Parts to Wholes: the Socionomic Systems Nexus

The last post took a pretty deep dive on the Economic Report of the President (ERP) because it was the best such document we've seen in years and lined up so well with our assessments of the economic situation (a link in that post took you to a proposed agenda for Economic Policy we proposed in Oct08 and wrote up in Jun/Jul08). We hadn't intended to go that deep but defining a baseline on where we're at and going seemed like a good idea, especially when somebody else did all the work AND you could use it to test whether or not the guys making the decisions get it. That's not all it should be because if we learned anything over the last year or two it's that being right on the substance has little or nothing to do with what the politicians, punditocracy or population thinks about it. About the talking heads - we'll say this: to date we haven't seen, with some exceptions, any serious digging into what's really going nor any sense of timing, rythm or mechanics. In other words all the things that are critical for understanding what's going on and how we can go about things is largely missing from any discussion. As for the politicians and populace, well that situation seems to make the pundits beacons of reasoned enlightenment. Just to set the table try listening to this clip from Rachel Maddow's show on political rhetoric vs. local positioning on the stimulus and other policies. It's pretty amusing and factually accurate (that's not a general endorsement of her show - fun to watch, gently sharp-tooted but fair but more than over the top from time-to-time; after a spell last summer we quit watching. No grasp on "making it so" in the real world and the entertainment value faded).

Just So You Know: the Real Economic Situation Once Again

So, speaking of the stimulus, let's try and take one more level set of how things actually worked out when it turned out we weren't going to become the USSA. The UL graphic on the impacts of the stimulus is taken from a recent column by Leonhardt in the NYT (review by Menzies Chin) but consistent with what Menzie, I and many others have been saying for over a year. The bottom line is that it saved us but, in the UR graphic, we're a long way from being out of the woods. As bad as it was it'll take a long time to recover the lost jobs. Especially with the LR corner that tells us (btw that one's from Goldman Sachs!) how weak this recovery is and will be. The LL corner puts it all in strategic context - the question is how we keep things from tipping back over, move onto a self-sustaining basis, re-establish growth and then, the hardest challenge if we get, re-establish a new long-term path back toward prosperity. There's the rub, as they say!

Continue reading "Real State of the Deficits/Debts, Politics and Governance Changes" »

Posted by dblwyo at 06:15 PM | Permalink | Comments (0)

Both the proposed US Budget for 2011 and the Economic Report of the President were recently published. Both are well-written, accurate, complete, honest, skilled and inter-linked documents, though the former is probably sleep-inducing and it takes a certain amount of background to get excited about the latter. But you should, both are well worth skimming. The tables of contents if nothing else. Back at the beginning of 2008 we told our network and readers that the single most important issue facing the country would be the Economy but we didn't anticipate either how true that would be or how close to the edge of the abyss we would come. We were, by-the-way, within 24 hours of a complete collapse of world markets. An event that would have been worse than the Great Depression because of the levels of debt and financial leverage, would easily have seen base Unemployment skyrocket to 25-30% and the GDP drop by 20-25%, at least. Bad as our troubles are they could have been enormously worse, literally by orders of magnitude. Be that as it may we're still facing a decade of slow growth, difficult policy decisions and political gridlock. Let's be really, really clear about this. The world has changed more as the result of the economic crisis than it did on 911 - the arc of slow structural evolution in the US and world economies and the associated paths our societies were on are now on entirely new paths. That's why the partisan posturing in Washington is so critical and so dangerous. A major part of the problem is that for most people it really is rocket science. So to help as best we might we're going to devote this entire post to our best attempt at deconstructing the ERP to define the crisis, the impacts, the historical forces that set it up and the consequences for the future. NB: we'll also say this is the first ERP we've looked at that wasn't an apologia for an ideological position but instead a sober appraisal of the facts using the best public data and analysis. We can't emphasize that enough - the analysis in the ERP exactly mirrors that last few years of mainstream thinking, has roots in work that stretches back thirty years and lines up with our own. In fact if you compare the ERP and its TofC and strategies to a post of ours from Oct08 they are identical: Populist Panderings, the Candidates and Real Solutions.

Defining the Baseline: Crisis and Reactions

Let's start by defining the baseline of what happened, in somewhat simplified terms, using charts drawn (as they all are almost) directly from the Report. The details are more complicated of course but here's the gist. In the UL corner you see Housing prices stretching back to 1900. Just by inspection you can see the "mother of all bubbles". Housing prices will always go up indeed - talk about complacent self-delusion. Or that the smartest people in the world couldn't read simple charts! When the bubble began unraveling it took the credit markets down, largely because of leverage and coss-linkages. In the UR you see the spread between 3Mo Treasury bonds and commercial ones (TED) and the BAA-AAA spread between higher risk and low risk commercial paper. Normally the TED spread is infinitesimal. When it goes up people are worried and when it goes to far the money doesn't flow - no car loans, no working loans for businesses, credit cards and money markets are frozen, business and the ordinary business of life STOPs! You can how it got increasingly scary thru 2008 until it blew up into a life-threatening situation. Fortunately the Fed and Treasury have brought things back down into more normal ranges, the the BAA-AAA spreads are still elevated, but at least the markets are alive if not working well.

That's not the end of the story because the financial crisis leaked into the real economy and turned an already weak and accelerating slowdown into a major economic downturn greater than anything since the 1930s. Which you can see in the huge drops in Employment in the LR corner, which while still bad, are coming back as the result of stimulus and other policy actions. In fact in the LL corner you can see the differences in GDP with and without the policy interventions. Despite everything you've heard the stimulus worked, was the largest peacetime effort, was well constructed - especially when you allow for the speed with which it was put together and an act of real political courage and skill. Without it we'd have had Stalingrad instead of Pearl Harbor.

Continue reading "History, Baselines, & Your Future: the Economic Report of the President" »

Posted by dblwyo at 07:17 PM | Permalink | Comments (0)

Sine Qua Non is Latin for that without which there is no other - a tag that had to be explained to me years ago but which has stuck with me as a useful description. Those old Romans were smart about a lot of things, weren't they? Well the Sine Qua Non of everything we'd like to do is the Economy and it's a very open question of how smart we'll be about it.

To summarize we were saved from literal collapse last Fall, avoided the second wave of risk this last Spring and (likely) a lost decade and have turned the corner because of government monetary policy and spending programs. Make no mistake about it, absolutely none, the Fed and the Administration saved us from a near-run risk of disaster. We were staring into the Abyss and have moved quite a ways back from the edge. We still have a long way to go, the recovery will be weak and job creation will be poor (the jobless/jobloss recovery). Worse we're going to have deal with three decades of neglect, ideology and complacency to get growth. To get prosperity with rising wages, benefits, and long-term growth we need to re-base the economy while repairing its foundations. Almost all of the attacks and disagreements you have heard against those policies have been wrong-headed, proven wrong on the data to date, motivated by partisan political posturing, are self-serving and dangerous and grounded in ideological shibboleths that are dangerous to your health and well-being, as well as those of your children.

That's it in a nutshell and if you understand it and believe it we're done, especially if you know why. And in strong language as well. The problem with economics is that it makes everybody's head hurt and they don't want to learn the basics. On the other hand the professionals don't make it easy, don't communicate well and get caught up in bright shiny things and their own narrow shibboleths. Plus they usually have no clue as to the practical policy and politics required to turn arm-waving into real world actions that work and are effective. So we're going to try and parse things thru chunk by chunk to try and help out with that. But if we don't get this right, and most of what you hear is crap, look out below.

State of the Economy

Let's start with where we're at in the business cycle. Most of the news coverage presents the data in ways that are hard to see and understand. But the economy moves in cycles where the control settings change but the patterns are consistent over decades, even centuries. The economy is like the ocean and moves in waves driven by deep currents.

We look at it using the Year over Year percentage change (YoY%), which shows the redcurrant patterns very clearly. It also makes the trends, structure, relationships and turning points very clear as well. The top chart here is the core one and shows GDP compared to Consumption (PCE) an Employment. Notice how much deeper this downturn was but also notice that both GDP and PCE turned up this last quarter. Almost entirely because of the Stimulus programs. Also notice that Employment is still headed down.

The next two charts stretch the time period back to 1960 so you can clearly see how GDP and Consumption and Employment move together. Looking at the GDP trend you an see where it went over the Abyss. Something you need to know is that real GDP growth needs to be above 3% to grow jobs, closer to 4-6% for a while followed by 3-4% to get the engine growing on a self-sustained basis (call it organic growth). Until we get the engine running on its own we need public spending programs.

Continue reading "The Sine Qua Non: Economy, Stimulus and Outlook (UPDATE)" »

Posted by dblwyo at 08:51 AM | Permalink | Comments (0)

We're going to stick with Financial Reform for a while because so much has happened in the last week, and even more importantly, because it's such an important, even critical, issue. In some ways, though not all, Financial Reform is the single most important domestic policy challenge after stimulating the economy. Healthcare Reform as well as Education, Energy and Innovation are probably more important in the long-run but to get there we need to have a healthy, reliable and effective Finance Industry. Setting aside the natural anger that almost all of us feel about the last two years, which should be counter-balanced by the fact that we all rode the gravy train for the last three decades, we've concluded that the policy and business cases for not reforming Finance do NOT hold up, and in fact are completely contradicted by the facts and the economic history. But, like almost every other major policy initiative, we're now having to pay the Piper for that three decades party, before he comes to collect with claymore in hand.

Take a few minutes to listen to this BNN clip from the founder of a Canadian securities firm who sounds about like the rest of us on the banks, but starts with discussing his recent trip to Afghanistan and the level of public dedication displayed as well as the level of progress. Then close the loop....what a compare and contrast between the Financiers and those troops. You might also want to check out Andrew Sorkin on Charlie Rose (go to the site, go to the archives and scroll down) and this recent PBS Special on Brooksley Born and futures regulation. Among other things Sorkin uses a key phrase - "tone deaf". What's happening to the Industry is something that they refused to see coming because they figured it was business as usual. On that topic Ms. Born's history should give you a bit of the history involved.

The Vicious Cycle of Malfeasant Financial Engineering

The last post went into some length on why the business models are broken and why the case(s) for leaving the Industry un-regulated don't hold up as well as pointing to support from an interesting range of commentators, from Greenspan to Volcker to Mervyn King of the Bank of England. In the accompany graphic we've tried to summarize those arguments and put them into the context of the bigger economic picture.

The top box summarizes the key economic policy goals that we must succeed at, no ifs, ands or buts, if we're going to stabilized the economy, get it growing again and re-create a healthy long-term outlook for us all. A healthy and product Financial sector is vital to all of them, but is key to #6 and IS #7!

Continue reading "Banks Hate Banks, Voters Hate Banks: Hear the People Singing!" »

Posted by dblwyo at 02:26 PM | Permalink | Comments (0)

An existential crisis is one that threatens the existence of the entity in questions - the Hudson plane crash was that for the passengers, WW2 and the Cold War were such for the US and the world order as know and love it. By those standards the current multi-part crisii aren't quite existential but in each domain (Economic, Foreign Policy and Domestic) we are faced with disruptive threats to the structure of the system as it exists. In other words if/when/as we get thru all this the nature and structure of the US and World economies will be radically different than what's evolved over the last 3-5 decades, the world system is being re-architected as we watch and key domestic policy issues (Education, Healthcare, Energy) that have been allowed to metastasize into systemic, disruptive threats by willful neglect have all reached cusp points. As existential as we care to get. Yet, by and large, in a few weeks a lot has been done to address them. The prior three posts were wrap-up and summary assessments for each of the three and were preceded by series exploring each. With the release of the new Star Trek movie everybody and their siblings have been using it to re-visit history, the culture wars and current events. Newsweek for example gifted us with this Star Wars vs Trek poster, which is both amusing and rings true (or truish). Jon Meachem, the managing editor, was on Charlie Rose the other night and gave his impressions of Barry after the first 100 Days. [A conversation with Jon Meacham] Pretty inside baseball stuff and it misses some of the key points which are critically important. Not least of which is not just the speed, force, magnitude and scope/number of major policy initiatives being put into place, nor how well the process is being managed or even - so far - how decently they are being implemented. What Meachem and the rest of the beltway observers are missing is the processes that are being used to apply rigor, logic, experience, multiple points of view and consensus building to arrive at pragmatic, workable and implementable solutions.

Revisiting the Policy Blueprint

 This particular graphic evolved to try and compress and represent the fundamental themes we face as a nation. It's genesis begins back in 2004 and it was put together almost three years ago. The point was that these were and are the changes in philosophy, policy and values needed to meet the existential challenges we faced... and still face. If you skim back over the prior readings you'll find that each one is being tackled, being tackled with a strategic policy that meets the test of being the best thinking that has evolved over the last three decades and is, therefore, the "right" thing to do. The readings provide current updates coupled with structural graphics illustrating each area in all of the major policy areas, politics and value development. While each deserives it's own series consider two key examples - mileage standards and Healthcare. The US auto industry has fought standards for years because it's profit-dynamics favored large vehicles while it gave ground to the Japanese. What's been needed is a set of national standards that reduce consumption, decrease pollution and avoid the expense of a single company trying to invest in multiple standards from many states. This legislation was put together over several months and is a consensus among the stakeholders, especially including the manufacturers, on how to proceed collectively. Similarly the biggest momenturm for HC Reform since 1992 has been built up and, as shown by recent industry payors and other players, it too represents a coalescing consensus that's been carefully built up in the public square. As opposed to be crafted by a small team in a backroom and forced down the throats of the polity, of Congress and the stakeholders. On all these fronts we have the best chances we've had to do something reasonable and constructive we've had in two generations. If they fail it won't be because the best we can think isn't being put on the table. Nor will it be because the right steps to building political support and putting workable implementation are being put in place. It'll be because narrow interests can't help themselves or because we haven't yet come up with the right mechanisms for implementation.

