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Same 'Ol, Same 'Ol: Economic Cliff-bottoms vs Cliff-diving

The immediate prior post actually covered the ground we're going to re-cover with this one. The difference then is that we pivoted around the new and revised GDP numbers to hang everything else on while this time we'll focus a bit on employment and retail sales. While we put up this longish posts that cover some ground and attach excerpted readings to go with them this time we've outdone ourselves on the readings. In fact normal blog practice would have had almost 20 separate posts on just the first item - the hot, recent econ news, alone. This way though you don't get machine-gunned with a bunch of data that doesn't fit into a larger picture. Instead we're going to drop a round of artillery with many big guns to try and link it all together. We start with the recent economic news (employment, output & consumption and real estate) then we hop to some big picture topics on the longer-term consequences of the new new thing...FRUGALITY ! Then we segue to the international consequences with particular attention to China, move on to talking about oil and the dollar and conclude with a few readings on policy. Which, btw, was extensively covered in the last post (Interrupting Your Reported Data Distortions: More Darkside for the Economy).

Employment and Outlook

 Amazingly enough a loss of only 270K jobs had everybody dancing in the streets, completely unjustifiably so in our opinion. The basic chart on YoY Employment is shuttled off to the readings. The only number that showed any "improvement" was unemployment, which was down "only" -60% instead of the prior '-80% ! Jobs and hours continued to deteriorate. Consumer spending is NOT going to come back until we see significant long-term job creation, which will be a long time coming. Based on this prior chart of job re-creation (HT CalculatedRisk of course and not the NYT, et.al. who ripped him off w/o attribution) this is already longer and deeper with more to come; ioho we're not going to see significant job creation for a long time indeed. To breakeven we need to create 150K jobs/month, otherwise it's the Red Queen falling farther behind. We entered this recession ~3million in the hole and are now about 12 million jobs in the hole. It'll take a long period (five years ?) to make that up and required we hit 4-5% GDP growth (3%+ real growth ?). The Fed's looking for 2.5% growth in real GDP at best !

Consumer Behavior

Some folks outlook is pretty sanguine but some have a more realistic view, as you can see in this chart on consumer spending recovery. More importantly we funded the growth in consumption in the '90s on the wealth effects of the Tech Bubble and during this decade by leveraging the housing ATM. Those are both going away, consumer are converting to savers, faced with years of having to re-build their balance sheets AND we're seeing some fundamental re-thinkings about what we actually need. So for many years at least credit availability restrictions will constrain spending, followed by balance sheet constraints and then we might reach a new normal. But that new normal will be at alower set point. The best depiction of all that we've seen is (HT !) from our buddy Jake over at Econpic where he looks at 10yr annualized change vs. net worth. Read a certain way the last four decades of consumer wealth creation has just been destroyed. And people are pricing the market for a quick-hit V-shaped recovery ? We don't think so.

The China Syndrome and Consequences

China's performance so far has been miraculous while India and Brazil's have been excellent. But Russia is sliding over the lip of a black hole. We want to talk about China mostly but a few words on the others as well. First off, China's recovery has resulted from massive public spending and money injections. But unlike in the states where the new money disappeared into the banks balance sheets China's sloshed on thru to spending. The question is how much of that went to productive investments that will pay off in the long-run. Not a lot. Aside from severe data reporting problems where there kumquats are not either our apples or oranges (cf. the Jim Jubak URL in the readings on China's realities) the real problem is their continued dependence on exporting. If the US and the other developed countries become net savers and reduce consumption the demand for Chinese exports will drop dramatically. That in turn will lower the demand for commodities over what the speculative fantasists are currently imagining. When you look at the long-term prospects China has to keep running faster and faster to stay ahead of its population's needs for jobs but is facing some major barriers. So, of the BRICS, we'd have to say that Russia is a basket case headed for worse, India will face many challenges and China is storing up serious problems for the not to far future. On the whole the best of the four is Brazil which has pursued careful monetary and fiscal policies, has a more robust and balanced economy and has a shot at growing domestic consumption enough to be self-sustaining.

