About the time of the first big crashes in the housing market and the first banking failures, there were many threads on the subject of the economy. Some foresaw bad times that would soon get better, others bad times that would take a long time to get better, and a few saw Great Depression II. Similarly, many opinions were raised about the wisdom of the various actions the government took, and are planning to take, to address the problems.
Have the events of the past few months changed any minds out there about where the economy will go in the near future, and the things government, companies, and individuals should do? If so, what’s it changed to? If not, why not?
Not me. They confirmed them. We are right on track to another depression before the end of the world in 2012. Everything the “fear mongering conspiracy nuts” warned us about is happening.
Nope, hasn’t changed my mind. A few months ago I knew it was going to be rough but I didn’t think it was going to be apocalyptic. Then about two / three weeks ago, right before going to bed, I caught a headline and read the article. That article was about the Big 3 going to Washington to ask for money because if they didn’t get it they’d collapse within the month. It was at that point that I realized, its all over.
I stayed up another few hours reading as many articles as I could find about the economic situation which only served to confirm my original thought, the United States is bankrupt and capitalism has failed. Now regardless of the ubiquitous bad economic news that is continually released, people seem blissfully unaware that we are on the cusp of economic Armageddon. And what I find ludicrous is that both government and the majority of the public believe the automakers should be allowed to fail!
If the Big 3 fail, United States economic hegemony is lost. Not that it might already be, but if they fail it is assured and nearly instantaneous. I just don’t understand it, $700 billion just handed over to the banking industry and nobody wants to spend a - measly - $35 billion to protect the backbone of what is left of the American economy?
Every day I read the headlines at Bloomberg.com. I also scan the business section of the Washington Post when I can, and absorb opinions from various other sources as the opportunity presents itself.
My conclusion at the moment: nobody knows what’s happening right now or what will happen in the near future.
Part of the problem is our addiction to historical metaphors. People want to debate whether this is 1988, or 1971, or 1932. Well it’s not. It’s 2008. It’s a set of circumstances that’s never occurred before. Nothing remotely like it has ever occurred before.
So here’s a rough summary of my thoughts.
Back in the olden days, the Dems were the party that raised taxes and raised spending, while the Pubs were the party that cuts taxes and cuts spending. (Never really true, of course, but that doesn’t matter.) Now times have changed. The Dems are the party that cuts taxes and raises spending. The Pubs are also the party that cuts taxes and raises spending. No one in Washington is even thinking about doing anything else. So then, taxes will be cut and spending will be raised.
If taxes are cut enough, and spending is raised enough, it must have some effect. Consumers with more money from tax cuts will eventually buy stuff. Companies flush with government contracts will eventually invest their money. This may or may not bring about actual growth, but it will at least ease the rate of decline to something reasonable in the short term. (Say the next year.)
The problem with cutting taxes and raising spending is, of course, massive deficits. Our deficits are already huge and we know that the foreigners who hold our debt won’t hold it forever. Traditionally U.S. debt is the world’s safest investment; that’s how everyone has seen it for generations. But if the national debt goes too high, then that simply won’t be true anymore, and people will start dumping our debt.
Once that happens, things will go really bad really quickly.
I’ve pretty much been of a mind for the last year that this would not end well. It was only a matter of when. In the coin business, I’ve seen bubbles come and go. 1960-67, 1979-83, 1989-90, and the current one. I was of the opinion, in the dot com implosion, that it was a bubble. It turned out to be such.
This doesn’t mean that I"m ready to ask for subscribers to my newsletter.
I’ve missed calls also.
I’ve been of the opinion the last 2-3 years that there will be hell to pay before we get over this one. Nothing has changed my mind. It will get worse before it gets better.
Agreed on all points. I’m shocking how quickly we’ve gone from having huge budgetary fights over a billion more for NASA, or a 200 million dollar bridge, to throwing around hundreds of billions of dollars on a wild attempt to ‘do something’, even though no one’s quite sure on what needs to be done or what effect it will have. All the politicians know is that they’ve suddenly been given the green light to spend as much money as they feel like spending, and unsurprisingly they think this is a great idea.
No one believes a government can actually go bankrupt - until it does. The collapse comes swiftly. If it happens in the U.S., the first result will be that all the various pension funds will go bankrupt (the state pension funds are already grossly under-funded in most states). Medicare and Social Security will be in trouble, because the government won’ t be able to raise the funds to support them. Basically, the big entitlement programs, which represent the bulk of government spending, will all be scaled back in a very short time - in some cases dramatically. This will cause immense financial hardship for the poor, the sick, and the elderly. And all those people who expected to retire at age 60 or 65 can forget it.
This current problem is the result of our being entirely in too much debt. Too much borrowed capital, not enough savings, too much paper wealth. You can’t spend your way out of a problem like that. All you can do is, perhaps, delay the reckoning a bit, while making the problem more severe.
There’s a hard reality behind all this paper shuffling. Ultimately, all that borrowing is trading on future productivity. You’re selling a chunk of your future productive capacity in exchange for cash now. At some point, your customers start to wonder whether you can really deliver, and stop buying your debt. Or they go broke themselves as part of the giant shell game.