Making It So: Policy From Vision to Selling It

To get a new idea from vision to implementation there are several components that have to be put in place. First is the overall Vision - what principles, values and directions are suited to the time, which direction do we need to head, how do we judge ? Next is Leadership - or character, integrity, explanations (Voice) and delivery (making it happen; approach). Finally there are the wonkish specifics - what, where, when, why and how ? Especially mechanism ! Over the course of the last two years Barry started out focused on the Vision Thing while John-boy had some old principles lying around but was mainly focused on specific policies. As the election evolved Barry got more and more into details and strategies (his acceptence speech, his victory speech, his inaugural and every subsequent major policy speech could almost be a single book as they are consistent from beginning to end). Meanwhile JB retreted more and more to vituperative specifics based on old philosophies and shibboleths that were and are out-dated. Though he redeemd himself with a noble and public-spirited concession speech, as fine as anyone could make. His party on the other hand is turning out to be a bunch of angry, old white mean, I mean men, who are getting angrier and angrier about narrower and narrower concerns. Concerns where they are not only losing on each issue but are proving to be wrong, which is more important.

The Agora and Civitas:

Tolerance, Civility, Open-Mindedness & Public Responsibility

Having a different point of view is all well and good but it should come with two critical characterisitcs. A willingness to dsiplay tolerance for alternative perspectives and to reason together in resolving disagreemetns. And a commitment to abiding by the decisions reached in the public square - the Agora. At the end of the day we all benefit from a functioning public square and it is healthy if and only if we all exhibit civility, manners, tolerance and a commitment to it's health. Each of the last two administrations, in their own ways, contributed to the disruption of the Agora. Clinton by chasing after the latest polls and swinging with the wind, looking not for the right thing to do but the thing that would win. Bush by trying to force what he and his people "knew" was right and govern not for the good of the majority but trying to find the 50 + .01% that would allow them to force a decision. If you actually listen to President Obama's Notre Dame speech he's not insisting that he's right. Rather he asks for open minds and a willingness to tackle collectively difficult and divisive issues. And live with the collective decision.

So, at the end of the day, the pundits are missing the two most important things that are happening.

1) Each major policy decision is being arrived at by open dispute among the involved parties until the issues and alternatives are clear when a decision is arrived at.

2) The Administration is treating the public and it's opponents as adults who are open to discussing complex issues with difficult answers. And who are also willing to govern themselves with Civitas - that is with a sense of public responsiblity. MUCH more importantly we can slowly see the tenor of the debates change and evolve more toward a sense of Civitas - tolerance, open-mindedness and a willingness to roll up our sleeves.

Continue reading "Existential Crisis IV: the Agora, Civitas, Values and Futures" »

Posted by dblwyo at 09:33 AM | Permalink | Comments (0)

If the news over the last few months hasn't made it crystal clear to you last Friday's bankruptcy filing by Chrysler, with GM likely to soon follow, should make it clear that we are in the eye of the biggest economic storms in over sixty years. We're facing fundamental changes in the structure, nature and direction of the US economy which will define the limits of policy and prosperity for decades to come. The good news is that the Administration is doing extremely well in putting the right policies in place quickly and implementing them about as well as could be expected. The bad news is two-fold. First we've got a long way to go before this is over and we reach a growing economy again. The worse news is that longer-term growth prospects are extremely poor and will be potentially lower than at any time in the post-war period. Now that's big picture stuff but presumably you've all heard about growing income inequality, businesses and industries disappearing forever and all the rest of the symptoms of underlying structural flaws that have been accumulating since 1980. If we'd like to return to a modicum of growth we need to get the economy and society on a new footing. The good news is that not only does the administration realize this but it's already putting in place the necessary programs and investments that stand a reasonable chance of making it happen. We've heard no better summary of this existential crisis than this Rose interview with Lionel Barber, editor of the Financial Times. Memorize it and use it as a checklist !

Addons and Extensions:

We just put up a major survey of the structure of the US economy which is complementary background reading for how the economy works. In fact we'd almost say mandatory: It can be found here: Real Data Interlude I: Econ-ecostructure (GDP to Trade)

Economic Alternatives: Stagnation vs Re-structure

We've been covering the economic news for quite a while here, going back to early '08 at least so we won't dive into the details of the cycle, policies and politics as well as budgets. You can check back to skim over all that in the archive and/or we've listed some of the prior postings in the readings excerpts (NB: you'll also find a very extensive collection on the current situation, the long-term prospects for low growth, specific policy areas (Taxes, Regulation, Housing & Autos) and fundamental shifts in strategic policy which represent the biggest shift since 1980. Judging by the most recent poll results (discussed in the last post:Peace in the Public Square: the 100 Days and Re-emergence of Civitas (Updates) ) the public trusts the President and the Administration but still hasn't grasped the implications and is particularly angry about the on-going rescue of the Finance Industry. While the Administration has clearly laid out it's policies and how the pieces all work together the explanations are also still lacking something. We're going to take a shot at framing the discussion using three variations on a conceptual chart to try and read you into the context. No guarantees but let's see what we can do.

The chart shows the possible alternative timepaths that the economy could end up following - in fact the likely ones. The red line is a sustained "Great Recession" which would be as close to disaster as we'd ever want. Fortunately fast and heavy action by this and the preceding Administration and the Fed have likely avoided that, barring some catastrophe. The real danger, and a real one because of the structural flaws, is that we get trapped into a long-term L-shaped recovery like Japan since the 1990s. The best available alternative is a gradual U-shaped recovery which is what current policy is aimed at creating, unfortunately followed by a very weak recovery with low growth, very low new job creation and a continued deterioration in incomes, well-being and the overall health of society. To get onto the path (green line) of a higher, sustained and self-reinforcing growth path requires that those structural flaws be fixed.

 From Crisis to Recovery: Phases, Policies and Risks

For even a weak recovery a lot of things have to go right and at each major cusp point there will be serious downside risks that could abort the recovery. In a normal economic cycle growth in consumer spending causes business to invest in new capital equipment and hire more workers. The post Tech Bust saw the lowest post-war job creating economy because growth prospects were so poor. In fact the only thing that held up the economy at all was the Housing ATM; without it we'd have the kind of recovery we're now facing again. When both consumer and business spending are low there's NO source of demand but government spending. Once the pump gets turning over after the priming it hopefully becomes self-sustaining, organic if you will. Given the cyclic and structural weaknesses we're facing that will require continued government spending for several years or we'll fall back into recession. To get to the higher growth path and make it self-sustaining we need a more efficient economy where infrastructure is not a bottleneck, where we aren't vulnerable to surges in energy prices and healthcare isn't an exponentiating drain on business and the rest of society. More importantly it also requires new jobs to be created which result from innovation in technology and business that lead to new industries. Finally the potential new jobs have to have the right kind of workers - a real set of inter-connected and complex dependencies. But stop me when you think you haven't heard the rationale for new policy strategies in Education, Energy and Healthcare as vital to our long-term well-being. We've been deferring these issues - which we've known what to do about for at least 30 years. (Oil and Other System Shocks: Beyond Iraq & Georgia, 911 Memorial: Fix the Problem Don't Repeat the Crash") Now we no longer have that luxury.

Long-term Economic Policy: From Stimulus to Investment

One of the knocks on current policy - actually a twofer - is that we're going to pile up a bunch of debt and trigger a major inflation. Both are basically unfounded nonsense that don't understand how things will work out for several reasons. First, on debt, the faster the economy grows the easier it will be to repay any debts and reduce the burden. Investing in that growth is a sensible decision. Government spending that subsidizes consumption in the long-run would create problems but government spending that puts the economy on a new base will grow the economy as a whole. Associated with that is that over the last two decades businesses and consumers have run up huge debts of their own but they are changing to more rational, conservative and prudent savers which will reduce the overall debt levels of society, leave plenty of cash flow for funding constructive investments and put us on that healthier path. As for inflation that will be a risk only if the massive injections of funds by the Fed are left in the system as the economy recovers. Right now the amount of sloshing funds (call it Liquidity) is enormously less than the talking heads tell you because it's not moving as fast. Think of it this way Liquidity = Money Supply (M) times the speed of circulation (Velocity). Right now M has gone up hugely but V has dropped even more; it'll take years to repair the damages done to the financial system but when we get there it'll be just as easy for the Fed to withdraw the excess funds as it was to inject them. Let's hope we manage to get to where that's a problem. The real danger is that too many opstrepterous orothodxies will force something premature and do to our economy what the ECB has done to Europe in the downturn; making a bad situation worse. BtW - we got out of the Great Depression because of WW2 spending but didn't have to because the New Deal policies were working until they were aborted in the mid-30s and re-started the Depression. Let's settle for once-burned thrice-shy please ! Whether we manage to do the right things gets back to the question of can we get the economy on a self-sustaining feedback loop !

The short-term emergency spending is designed to arrest a collapse and won't do that, neither will the short/intermediate-term stimulus spending. Even the current scheduled follow-on spending is likely to lead to an anemic recovery (which is btw the long-term forecast of the Fed, the CBO, OECD and the IMF; sounds like a consensus to me). A prosperous future that's sustainable comes about only from the strategic policies in the key areas. And one that makes a better life for the next generation comes about only from fundamental change.

THAT's the challenges we're facing !

Continue reading "Existential Crisis in the Agora I: Economy, Policy and US Strategic Outlook (Addons)" »

Posted by dblwyo at 03:30 PM | Permalink | Comments (0)

It's time to speak of many things, of kings, and cabbages, said the walrus. And speaking of things unless you've been hiding in the wilderness you've heard about Susan Boyle's stunning performance on the British Idol. Truly wonderful and a revelation. But beyond the singer and her voice one fascinating thing was watching the reactions of the audience and the judges - which we've tried to capture a bit here. But you need to watch the whole carefully as they move from snickers to shock to transformation to sheer joy. Amazing what's out there if only the opportunities are available, ain't it ? What she sang was "I Dreamed a Dream" from Les Mis, about the sundering of hope, ambitions and the cruelties of the world. Personally ironic but in light of the times we're living in more so for all of us. The question becomes what opportunities will we all have, what might be taken away and what do we do about it.

Economic Opportunities: Potential vs Actual GDP

One way to sneak up on those questions is to compare potential GDP - what the economy could produce at full employment, and actual GDP - what it produces when it's working at less than full capacity. The chart shows potential and actual real GDP per capita and they look pretty close from 1950-2008. Until you look at the differences between them ! Which is what the faint red line does while the heavy red line shows the trend. Notice that up until the late '90s things moved in a nice gentle cycle and then blipped up a bit. But the recent collapse is already more severe than anything we've seen in almost sixty years. And given that this downturn is going to go on for a while you can imagine where it will end up !

Dreams Indeed: Long-term Job Creation

One way to bring home the consequences a bit more is to look at the creation of new jobs which the next chart does. The light blue line shows new jobs quarterly from 1980 while the dark blue shows net new jobs. For the economy to grow, met growth in population and make folks better off we need to create a minimum of 450K jobs per quarter just to breakeven. Otherwise net new jobs falls behind population and productivity growth - and it is increased productivity that creates prosperity. When you take the running total over time you get the red line, which tells us more than we'd like to know about the health of the economy. For one thing it was poor with little real job growth thruout the '80s until the mid-'90s with only a little blip in the Tech Boom followed a very weak, jobless recovery that gained NO ground. And now - well judge for yourself - but it looks like a lot of folks will be singing "had a dream", emphasis past-tense, unless we do something. And that something is NOT just arresting the economic collapse or even beginning a recovery. It's putting the economy a path to new, sustainable growth based on new technology, new industries and new jobs. Which, as it happens, is exactly what the Administration has set out to do.

The Best Economic Policy Speech Ever

As it happens that President gave the single best economic and economic policy speech last week we've ever heard. He covered all the bases, talked about what got us into this mess, where we need to go, each major element of the recent spurts of activity and where they fit and how they all work together in a coherent and cohesive pattern that makes a whole greater than the sum of the parts. In particular he focused on why we need to act intelligently now with an eye on positioning ourselves for the future. If you click on thru the picture it takes you to the CSpan vidclip and we highly recommend you do just that. A while back, in fact several times, we listed out, discussed and analyzed the state of the economy and all the steps we saw, both on our own analysis and as a synthesis of the best thinking of a very wide variety of analysts and economists what needed to be done. Now there's a few green shoots (Green Shoots vs Self-Arrest: Back to Economic Realities (UPDATED)) that have shown up but we've got a long...long way to go. Some of the details are listed out in earlier posts (First Things: Financial Crisis, Economy and Barry, To Boldly Go Where We Must: Speech, Budget and Dr. Noes).

The shopping list of necessary economic policies is:

1. Find immediate and emergency fiscal stimulus through things like tax cuts, extended unemployment benefits and direct spending while

2. Keeping the wheels on the credit markets by injecting loanable funds directly but then we need

3. Substantive direct spending programs that should also not be simple consumption in disguise but improve the long-term performance of the Economy. Investment in Infrastructure perfectly fits that intermediate term bill. But then...

4. Invest in the creation of new industries that lower costs in the economy, create new technologies and new jobs. Strategic investment in Energy and Healthcare happen to fit that bill perfectly. And then...

5. Make sure enough people have the right qualifications - in other words we need to re-think how we deliver Education for the 21rst Century. Finally...

6. Quite wasting money on pork barrel projects driven by special interests and political manipulations and

7. Re-regulate the Financial Markets without destroying their creativity.

Now almost all of the markers are down and it's time to play the game - which means patience, persistence, skill and hard work. Fortunately all the right things are in place, unfortunately it won't be a quick or easy set of fixes because we've neglected things for too long and worse yet there are still major execution challenges. As the Zen Master Huitang said in Lessons on Leadership:

"What has been long neglected cannot be restored immediately. Ills that have been accumulating for a long time cannot be cleared away immediately. One cannot enjoy oneself forever. Human emotions cannot be just right. Calamity cannot be avoided by trying to run away from it. Anyone working as a teacher who has realized these five things can be in the world without misery". (Welcome to Coach Carter's Gym: Renewal of Duty, Honor and Country).

Sadly that was written well over 1200 years ago but then we're clearly a species that learns slowly when we learn.

