Friday, November 28, 2008
This is really bad news for more than just these particular property owners. When businesses go out of business, employees lose their jobs. Communities and towns lose the tax revenue, which cause problems for school budgets and the social services.
Yes lots of companies have survived plenty of downturns, and this is no different, but a lot of economists see this recession playing out like never before. In the past, when businesses hit rough patches, owners negotiated with banks or refinanced their loans. But many banks are no longer hold the loans they made. Over the past decade, banks have increasingly bundled mortgages and sold them to investors. Pension funds, insurance companies, and hedge funds bought the seemingly safe securities and are now bracing for losses that could ripple through the financial system.
The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Thursday, November 27, 2008
The measure then went to the Iraqi Parliament for approval, (not the U.S. Congress of coarse) yet success of the measure was not a given.
As it turns out, it passed rather easily.
Iraq's parliament approved Thursday a security pact with the United States that lets American troops stay in the country for three more years.
The vote in favor of the pact was backed by the ruling coalition's Shiite and Kurdish blocs as well as the largest Sunni Arab bloc, which had demanded concessions for supporting the deal.
The breakdown of the vote was not immediately available. But parliament speaker Mahmoud al-Mashhadani said an "overwhelming majority" of lawmakers who attended the session voted in favor. Parliament's secretariat, which counted lawmakers as they entered the chamber, said 220 out of 275 legislators attended.
An AFP report added:
The vote came after a flurry of last-minute negotiations in which the main Sunni parties secured a package of political reforms from the government and a commitment to hold a referendum on the pact in the middle of next year.
Should the Iraqi government decide to cancel the pact after the referendum it would have to give Washington one year's notice, meaning that troops would be allowed to remain in the country only until the middle of 2010.
It prompted Spencer Ackerman to respond, "That would be ... give or take a few days ... why, sixteen months after Barack Obama takes office! Happy Thanksgiving from Baghdad, Barack
Nearly 150 years ago, in one of the darkest years of our nation’s history, President Abraham Lincoln set aside the last Thursday in November as a day of Thanksgiving. America was split by Civil War. But Lincoln said in his first Thanksgiving decree that difficult times made it even more appropriate for our blessings to be – and I quote – "gratefully acknowledged as with one heart and one voice by the whole American people."
This week, the American people came together with families and friends to carry on this distinctly American tradition. We gave thanks for loved ones and for our lasting
pride in our communities and our country. We took comfort in good memories while looking forward to the promise of change.
But this Thanksgiving also takes place at a time of great trial for our people. Across the country, there were empty seats at the table, as brave Americans continue to serve in harm’s way from the mountains of Afghanistan to the deserts of Iraq. We honor and give thanks for their sacrifice, and stand by the families who endure their absence with such dignity and resolve.
At home, we face an economic crisis of historic proportions. More and more Americans are worried about losing a job or making their mortgage payment. Workers are wondering if next month’s paycheck will pay next month’s bills. Retirees are watching their savings disappear, and students are struggling with the cost of tuition.
It’s going to take bold and immediate action to confront this crisis. That’s why I’m
committed to forging a new beginning from the moment I take office as President of the United States. Earlier this week, I announced my economic team. This talented and dedicated group is already hard at work crafting an Economic Recovery Plan that will create or save 2.5 million new jobs, while making the investments we need to fuel long-term economic growth and stability.
But this Thanksgiving, we are reminded that the renewal of our economy won’t come from policies and plans alone – it will take the hard work, innovation, service, and strength of the American people.
I have seen this strength firsthand over many months – in workers who are ready to power new industries, and farmers and scientists who can tap new sources of energy; in teachers who stay late after school, and parents who put in that extra hour reading to their kids; in young Americans enlisting in a time of war, seniors who volunteer their time, and service programs that bring hope to the hopeless.
It is a testament to our national character that so many Americans took time out this Thanksgiving to help feed the hungry and care for the needy. On Wednesday, I visited a food bank at Saint Columbanus Parish in Chicago. There – as in so many communities across America – folks pitched in time and resources to give a lift to their neighbors in need. It is this spirit that binds us together as one American family – the belief that we rise and fall as one people; that we want that American Dream not just for ourselves, but for each other.
That’s the spirit we must summon as we make a new beginning for our nation. Times are tough. There are difficult months ahead. But we can renew our nation the same way that we have in the many years since Lincoln’s first Thanksgiving: by coming together to overcome adversity; by reaching for – and working for – new horizons of opportunity for all Americans.
So this weekend – with one heart, and one voice, the American people can give thanks that a new and brighter day is yet to come.
Wednesday, November 26, 2008
Teams of heavily armed gunmen stormed luxury hotels, a popular tourist attraction and a crowded train station in at least seven attacks in India's financial capital of Mubai, India. The terrorists have killed at least 78 people and wounding at least 200, officials said Thursday.
The gunmen were specifically targeting Britons and Americans, media reports said, and may be holding hostages.
Reports say that the gunmen also attacked police headquarters in south Mumbai, the area where most of the attacks, which began late Wednesday and continued into Thursday morning, took place.
"We are under fire, there is shooting at the gate," said constable A. Shetti by phone from police headquarters.
Hours after the first attacks, A.N. Roy, a senior police officer, said police continued to battle the gunmen. "The terrorists have used automatic weapons and in some places grenades have been lobbed, the encounters are still going on and we are trying to overpower them," Roy said.
The motive for the attacks was not immediately clear but Mumbai has frequently been targeted in terror attacks, often blamed on Muslim militants, including a series of blasts in July 2007 that killed 187 people.
This Thanksgiving, progressives have a lot to be thankful for.
Here's their list:
We're thankful for the thousands of protesters who took to the streets across America to push for marriage equality.
We're thankful for Tina Fey.
We're thankful to be liberal hacks.
We're thankful that our troops will be able to get the education they so richly deserve.
