I find it very hard to know what to make of various experts' economic forecasts but Martin Feldstein says we're in for a recession that may be "substantially more severe" than recent ones.
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Feldstein: Severe Recession Looming
15 Mar 2008 11:45 am
Comments (43)
This is the guy who used to officially call recessions. The ignorance of political blogs about the current economic situation is incredible. You are all still looking at Iraq like it is going to be the major issue in this election. Come November -- after the devastation this coming summer selling season brings --- the economy is going to make Iraq look like an afterthought.
We have a survey in which the majority of CFOs--- the people who paid major money by corporations to keep on top of these issues --- see no sign of economic recovery until late 2009. We are looking at the demise of Bretton Woods II, which is the entire reason we have been able to claim "deficits do not matter". You have numerous people talking not about recession, but complete systemic failure of the banking system.
If you are not going to bother to educate yourself about these issues, then you have no business being in political commentary right now.
Walker:
How many bloggers know about economic issues? I mean the more political type bloggers. Atrios? Don't even get me started on McMegan. You'll get better info by reading Ccalculated Risk or The Big Picture.
Re Walker's comment "Come November -- after the devastation this coming summer selling season brings --- the economy is going to make Iraq look like an afterthought."
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The prime directive for the Democratic leadership is to point out that this recession is the result of CORRUPT mismanagement by George Bush and past Republican Congresses. To DAMM George W Bush for all eternity as the second Herbert Hoover.
Example 1: The increase in federal debt to more than $4 Trillion above what Bush projected it would be just a few years ago (Budget for fiscal 2002)
Example2: Pissing the money away on defense contracts (to provide the ILLUSION of economic activity without the real investment needed to sustain the economy). The hideously wasteful, unnecessary war in Iraq is a primary component of that waste.
Example 3: Giving the superrich an enormous tax cut -- a direct transfer of several $Trillion dollars from the Social Security/Medicare Trust Funds to the pockets of the superrich.
Which the superrich used to create jobs IN CHINA while throwing US workers out on the street.
Example 4: The total failure of George W Bush to spend anything beyond a token amount on development of new energy sources -- even though he and Cheney have been spending roughly $35 PER GALLON of Middle Eastern gasoline on military operations to protect Exxon and Chevron's oil concessions.
Now George the Whore announced yesterday that "Our" energy policy hasn't "been very wise".
Hey, if you turn your estate over to a corrupt whore for management, you shouldn't be surprised to find yourself bankrupt in a few years.
Unfortunately, NOT ONE GODDAMM DEMOCRATIC LEADER has the courage to point out to the country how George the Whore has been lying to us the past few years.
I happened to be at that conference that he spoke at. The accounts of the speech don't give the tenor of it. He was extremely pessimistic throughout the entire speech. My co-worker and I were chuckling about we should just go jump off a building or something, the news he was delivering was that bad.
Walker, I agree fully. This is the most important issue in a generation or maybe longer. The Iraq war is a footnote.
Note that somehow, the "economics blogger" that is McMegan has missed this entire picture. She doesn't even write about the largest economic event of her entire lifetime. This is much larger than the Asian Crisis.
Matt, we are talking about the investment banking system going under and being nationalized by the US govt. This is the very center of modern capitalism, and it is likely going to fail in the next month or two. Educate yourself on the economic outlook, and you will not be talking about prostitution.
The US govt just gave ( and that is the appropriate term, "Gave" and not "lend") Bear about $100B and it doesn't seem to be enough. If we have bad news over the weekend, we could crash monday.
read the text of martins speech. He puts the right emphasis on why this is so bad. We have several trillion dollars of loans out there that are going bad and there is no longer a way for these loans to be worked out informally due to the structure of the modern mortgage market. They must all be worked out formally and the chain of events that this workout MUST trigger results in a financial apocalypse for the U.S. and investment bank based capitalism.
He also had an excellent point, in that the current recession is the first recession in about 30 years that was not initiated by the fed.
But, but, Marty Feldstein is an evil Conservative who doesn't know anything about economics and shouldn't be allowed to pollute the impressionable you minds in Ec-10.
(J/K, and I know he doesn't teach Ec-10 anymore).
You'd think we'd have known, given that even his dad was named Herbert.
McMegan is an ignorant Republican hack and the Atlantic should be embarassed to have her on the site.
The most important thing Feldstein said that this could be the worst recession since WWII. He's saying it will be worse than the 1980-82 recession, which was really, really bad.
On the other hand, Macro Advisors is explicitly not making a recession call, and the Blue Chip consensus (whatever that's worth) is still not nearly as pessimistic as Felstein.
