US Economy

[Kirkhill]

So true, but you would think that we would have got a clue by now...

Grunt, have you ever noticed how every 16 year old figures that they are the first to discover sex?  It's not a matter of bad habits that can be corrected.  It's who we are.

 

[tomahawk6]

The banks were required by law to lend to poor credit risks. Then last year with TARP I the top bank execs were summoned to Washington and told they would take TARP money and the government would take an equity position. This is how the government interfere's in the market. Another example is Congressional mandates for fuel economy which cost Detroit billions.

 

[Rifleman62]

Opps! President Obama signs the billion-dollar economic stimulus bill in Mile High City. How apt!

 

[a_majoor]

People are starting to wake up. The porkulus bill has to be paid for somehow (massive inflation is the best bet), banks still have non performing mortgage assets on their books and the looming public service pensions tsunami is appearing on the horizon. When cities and eventually US States like California and New Jersey have to declare bankruptcy (or demand special bailouts, which amount to the same thing) because of unsustainable public service pay and benefit packages, then the $800 billopn will seem like small change.

Expect the Obama Administration and Democrat Congress to try and paper over these problems as much as possible, but the result will be like those old cartoons in the end; the pressure builds under the carpet until there is a terrific explosion.

Markets forecast the future:

http://michellemalkin.com/2009/02/17/president-obamas-2000-point-tumble/

President Obama’s 2,000-point tumble
By Michelle Malkin  •  February 17, 2009 10:37 AM

On Nov. 4, after Barack Obama clinched the White House, the market closed at 9,625.28.

In mid-morning trading today, the day President Obama signs his massive Generational Theft Act into law and a day before he unveils a massive new mortgage entitlement, the Dow dropped to to 7,606.53.

Now, imagine if President Bush had presided over a 2,000-point stock market tumble in the same time period — during the first few months of his presidency.

Great start, O.

Just saying…

 

[KingKikapu]

Gee, that quote is a little misleading.

I'm quite sure the DOW was going down long before Obama won the election.  Maybe not by 2,000 points, but to expect the man to fix things overnight is laughable.  This is so much bigger than one man (even if he happens to be the POTUS).

 

[a_majoor]

Gee, that quote is a little misleading.

I'm quite sure the DOW was going down long before Obama won the election.  Maybe not by 2,000 points, but to expect the man to fix things overnight is laughable.  This is so much bigger than one man (even if he happens to be the POTUS).

The markets reacted to the election victory:

http://www.powerlineblog.com/archives/2008/11/022010.php

    It's A Bit Late...
    November 5, 2008 Posted by John at 8:41 PM

    ...for investors to notice that pretty much everything Barack Obama wants to do will hurt the economy. Today, the stock market plummeted around five percent on Obama's election. At least, that's how it was being reported this morning as the collapse occurred. Later in the day, accounts softened to downplay Obama's election as a cause of the market slide.

    Actually, I think--more important, my broker thinks--that the prospect of an Obama administration is one factor that has contributed to the sharp decline of the stock market in recent months. Obama wants to increase taxes on capital gains and dividends, which will instantly reduce the value of every company in America and drive more jobs overseas. And that's before we even get to "windfall" profits, increased regulation, empowerment of union thugs, higher tariffs and reduced trade, and so on.

    Barack Obama is a rather mysterious figure: despite the fact that every policy he advocates will hurt the economy and the stock market, he has been the darling of Wall Street. Employees of securities firms have been among the biggest contributors to his campaign. I'm not sure how to explain that, and I don't really think that today's steep drop represents a case of buyer's remorse. That will come, I think, but not for a while.

Why is he the darling of Wall Street? They have realized they can remain just as wealthy and influential living as political rent seekers. Your grandchildren will still be paying for this stimulus bill...

 

[tomahawk6]

No way in this world that we can raise enough taxes to pay off this debt and we are going to see trillions more in wasteful "stimulus" before the democrats are through. My concern is that the uncertainty on Wall Street wont stimulate a recovery. Throw into the mix creative taxes to be raised to fight "global warming" and I think these amatures will push the economy into or close to depression. We are nowhere near the 30% unemployment that we saw in the Great Depression but I suspect we will see 12% by years end and if we do see a collapse due to high gas prices and a cap and trade system it will go much higher. Inflation is going to be in the double digits and that will hurt the poor particularly.

 

[a_majoor]

There is another historic example Americans can follow (perhaps as early as 2010):

http://reason.tv/video/show/696.html

Perhaps the only people who don't like the hit movie Slumdog Millionaire are those who compete against it at awards shows. After all, it's already cleaned up at the Golden Globes, and the BAFTAs, and it's poised to repeat these feats at the Oscars.

The film follows an Indian orphan named Jamal who grows up and hits it big on the famous game show Who Wants to be a Millionaire? In important ways, Slumdog tells the story of India itself—a poverty-stricken underdog with its own rags-to-riches tales. British rule ended in 1947, and the economic woes America faces now are nothing compared to the widespread malnutrition and starvation India faced then.

