This week’s most interesting articles about the financial crisis!

In our quest to bring you the finest insights for your weekend reading, here are this week’s offerings.

  1. The best comment of the week on the FM site:  McLaren’s about some conservatives discussing the economy.  Gallows humor at its finest.
  2. Most interesting article:  “Can Countries Really Go Bankrupt?“, Der Spiegel, 30 January 2009.
  3. The best briefing I have seen about the crisis:  “How Did We Get Here? The Financial Crisis: The View from America“, Brad Delong (Professor of Economics at Berkeley), November 2008, 16 slides.  Esp note the last line on slide #11.

Last, below are two excerpts:  the “best quotes of the week” and “Best review of this week’s performance by the Clown Patrol in Washington.”

(A)  Best quotes of the week (it’s a tie)

(1)  Excerpts from two reports dated 6 February 2009 by economist David Rosenberg, (bold emphasis added):

Now, there is just a feeling of dread in the lead-up to these employment reports, even for folks like us that have had a bearish view on the economy for some time now. It is one thing to forecast a depression and quite another to actually live through one. Not that this is the 1930s, but it is clearly not a garden-variety recession of the likes we became accustomed to know and understand in the post-WWII era, which were dominated by inventory cycles and when traditional policy stimulus could always be relied upon to provide at least a flicker of light at the end of the tunnel.

After all, the “average” post-war recession lasts 10 months and the two longest in the past five decades were 16 months apiece. Yet, here we are, 15 months into this downturn, and the only thing we see at the end of the tunnel right now is a train.

… The Household survey was even worse than the payroll report {establishment survey}, if that is possible – showing a record 1.24 million job plunge. The data go back to 1950, and we have never seen something like that before; even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years.

And almost all of the January plunge was in full-time employment – down an eyepopping 1.1 million, taking the cumulative loss since the recession began in late 2007 to 6.1 million, which is unprecedented. In a “normal” recession, we lose a little more than 2-1/2 million full-time positions. We have already lost nearly three times that amount and counting.

(2)  Jeff Immelt, CEO of GE (Reuters, 5 Feburary 2009):

“We’re at least to 1974-75 … Once you break through ’74-’75, you don’t stop ’til you get to 1929. Unlike the other downturns that I’ve been a part of, this one is faced with limited liquidity. If liquidity exists, it’s not coming back readily. That’s why the government’s role in this cycle is so gosh-darned important.”

(B)  Best review of this week’s performance by the Clown Patrol in Washington

They are running the country, for sure.  Running it into the ground.  For more evidence see “Bad Banks, Insurance Wraps and Other Fanciful Notions“, Instituteion Risk Analyst, 2 February 2009 — Excerpt:

As with the muddled thinking on asset valuations we heard last year from Fed Chairman Ben Bernanke, this new plan supposes that there is a “happy medium,” some compromise that awaits taxpayers in the US (and the UK too) in terms of buying bad assets from already insolvent banks without requiring the purifying step of insolvency and restructuring.

Indeed everyone from our usually sagacious friends at BreakingViews to the Financial Times to US Economic lider maximo, Larry Summers, seem to be coming under the nonsensical notion that there is some alternative to restructuring for the large money center banks in the US and Europe. The editors of the FT in particular seem to forget that their continued existence as a business comes from a healthy, private financial market, not the politically-conflicted statist paradise envisioned by Geithner, Bernanke and their masters at Goldman Sachs.

We are encouraged that a growing number of Republicans in the Senate seem to have figured out that the only way to protect the US taxpayer from further rape at the hands of the profligate souls who inhabit the senior appointed posts at the Fed and Treasury is to first mark the assets of the largest banks to market, a process that must necessarily wipe out the equity of these institutions. Like we said last week, the bondholders are the true owners of Citigroup, Bank of America, et al.

One key indicator that the children’s hour continues at the Treasury and Fed is the talk of issuing more equity warrants to “protect the taxpayer” as part of a bold plan being considered by the Obama Administration. Geithner is said to be the chief proponent of this idiocy, but we have heard even good friends in the analyst and Buy Side worlds prattle on about how we can draw the line at the equity of the parent companies of the money centers and then commence a credible recap.

… Thus when you hear people in Washington talk about buying bad assets from already insolvent banks, the illogic of their position should be apparent to all. Let’s walk through the two basic alternatives under a “bad bank” approach.

Scenario A: The Treasury buys the “bad” assets at inflated prices, say par value, taking the assets from the bank without incurring a loss. The unrealized loss is passed to the taxpayer, who now owns this asset at well-above market value. Unless you believe that the market value of these assets will recover at some time in the future, the prospect is for a subsidy by taxpayers to the bond holders of the large bank. The solvency issues of the large bank may or may not be resolved, but in consideration for taking the bad assets, the taxpayer is clearly now the owner.

Scenario B: The Treasury first forces the banks to write down the value of their assets in a one-time “Come to Jesus” M2M exercise, a global celebration of Fair-Value Accounting, if you will. The equity and the junior sub debt of C would be completely wiped out, with senior bondholders and new investors comprising the new owners. The large bank will then be solvent and could continue to sell assets and restructure its business to repay the taxpayer for previous support and meet a new business model.

