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Friday, January 1, 2010

Transcript: 339 2009 The Year that Wasn't

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Last year we reported on 2008, the year that wasn't, with such points as:

The housing market did not stabilize, contrary to popular press reports. And Ben Bernanke and the Fed did not prevent recession or systemic financial sector collapse, as was being reported up to and well after the onset of the recession.

This year, we have a similar string of stories, oft reported, widely believed, not a part of factal history.

The Great Recession ended

This of course is our favorite windmill. We do not see a recovery. There is no doubt GDP grew at a tepid pace in the Q3 '09, but GDP is not the only indicator of the business cycle. To even have a technical recovery, you need some action in investment. That action is not there. The only investment in town is coming from the federal government. End of story.

David Rosenberg calls it this way, "

I do not view the economic events of the last two years as a classic recession/recovery phase. They only exist in the context of a secular credit expansions and contractions. We are in a post-credit bubble credit collapse that is ongoing.

Steve Keen at Debtwatch points out that those who predicted a strong recovery because the crash was so strong are so far disappointed. The 5 percent plus predicted, for example, by Bush chief economist Ed Lazear has been so very wrong that we don't hear from Lazear any more.

We were heartened when we answered a poll recently on the Credit Writedowns web site and clicked "vote" and up popped the results where a majority of the readership agreed with us. Or we agreed with them. It's beginning to feel less lonely.

This so-called double dip. I don't know. The second derivatives are getting better, but as we said earlier in the year, this could be more an approach to the bottom than a harbinger of improvement.

The financial sector's systemic meltdown was arrested

If you look at the recessions since the Second World War, they are becoming gradually shallower and longer. The actual damage is extended, not reduced. The volume of the downturn is virtually the same, if not worse. It is the so-called "jobless recovery." We have tried to make the point that a jobless recovery is not a recovery because jobs are the essential element of a healthy economy, not the monetized activity attending what may or may not be useful enterprises.

I make that point here, because what we have done is not resolve or reform or rebuild or restore, but make it easy to carry the damage forward for the big banks to the detriment of everybody else.

The big banks repaid the government the costs of their bailouts

Hundreds of billions of dollars were spent to float the big banks. Much of the money will not be repaid, according to the TARP inspector general's recent report. In addition, the Fed has bought more than a trillion dollars worth of mortgage backed securities (MBS's) that now sit on its balance sheet awaiting the day, if ever, they will be worth something like what they were bought for.

The Fed is the life in the MBS market. It threatens to leave. But in passing it has ratified some of the dodgiest innovations yet. By ratified, I mean made decisions to create them worth more than a pickle in a peat bog. Likewise other purchases have been made by the Fed. This amounts to covering over a huge pile of blunders that the Fed oversaw before it begins to smell so bad nobody can deny the corruption and incompetence. But it's too big a pile and there's not enough dirt even at the Fed. So that stink you're smelling is not going away.

Significant progress made toward climate change at Copenhagen

pair this with

Cap and Trade emerged as a viable way forward

and answer both "No."

The year's top award for obtuseness again goes to those who say we cannot afford to address climate change. In fact, we cannot afford not to, and a concerted and aggressive effort would actually save the economy, providing the kinds of productive investment that just are not anywhere else. Switching from fossil fuels to infrastructure and renewables, along with the infrastructure to make them happen, and you have a switch not only from dirty to clean, but from low-job to high-job activities.

The year's award for best legislative initiative goes to Maria Cantwell's CLEAR act, which puts a price on carbon and thus internalizes the so-called externality that is central to life on the planet, while at the same time holds consumers harmless by rebating the proceeds from carbon auctions directly to them. This is absolutely right on the mark.

Significant Health Care reform was enacted

HA HA HA. Mandates are not the economically rational way to go. Single payer is the economically rational way to go. The Health Care lobby and their toadies in Congress have displayed no conscience and have provided evidence they do not believe in an afterlife with this absolutely disgusting perversion of the public good of health care.

Joe Lieberman is carving out a place in history right next to the infamous, say the Joe McCarthy's or Phil Gramm's as completely corrupt.

Housing Recovered

The decline in home sales did go flat as a result of the huge support from the federal government. Not only the Fed's making good the bad mortgage backed securities, but Fannie and Freddie and FHA being the only players in the market which, what, only two or three years ago teemed like a colony of termites with mortgage originators, middlemen, slicers and dicers, and so on.

But this action is at the low end of the market, considerably assisted also by the first-time homebuyers tax credit, as well. The drop in housing is a function of overpriced homes, a glut of supply -- including a huge shadow inventory, weak labor markets, difficulties in obtaining mortgages, and of course, the continued asset deflation.

Low interest rates are doing something good

Whether they work in normal times is not the question. Many times cheap money has inflated the economy off the rocks. This time, however, low interest rates are serving only as a back-door bailout for the banks. Expanding their margins between zero and usury. Similarly the suspension of mark to market has just kept the zombies roaming the countryside, leaden by their internal diseases, but still ambulatory.

Meanwhile people who depend on income from their savings are eating their savings. The increase in the savings rate is only an increase in the difference between incomes and spending. It is being used to pay down debt.

