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Obama makes his first major policy error

27 February 2009

Summary:  The Obama Administration is continuing the Bush team’s Wall Street friendly policies, probably because they believe, as do most economists, that the downturn will hit bottom in the 2nd half of this year, and slow growth will resume next year.  That’s bad.  As a result they are missing an opportunity to fix the financial system, clearing their desk for the next wave of problems.  That could be a catastrophic error.  As always when looking ahead in this crisis, these are just guesses.

Contents

  1. Stress testing the banks:  real or faux?
  2. Why are they doing this?
  3. The next phase of the crisis
  4. Possible Consequences
  5. Afterword
  6. For more information

(1)  Stress testing the banks:  real or faux?

Having regulators do stress testing of banks’ balance sheets is a good idea.  Many or most would be shown insolvent under reasonable assumptions involving, for example, a severe downturn lasting into 2010, with peak-trough GDP down 5%.  That would be the worst downturn since WWII for America, but common in our history — and more common in modern world history.  That finding might break the logjam over fixing the financial sector:  rising public anger over the “bailouts” (gifts of public money to banks and brokers) vs. a Washington elite mostly in Wall Street’s pocket.

This might allow rapid nationalization of the affected banks.  Perhaps a domino effect, as nationalized banks might have a substantial competitive advantage over private banks — such as a greater perceived solvency and a lower cost of funds.  This would clear the desks of Obama’s team, allowing them to focus on their political agenda and — more important — deal with the next wave of problems as the financial crisis moves down Main Street.

But it appears that they are not doing this.  Instead we get more kabuki, probably faux stress tests designed to boost confidence.

Note:  imagine if other professions were run like the government.  Instead of fixing your car, removing your appendix, of defending you in court — mechanics, doctors, and attorneys could lie to you in the hope of boosting your confidence!

See page 4 of the FDIC description of the stress test.  The “capital assessment” will cover 2 economic scenarios:  an absurdly optimistic baseline scenario and a slightly more “adverse” scenario.  Here are the adverse scenario assumptions for 2009 and 2010.  These would work as the baseline scenario.

  • Read GDP of -3.3% and +0.5%.
  • Civilian unemployment rate:  8.9% and 10.3%.
  • Home prices:  -22% and -7%.

For more on this see “Wait And See” by Simon Johnson (was Chief Economist of the IMF, now MIT professor), The Baseline Analysis, 25 February 2009 — Excerpt:

So the banks have – by assumption – sufficient capital. The stress test will be relative to this baseline; you can see that the “maximum stress” will be pretty mild and, very important, short-lived.  President Obama therefore can present and emphasize his (admirable) long-term goals, as he did last night.

I just have one question. How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system. Monetary policy sounded bold a month ago; now less so (again, if your central forecast is so rosy, why embark on risky or controversial further monetary expansion?)

The answer is: wait and see. If we get a recovery, then we are fine. If there is no recovery, we’ll deal with it at that time and we can bolder at that time.

Economist Paul Krugman also finds this plan depressing, as we see in these two posts in his blog at the New York Times:

(2)  Why are they doing this?

My guess is that Team Obama is hoping to “keep their options open”, one of the classic modes of failure for decision-makers facing difficult choices.  Unfortunately time relentlessly closes options.  Every decision taken closes options.  Every opportunity missed closes options.

(3)  The next phase of the crisis

Bad things are coming.  Governments have deployed a wide range of fiscal and monetary police measures, but these can only mitigate the suffering and damage to economic infrastructure.   Also, most are too small.  As people and their leaders understand the potential magnitude and duration of this downturn, additional rounds of fiscal stimulus will be approved.  (See this presentation by Richard Koo, who describes Japan’s experience)

Public policy measures have seldom if ever sparked a recovery.  Economies recover when the imbalances that caused the downturn are burnt off.  In this case, that means the excess private sector debt is defaulted, refinanced, inflated  away, or socialized.  Also helping to spark the recovery will be low asset prices, which eventually stimulate private investment.

Getting there will be painful.

A fair number of our major banks are technically insolvent, even after many rounds of government bailout programs.  Public anger is rising as they see vast sums of our money funneled to Wall Street.  Slowly the realization spreads that recapitalizing the banks will take several trillion dollars, a sum impossible for even the cleverest apparatchik to gift to banks.

Note:  Legend has it that Hank Paulson was once asked if it was in the people’s interest to have so many ex-Goldman Sachs partners working in the Treasury Departments of Western nations.  “There is no such thing as an ‘ex’ partner of Goldman Sachs” he replied.

Another note:  Paulson did not say that.  Putin did say that about the KGB.   But the earliest instance I find of this is by Aleksandr Nikitin, the ex-Soviet Navy officer arrested on charges of treason in 1996 for exposing the Russian Navy’s harmful nuclear dumping practices.  He said “There is no such thing as an ex-KGB employee, just as there is no such thing as an ex-German shepherd.”   (Source:  “The Two Worlds of Vladimir Putin”, Amy Knight, The Wilson Quarterly, Spring 2000 — subscription only)

To use another bad analogy, the crisis has been traveling  during the past two years through the virtual space of “Wall Street” – the financial markets.  That has caused severe damage.  During the 4th quarter it made landfall at Main Street.  Now it travels through the real economy, leaving behind a trail of unemployed people and wrecked businesses.  During the next two years our government will be busy coping with the resulting bankruptcies, poverty, and structural damage.  Plus any geopolitical turmoil caused by this global depression.

Our leaders must clear their desks NOW to prepare.

(4)  Possible Consequences

The Obama Administration has many bold policy objectives.  Reforms in health care and education.  To re-unionize US companies.  More critically, they must manage the domestic and international dimensions of the depression while winding down the war in Iraq and heating up the one in Afghanistan.

It’s a heavy schedule.  Fail to deal expeditiously with problems, they risk getting overwhelmed by events.  Their observation-orientation-decision-action loops (OODA loops) can fall behind the situation, so that they cannot effectively absorb new information and forecast events — the basis for planning and executing policy.  As the late John Boyd (Colonel, USAF) said in page 44 of  The Strategic Game of ? and ?:

{the decision-maker} will experience various combinations of uncertainty, doubt, confusion, self-deception, indecision, fear, panic discouragement, despair, etc.,
which will further disorient or twist his mental images and impressions 0f what’s happening;
thereby
disrupt his mental maneuvers for dealing with such a menace;
thereby
overload his mental capacity to adapt or endure;
thereby
collapse his ability to carry on.

OODA loops are especially vulnerable to this form of collapse when operating without a plan.  Plans provide a context for new information and a baseline of policy from which policies can be modified.  This is a common cause of battlefield defeat, and I suspect contributed to the failure of the Hoover Administration in 1930-32.

(5)  Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

(6)  For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest these days:

Forecasts about the crisis:

  1. Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end?  With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive.  No more trade deficit, and we can pay our debts.
  2. What will America look like after this recession?, 18 March 2008  — The recession will change many things, from the distribution of wealth within the US to the ranking of global powers.
  3. Consequences of a long, deep recession – part I, 18 June 2008
  4. Consequences of a serious US recession – part II, 19 June 2008
  5. Consequences of a long, deep recession – part III, 20 June 2008
  6. A look at one page of what lies ahead in America’s history, 7 August 2008 — Death of an American industry.
  7. Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
  8. Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008
  9. A look at the next phase of the crisis, as it hits the real economy, 31 October 2008
  10. A look at out future, 2009 – 2010 … and beyond, 9 November 2008
  11. A look at 2009 economy – some guesses, 28 December 2008
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76 Comments leave one →
  1. pluto permalink
    27 February 2009 12:48 am

    Well done, as usual, FM.

    This is why I think the Republican Party may well sweep back to power in the House in 2010. I was afraid that the Obama administration would underestimate the size of the problem (they have) and that they would choose to sweep the problem under the rug (they are doing so right now) in favor of expensive new programs that will take a while to get up and working properly.