Continue reading "Re-building On A Rock: Policy, Economy & Values" »

Posted by dblwyo at 05:10 PM | Permalink | Comments (0)

We're going to circle back to the US and take up the state of the economy, economic policy, policy vs. politics and partisan political posturings and try and braid them together into a single rope of investigation. At the same time we are NOT leaving the topic of the state and outlook of the world because, as we argued in the first foreign affairs post in this series the US's role in maintaining and re-developing a new international system is critical and indispensable. And central to that role is the success of economic policy without which both the US and the world will face severe difficulties. In the readings we cover a lot of ground, as usual admittedly, starting with a survey of the state of the economy and real nature of proposed economic policy instead of what the headlines, pundits and partisans are telling you. If you read nothing else click thru and download Paul Kasriel's two essays on what did work in fact in the Great Depression (The Great Depression – Just the Facts, Ma’am) and on what role savings and investment will play in future growth (Paradox Squared). Then we shift to what the real challeng is - IMPLEMENTATION ! Then we segue to the partisan catfights where old shibboleths of the '80s are being revived to counter these policies when the facts on the ground  have changed ("when the facts change I change my mind. what do you do ?"). Finally we finish up with some readings on re-imagining what the new world could/should look and why a return to fundamental values revived in new clothes are essential to making this all work !

To summarize our main points however we'd say: 1) the economic situation is very serious but fixable and we have strong historical evidence, 2) the biggest challenges are implementation AND laying future foundations. On the latter the Administration is doing many right things on the former it's early to say. However, 3) partisanship is proving to be a poisonous legacy, 4) the American people still haven't grasped the Administration's direction at a fundamental (gut) level and 5) the biggest danger is the knife-edge balances between impatience for what will take time, effort and perseverance against the all to real risks of backlashes, anger and a radicalization of American politics. Then all bets are off. We take our socio-political stabilities for granted but what happens if they aren't a self-renewing gift from past generations ? Then we're in for the same kinds of troubles that are threatening other nations !

Economic History Realities

 Take a look at this composite chart from Kasriel of Northern Trust, which dissects the realities of what what on during the 1930s. The UL corner shows real GDP changes from 29-39 and that a recovery was actually underway. In fact when you net out Gov't spending it was in the core economy; that is there's a pretty good chance it was internal and organic. The evidence is further strengthened by looking at the significant improvements in Employment that took place in the middle '30s. Now look at the last sub-chart in the LL corner which shows the increases in Gov't spending. It turns out that this was the priming that got the pump going. And when "religious" orthodoxies prevailed the Depression resumed ! Despite the nay-sayers it is possible to re-stimulate the economy, you have to act early, forcefully and with enough resources. You also have to sustain until full health is restored. Fortunately for us the financial system is not anywhere near as frayed nor is there a complete absence of social safety nets. So there's no way this'll be anywhere near as bad but unless we act well and hard it'll get a lot worse and things are going to say fragile for a long time.

 Current Economic Legacies

Now let's look at another chart set that traces out the situation in the US economy and it's evolution over the last several decades. The top sub-chart shows the cumulative % change in GDP, Corporate Profits and the SP500 from 1950 to now. This is another one of those "simple" charts which tells us, when properly decoded, a profound human story. Notice first that they moved in lockstep until 1995+; in other words there was a natural, structural linkage between prosperity, profits and stocks for almost five decades. Which was broken by the Tech Bubble of the late '90s but investment-driven speculative bubbles are endemic to market systems. More interesting is the surge in Profits in this decade which appears to un-grounded in the underlying economy. If you look at the second sub-chart you can see that "bubble" highlighted. Now we know that much of these profits came from the Financial Sector and were built on houses of cards and sandcastles. In the non-financial world they also turn out to be built on reduced hiring (this was the weakest post-war job creating "recovery") and reduced capital spending. Both symptoms of corporations not investing in growth because they couldn't find the opportunities. Bear that in mind - economic growth is the sine qua non of prosperity and socionomic well-being. Back to the first chart for a minute when things were saner notice the markets did well in the '50s and '60s relatively and under-performed from then until the mid-'90s ! In the bottom chart you see the shares of national income that went toward Profits, Wages and Capital investment. Thru the mid-'60s Wages and Profits did well together while capital spending was stable. Then the piper wanted to be paid and wages and profits dropped during the "malaise" while capital's share went up to help deal with the shift to a less-energy intense economy. Since then it's re-stablized but wages have deteriorated, with the excpetion of the late '90s boom. Profits alone would appear abberational. There's probably a lot of complex factors but we think one is central: during the '50s and '60s we were enjoying the stable and sustainable growth from new industries in a stable political environment. Unless we find new sources of growth averting this current emergency and returning to a more normal business cycle WILL NOT fix these long-term problems.

Unintended Consequences

 Consider this interesting little chart which summarizes the Unintended Consequences (UiC) of our decades-long neglect of finding successful policies and politics in several key areas. Including Energy, Environment, Education, Healthcare, Welfare and Retirement. Strange how that chart which is close to two years old at this point so closely resembles the Administration policies being put on the table to address our long-term needs to re-vitalization. For each of these areas a detailed examination of a policy, or it's lack, would ask "what next ?" several times.That is what's the initial proposal, what incentives does it create, how will the various stakeholders act and what are the longer-term ripple effects. For four of the major areas we provide our summaries of where stood and where we stand; again the proposals on the table seem like they were all tailor-made to address these concerns. And, if you believe the implications of the prior discussions about the need to balance and integrate short- and long-term policies represent areas that MUST be successfully addressed.

Speaking of Stakeholders

Which means the stakes for all of us are pretty serious indeed, if not as serious as they could become if things don't go well. Which leads to the natural question of how are the various stakeholders acting - responsibly as concstructive citizens ? Or otherwise and pursuing their own narrow agendas ? Now in my book there's clearly enormous merit to almost all the proposals on the table and each of them have flaws. Those flaws are natural to the speed, size and complexity of what's involved as well as the messiness of the political process. We can't reasonably nor legitimately expect the various stakeholders to sacrifice all their own interests in the pursuit of some vauge national agenda dictated to them. We can expect them to balance the two and, where they have grounded and legitimate disagreements, provide critiscism and suggestions. That in fact is one of our acid tests for the loyal opposition. By their own lights are they trying to make things better ? A second is are they balancing partisan advantage reasonbly well with broader interests in the light of how things are going ? Finally a third is are they right ? A friend has rather strenously objected to some of my previous characterizations of the Rips as being almost entirely and narrowly partisan. The counter being that they are sincere in their objections. That may be true as it's hard to judge the inside of someone's heads. But my counter-counter is that even if they are they fail the tests of not offerring up constructive critiscism and contribution. And blind opposition is not in their own best interests as it paints them as part of the problem. Those are observables. But the most important thing, after much reflection, that I come down to is this. Sincerity when you're wrong and making no effort to test and validate your ideas doesn't count. Let me make a terrible and odious comparison. The Khemer Roughe were entirely sincere in their ideological purities that led to genocides. As was Mao during the Culutural Revolution or Stalin in his purges and collectivizations. Yet millions still died while they were field-testing their ideologies. If the best available evidence, thinking and analysis indicates your ideas are wrong while the best available history suggests they've been tried and failed it's time to come up with new ones. And be a constructive loyal opposition instead of a destructive collection of nay-sayers. So Mr. Wizard, just how would you go about this ? And why should we believe you ?

Continue reading "Back in the US: Economic Realities vs Partisan Posturings" »

Posted by dblwyo at 01:47 PM | Permalink | Comments (0)

Judging from the readership indicators we can move on to the next discussions but judging from the cartoons, talking heads and agitated feedback from my network we need to stay with the "Political Economy" of the Stimulus/Budget/Rescue efforts, so we will. Just in case you were on vacation last week it was one of the most momentous in post-war American history ioho - particularly for the speed, size and complexities of what was done. Mo saw the signing of a giant stimulus package, Tu a major national "suck-it-up" address that's largely gotten plaudits from almost all sides with the exception of diehard Rips, We saw the Phase 2 announcement of TARP II and Th the tabling of the most ambitious budget proposals we've seen in a very long time. Not to mention Chairman Bernanke's testimony that "yes a recovery was possible if everything went right AND we repaired the financial system". Any one of those things, or actually a subset of line items, would have been as much major news as we've been used to getting in a month in the last 8-12 years. Barry's striking while the iron is hot indeed. As is our wont we've tried to capture the sense of things, at least as seen by others, in a cartoon collage.

Just for the record we won't re-visit our dissection of the not-so-loyal opposition's behavior beyond the longish review in the last post but we want to stake out two arguments. First, we try not to do opinion here but instead understand how things work and let the observables drive us to our arguments and then test the results against reality. So far the results have held up pretty well over the last almost two years. So empirics would seem to support the approach. Within all that we repeat our assertion that the Rips as a whole aren't serving anyone, including themselves. They're falling prey to the same problems the Dims had with respect to Iraq. Once something's already happened that you think isn't going well then try and fix it - particularly when so much is at stake. If nothing else a good-faith effort gets you credit for being public spirited citizens. At the end of the day we need a competent and effective loyal opposition and, as among others, David Brooks argues what we're watching is a suicide pact in process. A legacy of the partisan '90s that won't go away any time soon, unfortunately, but one which makes solving our problems unnecessarily more difficult.

Private Gain vs Public Spirit:

Civitas vs Indulgence

After the break you'll see a pretty complete collection of a representative range of reactions to Barry's major speech as well as assessments of Jindal's (we recommend the PBS Newshour vidclips of Brooks and Shields very much btw). You'll also find assessments of the Budget proposals and a couple of sections looking at the strategic implications and the positions of key players. In a nutshell the Budget proposal is bold, innovative, addresses the critical set of policy issues that Barry's been talking about since Grant Park and we've id'd as the critical ones for a couple of years now. It not only complements the stimulus package by trying to build on the foundations being laid there but also tries to combine long-term fiscal discipline with a reversal of nearly three decades of policy neglect. In other words there are at least four major strategic policy themes being braided together here: 1) Stimulate the economy, 2) do it intelligently so we lay the groundwork for areas of public policy that have been neglected, 3) do it with due recognition of the trades-offs and long-term fiscal consequences and 4) try to repair the damages that have been dragging down US socionomic performance for decades. Before we try and talk about the uglier side of practical policy let's look at the big picture and see if we can't frame this up a little. In the graph the green line is public effort, the blue the level of indulgence and the red the state of prosperities.

If you step back and ask what's gone on in the US you can very roughly look back nostalgically at the "Golden Age" '50s where hard-work, thrift and shared prosperity laid the foundations for the rest of the century. A golden age succeeded by the gilded age partay of the '60s in some views which led to the problems, crisis and general malaise of the '70s. Followed by another era of hard work, thrift and a return of prosperities, then another party decade and so on. It's tough times that call for hard efforts but as all that work begins to pay people naturally want to enjoy some of the fruits. Unfortunately their successors all too often take that prosperity for granted and over-indulge and not only eat all the food and drink all the bear but consume all the seed corn and end up in debt to the bank as well. There's just one problem as we keep cycling around this quadrille - every trip 'round we take more of the "nutrients" out of the soil, use up more of the water and so on. Or put another way we haven't made the investments in Education, Innovation, Infrastructure, Energy etc. necessary for the long-term trend to be up. Instead it's down - and with every turn the peaks are lower and the valleys deeper. So if we don't make those four strategic themes work in harmony we might get out of this immediate problem and still find ourselves in trouble.

Pragmatics, Policy & Politics:

Inside the Sausage Factory (Again)

We won't argue that either the stimulus package or the budget proposals are perfect; far from it. Neither are they anywhere near as bad as their harshest (partisan and polemical) critics would have it either. What they are is large, fast, complex and targeted at the right areas. They pass the first major test that should be applied - as in don't let be perfect be the enemy of good enough especially when you're in trouble and your window of opportunity for both emergency fixes and directional change is likely to be limited. Most of the criticisms on the other fail the two mirror tests. Nobody's proposed anything better or stepped up to constructively contribute improvements. And they aren't realistic - ideal policy on some narrow topic that's your own interest has to be weighed against what you can persuade all the interested stakeholders to support. Policy must be balanced with politics and both must be traded-off against the possible. We've talked multiple times about what we think are the ideal strategic policies and why we think so. Now let's add the pragmatic dimensions. First of there's a fundamental question of implementation: are the resources, people, money, skills and implementation mechanisms available ? If so in what timeframes ? A new green energy infrastructure is useless if the technology ain't there, it takes decades to deploy or the power grid won't support it for example.

The graphic tries to pull all that together but listing the major policy initiatives we've argued are important in each major category; it you test our shopping list against the Administration's pronouncements the alignment is close to 100%. The red line is our assessment of where we're at while the yellow represents a reasonable set of goals to get us back on a healthier, more self-sustaining path. Note - that still leaves a long way to go to some "ideal". The real challenge is mechanisms and means: do we know how and have we the resources ? And what are the trade-offs ? The second sub-chart maps the policy areas to the political questions - the "Four P's of Power". Who are the Players, What are their Positions, What's their Power to influence things and what Policies will they support ? Answer those questions and you have an idea of the layout of the sausage factory.

The other, almost as important and more influential, implementation barrier is that every policy initiative will face entrenched stakeholders with their own positions, influence, resources and interests. As Machiavelli noted doing something new is the most difficult thing in the world because your support comes only from those who might benefit while your enemies are the folks who know they'll be hurt or disadvantaged. One can trace thru the rise and fall of Chinese Dynasties for millenia with the re-birth under strong new emperors, the rise of the state, the gradual accumulation of power by the mandarinate and the erosion of the system as corruption led to the priveleged placing their own short-term interests ahead of the common good. Did you know that the Great Fleet of Kublai Khan that invaded Japan and was destroyed by the Kamikaze was, when the marine archeologists got to it shoddily constructed because the mandarins in charge of construction had stolen the funds ? One doesn't have to look that far back in history to illustrate the problem - just look to Detroit these days...or the Steel industry before it.

We come full circle - we have a limited window of opportunity here to not only get out of a crisis but to do so in ways that help us move back to an upward trajectory. And an essential part of that is persuading the power groups to support it in the broader public interest while we undertake the biggest re-vamping of our economy and society in decades. To try and recover from squandering the legacies that the prior generations created and leave something more hopeful for our successors. On that basis - all things considered indeed - not bad.