We're thankful that reality still has a liberal bias.
We're thankful that there are only 55 days left until the end of the George W. Bush presidency.
We're thankful for the progressive mandate to govern.
Karzai was quoted as saying:
"If there is no deadline, we have the right to find another solution for peace and security, which is negotiations."Now Karzai didn't specify when he wants the deadline set by. Currently the international community and the United States are ramping up military and aid efforts for Afghanistan. The U.S. now has some 32,000 troops in the country, but U.S. military leaders say up to 20,000 more American forces could be sent to Afghanistan in 2009.
President-elect Barack Obama has made it clear that he plans to send more support to Afghanistan. It is interesting to see how this will affect Obama's plans.
The Afghani president also told the U.N. team that airstrikes by international military forces and searches of Afghani homes must stop. President Karzai has made this demand repeatedly.
Rachel Maddow spoke about this on her television show:
The President-elect tried to reassure Americans that "help is on the way" for the economy. He said during the news conference:
"I was elected with the charge of getting this economy back in shape."The announced panel will be called the President's Economic Recovery Advisory Board, and it is intended to help Obama bring stability to the financial markets and create jobs. Former Federal Reserve chairman Paul Volcker will be the head of this advisory board, while it's top staff official will be Austan Goolsbee, a University of Chicago economist.
"We are going to implement starting Day One when I come into office."
Watch the video here:
President-elect Barack Obama also pushed back against criticism that he was recycling former Clinton administration officials as he builds his new economic team. He said his Cabinet would "combine experience with fresh thinking."
CNN’s Ed Henry challenged President-elect Barack Obama on the naming of some recent appointees who have had experience serving in the government. “What do you say to your supporters looking for change?” Henry wondered. Obama noted that there is a “conventional wisdom floating around Washington that ‘well, there’s a recycling of people who were in the Clinton administration.’”
Addressing the criticism directly, Obama explained:
"It would be surprising if I selected a Treasury secretary who had had no connection with the last Democratic administration because that would mean the person had no experience in Washington whatsoever. And I suspect you would be troubled and the American people would be troubled if I selected a Treasury secretary or a chairman of the National Economic Council…who had no experience whatsoever."Obama said his personnel selections will “combine experience with fresh thinking.” But he underscored that the buck stops with him:
"But understand where the vision for change comes from first and foremost. It comes from me. That’s my job — is to provide a vision in terms of where we are going and to make sure that my team is implementing it."
In an interview with Barbara Walters to air Wednesday, Obama said bank executives should make sacrifices because so many other people are struggling as the nation's economy slips further. Some financial firms, including Goldman Sachs, the Swiss bank UBS and the British bank Barclays, have said they aren't handing out annual bonuses to top executives, and Obama encouraged more to follow."I think that if you are already worth tens of millions of dollars, and you are having to lay off workers," Obama said, "the least you can do is say, 'I'm willing to make some sacrifice as well, because I recognize that there are people who are a lot less well off, who are going through some pretty tough times.'"
As shown by Nate at FiveThirtyEight.com, Norm Coleman's campaign opened up a gap yesterday in the number of ballots challenged in the statewide recount. While Coleman's lawyers certainly have the right and responsibility to put a good public face on it, the numbers don't lie: if Coleman challenges as many or more ballots than Democratic opponent Al Franken does, regardless of the merits of those challenges, he can make a case in the media that the recount worked, Coleman won, and should be re-seated in the Senate come January. Such a press conference would no doubt be accompanied by a fourth declaration of victory before the results are actually known.
But a view from inside the recount operation shows just how the Coleman operation is working: not just challenging questionable ballots, but challenging ballots that are clearly Franken votes for the sake of challenging Franken votes, tamping down any possible gains Franken might make in the official tally.
Emerging accounts indicate that ballots with clear intent -- an X instead of a filled-in circle, with no other confusing marks, for example -- are being challenged by Coleman-affiliated observers. One account indicated that a Coleman observer challenged a clear Franken vote because apparently, "the dots were too big." In another case, a Coleman volunteer challenged a ballot and was told by the attorney on hand that it was a clear Franken vote, but if they wanted to challenge it "tit-for-tat", to go ahead.
Do these accounts amount to a Franken advantage despite the official margin remaining right around where it was before the recount? Possibly. Some of Franken's challenges have no doubt been frivolous as well. How many is the question. With thousands of ballots now being challenged, are Franken's challenges, say, worth 500 votes more than the run-up-the-numbers challenge system apparently in use by Team Coleman once the state canvassing board reviews them? 400 votes? 300? The accounts relayed by sources close to the recount process indicates that Franken's operation may be making more valid challenges, but in a race this tight, exactly how many more is the million-dollar question.
And for those who thought this campaign season would be over on November 5th, think again.
The administration has intentionally withheld the official English translation of the agreement from both Congress and the public in an effort to suppress a public dispute with the Iraqis until after the Iraqi parliament votes. The White House National Security Council said it had purposedly held up the translation's release until the Iraqi parliament votes. My question is why?
What is the Bush administration hiding? Why should we not know what Bush is signing us up for? What if the Iraqi's are agreeing to something that Barack Obama and the majority of Americans will not agree too?
U.S. officials have told McClatchy Newspapers that the Bush administration was eager to complete the deal before it leaves office in January and acquiesced to many Iraqi demands.
McClatchy's Baghdad bureau last week produced an unofficial English translation of the agreement based on the Arabic text. McClatchy on Tuesday also obtained an official English version.
According to McClatchy Newspapers, that upon studying the agreement, and speaking to the Iraqi government, it becomes pretty clear that the Bush administration has very different interpretations of some very key provisions than Iraqi Prime Minister Nouri al Maliki's and his government has. In fact Iraqi lawmakers might actually balk at approving the pact or delay a vote if they were to understand the Bush administration's interpretations. The Iraqi's definitely would post-pone the vote while seeking clarification from the U.S. government.