I think we're in the worst financial crisis since WWII (although the S&L crisis was pretty bad and did help lead to the 1990-91 recession), but a lot of economic sectors are still pretty healthy. We're about to see how well a financial crisis can be contained using all the most frantic bailout tools available.
The other thing is that this is coming on top of a really very weak recovery from the stock market crash recession of 2001. The overall story of the last 10 years or so is the two successive financial bubbles distorting the economy in all kinds of ways.
It isn't just political bloggers. Peter Baker, a mediocre political journalist for the Washington Post, was assigned to report on Bush's economic speech yesterday. It was... stunning. He doesn't even seem to know what he saw. What happened yesterday was unprecedented - never before has the Federal government propped up an investment bank. Investment banks do not have federal insurance. And because of that, they follow a pretty unregulated path. So, we have Bush making a speech in which he says that government has no business in the private sector, propping up the mortgages of endebted homeowners - at the same time his government is propping up an investment bank. All of which seemed to go right over Baker's head.
The price to pay for nourishing a tribe of dingbats as political reporters (and this isn't true of MY, who is pretty shrewd) is that when something really happens, they don't know how to report it. A hairstyle, a scandal involving a preacher, whether x of y is appealing to college students - in other words, questions that concern a good tv critic, writing about American idol - are well within the scope of political reporters. But politics isn't. They known nada.
Long ago, Sir Henry Maine said that politics was one third entertainment. He bemoaned that fact. There is, however, nothing bemoan-able about it. Politics is and always has been partly entertainment. But it isn't only entertainment. As the flood of bad economic news comes down, we are going to see worse and worse reporting, because we are going to be dealing with the non-entertainment part of politics. It will be interesting.
To DAMM George W Bush for all eternity as the second Herbert Hoover.
You're being really unfair to Herbert Hoover. Hoover, for all his faults, was not blind to the misery of the Depression. His problem was that he did not think the office of the presidency had the power to act to alleviate that misery.
Or to put it another way, while the country collapsed around him, Hoover didn't smirk once...
Re Herbert Hoover
Mr. Hoover at least had a record of accomplishment before he became president, unlike Mr. Bush who had a record of non-accomplishment before he became president. It is also, perhaps, a little harsh to place the blame for the depression entirely on Hoover. The seeds for the depression were sown during the speculative bubble which ran during the previous Coolidge administration.
re: Matt, we are talking about the investment banking system going under and being nationalized by the US govt.
Nonsense. We are talking about a shakeout in the industry-- much needed and long overdue. We may see Bear-Stearns go under and be acquired at fire sale prices by some other corporation. The others will retrench, lay off some workers, get out of mortgages and lay low for a while. The Fed will quietly provide bail-outs where it thinks it can do some good. There will be no nationalizations. Even the Democrats will shy away from something like that. (And does anyone in their right mind really want the federal government, which is notoriously incompetent at its own budget, in the docket for Wall Street's losses as well?)
Re: the current recession is the first recession in about 30 years that was not initiated by the fed.
The recession of 1990-91 was initiated by the collapse of the energy market, the deflating of a housing bubble and the S&L collapse-- not by any action of the Fed. The recession of 2001 was initiated by the collapse of the tech bubble, not by the Fed. The last recession created by the Fed was the double-dip recession of 1980-81.
By the way, I’ve found that I keep going back to this Business week article by Michael Mandel, How real was the prosperity, published back in January
(http://www.businessweek.com/magazine/
content/08_05/b406900001)
because it really is the best overview of what is happening. In two paragraphs, I think Mandel nails the very baseline of this recession – it will be the three trillion dollar recession:
“The rule for a prudent individual is simple: Don't spend more than you make. For a long time, the U.S. economy obeyed that rule. As far back as the 1960s, personal spending, adjusted for inflation, has basically tracked the overall growth of the economy, as measured by gross domestic product. Sometimes consumers would get ahead of the economy for a few years, and sometimes fall behind, but never for very long.
That pattern changed in the 1990s. As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap. If consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.”
Like a snake that has pounced on something that is too big, we collectively have that 3 trillion dollars half way down our throats – and we will have to swallow and digest it. Which is why the Fed is pursuing a policy that will create enough inflation to make that 3 trillion go down. The problem, of course, is that we aren’t a collective but individuals, and those individuals in the middle and working class are going to have to take deep cuts to their life styles. The political class will protect the life styles of the rich, so they won’t have to miss a vacation or buy one less yacht. When this recession is over, one of two things will have happened. Either Americans will address the structural wealth inequalities that make it the case that the American middle class must put itself into enormous debt just to keep running in place – or American inequality will have nicely increased. If it is the latter, the majority of Americans will find that being stripped of political rights during the Bush administration was only half of it – their economic rights, their traditional recourses to bankruptcy, etc., will have been nicely tucked in with ‘anti-terrorist’ laws to make their lives ever more miserable – and they will still reliably produce the Snopes crowd of witless right wingers who drool while watching Fox TV, a sort of fifth column within the middle class to bring it down into perpetual bondage.