Continue reading "To Boldly Go Where We Must: Speech, Budget and Dr. Noes" »

Posted by dblwyo at 03:00 PM | Permalink | Comments (0)

The big news from the last couple of weeks, at least domestically, is that we've succeeded in crafting and passing the largest peacetime suite of economics legislation in our history (the Stimulus Package plus the next round of TARP) with more to come as the other two legs of a 4-legged stool. Those being a Housing rescue package and a re-formulation of Financial Industry regulation. We also learned that the ME is not the only place where intransigent adherence to provably wrong shibboleths of policy, position and belief are rampant. Nonetheless the package is un-surpassed for size, scope, force and timeliness and as such gets a B+ on economics, an A- on politics and an A for pragmatic and realistic policy-making craftsmanship, admittedly grading on a curve. What do we mean by all that ?

Economic Policy to Date

First, make absolutely no mistake about it. This package is absolutely essential to saving the economy. We're in a very serious situation where the liklihood of a more pronounced downturn followed by a decade or better of Japanese Malaise is entirely possible. Further, the economy is unlikely to recover on it's own because the normal, organic self-correction mechanisms are broken. People and companies are, were and will be continuing to pull in their horns as the situation deteriorates; government is the ONLY possible source of the spending necessary to salvage things. Second, in a short-term view the notion that OMG it's spending is just utter and absolute nonsense, that in fact is the whole point. It doesn't matter if gov't employees steal everything and go to Vegas - it's still stimulative. Third, there are real tradeoffs between tax cuts (which are fast but don't give you much bang, direct spending which gives you a much better multiplier but is slower and investment, e.g. infrastructure, where you get the most bang but is much slower and complex. For example investment in new energy sources doesn't do much good if you haven't the power grid to move the new power. Fourth, given the spending if you can use some of it to both get high multipliers AND lay the foundations of downpayments in future improvements in the economy that's smart policy-making. Finally, this is a large, very complex under-taking for which the implementation mechanisms are lacking; as a result there's only so much spending you can do in certain timeframes and you need to build up your capabilities. You also need to get support and buyin. Taken all together the package is a very well-crafted balance among all these competing requirements, let alone in the time and with the ideological oppositions it faced. We've gone into some of this before (First Things: Financial Crisis, Economy and Barry) but if you'd like some more details try these more "technical" discussions (State of the World: Crisis Metastasis, Strains and Fault Line,Economy vs Earnings Cage Match: Outlook, Business Performance & Realities ???,Time, and Past to Play Bizzball: Economy to Business Performance).

 Let No. 1 Speak for Himself

If you don't entirely grasp the size and complexity of the package check out the accompanying graphic from the WaPo which shows how it's balanced across the major components and how those components break down across the various Departments and areas as well as across time. And if you think pulling that off in the timeframe with that good a design was an accident, or that all the talking heads echo-chamber discussions of how badly things were done is accurate here are some excerpts from the recent AFOne Chicago flight of an on-record interview with the President, again from the WaPo.

Obama Interview Transcript

1. Almost to a economist, there was a consensus that we needed a large stimulus package not as the silver bullet to solve our economic problems, but as a necessary component to solving our economic problems, and in terms of scope, that we were going to need something between $600 billion and $1.3 trillion. That was the range that was presented to us. There also was consensus among economists that the best approach to spending that much money and getting the stimulus out of it was to diversify a little bit, so have a tax cut component -- there was a generally strong feeling that tax cuts targeted at people who were most likely to spend would have the biggest impact; a state fiscal relief component, or a countercyclical spending component, so everything from -- food stamps to unemployment insurance -- again, stuff that would be spent out quickly and, in some cases, help prevent a worsening of layoffs and a spiral downward. And then a third component of infrastructure. Now, each of these components had pluses and minuses. For example, tax cuts, you can get them out quick, but the general view is that you don’t necessarily see a dollar of spending by consumers for every tax cut they receive. Infrastructure, you get probably the biggest multiplier effect -- for every dollar you spend you might get $1.5 worth of demand out there, but necessarily you can’t get all those infrastructure projects done within a two-year time frame and the start-ups may be longer. So our whole goal was to provide a framework for Congress that presented the best mix based on the best available information that we’d gotten. I raise this because I think that some of the critics ended up fastening on this pet project or this program that they suggested was not stimulative; in fact, it would be hard to find economists who would argue that the guts of the program, the core of what just passed the House and hopefully will pass the Senate while we’re in the air or shortly after we land is not pretty well designed to get the economy moving again. And one last point -- one last goal that we set out, and that was if we were going to spend this much money, our number one priority being to get jobs in place and to get the economy moving again, wouldn’t it also be helpful for us to make sure that we laid some made -- that we made an investment in longterm economic growth -- that we put a down payment on things that have been deferred for too long?

2. Now, in terms of what I’ve learned on the politics of it, I think what I’ve learned is that I’ve got a great team because we moved a very big piece of legislation through Congress in record time. And that was not easy to do. And I think the end product is not a hundred percent of what we would want, but it is a very good start on moving things forward. I made every effort to reach out to Republicans early to get their input and to get they buy-in. I think that there were some senators and House members who have a sincere philosophical difference with the idea of any government role in boosting demand in the economy. They don’t believe in Keynes and they’re still fighting FDR. And no matter what we did, said, whatever the process was, they just don’t agree that this is the best prescription. And I think we can disagree without being disagreeable on that front. I also think that there was a decision made that was political and tactical on their part where they said, you know what, if we can enforce conformity among our ranks then it will invigorate our base and will potentially give us some political advantage, either short term or long term. And whether that’s a smart strategy, I think you should ask them. The last point I would make, though, is that given the urgency of the situation right now, my consistent goal throughout this process is: Are we getting the most immediate, most effective relief possible to American families who are losing their jobs, losing their homes, losing their health care? I welcome Republican participation in that process, but ultimately I’m answerable to the American people. And my determination was to get it done, and I think that we’re going to get it done.

3. Look, I mean, the fact of the matter is, is that once a decision was made by the Republican leadership to have a party-line vote -- a decision that I think occurred before I met with them -- then I’m not sure that there was a whole host of things that we were going to do that was going to make a difference. But again, my bottom line was not how pretty the process was; my bottom line was am I getting help to people who need it. Going forward, each and every time we’ve got an initiative I’m going to go to both Democrats and Republicans and I’m going to say, here’s my best argument for why we need to do this. I want to listen to your counter-arguments; if you’ve got better ideas, present them. We will incorporate them into any plans that we make, and we are willing to compromise on certain issues that are important to one side or the other in order to get stuff done. There are 535 members of Congress; they’re not potted plants. Their job is to represent their constituents and they’ve got ideas, too. So I’m not interested in bulldozing them. On the other hand, I’m answerable to the American people in an emergency economy. And what I won’t do is to engage in Washington tit-for-tat politics and spend a lot of time worrying about those games to the detriment of getting programs in place that are going to help people. : Well, look, as I said, I don’t want to question the sincerity of some of the Republicans who opposed this plan. They just may have a different theory about how the economy works. Now, I have to say that given that they were running the show for a pretty long time prior to me getting there and that their theory was tested pretty thoroughly and it’s landed us in the situation where we’ve got over a trillion dollars’ worth of debt and the biggest economic crisis since the Great Depression, I think I have a better argument in terms of economic thinking. But, again, I don’t question their sincerity. I do think that over time, as we keep on reaching out, and as I think the American people express their view that we need to start actually doing something about jobs, housing, health care, education, and so forth, that there will be some counterveiling pressures to work in a more constructive way.

4.I don’t have a crystal ball, and I don’t think anybody does, but I think that you can imagine very easily a scenario in which we duplicate what happened in Japan in the ‘90s, where we paper over core problems in the banking system. Despite some efforts at stimulus, we never fully get private credit flowing again, and the economy contracts severely and then sort of limps along for a very long period of time. Keep in mind, though, that even in that scenario, Japan had an awful lot of foreign currency reserves, they had a surplus from a positive trade balance. And the United States was pulling a world economy along. In this situation you’ve got all the economies around the world, even including China, decelerating at a fairly rapid rate. So if what happened in Japan is duplicated here in the United States, there’s nobody else to help drive the engine of growth, you could end up seeing an even more protracted and prolonged worldwide contraction. And I think that would have a severe impact on our quality of life. Let me, first of all, emphasize that the recovery package was critical to help families right now. Unemployment insurance extensions, health care through a COBRA that’s affordable, some immediate job creation -- those are very important. That’s only one leg of the stool. As I said in my press conference, the second leg of the stool is getting credit flowing again. And what the first round of TARP accomplished was to avert potential -- I hate to use the word again, but potential catastrophe in the banking system. I mean, things could have melted down much worse. Because of a lack of clarity, consistency, transparency, what you didn’t see was a market rebound and credit moving the way it needs to. So the credit markets still are not functioning the way they should. Now, this is a hard problem, and that’s why I said, I think on Nightline the day that Tim Geithner spoke, there are certain market participants who think that there’s some painless, quick fix here. There isn’t. Because what happened was that you had banks making bets, leveraging $30 off of one dollar of subprime assets; that was duplicated throughout the system, and deleveraging, sort of working through all those bad debts is going to be really tough. Now, we started talking about this, by the way, in transition as well, and so along parallel tracks, even as we were working on getting the recovery package done, we were also talking about how do we get credit flowing to home owners; how do we make sure that we’re getting small businesses the resources they need; how do we make sure the banks trust each other in terms of lending, and even blue-chip companies are able to shed corporate debt, so they can make payroll and keep people working. 

 Bottomline Assessments

 Think of this as the New Coke marketing paradigm - even if you screw up you gain because you've ranged and bracketed the opportunity.
 
1. Barry reached out to everybody and included major chunks in the plan strictly for compromise, that is the tax cuts, which we know are NOT that efficacious in this regime.
 
2. He and his team guided things in the background but rested the primary responsibility for Congress and let them do their thing.
 
In both cases we learned they aren't up to the task, still thinking in old patterns and (especially the Rips) reverting to old posturings and shibboleths; the talk show appearances sounded just like Newt the Grinch's playbook from the mid-'90s on perjorative labeling to trigger the lizard brain. McCain did too. And btw it was the same rhetoric that lost the election for him.
 
So what did Barry do so far...he
 
3. Kept his cool, didn't get trapped into we said/you said, and pointed out it takes time to change people's habits thought, especially when they're burned into the deepest levels of their lizard brains.
 
4. At the same time in the press conference and at Elkhart he fired several major warning shots that said he can't afford to tolerate to much childish behavior before being forced to get out the leather strap.
 
Chess master indeed. And playing not just for the Opening or to set up the Middle Game but begin to set up the positional game for the long-run. And AT THE SAME TIME taking a very long, patient and balanced view of how you work in the short-term but play to change the tone without getting trapped in the emotionalisms and posturings. Unlike almost everybody else in the game.

We'll see in that short-run how the messaging and positioning works out - that one he may have lost by losing some of the skirmishes but this battle isn't over. Let along the campaign. In fact if you'd like a baseball analogy much of the critiscisms have been about the base-running and sliding while ignoring the hits, runs and errors, let alone the season or the balance of forces. As it happens less than 1% of the bill is characterizable as "Pork" but the Rips played the old pejoration labeling games invented by Newt the Grinch to go after Clinton that have since dominated political discord, oops, I mean discourse, in this country. For a prior dissection of Lizardbrain vs Substantive communications see this (Rope-a-Dope at Hofstra: Handicapping the Debate and Results) and then compare it to the Meet the Press vidclip. Better yet compare that vidclip to this book talk by psychologist Drew Westen and look for the labeling vs non-labeling appeals to the lizard-brain.

IOHO they've made major strategic and tactical blunders for narrow partisan advantages that may in fact be cynically self-serving, with an admixture of sincere disagreements (despite all evidence to the contrary over almost thiry years of Supply Side debates). In any case listen to the posturings on some of the vidclips in the readings (of which there is a whole......le bunch covering the spectrums of political, policy and posturings concerns). Or check out this series that provides a window on how well they sold the PorkFest Messages.

Continue reading "Miracles on Pennsylvannia Ave: Make it So, No. 1 !" »

Posted by dblwyo at 05:24 PM | Permalink | Comments (0)

Otto, Furst von Bismarch, was not only a great statesman but an experienced, wise and witty politician; author of the "Sausage Factory" epigram we keep re-using. He had another, actually several but this one sticks, that when a crisis goes by grab its' coattails and ride for all it's worth. In this case we're facing multiple inter-lacing policy crisis that have been accumulating for decades, which nobody was willing to tackle to the can kept getting kicked in the ditch until it put itself back on the road and, worse, we actually knew what to do about all the cans. The thing about a crisis is that it not only represents danger but opportunity since it's likely that the will to change and do what is NOW clearly necessary can be mustered instead of continuing in denials. We're so much in that position that many on the inside of things are actually excited to finally get a chance to do what they've known needed doing for a long time. So much so that my alternative title was Economic Crisis=Opportunity, Danger and Change. While we're in the midst of the worst financial crisis since the '30s and the most serious economic downturn since the early '70s the cartoon is still more black humor than reality; but if we don't seize this opportunity it'll be more truth than anything. Fortunately not only is Barry picking the best economic team since Bretton Woods or the Marshall Plan with outstanding people in the right jobs (Hit the Decks aRunnin...Git 'er Done Barry) but he and they are moving with speed, urgency, accuracy and skill. He's already made more progress that's the right kind than the last three Presidents did in their first 18 months. Amazing and startling but to establish why we're going to have to take rather deep dive on the subject of economic policy by poking at the nature of business cycles and fiscal stimulus. In the readings below are some URL addresses for a key press conference, a couple of critical interviews and some commentary. After you finish here watch the press conference carefully - you'll hear a thoughtful, forceful, true and nuanced but workable discussion of staged economic policy that moves from very short-term tactics to intermediate-term initiatives to strategic investments. (Populist Panderings, the Candidates and Real Solutions) It couldn't be better IOHO.

