Parts, Structures, Systems and Outcomes

Why Obama is the new Reagan   Barack Obama now stands in broad daylight, where skeptical investors in Tokyo, Singapore, Beijing and London can assess the real man instead of the political animal running for election. I think they will find his intelligence, his oratory, his dedication to public service, his ease at gathering smart advisers, his ability to inspire confidence and his tight management of a brilliant political campaign are all the real deal. As a result, despite his incredibly thin résumé, investors will come to believe he is ready to take on this august job. But now comes the tough part: Obama faces a domestic economy ravaged by falling home prices, rising unemployment and thinning industrial production. He faces a banking system savaged by epic greed. He faces a public that's more cynical than ever about its leaders. And he faces two wars. It's almost impossible to say with certainty how Obama will govern as these difficulties arise, for there is nothing in his background that will help us judge. We can only pray that he approaches issues in a holistic way -- not reactively but with a grand plan into which each fresh nuance is thoughtfully fit -- much as he conquered the intricacies of the long presidential race. I'm hopeful Obama will turn out to be as successful as Ronald Reagan in this regard. Reagan was no genius in the classic sense, but he had a thoughtful, humanistic vision that guided his path. And for the most part he had a good economic team that cleaned up the titanic mess of the 1980-81 recession and, after an initial 20% decline in the stock market in his first 20 months, delivered us into a bull market that generally prevailed for 25 years. Obama was sometimes criticized during the campaign for being more of a speechmaker than a lawmaker, but that is not such a bad thing. Smart words, delivered well in public, have incredible power. The ability to inspire confidence in a well-articulated vision can help drive men and women to achieve things that may be well beyond their own imagined abilities.

Economic Situation and Outlook

A Date With Scarcity Nov. 4, 2008, is a historic day because it marks the end of an economic era, a political era and a generational era all at once. Economically, it marks the end of the Long Boom, which began in 1983. Politically, it probably marks the end of conservative dominance, which began in 1980. Generationally, it marks the end of baby boomer supremacy, which began in 1968. For the past 16 years, baby boomers, who were formed by the tumult of the 1960s, occupied the White House. By Tuesday night, if the polls are to be believed, a member of a new generation will become president-elect. So today is not only a pivot, but a confluence of pivots. When historians look back at the era that is now closing, they will see a time of private achievement and public disappointment. In the past two decades, the United States has become a much more interesting place. Companies like Starbucks, Apple, Crate & Barrel, Microsoft and many others enlivened daily life. Private citizens, especially young people, repaired the social fabric, dedicated themselves to community service and lowered drug addiction and teenage pregnancy. Yet, at the same time, the public sphere has not flourished. Despite decades of affluence, longstanding issues like health care, education, energy and entitlement debt have not been adequately addressed. The baby boomers, who entered adulthood promising a lifetime of activism, have been a politically undistinguished generation. They produced two presidents, neither of whom lived up to his potential. They remained consumed by the culture war that divided their generation. They pass their political supremacy today having squandered the fat years and the golden opportunities.  Month by month, frustration has mounted. Americans are anxious about their private lives but absolutely disgusted by public leaders. So change is demanded.

Will the Safety Net Catch Economy’s Casualties? Economists rarely agree on anything, but a great many do agree on one unfortunate matter these days: the current economic downturn is likely to develop into the worst recession since the downturn of 1981-82.The United States is a far different place. Government programs in place then to cushion and counter recessions have been scaled back sharply, raising questions about whether they are up to the task as the economic outlook darkens today. Unemployment insurance is not as generous now. Yet the unemployment rate is at 6.5 percent and some forecasters say it could top 8 percent next year. It hit 10.8 percent in the early 1980s. This is also the first severe economic slump since President Bill Clinton overhauled the welfare system and made it tougher to qualify for, and keep receiving, benefits. Many people who lose their jobs now and fall into poverty may not qualify for public assistance. Other programs designed in part to counter hard times — like job training and housing subsidies — have also been cut back.

