Category: Economy

Where is Stiglitz?

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At Newsweek, Michael Hirsh asks this important question.

Joseph Stiglitz has a Nobel prize in economics, and he called the financial crisis, and made the correct policy recommendations about how to prevent it, for well over a decade.

Unfortunately, Obama is turning marginally enlightened Chicago School types like Austan Goolsbee, and people with a lineage that traces its path from Wall Street kleptocrats *cough*Robert Rubin*cough*, like Larry Summers, and neither of these groups are particularly interested in someone who has been consistently proved right, because he has also proveds them wrong.

This is the best endorsement of Stiglitz being brought in I can think of:

Like Keynes himself, who fought successfully to block “hot money” at the postwar Bretton Woods conference in 1944, Stiglitz understood the problem of international capital flows like few others of his era. As his longtime collaborator Bruce Greenwald—another Columbia professor who, by the way, is a conservative Republican—puts it: “You need radical global reform” to correct chronic imbalances in capital flows, all of which Stiglitz has laid out in his book, “Making Globalization Work.”

This is precisely our problem, and this man has gotten a Nobel plotting the solutions.

Quite my solution, in the broadest terms, is to recognize that Wall Street (and the Street in London, and the rest of the financial markets) have become gangrenous, and need to be amputated, but Stiglitz, has the specifics as to what is rotten.

Economics Update

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I’ve never been entirely sure why, but Fridays tend to be OMFG kinds of days, and this one is a doozy.

We have the jobs report out, and it is unbelievably grim, with 533,000 job losses, and the unemployment rate going from 6.5% to 6.7%.

By way of perspective, the so-called experts has predicted job losses of “only” 335,000.

It’s the worst monthly job losses since 1974.

The numbers are actually worse, since this does not count the 422,000 people who just stopped looking for work.

BTW, the unemployment number quoted, the U3 is considered, by me at least, to be over restrictive and understate unemployment. The broader U6, it hits 12.5%:

The U-6 rate only has comparable history back to 1994, but November’s rate is by far the highest since then and the swift rise to that elevated level also far surpasses similar moves during the recessions in 2001 and 1990-91. Previously, the Labor Dept. kept a similar gauge with history back to 1970, showing a high of 14% unemployment during the deep recession in 1982.

The U-6 rate rose sharply in November, from 11.8% in October, and is markedly higher now than the 8.4% recorded in November 2007.

It sucks north of the border too, where Canada Lost 70,600 jobs, which is more on a per capita basis…but Steven Harper wants to try Hoovernomics for a few months to see if it will fix things, which is why the hereditary enemies Liberal, NDP, and BQ parties are trying to desperately form a coalition government to kick his ass to the curb.

Given these numbers, it’s no surprise that a record number of Americans are on food stamps.

Meanwhile, in real estate, delinquencies and foreclosures hit record highs, loans in foreclosure are now at 2.97%, and delinquencies rose to 6.99%.

Meanwhile, it’s clear that the central banks are pushing on a string, and the Bank of England is looking at finding new ways to give away money, because rate cuts are not working:

The Bank of England is working on radical plans to inject cash directly into the British economy as a last resort to reverse a slide into recession, a newspaper reported on Friday.

…

The Daily Telegraph said the Bank was “working on radical plans to inject cash directly into the economy — the nuclear option to be used only when interest rates approach zero.” The report said the Bank was considering engaging in “quantitative easing” — printing more money to reflate the economy.

“Measures under consideration include direct purchases of assets, such as government debt or commercial investments, by the Bank or the Treasury, as well as expanding the Bank’s balance sheet, a means of pumping extra cash into the banking sector,” the newspaper said.

This is end of days economics…..They are literally considering throwing money out the window.

Meanwhile, the markets behaved in ways that make no sense to me, once again indicating that anything beyond simple index funds is not a good investment option for me:

because….Honestly, I have no clue as to why.
In the meantime, oil fell to $40.81/bbl, the lowest since December 10, 2004, and Gasoline?: $1.773/gallon retail.

Economics Update

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First, Calculated Risk’s Credit Crisis Indicators are either flat or down, and the 3 month treasure note is still at 0.005%, which means that people basically put their cash in a mattress, so that is how freaked investors are, and how much they look for a safe haven.

Of course, what with the Bank of England cutting its rate by 100 basis points to 2%, it’s not like there is a whole bunch out there that is going to generate decent return anyway.

The weekly jobless claims posted a surprise drop, but continuing claims rose to a 26 year high.

Additionally, we have factory orders falling by the most in 8 years, which is completely unsurprising, as factories do not order much if consumers are not buying, and we are seeing double digit drops in buying this holiday season.

Considering that demand for commodities is falling with the economy, it’s not a surprise that oil has fallen to less than $44/bbl, and retail gasoline price has falls below $1.80/gallon.