We will find out. Can we live in a house divided, eighty percent suckers, twenty percent bloodsuckers?
6691.htm?chan=search
Didn't the two (or three?) small business corporations that had Bush as CEO all go bankrupt, and have to be bailed out by larger companies that were friendly with his father.
Guess Bush was just warmed up for his really big THIRD bankruptcy...
To state the converse of Napoleon's dictum, it's really bad to have an "unlucky" general...
"Um...this is excellent news for Hillary?"
I know it's stupid, but this bit kills me every time I read it. Kudos, sir!
How many bloggers know about economic issues? I mean the more political type bloggers. Atrios? Don't even get me started on McMegan. You'll get better info by reading Ccalculated Risk or The Big Picture.
We are in a democratic republic. We solve our problems by electing representatives that we believe are most capable of addressing them. In order for our system of government to work at all, we must be informed enough (not necessarily completely or expertly) to be able to choose those representatives. An informed electorate is key to our survival as a nation. Any sort of political discussion other than that which helps us become informed is pointless.
This is the entire purpose behind the liberal arts programs at fancy institutions like the ones that awarded degrees to Matt and McMegan. These programs were historically created to produce the life-long learning skills to necessary to create an informed electorate --- an electorate that can adapt to a changing world around them. It is why this form of education is (largely) unique to the US.
If political commentators like Matt or McMegan are unable (as opposed to unwilling) to learn enough about these economic issues to understand how we should elect our representatives, then this is a damning indictment of the quality of the modern liberal arts degree.
Bleh.
First, Feldstein is, in and of himself solely, was a major contributor to the current economic structure of the United States. Feldstein was himself the leading economist in the Reagan administration and to the 2000 Bush campaign - the major reason why he's not Fed chair is that his term as an AIG corporate director included 3 billion in earnings restatements. So, a not small part of any current economic problems explicitly goes back to Feldstein personally - the economic structures are largely either his personal creation or that of his students (Larry Summers, Glenn Hubbard, Larry Lindsey, Larry Kotlikoff, etc).
So, what NOW he sees a severe recession? Feldstein only began to yammer on about problems in the housing markets when they became perfectly apparent to everyone. Go look at his writings from before 2007 - there's not much evidence he had much of a clue. And his economic policy proposals from 2004-2006 are pretty much standard issue neoclassical economic fare: Social Security privatization, low capital gains taxes, keep Bush's tax cuts, blah blah blah. Some babbling from Feldstein about the trade deficit and low savings rates but not much challenging or deep thought about what that might mean.
Okay, MY is a foreign policy specialist and I don't expect him to focus on the economy. And Iraq is probably the most significant FP disaster since Vietnam, so I can't call it unimportant. But is has been eclipsed in average voters minds by the economy. Obama as the change candidate, I think, is getting an advantage from the economy he may neither understand or deserve.
But Bushco has created a revolutionary climate, both in FP and economic policy, and the Revolution is here. By Revolution I don't mean pitchforks at the Bastille, but a period when the old paradigms fail and must be replaced.
Someone will creating the new paradigm and the new economy. It better be the fucking Democrats. Obama has been relatively weak on the economy, certainly not radical, and he needs to grab this issue hard. This is what will build the mandate, and create a new progressive supermajority.
Obama has to have a first hundred days like FDR or he, and the average American, will get totally screwed.
Unless Obama is some kind of corporate whore. Who knows? I am not that optimistic.
jonf, to be precise, although they put a fig leaf on it, the fed - on an emergency vote - kept bear stearns from going under immediately.
maybe it will be sold in a few days, maybe it won't: there is a due diligence obligation to the shareholders, after all.
meanwhile, the fig leaf - jp morgan - has no risk (it's a non-recourse loan), meaning that the fed is potentially going to hold the bag on bear stearns.
while that's not quite nationalizing, it's not quite a long overdue shakeout, either: letting bear stearns go would have been a shakeout but the fed judged (rightly or wrongly) that the risk of a cascade of failure was so great as to justify a bailout.