Nature of Economic Cycles

 Economic cycles are like waves in the ocean - they move in predictable and repetitive patterns. Depending on the forces acting on them sometimes you get small waves, sometimes you get storm-driven huge surf that's scary and dangerous and sometimes you get tsunami's. We're facing heavy storm surf that we want to keep from getting worse. Economic cycles are inescapable - trying to avoid them entirely leads to the kind of malaise we had in the '70s. Post WW2 we had fairly normal, consumer-driven cycles shown by the heavy line. The Tech Boom/Bust was investment-led where over-spending on technology led to a bubble that, when it burst, could in fact have driven a huge downturn (GD II ? Possibly). To mitigate that the Fed and the Administration moved to cut interest rates and cut taxes and it worked. You'll hear a lot about that being a screwup but employment didn't recover until '03, rates were raised in '04 and Housing didn't turn into a new bubble until '05 with the worst insanities in '06/'07 after the coming collapse was already predictable and predicted. Now we're dealing with the aftermath of another burst bubble combined with a crisis in the credit markets brought about by self-serving and non-adult behavior in the financial markets and industry.

Current Economic Cycle and Alternatives

The next graphic shows you where we're at and what we're trying to avoid. The short and shallow downturn meme has finally been put to sleep after getting over-used, and being just plain and grossly wrong. On the other hand we're also avoiding, so far, a major downturn of the worst sort (the tsunami) and are instead trying to mitigate the worst effects while not denying their inevitability.  The green line would be a normal cycle which the Dotcom bust took away as an option while the light purple line is the fantasy that's not possible. At the same time we're avoiding and should be able to avoid the disaster of the red line if we can get some pump priming in the economy (otherwise known as fiscal stimulus) and get the financial markets working again. So what we're really debating is the region between the yellow and black lines (the yellow area) and where we're at. The bad news of course is that it's really just taking off, so-to-speak.

Credit Crisis and Vicious Cycles

We've "enjoyed" nearly two-three decades of increasing de-regulation of the financial markets. What people forgot and are re-discovering is that markets require rules and governance to function; nor are the participants apparently capable of self-responsible adult supervision. Instead they exploited their positions in pursuit of their own immediate, narrow advantages at huge and systemic costs to the rest of us. We're going to need to re-regulate and provide that supervision while finding the proper balance between excesses of too little and too much regulation. This means that an industry that depended on lax supervision, bad business judgment and excess leverage (that's where you have a $1 and loan out $7 instead of $3 btw) to create a liquidity bubble. Unfortunately we still have a lot to work thru until that process is complete so all we can do is keep the wheels on the wagon and find ways to inject credit into the economy where businesses and consumers can get to it instead of being trapped in a corner where no amount of lower interest rates increases lending. Economists call this a liquidity trap - the bad corner of the economic universe where no amount of money causes people to spend or lend. While we're not back to normal by any means things would have been enormously worse without the Fed and the Treasuries amazing innovations and skills. Sadly the only senior politician who appears to get that is Barry himself - wait that's not sad. The next President gets it ! Hallelujah !! Hopefully the graphic almost speaks for itself but it shows breakdowns in Housing leading to accelerating breakdowns in Credit Markets and the feedback between them turning the situation worse until it spills over in the real Economy. Which in turns weakens the ability borrow and loan and so on and so on. Welcome to a malfeasant world which we need to fix; but first we need to survive it.

Employment, Downturns and Policy Strategy

One of the key initiatives announced is a fiscal stimulus program exact nature TBD, to create 2.5 million jobs by Jan11. That's good, necessary, conservative and likely doable. The number probably sounds great until you realize that this was the weakest recovery on record for job creation (the top and middle panels of the graphic) and when you look at job creation this decade was the weakest of the period.

Sorry for the business of the chart - hopefully you're head won't hurt too much but we're compressing a lot of data into one graphic. The bottom panel shows net new jobs over the amount required to keep up with growth in the labor force and productivity. When you take the running total it turns out we're in the hole by almost five million jobs and we still have a long ways to go. To get back to where we're actually growing the economy we need new industries creating new jobs for people who need new and suitable educations. So there you have it in a "nutshell".

Key Steps to Economic Recovery 

1. Find immediate and emergency fiscal stimulus through things like tax cuts, extended unemployment benefits and direct spending while

2. Keeping the wheels on the credit markets by injecting loanable funds directly but then we need

3. Substantive direct spending programs that should also not be simple consumption in disguise but improve the long-term performance of the Economy. Investment in Infrastructure perfectly fits that intermediate term bill. But then...

4. Invest in the creation of new industries that lower costs in the economy, create new technologies and new jobs. Strategic investment in Energy and Healthcare happen to fit that bill perfectly. And then...

5. Make sure enough people have the right qualifications - in other words we need to re-think how we deliver Education for the 21rst Century. Finally...

6. Quite wasting money on pork barrel projects driven by special interests and political manipulations and

7. Re-regulate the Financial Markets without destroying their creativity. 

As you skim over the readings below and listen to the various vidclips see if that's not exactly what's being proposed. 

Continue reading "First Things: Financial Crisis, Economy and Barry" »

Posted by dblwyo at 06:13 AM | Permalink | Comments (0)

Well the last of the debates are tonight and THE focal issue, as it should be, is the state of the economy. In our last post (Wobble Wheels Wakeup: Crisis, Response, Policy, Execution) we discussed the situation beyond the various worldwide rescue and re-vitalization efforts. In particular a key point we'll re-iterate is that once we get the wheels bolted back on the wagon we need to keep careening down a rather icy mountain sloped. A serious recession is pretty much in the cards and locked-in. The only real debate is how deep and how long; and this one is likely to be longer and deeper than anything many folks have seen for a long time.

One of the "interesting" anecdotes making the rounds in the financial community is that all the advisers aren't getting any phone calls ! It would seem that people are so shell-shocked that they're still trapped in the 1,000-yard stare syndrome. For my own part the contacts from family, friends and network more than reinforces that. We saw a more than generational collapse in the markets all collapsed into basically week. They come by their shock very....very honestly. We had to talk a bunch of folks out of selling their existing portfolios on Mon. open - which meant they would have missed the run up that mostly recovered the worst day from last week. We're far from out of the woods yet. In the readings the first one, finally, puts the emphasis where it needs to be - all these worldwide interventions are NOT quick fixes. Now we've been talking up the economy as THE central issue in this election for months (WRFest 20Jan08(Economics): Oops...Recession Ahead,The Coming Economic Crisis,Standing Corrected: Education 2nd Avoiding Economic Collapse 1rst) and outlined our sketch of a multi-faceted program that moves beyond arresting the immediate problems to looking at what needs to be done next and then beyond that. Which we thought we'd review here a little more. 

Comprehensive & Strategic Economic Program

Given all that what should we be doing - and therefore what should be looking for in tonight's debate. Well two things. One as close to this outline as possible and two minimal populist pandering, bearing in mind "nobody can handle the truth". That said in both his acceptance speech and the last debate Barry basically walked right down our reccy's while Johnboy appears to be improvising as he goes and throwing out one offs - not an integrated program. You might/ought/should invest the time to listen to this interview very carefully - from the guy who's called it for three years now !

Nouriel Roubini, New York University, Economics Professor Nouriel Roubini, an economist who predicted the depth and magnitude of the current financial situation before the decline of Bear Sterns, discusses the indicators he saw and his recommendations for stemming the financial downturn.

Step 1: Get Credit Flowing Again - we've been discussing this almost exclusively for the last several posts. While it's still very early days yet we think that the basic elements are in place and being acted on as rapidly as possible.

Step 2: "FIX" Housing - we're not going to get the economy back on it's feet while Housing continues to drag so much. At the same time too many people bought too many houses for unsupportable prices with funny money. Until prices come down significantly MORE it won't start self-correcting. In other words we need for the homeowners and the lenders to take another 15% haircut, write it off and re-negotiate the loans to something more sensible. And it'll need a serious institutional framework.

Step 3: Major Fiscal Stimulus - the last so-called recovery was put together on the Housing ATM and was pumping $500-700B/year into the economy at least. The economy will fall into a major serious recession unless we stimulate it and that stimulus needs to be of the same order of magnitude. This also needs to be quick, targeted and temporary - not another political boondoggle (fat chance I know but....). Tax cuts won't do it. On the other hand the impact on the deficit is irrelevant for a lot of reasons (still be low as a % of GDP, worse w/o stimulus). Things like extended unemployment benefits, more rebates, and direct spending programs fit the bill. Lots of very...y good economists like Larry Summers have tabled excellent proposals (btw - Barry's econ team is non-pareil and Larry's on it. See below). 

Step 4: Infrastructure Investment -the US has let it's electrical, waterway and transportation infrastructures deteriorate to the point of...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids, new highways and transportation systems and possibly new power plants and alternative energy supplies. This would have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-term investment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarily built around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficit spending and Clinton got lucky and also cut the defense budget. Bingo, that's it.

Step 5: Strategic Investment (Energy, Biosystems, Materials) - we need new industries and we need to get off of our oil dependencies. There's things we can do in each and both. For example by increasing conservation as well as mandating enormously higher mileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need to build new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil exploration and we need more refineries. That all togeter takes us into the next decade. Beyond that we need some major alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet. For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldberg fixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to create major new energy sources and technologies would stimulate the economy, create new industries and provide us several paths to the future.

Combine that we major parallel investments in new life sciences and materials, both because they offer the best hopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites for high-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designed alternative energy crops as well as way to control and manage environmental problems. The real beauty of this is that it doesn't take a lot now because it's all at early stages.

Step 6 - Education Investment: the decline in average income is due more to natural evolutionary shifts in the kinds of labor demanded by an increasingly technical economy. When the US Economy really started on its' accelerated path after the turn of the 19thC few know that a key ingredient was the widespread development of high-schools and the resultant upgrading of the skills and knowledge of the population. Education is the co-dependent imperative along with creating new industries IMHO. (Readings(Education): the Single Most Important Domestic Policy Issue) 

 So there you have it in a nutshell :) A complete now to futures strategic economic policy recommendation. Believe it or not it's at least a decent strawman based on reality, the ways things actually work instead of fantasies and offers some real benefits. Test it against the candidates if you like. The results might be interesting ! The guy you want to vote for is the one that comes closet to ticking off this strategic agenda, doesn't offer up utter unsinn (German for nonsense and Supply Side III more than qualifies), has the best team and sounds like he's got a better grasp. We highly recommend you at least skim the readings to get a feel for how they stack up therein. And also to help you decide on where you think economic policy lies on the importance spectrum. We happen to think it is the sine qua non and will dominate the next Presidential term and outweigh almost any other issue short of a major shooting war.

Continue reading "Populist Panderings, the Candidates and Real Solutions" »

Posted by dblwyo at 10:21 AM | Permalink | Comments (0)

That loud squeaking noise you hear and the side-to-side motion making you see-sick is "US" trying to get the wheels to stay on the economy wagon, keep 'em turning and get on down the mountain. After a pronounced lack of political leadership scared the bejesus out of the markets they shared the angst by scaring the bejesus out of us all. And in the last week or so, shall we say, the worldwide schadenfreude with (for example) the German Finance Minister dancing on the grave of the American economy has metamorphized into a worse crisis in Europe that's spreading worldwide. Oddly enough this apparantly was the wakeup call that finally got everyone's attention despite literally years of warning. Call it re-discovering history. Not the history that says that market economies are subject to cycles or that speculation leads to booms which lead to busts. We knew all that. No, we're re-discovering something more fundamental...people don't pay attention until the pain exceeds the gain. Which threshold was crossed this week apparently !

The Silver Light in the Tunnel

Which is good news in and off itself but there's actually better news. Not only has the rescue package passed but a) it's being modified or extended within the existing authorities to include other essential steps, including bank re-capitalization, direct purchase of commercial paper and some plans to buy down mortgages. And b) similar programs are being rapidly adopted on a worldwide basis by all the developed economies and they are coordinating their efforts, though more than somewhat hampered by on-going parochialisms. Nonetheless the toolkit to get out of this mess is being put in place about as fast as possible, let alone reasonable, by some very competent people who are also demonstrating a superb capability to innovate under stress (Adm. Jim Stockdale's primary and No. 1 criteria for real leadership !  Thoughts of a Philosophical Fighter Pilot (Reprint ed.))

At this point we've still got some pain to go though the markets may be calming down, at least the equity markets though considerable rehabilitation needs to be done (as we've been discussing) on the credit markets. Nonetheless we have the tools - and if that sounds too much like the leadin to the $6 Trillion Man I strongly urge you to listen to Paul Volcker's Rose interview. Which doesn't meant there's not some more pain to come but does mean that all this talk of a "Great Depression" is beyond overdone - if it bleeds it leads and right now the economy is what's bleeding. 

Some Perspective

After the break you'll find Volcker's WSJ oped piece excerpted along with Gordon Brown's, which outlines the nature of things, necessary corrective measures and shows some real grasp and leadership. While I'm not sure how he's received in Britain this is the kind of thing we needed over here and got only from some. And the complete opposite from others (Anatomy of a Crash: Welcome to the Political Sausage Factory). Neither of the candidates has particularly stepped forward, but the Senate leadership did on both sides of the aisle as did the House Democratic leadership. We won't further comment on the reprehensible to despicable actions of the House Rips but you likely take our point. But the two guys who've stepped up and carried the load are Hank and Ben - who've been struggling with this for well over a year, continue to meet Stockdale's criteria for leadership of performing well under incredible pressure and keeping a calm head and putting up with all the nattering from the critics who have almost uniformly focused on knocking things down instead instead of helping to make them better. The cartoon is very funny, IOHO, but greatly exaggerated so take it as black humor from somebody who's a superior critiquer but not a contributor.

The graphic at right is a much more realistic depiction of the strategic alternatives we're facing, though being a very simple chart it likely has no emotional impact. Let me try and wrap some words around it to help out.