    Now this economic train wreck stands a good chance of blind-siding them while they are spending time and political capital on nice-to-haves and administration is going to propose a series of half-measures to combat it while they distract themselves with their nice shiney new programs. The Republicans will vote consistently against all of the half-measures and will be overridden by the Democratic majority.

    Come 2010 people are going to be angry at the party in charge for screwing up so badly and the Republicans are going to point to their consistent voting record against the administration’s plans.

    Of course if by some miracle there is a recovery, the Republican goose will be well and truly cooked but their strategy looks like a winner right now.
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    Fabius Maximus replies: Obama took office in the equivalent of 1930, not the 1932 trough. Fortunately for him the Republicans have voted en blanc against the stimulus bill, setting themselves up as fall guys. Their statements — no need for stimulus, stiimulus is waste, etc — will provide all the ammo the Democrats need in 2010.

    Like

    • David Drake permalink
      27 February 2009 3:05 pm

      FM replies: “Obama took office in the equivalent of 1930, not the 1932 trough. Fortunately for him the Republicans have voted en blanc against the stimulus bill, setting themselves up as fall guys. Their statements — no need for stimulus, stiimulus is waste, etc — will provide all the ammo the Democrats need in 2010.”

      I agree with your first point and believe it is important. But I disagree with the last . The stimulus passed despite GOP opposition. Therefore, Obama cannot say that GOP opposition led to no stimulus. In my view, with the stimulus package (plus the short time that Bush had to work on the problem–after the election,with Obama’s input, remember) means that Obama now ownthe recession.
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      Fabius Maximus replies: You appear to assume that candidates deploy sound-bytes in attack ads in order to educate voters, using facts and data.

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    • pluto permalink
      27 February 2009 5:40 pm

      I understand what you are saying, FM, and it makes sense in terms of logic but I stand by my guns and predict major gains for the Republicans in 2010 and will take control of the White House and at least one house of Congress in 2012.

      The Republicans have an amazingly powerful propaganda machine in the right-wing political commentators who feed off of each other’s indignation and I think they will simply out-shout anybody who tries to interject logic or fact into the discussion.

      Of course the Republicans won’t have any good ideas on what to do when they get back in power so they will most likely continue Obama’s policies under a different name.

      Like

    • Rick Caird permalink
      27 February 2009 11:47 pm

      FM, you are incorrect on two points. The first is that we had, in fact, a stimulus package. We did not. We had a wish list and pork fulfillment package. Stimulus was merely the talking point.

      You are claiming the Republicans voted against the stimulus bill. While true, the Republicans also voted in favor of tax cuts rather than the bill we ended up with.

      If this stimulus fails to stimulate, then the Republican’s are not the fall guys. They are in a position to argue things would have been better if their advice had been followed.

      Rick

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    • 27 February 2009 9:11 pm

      You got the Republican position quite wrong, Fabius. They all supported an alternative bill and voted to try in get in on the Senate floor as an option by of course, couldn’t. The main difference (other than it being “only” $713 BILLIONS) was that it got the money to people instead of government agencies. Basic description: “GOP senators draft stimulus alternative“, CNN, 2 February 2009 — Excerpt:

      “A group of Republican senators drafted an alternative stimulus measure that narrows government spending to infrastructure programs and helping unemployed Americans, addresses the housing crisis and relies mostly on tax cuts.

      “The $713 billion plan was put together by Florida Sen. Mel Martinez, who has been working with a handful of other GOP senators. The proposal includes $430 billion in tax cuts, $114 billion for infrastructure projects, $138 billion for extending unemployment insurance, food stamps and other provisions to help those in need and $31 billion to address the housing crisis.

      “The draft Martinez put together is a broader approach than what some GOP leaders have suggested. … Martinez has just started showing the plan to his colleagues, and it is too early to tell how much traction this idea will get among other lawmakers.”

      Also, Boyd’s OODA loop was done specifically in the context of working against an active, human opponent. Boyd’s work applies best to military and police work because of this. Most of the science of strategy deals with the same issues (in this case, speed of response) real-world situations where there are no active opponents and people merely are trying to make good decisions from the basis of their own self-interest not from the perspective of opposing forces.
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      Fabius Maximus replies: I’ll let an expert on Boyd’s work answer your 2nd point. As for the Republicans’ actions. let’s look at what you say and reality.

      “You got the Republican position quite wrong, Fabius. They all supported an alternative bill and voted to try in get in on the Senate floor as an option by of course, couldn’t”

      As the CNN article says, this was an idea circulated by a “handful” of Senators, who never even bothered to submit the bill (any member can submit a bill. See the list of bills submitted by Senator Martinez). Hardy anything “they all supported.”

      Like

    • 28 February 2009 12:53 am

      Gary,

      Although Boyd’s work was partially inspired by conflict between humans (theory of evolution by natural selection was the other major source), all that’s necessary for the effects Fabius describes is that a menacing situation be changing more rapidly than the observer can comprehend. “Nature” operating inside our OODA loops, as it were.

      Best regards — Chet

      FM Note: this is by Chet Richards (Colonel, USAF, retired), editor of Defense and the National Interest — one of the major sites focused on the ideas of John Boyd.

      Like

  2. 27 February 2009 12:48 am

    I am guessing that without saying it the plan is really to inflate our way out of most of this. The faux attempt to keep Wall St. alive is trying to buy time and avoid further panic. Of course the panic may happen anyway, but it may be worth trying. If it is not, we will find out soon enough! My take is that any recovery will bounce up against energy prices, and we are in for years of, at best, a sort of ‘sludge mode.’

    For now the effort seems to be to put as pretty a face on that as possible. The major foreign lenders are as deep in this as we are and probably not going to abandon us… given human nature, it’s going to take time for everyone to adjust, both domestically and abroad. BTW thanks for the kind words.
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    Fabius Maximus replies: One of the great oddities of history is how folks refight the last war. The signature economic event for the Boomers was the great inflation of the 1970’s, so for the rest of their lives every bump in the night will be greet with cries of “inflation.” And they will consider inflation the super-duper deux ex machina of government policy. Quite absurd.

    Inflation is efficacious only if unexpected. Inflation that occurs only after everyone — down to elderly ladies in Peroria — has prepared for it has zero beneficial effects, and is catastrophic for the government. From A situation report about the global economy, as the flames break thru the firewalls:

    People are already preparing for this “inevitable” outcome by shifting to shorter-term debt. As the end of the downturn approaches — inflation can only manifest itself only in times or full employment or via a currency crisis — everyone will take strong measures. Even elderly ladies in Peoria will own inflation-protected bonds, short-maturity bonds, and hoard gold bars in their basement.

    These measures will foreclose inflation as a workable option. As the government is forced to either issue vast amounts of short-term debt or monetize the debt, inflation becomes useless as a tool. Short-term debt becomes an albatross during inflation: interest expense skyrockets as interest rates soar.

    Hyperinflation always remains an option, as does atomic war and mass suicide. None of these are “solutions” in any meaningful sense. With a history of vast deficits behind us and larger deficits ahead (from boomer’s retiring), the government will choose Door #2: default. We will just not pay all our obligations. This is historically the most common solution.

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  3. 27 February 2009 1:59 am

    To your point about waiting on events . . . I wonder if Obama figures that if he advocates nationalization now the GOP will dig in/mobilize around the “socialist” banner, whereas if his current measures fail, and the banks continue to collapse, enough of a bipartisan consensus might actually develop around nationalization. Heck, even Lindsey Graham has been saying we may yet have to nationalize.

    I’m not saying this is the right way to approach the issue, I’m just wondering if that’s the strategy.

    Like

  4. electrophoresis permalink
    27 February 2009 2:46 am

    No, his second major policy error. Obama’s first major policy error is to stay in Afghanistan. The unwinnable Afghanistan war will consume and destroy Obama’s administration exactly as the unwinnable Iraq war consumed and destroyed the previous administration.
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    Fabius Maximus replies: While I agree about the wisdom of the Afghanistan War, I do not consider an “error” to be any policy with which I disagree. The failure to stress-test the banks is an operational error in a narrow sense, as a decision with no advantages and large costs. It’s a slight difference in perspective, admitedly.