Among the areas of dispute are:
- Iraqi legal jurisdiction over U.S. troops or military contractors who kill Iraqis on operations. The agreement calls for Iraq to prosecute U.S. troops according to court procedures that have yet to be worked out. Those negotiations, administration officials have argued, could take three years, by which time the U.S. will have withdrawn from Iraq under the terms of the agreement. In the interim, U.S. troops will remain under the jurisdiction of America's Uniform Code of Military Justice.
- A provision that bars the U.S. from launching military operations into neighboring countries from Iraqi territory. Administration officials argue they could circumvent that in some cases, such as pursuing groups that launch strikes on U.S. targets from Syria or Iran, by citing another provision that allows each party to retain the right of self-defense. One official expressed concern that "if Iran gets wind that we think there's a loophole there," Tehran might renew its opposition to the agreement.
- A provision that appears to require the U.S. to notify Iraqi officials in advance of any planned military operations and to seek Iraqi approval for them, which some U.S. military officials find especially troubling, although Robert Gates, the secretary of defense, Army Gen. David Petraeus, the head of the U.S. Central Command, and Army Gen. Raymond Odierno, the top U.S. commander in Iraq, all have endorsed it.
That said, it is important that some deal is put in place. The current United Nations mandate governing the U.S. troop presence in Iraq expires on December 31st, and there needs to be something in place to govern how we end this useless war and occupation.
Sunni Arab lawmakers have listed a host of demands, varying from sweeping political reforms to amnesty for prisoners who number about 16,000, and a national referendum on the pact, even if the parliament passed it; in exchange for supporting the proposed deal.
This proposed deal would let American troops stay in Iraq through 2011, meeting a longtime Iraqi demand for a clear timetable for their exit. The 275-member assembly is due to vote by a show of hands on the wide-ranging accord, which would require US troops to completely withdraw within three years and pull out from Iraqi cities by the end of June.
Maliki's Shiite bloc and its Kurdish allies hold enough seats to propel the pact through parliament, but Maliki needs Sunni votes to prevent sharpening the country's sectarian and ethnic divides. In addition, Iraq's most influential Shiite cleric, Grand Ayatollah Ali Sistani, has said the pact should have national consensus. Passage by such a thin margin would highlight a failure to achieve the consensus that Maliki seeks.
But the intensity of political maneuvering among Iraqi factions contributed to deep uncertainty about the outcome of a vote scheduled for Wednesday that will determine the status of some 150,000 troops in Iraq after years of war. One Shiite lawmaker said that the government could only count on 139 MPs to vote for the measure, which would mean that it would just barely pass if most of the 275 MPs attended the session. If it does pass, it will pass with a simple majority and not consensus.
It has been reported awmakers arrived at the parliament building for the planned vote in a session scheduled for 7 a.m. EST, but the session did not begin at the appointed hour and the legislators waited for a new time to be set. Fearing insurgent attacks, the Iraqi army and police deployed additional forces around the parliament building and the Green Zone entrance leading to it.
If the pact is not passed by the end of next month, it would leave U.S. forces without legal standing to be in Iraq unless the U.N. mandate authorizing their presence was extended. The mandate expires Jan. 1.
Tuesday, November 25, 2008
Brennan's detractors have charged him of supporting some of the Bush administration's most disgusting intelligence-gathering policies, including rendition and "enhanced interrogation techniques."
If Obama was honest in his intention to move far away from the thuggish policies the Bush administration, then he should not have Brennan in his administration.
The criticism seems to have had the desired effect. Brennan withdrew from consideration for any intelligence post in the Obama administration, and he specifically sited opposition of him by the liberal blogs.
Brennan did get in a good whine in his letter, saying:
"It has been immaterial to the critics that I have been a strong opponent of many of the policies of the Bush administration such as the pre-emptive war in Iraq and coercive interrogation tactics, to include waterboarding. The fact that I was not involved in the decision-making process for any of these controversial policies and actions has been ignored."Glenn Greenwald however pretty much debunks Brennan’s defense, as he highlighted Brennan's "lengthy, empathic statements" that made clear he "defended 'enhanced interrogation techniques' and rendition -- grounds enough for making him unacceptable for any top intelligence post -- to say nothing of his strident advocacy for warrantless eavesdropping and telecom amnesty." For anyone who has read Greenwald's blog, you know he was a lawyer, and so writes out his arguments as if he were laying out a case in court. He documented at length why Brennan was not the right choice for the Obama administration.
As for the broader context, Brennan's withdrawal appears to be the direct result of blog coverage. For those who believe bloggers' concerns are inconsequential, this is clear evidence to the contrary.
Check out what Cenk Uyger of the Young Turks had to say about today's news:
Olbermann again gave a good break down of Barack Obama's press conference, highlighting the difference between Obama and Bush after their respective elections.
Krugman spoke to how much money Obama will be able to trim from the fat of the budget. I'm afraid that there is not enough fat for Obama to balance the new spending that is needed, but there is a lot that will be noticed by the public.
Watch their discussion here:
Both Bob Gates and retired General James Jones will bring decades of experience to an administration that has to bring two wars to an end, has potential conflicts in Pakistan, Iran, and North Korea, and has potentially dangerous situations in Africa and Asia.
Personally I like the idea of keeping Gates for one year, which will allow for a smoother transition. I have heard some rightly argue that it is bad precedent for a Democratic administration to concede the Defense Secretary position to the Republicans, as if Democrats are not strong enough o defense issues, but in this case I think stability in this position is better for the country and our troops.
That said I do hope in one year's time we see a new nominee for Defense Secretary who is a Democrat.