Economics Update

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Well, some employment numbers are out, and they suck wet farts from dead pigeons. Job cuts in November were up 148% from last year, 181,671 according to Challenger Gray & Christmas said and 250,000 according to ADP.

Other metrics are bad too, with the Fed’s Beige Book showing economic slowdown in every one of the Federal reserve districts, and the Institute for Supply Management’s Non-Manufacturing Index dropped off a cliff, falling to 37.3 from 44.4 in October.

Service activity in Europe is falling, with the Euro Zone service activity falling to a 10 year record.

In retail, we have Retail Tracker more than tripling its estimate as to the decline in this years holiday shopping season.

There is some bright news, with mortgage applications rising 112% in last week, though I tend to believe this analysis, that this is not new demand, but people scrambling to lock in the rate.

It’s one of those things that makes week to week stats noisy.

What isn’t noisy is the fact that Manhattan empty office space has doubled, and if there is a glut of office space there, there’s a glut of office space everywhere.

In international finance, we have, VEB, a Russian State Bank asking for a $34 billion cash injection, and the Kiwis% and the Thais central banks slashing their rates by 150 and 100 basis points (1% and 1.5%) respectively.

This makes it no surprise that the dollar gained against the euro and pound.

In energy, despite OPEC’s announcement of its intent to cut wasdown again today, and retail gas prices fell for the 77th straight day.

No Coherent Plan? Hoocoodanode?

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Hank Paulson and His Evil Minions™ are completely clueless

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

Hoocoodanode?

Hank Paulson is not trying to save anything but his friends and buddies back in Wall Street, and does not realize that much of that industry resembles a gangrenous limb, and requires amputation.

This is not just incompetence. It is incompetence and a complete unwillingness to do anything that might fix the problem, because that would make the high life style of the investment bankers largely obsolete.

Not Enough Bullets: The Ever Present AIG

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Or more specifically, the man who ran the company into the ground, Hank Greenberg, who is demanding more information on the government bailout of his former firm, because he feels that it may have adversely effected his portfolio:

Greenberg wants the government to do more for AIG, suggesting it provide guarantees to cover counterparty collateral agreements, according to an opinion piece in the Wall Street Journal on Tuesday.

(emphasis mine)

What was it that I just said about the WSJ Editorial Page again?

We really need to send the lot of them to prison.

Economics Update

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First, we have some developments on the other side of the pond, with the Australian Central Bank lowering its rates by 100 basis points (1%), the most since 1991, and a major Russian investment bank is calling for a 20% depreciation of the Ruble, to boost exports.

It might be a good idea, depending on how export dependent the Russian economy is. It would boost local and export oriented industries.

On more general metrics of the credit crunch, Calculated Risk’s credit crisis indicators show little progress, and the fact that the rates on Treasuries have fallen off a cliff, with people getting virtually nothing (0.05%) for 3 months T-Bills, 2.68% on 10 year notes (a near record), and 3.17% for a 30 year note (a record).

Basically, this means that investors are paying the government to hold their money safe for them.

For what it’s worth, people are not trusting anything, including much in the way of US and European sovereign debt, with the cost of swaps to insure that debt skyrocketing.

In energy, we have OPEC deferring a production cut, and so oil is now firmly below $50/bbl, and retail gasoline falling to $1.812/gal, a price I never thought that I would see again, and the 76th straight daily drop.

Meanwhile, the the dollar has weakened though there is downward pressure on the Yuan from rumors that the Chinese will actively move to push the value down to boost their economy.

This is Not the Onion

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It appears that the The Reserve Bank of Zimbabwe has issued a statement commending the US and UK central banks for following its lead: See also here):

As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

Yet there are telling examples of the path we have…For instance, when the USA economy was recently confronted by the devastating effects of Hurricanes Katrina and Rita, as well as the Iraq war, their Central Bank stepped in and injected life-boat schemes in the form of billions of dollars that were printed and pumped into the American economy.

(emphasis in original central bank statement)

I don’t know about you, but I’m very relieved that a bank that has engineered a 231 million percent inflation rate (and that’s just the official number) has endorsed our monetary policy.

Economics Update

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Where the hell did manufacturing go?

Seriously, with the ISM’s factory index falling faster than it has in 20 years in the US, and similar gauges dropping like epileptic ducks in the UK, Euro Zone, and Chine, I’m expecting global manufacturing’s face to show up on a milk carton.

If there is any solace, it is that oil prices fell on reports that OPEC is holding off on further cuts for now, as did retail gasoling (75th straight day!).

Meanwhile, another indicator of the credit crunch Treasury yields, are still plumbing record lows, indicating that money is still too frightened to do anything.

Economics Update

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Well, it looks like today was the day for all the stuff you wanted to dump before a 4 day weekend.