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  5. 27 February 2009 4:32 am

    FM:”Fabius Maximus replies: While I agree about the wisdom of the Afghanistan War, I do not consider an “error” to be any policy with which I disagree.”

    Would Obama have been better to send the 30,000 McKiernan asked for and not the 17,000. This all feels awfully Rumsfeldian.

    Krugman:”The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.”

    Tokyo leads the way again! Washington should read some of their own advice they gave to Japan. Shut down the zombie companies, clean up the balance sheets now. For Japan the solution was all so obvious to American elites. When it’s their buddies at Citigroup, well, now, oh, that’s completely different.

    I suspect Obama is settling for a ‘lost decade’ as our upside. It was miserable, but it wasn’t really that bad relative to the abyss we are staring down right now. With fiscal stimulus they can fake up the growth numbers and make it appear the economy is expanding. By 2019, Citigroup should be back in shape.

    We’ll head for the ‘slowly muddle along’ economy, and the fed puts out the fires overseas with currency swaps with places like South Korea. We share our magical ability to ‘make money out of thin air’ with the entire world, and maybe this can hold off the next disaster. I should try to be optimistic.

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  6. Fabius Minimus permalink
    27 February 2009 10:25 am

    What is your problem? Can’t you deal with the fact that we have a president who is taking charge of the crisis that we so sheepily endured with Bush. Man, you are the problem as well as others that can drag our country down just by your negativity. Rant if you want, it will not change the fact that there is hope. Time heals even when one chips away at the roots.

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    • 27 February 2009 7:31 pm

      F. Minimus, “hope” doesn’t pay the bills. F. Maximus’s point is that bank stress-testing is a good idea, but the assumptions being used by the Obama Administration are so unrealistic as to transform that good idea into political theater – accomplishing nothing, or worse, squandering valuable time by falsely appearing to do something useful.

      Attitude is important. No argument. Far better to approach a problem, or a crisis, from the standpoint of, “Let’s find a workable solution,” than from “Oh no!! Panic!!” But there’s a difference between “negativity” and “critique.”

      Finally, your assertion that “time heals even when” etc. is a distinctly free-market statement. Bravo! A person after my own heart! (But even I worry that SOME kind of intervention might be required here.)

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    • underscore permalink
      27 February 2009 11:27 pm

      The problem with waiting on time is that politicians in political cycles don’t have it, nor do people out of work want to wait it out. FM’s point number 2 speaks directly to this. Maybe the market can do it better, but sooner or later we may just have to accept that it is not a politically viable solution, no matter what we wish. Unfortunately, ‘nationalization’ is still a dirty word, though cleaning out the zombies through temporary nationalization could mitigate our problems. Mr. Minimus needs to step back from the Obama love and realize that he is not taking charge but moving very slowly not living up to his boldness. When Paul Krugman (who gushes today in the NYT over his progressive budget) says that he is DEPRESSED over the administrations handling of the financial crisis, he is speaking with the credibility of an avowed liberal and Nobel winning economist (they don’t just give those out like they do for peace). I think the concerns raised here aren’t just shudders of shocked free marketeers, but legitimate concerns that the government is moving too cautiously, hoping they don’t have to spend political capital to get a nationalization plan through.

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    • 28 February 2009 1:26 am

      Not sure who this is directed to. But me, I’m just repeating the Richard Koo argument that the lost decade of Japan was a triumph — they avoided depression in the face of a massive implosion of wealth. It was a slow muddling triumph at that, I’ll add, but it wasn’t the end of the world.

      I’m hearing more often repeated the Koo statement that the problem isn’t the lenders not willing to lend, but it’s the borrowers being unable to borrow. So, whatever the state of banks, there won’t be a recovery until households and companies repair their balance sheets. We might nationalize banks and still be stuck the next 10 years winding down business and private debt. Better to save a few bullets so the government can help debtors along and speed this up and maybe get out a little faster.

      Koo seems to be driving Obama policy more than Krugman. He’s a card-carrying banker so his advice is more attractive to the American elites. In the speech, linked by your site, Koo mentioned not letting out all the banking bad news at once, which is happening. I haven’t heard any Koo comments about the Cram-down proposal, he’d probably dislike it since he’s a banker, but the cram-down is consistent with the idea of helping household balance sheets.

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  7. houswife permalink
    27 February 2009 10:25 am

    Let’s put it simply, it is decided, no withdrawal from Iraq and Afghanistan. We carry on to threaten Iran, we will open a new front in Pakistan. And where are the contingency plans for Mexico, for unfavorable developments in the Arab world, even for Europe proper? Dangerous gambling. If Obama is a minstrel show, what’s up really?

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  8. 27 February 2009 12:11 pm

    “I desire to ask him where, in law or in morals, he can find justification for not protecting the debtors when the act of 1873 was passed, if he now insists that we must protect the creditors.” – William Jennings Bryan

    Here’s a link to his Cross of Gold speech, which he concluded with “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”

    The Obama administration should agree with banks on a 30% across-the-board cramdown on all mortgage debts. Given the total outstanding amount of $11+ trillion, this will reduce borrowers’s liabilities by around $3.3+ trillion. Banks should get a corresponding recapitalization for this. There’s still $350 billion left in the TARP. If this is lent to the Fed, with neccessary authorizations, they can leverage it up $3.5 trillion to buy equity in banks. This should be followed by “Know your customer” norms for banks which require them to verify all details provided by applicants. And “loan eligibility” norms specifying the maximum percentage of income that can be owed in EMIs.
    If banks are nationalized, people will owe a lot of money to a public sector bank, or new banks,instead of the old ones.Both borrowers’ confidence and lenders’ confidence in new borrowers’ ability to repay are seriously affected now, and this needs to be dealt with by helping both borrowers and lenders.
    Obama’s differentiation of “responsible families” in his address to Congress, and Geithner’s differentiation of “working Americans” in the official homeowner program document are both better postponed, and even better, relegated to causal analysis in economic history books.

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    • 27 February 2009 4:07 pm

      All the fuss over banks, and not enough attention to household balance sheets. Even if Obama did nationalize banks and their balance sheets magically fixed it will still take a long time for households to dig out of debt. People aren’t spending because of debt and unstable job prospects. Because of poor sales companies are laying off, and then people spend even less. Down, down she goes…

      It’s a vicious cycle, and the only way to break it is to get consumers buying again now. We need something like a negative sales tax, or maybe some way to give ‘free money to consumers’ or something. I saw a story on European governments giving subsidies to people who buy cars — to replace obsolete vehicles, they say. The Obama mortgage proposal is a step in the right direction. Anything to reduce household debt will reduce the length of the depression.
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      Fabius Maximus replies: While I agree the focus on the banks is misguided, here we see American delusion perfectly stated — “It’s a vicious cycle, and the only way to break it is to get consumers buying again now.” Yes, let the overconsumption continue now and forever!

      Bad news, children. No nation, let alone one with an aging population, can have a savings rate of zero — spendign 3-5% more than its national income every year (funded by foreign borrowing). The savings rate must rise, and that will hurt. From economist Daid Rosenberg:

      “From a GDP standpoint, a 1% rise in the savings rate is equivalent to 5 months of -500,000 nonfarm payroll prints! That means that the 3% runup in the personal savings rate over the past year is the equivalent, in terms of the downward skew to income, to 1.5 million job losses.”

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    • 27 February 2009 4:34 pm

      Well, what do you think that fiscal stimulus bill is? It’s more consumption. We’re in debt as a nation and we’re buying more stuff. Somehow when government consumes to solve the crisis, it’s magically cleansed. The people, no they must have more taxes.