China may eventually get there (certainly they are aware of the problem) but it won't be easy, will take longer than expected and be at a lower growth rate than we've seen. So for everybody expecting commodities and gold to shoot off think again. The one major caveat, which we've discussed before, is that folks like Russia, Mexico, Venezuela and Nigeria have been over-exploiting their existing oil fields and not investing in new ones. So, even with reduced Chinese growth, we're likely to be back at a D>S imbalance.(Oil Industry II(Analysis): LT Supply-Demand, Outlook and Disruptions)

Note: this will also impact the dollar. The dollar rose in the last several months as a flight to quality play when everybody was piling into US Treasuries (so much for the "replace the $" theory) and is since dropping as people are becoming more comfortable that worldwide Armageddon has been averted. What drove it down secularly, over a period of years, was that we were exporting borrowed dollars to buy oil, goods and other stuff from China and the ME. As we shift to a Savings > Investment world net exports will tend to get more positive. And fewer dollars will be flowing abroad; the net result will be the reduction, if not elimination, of the structural down pressures.

Welcome to the Brave New World of the New Normal.

But bear in mind lots of folks think we're kidding so you may want to play them !

US Economic Data 

Surprisingly strong jobs data signal turning point It's the clearest sign yet the recession is finally ending: U.S. employers laid off far fewer workers in July, the jobless rate dipped for the first time in 15 months and workers' hours and pay edged upward. Those are the kind of figures that could give Americans the psychological boost necessary for recovery to take root after the worst recession since World War II. A net total of 247,000 jobs were lost last month, the fewest in a year and a drastic improvement from the 443,000 that vanished in June. The Labor Department's report Friday showed that the unemployment rate dropped a notch to 9.4 percent in July, from 9.5 percent the previous month. Together with slight increases in the average workweek and wages, the new figures suggested the economy is in a transition from recession to recovery. "The worst may be behind us," President Barack Obama declared. "Today, we're pointed in the right direction." Still, the job market remains shaky. A quarter-million lost jobs are a far cry from the employment growth needed to put the national economy on solid footing. When the economy is healthy, employers need to add a net total of around 125,000 jobs a month just to keep the unemployment rate stable. And to push the jobless rate down to a more normal 5 percent range, it would take much stronger growth -- at least 200,000 new jobs a month. Economists say it might take until 2013 to drive down the unemployment rate to 5 percent. Analysts say companies will keep cutting jobs probably through the rest of this year, though the pace of layoffs should continue to taper off. The beginnings of recovery could actually push the unemployment rate higher, since far more people would be energized to look for work again. In fact, the main reason the unemployment rate declined last month was not an inspiring one: Hundreds of thousands of people, some discouraged by their failed job searches, left the labor force. The labor force includes only those who are either employed or are looking for work. If laid-off workers who have given up looking for new jobs or have settled for part-time work are included the unemployment rate would have been 16.3 percent in July. All told, 14.5 million were out of work in July.

Employment

 Output, Production, Consumption

 Real Estate

Savings and Change

Signs of economic cheer: The sun also rises The clutch of data now available for July has strengthened expectations that GDP will rise in the current quarter by as much as 3%. An index of manufacturing activity rose to its highest level since last August, and manufacturers reported that new orders were growing briskly, the best in over two years. Car sales jumped 15% to an annualised 11.2m and manufacturers are ramping up production. Sales of existing houses have risen. Even battered Elkhart got some good news: on August 4th Dometic, a supplier of recreational-vehicle parts, said that with some help from local incentives it would add 240 jobs to its operation in the town. Mr Obama and his aides have wasted no time in crediting the $787 billion fiscal stimulus for spurring this recovery. In fact the stimulus’s contribution so far has been relatively modest. More important was last autumn’s massive injection of public capital, loans and loan guarantees into the financial system, and this spring’s bank stress tests. These stopped the spiral of declining asset prices, credit withdrawals and bank failures that had threatened to turn a recession into a depression. One of the most encouraging bits of news is that the S&P/Case-Shiller 20-city index of house prices fell just 0.2% between April and May, the smallest fall in two years. Stable house prices would do wonders in reducing loan delinquencies, shoring up the banks’ balance-sheets and restoring the flow of credit. Despite the good news, Mr Obama’s approval ratings, though high, are slipping. This, in part, is because the single most important economic benchmark, employment, remains grim, surprisingly so. Unemployment usually responds to economic growth in a relationship that was captured by an economist, Arthur Okun, in the 1960s. But it has risen more during this recession than most formulations of Okun’s Law would suggest. The publication last week of revisions to earlier GDP data explains some of the discrepancy. The revisions show that GDP has declined a cumulative 3.7% since the end of 2007, thus tying with 1957-58 as the deepest recession since the Depression (before these revisions, the decline was shown to be 2.5%). Even so, Michael Feroli, an economist at JPMorgan Chase, says that Okun’s Law would have predicted an unemployment rate of just 8.6% during the second quarter, whereas it actually averaged 9.3%.