Here is how this story was covered by Keith Olbermann tonight:
Should we be worried that as a candidate Barack Obama ran on change, but he is putting a lot of old Washington hands in office? I don't believe so. I think that to get things done in Washington are very hard, so having people who knows how to work the system is very important. As long as the person setting the agenda and steering the ship does not forget his promise of change, I think we will get the change that this nation voted for.
Nothing I have seen has led me to worry. I think Barack Obama is at his core a realist, who will bring real change to this country.
Currently Orszag is the director of the Congressional Budget Office, which calculates the cost of legislative proposals for the House and Senate to consider in their deliberations. It is being written that Orszag has expertise in retirement security, health care and climate change issues. Orszag has also been an honest and loud voice warning about the exploding growth in the annual deficits, and the country's outragous debt load. He has also spoken out about the shortfalls in the Social Security and Medicare programs.
You may remember that President-elect Obama often promised during the campaign that his economic team would go through the federal budget "page by page, line by line" to get rid of programs that aren't working and making others more cost effective. Orszag is definitely a great fit for this job. Along with his experience with the Congressional Budget Office, Orszag served as deputy director of economic studies at the Brookings Institution and served in the Clinton administration as a special assistant to the president for economic policy and senior economic adviser to the National Economic Council.
With the economy in crisis, Mr. Obama said, "Budget reform is not an option. It's a necessity."
Later he echoed Abraham Lincoln, "I will ask my economic team to think anew and act anew."
For some Obama's focus on careful federal spending is a contrast to yesterday's discussion about a stimulus package. I do not believe this is quite the contrast the talking heads will try to make it. Restoring the economy to health will be the priority over the budget deficit, but there is a lot of waste in our system. There is a lot of money that could be better targeted to help the economy.
If you have ever read any of Krugman's works over the last 8 years, you also know he has been an ardent Bush critic. Maybe one of the harshest critics, from even before Bush was made President. It thus must have been a bit awkward yesterday in the Oval Office as President Bush and Professor Krugman met face to face. The President congratulated Professor Krugman, along with two other Nobel Award winners.
Keith Olbermann then spoke with Robert Reich about the New NEW DEAL, and the economics that might be a part of President-elect's stimulus plan. I am a huge fan of Robert Reich, and I like his idea's about the direction America's economy should take. In this discussion I believe Mr. Reich is correct that this nation really needs a seamless transition between President Bush and President Obama. I believe Professor Reich is correct that Obama's immediate challenge is to fill the leadership vacuum created by President Bush.
Here is Olbermann's discussion with Richard Wolfe:
Here is Olbermann's discussion with Robert Reich:
Watch Professor Krugman here:
Faulk also said he heard "pillow talk" phone calls of Iraq's first interim president, Ghazi al-Yawer, another key US ally, when he worked as a US Army Arab linguist assigned to a US National Security Agency (NSA) facility at Fort Gordon, Georgia, between 2003 and 2007.While not illegal to collect information on foreign leaders, the US and the UK have pledged "not to collect on each other", several former US intelligence officials told ABC.
“There are votes in Minnesota that aren’t even being accounted for, much less being counted,” spokesman Andy Barr told reporters at a press conference at Franken headquarters in St. Paul this afternoon.
Franken’s recount attorney, Marc Elias, said the campaign had become aware of the problem in the last few days from reports in the press as well as from campaign workers in the field. “Ballots have gone missing,” Elias said, calling it “a serious matter that is very concerning.”
He named more than a half dozen instances — from St. Paul to Duluth, and Crystal to Apple Valley — where the recount has turned up discrepancies between the number of recorded votes and the number of ballots county officials have been able to produce. And besides the cases reported in the news media, Elias said, the campaign’s own information indicates “this problem may be even more widespread.”
“In an election this close we cannot let any lawful vote go uncounted, and neither can we allow ballots to simply go lost,” Elias said.
Elias said the campaign’s letter to Ritchie would ask him to “launch an investigation to identify any and all missing ballots, and to immediately instruct local elected officials to redouble their efforts to find all missing ballots.”
As for the recount itself, Elias said the Franken campaign’s internal numbers, based on the judgment of the recount officials rather than challengers from either campaign, indicate that “the margin remains in double digits. In fact, it has narrowed since Friday.” He said that included ballots recounted on Saturday but not today. Official figures as of Saturday night had Coleman ahead by 167 votes with two-thirds of ballots recounted.
You can watch the video here:
This was just before the last congress was sworn in, and it was obvious he was going after Rep. Keith Ellison the first Muslim elected to Congress. Goode said that it would be wrong to allow Rep. Ellison to take his oath on the Koran, for it would basically be the first step towards the fall of the republic.
It is a great sign that we can now bid goodbye to Mr. Goode, out country needs leaders not bigots.
Ben Bernanke and the financial crisis.
At Princeton, where Bernanke taught economics for many years, he was known for his retiring manner and his statistics-laden research on the Great Depression. For more than a year after he was appointed by President George W. Bush to chair the Fed, in February, 2006, he faithfully upheld the policies of his immediate redecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment. But since the market for subprime mortgages collapsed, in the summer of 2007, the growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed. He has slashed interest rates, established new lending programs, extended hundreds of billions of dollars to troubled financial firms, bought debt issued by industrial corporations such as General Electric, and even taken distressed mortgage assets onto the Fed’s books. (In March, to facilitate the takeover by J. P. Morgan of Bear Stearns, a Wall Street investment bank that was facing bankruptcy, the Fed acquired twenty-nine billion dollars’ worth of Bear Stearns’s bad mortgage assets.) These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history.
Ben Bernanke, who seemed to have been selected as much for his predictability as for his economic expertise, is now engaged in the boldest use of the Fed’s authority since its inception, in 1913.Bernanke, working closely with Henry (Hank) Paulson, the Treasury Secretary, a voluble former investment banker, was determined to keep the financial sector operating long enough so that it could repair itself—a policy that he and his Fed colleagues referred to as the “finger-in-the-dike” strategy. As recently as Labor Day, he believed that the strategy was working. The credit markets remained open; the economy was still expanding, if slowly; oil prices were dropping; and there were tentative signs that house prices were stabilizing. “A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact,” he told a visitor to his office in August.