Indians were enthusiastic about self-rule, but "the problem was that the Indian political leaders had this very Fabian Socialist idea," says Shikha Dalmia, a senior analyst at Reason Foundation and native of India. "And that completely thwarted the entrepreneurship of the country."

For decades would-be entrepreneurs staggered under the weight of corruption and bureaucracy. Want to import a computer for your business? You'd have to get permission from a bureaucrat. Want to sell food from a small cart? You'd need all kinds of licenses.

But in the 1990s, India emerged as a high-tech powerhouse. What changed?

"In the 1990s India started liberalizing its economy," says Dalmia, "and it did three things: cut taxes, liberalized trade, and deregulated business." Although they failed to cut the kind of red tape that entangled Slumdog's orphans, the reforms did make it easier for more Indians to start businesses and hire employees.

"One IT company doesn't just employ computer professionals," says Dalmia. "It also needs landscaping services, cleaning services, and restaurants. There was this tremendous spillover effect that allowed people to lift themselves out of poverty."

Since the early 1990s, India has cut its poverty rate in half. About 300 million Indians—equivalent to the population of the entire United States—escaped the hunger and deprivation of extreme poverty thanks to pro-market reforms that increased economic activity.

Yet here in America we're turning away from market reform. Says Dalmia, "It's just this great conundrum that at the same time that deregulation and markets have produced such dramatic results in India, they are falling into suspicion in America." Dalmia's prescription for India is at odds with what politicians have chosen to "stimulate" the United States. "What India needs to do is continue apace with its liberalization effort, but expand it to include the poor. Release them from the shackles of government corruption and government bureaucracy."

"Slumdog Thousandaire" is written and produced by Ted Balaker. The director of photography is Alex Manning.

 

[tomahawk6]

Obama is expected to announce cap and trade which I believe will be the final nail in the coffin of the economy.CBO estimates $300b in tax revenue from this scheme. Estimates are a loss of 4 million jobs. This should hit the transportation and energy sectors very hard.Look for prices that the consumer will pay sky rocket.A very bad idea even in the best of economies. Proof to me that these socialists dont have a clue what they are doing.
http://www.humanevents.com/article.php?id=26621

"If you’re not at the negotiating table, you’re on the menu"

If you think energy is expensive now, just wait until our next president, working with a Democratic-majority Congress, implements cap-and-trade rules tailored for the greatest possible gain for special interests and the highest possible costs to consumers and taxpayers.

On Friday, Richard Sandor, the CEO of the Chicago Climate Exchange gave an interview which was (unintentionally, I’m sure) a shocking look into the reality of carbon emissions trading and the “cap-and-trade” proposals which are aimed directly at the heart of the American economy.

The interviewer, Dylan Ratigan, asked Mr. Sandor who was already participating in carbon trading in anticipation of a politically-imposed “carbon cap”. Sandor’s answer was a who’s-who of American industry: “17% of the Dow Jones…IBM, Intel, DuPont, United Technologies. In addition to that, 11% of the Fortune top 100…Ford, International Paper, Safeway. 20% of the top power companies…AEP, Detroit Edison, Alliant, Reliant.”

Ratigan then asked the obvious question: “Why are they buying protection against a political cap that does not yet exist?” Sandor’s fascinating reply: “Some of them have a hidden asset. They’ve already made cuts. They can sell them on our exchange and make a lot of money…. Others are there because they want to gain a competitive lead…. Others want to be there for the political debate. We have an expression at the Chicago Climate Exchange: ‘If you’re not at the negotiating table, you’re on the menu.’”

Picture the political cartoon: a table surround by wolves, labeled such things as “Energy Trader”, “Enormo Industries”, “Power Company”, “Radical Environmentalist”, and “Al Gore”, drooling while staring at a silver platter on which stand several small, cowering figures, labeled “Taxpayer”, “Consumer”, “Rational Scientist”, and “Small businessman”.

Regarding the size of the carbon market, Sandor said that “the carbon ‘crop’ in Europe (i.e. output of their vehicles and factories) is 2.2 billion (metric tons)…and trades at $40 (per metric ton). That’s over $80 billion (in total value), so the European emissions alone are bigger than the US corn and soybean crops combined. The US is going to be three times that size. We’re talking about something that is…humongous.” The risk to Americans is proportional to the size of the dollar signs in Sandor’s eyes and the efforts by early large participants to maneuver the system to their benefit.

When a corporation (or any capitalist) is given the opportunity to make money by (legally) taking advantage of a system, they will do so. One of the best ways to gain advantage is to be involved in the early moments of the system, guiding regulations in a way that benefits you. Having been involved in the development of a major exchange’s electronic trading platform, I saw first-hand how much effort certain market participants put into influencing trading rules in a way that would maximize their expected trading volume (and therefore expected profits) at the expense of smaller market participants…including public customers.

Combine that dynamic with Sandor’s description of the potential size of the carbon market and you get a sense of to what lengths companies will go to “game the system”. And who can blame them? The real problem is giving them a system to game, and the fault for that lies squarely at the feet of politicians who buy into the junk-science arguments of “global warming” alarmists without any consideration of the massive economic costs Americans will bear in a Quixotic quest to stop climate change. It reminds me of a club I once heard of: “The Stop Continental Drift Society”, and it makes as much sense.