      This is Hoover thinking, that people must be disciplined, and it’s what made the depression worse.
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      Fabius Maximus replies: A piece of it consists of tax cuts, which might be crudely called “consumption.” Some of it is stimulus of private investment. Some of it is aid to State and local governments, to support necessary social welfare systems. Some of it is government capital spending (public investment).

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  9. Hope On a Skewer permalink
    27 February 2009 1:25 pm

    You have not yet connected the dots. Your solutions are not timely or well crafted. You are unfortunately still fighting the last war and failing to understand the scope of current problems.

    Krugman is the last person one would want guiding a recovery. Ideologs dedicated to opposition cannot lead, it is not in them to do so.

    Obama’s grand plans have no chance of success, if one measures succes by a sustainable economy.
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    Fabius Maximus replies: (1) Since you provide no specifics, we have no idea what your first paragraph means. However, I have been writing about this since Nov 2007. Most of these posts discuss future events and measures needed to deal with them, with so far a very degree of accuracy. So until you provide more detail, I will tentatively classify this as smoke.

    (2) Krugman is an economist, not a leader in any meaningful sense. He was an attack dog for the Democratic Party during the Bush years, but has returned to his roots.

    We can all only guess at Obama’s liklihood of success. What is a “sustainable” economy? I’ve heard that phrase most commonly used by greens, refering to “environmentally sustainable.”

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  10. 27 February 2009 1:34 pm

    Major policy problems for this Administration and Congress:

    1 – Not clearing out the CRA and follow-ons to change the regulatory system to encourage loans to those not able to repay them. That is still on the books.

    2 – Not following NORTHCOM’s view that a COIN deployment in the desert SW US and northern Mexico will be necessary in less than four years and probably less than two years. This will hurt the economy more than Iraq and Afghanistan combined as combat in your own Nation is always highly expensive as infrastructure bills add up.

    3 – Not examining the ‘middle route’ in Afghanistan to open a supply route through Georgia, Azerbaijan, Caspian Sea, Turkmenistan and change the troop types to fit Mountain Warfare and modern integrated Stryker doctrine. That needs to be backed up with infrastructure work on the social, political and economic end in Afghanistan so as to address the opium problem and decay of Pakistan. Opening up trade for goods in central asia would start to give people something to do to lead worthwhile lives and turn them from radicalism.

    4 – Inserting the federal government into already agreed upon contracts has long-range implications for how the public views any contract. If citizens are not to be trusted to draft contracts on their own, then the overall trust in the contract system will be diminished as well as faith in the federal government to operate at the individual level.

    Military affairs will soon be civilian affairs in America. And if we don’t learn that, we will repeat past mistakes in COIN ops because ‘it can’t happen here’.
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    Fabius Maximus replies: I agree, there is a full stream of policy challenges coming at the Obama Administration. Hence my belief that not clearing their desks to prepare was a major mistake. Also, I suspect that they will be forced to “war-time” like decision-making: fast, effective, brutal triage. Little time for subtly in thought or execution except for the very largest decisions. Making the transition to this from business-as-usual will be important.

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  11. 27 February 2009 2:03 pm

    Before the Financial Meltdown in Sept 2008, had Obama been against both Iraq AND Afghanistan — the Dem nomination probably would have gone to Hillary. Only by essentially claiming that winning in Afghanistan, only, should have been the smart post 9/11 goal, was Obama allowed to repeatedly propose running away in Iraq.
    Obama was against successful surge in Iraq, which is now on track to become a normal, young, somewhat crony capitalist corrupt democracy. But as a Muslim & Arab majority democracy, it is currently almost unique.
    Perhaps after getting the Dem nomination and after the Meltdown, Obama could have pivoted and claimed that Afghanistan, too, was unwinnable — but those American voters who want victory would have voted McCain, who favored a bigger surge in Afghanistan.
    The lack of progress in Afghanistan is now going to be blamed on not enough troops, rather than on illegal drugs and a far less educated / urbanized / modernized population.

    But just as I continue to disagree with your “Iraqi failure” thesis, I agree with you about much of this financial crisis. It really is huge; yet Obama is trying to maintain most of the wealth and power of the same rich and powerful that Bush was supporting.

    Why nationalize any bank? Just get a pre-packaged Chapter 11 bankruptcy, wipe out the shareholders, most bond holder value (50%? 90%), and convert the bad Credit Default Obligation liabilities into equity. Real deposit assets; uncertain other bank CDO assets, but almost no liabilities except salaries (which can be reduced with pink slips).

    Oh, but the Chinese / Japanese / OPEC investors don’t want to lose so much money?
    Under capitalism, investors lose when they make bad investments. The former two should be stimulating more local demand.

    There was little or no sympathy for the thousands of home-builders who have gone out of business because of the overbuilding of houses, including thousands of bankruptcies. Letting the Big banks go bust, in a controlled fashion, is the least harmful choice for Main Street.

    Like

    • Nichevo permalink
      27 February 2009 2:40 pm

      I tend to sympa, Tom. Without any of the (conscious) desire to lash out that I see in others, ISTM we should let the system operate. Certainly Chapter 11 is the answer to the auto companies; that will “clear the desks,” in FM’s curious locution, of the union-borne benefits and rules albatrosses.

      And I am in no wise convinced that most people need or want housing prices propped up beyond their level. Certainly as a renter I have no dog in that fight; in fact if I am ever to own a home in NYC I have to wait until the blood runs in the streets.

      Perhaps the foreigners will be impressed by our devotion to principle. I recall the Bundesbank was much admired for its hard-core fiscal policies.

      On another note, “He said “There is no such thing as an ex-KGB employee, just as there is no such thing as an ex-German shepherd.” This usage is of long standing. For some considerable time (I haven’t troubled to research it) it has been a popular refrain that there is “no such thing as an ex-Marine.” And I’m sure it’s too good not to go back a ways. Perhaps it has roots in Macarthur’s “Old soldiers never die, they just fade away…”

      Rather than ask where is FM’s sense of history, I will assume it was a jape, to compare Goldman Sachs and their people to the KGB.
      .
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      Fabius Maximus replies: I think you have missed the point on a few things.

      (1) “Clear their desks” is a standard formula, meaning prepare to handle new urgent issues.

      (2) The meaning of “There are no-ex KGB agents” has no relation to “no ex-Marines.” It refers to the loyalty of the people. Unless you imply that every Marine is still an agent of the US government, working not for the interests of his/her employer — but for the Marines.

      (3) The usual process of chapter 11 might be the death of the autos. It is slow and expensive.

      Like

  12. Gary Ogletree permalink
    27 February 2009 2:14 pm

    Obama’s interest in raising taxes tells me he wants to cripple capitalism more than he wants an economic recovery. He seems to believe a recovery will arrive just in time for the next Congressional election. However, if we are actually facing a great global economic collapse, and the evidence for that mounts daily, we are unlikely to see a recovery before the next Presidential election. {snip, uncivil remarks}
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    Fabius Maximus replies: Obama has proposed some small tax increases, tiny compared to those signed by Bush Sr.

    Like

    • 27 February 2009 7:41 pm

      But (addressing F.M.) the tax cuts Obama has proposed don’t seem to match up well with his proposed expenditures, from what I’m reading. Am I mistaken?

      I’m gathering that the math on “not one dime” is, first, misleading because the huddled masses will certainly see their non-payroll/income-tax tax burden go up from things like the effects of cap-and-trade on price at the pump/on the meter, and second, ain’t no way taxing the top 2% of earners is going to pay for the “stimulus” package and its accompanying wish-list and the health care proposal.

      How else will these things be paid for, except by confiscatory (and incentive-providing) taxes against the “evil rich” and/or knocking down the definition of “evil rich”? IANAEconomist (by a long shot!) but the “proposed” tax increases don’t pass my sniff test.
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      Fabius Maximus replies: You assume that Obama is seeking to balance the budget, like FDR in the middle of the Great Depression, immediately trashing the economy into the 1937-38 recession.