Savings Are Good, but May Slow Recovery The stock market is clearly pricing in an end to recession. What remains to be seen is the strength of the recovery, and savings accounts could have a lot to do with that. The Bureau of Economic Analysis is due Tuesday morning to report June personal-income and personal-spending data, which will include the latest figures on personal saving. Economists, on average, think income fell 1.2%, reversing May's 1.4% spurt, which was driven mainly by a one-time stimulus windfall for Social Security recipients. Economists think spending rose 0.3%, thanks mostly to more-expensive gasoline. Inflation-adjusted spending was likely flat. If this expected combination of falling incomes and higher spending comes true, then the percentage of consumers' disposable income socked away into savings will likely fall after surging to 6.9% in May. But the long-term path for savings is inevitably higher. The ratio of household net worth to disposable income is at its lowest level since 1992, according to the latest Federal Reserve data. Lower net worth usually inspires people to squirrel away more of their income. Current net-worth figures are consistent historically with savings rates of between 6% and 10%, according to Goldman Sachs economists. If savings merely rise to the low end of that range -- 6% of disposable income -- then that could keep some $700 billion in consumer income out of GDP next year, assuming growth in disposable income gets back to normal. A 10% savings rate, which often prevailed in the decades before those stock and housing bubbles inflated, could put nearly $1.2 trillion on the sidelines. A recent San Francisco Fed paper estimated that getting to such a savings rate between now and 2018 would shave three-quarters of a percentage point from consumption growth each year. This savings boom isn't all bad for the economy. By spurring demand for Treasury bonds and short-term corporate debt, it could keep interest rates low. It will help households work off debt loads that are still far too high. The economy can recover even as savings rise -- but the recovery won't be as robust.

Building a Recovery, Factory by Factory If a V-shaped recovery is in store, it will be built in U.S. factories. The Institute for Supply Management reports its July manufacturing index on Monday morning. Economists think it rose to 46.5 from 44.8 in June. That still would indicate a shrinking factory sector, but it would be the best reading since last August and would signal the latest step toward recovery. There is a small cadre of forecasters who expect a far better outcome than mere recovery, soon. They see not only the end of recession but also a classic, V-shaped recovery brewing. In their view, global manufacturing is rebounding to refill inventories that were depleted in the recession. Juiced by government stimulus, this factory renaissance will kick a new business cycle into gear, leading to hiring, rising incomes and a rebound in consumer spending. One of the first gauges to register such an event would be the cyclically sensitive ISM. An ISM bounce certainly seems due. The government's "cash for clunkers" program generated an estimated 250,000 new auto sales in about a week, a far more concentrated boost than many economists expected. The program likely won't show in the July ISM report, but signs of its impact could come Monday, when car makers report July sales. Already, U.S. steelmakers have recalled workers and restarted plants, thanks partly to rising auto demand, notes Wells Fargo senior economist Mark Vitner. Some economists have estimated this program could boost third-quarter gross domestic product by 0.5 percentage point. More broadly, given the near-empty shelves, a slower pace of inventory liquidation is likely. More-stable inventory figures should further bolster third-quarter GDP, giving ammo to the V-shapers. But when these effects fade, the recovery's strength will fade, too, unless U.S. consumers resume their spending habits. Considering their still-heavy debt load and vanished wealth, both unprecedented relative to other recessions, it might take more than an inventory-rebuilding spurt to make that happen. "The stock market is betting on a full recovery, and it may occur in the short term," says Miller Tabak strategist Dan Greenhaus. "But you have to be apprehensive because this isn't an ordinary recovery."

Stiglitz: America at "Serious Risk of Extended Malaise" Day by day, the "the recession is over" crowd continues to get larger and louder. But the U.S. faces "serious risk of an extended malaise" after the bursting of the credit bubble, says Nobel Prize-winning economist Joseph Stiglitz of Columbia University. Today's optimistic policymakers (current and former) and economists risk confusing the technical end of recession with a robust recovery, he says. "It would be a mistake to say ‘because we're out of a sense of freefall and may have turned a corner [that] we're on the road to recovery.'" In the short term, there is a "very remote likelihood" the job market will turn around anytime soon, the famed economist says. Therefore, it will still feel like a recession for many Americans even if GDP does produce positive readings. Stiglitz also cited a number of potential negative speed bumps the recovery may hit, including: Weakness in commercial real estate. Huge deficits at the state level, leading to more job losses. Many Americans at risk of having unemployment benefits expire. Weakness in our major trading partners, and overall lack of final demand. In fact, Stiglitz says the next few years may be characterized by weak growth and false starts on the road to recovery, not unlike Japan in the past 20 years or America during the Great Depression. As a result, he says the government should plan on additional stimulus packages focused on improving technology, education and infrastructure. While lamenting "there's no appetite" for additional government spending, he says these investments provide a better long-term return than tax cuts or rebates. Best to get these plans ready to go for when the current stimulus package, which Stiglitz called "too small and badly designed" last spring, starts to wane. In sum, Stiglitz believes we should hope for the best, but plan for the worse.