The Surest Path Back to Prosperity – George W. Bush As we have seen in recent months, financial turmoil anywhere in the world affects economies everywhere in the world. And so this weekend I'm going to host a Summit on Financial Markets and the World Economy with leaders from developed and developing nations that account for nearly 90% of the world economy. The leaders attending this weekend's meeting agree on a clear purpose -- to address the current crisis, and to lay the foundation for reforms that will help prevent a similar crisis in the future. This crisis did not develop overnight, and it's not going to be solved overnight. There's going to be difficult days ahead. But the actions taken by the U.S. and other nations are having an impact. Credit markets are beginning to thaw. All these steps require decisive actions from governments around the world. But we must recognize that government intervention is not a cure-all. For example, some blame the crisis on insufficient regulation of the American mortgage market. But many European countries had much more extensive regulations, and still experienced problems almost identical to our own. History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market. All this leads to the most important principle that should guide our work: While reforms in the financial sector are essential, the long-term solution to today's problems is sustained economic growth. And the surest path to that growth is free markets and free people. In the wake of the financial crisis, voices from the left and right equate the free-enterprise system with greed and exploitation and failure. It's true this crisis included failures -- by lenders and borrowers and financial firms, and by governments and independent regulators. But the crisis was not a failure of the free-market system. And the answer is not to try to reinvent that system. It is to fix the problems, make reforms, and move forward with the free-market principles that have delivered prosperity and hope to people all across the globe. Capitalism is not perfect. But it is by far the most efficient and just way of structuring an economy.
Bush Calls on Leaders to Spurn Regulation, Push for Global Trade Agreement

A long, shaky bridge to recovery The lessons of Japan’s stumbling path out of deflation and recession suggest that government spending can help stave off an extended recession, but it may take years not months and require an unlikely combination of political will and consensus. That’ll be a lot of bridges to nowhere. The particular type of recession the United States faces, a balance sheet one, means that cutting interest rates will be really pretty ineffective, and while you can throw everything you have at saving the banking system, you can’t make people and businesses borrow and put the money to work. They too have their own balance sheet problems, having loaded up on debt and holding as they are assets like real estate and stocks that have fallen in value. Banks too are about to get whacked by another hit to their assets, as corporations respond to newly lousy economic conditions by, well, defaulting. In short, it’s a negative self-reinforcing cycle that low interest rates do little to break and that is bigger, though related, to the problems in the financial system. Government spending can break the cycle. Not tax cuts, which will only go to pay down debt or are saved into a banking system that isn’t working, but actual bricks and mortar. Think the New Deal’s Works Progress Administration super-sized or Japan building highways and bridges over seemingly every river, stream and rivulet. Lessons from Japan’s Great Recession. “I don’t think it will be over quickly. I am recommending at least three to five years seamless medium-term fiscal stimulus measures to give enough time for the private sector to repair its balance sheet.” Three to five years is an eternity in political life. It is an absolute sure thing that incoming President Barack Obama will design and implement a pretty chunky fiscal stimulus package even if President Bush does not pass one in his waning days in office. But think about how difficult it will be to maintain both the will and power to maintain a huge borrow and spend program for several years. Koo thinks that Japan, which was facing a far more serious destruction of assets, derailed its recovery with premature fiscal reform. “If we had known in advance that this kind of recession will never be over until private balance sheets are repaired and fiscal stimulus is needed to keep the economy growing, we could have done it in seven or eight years perhaps instead of 15,” he said.