Re JonF's comment "Nonsense. We are talking about a shakeout in the industry-- much needed and long overdue. We may see Bear-Stearns go under and be acquired at fire sale prices by some other corporation. The others will retrench, lay off some workers, get out of mortgages and lay low for a while"
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Not necessarily. As I noted yesterday in comments to an earlier thread ("The Romance of Empire"), word from London is that ANOTHER Big US investment bank is in trouble:
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"You can safely assume that Bear is not alone here," said an interest rate strategist at one European investment bank in London, who declined to be identified.
"We have been setting prices in swaps markets in recent days that were designed to say 'no deal' and at least one other U.S. investment bank -- not Bear -- dealt. That is very worrying if they needed the cash that badly. We have been forced to review our counterparty limits ever since."
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Most of the initial information has been coming out of London newspapers -- US papers seem to have been quiet until UK puts the info out and Drudge posts it. (The early warning on Bear Stearns was from the UK). The SPECULATION I've seen so far is that Lehman's is probably the outfit in trouble (it fell by 15% yesterday).
Bear Stearns is just the first domino. If nobody is willing to buy it within the next month, it's going down and will very likely be followed by Lehman Brothers. Every dollar in the Carlyle Fund that went belly up a couple of weeks ago was leveraged 32 times. The only reason some of our biggest banks are holding on is because the Fed has already stepped in to provide them with hundreds of billions of dollars in capital. In short, the financial sector is in a world of trouble and the structural changes required to fix are going to cause lots of people lots of pain.
In the meantime, we haven't even seen the housing market bottom out yet. Prices have just started falling and have a long way to go. Hundreds of thousands of homeowners are going to end up underwater, where their mortgage is greater than their property is worth. It's a crisis of epic proportion.
Meanwhile, Bush pulls his head out of his ass every week or two, sticks his finger in the air, and pronounces that even though the economy is "struggling" now, the fundamentals are sound and being "the optimistic kind of guy" he is, he thinks things will turn around quickly, especially once people start spending their tax rebates. Nice try, Georgie-boy. They won't.
Most politicians and most of the punditry is still in denial about just how bad things are getting. The first poster in this thread has it right--by summer the economy will be the issue and everything else will pale in comparison.
Re: The problem, of course, is that we aren’t a collective but individuals, and those individuals in the middle and working class are going to have to take deep cuts to their life styles.
If the remedy is really inflation then most of the pain will be felt by creditors: in other words, by the rich. The middle and working class, to the extent that they are debtors, will see their debts inflated away.
Re: As I noted yesterday in comments to an earlier thread ("The Romance of Empire"), word from London is that ANOTHER Big US investment bank is in trouble:
Rumors are easy to spread-- and financial analysts are not above spreading them for selfish purposes. Before this turns into a Chicken Little party, let's wait until the facts are known before donning sackcloth and ashes.
Re: The SPECULATION I've seen so far is that Lehman's is probably the outfit in trouble (it fell by 15% yesterday).
Lehman's has taken some big hits in the mortgage market, no doubt about it. But again, we should wait until the facts are in before jumping to the conclusion that its losses are of the same magnitude that have hit BS.
Re: If nobody is willing to buy it within the next month, it's going down and will very likely be followed by Lehman Brothers.
I suspect that the deal is already done for JP Morgan Chase to acquire BS. Hence their rather unique and odd role in the Fed's actions yesterday.
Re: Prices have just started falling and have a long way to go.
And may take a very long time get there, since homewoners seem determined to be stubborn about this. Last year there were all kinds of For Sale signs up in our neighborhood, people evidently imagining they could cash in on the housing boom just before it went bust. When they couldn't sell their houses they took down the signs and that was that. Sure, some people really need to sell because they havet o move, or because they can't afford their house. But the vast majority of homeowners are not in that boat: they bought long before the run-up in prices and so can easily sit out the bust without taking a hit. So my guess is that housing prices will drift downward very gradually (with very localized exceptions like Cleveland and Detroit where you can't even give a lot of badly damaged real estate away). Eventually (2010?) inflation will catch up with the falling house prices and the market will stabilize.
Re: the economy will be the issue and everything else will pale in comparison.
The economy already is THE issue and everything already has paled before it. This is what has driven Iraq off the front pages to the disappointment of those (like Matt) who had hoped to make it THE issue of 2008 as it was in 2006. Of course this bodes ill for the GOP. Now for a prediction of my own: this will be an unusual recession in that it will primarily be a Wall Street recession, bringing heavy losses to the banks and the investing classes. We will not see any vast increase in unemployment (though of course it will go up some, especially in anything housing related). Reason being, we never had a job boom to start with. Many companies (again, excepting housing) stayed very lean after the 2001 recession and so do not have a lot of extra bodies to lay off. This in turn will keep the economy chugging at a very low level, basically flat, much as Japan's economy chugged listlessly all through the 90s after their real estate and banking bust. On the other hand it will be a very long time (2011? 2012?) before we see anything like a solid recovery.
