Robert Reich on the economic crisis

As usual, Robert Reich is both cogent and absolutely right. You should read it all, but (emphasis mine):

First, understand that the main problem right now is not the supply of credit. Yes, Wall Street is paralyzed at the moment because the bursting of the housing and other asset bubbles means that lenders are fearful that creditors won't repay loans. But even if credit were flowing, those loans wouldn't save jobs. Businesses want to borrow now only to remain solvent and keep their creditors at bay... This means bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs....

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation... Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future... Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.

I get a warm, happy feeling from the idea that this man is advising the president-elect -- even if he has Rubin and Summers and co. to contend with.

(Also, this should be a reminder that all Democrats who support a balanced budget amendment should be slapped. I'm looking at you, Bill Richardson. Deficit spending is an important economic stimulus.)

Greg Mankiw, deep inside the Harvard bubble

I guess we could have seen this coming. Greg Mankiw, Ec10 mastermind and former Bush advisor, trying to explain why Republicans so dramatically lost the youth vote:

Why? I am not enough of a political scientist to be sure, but recent conversations I have had with some Harvard undergrads have led me to a conjecture: It was largely noneconomic issues. These particular students told me they preferred the lower tax, more limited government, freer trade views of McCain, but they were voting for Obama on the basis of foreign policy and especially social issues like abortion. The choice of a social conservative like Palin as veep really turned them off McCain.

So what does the Republican Party need to do to get the youth vote back? If these Harvard students are typical (and perhaps they are not, as Harvard students are hardly a random sample), the party needs to scale back its social conservatism. Put simply, it needs to become a party for moderate and mainstream libertarians.

This saddens me. That Mankiw actually thinks Harvard students -- among the most privileged, self-important, limousine-libertarian groups of people in the country -- could be a representative sample of anything is beyond ridiculous. (Not to mention, those students who wind up discussing politics with His Conservative Holiness are likely either wingnuts or Ec10 sycophants.) "Perhaps" is not nearly a strong enough qualifier here.

...Also, Ross Douthat, incidentally a rather disgruntled Harvard alum, is right to point out in response that today's young people are generally liberal on economic as well as social issues. I would go further and suggest that the "liberaltarianism" Mankiw's reaching for is basically a yuppie fantasy, a silly and impractical ideology which exists nowhere -- except silly and impractical places like Cambridge.

It'll take a long time before the elite media can admit it, and the right wing never will, but redistributionism is popular; we just saw a resounding affirmation of that, after Republicans called Obama a SOCIALIST!! at the top of their lungs and, surprise, Obama won anyway. (Don't even get me started on "limited government and free trade," which are not exactly big-ticket vote-movers either, DLCism notwithstanding.) Point is: people who think that kids these days are predominantly libertarian are probably spending way too much time writing textbooks.

Krugman Wins Nobel

Princeton Professor and New York Times columnist Paul Krugman was awarded the Nobel Prize in Economics today. I can't say I'm always the biggest fan of his column - though he's almost always right, I'm not really an econ guy - but as a very high-profile liberal economist, this might be the Nobel committee making a political statement.

He also just happens to be a damn good economist though.

Story here

FAILout, Pt. II

SO -- I've been out of touch the past few days. I left Friday to spend the weekend in sun-streaked Somerset, Mass. with the girlfriend's family, watching pro sports and eating delicious homemade meatloaf¹. Vaguely I heard, through the meatloaf haze, that Congress had reversed itself on the "bailout" for reasons I still haven't quite wrapped my head around. I gather they involved "sweeteners."² Anyway, I completely missed the Vote that Cured Wall Street and Saved America, so I guess I was less surprised than some of my contemporaries when I wandered out of Stat 100 this morning and saw:

NEW YORK (AP) -- Wall Street is plunging, with the Dow Jones industrials down more than 500 points amid growing fears that the credit crisis is spreading around the world.

Investors are realizing that the Bush administration's $700 billion rescue plan won't work quickly to unfreeze credit markets, and many banks are still having difficulty gaining access to cash. European governments also took steps over the weekend to limit the damage from the growing global financial crisis...

...World markets suffered massive losses Monday, striking four-year lows, as panic-stricken investors doubted whether a Wall Street bailout package would stem the global financial crisis.

London, Frankfurt and Paris all tumbled more than six percent approaching the half-way mark while a 15-percent dive in Moscow forced a halt to Russian trading...