International Outlook: Not What You Here !

Which Countries Are Surviving Downturn? This week, I take a look at which countries have best weathered the global recession and credit crunch. All economies have been affected by the crisis, but a combination of policy responses and strong fundamentals has given some countries, especially some emerging market economies, a relative edge. These same strengths could lead the countries I highlight below to perform better as the global recovery begins, even if their growth rates remain well below 2003-07 trends. What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.

China's Discombobulations

What should have been discussed during the SED meetings (Part 2) So what does all this have to do with the SED?  It means that the best hope for the two countries, I think, is a well coordinated set of policies acknowledging that the US savings rate must rise, and with it the Chinese must decline, but also recognizing that if this happens too quickly, or is accompanied by a collapse in trade, it will be bad for the US and terrible for China.  These coordinated policies must also acknowledge – and this becomes much more difficult – that the current Chinese stimulus may be making the adjustment more difficult, and much of it will have to reversed at the same time as the “appropriate” measures aimed at spurring consumption may cause a short-term rise in unemployment. Finally, the while the US commits to keep fiscal spending high, to turn a blind eye to trade disputes, and to run large trade deficits for several years more, China must commit to the financial sector and currency liberalization that will effectively reduce subsidies to producers and constraints on consumption.  The SED might also discuss the ability of workers to demand and enforce wage increases, since there is a wide consensus in China and abroad that among the main reasons for low household consumption in China is that wages are rising too slowly relative to GDP, and household savings are “taxed’ too heavily via interest rate policies.  Of course discussing workers right in a bilateral context is politically difficult, even without the irony of this particular discussion, so it will probably not happen.

Get Out the Wallets If I were told by the economic gods that I could have the answer to one question about the fate of the global economy, I know what I would ask. "When will the American consumer start spending again?" I know that doesn't sound as sophisticated as a question about industrial production, interest-rate fluctuations, or the Chinese stimulus plan, but it's the key to understanding when we will get out of this recession—and what the recovery is likely to look like. The rise of emerging powers like China, India, and Brazil is real. But for now, there is still just one 800-pound gorilla. The American consumer is the single largest factor at play in the global economy. Our spending is currently equal to the entire economies of China and India added together and then doubled. But this is not a usual recession. The United States entered this downturn with the average American deeply in debt. In 2007, total household debt was $13.8 trillion. Household debt per person nearly doubled between 1997 and 2007, from about $25,000 to $46,000. That means people might spend the next few years rebuilding their personal balance sheets, spending less, saving more. In fact, they're already doing that. The savings rate has shot up to almost 7 percent, the highest rate in 15 years. But many experts think that it will have to get up to 8 or 9 percent—the historical average in the pre-credit-bubble years—before Americans start spending again. That would mean either a longer recession or a much weaker recovery than most expect. The Chinese government is spending pots of money building bridges right now, German industries are retooling, but eventually they will all need to be able to export to Americans again.

Commodities & Exchange Rates

Bitter Cost of Replacing Oil Reserves Imagine an urn filled with good, strong coffee. As you pour cup after cup from the tap at the bottom, you simultaneously refill it at the top with weak, watery stuff. After a while, your supply is as full as ever, but it just doesn't deliver quite the same kick. The oil majors face a similar problem, underlined by talk of more cost-cutting from the likes of Royal Dutch Shell amid dreadful quarterly results. Overall, the sector has struggled over the past decade to replace crude-oil and natural-gas reserves depleted by production. Shareholders were prepared to overlook this as long as high energy prices funded big cash distributions. The added twist, says Neil McMahon of Sanford Bernstein, is that not all barrels in the ground are the same. Overall, the majors have been pumping out high-margin oil from mature fields in areas like the North Sea. The majority of those barrels have been replaced with expensive, highly taxed reserves in regions like Russia. Average cash flow per barrel divided by finding and development costs -- a ratio measuring whether oil companies can cover the cost of replacing reserves organically -- has dropped from about 200% at the start of the decade to about 150%. That cash flow also has to fund big dividends. Some companies also have relied too heavily on acquisitions, where the risk of overpaying is high. Less than one-third of BP's and ConocoPhillips's reserves added over the past five years have come from finding new fields themselves, says Mr. McMahon. Cutting costs helps. But weaker reserves portfolios will leave a bad taste in investors' mouths for years to come.