RE JonF's comment "I suspect that the deal is already done for JP Morgan Chase to acquire BS. Hence their rather unique and odd role in the Fed's actions yesterday."
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My understanding is that the Fed could not bail Bear Stearns out directly so it used JP Morgan as a middleman. JP Morgan has access to Fed's discount window, Bear Stearns does not. So JP Morgan took out a "loan" from the Fed on Bears behalf and put up a bunch of Bear Stearn's dreck as "collateral". Which mean US taxpayer stands to take it in the shorts if Fed has to sell Bear's dreck to recoup the loan.
What bothers me the most is the asymmetry here. When investment banks make a profit, essentially all the profit goes to the executives, traders, and stockholders. Any attempt to tax these profits is fiercely resisted. Yet, when banks start to run losses, they are bailed out by the Federal government - that is, the taxpayers.
This is not only immoral, but it encourages bad and risky behavior. Why not make dangerous gambles if Uncle Sam picks up the losses, while you get to keep your winnings?
The government should demand an equity stake in these financial firms in exchange for a bailout. They should have demanded the same from Chrysler in the 1980s. No more free rides for rich executives and corporations.
unlike Mr. Bush who had a record of non-accomplishment before he became president.
A little worse than that.
He lost his oil investors over $200,000,000. An impressive figure considering that he was widely considered to be a jackass. (One of the chief investors in his baseball deal only came in to the deal after he was assured that Bush would have nothing to do with actual management.)
Don, JonF, the reason that JP Morgan was the middleman is that Bear Stearns already used JP Morgan to clear trades (from the wall street journal tick-tock):
J.P. Morgan's risk officers were familiar with Bear's collateral because J.P. Morgan was the clearing agent for its trades; thus, J.P. Morgan seemed to be in good position to lend Bear money, say people familiar with Mr. Schwartz's thinking.
http://online.wsj.com/article/SB120550108028136579.html
Maybe Morgan will buy Bear Stearns, maybe it won't, but it certainly wasn't a done deal at 7 a.m. on friday when the fed agreed to bail Bear Stearns out.
The Journal has a good assessment of potential buyers, here:
http://online.wsj.com/article/SB120553736208238121.html
We may see Bear-Stearns go under and be acquired at fire sale prices by some other corporation.
Normally, I'd agree, but the Fed just loaned a lot of money to Bear-Stearns and took their essentially worthless mortgage bond portfolio as collateral. If B-S goes bankrupt, the US, as B-S's main creditor, is going to be the institution left to get all of its assets. And that raises the specter of nationalization of a major investment bank.
I'm not saying it will happen, but I am saying that the possibility is out there on the horizon.
JonF - you still seem to be living in the 70s. Then, it was true, the Middle Class benefited from the inflation. Why? Because wages kept pace, within a point or two, of inflation - and were a major driver of inflation.
That hasn't happened in eight years. What has happened is that your neighbors, with the for sale signs, took out 800 billion dollars in equity loans. So, we have falling asset prices + inflation +stagnant wages + rising interest rates on all consumer loans, from credit cards to home equity loans.
This is not a recipe for a ho hum attitude. If you don't adjust your way of thinking to the composition of the economy today, then you will miss the signs - but you won't miss the fall out!
From the Wall Street Journal link howard gave above:
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"The Fed, not J.P. Morgan, is bearing the risk of the loan. It is the first time since the Great Depression that the Fed has lent in this fashion to any entity other than a bank....
Exact terms weren't disclosed, but the amount is limited only by how much collateral Bear can provide, Fed officials said."
FED=US Taxpayers
At least now we know why they had to shoot Eliot Spitzer in the kneecaps earlier in the week.
Heh heh heh
Considering Spitzer's one of the few people to successfully prosecute the bastards, that's not at all surprising.
Here here Walker. The profound and almost universal ignorance of the roots of our financial and thus economic problems lies in the end to the failure of the Democratic party to hold firm to it's post FDR roots.
Clinton nurtured the Wall Street Paradigm and embraced Free Market Fundamentalism. In congress, except perhaps from Henry Gonzales, there was silence as well. Barney Frank to this day champions the GSE's. The bankrupt epicenter of Greenspan's insane plan to keep the credit bubble growing forever.
Dems just as much as Republicans knelt to kiss the ring of The Maestro. About the only opposition to the inevitable fiasco came from Libertarians of respectable and less respectable origins, ie. gold bugs and hard money ideologs.