By mid-September, however, the outlook was much grimmer. On Monday, September 15th, Lehman Brothers, another Wall Street investment bank that had made bad bets on subprime mortgage securities, filed for bankruptcy protection, after Bernanke, Paulson, and the bank’s senior executives failed to find a way to save it or to sell it to a healthier firm. During the next forty-eight hours, the Dow Jones Industrial Average fell nearly four hundred points; Bank of America announced its purchase of Merrill Lynch; and American International Group, the country’s biggest insurance company, began talks with the New York Fed about a possible rescue. Goldman Sachs and Morgan Stanley, the two wealthiest investment banks on Wall Street, were also in trouble. Their stock prices tumbled as rumors circulated that they were having difficulty borrowing money. “Both Goldman and Morgan were having a run on the bank,” a senior Wall Street executive told me. “People started withdrawing their balances. Counterparties started insisting that they post more collateral.”
The Fed talked with Wall Street executives about creating a “lifeline” for Goldman Sachs and Morgan Stanley, which would have given the firms greater access to central-bank funds. But Bernanke decided that even more drastic action was needed. On Wednesday, September 17th, a day after the Fed agreed to inject eighty-five billion dollars of taxpayers’ money into A.I.G., Bernanke asked Paulson to accompany him to Capitol Hill and make the case for a congressional bailout of the entire banking industry. “We can’t keep doing this,” Bernanke told Paulson. “Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.”
Paulson agreed. A bailout ran counter to the Bush Administration’s free-market principles and to his own belief that reckless behavior should not be rewarded, but he had worked on Wall Street for thirty-two years, most recently as the C.E.O. of Goldman Sachs, and had never seen a financial crisis of this magnitude. He had come to respect Bernanke’s judgment, and he shared his conviction that, in an emergency, pragmatism trumps ideology. The next day, the men decided, they would go see President Bush.
On October 3rd, Congress passed an amended bailout bill, giving the Secretary of the Treasury broad authority to purchase from banks up to seven hundred billion dollars in mortgage assets, but the turmoil on Wall Street continued. Between October 6th and October 10th, the Dow suffered its worst week in a hundred years, falling eighteen per cent. As the selling spread to overseas markets, the Fed’s failure to save Lehman Brothers was roundly condemned. Christine Lagarde, the French finance minister, described it as a “horrendous” error that threatened the global financial system. Richard Portes, an economist at the London Business School, wrote in the Financial Times, “The U.S. authorities’ decision to let Lehman Brothers fail will be severely criticised by financial historians—the next generation of Bernankes.” Even Alan Blinder, an old friend and former colleague of Bernanke’s in the economics department at Princeton, who served as vice-chairman of the Fed from 1994 to 1996, was critical. “Maybe there were arguments on either side before the decision,” he told me. “After the fact, it is extremely clear that everything fell apart on the day Lehman went under.”
The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently. I would be surprised if Obama wanted to reappoint him when his term ends”—in January, 2010.
Bernanke and Paulson’s reversals have been deeply unsettling, perhaps especially so for the millions of Americans who have lost jobs or defaulted on mortgages so far this year. And yet, for the past year and a half, the government has confronted a financial debacle of unprecedented size and complexity. “Everyone knew there were issues and potential problems,” John Mack, the chairman and chief executive of Morgan Stanley, told me. “Nobody knew the enormity of it, how global it was and how deep it was.” In responding to the crisis, Bernanke has effectively transformed the Fed into an Atlas for the financial sector, extending more than $1.5 trillion in loans to troubled banks and investment firms, and providing financial guarantees worth roughly another $1.5 trillion, making it global capitalism’s lender of first and last (and sometimes only) resort.
“Under Ben’s leadership, we have felt compelled to create a new playbook for the Fed,” Kevin Warsh, a Fed governor who has worked closely with Bernanke, told me. “The circumstances of the last year caused us to cross more lines than this institution has crossed in the previous seventy years.” Paul Krugman, the Times columnist, a former colleague of Bernanke’s at Princeton, and the winner of this year’s Nobel Prize in Economics, said, “I don’t think any other central banker in the world would have done as much by way of expanding credit, putting the Fed into unconventional assets, and so on. Now, you might say that it all hasn’t been enough. But I guess I think that’s more a reflection of the limits to the Fed’s power than of Bernanke getting it wrong. And things could have been much worse.”
Read more here.
Monday, November 24, 2008
— The 24/7 nature of the global economic crisis, which demands timely reaction.It's not unusual for presidents and their successors to talk and consult each other, but this particular crises has brought a shared spotlight this time that takes these consultations to a whole new level. With 24-hour cable news channels, Internet videos and markets gyrating on the slightest hint of news, and President Bush's low poll numbers, President-elect Obama has really had no choice but to assume greater leadership. People feel a need for immediate action, whether they are on Wall Street or on Main Street. When the media began suggesting last Friday that Obama had picked New York Federal Reserve Bank President Timothy Geithner as treasury secretary, the Dow Jones Industrial Average jumped nearly 500 points, or 6.5 percent. At the same time a recent poll showed that 65% of people responded highly favorably to Obama's response to the economic crisis so far.
— Incoming and outgoing presidents who have personal and political reasons to show that they can manage a crisis.
— A president-elect who believes in strong government and wants to get things under way immediately.
— A lame-duck president who's pretty much surrendered his responsibilities as President.
All the major indexes jumped more than 4.5 percent.