Something useful is being done for the demand side

Absolutely wrong. An organized mortgage renegotiation and write-down has not taken place. Only programs with gala opening nights and zero people in the seats. Many -- including James K. Galbraith -- have talked about additional money in the pocket by way of payroll tax cuts. Demand Side prefers a direct attack on the debt itself. Let credit card holders get some zero interest financing to carry their debt better, using it to say pay down high-priced cards, many of which were reset in a reprise of predatory practices in the mortgage industry.

Or our favorite, let the banks get small enough to fail.

We went over that on Tuesday, but there is an option, contemplated in part by the Cantwell-McCain return to Glass-Steagall, that holds promise.

I'm not sure we covered it in length, so as we go out on this first day of 2010, from Bloomberg

War on Wall Street as Congress Sees Returning to Glass-Steagall

A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc.

As Bloomberg says, link online

Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.



The McCain-Cantwell proposal, which has picked up four additional co-sponsors, could be considered by the Senate Banking Committee as early as January. A similar bill has been introduced in the U.S. House of Representatives by Maurice Hinchey, a Democrat from New York. Barney Frank, has said he supports giving regulators the power to apply Glass- Steagall in individual cases.


“Congress is at war with Wall Street,” said former Fed Governor Lyle Gramley, now a senior economic adviser at Soleil Securities Corp. in New York. “They perceive Wall Street as being the root source of our financial crisis, and they want to do something to make sure that doesn’t happen again.”

Splitting banking functions needed for the smooth operation of the economy from riskier securities and trading activities was proposed earlier this year by the Group of Thirty, a nonprofit organization made up of former government officials and bankers, including Paul Volcker, a former Fed chairman and head of the president’s Economic Recovery Advisory Board.

The group said the crisis spread like a contagion from firm to firm, putting both commercial banks and securities companies at risk. To prevent a domino effect, systemically important financial institutions shouldn’t be allowed to engage in proprietary trading that involved “particularly high risks” or “serious conflicts of interest,” the group said.


The financial system has “failed the test of the marketplace,” Volcker said in January. He added that “it’s been proven that they’re unmanageable, the existing conglomerates.”


Others are guided by the principle that smaller is better. Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, firm that evaluates banks for investors, said the repeal of Glass-Steagall in 1999 was based on the false premise that bigger banks would be more competitive and efficient.

“I don’t think there are any efficiencies of scale in banking,” Whalen said. “Making them smaller would be far more efficient and also improve competition. If we had broken up Citi last year, we would have seen a couple of new market entrants buying operations. That is what creative destruction is all about.”


  1. In your latest podcast, you said that household debt is nearly equal to the GDP. It's been reported that the US debt is about $183,000 per capita.

    Given these two "facts", is there anything other than default in our future?

  2. Government does not have to default, but I do see some sort of writedown on debt if we cannot get our act together to begin producing public goods at scale and give the capitalists a place to invest. Failure to generate forward momentum will lead to ever wider deficits.

    The household debt is much more problematic to me. There is no printing press for households. Default is a matter of incomes and contracts. That crunch to demand could very well send us even lower.

    The business debt as a matter of practicality will be written down much more quickly than the household debt.

    The $183,000 number may be total debt, government, business and household.

  3. Yes, the $183K per capita is total debt for household, business, financial and government sectors.

    I hate to be pessimistic but given that we're in such a hole with a dismal outlook for recovery, I find it hard to be optimistic about the US economy. (Twenty years or more for the real estate sector, long term high unemployment numbers, high levels of household debt.)

    Although they will try, the Federal Government cannot tax it's way of the predicament.

    As a Congressman once told me, the Feds have assets which can be "sold off" to raise capital. But why bother when you can simply print it. Pay off your debt with inflated dollars and let someone else live with the consequences.

  4. Speaking of "writedowns" on debt:

    I think you have mentioned previously that nothing has been done about the underlying problem of underwater mortgages.

    Since the Mortgage Refi program seems to be a dud, perhaps what is needed, is a writedown on these bloated notes. Hit the reset button, so to speak.

  5. Tax cuts got the federal government into its predicament.

    Once again, I have to suggest that the Feds are not the ones who are income constrained. That is, they have an out and a good one in a deflationary situation.

    It is households who are losing jobs, losing wealth and facing big debt payments from mortgages and credit cards that are the root of the economic collapse. Followed closely by businesses who have bet on a consumer whose increases in spending were financed by debt and who now is in no position to spend. Consumer demand is finally broken.

    These two sectors, the private economy, are collapsing and taking down the government sector with it. States and localities are forced to cut back for lack of revenues reinforcing the downturn.

    Was any of this due to high taxes?

    Was any of it due to overconfidence in market forces?

    Do untaxed bonuses to Wall Street millionaires make things better? Can we tax financial transactions and slow down the casino without hurting the real economy?

    I have a hard time being optimistic about the U.S. economy, too. But I think there is a way out if we will take it. It involves destroying debt by writing it down and making creditors take a hit. It involves big new development of public goods, which will spur investment in productive, not speculative enterprises.

    Unfortunately it is achieved only by reversing the illusion that government is the problem. The kings of capitalism are the slaves of greed and they've taken the economy down with them.