Demand Side Transcript

After some context from Robert Reich and Adam Posen, we get directly into what will happen next. What will happen to the economy, not so much the stock market. The markets continue their decline -- toward six thousand on the Dow and six hundred on the S&P.
Robert Reich encapsulated the bad news last week

The U.S.economy contracted in the 4th quarter of 2008 more sharply than initially estimated. Consumers cut spending the most in over 28 years. Businesses cut way back as well. Exports were dead in the water.

All told, according to the new Commerce Department data, the nation's economy shrank at an annual rate of 6.2 percent. Last month, the government's preliminary estimate was only 3.8 percent. Roughly half the revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories -- the amount of stuff they they have on hand to sell -- have dropped. That's good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here's the bad news: Inventories still aren't dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.
Keep your eyes on the gap between what the economy could produce at full employment and the paltry level of aggregate demand (consumers plus businesses plus exports). That's why the stimulus is too small -- and why Reich is betting the President will be back for more stimulus.
There's no reason to suppose the 1st quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We're at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they're continuing to bet that the economy won't be recovering by November, 2010, and why they're going to continue to say no?

And from Adam Posen, whom Paul Krugman describes as the go-to guy for understanding Japan's lost decade, some perspective on the monetary side. From testimony for a Joint Economic Committee hearing on the 26th.

The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses.
The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.
These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …

On February 24, the Conference Board reported that its consumer confidence index plummuted further in February. The Index now stands at 25.0 (1985=100), down from 37.4 in January. The Present Situation Index declined to 21.2 from 29.7 last month. The Expectations Index decreased to 27.5 from 42.5 in January.
Consumers' appraisal of overall current conditions, which was already bleak, worsened further. Consumers' short-term outlook turned significantly more negative this month. The employment outlook was also much grimmer.
Meanwhile the American Recovery and Reinvestment Act began moving federal money into infrastructure, help for states, education, unemployment extensions and other avenues.