Economist Wayne Winegarden, partner in the econometrics firm of Adruin, Laffer, and Moore, who wrote a paper on “The Adverse Impacts of Cap-and-Trade Regulations” with Arthur Laffer and testified before the Senate last year, offered some perspective in an interview for Human Events: “Cap-and-trade is an inferior policy to accomplish reduction in carbon output.” (Winegarden stays away from the issue of whether such a reduction is a valid goal, understanding that politics is moving that way in any case and that his expertise is not in climate science.) “However, if you’re going to try to reduce carbon output, it should be done as a carbon tax so that the costs are not hidden and politicians have to take responsibility. You can’t minimize the impacts of carbon if you’re trying to hide or lie about the effects of your carbon-reduction policies.” ”

Dr. Winegarden notes that “Cap-and-trade has been such a dramatic failure in Europe, including forcing even “green” factories to fire workers. When asked whether America could learn enough from Europe’s mistakes that we could implement a cap-and-trade system that made sense; Winegarden’s answer was a resounding “no”. “Cap-and-trade is the politically expedient solution – it has great political merit but no economic merit. We’ll be revisiting this because, like Sarbanes-Oxley, it will create more problems than it will solve”, not least of which will be dramatically increased volatility of energy prices.

The potential costs to America from cap-and-trade are enormous. The Department of Energy estimates that S. 2191, the Warner-Lieberman cap-and-trade proposal, will increase the cost of coal for power generation by between 161% and 413%. DOE estimates GDP losses (see chart) over the 21-year period they forecast, at between $444 billion and $1.308 trillion, with particular damage to the manufacturing sector. (This gives some hope that organized labor will, in a rare occurrence, oppose Democratic leaders on this issue.) Winegarden estimates that this bill could increase unemployment by 2.7% or about 4 million jobs. In fact, companies are already preparing to avoid increased level and volatility of American energy prices by setting up factories and partnerships in countries which won’t be subject to cap-and-trade restrictions…proving with real-world behavior of producers that no carbon-limiting regulation can succeed if it is not universal.

In the CNBC interview, Sandor noted that he “knows” we will be living in a “carbon-constrained world” because all three presidential candidates support “cap-and-trade”. Given support among Democrats for cap-and-trade, and recent history’s demonstration that a Republican president and Republican members of Congress are not interested in forcing any discipline on the other, it is all but certain that something like Warner-Lieberman would pass if John McCain were president. Maybe, just maybe, Republicans in the House and Senate would stand up against cap-and-trade if the president were a Democrat. Therefore, since these proposals represent the biggest threat to the American economy of any policy suggestion during my lifetime, John McCain’s position on cap-and-trade has cemented my intention not to vote for him in November.

As Americans are kept in the dark by gullible mainstream media, industry and special interests are ensuing that cap-and-trade, when it arrives, will either be as damaging as possible to consumers, will accomplish none of its stated goals, or, most likely, both. We taxpayers and consumers are “on the menu” indeed.



--------------------------------------------------------------------------------
Ross Kaminsky has been a professional derivatives trader for over 20 years. Ross is a fellow of the Heartland Institute and writes about political economy and current events at Rossputin.com. He also contributes to blogs for the Denver Post, the National Taxpayers Union and FreedomWorks among others.

 

[a_majoor]

The market is based on future expectations. People are not expecting good things:

http://directorblue.blogspot.com/2009/02/larwyns-link-kerplosion-depression.html

 

[KingKikapu]

Hitler explains why he should be bailed out by the government.  God is there anything this clip can't do.


http://www.youtube.com/watch?v=bNmcf4Y3lGM

 

[Kirkhill]

The market is based on future expectations. People are not expecting good things:

http://directorblue.blogspot.com/2009/02/larwyns-link-kerplosion-depression.html

If the answer to everything is government why would you bet on the market?

 

[a_majoor]

More evidence (as if we needed it) of a larger campaign surrounding the economic crisis. Political rent seekers want to make this a permanent state of affairs. (It will be interesting to see how the rent seekers fare against the "Tea Party" movement):

http://pajamasmedia.com/eddriscoll/2009/02/24/new-silicon-graffiti-video-rendezvous-with-scarcity/

New Silicon Graffiti Video: “Rendezvous With Scarcity”
Support Pajamas Media; Visit Our Advertisers

Ronald Reagan began his political career as an FDR supporter. Beginning in the 1960s, he took to using FDR’s iconic “Rendezvous with Destiny” phrase in many of his most important speeches. But these days, it’s looking like the next few years—maybe even a big chunk of the next decade—could very well be a rendezvous with scarcity.

As we note in the latest edition of our Silicon Graffiti video blog, it didn’t start with the financial crisis of September of 2008.  Flashback to:

A division of General Electric spending millions of dollars of valuable television airtime to encourage consumers not to use light bulbs, one of GE’s chief products.