The biggest risk we face is one no one is talking about right now - the collapse of international trade. This almost happened when the credit markets froze up earlier in the year - there were reports of container ships sitting in port refusing to leave because they wouldn’t accept the letters of credit their customers were offering. If we wind up in that kind of situation again, we are well and truly screwed. The best way to prevent that situation from happening is to be fiscally prudent and manage the crisis without selling your future.
The best thing for the market as a whole right now is stability. We need to find the bottom, and have a clear set of rules for working our way up and out. The longer government muddles around in the economy, throwing subsidy money all over the place and bailing out companies, the harder it will be for investers to trust where to put their money, and it will stay on the sidelines.
In any event, if you really want an economic stimulus, a much better way to do it would be to cut the capital gains and business taxes, and look at reducing the regulatory burden on companies until the economy strengthens. Let the automakers sell whatever cars they can without concern for EPA mileage, for a couple of years. Repeal the Davis-Bacon act, and lower the price of infrastructure building so more can be done at current spending levels. Exempt companies for a couple of years from having to meet the more onerous ADA regulations. That sort of thing. Let the economy breathe a little more freely, remove the roadblocks that keep investment money sidelined, and let the economy shake itself out.
Once confidence in a stable economy returns, a lot of companies and real estate will look like bargains, because we’ll probably overshoot the bottom. Investment money will start to move, and jobs will start to be created again. And the economy will grow organically, from the bottom up, under real-world incentives.
The alternative is government meddling, nationalization, higher taxes, and major business decisions being made by politicians in Washington, who are more interested in seeing that their own voters get a piece of the pie than in what makes the best business sense. And of course, almost none of these people have ever run businesses of their own. They’re just the kind of ‘elite’ you want running the show.
Obama now wants to create an ‘Auto-Czar’, who will oversee the ‘rebuilding’ of the auto industry. Do you know how terrible that idea is? It’s a recipe for political manipulation of the auto industry. And once the government shares responsibility for what is created, it will never be allowed to fail. That’s the path that leads to protectionism, because the government will have the power to protect its own products.
What I’ve specifically changed my mind about was the nature of our response. Normally, recessions are simply too short to justify any sort of proactive fiscal measures. Monetary policy (basically the Fed tinkering with interest rates) is typically a suitable response. Congress doesn’t need to get involved.
The severity of this recession, and the Fed’s loss of its traditional powers, changed my mind. This isn’t a typical recession where we can simply wait it out. Sitting with our thumbs up our asses is actively counter-productive right now, and could send us into a dizzying downward spiral. With the failure of typical measures comes the necessity of a massive fiscal influx.
This is a misdiagnosis.
The US government is borrowing short term at 0% interest. Zip. Nada. Nothing. We will definitely need to tighten our belts in the future, but the current problem isn’t related to our debt, else people would not be enthusiastically throwing money at us with no hopes beyond seeing the exact same amount of money given back to them three months later. Our current problems have to do with trust in the private financial sector. The debt problem is in our future, not our present.
They were trying to find a bottom in 1930, as well. And 31. And 32.
Sometimes interference is necessary. This is one of those times.
Oftentimes tax cuts are an ass backwards way of operating. This is one of those times.
The fiscal multiplier for corporate tax rates is 0.30, effectively nothing. The government would lose a dollar, and we’d gain only thirty cents of stimulus, whereas the multipliers for infrastructure, unemployment benefits, or food stamps are all over 1.5, creeping up to 2.0.
It also makes no apparent sense to cut capital gains taxes when the investment bottleneck is with the banks. Interest rates are scraping zero, which in any other situation would be more than enough incentive for businesses to invest. Capital gains tax cuts wouldn’t directly help in this situation. Look at the losses in wealth: financial assets are continuing to lose value. There are no real capital gains being made right now, and so there are no real capital gains to tax. If we tax 0 dollars at a rate of 10 percent instead of 20 percent, then there’s still no tax revenue, and no additional incentive to businesses to invest, which they still wouldn’t be able to do since the banks would continue to refuse giving them any money.
I have no idea how terrible an idea it is, because I haven’t even heard the position defined. I’ve only caught rumors being thrown about, and nothing substantive at this point.
One of the rumors is that this “czar” person is nothing more than a glorified bankruptcy judge, in charge of overseeing a restructuring of debt. Normal bankruptcy procedures are pretty costly, legally speaking, which is why they might want to avoid the normal process. If that’s true, then the position could do a lot of good. If it’s a permanent sort of thing, then of course it would be bad. But I’ve seen no evidence at this point that they want to set up a permanent official to oversee the auto industry.
When Bush proclaimed that the banking crisis “is not a failure of the free market,” I wished I could have been there among the press corps, to ask him, “Mr. President, just hypothetically, what sort of event would you consider a failure of the free market?”
But I would expect no response beyond the verbal equivalent of deer-in-the-headlights.
From him, that is. Maybe some of you could frame a more meaningful answer?
The main cause of the crisis is the catastrophic, systemic corruption of the banking industry.
We all just sat back and watched as the banking industry turned into an unimaginably huge fraud. A Ponzi scheme that sucked up more money than actually exists on the planet Earth.