The Federal deficit is headed towards a billion a year so of course we won't be able to afford any stinking New Deal this time around. Grover Norquist wins. The only question is how bad the social dislocation and breakdowns will be. The worse they are the more Homeland Security will be be sent into the breach. .
"Okay, MY is a foreign policy specialist and I don't expect him to focus on the economy."
That would be reasonable - if he knew anything about foreign policy, which he clearly doesn't since everything he's said about Iran, Afghanistan and Pakistan has been utterly ignorant of the facts.
Matt is good at one thing - making pronouncements about domestic politics. Period.
He's not a pundit - he's a horse race handicapper.
Meanwhile, I got an email from an acquaintance today quoting George Ure, a longwave specialist, saying that if you look at where gold is today and where is should be - somewhere over $2,000 an ounce - we're really looking at what called be the "Second Depression", rather than a recession.
Here's a quote from a Counterpunch article from way back in February of last year:
"There are many similarities between the pre-Depression era and our own. Paul Alexander Gusmorino says:
"The Great Depression was the worst economic slump ever in U.S. history, and one which spread to virtually all of the industrialized world. The depression began in late 1929 and lasted for about a decade....The excessive speculation in the late 1920's kept the stock market artificially high, but eventually lead to large market crashes. These market crashes, combined with the misdistribution of wealth, caused the American economy to capsize.
"(The income disparity) between the rich and the middle class grew throughout the 1920's. While the disposable income per capita rose 9% from 1920 to 1929, those with income within the top 1% enjoyed a stupendous 75% increase in per capita disposable incomeA major reason for this large and growing gap between the rich and the working-class people was the increased manufacturing output throughout this period. From 1923-1929 the average output per worker increased 32% in manufacturing8. During that same period of time average wages for manufacturing jobs increased only 8% (This ultimately causes a decrease in demand and leads to growth in credit spending)
The federal government also contributed to the growing gap between the rich and middle-class. Calvin Coolidge's (pro business) administration passed the Revenue Act of 1926, which reduced federal income and inheritance taxes dramatically(At the same time) the Supreme Court ruled minimum-wage legislation unconstitutional.
The bottom three quarters of the population had an aggregate income of less than 45% of the combined national income; while the top 25% of the population took in more than 55% of the national income...Between 1925 and 1929 the total credit more than doubled from $1.38 billion to around $3 billion". (Just like now, the growing wage gap has spawned massive speculative bubbles as well as a steady up-tick in credit spending. Wage stagnation forces workers to seek other opportunities for getting ahead. When wages fail to keep pace with productivity then demand naturally decreases and business begins to flag. The only way to spur more buying is by easing interest rates or expanding personal credit, and that is when equity bubbles begin to appear. That's what happened to the stock market before 1929 as well as to the real estate market in 2007. The availability of credit has kept the housing market afloat but, ultimately, the result will be the same.
On Monday October 21, 1929, the over-valued stock market began its downward plunge. It managed a brief mid-week comeback, but 7 days later on Black Tuesday it plummeted again; 16 million shares were dumped and there were no buyers.
The game was over.
Confidence evaporated overnight. People stopped buying on credit, the bubble-economy collapsed, and the mighty locomotive for growth, the American consumer, hobbled into the Great Depression. Tariffs were thrown up, foreigners stopped buying American goods; banks closed, business went bust, and unemployment skyrocketed. Tens years later the country was still reeling from the implosion.
Now, 77 years later, Greenspan has led us sheep-like to the same precipice. The economic dilemma we're facing could have been avoided if the expansion of personal credit had been curtailed by prudent monetary policy at the Federal Reserve and if wealth was more evenly distributed as it was in the '60s and '70s. But that's not the case; so we're headed for hard times."
My understanding is that the Fed could not bail Bear Stearns out directly so it used JP Morgan as a middleman. JP Morgan has access to Fed's discount window, Bear Stearns does not. So JP Morgan took out a "loan" from the Fed on Bears behalf and put up a bunch of Bear Stearn's dreck as "collateral". Which mean US taxpayer stands to take it in the shorts if Fed has to sell Bear's dreck to recoup the loan.
Exactly. Bear Stearns is an investment bank so isn't covered by the same kind of insurance regular banks have. The Feds used JP Morgan as a middle man to funnel the money to Bear Stearns. If Bear goes down, it takes billions of taxpayers' money down with it. Oh joy.
Bear Stearns has about 47 billion in debt, which makes it a pretty hard pill to swallow. Who, pray tell, is going to buy it? Most U.S. banks are already in enough trouble.