A future president telling potential voters they can’t heat their homes and drive large cars to the degree they’ve become accustomed, and a former president saying, “We just have to slow down our economy and cut back our greenhouse gas emissions ’cause we have to save the planet for our grandchildren.”

Well, Mission Accomplished, Bill!

Plus calls for the New, New Deal, back when the Dow Jones Industrial Average was well over 12,000 points, and Tom Brokaw begging the president (even before he took office) for four dollar gas–consumers be damned!

You and I have a rendezvous with scarcity—a destiny that for some is already here, and for the rest of us may be arriving all-too soon. Because a surprisingly wide swatch of the nation’s elite apparently wants us to have just that.

(Assuming your broadband isn’t too scarce, click here for a couple of dozen previous editions of Silicon Graffiti.)

 

[a_majoor]

The attempt to manage the economy will come to grief. Here is why:

http://pajamasmedia.com/richardfernandez/2009/02/24/avoiding-the-end-of-the-world/

Avoiding the End of The World

David Brooks hopes to find comfort in Barack Obama’s premise that “we cannot successfully address any of our problems without addressing all of them,” but can’t. The reason is that Brooks long ago learned to distrust people who thought they had all the answers. “The political history of the 20th century is the history of social-engineering projects executed by well-intentioned people that began well and ended badly.” And Obama sounds like he’s got a big project for us all.

These experiences drove me toward the crooked timber school of public philosophy: Michael Oakeshott, Isaiah Berlin, Edward Banfield, Reinhold Niebuhr, Friedrich Hayek, Clinton Rossiter and George Orwell. These writers — some left, some right — had a sense of epistemological modesty. They knew how little we can know. They understood that we are strangers to ourselves and society is an immeasurably complex organism. They tended to be skeptical of technocratic, rationalist planning and suspicious of schemes to reorganize society from the top down.

Brooks’ view is not inconsistent with the idea that the world economic and political system is facing a comprehensive crisis. It is a not a denial of the necessity of overhauling the way we do business. It is not an argument for piecemeal responses, nor for the exclusion of a government role in managing affairs. However, it is a skeptical view of the possibility that poorly understood complex systems can be successfully managed by rigid timetables and points of view. Brooks continues:

I worry that we’re operating far beyond our economic knowledge. Every time the administration releases an initiative, I read 20 different economists with 20 different opinions. I worry that we lack the political structures to regain fiscal control. Deficits are exploding, and the president clearly wants to restrain them. But there’s no evidence that Democrats and Republicans in Congress have the courage or the mutual trust required to share the blame when taxes have to rise and benefits have to be cut.

In short we don’t have any idea of what to do except to get back to the place we were before. But what if we can’t? What if the old ways have ended permanently and we’re on our way to someplace new?  Fabius Maximus has described the recent crisis as “the end of the post-WWII geopolitical regime”. He argues it must end but without quite saying what will replace it. Gregor MacDonald believes that the US must inevitably repudiate its public debt; very well, but what do we do for a encore? The long and the short of the debate on the crisis is that while an increasing number of commentators now understand that we ain’t in Kansas anymore nobody knows where exactly we are now and what we should do. We can’t stay where we are. Which way is the Yellow Brick Road?

For example David A. Rosenberg of the Bank of America/Merill Lynch research unit says that despite all the huffing and puffing of government, the financial sector is still very, very sick.


Libor-OIS spreads have stopped narrowing and indeed have recently moved back above 100 bps, which is off the worst levels of the cycle but ten times higher than what the norm was during the positive economic cycle (2001 to 2007) – in other words, after all that has been done by Uncle Sam, the money market appears to be telling us that it thinks we are still light years away from reattaining a functioning banking system. …

How greater government involvement in major banks, with the prospect of future share dilution, is bullish is truly beyond us. The incremental and reactionary nature of policymaking in dealing with the financial crisis remains very disturbing to us and much more Japan-like than Sweden-like.

And for anyone who thinks the problem has been caused by government keeping its hands off the economy, Gerald O’Driscoll from the Cato Institute writing in the WSJ has news for us. The government already has its hands all over the economy. The major reason there is no free-market solution to the current economic problem is because government is already part of everything. Driscoll writes:

There are no good options and certainly nothing resembling a free-market solution. The government has put the taxpayer on the hook in a myriad of ways. First, there is deposit insurance. Second, there have been guarantees issued to certain creditors. Third, and most notoriously, the Treasury has invested taxpayer funds in preferred shares of certain institutions. Fourth, the Fed has lent funds on many of the dodgy assets of these banks. The Fed’s balance sheet should be consolidated with the Treasury’s in any cost-benefit calculation of alternative resolution strategies.

So with government an inevitable part of the problem, let us return to David Brook’s misgivings about the ability of government to solve things.  One reason to doubt its ability has been its failure understand the crisis in the past; its inability to manage its early manifestations. Why, besides a new face in the White House, should we believe a batter with a .000 average can can now hit at .300?  Driscoll believes government could improve dramatically if it could get politics out of the equation.

The example of the Swedish banking crisis of the early 1990s is most often cited by nationalization advocates. … In short, the resolution was handled professionally rather than politically.

