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Saturday, December 31, 2011

Transcript: 486 New Year's Non-Happenings

Apologies to our long-time listeners for the spotty podcasting over the past few months. We have pressure from other commitments, which we hope at some point will subside. But we cannot pass up the turn of the year and the opportunity to produce our annual list of events widely reported and sincerely repeated that did not actually happen.

Included on the list,
  • Housing prices bottomed and a recovery in housing began
  • Labor markets recovered, substantial improvements to employment
  • The European debt situation stabilized, banks were in good shape
  • The U.S. returned to more robust growth.
  • Investment rebounded, and provided an important upward impulse for GDP
  • U.S. banks stabilized, with sufficient capital and improving prospects.
  • Bank regulation via the Dodd-Frank Act has made the financial sector safer.

Listen to this episode

First, as most of you are aware, the much ballyhooed passage of the Dodd-Frank Act has resulted in 18 months of intensive backroom lobbying to create nothing. The Consumer Finance Protection Agency is stillborn because of an unprecedented refusal of Congressional Republicans to confirm its director. We had great hopes for this agency, not just to make fine print on the back page into big print on the front page, but to standardize financial products, and so structure the market, so the market could work. Such an organization brings a bit of market discipline, since banks, credit card companies and finance agencies can no longer disguise and misrepresent their products. Mortgages, credit cards, other financial products would be easier to understand and compare.

That would be a major setback to financial product engineers, since the agency would be flexible enough to respond to new products. At least the capacity would be there. The Congress is now blowing a smokescreen of smaller, less intrusive government to cover giving the keys back to Wall Street.

The tragedy of Dodd-Frank, sung in falsetto by designated Wall Street divas and rebroadcast by the Wall Street Journal, Bloomberg and others did not just happen. The exceptions, exclusions and conditions basically allow the big banks to continue in the same incentive structure, trading on their own accounts, continuing to write backroom bets, and continuing to carry massive losses without recognizing them.

This is probably the most important non-event of 2011. A non-change in corporate culture.

But there are others.

Let’s take the return to growth story, since it has some interesting twists. As you may remember, our forecast last January, well … here
As an economic recovery denier, Demand Side can hardly be expected to have the optimistic view of the world going forward that most economic forecasters are demonstrating. The blue chip forecasters are in the stratosphere compared to our assessment of the probable experience of the economy in 2011 and beyond.

Our short form for 2010 was the economy would continue to bounce along the bottom, with significant downside risks from European debt and banking problems and from domestic weakness in commercial real estate. We saw only modest manifestation of those risks in 2010.

The short form for our 2011 outlook is that those risks will be put in play in 2011, triggered by the traditional trigger, rising oil and commodity prices.

But ours was not so accurate.

And we’ll take a detailed look at that in an upcoming podcast.

One thing for today: If you look at the charts, the starting point number is the most wrong. We should have just continued the line from our previous forecast, instead we took the BEA’s number from Q3 2010, the usually final revision, and plugged it in. Only to find it rolled back down in an extraordinary revision in late spring 2011.

The chief state forecaster put it this way in a recent session we sat in on. “Forecasts are very sensitive to the last data point.” We muttered under our breath, “Forecasting the past.” But it wasn’t the latest data point we took, it was three data points back. Quack Quack Quack.

As we cling to our forecast of bouncing along the bottom, with downside risks, we are sometimes concerned that we are stubborn for our own account, not willing to admit defeat, preferring to save face rather than adapt our views. Nah.

Then we look at the media and the people they run up for the edification of their viewers and listeners. That leads us to Idiot of the Week co-winners Leslie Curwen of Business Daily and Pippa Malmgren, the advisor to George W. Bush on financial market issues for the President, which included corporate governance, bank regulation, Government Sponsored Enterprises, mortgages, deposit insurance. Curwen hosted a program with the auspicious title “In the Balance,” and ran Ms. Malmgren up on a panel with former British Chancellor Allistair Darling. Similar to running

But let’s take a listen
PIPPA MALMGREN: Without a doubt, look, Greece has already said, “At best, we’ll pay back 50% of the debt.” But the markets are discounting that they will be lucky to get 20 cents on the Euro out of the Greeks.

If you were Italian, or even Irish Irish, Why would you pay 100% of the debt if the other guys only have to pay half.