      Why are these discussion so mindlessly binary, as if the only alternatives are a balanced budget or Weimar? In the real world policy-makers must make trade-offs. Budget deficits are necessary, probably requiring monitization of the debt (i.e., printing money). But careful tax increases can reduce the deficits.

      As to the long-term budget and debt situation, we cannot see that far into the future. But this seems likely IMO: A certain casualty of the recession: the US Government’s solvency, 25 November 2008.

      Like

  13. 27 February 2009 2:29 pm

    You said, “The Obama Administration has many bold policy objectives…. re-unionize US companies.”

    Re-unionize? Please explain how this will help. As someone who has worked in industries, in both union and non-union shops, I can tell you in no uncertain terms that the unions, as presently structured and operated do not help anyone other than themselves.

    Yes, I understand the abstract arguments of worker representation and strength through organization, yada yada. That however is all abstraction and in no way represents what really happens when a workplace is unionized.

    Many probably don’t recall the union pension scandals or the congressional inquiries into the influence of organized crime into the unions back in the 50’s, 60’s and 70’s. While many have read about the strikes and violence towards workers during the labor battles of the first half of the 20th century, far fewer are aware of the union’s tactics for gaining control. Tactics like violence, threats, vandalism and lying to workers about what they will get if they unionize. Forced ‘voluntary’ contributions for political causes they do not support.

    I do not see how installing another layer of management on workers and creating yet one more payroll deduction for them will help them.

    Re-unioinizing the workplace as you say is not a help. It is a hindrance. I would like to hear why you think they would help.
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    Fabius Maximus replies: I did not say it would help. Not only will expanding union membership not help the economy (it will help Unions and the Democratic Party), ending secret ballots is inexcusable on fundamental principals. Does the Democratic Party seek to end secret ballots when electing public officials?

    I suggest greater care when making assumtions. Bold means clear, distinct, daring. It does not mean good. Hitler was very often bold.

    Like

  14. Concerned Citizen permalink
    27 February 2009 2:34 pm

    What is not being talked about here is the enormity of the problems banks face — most of the largest banking institutions now being propped up by the U.S. government are insolvent. The toxic derivatives in the banks in Europe total about $24 trillion, more than Europe’s total GDP and you have to believe that U.S. banks are in a similar situation. The problem is too big even for all the governments in the world to solve and Obama’s failure to recognize this is his biggest policy failure, in my opinion.

    There is only one solution that we will get to eventually, no matter how much money is spent trying to save the current system — bankruptcy of the banks that made foolish decisions. The error made now is throwing money away on these bloodsuckers that will be needed in the future to support the depositors, the honest victims in this Ponzi scheme.

    Who is benefiting from the bailout? Not the depositors, who have FDIC assets of $150 billion to protect $7 trillion of their assets. Not the shareholders, the stock price is going to ZERO. Not the bond holders. The real bailout recipients are the Bank’s counterparties to toxic derivative credit default swaps (CDS) and interest rate swaps (IRS) — these would be sovereign wealth and hedge funds, who are politically connected to Bush, Obama, the politicians in power in every country. In a bankruptcy, they would get stiffed on their CDS and IRS contracts and this would in turn create mass defaults on almost all of these contracts — they will be ultimately be worth the paper they are printed on. The banks have been gambling with hedge funds — and it’s no surprise that they lost their money. Will this whole thing blow over? It might, but if the Eastern European economies crater, they will take down Europe and all hell will break loose.

    Like

  15. trice permalink
    27 February 2009 2:45 pm

    You assume our present leadership (Obama, Reid, Pelosi, et al) is sincere in wanting to steer our state ship to smoother sailing. I don’t see that in anything he has done or proposes to do. What he says means very little except to continue to hypnotize the media and masses, while he goes about dismantling everything America was built on.
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    Fabius Maximus replies: I prefer not to speculate about what lies in the heart of other people, esp people I have never met. However, your comment illustrates one interesting aspect of politics: the closer the policies of the parties, the greater their need to demonize each other.

    Lincoln and Douglas had radically different policies, and so could discuss those. Based on their campaign rhetoric and actions to date, the Obama-Biden-Hillary Administration appears to differ relatively little from the Bush Administration. There are a small number of substantial differences, such as health care — and broad areas of almost identical policy, such as national security.

    Hence the Democratic Party loyalists 8-year long gushing of hatred towards President Bush. And we see the first signs of the Republicans doing the same for President Obama.

    For more about this see Obama, his administration and Ameican policies today, section 3 “about change”.

    Like

  16. 27 February 2009 3:14 pm

    The basic tenets of the United States never set up our government to be everything to everyone, locally and globally. Yet that is the Democratic/liberal/Obama take on our “flawed” Constition, and in their desperate need to make it so, they’ve flushed the general citizenry down the proverbial toilet. What we have right now is unsustainable. Those who “hope” otherwise are truly in for an even ruder awakening.

    Big clues? Follow the money. AIG only remains in business because they manage pensions for federal workers. The rest of us, the “little people” and “the rich” be damned.

    Obama promised “change”. However, I don’t think he quite knew what that really meant.
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    Fabius Maximus replies: That’s silly. Obama is a Harvard Law graduate. He knows quite well what change means. However, I doubt that he intended to deliver more than incremental changes. Such as reducing troops in Iraq, national health care, more funding for schools (not necessarily better results).

    But events might force him to become a real leader, effecting major changes. A similar story to Lincoln’s.

    Like

  17. Peg C. permalink
    27 February 2009 3:50 pm

    His very existence is a policy error of mammoth and historic proportions.

    Like

  18. DMM permalink
    27 February 2009 3:52 pm

    As a CFO of a regional financial institution which had one of our best years in 2008 and is preparing for the best in 2009, I can say you all fail to understand the basis for the problem, FASB 157.

    I have a letter on my desk from an institution we have stock in daying that as of Dec. 31 they are undercapitalized by $178 million. I have on top of it a letter that says as of Jan 31 they have capital in excess of requirement of $149 million. The difference is the valuation of securities during a firesale and having to show the loss from the “Mark to Model” valuation to the bottom line. Strategies taken in response to the accounting of model valuations will never serve the long-term interest of shareholders.

    When consulting previously with banking clients on risk management I used to provide a 7 point memo of the fallacies behind mark to market valuations. Our recent experiences have only suppoted all those.

    Modify FASB 157 and the trigger of the banking “crisis” becomes a “problem” manageable over time, now that we have nationalized the supplier of the opiates to the housing market, Fannie and Freddie.
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    Fabius Maximus replies: For two years we’ve read such things from senior executives of financial institutions. Mr. CFO, meet Mr. Minsky.

    Also, people are beginning to look at people who predicted this crisis rather than executives who have denied it at every step (speaking of bank execs collectively, not you personally). As in articles like these:

    * The post-WWII geopolitical regime is dying, 21 November 2007 — Why the current geopolitical order is unstable, and the policy choices that brought us here.
    * We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007 — A list of the warnings we have ignored, from individual experts and major financial institutions.
    * Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
    * Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the 1982-2006 economic expansion; why the down cycle will be so severe.
    * A vital but widely misunderstood aspect of our financial crisis, 18 September 2008 — Too many homes.
    * A picture of the post-WWII debt supercycle, 26 September 2008
    * Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
    * Causes of the financial crisis (no, its not the usual list), 29 October 2008
    * Government policy errors and the Great Depession, 1 November 2008
    * Economics is not a morality tale, 14 January 2009

    Like

    • 27 February 2009 5:08 pm

      Bernanke has gone so far out there on the ‘no nationalization’ bandwagon, that to turn on a dime on this issue he would personally just have to go, and that would be more chaos. The bank nationalization wave peaked with the Greenspan speech on it, but just now it crested and is slowly receding back into the sea. I figure Krugman is going to be fuming for the next few weeks — he lost this one, that is unless something really big and bad happens, which you can never discount these days.