The contrast with the current U.S. crisis could not be sharper. From the beginning, the handling of the U.S. crisis has been politicized. The partisanship is as toxic as the bad assets on bank balance sheets. Both parties are coming up with schemes to impede the process of foreclosing on homeowners who can’t afford their homes, which would get those homes into the hands of new owners who can afford them. Does anyone believe that a government bad bank will squeeze homeowners? To ask the question is to answer it.

Moreover, we know how the government runs financial institutions — consider Fannie Mae and Freddie Mac. Or IndyMac, whose management by the FDIC has been criticized for inflating the rescue costs through its liberal loan-modification program. A money-center bank in government hands would become a conduit for politicized lending and grants disguised as loans. That’s what’s happened at Fannie and Freddie. The government would never let go of its political ATM. You might as well consolidate such an institution with the Fed from the outset.

But even if the Obama administration could suddenly adopt the politics of Sweden rather than Chicago other problems would remain. One is the rigid nature of government itself. One of the reasons government has a hard time managing complex systems is that politics treats events largely like linear systems. Politics interprets events in the context of its mythology.  But if politics is in the best of times the art of lying to ourselves in the broad day, politics in crisis is the vice of lying to ourselves while we are falling off a cliff. And when fables meet a changing environment disaster is often the result. The second difficulty is that government is a ponderous, elephantine beast. Bureaucracies are nearly always behind the curve. Part of the requirement is to get ahead of the problem and cut out those parts of governance which contributed to the problem. But what to do when government is already part of the equation; when only government has the legitimacy to do some of things which need doing? It’s like hoping a patient who shot himself can successfully self operate to remove the bullet. Nevertheless, government can maximize its chances of helping or at least minimize its penchant for hurting by observing a few simple rules.

Two ideas are necessary to keep in mind when dealing with complex systems. The first is that it will tend to evolve towards a new state whose characteristics we may not be able to predict but which we know exists. This is what Fabius Maximus refers to as the successor the post World War 2 political/economic system.  We are going there and are going to find it by trial and error. We know enough to realize we’ve left Kansas but not enough to set our new course with exactitude. We’re going to have to sniff our way along. Once we get near there, things will start to settle down because that’s the way complex systems often behave. “An attractor is a set to which a dynamical system evolves after a long enough time. That is, points that get close enough to the attractor remain close even if slightly disturbed.” The important thing is not to charge blindly past it and over the Edge of the World.

The role of the government isn’t to mandate the characteristics of that attractor by fiat — it can’t — but rather to take the necessary steps to midwife a new world being born by taking common sense steps without the burden of ideological finality. They have to do what works unimpeded by mental constructs which cannot comprehend what is happening to the complex system. In order to successfully do this, government must embrace the second idea inherent in dealing with complex systems. It must shorten its OODA loop. It cannot be in the business of setting Five Year plans in the middle of a dynamically changing situation. Rosenberg points out that much of the so-called fiscal stimulus package is “back-loaded to the out years; that we think it will be next to impossible to meet the employment goals (which could never be verified in any event – how can anyone prove that a job was “saved’?) since much of the spending is aimed at products that are imported into the USA.” But if government wants to treat the situation as one undifferentiated bolus and shit it out in one go we may create more problems than we solve.

What government needs to implement is a succession of quick but well thought out interventions with the least possible lag, so that some kind of closed loop policy fire control system can be implemented instead of the insane method of World War 1 style battleship prediction plotting extending over a period of years. Whether policy will evolve in that direction remains to be seen. The public debate so far has been about the Big Solution; the magic bullet because leaders like to pretend that they have one. What leader can admit that he hasn’t? The day Barack Obama gets in front of national TV and says he doesn’t have the answers is the day we start getting them. Already people are losing confidence. David Rosenberg observes that a tax revolt, or at least something that threatens to be one, is now a possibility.

Well, we are starting to see the impact of policies that breed “class warfare”. And it is not about banks versus nonbanks or about the rich versus the poor, or service-providers versus manufacturers for that matter.It’s really about the government pitting prudent citizens against profligate citizens, in our view. And the IBD article is important because it seems as though we could be on the precipice of a tax revolt.

A tax revolt is good to the the extent that it militates against the ponderous central planning approach to managing the crisis. But to the degree that it encourages another, albeit alternate version of the big fix it may lead to equally bad consequences. The alternative to a bad Five Year Plan is not another Five Year Plan. It is something else. In reality the system will have to find its own new equilibrium. Capitalism is the economy’s reconnaissance in force into the uncharted economic future. The reason capitalism works is that it can try different things. Unlike government, it is not obliged to do one Awesome Thing. As we venture into the unknown some businesses won’t come back. Others will, with news of a new and boundless vistas. But we have to let them go out. We can’t strike out in a central direction determined by bones cast upon a shaman’s cape. It could lead us to the promised land, or out into the desert.

In conclusion: all interventions should be immediate, nonideological and subject to change given the arrival of new data and the speed at which we close our OODA loop should be improved. This is the way our mammalian ancestors overcame the dinosaurs. If we remember nothing else, we should remember that.