During the news conference Obama said, 'We can't allow the auto industry to vanish,' Obama says, but urges no 'blank check'
Here is video of today's press conference:
Every four years, the National Intelligence Council takes a stab at predicting the furture. Their Global Trends 2025 was just released. As with the earlier NIC efforts the project's primary goal is to provide US policymakers with a view of how world developments could evolve, identifying opportunities and potentially negative developments that might warrant policy action. We also hope this paper stimulates a broader discussion of value to educational and policy institutions at home and abroad.
Just in case you were growing weary of all the happy talk about the economy, here's some of the reports highlights:
- ...the U.S. dollar, while remaining important, will decline to "first among equals" among other national currencies.
- U.S. global power also will likely decline, as Americans' concerns about putting resources into solving domestic problems may cause the United States to pull resources from foreign and global problems.
- China and India, following a "state capitalism" economic model, were likely to join the United States atop a multipolar world and compete for influence, the report said.
- Russia's potential was less certain, depending on its energy wealth and internal investment. But Iran, Turkey and Indonesia were also seen gaining power.
- A world with multiple power centers has been less stable than one with a single or two rival superpowers, and there was a growing potential for conflict, the report said.
- Global warming will be felt, and water, food and energy constraints may fuel conflict over resources. - "Strategic rivalries are most likely to revolve around trade, investments and technological innovation and acquisition, but we cannot rule out a 19th century-like scenario of arms races, territorial expansion and military rivalries," the report said.
- Global wealth was seen shifting from the developed West to the energy-rich Gulf States and Russia, and to Asia, the rising center of manufacturing and some service industries.
- A shift away from an oil-based energy system will be underway or complete by 2025. Better renewable technologies such as solar and wind power offer the best opportunity for a quick and low-cost transition, the report said.
- The risk that militant groups would use biological weapons was greater than the risk of nuclear terrorism, the report said.
- India, China and Brazil will rise, the Korean peninsula will be unified in some form, and new powers are likely to emerge from the Muslim non-Arab world.
While not apocalyptic, the future will be very rocky, and we can no longer afford to have children pretending to be Republican leaders in charge anymore.
These attacks come as Iraqi lawmakers prepare for a vote this week on a security pact with the U.S. and are seen by some as “a calculated show of insurgent defiance” towards the agreement.
The Iraqi parliament has postponed its vote on the proposed US-Iraq security pact from Monday to Wednesday. MPs had complained that there were not given enough time to study its provisions. It is still not clear how the Sunni Arab MPs will vote; without their support, the agreement would likely be seen as a joint Shiite-Kurdish conspiracy.
There is also evidence that the situation is tenuous with both the Sunni's and Kurds. Kurdistan continues to act as an independent country. It was revealed on Saturday that the Kurdish authority have been importing arms from Bulgaria without informing the central government in Baghdad.
Sunni Arabs in Iraq have considerable grievances against the Shia dominated government in Baghdad, though they may be willing to cooperate with it if money and works project flow to their regions. There is still some fear that the central government in Baghdad will not maintain payments to the Sons of Iraq, and Awakening Councils, who ended their insurgency and went on to the American payroll. Now that the Iraqi government has taken over these payments, any disruption or cancellation could lead to serious problems. At the same time the presidency council in Iraq is now criticizing Prime Minister Nuri al-Maliki for building up tribal levies of Shiite Arabs into forces supporting the Prime Minister and his party. There are rumors in Iraq that these are militias that are loyal to the Da'wa or Islamic Mission Party. One of Da'wa's weaknesses has been that it does not have a powerful militia like the Sadarists, the Kurdish parties, or the Islamic Supreme Council of Iraq. This may play a role in strengthening his party against his Shiite rivals. Maliki has defended the Support Councils as a natural outgrowth of the Sahwa Awakening movement that began in the western province of Anbar in 2006, when the US allied with local Sunni militias to drive out Al-Qaeda.
There are some who look at this with hope. I don't, I see armed camps preparing for another war. Iraq still is in great danger of following the same path as Lebenon.
I would like to point out that this mismanaged company is worth $20.5 billion. It's already received $25 billion from the TARP rescue plan, and now Treasury is poised to inject another $20 billion, on top of generous asset guarantees. Yet for some reason Paulson is unwilling to help the auto industry? Now I agree with the Democrats that the Big Three needed to come back with a plan on how they are going to use this loan from the government, but now
The president-elect is likely to use the event to assure investors and consumers that he will take rapid, large-scale action in the coming weeks and months. The message will be: "This is an extraordinary time, and extraordinary responses are going to be needed."
At the news conference, President-elect Obama will likely offer for the first time an explicit pledge to honor all commitments already made by the Bush administration in the TARP program, without imposing new conditions even if there are changes are made to the program in the future. Obama officials also say the president-elect will promise to find spending cuts to try to keeps short-term stimulus spending from exploding the budget deficit even more than it already has over the long term.
Since winning the presidency, Obama has expressed reluctance to begin steering economic policy, repeatedly saying the country can have only one president at a time. Large-scale economic stimulus is all but impossible before Obama takes office, since Bush has said he would oppose big new spending plans before he leaves the White House.
But President-elect Obama and his team have in recent days indicated fairly explicitly that a considerable boost to the economy will come as soon as he takes office. While Obama advisers have so far declined to detail publicly just how large the stimulus would be, there have been credible reports calling for a $500 to $700 billion stimulus package that would be injected directly into the economy.
Democratic leaders in Congress are preparing to hurry passage shortly after New Year's to have a stimulus-plan bill ready for Mr. Obama to sign once he is inaugurated Jan. 20.
Republicans quickly criticized the idea of such a vast [stimulus] initiative, saying Congress should instead cut taxes to spur economic growth.
"Democrats can't seem to stop trying to outbid each other -- with the taxpayers' money," House Minority Leader John A. Boehner (R-Ohio) said in a statement. "We're in tough economic times. Folks are hurting. But the American people know that more Washington spending isn't the answer."