And yet we have very little information on the details of this disaster, and no idea if anything is being done to fix it.
Are banks doing business now in a fundamentally different way than what caused the collapse? Has anything at all been done in this area?
Where is all the money going? Did the first 100 billion we gave AIG get sent straight to the people who are robbing us?
Exactly how much money does each company owe to the looters? At some point, if they owe too much, we would have been much better off letting them fail, and leave the looters with worthless paper. By “bailing out” these companies, how do we know we aren’t really bailing out the looters and noone else?
We don’t have enough information to truly predict what will happen. A lot of the information is being deliberately withheld, but I think the government is acting on severely incomplete information as well. It is possible we are completely screwed already and don’t know it. It is possible that if we had known exactly what condition each company was in, we could have survived (after much hardship) by letting the ones who were in too deep die, or creating a law that would avoid us having to give the country to the looters. But the government has proved to be utterly incompetent, giving me little hope for the future.
This type of short-sighted reasoning is repeated so often (mainstream news media?) that it actually sounds “correct.” It is wrong. It’s like saying the “main cause” of the American Civil War was the Confederate attack on Fort Sumter. Or the main cause of 9/11 was the hijacking of 4 planes. Would you find these kinds of “main causes” as convincing to you?! These type of shallow answers do not go deep enough into the underlying reasons.
If one stays stuck on the idea that the banking industry caused the current meltdown, then the “obvious logical” response is to enact “more regulation.” This does not address the root of the problem at all.
There are several better candidates to be considered as “main causes”:
[ul]
[li]the country’s over-reliance on debt (instead of real productivity) to fuel economic growth.[/li][li]the undisciplined and reckless loose money supply (Greenspan 2001)[/li][li]a mentality of consumption (especially conspicuous consumption) instead of production[/li][li]the greed of humans at all levels from the individual investor to mega money funds to invest in financial products that they do not truly understand[/li][/ul]
This is the wrong area to focus on. Instead, the country’s situation would be truly improved if the underlying pyschology of citizens was changed to be afraid of debt instead of welcoming it.
Look at the continuum of behavior from the individual to the entire country and you’ll notice a pattern:
[ol]
[li]typical American lives from paycheck-to-paycheck, with heavy debt (credit-cards, car loans, etc), and no money for a rainy-day or adequate retirement savings[/li][li]typical city and state governments are burdened with debt (municipal bonds) and underfunded govt pension obligations[/li][li]the federal govt spends more than it saves, burdened with debt, underfunded govt entitlement programs (Social Security, Medicare, etc)[/li][/ol]
The common theme running through all these levels is that humans occupy all these levels and that humans (in their current mentality) totally mismanage debt and growth.
Yes, the bank industry has done some evil things but they are not the root cause. They’re just a convenient punching bag for simplistic people who want their “main causes” giftwrapped in a single soundbite.
Although I think you are missing one, big reason. Let me try to tease it out by asking a few questions.
Madoff’s investment company just failed (read the headlines of the WSJ or NYT) taking up to $50 billion of investors money and making it go poof. This is more-or-less the order of magnitude of some of the larger banking failures - Bear Stearns, Lehman, etc. Not exactly the same numbers, but close.
Why isn’t the system collapsing because of this? Why isn’t the populace panicked? Why isn’t the government stepping in here?
There’s a good reason. Let’s see if the Board can tease it out.
Yet, when a bank of similar size wobbles, there is potential catastrophe afoot due the ripple effect that could be felt throughout the financial system, and the strain that could be placed upon the US Treasury (Which I generally agree with, by the way).
What’s going on here? What is the fundamental difference between the Madoff case and a bank? How does it relate to the current arguments about bailouts, systemic failure, the Big 3, etc.
On the contrary, the mainstream media is largely ignoring the systemic corruption in favor of simplistic sound bites about housing prices falling, or making fun of some trivial thing like executives going to a spa.
Systemic catastrophe was predicted years and years ago, but did not and does not get “air time.” It is too complicated. People prefer to blame “evil bankers” or just throw up their arms and blame human nature, which may be true but is not particularly helpful.
We have very little information about what is going on. We are bailing out companies without knowing who is getting what, what they owe, or to who. We don’t know what, if any, changes have been made in the banking industry.
It is actually pretty strange when you think about the trillions of dollars on the line with almost no information about the circumstances.
Let’s not create any strawmen about anyone being “evil.” I never said any such thing. Human nature is what it is, and I don’t think bankers deviate much from the norm. This is why it is so important to have a system in which human nature works for us, instead of against us.
It is certainly tempting to ignore the system itself, because it is complicated, and it is easy and correct to blame human greed. But it is less helpful. We aren’t going to change human nature, but we can try to avoid a system in which following human nature leads to destruction.
For the same reason, we don’t let citizens buy nuclear weapons. Sure, if they used them we could blame human nature. But the system that allowed them to buy the nuke would be the main cause, and more importantly would be the thing we could change.
Why doesn’t the collapse of a $50 billion asset firm like Madoff cause the same systemic failure as a similarly-sized bank? Why no bailout for Madoff’s firm? Why no panic? What’s the reason?