Welcome to the New Ickonomy This just in: The folks who told you last year that there would be no recession, and early this year were saying there might be a just a mild recession, are now saying there definitely won't be a depression. This time they might finally be right, technically, in a squeaker. But it sure won't feel that way, as a downturn that has already destroyed the savings and livelihoods of hundreds of thousands of Americans is growing more pervasive by the hour, and every attempt by the government to make things better is making things worse in ways that most of us can barely imagine. The environment is growing so hostile to jobs and capital -- as layoff and bankruptcy rates rise to multidecade highs -- that I need to coin a fresh name for our era. So let's call it the New Ickonomy. The distinguishing feature of the New Ickonomy is the virtually unprecedented way that all asset classes, economic classes, industries and regions are now correlated with each other. It's about 90%, the highest since at least 1974, according to one study, which means for investors and job seekers alike there is nowhere to hide. Since 1940, the United States has gone through 10 recessions, or about one every seven years. But data from the Economic Cycle Research Institute show that from 1790 to 1930, there were 35 recessions, about half of which deepened into depressions (essentially severe, prolonged recessions). The fact that we haven't had a depression since the 1930s, in other words, is an anomaly in U.S. history -- not the norm. We're about 300,000 job losses away from the worst of the 1991 recession, which is one month's total lately, and about 1 million losses away from the worst of 1982, which could be reached by February. Meanwhile, service job losses alone are already worse than a level last seen in 1974. Negative feedback loops, which start slowly and gather speed, are now the only conveyor belts working overtime in the world today. The terror of the New Ickonomy might have started with banking and homebuilding, but their toxins spread quickly to technology (fewer banks need fewer computers), commodities (fewer homes need less lumber) and manufacturing (fewer floors need less carpeting). The terror may have started in the U.S., but it has spread to China, Europe and Latin America. The terror might have started with lower-income people losing their homes to foreclosure, but it has spread to corporate tycoons such as Sheldon Adelson of Las Vegas Sands (LVS, news, msgs) losing billions in stock holdings bought on credit, the superrich losing tens of millions of dollars on land, stocks and yachts bought on credit, the middle class losing middle-management jobs ranging from high finance to automaking, and the poor losing jobs ranging from restaurants to construction. The terror might have started with equities, but it has moved on to bonds, oil, timberland and private equity. The terror might have started as something happening to someone else, but it has moved on to affect virtually everyone, everywhere.
Have past crises taught us anything?

Economic and Financial Policies

Obama Aims to Create 2.5 Million U.S. Jobs Amid `Historic' Economic Crisis President-elect Barack Obama said he aims to save or create 2.5 million jobs in a two-year plan to stimulate an economy facing a “crisis of historic proportions.” “It’s likely to get worse before it gets better,” Obama said today in his weekly radio address. He said that this week “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs. The economic slowdown has been exacerbated by the worst credit crisis in seven decades. More firings will weigh on the economy and consumer spending, putting pressure on Obama and Congress to agree on legislation that will stimulate growth. The incoming 44th president is expected to announce, as early as Monday, his economic team, to be headed by Timothy Geithner, head of the Federal Reserve Bank of New York, as Treasury secretary. Others include Jacob Lew, former President Bill Clinton‘s White House budget director, who will serve as National Economic Council director; and Peter Orszag, head of the Congressional Budget Office, who will be the next White House budget director. Obama hailed this week’s enactment of a $6 billion extension of unemployment benefits, and said more needs to be done, and quickly. “We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year,” Obama said. The president-elect’s address was also recorded on video and was posted on the official presidential transition website - - http://www.change.gov/
!!! Obama: "Act Swiftly and Boldly"

Obama Says Spending Overhaul Is `Imperative,' Names Orszag Budget Director President-elect Barack Obama said overhauling the federal budget is “imperative” and vowed to eliminate unnecessary spending in areas from health care to agricultural subsidies. “We cannot sustain a system that bleeds billions of taxpayer dollars on programs that have outlived their usefulness, or exist solely because of the power of a politician, lobbyist or interest group,” Obama said at a press conference in Chicago, his second in as many days. Still, he said his first priority would be to find ways to stimulate the economy -- a move that will cost hundreds of billions of dollars -- and then take on spending cuts after the recovery is well under way. Obama announced his choice of Peter Orszag, head of the Congressional Budget Office, as his White House budget director. Rob Nabors, the staff director on the House Appropriations Committee, will be Orszag’s deputy. Orszag will put together Obama’s proposed spending plan as the federal budget deficit may top $1 trillion next year.