 

[a_majoor]

Historic data, and a future forecast:

http://business.theatlantic.com/2009/02/deficit_driven.php

Deficit driven

Andrew calls George Bush "the most fiscally reckless president since FDR" and says we should name the tax increases needed to pay for the current deficits after him. George Bush was indeed fiscally reckless, but the honor of most fiscally reckless president since FDR goes not to him, but to Ronald Reagan, who ran 6% deficits without even the excuse of a war.

I suppose you could claim that his decline was more impressive, but that decline was only about half due to tax cuts or spending; the rest was the popping of the stock market bubble, which both hammered GDP and changed the tax base in ways that made it less lucrative to the government.  (Tax revenues in America do best when the very rich are making a whole hell of a lot of money in big whacks, like stock-option vests)

Nor are the current deficits, or the tax increases needed to pay for them, much about George Bush.  By 2007, as the chart above shows, budget deficits were at 1.2%, rather average by postwar norms, and low interest rates mean that debt service payments for Bush's spending are not notably onerous.  There are Medicare Part D and Iraq, of course, but Iraq is simply dwarfed by the current deficit, and the chief alternative to Medicare Part D was making it more expensive.  I was against it, but the Democrats can hardly complain.

One could argue that George Bush should have run a nifty surplus, but that's not American politics; anything but a modest deficit or (very) modest surplus was going to get spent, as has been true for the last seventy years.

More broadly, this misunderstands what stimulus is.  Stimulus is not spending; it's deficit.  If Bush had delivered a budget in rough balance, Obama would have had to borrow up to the current deficit to get the stimulus he desires.  Given that more recent debt is always much more expensive than older debt (that's the magic of inflation, kids!), when taxes are finally raised, they will pay more for spending on Obama's watch than on Bush's.

That's not to blame Obama; recessions are what they are, and if you favor big stimulus, you favor a big deficit.  But those big deficits won't have much to do with Bush's fiscal imprudence.  In fact, they won't have much to do with either president, except insofar as they failed to reform entitlements.  The coming structural gap from Medicare and Social Security will make any interest payments on spending we're doing now look trivial.

Add the public service pension meltdown and we are looking at the tsunami scene from "Deep Impact"

 

[a_majoor]

Fabius Maximus has some good points:

http://fabiusmaximus.wordpress.com/2009/02/27/obama-7/

Obama makes his first major policy error

Summary:  The Obama Administration is continuing the Bush team’s Wall Street friendly policies, probably because they believe, as do most economists, that the downturn will hit bottom in the 2nd half of this year, and slow growth will resume next year.  That’s bad.  As a result they are missing an opportunity to fix the financial system, clearing their desk for the next wave of problems.  That could be a catastrophic error.  As always when looking ahead in this crisis, these are just guesses.

Contents

Stress testing the banks:  real or faux?
Why are they doing this?
The next phase of the crisis
Possible Consequences
Afterword
For more information

(1)  Stress testing the banks:  real or faux?

Having regulators do stress testing of banks’ balance sheets is a good idea.  Many or most would be shown insolvent under reasonable assumptions involving, for example, a severe downturn lasting into 2010, with peak-trough GDP down 5%.  That would be the worst downturn since WWII for America, but common in our history — and more common in modern world history.  That finding might break the logjam over fixing the financial sector:  rising public anger over the “bailouts” (gifts of public money to banks and brokers) vs. a Washington elite mostly in Wall Street’s pocket.

This might allow rapid nationalization of the affected banks.  Perhaps a domino effect, as nationalized banks might have a substantial competitive advantage over private banks — such as a greater perceived solvency and a lower cost of funds.  This would clear the desks of Obama’s team, allowing them to focus on their political agenda and — more important — deal with the next wave of problems as the financial crisis moves down Main Street.

But it appears that they are not doing this.  Instead we get more kabuki, probably faux stress tests designed to boost confidence.

Note:  imagine if other professions were run like the government.  Instead of fixing your car, removing your appendix, of defending you in court — mechanics, doctors, and attorneys could lie to you in the hope of boosting your confidence!

See page 4 of the FDIC description of the stress test.  The “capital assessment” will cover 2 economic scenarios:  an absurdly optimistic baseline scenario and a slightly more “adverse” scenario.  Here are the adverse scenario assumptions for 2009 and 2010.  These would work as the baseline scenario.

Read GDP of -3.3% and +0.5%.
Civilian unemployment rate:  8.9% and 10.3%.
Home prices:  -22% and -7%.
For more on this see “Wait And See” by Simon Johnson (was Chief Economist of the IMF, now MIT professor), The Baseline Analysis, 25 February 2009 — Excerpt:

So the banks have - by assumption - sufficient capital. The stress test will be relative to this baseline; you can see that the “maximum stress” will be pretty mild and, very important, short-lived.  President Obama therefore can present and emphasize his (admirable) long-term goals, as he did last night.

I just have one question. How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system. Monetary policy sounded bold a month ago; now less so (again, if your central forecast is so rosy, why embark on risky or controversial further monetary expansion?)