First, consumer spending fell 1%, well beyond the prediction of 0.7%.

Remember that these days, the Christmas season starts in October for a lot of people.

This is a crushing figure, and it’s not just due to falling energy prices, because people are paying down debt too.

The consumer confidence numbers reinforce this. The index is at 55.3, the lowest number since 1980, though still above the record of 51.7 in May, 1980.

Confidence not any better on the business side of things, with
durable goods orders falling 6.2% in October, and no, that’s not an annual rate, that is the shrinkage for the month.

The unemployment stats say that weekly jobless claims fell last week, but I’m taking that with a grain of salt for the following reasons:

  • Initial claims for state unemployment insurance benefits were a seasonally adjusted 529,000 in the week ended November 22 from an upwardly revised 543,000 the previous week…..Meaning that you compare lower initial numbers versus the later ones from the previous week, and it’s a “drop”….yeah right.
  • The 4 week moving average, which smooths out the noise, hit a 25 year high. (click for full size pic)

Just in case you are wondering how bad this will get, note that Fitch just cut its ratings on Toyota’s bonds to AA from AAA.

Seriously this is a Stay-Puft Marshmallow Man news.

The credit markets are freezing up, though applications for mortgages are up, largely on insanely low interest….I wonder how many applications are rejected though.

I would also note that new home sales declined to the lowest level since 1982, so its not like there are a sh^%load of buyers out there.

As a result of all this, we are seeing a number of rescue packages world wide, with the European Commission announcing a €200 stimulus plan, ]China’s central bank cutting rates.

These are probably what drove the dollar up today, and it also drove oil up

That being said, I think that the most troubling indicator is the fact that the 10-year Treasury yield fell below 3%, a new record, and this indicates that the flight to the relative safety of US Treasuries is continuing unabated.

Good Note on Financial Regulation

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In an article in the Guardian, economist Dean Baker notes that Timothy Geithner has been pretty much inside everything that has happened in financial regulation in the past decade or so, and it gives him gas:

Geithner was in the middle of all this [the Robert Rubin aggressive strong dollar policy that evicerated US manufacturing], even if not a lead actor. While this should not be forgiven – this recession and the millions of lives that are being ruined is not funny – it is not clear that Obama had very much choice.

Though he does acknowledge that there may not have been much of a choice:

In this respect, Obama faced the same sort of problem as those hoping to de-Ba’athify Iraq following the overthrow of Saddam Hussein. It would have been almost impossible to establish a government without including members of the Ba’ath party, since membership was a virtual requirement for holding a position of responsibility under Saddam.

Similarly, it would have been almost impossible to get to the top echelons of power, or even the middle ranks, during the Clinton-Bush years without giving lip service to the policies of one-sided financial deregulation and bubble-driven growth that were so fashionable at the time. The real question is whether Geithner has learned anything.

(emphasis mine)

I would that there are some bigger questions to ask in all of this:

  1. Is part of the problem that the financial services industry became too large relative to the rest of the economy?
  2. Did this create excessive exposure for the rest of the economy to downturns of increasingly speculative activities?
  3. If 1 and 2 are true, how do you go about shrinking the financial services industry.

Economics Update

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Gee, the updated numbers for US GDP are in, and they have gotten worse, going from an annual rate of contraction of -0.3% to -0.5%.

In an effort to staunch the bleeding, the Federal Reserve has announced a new sh#@pile buy:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

They are also opening up a facility for
consumer and small business loans.

This took down 30 year mortgage rates to a record low, down 1-1/8 percentage point to 4-7/8.

Of course, right now, the banks are so skittish that they are unlikely to do a mortgage unless the property is sold at a seriously depressed price anyway.

This is actually good sense, as the Case-Schiller home price index fell 17.4% year over year.

That’s probably why the Libor is trending up again. Too much uncertainty, so banks want more for their overnight loans.

Then again with the number of banks characterized as “troubled” by the FDIC jumped from 117 in the 2nd quarter to 171 in the 3rd quarter, the highest number in 13 years.

It’s no wonder that some of the technical wonks who watch the stock market are noting that this is the most volatile market ever, with average daily swings over the last 50 trading days of 3.82%.

By way of comparison, this number was 0.33% in February.

Oil fell a bit to day, to $50.77/bbl, and I think that the markets are starting to wonder about just how much money that the Federal Reserve will print, so the dollar fell on the news of the new Fed lending facilities.

Big Bonuses Make You Stupid

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That’s the short read on Dan Ariely’s reseasrch, he is a professor of behavioral economics at Duke University:

We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.

What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.

(emphasis mine)

So, we have people over compensated and for work that mostly really does not to be done, (financials have exploded relative to the rest of the economy over the past few decades) and given bonuses for under-performing, and now we find out that the bonuses make them do a crappier job.

Delightful.