...Investors will learn today whether the Paulson bail-out - fattened to $850bn (£480bn) by Congress - can begin to halt the death spiral in the credit system. So far, the response looks terrible.

During the past week, we have tipped over the edge, into the middle of the abyss. Systemic collapse is in full train. The Netherlands has just rushed through a second, more sweeping nationalisation of Fortis. Ireland and Greece have had to rescue all their banks. Iceland is facing an Argentine denouement.

The US commercial paper market is closed. It shrank $95bn last week, and has lost $208bn in three weeks. The interbank lending market has seized up. There are almost no bids. It is a ghost market. Healthy companies cannot roll over debt. Some will have to sack staff today to stave off default.

Good job everybody! Time for a well-deserved vacation!

I have been telling my friends for a while -- and I'm increasingly convinced myself -- that the "bailout" is wrongheaded NOT JUST because it's a humongous transfer of wealth from the public to the financial elite, but also because it misses the core of the economic problem. The "bailout" is all well and good if the banks and other institutions are jammed up because of liquidity, i.e. their assets are tied up in this bad paper that nobody wants, and if the gov't takes it all then cash can flow again. But what if the problem is not liquidity but solvency, i.e. they've been operating on imaginary money and fancy bookwork this whole time, and a lot of these institutions just fundamentally have more liabilities than assets? In that case, the "bailout" does absolutely nothing to assure anyone that the system can meet its obligations. Increasingly it seems like that's the case -- in which case, we're in much deeper trouble than Paulson, Bernanke, Bush, Congress, or anybody in power seems willing to recognize.

Here is the article that got me thinking about the solvency/liquidity issue. Also, Nouriel Roubini -- who's been completely right about this entire thing since 2006 -- has been making this argument, as have some others, for quite a while.

Next weekend I'm leaving again, this time for Canadian Thanksgiving. If past experience is any indication, Congress or the Fed will do something SUPER-AWESOME over the weekend which will undoubtedly fix the problem, at taxpayer expense (again). And on Tuesday when I return, I'm just going to assume Wall Street will have burst into flames, or something. Just how much closer to systemic collapse can we get before everything tips over -- or at very least, until somebody important recognizes the problem?

1. RECIPE TIP: next time you make meatloaf, put some FRENCH'S brand french-fried onions on top. Mmm, crispy goodness!

2. Congress' "sweeteners" couldn't possibly be as SWEET as FRENCH'S brand french-fried onions! Add that onion crunch to your salad, soup or stir-fry today!

Preemptive buzzkill

Because of the fact that Lehman Brothers, Merrill Lynch, Fannie, Freddie, and a whole bunch of other companies are crashing and burning, it may happen that fewer students go directly into consulting or i-banking. If this happens, it will not mean that a bunch of students felt idealistic and turned down the big bucks to go fight AIDS or something. It'll mean they couldn't get jobs.

So please, future commencement speakers, just don't mention it. 

Shorter Wall Street:

"AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAHHHHHHHH!"

...I especially love this tastefully understated bit from the abovelinked NYT article. Emphasis mine:

Over the weekend, the Federal Reserve Bank of New York called together the leaders of most major financial firms in an effort to get them to act collectively to stem any possible panic, but could not force a deal.

In a way, that was similar to what happened a little more than a century ago, when the financier J.P. Morgan called the heads of all the trust companies in New York to a meeting in his library, and demanded that they agree to put up money to stop the bank run at another trust company.

The bankers did not want to do so, in part because they would need that money if the panic spread. Morgan locked the door, and kept the presidents in the library until morning, when they finally gave in. No such coercion exists this year.

No kidding.

...Also: all the suit-wearing Harvard douches who'd planned long and fruitful careers at Lehman Bros can kiss my soon-to-be-delivering-pizza-for-minimum-wage ass. That's right.

Phil Gramm is the gift that keeps on giving.

This:

On Tuesday near the Republican National Convention, he told the Financial Services Roundtable, a lobbying group for the banking industry, "If you’re sitting here today, you’re not economically illiterate and you’re not a whiner, so I’m not worried about who you’re going to vote for," according to Bloomberg news service.

Plus this:

...a senior McCain adviser said privately that Mr. Gramm, an economic conservative who is now a vice chairman for UBS Investment Bank and a former Senate Banking Committee chairman, could well be Treasury secretary in a McCain administration.

Equals jackpot.