The answer is: wait and see. If we get a recovery, then we are fine. If there is no recovery, we’ll deal with it at that time and we can bolder at that time.

Economist Paul Krugman also finds this plan depressing, as we see in these two posts in his blog at the New York Times:

“Not much stress“, 25 February 2009
“Feelings of despair“, 26 February 2009.

(2)  Why are they doing this?

My guess is that Team Obama is hoping to “keep their options open”, one of the classic modes of failure for decision-makers facing difficult choices.  Unfortunately time relentlessly closes options.  Every decision taken closes options.  Every opportunity missed closes options.

(3)  The next phase of the crisis

Bad things are coming.  Governments have deployed a wide range of fiscal and monetary police measures, but these can only mitigate the suffering and damage to economic infrastructure.  Also, most are too small.  As people and their leaders understand the potential magnitude and duration of this downturn, additional rounds of fiscal stimulus will be approved.  (See this presentation by Richard Koo, who describes Japan’s experience)

Public policy measures have seldom if ever sparked a recovery.  Economies recover when the imbalances that caused the downturn are burnt off.  In this case, that means the excess private sector debt is defaulted, refinanced, inflated  away, or socialized.  Also helping to spark the recovery will be low asset prices, which eventually stimulate private investment.

Getting there will be painful.

A fair number of our major banks are technically insolvent, even after many rounds of government bailout programs.  Public anger is rising as they see vast sums of our money funneled to Wall Street.  Slowly the realization spreads that recapitalizing the banks will take several trillion dollars, a sum impossible for even the cleverest apparatchik to gift to banks.

Note:  Legend has it that Hank Paulson was once asked if it was in the people’s interest to have so many ex-Goldman Sachs partners working in the Treasury Departments of Western nations.  “There is no such thing as an ‘ex’ partner of Goldman Sachs” he replied.

Another note:  Paulson did not say that.  Putin did say that about the KGB.  But the earliest instance I find of this is by Aleksandr Nikitin, the ex-Soviet Navy officer arrested on charges of treason in 1996 for exposing the Russian Navy’s harmful nuclear dumping practices.  He said “There is no such thing as an ex-KGB employee, just as there is no such thing as an ex-German shepherd.”  (Source:  ”The Two Worlds of Vladimir Putin”, Amy Knight, The Wilson Quarterly, Spring 2000 — subscription only)

To use another bad analogy, the crisis has been traveling  during the past two years through the virtual space of “Wall Street” – the financial markets.  That has caused severe damage.  During the 4th quarter it made landfall at Main Street.  Now it travels through the real economy, leaving behind a trail of unemployed people and wrecked businesses.  During the next two years our government will be busy coping with the resulting bankruptcies, poverty, and structural damage.  Plus any geopolitical turmoil caused by this global depression.

Our leaders must clear their desks NOW to prepare.

(4)  Possible Consequences

The Obama Administration has many bold policy objectives.  Reforms in health care and education.  To re-unionize US companies.  More critically, they must manage the domestic and international dimensions of the depression while winding down the war in Iraq and heating up the one in Afghanistan.

It’s a heavy schedule.  Fail to deal expeditiously with problems, they risk getting overwhelmed by events.  Their observation-orientation-decision-action loops (OODA loops) can fall behind the situation, so that they cannot effectively absorb new information and forecast events — the basis for planning and executing policy.  As the late John Boyd (Colonel, USAF) said in page 44 of  The Strategic Game of ? and ?:

{the decision-maker} will experience various combinations of uncertainty, doubt, confusion, self-deception, indecision, fear, panic discouragement, despair, etc.,
which will further disorient or twist his mental images and impressions 0f what’s happening;
thereby
disrupt his mental maneuvers for dealing with such a menace;
thereby
overload his mental capacity to adapt or endure;
thereby
collapse his ability to carry on.

OODA loops are especially vulnerable to this form of collapse when operating without a plan.  Plans provide a context for new information and a baseline of policy from which policies can be modified.  This is a common cause of battlefield defeat, and I suspect contributed to the failure of the Hoover Administration in 1930-32.

(5)  Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

(6)  For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

About Financial crisis - what’s happening? how will this end?
About the Obama, his administration and Ameican policies today
Good news about America, a collection of articles!
Forecasts about the crisis:

Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end?  With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive.  No more trade deficit, and we can pay our debts.
What will America look like after this recession?, 18 March 2008  — The recession will change many things, from the distribution of wealth within the US to the ranking of global powers.
Consequences of a long, deep recession - part I, 18 June 2008
Consequences of a serious US recession - part II, 19 June 2008
Consequences of a long, deep recession - part III, 20 June 2008
A look at one page of what lies ahead in America’s history, 7 August 2008 — Death of an American industry.
Forecasting the results of this financial crisis - part I, about politics, 13 October 2008
Forecasting the results of this financial crisis - part II, a new economy for America, 14 October 2008
A look at the next phase of the crisis, as it hits the real economy, 31 October 2008
A look at out future, 2009 - 2010 … and beyond, 9 November 2008
A look at 2009 economy - some guesses, 28 December 2008

 

[tomahawk6]

The Fed essentially nationalized CitiBank this morning. by taking a 50% equity position thereby diluting the shareholders value in half. Another down day on Wall Street.