Big Mac Says All About World After Lehman's Fall The U.S. Treasury secretary is spending more and more time placating fears about the dollar in Asia. Yet concerns that Asian policy makers would pull the plug on U.S. debt haven’t been realized. The reason says more about Asia’s weaknesses than its strengths. Many believe Asia’s vast savings give it considerable leverage over the biggest economy. In reality, Asia’s Treasuries fetish is more about weakness than strength. Asia has gotten itself into an arrangement from which it can’t escape. If it dumps its Treasuries, it loses billions of state money and wrecks any chance of a U.S. recovery. Political will is lacking to retool economies away from exports toward domestic demand. China, for example, is throwing nearly $600 billion at its economy and the result is an astonishing 7.9 growth rate. It’s doing little to boost domestic demand, though. The unbalanced nature of China’s pump priming may be setting the stage for a Japan-like bad-loan crisis. Japan’s plight isn’t much brighter. The hundreds of billions of dollars it’s spending offer merely a short-term fix. The money won’t get Japan any closer to dealing with a steady loss of competitiveness amid the rise of China and India or an aging population. It will only increase an already daunting debt load for Asia’s biggest economy. And so, policy makers are sticking to a formula that’s worked wonders for over a decade: Holding down exchange rates. That’s good for the U.S. at the moment. Washington needs Asia’s money to finance its historic borrowing spurt. That’s why Asia’s dollar-buying has a powerful inertia to it. The question, of course, is whether the phenomenon can continue indefinitely.

Strategic Outlook and Policy

`Lost Couple of Decades' Looming for U.S. Economy: Chart of the Day The U.S. economy may be just as sluggish during the next 20 years as Japan’s economy was in the last 20, according to Comstock Partners, a money manager founded and run by Charles Minter. Stimulus programs and a surging money supply aren’t likely to “solve a problem of excess debt generation that resulted from greed and living way beyond our means,” the firm wrote yesterday in an unsigned report on its Web site. “We could wind up with a lost couple of decades.” The CHART OF THE DAY shows U.S. total debt and gross domestic product since 1952, along with the ratio between them, based on data compiled by Bloomberg. The ratio rose in the first quarter to 372 percent even as household borrowing dropped for a second straight quarter, an unprecedented streak. The U.S. is headed for “a deleveraging period” in which the amount of so-called private debt, including consumer borrowing, collapses as government borrowing explodes, Comstock wrote. Assuming that private borrowers pay down debt at the same pace as they did in Japan after its 1980s economic bubble burst, the savings rate will climb to about 10 percent in 2018, the report said. The estimate was made in a study by the Federal Reserve Bank of San Francisco that Comstock cited. It’s more than double the 4.6 percent rate for June. Citing the study in addition to its own research, Comstock wrote that reduced borrowing may curtail growth in U.S. consumer spending by 0.75 percentage point annually on average during the next nine years.

Fed Focusing on Commercial Real-Estate Recession as Bernanke Convenes FOMC The collapse in commercial real estate is preventing Federal Reserve Chairman Ben S. Bernanke from declaring the economy and financial markets are healed. Property values have fallen 35 percent since October 2007, according to Moody’s Investors Service. That’s making it tough for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls and hotels this year, pressuring companies such as Maguire Properties Inc., the largest office landlord in downtown Los Angeles, to put buildings up for sale. The industry is likely to be high on the agenda when Bernanke and his colleagues sit down in Washington tomorrow for the Federal Open Market Committee meeting on monetary policy. Lawmakers including Barney Frank and Carolyn Maloney are pushing the central bank to extend an aid program designed to restore the flow of credit. If nonresidential real estate remains in the doldrums, the Fed may be forced to leave emergency-lending programs in place and keep its benchmark interest rate close to zero for longer than some investors expect, given positive signs elsewhere in the economy. Commercial property is “certainly going to be a significant drag” on growth, said Dean Maki, a former Fed researcher who is now chief U.S. economist in New York at Barclays Capital Inc., the investment-banking division of London-based Barclays Plc. “The bigger risk from it would be if it causes unexpected losses to financial firms that lead to another financial crisis.”