Deregulation solves everything. Deregulation is magic. Deregulation is your father

Nathan Newman's little article about the failure of deregulation and the current financial crisis made me have an equally little thought -- remember after one of the more recent Wall Street shocks, I think it was the Bear Stearns collapse, when McCain went on TV and gave a big speech where he said the answer to our problems was more transparency and a simpler tax code?

My thought: Boy, that was stupid.

What Not To Do On CNN

This clip has been making the rounds today, in which Gov. Mark Sanford (R-SC) does a total faceplant trying to articulate any contrast between McCain and Bush on the economy. This is one of the worst appearances by a high-profile surrogate you'll ever see, and it highlights the severe message difficulty McCain's campaign is having on the economy. Look:

Brutal.

(Also, as Taegan Goddard notes -- we can probably strike Mark Sanford off McCain's VP list.)

And baby makes five

I recall writing a blogpost five weeks ago called Next Stop: Bank Failures. Well, I'm not one to toot my own horn, but... Toot! Toot!

The federal government took control of Pasadena-based IndyMac Bank on Friday in what regulators called the second-largest bank failure in U.S. history.

Citing a massive run on deposits, regulators shut its main branch three hours early, leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: "Please, please, I want to take out a portion." All she could do was read a two-page notice taped to the door.

IndyMac -- whose slogan, wonderfully, was "You Can Count On Us" -- is the fifth U.S. bank this year to bite the dust. Something tells me it's not going to be the last.

(Note: FDIC insures every account up to $100,000, so most non-business and non-rich IndyMac account holders have nothing to worry about save some logistical hassles. Over that number, it's an open question. The government will sell off IndyMac's assets for whatever they can get, and go from there...)

Comparing the Obama and McCain tax plans

Look:

These are from the Tax Policy Center's new report (PDF here, it's dense and detailed but worth reading if you're a wonk) on the two presidential candidates' tax plans. The differences are pretty stark: McCain wants to keep the ludicrous Bush tax cuts (and, incredibly, cut corporate tax even more), while Obama wants to roll them back on the wealthy and introduce targeted exemptions and credits for everyone else. Consequently, as you can see above, the Obama plan produces an immediate gain for the bottom 80%, while McCain's is helpful to the top fringe. In the long term, working-class and middle-class Americans will benefit more greatly from the Obama plan, while McCain's plan overwhelmingly favors the ultrarich elite.

Another illuminating policy difference is the estate tax, which is levied on multimilliondollar inheritances (read: Daddy's yacht. And to preempt the inevitable Harvard Republican rebuttal, no, family farms and 96% of small businesses are NOT affected by the estate tax. Do your research). Obama will keep the current exemption levels (slated for $3.5 million in 2009) and set the rate above exemption at a sensible 45%. McCain, however, would raise the exemption to $5 million -- meaning someone who inherits $4.9 million would pay nothing on it -- and set the rate at just 15%. You don't need an economics degree to figure out what's happening there.

So in short: Democratic policy supports the interests of the middle and working class, while Republican policy amounts to a handout to the superrich elite. In other news, grass is green and the sky is blue. But this is a helpful reminder of both how radical John McCain (and the entire Republican Party) really is, and how basic the issues really are in 2008.

(from TaxProfBlog via TPM)

UPDATE (Monday, June 16): Paul Krugman argues in his column today that Obama doesn't go far enough in raising revenue, and has accepted the conservative framework that tax cuts are the best thing you can do for working people. It's a valid argument, but I think -- and this is one of the only times I've ever found myself disagreeing with Paul Krugman -- the key thing is the progressivity of the tax system. Raising taxes on the rich is preferable to raising taxes on everybody, and Obama's plan embraces that philosophy (in a way, also, that will make it very palatable to the public). The revenue we need for UHC and deficit reduction and whatever else can come from spending cuts (esp. in defense once we're out of Iraq) and further tax hikes on corporations and the highest brackets.

Obama's latest on the economy

MyDD's Josh Orton is right to cite Obama's speech today in Raleigh as evidence he's pivoting to a broadly ideological critique of conservative economics, and tying them directly to the present crisis. This is exactly what our discourse needs. Now, I wish he'd be more forceful and explicit in his criticism -- but I always wish that about Obama, and this is still a good start:

We did not arrive at the doorstep of our current economic crisis by some accident of history. This was not an inevitable part of the business cycle that was beyond our power to avoid. It was the logical conclusion of a tired and misguided philosophy that has dominated Washington for far too long.