      So what does that mean? Banking accounting is pretty confusing to us ‘bank civilians’. Maybe we kind of have the worst of both worlds a little bit? That banks are insolvent according to the law, but we’re just not looking too hard at the data and we let them muddle along in the meantime in sort of a strange intermediate state. I’m not sure myself, why can’t we just admit that the balance sheets don’t balance right now, it is a financial crisis after all, and they’re working on it? It’s the gray area of unknown value that’s spooking the market. If we just valued it all really low and accepted that balance sheets were broken, could we just live like that for awhile?

      Like

  19. Erasmus permalink
    27 February 2009 4:29 pm

    #20. Interesting. Thanks. Does this sort of thing also hold true for the international players with over-exposure in fancy derivatives?

    FM, I believe it was around last October you were arguing that the US economy was in cardiac arrest and needed emergency survival treatment, that addressing longer term structural concerns was premature. Well, it seems that they did succeed in preventing a run on the money markets last fall. However, it does not appear that longer term structural issues are being addressed, nor do we yet see much analysis anywhere initiating a national conversation about it.

    Personally, I think there are two important levels to the crisis. The more immediate one is cyclic in the sense that as we have eroded the manufacturing base and turned increasingly to finance as the engine of growth, the national economy has lost its base; furthermore, any bona fide recovery will have to involve ‘the next big thing'; (perhaps changing the energy paradigm is it, but so far nothing substantive has been initiated). That is serious enough, even if over-simplified a description.

    More fundamental, though, are the reasons behind which economic and cultural creativity/productivity have increasingly declined the past several decades (at least) to the point where the financial bubble now unfolding became basically inevitable. That gets into deep issues involving the national ‘vision and mission’ statement which I think must be reworked at this point before any substantive changes can emerge. And again, I don’t see this happening anywhere.

    Care to take a crack at it?
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    Fabius Maximus replies: Last Fall the economy went into cardiac arrest, with a crash in normal credit flows. “Well, it seems that they did succeed in preventing a run on the money markets last fall.” That was one tiny aspect of the problem. As a result of world governments’ failure to implement immediate corrective measures on the scale necessary (as I described here, see the October posts in section 7: “solutions”), consumer spending and business investment have both entered a severe decline, with no signs of this decline even slowing.

    Like

  20. 27 February 2009 5:08 pm

    The American consumer is the lynchpin in our economy. Period. The consumers attitude, composed of local experience and a perception of the consumers at the national level will always fuel us, in either direction. Small local victories spread faster today than ever before. Small defeats, closures, layoffs at local levels are no longer local because of the virality of news. The Consumer can only act locally, but upbeat local actions become the first signals of a turnaround with the trust and confidence the consumer needs to make his purchases willingly. Obama’s only job in the economy is to cheerlead the consumer.
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    Fabius Maximus replies: This is a common view, one which I consider totally nuts.

    “upbeat local actions become the first signals of a turnaround with the trust and confidence the consumer needs to make his purchases willingly. Obama’s only job in the economy is to cheerlead the consumer.”

    In what other field do we believe “confidence” is the key to success, above and beyond objective measures of performance? Medicine, car repair, sports? Bad news, children: in economics and finance, just as in other fields, the tangible factors trump “confidence.” America’s private sector balance sheets must be repaired, and happy thoughts will neither reduce the debt or increase savings rates. US exports must increase and imports (consumption of foreign goods) decrease so we can pay our foreign debts. Etc.

    Like

    • 28 February 2009 4:19 am

      FM:” Bad news, children: in economics and finance, just as in other fields, the tangible factors trump “confidence.” America’s private sector balance sheets must be repaired, and happy thoughts will neither reduce the debt or increase savings rates. US exports must increase and imports (consumption of foreign goods) decrease so we can pay our foreign debts. Etc.”

      You know, at the heart of it, money isn’t really tangible either. The Fed can summon money into existence at will, instantaneously and in any quantity. The dollar is only a symbol, and it has worth only because we believe, err, have confidence in its value. Nothing physical has actually happened to the world. If the aliens flew in and watched our planet and saw starving homeless people, and we told them “we’re repairing our balance sheets” they’d think we were mad. There’s not even an enemy here. This is a global depression that nobody really wants, and yet it happens! This is the paradox.

      Like

  21. 27 February 2009 5:22 pm

    The reality is that bank failure has been a programmed part of the American economy for at least the past 25 years. There was an effort going all the way back to the 1970s to streamline world banking, and the only way to do that was to devalue the American dollar and put stress on American banks. After 30 years, that has finally worked and now we are going to see American banks become officially part of the European-organized banking system for the whole world.

    Like

  22. ian permalink
    27 February 2009 6:40 pm

    I find this page generally well done. I think the author is a bit high on himself. Before the meltdown he was predicting recession. No one was disputing that a recession could occur. The issue was whether we were already there, which ws a more debatable issue, and whether teh media was jumping the gun. Then the meltdown hit, which he did not predict, and a certain triumpalism occurred. It would be like a weatherman predicting a rain shower before a hurricane and then touting his analytical brilliance.

    That said, I would be interested in a clear and brief statement from the author of what caused this mess. He talks of Wall Street friendly policies but what is missing is any sense of what fueled the underlying bubble in housing. It feeds into a partisan “too little regulation” argument, but that is really the tip of the iceberg.
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    Fabius Maximus replies: More humor to lighten this otherwise grim thread. How amusing that after years of being called an extreme prophet of doom to be told that I did not predict the meltdown.

    Ian is inaccurately summarizing these posts:

    * Making us dumber, chanting “Dude, where’s my recession?”, 3 June 2008
    * When did “Dude” predict a recession? How severe?, 6 June 2008
    * The myth of media pessimism about the economy, 13 June 2008

    The rest of his comment is similarly bizarre. These posts clearly warned that our system was structurally unstable. Predicting the date and nature of collapse asks too much of any human agency.
    * The post-WWII geopolitical regime is dying, 21 November 2007
    * We have been warned. Death of the post-WWII geopolitical regime, 28 November 2007
    * Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
    * Geopolitical implications of the current economic downturn, 28 January 2008

    As for the causes, they are discussed in considerable detail in the posts listed in section 3 of Financial crisis – what’s happening? how will this end?

    Like

    • 27 February 2009 8:00 pm

      what (and who) caused this mess?

      I’m not the author, but let me answer the question. Who: definitely politicians. During the Clinton administration Democrats, such as Barney Franks, Chris Dodd legislated the existence of Freddie and Fannie, headed by Clinton cronies, forced banks to loan subprime loans to those who could not afford the loans. The bankers who asked questions or not loaned enough subprime mortgages were harangued, some of them were prosecuted for discrimination. Bush saw the crisis coming, but too chicken to do anything lest be accused of race baiting. Fannie and Freddie bundled the subprime loans and sold them thru out the world. The geniusus actually created something from nothing, and “enriched” everyone on the planet. They also did their “swaps”, i.e. you insure me, I insure him, and he insures you. Insure against default risks. Insure with what? Who the heck cared? Everybody is rich, everybody is happy. Some brave soul who was overseeing commodities trading questioned the new finance instruments and wanted regulations. He was eased out by Rubin, one of our current saviors. The Democrats wanted regulations to force banks to make subprime loans, the Republicans did not want any regulations at all, no regulations to rein in exotic finance instruments, swaps and commodities trading…

      I may not know exactly how the mess began or where we’ll end up, but I’m sure the culprits are our beloved politicians (beloved, how else can they return to Congress time after time), Wallstreet geniuses who created “wealth” from nothing and now are to save us from their creations. I also know who the losers are: the little people who pay taxes, the winners: same politicians and Wallstreeters who stimulate their pockets with our money. I also know we have too many regulations: force banks to make subprime loans; too little regulations: to rein in exotic trading instruments. I also know what we should do next: to rehabilitate Enron and Ken Lay. They were not doing anything the better connected Wallstreeters and politicians were not doing. They caused less damages.