The bottom sub-chart shows GDP under four scenarios: a "Mild" downturn though one still more severe than we've seen in thirty years. My expected case and two bad cases - one where we have a protacted and fairly severe downturn and the other where that bad case morphs into a sustained malaise. The equivalent of the GD is NOT shown but it'd have GDP declining for 4-5 years for a total 25% drop followed by another five of sub-par growth. What we're facing is nothing at all like that. Let's get some perspective people - this is going to be painful enough and take us all pulling together. Time for the negative heads to quit pumping up circulation in their outlets and start pumping up circulation in the country !

In other words even the worst case is better than the GD by two or more orders of magnitude. What we're trying to do is get as close to the region between the green and blue lines as workable and stay as far as possible from the orange and red lines. On the record to date I consider that both possible AND likely, though beyond getting the wheels more secure and turning again there's a bunch of other things required that boil down to stimulate the hell out of the economy. But do it right and don't run us thru another trip in the political sausage factory. But you'd better darn well vote for the candidate you think will do his best to avoide that repeat or take our medicine. 

Continue reading "Wobble Wheels Wakeup: Crisis, Response, Policy, Execution" »

Posted by dblwyo at 10:11 AM | Permalink | Comments (0)

Now that we've just had the worst single week in the financial markets in post-war America, that people are (literally) shivering in their beds and nobody knows which end is up now what ? The answer to that is technical, economic and political. But remember back in distant history when Wall St. was going to rip us all off with a "bailout" package and the consensus reaction was let 'em burn in hell. Well we did, they are and we've got the seat right next to 'em. Be careful what you wish for - God's listening and he has a bleak sense of humor. There's so much going on we can't compress all the explanations, analysis and readings into one post. And it's been moving so fast it's been hard to keep up. For a bit more technical explanation of the market situation, and a few reasons for a gleam of hope try this: Whistling Past the Graveyard: Market Assessment and Outlook. And for a look behind the curtain at the economic realities which are just beginning to come home try this one: Wheels Back on the Wagon ? Still Headed for Icy Curves along with the prior post: Marketing Elephant Pills: Struggling to Explain the Rescue. So here we're going to concentrate on some of the political and policy issues with more to follow. However the bottomline is that the composite political cartoon exactly captures what triggered a crisis into a near collapse.

Inside the Sausage Factory

This started out bad, as we've discussed and metastasized into something really dangerous but, IOHO, what sent things over the edge was the failure of the rescue package on the first attempt in the House. And make no mistake, it failed because it not only didn't get supported by the Rips there but was actively opposed on ideological and partisan grounds. In fact the House Dems more than stepped up to their responsibilities. Unfortunately by the time the bill eventually passed it was necessary to scare people which woke up everyone to how fragile the situation is before we we prepared to cope with it. Now that's not the only thing that went on. Rather like that H.S. lab experiment where you drop just one more grain of salt in the super-saturated solution which immediately crystallizes into a near-solid this was a pre-avalanche situation just waiting for that last big boulder to start the whole thing down the mountain. BtW - that's not entirely a metaphor but how the mathematicians describe catastrophic cascades leading to collapses. The picture is from the press conference just after the Rescue package was passed - you can judge the level of strain AND the anticipated results from the near giddy grins on the faces of the most senior and serious members of both House and Senate. Unfortunately little did they and we know we were all standing on the lips of the abyss.

Now What ?

After the break you'll find some readings on the the anatomy of the political backstory and some on the financial backstory. The former substantiate all the conclusions we're suggesting IOHO. Skim 'em and reach your own conclusions if you like. In the latter section we especially want to draw your attention to the story and audioclips from PBS on some of the details which are all couched in non-technical terms. We strongly suggest you listen to those - it'll only take a few minutes and surely this crisis deserves that much attention ? Even more strongly we suggest you listen to Charile Rose's interview of Warren Buffett who provides his usual insight, folksy wisdom and blunt, plan-speaking truths about where we're at and where we're going. 

The bottom line here is that y'all just got a lesson in practical politics and what the majority of the electorate thought it wanted. The problem is that what you've seen is the triumph of the lizard-brain over good sense. The lizard-brain being that primitive part we inherited from our remotest ancestors that makes decisions on emotions and survival instincts and relies on the thinking mind to help rationalize things and get us out of trouble. We aren't going to wax on having done so at some length, if rather abstractly, in major prior posts (Inside the Sausage Factory: the 4P's of Political Reality ,911 Memorial: Fix the Problem Don't Repeat the Crash,Rational Voters, Public Choice, Economics and Futures).

Here's the key point - this is going to keep happening as long as we keep electing people to public office who tell us what we want to hear instead of telling us what's really going on.

You don't have to know the technical details of these major issues to make deeply informed decisions. What you do have to do is pick people to represent you whom you trust, who tell the truth and who will act in the balance for larger as well as narrower interests.

Let me that another, blunter way.

There's nothing going on that we didn't encourage. Make up your minds whether or not the party's worth the price the Piper always charges. And then either party on or let's start cleaning up these messes. 

Continue reading "Anatomy of a Crash: Welcome to the Political Sausage Factory" »

Posted by dblwyo at 03:42 PM | Permalink | Comments (0)

Well now that we've all had a decent night's sleep, being defined as not sleeping like a baby too..o much hopefully we can step back and get some perspective on this. A couple of analogies occur to me. The underlying cause of all this was the massive voter negative reactions which prompted and supported a palace revolt by the House Republican back-benchers. The best comparison is that the Peasants set out to burn down the castle and destroy the monsters but instead set the forest on fire and are about to see the village go up in flames. Now the question is can we contain the fire, put it out and then we'll deal with the monsters. The political cartoon collage almost captures things perfectly IMHO. The "interesting" thing here, at least for me is the extent to which the most primitive parts of our brains have dominated those reactions (the lizard-brain) and how ill-informed almost all the pundits, legislators and others have been. Including many who should know better. One doesn't expect deep financial expertise out of the general populace but the lack of grasp of people in decision-influencing positions should be a permanent blight on their records. On a par with Winston Churchill's triggering of the British Depression of 1922.

How Bad Was It ?

Yesterday the US equity markets lost about $1.3T in value. Now one can honestly argue that we're due for a major downturn in the markets, which haven't properly priced in the rapidly metastasizing downturn, but the question is how far and how fast ? This certainly hasn't helped. Judging from the reactions prior to the vote of several of my network the conspiracy theories are widespread among more than the peasants as well. So these results shouldn't be surprising. For the record both the Rep. and Dem. leadership and, so far, membership in the Senate stepped up to the plate as did the House Dem. leadership. The Rep. leadership in the House threw major monkey wrench in the works last Thur. when they disrupted a deal that met all the requirements and the principles of both candidates. John McCain's statement that there was no deal and his principles weren't satisfied is, IMHO of course, somewhat disingenuous. Somewhat in the sense that there was a backbenchers revolt. His subsequent statements haven't helped much and show a lack of grasp of the importance and intricacies. Obama, while still speaking as they both must, to the populist anger has done a much better job of attempting to calm people down, explaining the necessity to act and supporting the process. Particularly by concentrating on the forward/backward sausage-making of the legislative process that we're all now getting over-educated in.

If you'll permit the wry observation some of my own early religious training was in economics though I became apostate and went into business while retaining a lot of affection and conviction about the discipline. And learning that the book theories must be balanced and integrated with a lot of real world practicalities. But for those who argue that it's all theory let me tell you your flat wrong. In the long-run economics works as well as the Newtonian physics that describes the orbits of the planets. As we're all going to be learning here shortly. So for all the folks who think economics has no laboratory verification let me warn you we're all about to be lab rats in yet another giant field experiment.

Leadership to Date

Last week began with an awesome and somewhat skilled display of political kabuki as the Senate hearings were kicked off with posturing displays designed to placate the angry, fearful and vengeful electorate. By the end of the week enough progress had been made that a workable bi-partisan package was ready for approval. It was of course blown up but put back together over the weekend. What is slightly amusing is that the heart of the proposal is entirely intact and it was merely wrapped with clauses designed to make it more palatable and saleable. Both the Kabuki and the wrapping were vital to moving it forward because, in the face of profound ignorance, it was necessary to force it thru the approval process. For the record the final vote (Y/N/Pass) was: Dems(140/95/~), Reps(64/133/1),Ind(~/~/~) for a Total of 225/208/1.

Now a lot of blame is being placed on a floor speech by Nancy Pelosi for attacking Rep mis-management. Not sure that her timing wasn't bad but then she hasn't had any sleep in a week either. If you listen to the speech though it struck me more as attempt to save a failing bill but telling her colleagues that they'd address and fix all their long-term substantive concerns when they came back but vote for this bill now. Clearly there were opponents in both parties but this was a Rep. bill, put together by the leadership of both Houses, strongly supported by the Pres., initiated by two of the best public servents we've had and the perfact men for the job (Paulson with his exemplary real-world experience and pragmatism and Benanke with his distinguished background as one of the world's leading macro-economists and a specialist in the Depression). At the end of the day this bill failed because the House R's decided to oppose it and they were given air-cover and leadership by McCain. If you want to see some real straight-talk by a man who know's what he's talking about listen to Sen. Gregg's press conference (R of NH btw). Here's the URL: rtsp://video1.c-span.org/project/economy/econ092808_gregg.rm.  And back that up with Mark Zandi's interview on his recent book. Finally walk, don't run, to read John Mauldin's latest newsletter.(Who's Afraid of a Big, Bad Bailout?) Save your energy, you'll need it later in the bathroom.

Judging the process we apply the criteria we've already set out. Who's acting to lead ? Acting in the public interest ? Spending less time pointing fingers and more acting, constructively and proactively, to support this critical bill ? So you can judge for yourself we've included various press conferences and speeches in the readings. Ironically Pelosi said nothing on the floor that McCain hadn't said in his press conference the week before, during the debate, on Sixty Minutes and in his press conference after the failure. With a major difference. Her speech spent a 1/3 of its' energy on polemics, a 1/3 on futures and another 1/3 on pass it now. His was all about partisanship (or at least 80%). This is not the country first, straight-talk that was supposed to be his hallmark. Either this was a display of massive ignorance of the consequences and how things worked, a brilliant tactical political manuver for which both parties leadership tried to give him credit or both.

My suspicion is that as Obama continues to play the public spirit card, with the necessary popular wrappings to sell it given voter angers, and as more and more of the sausage making becomes visible that he may have just cost himself the election.

On the other hand the ex-post statements of Paulson, the President and Dodd and Gregg continued to sustain a spirit of not laying blame, of understanding the job-threatening difficulties for the House representatives, to appeal to bi-partisanship and to emphasize the criticality. Now if any of this is working for you is the time to speak up. To this point people still weren't and aren't taking this as seriously as it deserves to be taken. Maybe that'll change and we'll get this rescue package passed in a workable form. The punditry is certainly not helping and the dearth of constructive suggestions and total lack of insight is stunning. With the occasional exception like our last post focused on Perlstein's column. Let's hope we end up doing the right thing. The downside risks are more enormous than anyone is admitting. 

Continue reading "Calm Down: the Fat Lady Ain't Sung, Yet." »

Posted by dblwyo at 10:50 AM | Permalink | Comments (2)

The original plan was to put up a post over the weekend looking beyond the rescue package but as the news ebbed and flowed we got distracted more than a bit. And still headed into today with a relatively benign outlook which turned out to be mis-placed. There's been a change of plan since instead of containing the breakout from Stalingrad we've had an ideologically motivated sit-down strike on the part of the troops who're now sulking in their tents. So rather than our normal longish analytical post along with excerpts, charts, etc. we're going to focus on Steve Perslstein's latest column from the Washington Post which is as short, pithy, direct, accurate and honest a description, in ordinary English, as we've read. We've got a lot more to say but we're simply going to start here and pick up more tomorrow, depending on how tonight's drinking goes. BtW - how's your food, water, ammo, fuel and liquor stocks doing ? After you read Mr. Pearstein's elegantly direct assessment we also suggest you consult John Mauldin's latest newsletter for a more detailed explanation: Who's Afraid of a Big, Bad Bailout?

They Just Don't Get It

Oy vey.

That is the technical economic term that best sums up a day in which the House of Representatives refuses to pass a $700 billion rescue plan pushed by the White House and congressional leaders from both parties, Wachovia is taken over in a deal that will have the government potentially owning 10 percent of Citigroup, a few European banks fail, the Federal Reserve and other central banks are forced to inject an additional $300 billion into the global banking system, the Dow Jones industrial average plunges 777 points, and investors everywhere rush to the safety of gold and short-term Treasury bills. The basic problem here is that too many people don't understand the seriousness of the situation. Americans fail to understand that they are facing the real prospect of a decade of little or no economic growth because of the bursting of a credit bubble that they helped create and that now threatens to bring down the global financial system. Politicians worry less about preventing a financial meltdown than about ideology, partisan posturing and teaching people a lesson. Financiers have yet to own up publicly to their own greed, arrogance and incompetence. And leaders of foreign governments still think that this is an American problem and that they have no need to mount similar rescue efforts in their own countries. In the coming weeks and months, all of these people will come to understand how deep the hole really is and how we're all in it together. They'll come to understand that the giant sucking sound they hear is of a massive deleveraging of the global economy and the global financial system as households and governments, businesses and investment funds adjust to living in a world with less debt and more inflation.

And they will come around, reluctantly, to the understanding that the only way to get out of these situations is to have governments all around the world borrow gobs of money and effectively nationalize large swaths of the financial system so it can be restructured, recapitalized, reformed and returned to private ownership once the crisis has passed and the economy has gotten back on its feet.

In the next few weeks, the center of attention here in the United States will shift from the Congress and an exhausted Treasury to the Federal Deposit Insurance Corp., which will now have to rescue any number of failing banks, either by taking them over directly or managing their transfer into stronger hands. It will also shift back to the Federal Reserve and other central banks, which will have to step up their efforts to maintain liquidity in money markets and prevent the credit crunch from taking down hedge funds, businesses, and state and local governments.

These will, alas, be only holding actions. Restoring real stability to financial markets will require the kind of systemic approach and extraordinary government interventions that the public has refused to authorize and finance. In better times, the public might have put aside its reluctance in response to the strong and unified recommendation of political and business leaders. But it is a measure of how little trust remains in both Washington and Wall Street that voters are willing to risk a serious hit to their wealth and income rather than follow their lead.