This isn't going to be a recession that will affect one or two sectors of the economy. Housing is a problem not only because housing prices are going to decline precipitously, but also because people used their houses as ATMs while the value was going up, up, up and nobody thought the bubble would burst. This helped fuel consumer spending. Now that the bubble has burst, people aren't going to be able to spend that money. Credit card debt is already at record highs, and credit card companies are looking to gouge card holders to the highest extent possible to make up for losses elsewhere. Combine tightening credit with rising inflation and stagnant wages and the U.S. economy, which is based largely on consumption, is going to go down the drain.
And, of course, the government is totally broke because of the happy-go-lucky spending spree of the Bush years, so there won't be much the government can do to stimulate the economy.
Not a pretty picture. I can see why a lot of people are in denial.
"What bothers me the most is the asymmetry here. When investment banks make a profit, essentially all the profit goes to the executives, traders, and stockholders. Any attempt to tax these profits is fiercely resisted. Yet, when banks start to run losses, they are bailed out by the Federal government - that is, the taxpayers."
Bear's stockholders are getting crushed; the bailout doesn't change that, it just buys time to avoid a broader systemic problem. The largest individual shareholder, AFAIK, is Joe Lewis, who upped his stake in the company to 7 or 8%, at an average cost of about $100. Bear closed at $30 yesterday. It could well go to $0.
"Clinton nurtured the Wall Street Paradigm and embraced Free Market Fundamentalism. In congress, except perhaps from Henry Gonzales, there was silence as well. Barney Frank to this day champions the GSE's. The bankrupt epicenter of Greenspan's insane plan to keep the credit bubble growing forever."
The GSEs aren't an example of "Free Market Fundamentalism" -- you do realize the "G" there stands for "government", right? The U.S. government has had massive involvement in creating and promoting the secondary market for mortgage-backed securities -- one of several policies it has implemented to promote homeownership (the GSEs have also had a secondary function in providing sinecures for well-connected Democrats, e.g., Franklin Raines). If there had been a true free market in mortgages, we wouldn't be having this painful de-leveraging now: mortgage rates would be around 9% instead of 6%; maybe 45-50% of Americans would own homes instead of 66%; no mortgage lender would have taken no-money-down or NINJA loans, and all the marginal borrowers who are losing their houses now would have been renters all along.
Josh G: "What bothers me the most is the asymmetry here. When investment banks make a profit, essentially all the profit goes to the executives, traders, and stockholders. Any attempt to tax these profits is fiercely resisted. Yet, when banks start to run losses, they are bailed out by the Federal government - that is, the taxpayers."
Fred: "Bear's stockholders are getting crushed; the bailout doesn't change that, it just buys time to avoid a broader systemic problem. The largest individual shareholder, AFAIK, is Joe Lewis, who upped his stake in the company to 7 or 8%, at an average cost of about $100. Bear closed at $30 yesterday. It could well go to $0."
That's only part of the picture, though. First of all, you're overlooking the executives and traders at Bear Stearns. They've drawn countless millions of dollars in "performance-based" compensation over the past couple of years, on a basis that we now know to have been false. Before any bailout commences, any Bear Stearns employee should be required to pay back any bonus money from the past 5 years that exceeds double the median income in that region of the country. For instance, CEO James Cayne should have to pay back the over $100 million in bonuses he received over the past five years (http://www.forbes-global.com/lists/2006/12/9X3I.html) and be allowed to keep only his $200K annual base salary. Otherwise, no bailout.
Furthermore, what happens if Bear Stearns does manage to recover? Shouldn't the taxpayers get an equity stake in exchange for all the risk we're being asked to assume here? If they have to go to the Fed for a loan, that means they couldn't get one from a private company. Which means we, the taxpayers, are basically acting as venture capitalists. Where's our liquidation preference?
I'm tired of this double standard where the rich get bailed out at the drop of a hat and the middle class gets nothing.
"That's only part of the picture, though. First of all, you're overlooking the executives and traders at Bear Stearns. They've drawn countless millions of dollars in "performance-based" compensation over the past couple of years, on a basis that we now know to have been false."
Why do you say it was false? It's perfectly possible (if perhaps imprudent) to make money for years being highly-leveraged, and then get crushed when the credit markets tighten. That's what happened to Bear Stearns.
"Otherwise, no bailout."
You're missing the point. Bernanke doesn't care about Bear's shareholders or employees. The shareholders will probably be wiped out and a good chunk of the employees will probably get the ax. Bernanke's bailout was to prevent a systemic domino effect of margin calls.
"Furthermore, what happens if Bear Stearns does manage to recover?"