Bush says Citigroup deal needed to protect system President Bush argued Monday that the government's dramatic rescue of Citigroup was necessary to "safeguard the financial system" and help the economy recover, and he said there could be more such moves if other institutions need help. Bush said he approved the action, recommended by Treasury Secretary Henry Paulson, while flying back to Washington on Sunday evening from meetings in Peru with Pacific Rim leaders. He said he also spoke with President-elect Barack Obama on Monday morning, part of what he has promised will be "close cooperation" between his administration and the Obama camp until the transfer of power on Jan. 20. Referring to the Citigroup rescue, Bush said: "We have made these kind of decisions in the past. We made one last night. And if need be we will make these kind of decisions to safeguard our financial system in the future." The president has repeatedly sought to defend his administration's unprecedented intervention in the financial markets in recent months, arguing against criticism from some fiscal conservatives by saying that the moves go against his free-market instincts but are necessary because of the dire times. He also has said that he was warned that the economy could fall into a slowdown worse than the Great Depression of the 1930s if the government did not act. Analysts said a Citigroup failure would have seized up still-fragile lending markets and caused untold losses among institutions holding debt and financial products backed by the company. At the meetings in Lima, Peru, over the weekend, Bush succeeded in getting the nations there to endorse the action plan drafted a week earlier at an international summit Bush hosted in Washington. That means that both the so-called Group of 20 nations and the Pacific Rim countries are now on record behind overhauling financial regulation and avoiding the temptation to erect new trade barriers during the current downturn.

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 predecessor, 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.

Consequences and Impacts

The Formerly Middle Class At the beginning of every recession, there are people who see the downturn as an occasion for moral revival: Americans will learn to live without material extravagances. They’ll simplify their lives. They’ll rediscover what really matters: home, friends and family. But recessions are about more than material deprivation. They’re also about fear and diminished expectations. The cultural consequences of recessions are rarely uplifting. The economic slowdown of the 1880s and 1890s produced a surge of agrarian populism and nativism, with particular hostility directed toward Catholics, Jews and blacks. The Great Depression was not only a time of F.D.R.’s optimism and escapist movies, it was also a time of apocalyptic forebodings and collectivist movements that crushed individual rights. The recession of the 1970s produced a cynicism that has never really gone away. The share of students who admitted to cheating jumped from 34 percent in 1969 to 60 percent a decade later. More than a quarter of all employees said the goods they produced were so shoddily made that they wouldn’t buy them for themselves. As David Frum noted in his book, “How We Got Here,” job dissatisfaction in 1977 was higher than at any time in the previous quarter-century. This recession will probably have its own social profile. In particular, it’s likely to produce a new social group: the formerly middle class. These are people who achieved middle-class status at the tail end of the long boom, and then lost it. To them, the gap between where they are and where they used to be will seem wide and daunting. The phenomenon is noticeable in developing nations. Over the past decade, millions of people in these societies have climbed out of poverty. But the global recession is pushing them back down. Many seem furious with democracy and capitalism, which they believe led to their shattered dreams. It’s possible that the downturn will produce a profusion of Hugo Chávezes. It’s possible that the Obama administration will spend much of its time battling a global protest movement that doesn’t even exist yet. Recessions breed pessimism.

Poverty spreading in suburbs: study Poverty in the United States is spreading from rural and inner-city areas to the suburbs, according to a study, a situation that can worsen as the economy confronts what may be a protracted recession. The study by the Federal Reserve's Community Affairs department and the Brookings Institution Metropolitan Policy Program found that poverty levels in the world's richest nation were on the rise. "It shows that concentrated poverty is still very much with us, and that it can be found among a much more diverse set of communities and families than previous research has emphasized," said Bruce Katz, a director Brookings Institution Metropolitan Policy Program. "Poverty is spreading and may be re-clustering in suburbs, where a majority of America's metropolitan poor now live." The study was released ahead of next week's conference on concentrated poverty at the Fed. It shied away from explaining the causes of poverty, but past research have linked the phenomenon to loss of jobs in manufacturing, agriculture and mining. With the U.S. economic outlook rapidly deteriorating, poverty could get worse. The U.S. housing market collapse has unleashed the worst financial crisis since the Great Depression, forcing business to scale back on investments and driving the unemployment rate to a 14-year high. Data on Tuesday showed the U.S. economy contracted 0.5 percent in the third quarter, its fastest pace in seven-years, with consumer spending dropping to a 28-year low. Many analysts believe the United States already has joined Europe in recession, though it will take another quarter of contraction to meet a widely used definition for it -- back-to-back quarters of declining output. The study noted that a strong economy had helped to reduce the incidence of concentrated poverty across the United States, but the process might have stalled during the current decade.