Posted by dblwyo at 09:58 PM | Permalink | Comments (1)

For several years I've been arguing that economic health is critically important to all other policy agendii we want to pursue; and, for several months, that it was the single most critical issue in this campaign. Hopefully, at this point, the number of naysayers is approaching zero on this argument. At the same time the number of scared, angry and obtuse commenters and pundits who have been energized by the crisis of the last two weeks has metastasized. Sadly, but understandably, because of a lack of grasp of the seriousness of the situation, it's sources and possible cures. Instead we're being inundated with populist rhetoric and political posturing. Often by the same people who helped us all get in this mess in the first place. Calming them down is now the first order of business since without some popular support the proposed rescue package will be stillborn and we'll all be in deep kimchi. Fortuantely there are some calmer heads who do have the necessary knowledge, and more fortunately, some of them occupy positions of power on the Hill. To try and contribute to some small smidgeon of understanding we'd like to disabuse you of some of the errors and make you aware of the stakes.

Quick and Dirty Summary

That lack of grasp is our most dangerous problem and it has two roots. First off almost noone understands how this is all working - and hasn't bothered to learn or investigate - and popular anger is out of control. Second, rather like a fish swimming in the ocean, we take the complex system we depend on for survival without grasping it's linkages, fragilities and susceptibility to disruption. We're going to do our best to to move along with more, hopefully, to follow. Too much ground for one post if we try and explain the background.

1. Bailout = Rescue. This is called a bailout and postured as charity for the fat cats. It is nothing of the sort. It is a purchase of assets that yield a flow in income and are likely to be worth more in the future if they weren't sold during the sack of the city but held until things return to more normalcy and less turbulence. $700B is not $700B - by buying at less than book valuation but above distress the goal is to unfreeze the banks and get them lending again. Some of the table stakes are laid out in the first section of readings, including a fact that everybody has lost sight of. All the econ news was really bad, including this morning's major downward revision of GDP growth from 3.3% to 2.8%. 

2. Main Street, Not Wall Street: Everybody is reacting as if this were their problem and not ours when just the opposite is true. The few who got and kept the $M bonuses won't go hungry. Right now companies thruout the country are having trouble meeting daily cash needs for purchases, payroll and other bills because the credit markets have frozen up. They've frozen because banks are afraid to loan money to anybody, especially themselves, for any reason. You care because you're car loan, credit card payments, etc. are at risk. If this worsens you really care because you job, your retirement, your kid's college and your healthcare is too. There's actually plenty of money to loan if the banks weren't afraid they'd lose it. Call this the paradox of caution - when one bank is careful and nobody else changes their behavior o.k. But when the next two banks react by also getting cautious that quickly turns into four, then forty, then four thousand. It's like a benign and life-giving fluid we need to live where some cells suddenly turn cancerous. If caught and treated in time it won't spread. That's what the Fed and the Treasury were trying to do until last week when three major danger spots metastasized into contagion at alarming speed. Not it's systemic and it needs a massive dose of chemotherapy and radiation treatment. That comparison is deliberate btw. No one enjoys such treatment, wishes they had to undergo it but it's the best we have available. Unlike cancer the really sad part is that this is all self-inflicted by widespread irresponsible behaviors. 

3. Economic Collapse is the Risk: even if the total rescue investment were doubled and a deadweight loss we'd still get a positive return. All the rescue does is keep the wheels on the wagon by un-freezing the credit markets. It doesn't make the Housing crisis go away and it still has two years to run to get back to more reasonable values and work off excess inventories. Nor does it stop the recession that's underway from happening. What it does do is stop it from turning into something far...far worse and ending up in a 15-year malaise like the Japanese created for themselves by trying to avoid realities and wave the tide out when it wanted in. Learn to surf the waves, don't go surfing or drown. Those are the choices on offer...period, end-of-story. This being the ocean we swim in it's hard not to play. Drowning is not much fun. Let's see if we can learn to swim - and it doesn't matter how well. Only that you keep your head above water for long enough to reach the shore. Let me give you two cases that concern the bald twins, King Henry and Uncle Ben, as well as the President and apparently darn few others.

 The trick is to ask yourself what the economy looks like over the future with and without a rescue. Now if things really seize up the numbers will be much worse. These two cases are not major downturns (trying to avoid the D word here) but are worse than the downturn we will have to live thru if the credit markets aren't repaired. The Bad case is a moderate recession followed by slower than potential growth while the Malaise case is a more severe downturn finished up with the Japanese disease. In the first case the total losses are $18T while in the second they are $25T. Plus of course the destruction and blighting of all our hopes for the next two decades but that's hard to analyze.

4. Deeper Problems Remain - the Rescue is a quick-fix proposal to keep the wheels rolling and doesn't address nor is it intended to address, the need for regulatory reform, a short-term stimulus package needed to get the economy cranking again. Or the necessary investments in infrastructure, energy, education and new technologies that are required for a prosperous future. All it does is reduce the risks of Malaise, which are otherwise pretty high.

5. Congress Not Acting Well - if you've been listening to any of the hearings you're hearing a lot of yokel like posturing and just plain ignorance on display. How much of that is political kabuki and how much of it is dead serious isn't known. If we're lucky it was 1/3 play-acting and 2/3 posturing for the folks back home so the Congress critters could return and sell the package. If we're unlucky it was 2/3 dead serious and 1/3 demagoguery by politicians without a clue. Given that the leadership managed to craft the details of a legislative proposal that addressed the core of the original proposal, added on the fixes that made it salable and palatable, had the public and full support of the President and were blindsided in a surprise attack with no warning by House Republicans at the last minute in a political maneuver triggered if not directly supported by John McCain and his grand-standing inclines me to the latter for some. On the other hand they climbed back into the pits to fight again. Bravo ! This is important - welcome to the Sausage Factory. This is how politics gets played. All those grand hopes we have for the right economic agenda are going to get wrung thru it.

6. Popular Pressures - by and large the politicians, even the good ones have no choice but to dance the Kabuki dances because the outpouring of popular anger was and is over-whelming. This coming from an electorate that was perfectly happy to ride the gravy train up when it met rising housing prices, a growing economy, easy boat loans, credit for vacations and all the goodies everybody consumed. When this is all said and done we're all going to have to change our behaviors. The real downside risks here are that a major downturn turns us all into a witch-hunting mob and locks us into another decade of angst and general despair like the '70s. Except this is more avoidable and almost entirely self-inflicted. 

7. Twins and Bush - Paulson and Bernanke having been performing well under incredible pressures for almost two years. We couldn't ask for a better pair. The distinguished macro-economist who's spent a lifetime studying this exact problem but also nearly a decade making policy along with a tough, no-nonsense financial executives who understands markets as well as anyone. Almost every other past pairings would not be doing as well. We got lucky. On the other hand they aren't selling it. 

8. Barry and Johnboy - up until four o'clock last night I though the candidates were playing it well asking us all to pull together and standing up for a non-partisan approach which is so critical. Unfortunately John McCain violated every principle he purports to stand for when he attended to critical kiss and sign meeting and withheld his approval from an all but done deal that met every requirement he'd laid out for a proposal he was entirely ignorant of and hadn't been involved in crafting. Leadership in this case calls for standing up and supporting this as the best available solution crafted by the best available minds. Not posturing for your base.

9. WE WILL GET THRU THIS - perhaps the most important point. Despite long hours, much strain, the severity and urgency of the task and being bushwhacked at the last minute by the House Republicans the Dems, all the Senate (so far), the Twins and Bush are keeping their heads and staying conciliatory. Last week when this blew up in hours the markets and the credit markets almost crashed. So far today they're being a lot more sanguine than anybody should expect. Let's hope they're right.

10. IT'S UP TO YOU - at the end of the day this may still remain a great mystery but the slivers of silver lining in all this is we're getting to pre-test our candidates, the machinery and the process. As well as undergo a forced education in economics that was long overdue for everybody. You may not be able to judge the technical merits but you can judge the behavior and cut the Gordian knots of complexity.

• Who's acting in a public spirited manner ?
• Who's supporting collective action in the best interest ?
• Who's stepping up and providing leadership by speaking in support ?
• And who's attacking the other parties at an inappropriate time ?

Continue reading "This is a Rescue, Not A Bailout: And It's Your Life" »

Posted by dblwyo at 09:22 AM | Permalink | Comments (2)

We've paraphrased Jim Carville's famous observation by adding on the notion that we're all boiled frogs. In other words economic issues have moved front and center stage, in case you haven't noticed. In fact if you look back at the last two posts which frame the overall set of challenges we face and sketched some strategic policy directions, admittedly simply at a high level, we id'd Economic Policy as one of the Big Three. If you'll skim over the readings below you'll get a pretty good take on the deep-seated structural challenges we all face. The problem is that most of them aren't new to this downturn but are the gradual accumulation of things that have been building up for quite a while - time to que the Crazy Frog ? Wonder what he'd look like boiled.

Just to put this in some long-term perspective the chart shows shares of national income going to Wages, Profits and Capital since the end of WW2. What you see is a relatively healthy high-wage, high-profit economy in the '50s and '60s followed by a deterioration in Profits and Wages in the '70s as more equipment was required to shift the structure of the economy under oil prices, regulations, etc. Capex reached a plateau but other than a brief blip during the Tech Boom Wages have been in a long-term secular downtrend ever since. Profits have shot thru the roof relatively speaking because companies aren't either hiring or buying equipment. Why - setting evil capitalist conspiracies because they don't see rising demand justifying the return. We forget that our post war Golden Age had four major new industries (Pharma, Plastics, Electronics, Transportation) that drove the creation of new jobs, we had a major shift upward in human capital with the GI Bill and we inherited a lot of manufacturing equipment investment from the war. If we'd like a new Golden Age we need to come up with new industries that create new jobs and make sure that the right kind of folks are available to work in those jobs. A lot of the symptoms of our failure to do that are listed and discussed in the readings.

Now the Economy has many moving parts but two large components. The business cycle and the long-term secular growth trend. L.T. growth is entirely dependent on the sum of population (labor force) growth and productivity. If we want to get wealthier in the long-run the only sure path is to get more productivity. Just to keep growing to pay Social Security we need to grow the population (btw - that's one reason Immigrants are so vital. Without Hispanic population increases are growth would drop ~ 1% and we'd look like the aging Europe !). In the short-run the economy goes thru cycles where the goal is to get as close to the long-run speed limit of about 3.3%, though it may be dropping for the reasons discussed. On the outside you want to keep inflation from turning into hyper-inflation and destroying the society (think Weimar Republic) or from dropping into a major depression - which we could have in '01 in the aftermath of the bust bubble (think Great Depression or Japan since 1990). Within those bounds we need to ride out the cycles but mitigate the effects as best as possible. Cycles can't be cured but can be managed. In other words we can't avoid the downturn that's coming but we can keep it from metastasizing. We have basically two options - monetary policy (lower interest rates) or fiscal policy (cut taxes or spend money). That's it. So you put it all together we need to deal with the Housing and Credit Market crisis before they spin out of control (btw - you may not have been paying attention but the credit markets did their drunken Irishman thing and almost completely collapsed in mid-March. Collapse is analyst-speak for oh my god the world is ending). Then we need to stimulate the economy to mitigate the downside. Finally we have several major things like infrastructure and energy that are drains on the economy. Let's put it all together.

1. "Quick Fixes" -

a) the Fed may have saved the free world with it's new tools that prevented the collapse of the credit markets and it's foreclosure of Bear-Stearns (nobody got rescued btw). Now we need serious regulatory reform

b) Houses got inflated way over sensible values thru widespread greed and stupidity. If we don't figure out a fix this will drag on for years and threaten the viability of the economy. Two parts - re-write the loan terms, with gov't guarantees and workout management and then combine it with writedowns in house and home value. Straightforward, simple and hard - the biggest problem is finding the people to do it. But it'll get done the hard way or this way.

Stimulus - that still leaves us with a weak economy, just not one on the brink of implosion. So we need to spend some money. And $150B ain't gonna cut it. But any fiscal stimulus needs to be targeted, temporary and big enough. McCain's gas tax holiday is actually a pretty good idea. What should be added is some major hits (on the order of the '00s of $Bs that people pulled from home equity) in such things as extended unemployment insurance, targeted tax cuts and training programs.

2. Big Fixes - the US has let it's electrical, waterway and transportation infrastructures deteriorate to the point of...well never mind. A massive decade long infrastructure rebuilding project would see us get new electrical grids, new highways and transportation systems and possibly new power plants and alternative energy supplies. This would have the benefit of providing enormous fiscal stimulus, i.e. creating jobs and making a major long-term investment for things we know how to do. BtW - major sidebar. The long boom of the '80s and '90s was primarily built around two things. Supply side is utter nonsense. Reagan got it going the old-fashioned way with deficit spending and Clinton got lucky and also cut the defense budget. Bingo, that's it.

3. Long-term Fixes - we need new industries and we need to get off of our oil dependencies. There's things we can do in each and both. For example by increasing conservation as well as mandating enormously higher mileage thru better materials and engineering we could get a huge jump for the next ten years. Then we need to build new power plants, particularly nuclear, we need to open up our own offshore deepwater to oil exploration and we need more refineries. That all togeter takes us into the next decade. Beyond that we need some major alternatives - and don't believe 'em. We don't have the knowledge or technology do magic yet. For example we should really be heavily emphasizing coal but need major new technology not the Rube Goldberg fixes running around. So a concerted national effort (does the word Manhattan Project ring any bells) to create major new energy sources and technologies would stimulate the economy, create new industries and provide us several paths to the future.

Combine that we major parallel investments in new life sciences and materials, both because they offer the best hopes for the Next Big Things and because they are synergistic with energy investments. For example if we pie-in-the-sky about Fusion we need the new materials for the reactor vessels. Or new lightweight composites for high-temperature turbines. Similarly new bio-sciences offer up their own benefits not least of which is designed alternative energy crops as well as way to control and manage environmental problems. The real beauty of this is that it doesn't take a lot now because it's all at early stages.