George Bush called it the Ownership Society, but it's little more than a worn dogma that says we should give more to those at the top and hope that their good fortune trickles down to the hardworking many. For eight long years, our President sacrificed investments in health care, and education, and energy, and infrastructure on the altar of tax breaks for big corporations and wealthy CEOs - trillions of dollars in giveaways that proved neither compassionate nor conservative.

And for all of George Bush's professed faith in free markets, the markets have hardly been free - not when the gates of Washington are thrown open to high-priced lobbyists who rig the rules of the road and riddle our tax code with special interest favors and corporate loopholes. As a result of such special-interest driven policies and lax regulation, we haven't seen prosperity trickling down to Main Street. Instead, a housing crisis that could leave up to two million homeowners facing foreclosure has shaken confidence in the entire economy.

I understand that the challenges facing our economy didn't start the day George Bush took office and they won't end the day he leaves. Some are partly the result of forces that have globalized our economy over the last several decades - revolutions in communication and technology have sent jobs wherever there's an internet connection; that have forced children in Raleigh and Boston to compete for those jobs with children in Bangalore and Beijing. We live in a more competitive world, and that is a fact that cannot be reversed.

But I also know that this nation has faced such fundamental change before, and each time we've kept our economy strong and competitive by making the decision to expand opportunity outward; to grow our middle-class; to invest in innovation, and most importantly, to invest in the education and well-being of our workers.

We've done this because in America, our prosperity has always risen from the bottom-up. From the earliest days of our founding, it has been the hard work and ingenuity of our people that's served as the wellspring of our economic strength. That's why we built a system of free public high schools when we transitioned from a nation of farms to a nation of factories. That's why we sent my grandfather's generation to college, and declared a minimum wage for our workers, and promised to live in dignity after they retire through the creation of Social Security. That's why we've invested in the science and research that have led to new discoveries and entire new industries. And that's what this country will do again when I am President of the United States.

Also, here's a quote that certain Harvard friends of mine should ponder for a while:

We do the cause of free-trade – a cause I believe in – no good when we pass trade agreements that hand out favors to special interests and do little to help workers who have to watch their factories close down. There is nothing protectionist about demanding that trade spreads the benefits of globalization as broadly as possible.

Next Stop: Bank Failures

Hello everybody! Enjoying your summers? Well, I intend to put a stop to that right now.

Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate--including loans to builders and developers--are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.

That's Fed vice-chairman Donald Kohn. Loosely translated, he's saying that the continuing implosion of every loan in America will soon endanger American banks.

Now, in Boston and other Northeastern cities, you mostly hear about the big national banks, who are no doubt suffering (*cough* Citigroup) but whose total failure would probably not be permitted by risk-averse regulators. In much of the country, though, banking is primarily local. Out here in Denver -- from which I might provide a real update sometime soon, if I can ever get off Interstate 225 -- there's a preponderance of local banks and credit unions, with names like "Bank of Denver" and "Rocky Mountain Savings Bank" and "Western Bank of Colorado" and "DenverWestBankMountainBankWestBankBank" and whatever the hell else. Now, if the economy continues on its current path (and bear in mind that mortgage loans were only the first to collapse; there are indicators that auto loans are next, not to mention appliances and of course consumer credit), can small institutions like this really be expected to survive? How much can the FDIC handle? Anyone? Bueller?

Above: All the hot trends start in England

Filed under: banking • Denver • economics • impending disaster • the real issues

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Sound policy choices

Clinton:

"I’m not going to put my lot in with economists."

(sound of my head slamming against a wall, repeatedly)

Just a note on today's economic figures

You may have heard about the Labor Dep't statistics released today showing a little decline in the unemployment rate and a "smaller-than-expected" contraction in jobs. This has caused Drudge, typically, to flip shit and argue that the economy is rebounding. Now, this is obviously insane for a couple different reasons -- but I want to remind everybody that the real story is still wages:

Companies are cutting working hours, even as many avoid layoffs. Those working part time because of slack business or out of failure to find full-time work swelled from to 5.2 million in April from 4.9 million in March. In percentage terms, employees working part time involuntarily climbed to the highest level since 1995.

The average weekly pay for rank-and-file workers — about 80 percent of the American work force — fell $3.55 in April, to $602.56 in inflation-adjusted terms. This figure has been generally falling since the end of 2006. Gains in pay have been canceled out by the soaring costs of food and energy.

Awesome rebound!

UPDATE (6 PM): Mike Shedlock argues that the numbers are simply bogus.