ALISTAIR DARLING: Greece is two percent of the Euro area economy

PIPPA MALMGREN: It doesn’t matter…


PIPPA MALMGREN: t doesn’t matter if it’s small. The problem is Italy, the problem is Spain, and even the problem is France, where their banks are on the brink of exactly the same kind of meltdown as we saw then. So the issue of default is imminent. It is with us now. And it remains a problem in an environment where we don’t have the cash to throw at it.

Governments do not create jobs. What we’ve got to do is find ways to lift the tax burden, lift the red tape, from that community, in order to get growth back. That is the end of the story.

Ms. Malmgren starts out as if she has some clue, that quickly dissolves as she conflates the problems of the sovereigns with those of the banks. Then she goes into the absurdity of entrepreneurial risk-taking being the magic ring. She postulates a magic of entrepreneurship that is a figment of her imagination. As must such analysts, she prefers an alternative universe, most likely for its efficacy in this one. It helps keep her job because it plays to the prejudices of her employers. It does not explain anything about this universe. If small business were so important, you’d think she’d talk to small businessmen.

According to the National Federation of Independent Business and its chief economist Bill Dunkelberg, who is hardly a left wing Keynesian, the biggest problem for small business is demand.

At best small business is the tractor. It is not the field, the crop, the rain or the sunshine. It works often quite nimbly if those things are provided, those components of demand. But by itself, it doesn’t produce anything. Saying entrepreneurship is going to save the day is like saying if we super-charge the tractor it is going to grow a crop in the garage.

But as bad as it is that Ms. Malmgren is still getting a hearing, with her history – George W. Bush’s chief advisor, self-proclaimed, on corporate governance, bank regulation, Government Sponsored Enterprises, mortgages, deposit insurance. (How well those turned out!), it is worse that the media – here Business Daily and Leslie Curwen, is still giving her that platform.

So Pippi Malmgren, Leslie Curwen, Business Daily.


We have not reached this place, stagnating employment combined with perpetual crises, because our guides knew where they were going. Record debt, enormous unemployment, massive use of planet-killing fossil fuels, crumbling infrastructure. It is as if your doctor said you have to keep smoking because you need to keep breathing, and don’t worry about the muscles and bones – they’ll take care of themselves when you get back to health.

Companies like Apple … well, maybe only Apple .. are cited as the exemplars of what could be done. We need to have a planet of Apples producing great gobs of technical advances so every nation can be an exporter. I mean, please.

Regardless of the arithmetic impossibility, we need to employ our people in useful tasks, not outfit the technologically advanced with new ways to do old things, no matter how magical. There are people to feed, clothe, house, educate, transport, and keep in good health.

Even more to the point, Apple does not produce the great net gain attributed to it. It takes from the old technologies. Newspapers are failing, traditional media is stagnating, landline telephones are like Model T’s. This is creative destruction, in Shumpeter’s terms, that is driving new investment. Great. But it is on a pitiful scale.

The creative destruction we need is to replace fossil fuels with clean energy, replace auto-based transportation with rail-based, somehow adapt or recreate a housing stock and an urban design with something that works for older people, and more people, and uses one-quarter the energy.

You just don’t get there by saying, first cheap gasoline, then trust the market.

And note, No country should be a net exporter. Sorry. That’s what has built the imbalances. Germany has created a virtue out of a vice, and now stands over Europe waving a promissory note. Shades of Economic Consequences of the Peace. That was Keynes’ break-out work, written after he quit the negotiations at Versailles in disgust. The Allies after World War I were in the process of imposing impossible austerity upon the Germans and he saw that it was, first, impossible, and second would lead to social disruption.

China has built an export machine while exposing its people to ever greater insecurity. The U.S. has borrowed its way to basically being an obese matron with tattoos and a nice hat.

So when the pundits nod sagely and say, “Yes, we have to endure a period of deleveraging and below-par employment growth,” don’t believe they know what they’re talking about. This time last year they were saying, “We’re on our way.” Two short years ago, they were saying, “The recovery is just over the hill. All we need to do is save the banks some more and make those corporations profitable. Investment will boom, companies will hire.” Well, we’re over the hill. This is not the road to recovery.

To say the least.


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