Still reading Adrian???.

As for the one numb skull who said that I said there would be no recession, look at the interview (with Suzie Gharib on the Nightly business report... it ran on July 19, 2006. ( Now what pains me is that other people have jumped on this claim and have referred to my stupidity in missing/denying the recession. This was done without going to link to check what I said in the interview or when it was said. The critic provided the link but apparently did not himself/herself check the date in the story. That's like a blind man saying he does not like my paintings!

By any reckoning saying there would not be a recession at that point was correct and was a GOOD FORECAST. The recession did not start for another 1 1/2 years and its fate was not sealed for over two more years when jobs finally collapsed after huge increases in energy prices. I did warn of ongoing energy price increases in the PBS interview with Suzie.

For God's sake read. I really don't care what people who are that uncareful think about me, but if you really care about about the issues and if you are trying to figure out who tells the truth then pay attention to small things Like WHEN someone said something.

I did in fact contend early in 2008 that recession was not inevitable even with the persistent but mild job declines early in the year. Once oil prices shot up to $100/bbl I called for recession and soon after we had the job losses that were the trigger andwe were in recession.

As economists always say ... on the other hand... I do admit that the housing decline has been more pronounced than I thought. The use of derivatives has made the damage so much worse than the $360bln sub-prime market seemed to warrant. Banks have really cut back and made things worse. But now the Fed's Senior Loan Officer Survey says banks have backed off on tightening conditions the way they had in 2008-Q4. That's good news.

But that's what happens when you forecast, you are wrong sometimes. I won't try and hide forecasting mistakes. You need to face up to them so you can learn from them and move on...

By the way: Everyone makes mistakes even presidents elected by large margins...

As for compariosns with Adam Posner I don't get it. You want to compare my chatty blog to his academic-like papers? OK your call. But even in this blog I have been critical of the WSJ when it quoted Robert Barro of Harvard when he said the multiplier may not be even one. Posner has urged stimulus which I am in favor of, too. I am not in favor of this mega-stimulus that goes on for years and years. I still have heard no defense of it that I can embrace - from Posner or anyone else.

All of this is very interesting to me because it helps me to understand why economic literacy is so low. People will believe what they want and will ignore the details of truth to skewer whoever they want to put at a disadvantage. I have so many quotes floating out there I hope people are careful with the context in which they use them. Of course I know they are not. It is eye-opening how people on my own blog attribute to me things I have not said and infer from my writings things I do not believe and that do not characterize me. It's all about modern character assassination. However, some these assassins have guns, but alas, no bullets.

More facts and opinions...
I continue to be optimistic that this recession will end by mid-year. In my weekly email to clients I document the trends. My weekly round of eco-data shows that the recession job losses (even percentage losses) are among the worst in any post-1960 recession, but the hours-worked losses are not as bad. GDP has hardly declined at all. Yep. The best and broadest measure of goods and services output of the economy is showing this is the MILDEST recession at the fifth quarter mark of recession! (That is a fact). That result is due largely to exports that are strong, imports that are weak ( imports subtract from GDP) and productivity that is among the strongest in any recession in the past 50 years in terms of its profile in recession.

I know a lot of you want to say it's a depression in order to justify MEGA-SPENDING but the data are not there. Job losses are severe but the economy is about more than just jobs. So bitch if you want but don't kill the messenger. Maybe even question what you have been told by others and maybe even do it enough to try and search out the facts for yourself!!! Imagine- facts in addition to opinion.

Thanks for all your comments. They help to keep the blog alive. I see lots of opinions out there. Just hope that you apply the same standards to your selves you want to apply to me. Nasty comments simply drop though grate. If you have some point to make make and if you have a fact to support it, that might be interesting too. If your have a person who's view refutes mine or refutes a 'fact' I've presented, offer a link to it and so on. We will make progress instead name-calling.

Expect me to be hard on Obama because he IS the president. It's his job to do good and to do it well. He campaigned for this, he wanted this responsibility. He's got it. I want to see evidence that he can make his soaring rhetoric fly.

Can he?

I'll not go easy on him just because so many want to cut him slack. Count on that and don't misconstrue it. It's called democracy and free speech.

REMINDER - Since I don't get a chance to vote the way I like, I am very hard on elected officials that matriculate through the political partisan patronage system. I cannot vote in primaries in NYC because the parties OWN them. My tax dollars, curiously, pay for them but the parties own them. In Michigan, where I grew up, I could vote in any primary I wanted - but just one. Now I don't even have that option. And no third part has a chance as long as this is true and as long as we have a winner take all electoral college. So call me a spoil-sport. Since I have to play the election game with marked cards I will be tough on the guy/gal that wins the big pot -every time. Democrat or Republican..

End of story.

Thursday, February 5, 2009

Adrian's day in the sun & Mary Poppin's

Hi Adrian!
Thank you for you thoughtful post (Below). It was so insightful, I thought I'd share it with everyone.

I can't believe that crap like this has ended up being picked up for google news story attachment... pure conservative garbage... who let you out of your cage and on to the web?

First of all I 'm not conservative. I am an independent. And you probably liked me better last year when I was critical of Mr Bush, who I bet you hated- I'm just taking a stab in the dark here. I do not live in cage. I live in Manhattan, its actually quite free here- you don't even need car. And the web my dear is open access. For a small fee it's open to anyone- even if they disagree with YOU. How about that! Ain't America grand? Although I can tell you are probably the kind of Democrat Like Hilary that wants to tell me what health care I can and what I can't have and so on. YOU are one those sanctimonious know-it-alls that hates free thinking unless it is free to agree with YOU.

Sorry dear, not here.