Highly doubtful.
"Shouldn't the taxpayers get an equity stake in exchange for all the risk we're being asked to assume here?"
That has been the case in the past, e.g. Chrysler's bailout, or the bailout of the airlines post 9/11.
This Barron's article does a good job of explaining why the Fed did bailed out Bear Stearns, "Bear Facts About the Fed's Priorities". Excerpts:
In Thursday's edition of the Financial Times, the lead story declares: "The U.S. will avoid a serious slump similar to the Japanese recession in 1990s because U.S. policy makers will do whatever it takes to avert such an outcome, the Federal Reserve believes." [...]
[T]he FT declares that U.S. economic policy makers have decided what is the clear and present danger facing the American economy—a debt deflation similar to what beset Japan in the previous decade. (Debt deflation occurs when liquidation of declining assets to meet debt obligations creates a vicious circle of price declines.)
[...]
What's next? Somehow, the Fed will try to funnel liquidity where it's needed most. That's its key priority currently, notwithstanding the dollar, gold or oil.
The key conclusion to be taken away is that the Fed sees its No. 1 problem as debt deflation and will pull out all the stops to counter it. Whether you agree or not, that's apparently the way it is. And the Bear Stearns bailout bears this out.
We are heading to the 2nd Great Depression, but made even worse, because we have trillions in obligations to foreign investors with either: (a) ICBM's aimed at us; (b) civilians willing to take a suit case nuke and attack us.
Folks - social breakdown is going to happen in the US.
I think I already missed the bulk of the argument, but for those of you who missed this tidbit in the WaPo (pg A9 in the paper version):
Chinese Brokerage Might Cancel Deal to Invest $1Billion in Bear Stearns.
As Fallows has amply argued in his extensive reporting, the chinese investment in the national investment/security spending is one of our life supports. I may be overly simplifying, but I think our Asian partners skepticism of our economic stability is just as important as our own opinions/strength of economic stimulation/proactivity.
to return to Josh G's point, despite Fred's belief that bear stearns was simply making money on leverage and has now been whiplashed by the market, bear stearns (like every major investment bank other than goldman) made money by dealing in junk securities that were labelled as AAA. Since it was obvious to people like me - people in another walk of life altogether - that the stuff was junk, it was obvious internally at bear stearns as well, and they simply chose to ignore through the convenience of marking to model.
if they had marked to a real market, the bonuses would have been smaller; the worst that happens now is that senior management collected the bonus and will now lose its job. i'd love to see a shareholder launch a suit forcing the bonuses to be partially disgorged.
Re: Normally, I'd agree, but the Fed just loaned a lot of money to Bear-Stearns and took their essentially worthless mortgage bond portfolio as collateral.
The collateral details were not disclosed so to you are jumping to conclusions about it. Moreover by law the collateral must be of high quality-- it can't be "dreck". It will also have received a "haircut" a discount designed to protect against a future decline in value. Sould Bernanke or his collegaues have flouted these requirements they would be lawbreakers with very severe consequences to their own persons. My guess is they hewed to the law and demanded sound collateral.
Re: That hasn't happened in eight years.
Um, yes it has, Wages have (barely) kept pace with inflation. There is a lag factor of course and right now the current enhanced inflation has not yet made its way through the economy, but when that happens, wagse will rise accodringly. They have to: you can't have inflation that leaves wages out. They're too big a factor and would stop inflation dead in its tracks if they stayed fixed.
Re: What has happened is that your neighbors, with the for sale signs, took out 800 billion dollars in equity loans.
I imagine that you have gone door to door in my neighborhood and asked?
Re: We are heading to the 2nd Great Depression
There are reasons we will not have another Great Depression:
A. The economy is vastly more diversified so that one sector (or region) can go down while others continue to function.
B. Unemployment insurance, Social Security and the FDIC prevent wholesale deflation. The bank failures of the Great Depression, which vaporized billions of dollars, are simply not possible today.
C. The political leadership is profoundly sensitive to economic upheaval (the lesson the GOP learned from the 30s) and will act with alacrity, if not always with success, when danger threatens. You will not get laissez faire sermons about liquidating everything as some were giving well into the 30s.
The closest we have come to replicating the conditions of the late 20s came in the late 80s: a depressed farm economy, growing class disparities, GOP incompetence at the helm, a stock market crash (1987) and a cascade of insolvent banks (the S&Ls). A recession was the result. But no depression. Ask yourself why if you do not believe my above comment.
Comments closed March 29, 2008.
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Heads in the Sand
Um...this is excellent news for Hillary?
Posted by Bill | March 15, 2008 11:59 AM