Actually the American people know that more Washington spending is exactly the answer the nation needs. You would think that Republicans would just shut up for a while, considering their policies drove this nation into a ditch.
Steve Benen of the Washington Monthly's Political Animal had some great advice for people during an economic crisis.
In a time of severe economic crisis, it's important that all of us -- voters, policy makers, investors -- remember to do two key things. First, keep a cool head and avoid panic. Second, pay absolutely no attention to congressional Republicans, who have no idea what they're talking about.
Luckily Barack Obama and Democrats in Congress seem to be taking this advice to heart and seem to better understand both the gravity of the circumstances this nation faces and the necessity for a remedy. While Barack Obama, during the presidential campaign, had talked about a $175 billion stimulus program, he now is looking at a stimulus package that may be four times larger.
Senator Chuck Schumer of New York told George Stephanopoulos yesterday that the stimulus should be between $500 billion and $700 billion. Schumer said:
"It's a little like having a new New Deal, but you have to do it before the Depression. Not after."
ABC News' Jake Tapper reports that Obama's transition team would like to see the stimulus package be passed by Congress and be in the Oval Office waiting for the new President literally the day of the inauguration. There are lingering concerns, though, that a Republican filibuster may scuttle the plan.
This is why we really need Al Franken to win in Minnesota, Martin to win in Georgia, and we need to pull in Collins and Snowe up in Maine to keep Republican's from interfereing. If Republicans want to offer constructive advice, or real suggestions, they should be at the table. If they are going to throw up road blocks for no other purpose than to scuttle the Democrats, then they need to be shut out of the room.
An analysis by FiveThirtyEight.com of precinct-by-precinct returns available on the Secretary of State's website, however, suggests that Franken's position is really good. This analysis points to the fact that in precincts where no challenges have been issued (these are the only precincts in which, in some sense, the results of the recount can be considered to be final and "official") Franken has gained a total of 34 votes, and Coleman a total of 6 votes, for a net gain by Franken of 28 votes. Moreover, in precincts where just 1 challenge has been issued, Franken has gained a net of 31 votes on Coleman, and in precincts where exactly 2 challenges have been issued, Franken has gained a net of 32 votes on Coleman. By contrast, in precincts where 5 or more ballots have been challenged between the two campaigns, Coleman has gained a net of 57 votes on Franken. Basically the more challenges there are, the longer this process will be. Because it is now apparent that Norm Colemans strategy is if they don't like a ballot, they're going to challenge it.
But are these challenges legitimate?
Here's a video from the Uptake detailing some of the ballots the Coleman campaign is claiming should count for Coleman. This falls under desperate much?
Sunday, November 23, 2008
Didn't Paulson say the financial crisis was behind us, that we were no longer having to worry about what the next bank would be that would go under?
Guess the crisis isn't over.
Under the terms being discussed, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold. The federal government would cover losses beyond that level, people familiar with the matter said. One person said the new entity is expected to hold about $50 billion of assets.
BROKAW: I hear the word regret, but not the word apologize.
LIEBERMAN: Well, I do — I regret it. I mean, you know, I’m going forward. You can take from the word “regret” what you will. I wish I had not said some of the things I’ve said. But again, we all do it.
Watch it here:
Watch SNL joke on Rahm Emanual:
Saturday, November 22, 2008
According to MSNBC, it is “also expected Monday” that New Mexico Governor Bill Richardson will be named Commerce Secretary,” and New York Fed President Tim Geithner is expected to be announced as Treasury Secretary, “barring last minute changes.”
"These aren't just steps to pull ourselves out of this immediate crisis. These are the long-term investments in our economic future that have been ignored for far too long."
The goal is to get the plan Congress quickly, with help from both parties, after Obama takes office Jan. 20. The plan envisions bringing these new jobs to the economy by January 2011.
It is good to have an adult coming to the White House.
Friday, November 21, 2008
The markets are apparently "applauding the change":
After two days of punishing losses, Wall Street surged on Friday afternoon after news reports said that President-elect Barack Obama had tapped Timothy F. Geithner, the president of the New York Federal Reserve, to be secretary of the Treasury.
Skittish financial markets closed dramatically higher following the reports, recouping some of the slide that brought them to 11-year lows. The Dow Jones industrial average soared 494.13 points or 6.5 percent, closing at 8,046.42. The broader Standard & Poor’s 500-stock index swung 6.3 percent higher, or 47.59 points to 800.03. The Nasdaq composite was up 5.2 percent.
“It was almost a Geithner relief rally,” said Steve Neimeth, portfolio manager at AIG SunAmerica Asset Management.Bits of news have swung financial markets widely
in recent weeks, and on Friday afternoon, traders seemed to rally behind unconfirmed reports that the country’s next president had picked his chief financial officer. The markets were not applauding the choice specifically, said Ryan Larson, senior equity trader at Voyageur Asset Management, but any choice at all.
“What you’re seeing is a rally off the headlines,” Mr. Larson said. “The markets are applauding change. It’s a hope that change will bring some sort of effectiveness to these plans and ultimately make a road map to come out of it.”
As head of the New York Fed, Geithner has served as the central bank’s top liaison with Wall Street. Geithner oversaw meetings at his bank to attempt to head off Lehman’s failure in September, later hosting gatherings on how to resolve AIG.
Geithner is no stranger to Washington or the Treasury. Before taking over the New York Fed in 2003, he spent most of the previous 18 years working in the nation’s capital, first at Kissinger Associates, then at the Treasury and finally at the International Monetary Fund.
During that time, Geithner earned what his one-time mentor Summers called a “doctorate in financial policy.” He also developed a skill-set his supporters say makes him well suited for his new job: calmness under pressure, an ability to see many sides of a problem and a sense of the politically possible.