So there you have it in a nutshell :) A complete now to futures strategic economic policy recommendation. Believe it or not it's at least a decent strawman based on reality, the ways things actually work instead of fantasies and offers some real benefits. Test it against the candidates if you like. The results might be interesting ! 

Continue reading "Readings (Economy): It Really is the Economy, Stupid Frog" »

Posted by dblwyo at 04:31 PM | Permalink | Comments (0)

Let's go a tad off-center from the normal run of posts here and point to a deeper dive in the economic and credit market news. While we've posted several times on the economic outlook, both for its' own sake and because it's moved front and center as a political issue, we strongly suggest that on an individual basis this is worth your attention. Why ? Because, first, the economy underpins all the other issues we normally address. If you can't afford it you don't get it and lots of things are going to be unaffordable in the next few years. In fact the political agenda for the next President is being determined as we speak by events on Wall St. and in the Economy. Central to the accelerating economic malaise is the increased liklihood of a longer and deeper recession brought about by the unraveling of the credit markets. Now if you're like most folks you pay attention to the news that interests you, bears on your concerns and/or comes to your attention. Economics continues to be arcane and ignored. In fact my college roommates one summer, on finding out I was majoring in economics, came up with the classic summary: "as long as my paycheck shows up and clears I could care less".

Continue reading "A Little Off-Topic: the Credit Crisis, the Economy & You" »

Posted by dblwyo at 09:10 AM | Permalink | Comments (0)

Back in the day I had been a Bill Bradley supporter even going so far as to make a contribution but more importantly suggesting that he, if he were serious, needed to differentiate himself by staking out a unique position. The position - a pragmatic and centrist one where in my book centrist was tackling serious issues with workable approaches. With his background and track record he struck me as just the mean to speak truth to power, i.e. the voters. After all why not ? As a traditional candidate he didn't stand a chance but by introducing a new note into the national debates he could strike off on a whole new pathway. Well unfortunately Bill turned out to be a terrible speaker and not able to translate his pratical experiences in the Senate into either a vision, policy or pragmatics. After we squandered the golden opportunities of the '90s on a binge while the Brits kept moving forward under the Thatcher-Major-Blair sequence it was, IMHO, more than time for a change.

Worse as Bradley's results deteriorate his willingness to pander to special interests accelerated accordingly. Now that the state of the economy has moved back to center stage we're seeing the same with both Billary and Barrack competing to attack trade, globalization and the fat cats. Despite having good economic policy teams no less. Now a lot of this is necessary tactical manuvering, especially in the primaries. And when you listen carefully you can hear a lot of caveats and realisms.

Continue reading "WRFest 2Mar08(Policy): More Economics - Realities vs Rhetorics" »

Posted by dblwyo at 03:36 PM | Permalink | Comments (0)

Sometimes life is just full of those funny little coincidences, convergences and serendipities. After a friend asked about the stimulus package and caused us to generate a graphic on where we're at in the business cycle "Father" Martin Feldstein not only appeared on the Charlie Rose show but had a great WSJ column "explaining it all to us". Seriously - not if you can find the time but if you're at all concerned with the economic situation, taxes, Social Security reform and the long-term future of retirement or the long-term prospects for this country don't find, make the 30 min. you'll need to watch this.

Meanwhile here's the excerpt from the WSJ column - which we've pulled at some length (key points highlighted):

Our Economic Dilemma Although it is too soon to tell whether the United States has entered a recession, there is mounting evidence that a recession has in fact begun. Key measures of economic activity stopped growing in December and January or actually began to decline. The collapse of house prices and the crisis in the credit markets continue to depress the real economy. The sharp reduction in the federal funds interest rate and the new fiscal stimulus package may, of course, be enough to avert a downturn. Many forecasters still predict that the economy will just slow in the first part of this year and then rebound after the summer. But the hope that monetary and fiscal policies would prevent continued weakness by boosting consumer confidence was derailed by the recent report that consumer confidence in January collapsed to the lowest level since 1992. If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character.

Continue reading "Facing Reality: Father Feldstein Explains It All" »

Posted by dblwyo at 04:46 AM | Permalink | Comments (0)

Warren Buffett has a famous saying that when the tide goes out you found out who was swimming naked. Well, it's true. Worse you also find out who's about to land on sharp coral and get cut up, or those who already have. And, speaking as somebody who's done a little diving, you also find out how many sharks are around who'll smell the blood. Unfortunately we may be about to find out how many naked swimmers, sharp rocks and sharks there really are after a couple of decades of dodging all that. AP has an interesting story that throws all this into a sharp highlight. And below the line you'll find a pointer to another post on the breakdowns in the economic cycle that are part and parcel of this problem.

Economic Woes Reveal a Long-Felt Unease Even when experts were declaring the economy healthy, many Americans voiced a vague, but persistent dissatisfaction. True, jobs were relatively plentiful over the last few years. It was easy to borrow and very cheap. The sharp rise in the value of homes and plentiful credit cards encouraged a nation of consumers to get out and buy. But to many people, something didn't feel right, even if they couldn't quite explain why. Now the economic tide is receding, and the undertow that was there all along is getting stronger. Take away the easy credit and consumers are left with paychecks that, for most, haven't nearly kept pace with their need and propensity to spend. Americans' declining confidence in their economy is triggered by a storm of very recent pressures, including plunging home prices, tightening credit, and heavy debt. But it is compounded by anxiety that was there all along, the result of a long, slow drip of worries and vulnerabilities. Much of that anxiety is the uncomfortable, but expected jolt of the economic roller coaster. During a downturn, people become less confident about keeping their jobs or being able to find new ones, meeting household expenses and about the prospects for the future. But there may be more to it than just cyclical ups and downs.

Continue reading "Economic Tides, Naked Swimmers and Sharp Rocks" »

Posted by dblwyo at 12:08 PM | Permalink | Comments (0)

Back in the saddle again - here we go once more in harm's way (alt. version). On my other blog just posted a plug for a friends blog and it turned into a long riff on macroecon, business cycles and why it matters (can you spell social collapse). Given that all our choices are conditioned by the state of the economy, that most of the issues facing us in this election have their roots in policy failures reaching back to the '60s and our prosperity in the '90s was the other side of the coin you might be interested. The excerpt and link are below the line.

Giving ourselves a break today and taking care of chores and errands we had lunch at our favorite little local family resteraunt where business wasn't as good as it might be. Partly because of the weather, partly because of the snowbirds who're south right now but largely because of the impacts of energy, et.al. on people's spending money. In two hours we had the same conversation at the tobbaconist, the video store, the barber AND the wine shop !

If you don't think the next President is going to be faced with a major economics challenge which is, now, inescapably painful for all of us then you are sadly mistaken.

Continue reading "Understanding Economics: Introduction to Macroeconomics & Businss Cycles" »

Posted by dblwyo at 11:43 PM | Permalink | Comments (0)

One of my e-friends has suggested that, from time-to-time, that if I insist on babbling away about economics, the Economy and the rapidly metastizing crisis that it would be helpful to put it more clearly and simply. While it's not entirely clear that such is within my circle of competencies fortunately there are alternative. Especially altnerative sources.

He also mentioned not making my posts so long and detailed - which is another little thing to be worked on at some future date. But in pursuit of both objectives we've found three excellent vid clips that put the current economic problems simply, clearly and in some Nuts Shells.

We'll start with this little gem from Jon Stewart and CNN's financial editor who basically encapsulate the whole thing:

Continue reading "Economic Crisis in a Nuts Shell: Jump Out of the Window ?" »

Posted by dblwyo at 07:12 PM | Permalink | Comments (0)

This week Paul Krugman's column drew attention to a recent paper by Reinhardt and Rogoff, both of whom are distinguished economists with wideand deep practical experience in the real world of policy making. Once he'd posted the blogosphere (i.e. two my favorite econ/finance blogs) proceeded to go to town on the topic. Here's what Prof. Krugman had to say, which needs no further embellishment from me. The point YOU need to take from this is that the next President will be facing severe economic pressures that result from an accumulation of dodged problems that will HAVE to be dealt with. As you weigh candidates and issues we suggest, therefore, that you put the economic situation rather high on your priority list. In addition to Krugman's column we also point to some other concerns, e.g. another column by Ken Rogoff about the fragilities in China which could have even more severe consequences.

Continue reading "The Coming Economic Crisis" »

Posted by dblwyo at 09:15 AM | Permalink | Comments (0)

Well if the polls are to be believed the state of the economy is not only first place but pulling way ahead. While the primary purpose of this blog is to focus on current affairs in general that means being responsive to the issues at hand as well as pursuing lines of inquiry that need some attention. So we've already put up a couple of other posts with links, references and pointers. The week's interesting readings/links on economics and economics policy are below as well as some links to prior posts. But a blogging friend recently sent me a question and it made so sense to post my response since it provides some context. And the readings beyond the break provide a pretty good survey, IMHO, as to the issues, stakes and consequences. Notice btw that while the economy is strengthening its' hold on the #1 position you're not hearing much from the candidates about. At least that makes sense (no Canute telling the tide to stop won't keep it from coming in).

Q: So far the best I’ve been able to come up with is that “the new stimulus plan is reparations for the people that don’t work as hard as other” lol but quickly abandoned that line when the thought of offending anyone popped into my head lol.

Continue reading "You, Economics and the Elections" »

Posted by dblwyo at 03:22 PM | Permalink | Comments (0)

Well the Economy has indeed moved into the #1 slot on the political agenda. Tu. the Fed announced a major rate cut while Th. the White House and Congress announced a major stimulus package. Both of which, on balance, should be helpful. At least it mitigating the damage that's likely though not avoiding it all together. And, much more importantly, reducing (at least hopefully), the enormous downside risks we're exposed to because of the fault lines in the economy that have been created and are under increasing pressure.

We'd like to point you to a summary and analysis of the recent news as well as some relevent readings. Which entails admitting that we lead a duel existence (and you thought the we was mere editorial posturing :) ). This blog is focused on Current Affairs while my other one is focused on Economics, Markets and Business. The most recent post there goes over what's becoming an increasingly vital issue that WILL haunt us all for some time to come. As we've argued before. So, without much further ado, here's an excerpt and link. Which has a nice selection of readings from a range of good resources. Hopefully you'll find it worthwhile.

Cramer's Comeuppance vs Pump Priming Realities Well some more interesting news hot off the press, so-to-speak. One both amusing and  schadenfreudish but also informative. And the other a matter of both public policy and another reality check. The latter is the recent announcement that House leadership and the White House have reached an agreement to pass an economic stimulus package that's actually fairly sensible as well as astounding for its' speed. Though it still has to make it thru the Senate where further wrangling is all to likely. The former is Jim Cramer being called out by Rick Santelli on CNBC for now trying to sound like a Bear when in fact he was not only bullish for most of last year but stayed bullish weigh into the year. Some more readings are below. In one of them Larry Summers lays out the primary criteria for a tax stimulus: 1) quick, 2) targeted with the right instruments and 3) temporary. Another reading is a Brookings survey that takes a deeper dive but is nearly identical. So on that basis what do we think. Well... 

We also recommend reviewing the prior post on economics related readings: WRFest 20Jan08(Economics): Oops...Recession Ahead

Posted by dblwyo at 09:30 AM | Permalink | Comments (0)

Economics and economic policy is one of those things that most people ignore, take for granted and find making their heads hurt. Unfortunately, for good or ill, it conditions most of the rest of what we can do. Just in case you were living in another world, or paying attention to purely "practical" things last week not only did the major US markets continue tanking but the escalating chorus of cries for some sort of combined monetary and fiscal stimulus effort to short-circuit an increasingly likely US recession were capstoned by Ben Bernanke's Congressional testimony and Pres. Bush's call for a $150B fiscal stimulus program. Please understand that these efforts are necessary and vital but are unlikely to prevent a recession that's likely already underway. The real goal here is to a) mitigate the damage and b) prevent it from metastasizing into something much worse given the weaknesses in credit markets and the housing sector. And also c) to keep worldwide problems from feeding back to severely, as it increasingly turns out that the rest of the world is not in fact decoupled from the US.

At this point you may be going, oh my god...he's off on economics. Please don't or why do I care ? Several of the excerpts below will speak directly to that question of course. And it's an interesting one - for several years now it seems a conversation I"ve been having with several friends, all of whom would rather not think about it, by and large. Part of the problem is that everyone confuses economics with business or finance, which are significant parts but not the subject as a whole. Economics on a small scale is about finding the best use of available resources to get the most done with those resources. On a large, or macro-, scale it's about the complexities of making sure that the most people have the most jobs and overall welfare and well-being is moving ahead as well as possible. Put another way all the other things we think we need to do from protect our national interests to reform education to changing healthcare to paying for pensions involve economics, on several levels. First off designing workable programs and paying for them is often 90% a problem in micro-economics. But second off without a healthy macro-economy we end up being unable to pursue any of these other initiatives.

There's a Latin tag phrase somebody explained to me once - sine qua non. That without which there is no other. Economics is the sine qua non of a healthy society.

When Antwerp fell to the besieging Spanish army in the 16thC and was sacked because the siege had been long & ugly and the bankrupt Spanish monarchy hadn't paid the troops in months it destroyed a major port and trading center that had risen to prominence as the major economic and financial powerhouse of Europe. Its' destruction during the Dutch-Spanish 80 Years War lead to the rise of Amsterdam as its' replacement and the eventual independence of the Dutch and their leading role on the world-stage for two centuries as a major trading, economic and politico-military power. After months of successfully defending themselves do you know what one of the primary triggers was ? The city fathers put price controls on smuggled food and smugglers would no longer take the risks to bring in the supplies that had been keeping the city alive. After a few months the starving city was so weakened it fell to the Spanish troops.

Be careful what you wish, understand that often supposed unintended consequences are the results not of ignorance but of either not thinking things thru to the next step. Or of believing what we'd like to believe in the face of all evidence to the contrary.

Continue reading "WRFest 20Jan08(Economics): Oops...Recession Ahead" »

Posted by dblwyo at 08:31 AM | Permalink | Comments (0)