 

[a_majoor]

What happens when the center's of liberal excellence go bankrupt? Remember the "Blue" states are the source of votes for the Administration and the current Congress. The Administration could become even more predatory in order to transfer more taxpayer wealth to the Democrat supporters and "base", which in turn will ignite the already smoldering "Tea Party" movement. (It is interesting to note that even in "Blue" states, counties outside the major metropolitan areas are often "Red", I doubt the hinterlands are interested in being plundered to support the metropolitan elites)

Edgelings.com - http://pajamasmedia.com/edgelings

The Coming Blue State Collapse

Posted By edgelings On February 26, 2009 @ 12:02 pm In Uncategorized | 46 Comments

Here’s a quick and dirty guess: Upper-middle-class families in blue states–those President Obama calls “the rich”–will soon be paying 20% more a year in state and federal taxes. If you pay $100,000 off
of a $300,000 income now, look for $120,000 in a couple of years.

Federal income taxes are going up, and deductions are going down. That much we know. What we don’t know yet–but I would bet money on it–is if the 7.65% Social Security and Medicare tax ceiling will be
lifted from $102,000 to $150,000 or so.

Taxes are headed up at the state and local level too. Residents in blue states like California and New York will be socked hardest.

Take California. Its top income tax rate is the nation’s highest at 9.3%. More appalling, it kicks in at only $47,056 a year. Make too much gold in the Golden State–a million a year–and you are pinched by a 1% surcharge. California also has a 7.25% sales tax, but that’s just a base.

Capital gains get no preference. They are taxed like ordinary income.

For all that, California spends more than it takes. The state is on the verge of bankruptcy and just passed a budget with $12 billion of new taxes.

The trend of higher taxes has not escaped California taxpayers. For each of the last five years, California has led the nation in the outflow of its residents to other states. Since 2004, California has lost about a million and a half people from taxpaying households. At the same time, the state has taken in two million people, mostly non- or minimal taxpayers who are newborns or immigrants, legal and illegal.

I focus on California because I live there. The same trend is at play in other high-tax, high-cost blue states such as Massachusetts, New York and New Jersey.

How will this play out? Well, consider:

1. Home prices are highest in the coastal blue states and remain that way despite the recent losses. In California, the percentage losses are uneven. Silicon Valley residential real estate is down only 15% to 20% from the peak–and less for those little sub-$2 million houses. I’m not kidding. A modest three-bedroom, two-bathroom house of 2,500 square feet in Palo Alto still sells for $1.5 million to $2 million. The income it takes to buy such a house, which is a middle-class house by size and amenities, is what Obama and the tax collectors are now calling “rich.” Palo Alto may be extreme in its home prices, but the same is true in all blue-state upper-middle-class suburbs. It takes a “rich” income (north of $250,000) to live a middle-class lifestyle if one is still raising children and paying a mortgage in these places.

2. Jumbo mortgage loans (more than $417,000 nationally and $625,000 in high-house-price counties) are often required to buy a house in urban blue states. Too bad for the blue-staters. Mortgage interest rates on jumbos are about 1.5% higher now than for regular conforming loans.

3. Inflation–when it restarts (likely five minutes after the economic recovery begins, as it did in the 1970s)–will push droves of upper-middle-income earners into higher tax brackets, as it did in the 1970s.

4. An upper-middle-class income–an income I would define as middle class but with the bonus of freedom from day-to-day worries about grocery and doctor bills, car and mortgage payments, and education and vacation costs–only begins at the point defined as rich by President Obama in many urban blue states. On the other hand, $200,000 might be upper-middle-class in Atlanta or Denver, $150,000 will get it done in Des Moines and Spokane, and $120,000 should do the trick in Fargo or Fayetteville.

A reasonable conclusion is that America could see a huge outflow of educated, upper-middle-class families from the high-tax urban blue states to more congenial places. (I wrote about this in my 2004 book, Life 2.0 but I’m convinced today’s circumstances will accelerate this trend.)

If I were investing in real estate, I would look at Washington state (no state income taxes but a vibrant economy and educated populace), both around Seattle and Tacoma and in the east around Spokane; and Texas (no state income tax), particularly in the high-tech areas of Dallas and Austin.

*

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[Kirkhill]

Don't I remember, from one of your posts Thucydides, that in the 30's States quickly learned that the route to success was to rush to the bottom because the worse your situation was the more free money you got. And IIRC Illinois was at the bottom.


Your Blue States would seem to be playing to that form.

 

[time expired]

A question to the economics experts out there,when one prints
money to solve your present problems does that not cause inflation
somewhere down the line?,and as Pres O is printing huge amounts
of money does that not mean massive inflation somehere in the
near future.Or am I reading the wrong textbook?.
The second question,does anyone out there had any idea of the
value of the US gold reserves and what would be the effect on
the world economy if the US sold off a portion of this to pay off its
deficit?.
                        Regards