The Lame-Duck Economy
By PAUL KRUGMAN
Everyone’s talking about a new New Deal, for obvious reasons. In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum, these are hopeful times.
There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.
It’s true that the interregnum will be shorter this time: F.D.R. wasn’t inaugurated until March; Barack Obama will move into the White House on Jan. 20. But crises move faster these days.
How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot.
Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.
Most obviously, we’re in the midst of the worst stock market crash since the Great Depression: the Standard & Poor’s 500-stock index has now fallen more than 50 percent from its peak. Other indicators are arguably even more disturbing: unemployment claims are surging, manufacturing production is plunging, interest rates on corporate bonds — which reflect investor fears of default — are soaring, which will almost surely lead to a sharp fall in business spending.
The prospects for the economy look much grimmer now than they did as little as a week or two ago.
Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet no new rescue plan is in sight. On the contrary, Henry Paulson, the Treasury secretary, has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff.
How much should we worry about what looks like two months of policy drift? At minimum, the next two months will inflict serious pain on hundreds of thousands of Americans, who will lose their jobs, their homes, or both. What’s really troubling, however, is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.
About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.
About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced into liquidation — that is, forced to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.
Now, maybe letting the auto companies die is the right decision, even though an auto industry collapse would be a huge blow to an already slumping economy. But it’s a decision that should be taken carefully, with full consideration of the costs and benefits — not a decision taken by default, because of a political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead.
Is economic policy completely paralyzed between now and Jan. 20? No, not completely. Some useful actions are being taken. For example, Fannie Mae and Freddie Mac, the lending agencies, have taken the helpful step of declaring a temporary halt to foreclosures, while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition.
But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis. And it’s scary to think how much more can go wrong before Inauguration Day.
Its pretty hard to remember, isn't it? Considering the record of the Republicans the last two years when they as the minority party, with 49 seats, filibustered more legislation than any Senate minority in congressional history.
Now Senator McConnell, the highest ranking Republican in the Senate speculated about another two years of filibusters.
A feisty Senate Minority Leader Mitch McConnell (R-Ky.) warned Friday that while he looks forward to working with President-elect Barack Obama in the coming months, Republicans will continue to demand that they be given the ability to amend legislation or will filibuster bills as they move through the Senate.
McConnell released a letter signed by the entire GOP Conference to Majority Leader Harry Reid (D-Nev.) calling on him to use a more open process for advancing legislation in the 111th, a clear warning to Reid that Republicans will be looking to stand together over the next two years.
"The 42 Republican Senators represent 157 million Americans. Their voices are entitled to be heard, and the way to be heard in the Senate is an open amendment
process," a clearly rejuvenated McConnell told reporters.
The thing is I don't think Senator McConnell has thought through this threat. There are a few things working against him.
First, Democrats will have at least 58, probably 59 Senators in their caucus. While I hated not punishing Lieberman, the way Obama handled it, he has effectively neutered Lieberman, there will be no crossing the line by him anymore. I know a lot of people think that Lieberman will feel free to cross the line, but a President Obama and his Chief of Staff Rahm Emanual will know how to smack him down.
Second McConnell will not be able to keep Republicans in line, like they were for the last 8 years. Senators like Luger, Specter, Collins, and Snow will be convinced to cross the ailes often, and on specific issues like SChip particular Senators like Hatch will cross the line. There is no central leader in the Republican party, and the in-fighting will ensure there is no united minority.
Third, and most important the Republican's no longer have the bully pulpit. President Obama will have the biggest bullhorn, which will drown out McConnell, and a debate between President Obama and Senator McConnell is a no brainer.
Last, McConnel completely screwed up by making the threat. You don't bluster if you have the power, you stay quiet, and use your power when needed. Now he just looks like an obstructionist.
So you go McConnell, make your threats, keep proving what a pathetic politician you are.
20 Reasons Why the U.S. Consumer is Capitulating, thus Triggering the Worst U.S. Recession in Decades
Today’s news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the U.S. has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis. Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:
- The US consumer is shopped-out having spent for the last few years well above its means.
- The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.
- The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.
- Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.
- The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%. And with home prices falling over 30% about 40% of all households with a mortgage (or 21 million out of 50 who have a mortgage) will be
under water (negative equity in their homes) with a huge incentive to walk away from their homes.
- Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.
- The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.
- The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.
- Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.
- Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.
- The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts
- Employment has been falling for 10 months in a row and the rate of job losses is now accelerating. In the last recession in 2001 that was short and shallow (8 months from March to November 2001 with a cumulative fall in GDP of only 0.4%) job losses continued all the way until August 2003 with a job loss recovery and a total cumulative loss of jobs of over 5 million from the peak. In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators such as initial and continuing claims for unemployment benefits. Massive job losses and concerns about job losses will
further dampen current and expected income and further contract consumption.
- Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage. The tax rebate was supposed to boost consumption all the way through September 2008: in reality real retail sales and real personal spending rose only in April and May while starting in June and all the way in July, August, September, October and now into the holiday season real retail spending and real personal spending are down month after month. Thus, another general tax rebate would be as ineffective as the first one in boosting consumption.
- The 1990-91 and 2001 recessions were not global; this time around the IMF is
forecasting a global recession for 2009.
- The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other
sources (wealth, income, debt servicing ratios) are much larger and more significant.
- The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.
- With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth. But the worsening balance sheet of US consumers in 1990-91 (debt ratios, debt servicing ratios, employment contraction, wealth effects of housing and stock markets) was much less severe than the current downturn.
- Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut and monetary
policy is becoming ineffective to resolve that glut.
- While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling: rising mortgage rates (and event near lack of any mortgage financing at even higher rates for sub-prime and jumbo loans), rising rates on credit cards, auto loans and student loans together with less availability of credit are severely dampening the ability of households to borrow and spend.
- To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the
1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.