Bailing out the Busted Three

Just Say No to Detroit Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear. In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen's presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen's calculations. Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998. As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.
Stimulate Car Buyers, Not Car Makers ,

A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11 G.M is using money so quickly that a $10 billion infusion made today would disappear by February. That is why taxpayers shouldn’t fork over a cent, at least until shareholders are wiped out, management is tossed out and the industry is completely reorganized. But there is a fix. Call it a government-sponsored bankruptcy, a G.S.B., if you will. It might sound a bit like an oxymoron, but it is an idea that has been quietly making the rounds in Washington. It makes a lot of sense. Here’s how it could work: First, let’s recognize that G.M. doesn’t need life support. What it needs is Chapter 11. The bankruptcy process is not a bad thing — indeed, it should be embraced. Bankruptcy allows companies to do tough things they could never do in the normal course of business. It has helped many companies turn themselves around and come out even stronger. Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships. In fact, unless G.M. files for bankruptcy, state laws would make it prohibitively expensive to shut dealerships.

An Auto Bailout Would Be Terrible for Free Trade – Matthew J. Slaughter The first global cost of a bailout could be less foreign direct investment (FDI) coming into the United States. On Sunday, President-elect Barack Obama asked, "What does a sustainable U.S. auto industry look like?" Well, it looks a lot like the automotive industry run by "foreign" car companies that insource jobs into the U.S. In 2006 these foreign auto makers (multinational auto or auto-parts companies that are headquartered outside of the U.S.) employed 402,800 Americans. The average annual compensation for these employees was $63,538. At the head of the line of sustainable auto companies stands Toyota. In its 2008 fiscal year, it earned a remarkable $17.1 billion world-wide and assembled 1.66 million motor vehicles in North America. Toyota has production facilities in seven states and R&D facilities in three others. Honda, another sustainable auto company, operates in five states and earned $6 billion in net income in 2008. In contrast, General Motors lost $38.7 billion last year. Across all industries in 2006, insourcing companies registered $2.8 trillion in U.S. sales while employing 5.3 million Americans and paying them $364 billion in compensation. But as the world has grown smaller, today the U.S. faces increasingly stiff competition to attract and retain insourcing companies. Indeed, the U.S. share of global FDI inflows has already fallen. From 2003-2005 the U.S. received 16% of global FDI. That's down from 31.5% it received in 1988-1990. Will fewer companies look to insource into America if the federal government is willing to bail out their domestic competitors?

The Nation: Is Steel’s Revival a Model for Detroit? A FEW years ago, an industry whose history and mythology were indelible parts of the American identity was dying. The great steel mills of Pennsylvania and the Midwest had literally built this country, but the twin burdens of competition and self-inflicted wounds had brought them to the edge of extinction. If they were allowed to go under, their partisans warned, the consequences would ripple through the economy at a cost too high to bear. The old saying, “As steel goes, so goes the nation,” was as much a threat as a boast. Yet steel’s savior was not the government bailouts it ardently sought but exactly what it so long tried to avoid: bankruptcy. Only when the companies failed were they successfully slimmed down and retooled into smaller but profitable ventures. As debate continues over what, if anything, should be done for G.M., Ford and Chrysler, the steel industry may offer a model. The steel and auto industries are both capital-intensive enterprises that peaked a half-century ago and have been intermittently embattled ever since. Both secured peace with their unions by vastly expanding benefits, a bargain that eventually hobbled them. Both had entrenched layers of management that believed — despite all evidence — they could wish away change.There are also key differences. Steel is essentially a straightforward commodity industry: the companies compete on price. Auto sales are often ruled by consumer perceptions. This has been a problem for Detroit. Many of its customers long ago fled for Toyota and Honda and a bankruptcy would scare away many more. The steel industry was beginning its long stumble when it turned to Washington for help in the late 1970s. The Carter administration responded by committing $300 million in loan guarantees to five struggling companies. Nearly a third of the funds went to help Wisconsin Steel, a Chicago outfit that had been around since the previous century.