Policymakers "Got It Right": Why Free Market Ideology Is Wrong Just like the market's mood, economic orthodoxy moves on a pendulum - only the swings come far less frequently. Generally speaking, from the 1940s to the 1970s, the prevailing wisdom in economic circles was that government was a force for good. Then came the Reagan Revolution of the 1980s, which steadily led to the dominance of free market ideology until the present day. After the credit crunch of 2007-08, even free market stalwarts like Alan Greenspan admitted the ability of markets to self-regulate was a "flaw" in the prevailing view of capitalism. But even after the implosion of Wall Street, a "high degree of residual [free market] ideology" remains, says Mark Dow, fund manager at Pharo Management, a global macro hedge fund with about $2 billion of assets. This view that government isn't the solution, it's the problem is "impeding progress" and limiting policymakers' abilities to bring about necessary reforms to reduce the odds of another systemic crisis, Dow says. Being a former staff economist at IMF and Treasury, it's not surprising Dow believes government has a role in keeping the market's "animal spirits" in check; but he's not advocating socialism -- far from it. Nor does he believe the Obama administration wants to maintain such a high degree of government involvement as currently exists, noting Tim Geithner and Larry Summers (particularly) are big believers in free market capitalism. Whether the government and the Fed can get the "exit strategy" right is to be determined, but Dow has faith in policymakers and believes they've mainly "got it right" so far. It may not be perfect but he says actions taken to date "saved the system" - arguably from itself.

Turning on a Paradigm In my experience there is little room for ideology in economics. No set of rules or principles can fit all of reality for all points in time. The world to too complex and moves too quickly for this. The ‘perfect’ mix of markets and government is not a static concept. It is dynamic, and highly contextual. Again this post is not ideological. It is more a cautionary tale about human nature and the way we follow trends. We are trendy by nature. We stick with our old ideas for too long after the facts on the ground change. We then begrudgingly migrate to what appears to work, and, inevitably, take things too far. No amount of regulation can fix this; it can only mitigate the consequences from it. Let’s just hope that the amplitude of the next pendular swing is less extreme—but I suspect we are years, if not decades, away from worrying about it.

Averting the Worst A few months ago the possibility of falling into the abyss seemed all too real. The financial panic of late 2008 was as severe, in some ways, as the banking panic of the early 1930s, and for a while key economic indicators — world trade, world industrial production, even stock prices — were falling as fast as or faster than they did in 1929-30. But in the 1930s the trend lines just kept heading down. This time, the plunge appears to be ending after just one terrible year. So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government. Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

As Economy Turns, Washington Looks Better What if, amid all their missteps and all the harsh criticism, the people in charge of battling the worst financial crisis since the Great Depression — Ben Bernanke, Timothy Geithner, Lawrence Summers, Henry Paulson and the rest — basically succeeded? It is clearly too soon to know for sure. But the evidence is now pointing pretty strongly in one direction: history books may conclude that the financial crisis of 2008 turned out to be far less bad than it could have been and that Washington deserved much of the credit. Washington’s early responses to the bubbles in real estate and stocks, and then to the crisis that followed, were full of mistakes. But since the collapse of Lehman Brothers, the record has started to change. The government has undertaken one extraordinary effort after another to revive the economy, and the economy has seemed to respond.

As Wall Street fix slips, a reminder from Enron Yet only seven years after Enron went down in a flaming pile of management hubris and false accounting -- taking corporate America's reputation with it -- small investors and savers found themselves again at the mercy of a Wall Street-induced scandal, this time one that would take down the world economy. No wonder Timothy "Come on, guys" Geithner, our usually placid Treasury Secretary, exploded in a profanity-laced tirade recently at a meeting with financial regulators. Now that the major bleeding has stopped in New York, banks and bankers want to get back to business. And regulators of those banks and bankers want to keep their turf. So the old battles have started up again in Washington and the prospect of major financial overhaul grows dimmer by the day. Perhaps sometime after the health-care issue gets addressed, right? There have been a lot of batty ideas coming out of Washington in the first few months of the Obama Administration with regards to Wall Street. The idea of taxing bonuses at 90% comes to mind. But the core idea that something must be done to rein in abusive trading and risk-taking, and the compensation impetus behind them, is still something that must get done. The time to push through some sort of overhaul is still now, while the administration is young and can wield influence. FDR pulled it off during the Great Depression, and it changed Wall Street for 70 years. Nothing of that magnitude appears headed anywhere now.

Posted by dblwyo on August 14, 2009 01:18 PM |

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