You can disagree with me and that's fine. But I do stand by the LOGIC of the points I have made. The president will have a budget. This is only a stimulus plan. And stimulus that lasts for years and years certainly is a misnomer. I bet you hated Bush playing bait and switch with WMDs in Iraq didn't you? I don't care who pulls those shenanigans - I don't like them. No, not even if they are YOUR sacred cow, Adrian.

I have had a lot of people write, thinking I was too timid in my criticism or, like you, people who thought I was outrageous to be critical of the President.


I did not realize the country was supposed to roll over and play dead? Did you do that favor for Mr Bush - Adrian?

I am ANGRY at Republicans and Democrats for rules at the state and Federal levels that have given THOSE TWO PARTIES a lock hold on elections. With a winner-take-all Electoral College there is no chance for a third party. The two greedy ones have cornered the market in political opportunity. I'm an independent.

As a result I am suspicious of whoever wins-whether you, Adrian, think he is a great guy and a practically perfect person (Mary Poppins-like) or not.

Obama has tripped and stumbled with his appointments. Daschle was a particularly bad choice not for his tax issues but because he was a hired gun for the Health Care industry for which he was then going to recommend changes. No he was not actually a 'Lobbyist'. But are we judging Mr Obama on his technical word or more broadly on his character?

He falls short of walking on water my dear.

As for his stimulus plan, it is such a misnomer: as an economist the whole idea of calling such multi-period spending 'stimulus' pisses me off! So take that Adrian.

You think I'm some conservative twit? I think you have such a love-crush on Mr Obama you have disabled your brain. OHHH Obama did it it OOOOH its SOOO goooodd.


What a mellifluous name OHHHHH_Bama!

Get over it. When you find you disagree with someone, disconnect your bile and engage your brain

Look at what we need and what this plan really does. Compare and contrast. When you do that maybe you will acknowledge there is some disconnect in what is being done Vs what has been advertised.

To oversimplify the analysis, I divided the spending of the O-plan into three parts called Stimulus, Cushion and Agenda. The CBO NOT ME (the CBO! Congressional Budget Office, Adrian) finds that one -third of the spending impacts the deficit more than 24 months from now! How can that be construed as either cushioning or as stimulus?

That is why economists say (ever taken an economics course ADRIAN?) that monetary policy is better for economic stimulus than fiscal policy. It is more timely. But of course our cup runneth empty in the monetary dept so we have a mechanism of last resort in place - fiscal spending.

When it comes to your brazen bile, I don't get it Adrian. Nor do I get how my pointing this out makes me the label you so fondly have attached to me. There is nothing conservative about pointing out that the President has mislabeled his plan and is trying to sneak in agenda spending under the rubric of 'stimulus'. All this rush-rush to pass something that a third of which won't take effect for 24 months and much more strikes me as well BUSH-LIKE! Obama is taking a page from the Bush playbook!

Not exactly the guy you expected him to emulate, was it?


Still there?

Monday, February 2, 2009

Blogging myself or Obamafuscation

Jim Pethokouskis from US News and World Report picked up my last blog entry and that brought in some mail and stimulated (ah yes Stimulus at last!) some behind the scenes dialog that has prompted some more thinking on the subject of stimulus and Obama.

As I have tried to explain the conclusions I came to, I have made some new discoveries about what I think is going on.

This plan is purposeful obfuscation, call it Obamafuscation.

Obama-rama (as I like to call it) features two goals: speed and punch. Obama is pushing for speed faster than George W. Bush trying to jam his Iraq War bill though Congress. Even more important (perhaps?) he is pushing for punch. Spending has more of it than tax-cutting since the multiplier is larger. So spending it is...or is it?

A Hallmark moment: belated stimulus...
The spending multiplier is bigger. Every introductory economics student knows this about the spend Vs tax cut multiplier, just as preschoolers know the alphabet song: A, B, C, D, E, F, G... Spending money packs more punch than untaxing me... Ah, but the CBO has scored the House plan as leaving about one third of the stimulus from this plan to after 2010. That's two years in the future!! What do we want! Stimulus? When do we want it? Now! So what is this? Does the administration go to Hallmark and buy us taxpayers a belated stimulus card? Dear taxpayers: Happy but belated stimulus!!! Signed Barack and Michele!

What do you do when speed and punch conflict? This is no Muhammad Ali plan (float like a butterfly, sting like a bee). It's more like float like a lead balloon, bite like a flea. It seems when these goals conflict, the Obama guys spring in favor of spending. Why? I think it is because the secret plan is to control the outcome. If you give tax cuts as your main stimulus, you lose control of how monies are spent. If you do the spending, you control where and how money is spent. You get $X of stimulus and you get it where you want it right there in your favorite agenda projects.

Who's on First?
Now that suggests another hierarchy in choice. You can choose to whom to give money or how to spend it. While the Obama-rama plan has some tax cuts that do target certain people, the larger spending portion will target 'what' instead of 'whom'.

President as Sacred Cow
There are clandestine choices that underlie the spending plans that no one has been able to rationalize. We do not have a good enough map of the spending to truly know what it is. And anyone who disagrees with the new president is branded as nearly a triator. Hey hold on about closing down Gitmo after all.

Nothing up my sleeve...
Barack has begun his first foray into policy with a plan that is either a hopeless muddle or a brilliant piece of politics that no one can understand or oppose. He has dedicated his stimulus plan to conflicting goals allowing him and his staffers to switch back and forth like the guy doing three card Monte on Broadway- oh 'scuse me that was an investment banker!

The truth lies somewhere. Unfortunately in this administration it appears to be buried about as deeply as it was in the last administration.

Call it Obamafuscation.