      Like

  23. 27 February 2009 7:17 pm

    Fabius Maximus, is it possible to provide a quick summary as to how the US economy is supposed to recover and gorw in future … however far ahead that growth may be? For instance, if future US savings aren’t going to come from US consumption, are you indicating that increases in US exports should fuel the future growth?
    @ian: FM’s theory is that the geopolitical regime that followed WW II has ended and this is at the root of different types of crises, including the home mortgage collapse.
    As of July 2007, according to the Census Bureau there were 128 million housing units in the US, for a population estimated at around 300 million. I calculated sometime back that it amounted to one house for every 2.35 persons. This equilibrium caused a re adjustment away from a housing sector driven by around 500,000 new starts a year to more of a home improvement led housing sector. That’s my personal explanation for the crisis, and it isn’t subscribed to by a lot of people.

    Like

  24. 27 February 2009 7:24 pm

    The way Obama and the Democrats pay off their cronies with the $800 billion “stimulus” tells me that they don’t know what the hell is going on. They are doing their politics as usual: they use the “depression” as a pretense to grab as much as they can from the taxpayers to enrich themselves, country be damned. They are so unserious: paying billions to ACORN, millions to build schools in population falling states,… It’s revolting. They are also going to pay 900 million to Hamas(alas not from the stimulus package), but from the taxpayers’ pockets,nonetheless. The next crisis will be the crash of the greenish funny paper with heads of dead white guys printed on them.

    Like

  25. 27 February 2009 7:37 pm

    If we have a semi-official mouthpiece for the govt. to float trial balloons, aside from the NYT, that would be NPR. Today, NPR had a segment with an economist for Deutch Bank opining that the government needs to choose between worrying about fairness (especially for tax payers), and worying about getting the current banking crisis behind us. In his opinion, the government must pick a number they are willing to pay for troubled assets, and buy them off the bank balance sheets, end of story, tax payer be damned. His point is that the tax payer is screwed no matter what, the only question is do we screw him and get on with life, or do we have cascading economic fall out from not acting, and then screw him. The segment had a distinct “trial balloon” flavor, where they joked about the “offer you can’t refuse” nature of his comments, interspersed with “but the guy might be right”, banter.

    Like

  26. DeathsAngel permalink
    27 February 2009 8:02 pm

    Honestly that paper is {snip}. Bush administration made sure that the Democrats would get a huge problem on their hands that will make them so stuck in shit that people will vote back Republicains in 2010.

    Do you have any economic classes? Probably not, else you would know the real situation of the problem and that sadly there’s no way to solve it aside helping the banks and Wall Street as they are the pivot of USA economy.

    What I am being piss about is that you guys find every good chance to make a drama about Obama policies when there should not be. Do you prefer Bush friends who prioritize private industries that ripes you off, the nice Administration that you elected that during their 8 years made the whole world spit at USA face? Or even created stupid wars just to get more cash as they have actions and the likes in weapons compagny… if you are that kind of person of course vote Republicains, even if Bush is not the party leader anymore his friends are still there waiting for people to vote back.

    I won’t go on a long paper to describe how much wrong you are, as first I would have to give you economic basics which would take me more than a few squares and secondly give you a long and detailed explanations of what happened in the last decade that lead to this crisis.
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    Fabius Maximus replies: While we are all honored to learn of your wonderfulness, and ability to explain things beyond our ken. However your vulger boasting gives us little assurance that you are in fact Mr. Wizard.

    Like

    • Seven Machos permalink
      27 February 2009 9:08 pm

      Foreigners should take care of their own national economies and not worry so much about ours. This is an opportunity for your country, whatever it is, to break the hegemony which, frankly, our country has had over the rest of the world since 1945.

      Anyway, I don’t agree with everything here, either, but it is impossible to believe that whoever wrote this doesn’t have a solid grasp of economics, whether you agree or not. How about you get some English syntax and idiom lessons, and get back to us? Thanks.

      Like

    • Arms Merchant permalink
      27 February 2009 10:50 pm

      “Bush administration made sure that the Democrats would get a huge problem…”

      You assume that the Bush administration was competent–bad assumption.

      Like

    • Seven Machos permalink
      28 February 2009 12:46 am

      So, anyway, about those ad hominem attacks.

      Like

  27. 27 February 2009 8:42 pm

    As far methinks that we can not imagine that he made a mistake in this regard. He is right and he can not make mistakes as if he makes a mistakes then it would be history not a mistake.

    Like

  28. 27 February 2009 8:51 pm

    While I appreciate your analysis and opinion, I think that we need to give O’bama and his team a shot at this. Your analysis comes from one viewpoint (your own) whereas O’bama allegedly receives input from many sources, including congress on his budget, and tries to balance what he “wants” to do with what he “can” do given there is an opposing party.

    History may prove you right, but I’m hedging that O’bama and his team has a much broader picture of what’s going on than a single blogger…time will tell.

    Like

  29. 27 February 2009 8:59 pm

    IndianInvestor may be right about what lit the bomb, but the bomb itself is the vast interlocking credit instruments peddled among interlocking networks of banks etc. Why waste time describing the extraordinary frauds that have been perpetrated. Let bounty hunters pursue the people who did this, seize their houses, art, trophy wives whatever. My question is simple: why does the government not apply the remedy that was applied to the S&Ls? This amounted to seizing them, taking their crap off the books and selling it over time. Meanwhile many of the lead players were sent off to golf, jail whatever. Yes, the banks are vastly bigger and because they have lobbied (paid off) everyone in Washington, they are escaping this. This is a choice Obama made. Why appoint Geithner who watched this entire debacle from the NY Fed where he did nothing. Rubin slides over the horizon with his loot but his people are in power. This is vile, Mr. President.

    Like

  30. llabesab permalink
    27 February 2009 9:15 pm

    First Major Policy Error? {snip — not civil and hence in violation of the comment policy that appear at the end of each post, and here in more detail} how about many “policy” errors such as:

    Error: Enact a policy of only appointing “Tax Cheats” to important posts.
    Error: Place inexperienced people in sensitive posts–Panetta, no experience in the “spy Arena; the new Solicitor General who has never/ever argued a case before the US Supreme Courtor any Appellate Court.
    Error: Increasing taxes in the middle of a recession.
    Error: Spending dollars we don’t have and for which our children and grandchildren will pay.

    He is deliberately trying to wreck this country because of his deep belief that Rev. Wright is The Messiah.
    He has the a-typical Black person’s hatred for America blaming every ill on “Whitey”. In this connection, read Michelle Obama’s thesis at Princeton in which “Whitey” is always to blame.
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    Fabius Maximus replies: Thank you for injecting humor into this otherwise acrimonous discussion.

    * Obama is rasing some taxes, but lowering others. I have not seen an analyis of the estimated net effect over 5 and 10 year periods. Have you?

    * Obama’s nominee for Soliciter General is Elena Kagan, Dean Professor of Law at Harvard University. She served as Associate White House Counsel under President Clinton. She is far more qualified to be Soliciter General than Harriet Miers was to be a Justice of the Supreme Court (nominated by Bush in 2005).

    Like

    • Seven Machos permalink
      27 February 2009 9:27 pm

      {snip, not civil and hence in violation of the comment policy that appears at the end of every post and here in more detail.}

      Like

  31. chrismccardell permalink
    27 February 2009 10:44 pm

    {snip — in violation of the comment policy, which appears in brief at the end of every post and in more detail here}

    Like

    • AMac permalink
      27 February 2009 11:22 pm

      Chris (#35), the “Caps Lock” key is to the left.

      Like

    • anna nicholas permalink
      27 February 2009 11:57 pm

      These may be an imbecilic questions , but-
      What is wrong with Protection-ism ? Work near home . Walk , cycle , grow , make , swop . Default on international debts – why not ? More fool the lenders . Only trade goods for goods , if trade needed .
      Junk mortgages :extend mortgage in time / take possession and lease back .
      Financial instruments : Never existed in real life , so just forget .

      PS .Just wondering , What would happen in the US if the health insurance companies were to fold ?

      Like

    • Seven Machos permalink
      28 February 2009 12:06 am

      Protectionism means no trade. No trade is fewer transactions. Fewer transactions means less money is made. Less money is made means shrinking economy.

      You cannot be serious about economics and support protectionism, either theoretically or, if you like, simply by looking at history.

      Like

    • anna nicholas permalink
      28 February 2009 1:03 am

      Perhaps, the, economy, could, just, shrink. After all , the nicest thing about banging your head on a brick wall is supposed to be when you stop . ( Ref : Anon . )
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      Fabius Maximus replies: Yes, let’s live like the ancient Isralites on mana from Heaven. No need to work, as the God in Washington will just send us magic money to live on!

      Like

    • Seven Machos permalink
      28 February 2009 1:07 am

      “When goods don’t cross borders, armies will.” — Frederic Bastiat.

      Like

  32. 28 February 2009 2:15 am

    Considering that the Republicans prefer to have the economy adjust itself, I think this is vaguely better in the sense that they are doing something. However…I completely agree, there is no way that things will clear up as quickly as anticipated.

    Like

  33. creeping permalink
    28 February 2009 2:22 am

    wake up Rumpelstiltskin, it’s just another in a long list of major policy mistakes by Obama…and clearly won’t be the last.
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    Fabius Maximus replies: Long list? He’s been in office a month. He many have done many things you do not agree with, but hardy many that are even by his own lights policy errors.

    Like

  34. Larry permalink
    28 February 2009 2:50 am

    Today’s semi-nationalization of Citigroup demonstrates that the administration has no plan other than rapid response. Anyone who thinks otherwise should identify the criteria that they used to trigger the preferred conversion…Even a bad plan that is visible is better than no plan at all, or one that is so secret that not even the leaders know what it is.
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    Fabius Maximus replies: I agree. This does to the heart of the problem. I fear they have no plan.

    Like

  35. 28 February 2009 2:51 am

    Obama is trying to wear us out so he can gain control of everything and everyone. If you notice, when he creates policy, he counters it with something Bush did so it wont seem so bad. Well, the war is Obama’s now, The ressesion is Obama’s now, and will all of that said, remember, he has only beed in thirty days. This is truely a one term president. I never thought in my lifetime I would see the Three Stooges in the Whitehouse. Obama , Biden and Pelosi I can see it now, Obama turning to Pelosi and Biden and saying, “Spread out.”
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    Fabius Maximus replies: Please do not confuse your nightmares with actual analysis of events.

    Like

  36. Dr. Fred in PA permalink
    28 February 2009 3:38 am

    These banks need to complete their failure. The executives, the shareholders and the bondholders need to eat the result of their utter lack of due diligence. The world will not end if Citi goes belly up. I’m not a finance guy (I’m a physician) but it seems to me that after these clowns go under, we might want to consider a) a different method of setting interest rates; b) limits on credit default swaps, CDO’s, etc., etc. and c) limiting the amount of leveraging that can occur when buying stocks, bonds and options. FM is absolutely correct about the price of housing. It needs to come down substantially more, especially in the Big 4 of this mess (CA, AZ, NV and FL). And I am not remotely interested in helping them pay for their mortgages, either. A whole bunch of people have behaved irresponsibly and they need to pay the price. It won’t kill them. Everybody is acting like financial failure will result in the deaths of millions. They’ll just be a lot poorer for their stupidity and greed. Poverty can focus the mind wonderfully (which I learned first hand in college). They’ll survive.

    Like

  37. ian permalink
    28 February 2009 4:11 am

    FM, regarding # 25, the tone of your response absolutely proved my point. I didn’t realize being an economic prophet was so important to you. Wow. The US had too much debt? There were trade imbalances? Poor regulation? Questionable monetary policies? Best yet, there was really a bubble in the housing market when everyone who owned a home was putting theirs on the market due to the extraordinary prices being paid? Generally predicting economic castastrophe doesn’t redound to your credit without specifics. For example before the 1929 crash the NY Times spent months predicting all manner of doom. When it happened, albeit in a way the Times did not predict, the gloating was not exactly subtle. But as Galbraith noted while we naturally focus in critical reappraisal on those who say that the economy is sound before a sharp downturn, those who make a similar vocation of predicting economic doom are often just as unsound in their own judgment as the seeming Polyannas we take such pleasure in revisiting.
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    Fabius Maximus replies: I do not understand what you are attempting to say. If the forecasts here were insufficiently precise for you, you are welcome to go to sites where the content meets your high standards. If you have a criticism, please base it on a quote or specific reference.

    Like

  38. ian permalink
    28 February 2009 4:42 am

    I’ll streamline it for you. Your previous posts have references to the subprime mortgage problem and the housing bubble and debt among quite a few other things. Now please point out the post where you stated that because our financial institutions through exotic financial instruments were insanely overinvested in insecure mortgages to the extent that a catastrophic failure of our banking and credit system could result. That would not be beyond any human agency, particularly as you were identifying the pieces of the puzzle. If you did that then congratulations.
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    Fabius Maximus replies: What is the point of this carping? As I said before, you are welcome to transfer your attention to sites meeting your high standards. IMO you are not saying anything of use or interest.

    Like

  39. 28 February 2009 2:33 pm

    Interesting points. I concur with you on the future outlook. The source of the crisis is multi-dimensional and both parties bare the blame for it, however, the Democrats appear to be using the crisis to pursue an aggressive change in the basic tenets of the economy. With Bush starting the process, Obama, Reid, and Pelosi are converting our market economy into a command economy. I think our Democracy is strong enough now to recover but I am afraid the people lack the mental and political strength of will to take back control. Right now the only strong charismatic leader in this nation appears to be Obama and clearly he is charging in the wrong direction.

    Like

  40. James permalink
    28 February 2009 3:08 pm

    People blithely use the word nationalization of banks. What is the OODA loop of bank nationalization? Do those commentators above know, does FM know? My feeling (not knowledge) is that the genius technocrats in Washington peeked under the cover of the box marked universal or money center bank nationalization (remember these are not local or regional banks) and recoiled in horror.
    My limited understanding of nationalization:
    1) If you nationalize one, say Citibank, the next in line will be shorted or attacked, say BofA, which if nationalized will lead on to JP Morgan, then Wells Fargo, and on and on…
    2) Each of these banks represent huge amounts of capital intricately connected to other entities by complex instruments, such as CDOs, various kinds of preferred stocks, common stocks, bonds, swaps, loans, insurance and other obligations. So very quickly insurance companies, other banks, reinsurance companies, hedge funds and other companies will start to weaken even more as the capital on their books represented by these various obligations evaporates. Will we nationalize them too?
    3)Much of the bank capital is also to be found in pension funds, endowments, foundations, IRA’s, 401K’s, and mutual funds. Will we step in and make them whole also?
    4)I don’t know the aggregate number but have seen figures in the $100s of trillions when you total up the whole ball of wax.
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    Fabius Maximus replies: Banks have often been nationalized. By Sweden in the 1990s, the US experience with the S&L’s. It is hardly the horror show you describe.

    (1) Unless crafted well, a nationalized bank might have a competitive advantage vs. competitors (e.g., lower cost of credit, greater percieved solvency). That might tip other money-center banks into nationalization.
    (2) Nationalization makes the complex chain of finanancial relationship more stable — not less, as you imply. A major stress on the system is counter-party risk, which goes away when dealing with government-owned entities.
    (3) The remaining equity market value of the major banks is tiny, so nationalization will have little effect. By stabilizing the sector, the value of bank bonds might rise — even if the government gives a “haircut” to the bonds as part of “sharing the pain” of nationalization. Given the massive amount of bank debt in the system, this might have a very beneficial effect.
    (4) Let’s not get hysterical. As I have explained several times. numbers like that are losses from an atomic war — not any plausible financial event.

    Like

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