The “Bad Bank” approach in Scenario A represents further delay and temporizing, a strategy that ensures that the US economy remains mired in crisis and recession for years to come. Scenario B represents a painful but ultimately quick remedy, the path whereby we can jump start the US private sector and get on with the process of rebuilding the global financial system. All that is required is courage and leadership, two qualities that still seem to be lacking in Washington.

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.

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:

Some posts on the FM site with analysis of the financial crisis:

  1. The most important story in this week’s newspapers, 22 May 2008 — GAO estimates the government’s liabilitis:  $57 trillion.
  2. Essential steps to surviving the current crisis, 23 September 2008 — analysis
  3. More reasons why the government will be taking over allocation of America’s capital, 27 October 2008
  4. The US economy must go to Defcon 1, 13 November 2008
  5. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
  6. The greatness of John Maynard Keynes, our only guide in this crisis, 4 December 2008
  7. About the state of economic science, and advice from a famous economist, 8 December 2008
  8. Destroying houses in order to boost home prices
  9. “A depression is for capitalism like a good, cold douche.”, 17 December 2008
  10. President Bush: “I’ve abandoned free market principles to save the free market system”, 20 December 2008
  11. Words of wisdom about the global recession, from the greatest economist of our era, 29 December 2008
  12. An Epistle to the good savers of America, 6 January 2009
  13. A warning from Paul Krugman of what should be blindingly obvious (but is not obvious to many experts), 7 January 2009
  14. “We are likely enduring a depression today”, 27 January 2009

9 thoughts on “This week’s most interesting articles about the financial crisis!

  1. Rosenberg has had a good feel for this recession and its severity. Basically, the ‘Great Moderation’ was a mirage; those on the bottom saw stagnating wages for a generation , while the folks in the top 5 % were partying. Well, the party’s over.
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    Fabius Maximus replies: More precisely, the moderation of the business cycle resulting from adding debt in the downturns — without reducing it during the recoveries. Fun while it lasted!

  2. There is not an ounce of courage in the entire city of Washington. Only avarice, corruption, and duplicity. Expect the Keystone Kops and the gang that never could shoot straight to collaborate on the greatest rape of the taxpayer in history.

  3. Of course, this is exactly what happened in Japan, which was the beginning of their “Lost Decade” of tortuous and slow restructuring of bank balance sheets.
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    Fabius Maximus replies: IMO it is too early to say this with any certainty, but not too early to worry that it is true.

  4. My greatest irritation at the entire fiasco is that we keep being told by our lawmakers, “Don’t worry, it isn’t going to come out of your pockets…” as if the people of our country are so venal as to be happy to steal from our kids. “Whew, at least it’s not my money they’re stealing. It’s only my kids they’re raping.”
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    Fabius Maximus replies: I do not closely watch the antics of our politicos, and certainly don’t listen to or read their speeches (life is so short). But have any really said “it isn’t going to come out of your pockets”?

    Of course the statement is true if they add “your children will pay it, unless we just default.”

  5. FM note: Can anyone explain why the folks posting belligerent comments are usually wrong, even in simple matters of arithmetic? I have seen this so many times in the 7300 comments on this site; this is another fine example.

    To see accurate representation of employment changes during recessions:
    * “Comparing this recession to the last five“, Justin Fox, Time, 9 February 2009 — This shows the past 6 recessions.
    * “Job Losses During Recessions“, Calculated Risk, 9 February 2009 — this shows all recessions since WWII.
    * For analysis see this by William J. Polley, Assistant Professor of Economics at Western IL U.

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    I’m calling BS on this junk you are posting. Relevant data from 1948 on is here:

    “The Household survey was even worse than the payroll report {establishment survey}, if that is possible – showing a record 1.24 million job plunge. The data go back to 1950, and we have never seen something like that before; even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years.”

    January 1968:…-1.02% (FM: 41 is greater than 40)
    June 1981:…….-0.74% (FM: this decrease is less than that of Jan 2009)
    January 2009:…-0.86%

    People who can’t quote simple publicly available statistics correctly do not deserve to be believed on anything they say.
    {FM note: people who cannot do arithmetic should be more polite}

    Rosenberg: “And almost all of the January plunge was in full-time employment – down an eyepopping 1.1 million, taking the cumulative loss since the recession began in late 2007 to 6.1 million, which is unprecedented. In a “normal” recession, we lose a little more than 2-1/2 million full-time positions. We have already lost nearly three times that amount and counting.”

    First: He doesn’t have the following numbers right either, because the commentator is looking at numbers not adjusted for seasonal variation and then comparing across months (a statistical no-no).

    {FM Note: the data Rosenberg used is from table A-5 A-6 of the BLS Current population survey. Despite this gentleman’s bold statements, Rosenberg cites them correct — as I indicate below. They are the seasonally adjusted numbers.}

    November 2007:…146,665,000…121,900
    January 2009:……142,099,000…115,794
    Net Change:………004,566,000…006,106 loss
    (January 2009 data is preliminary)

    Second: In a “normal” post-war recession, the job loss was around 2 million each time (not 2.5 million), except for 1960, 1970, and 1980, which saw barely any job losses by the CPS. In 1953, we lost 2,102,000 jobs, from a base of 62,010,000 jobs. That’s equivalent to a job loss of 5,000,000 jobs from the 2007 base.

    {FM note: the convention among economists is to consider typical post-war recessions as starting after 1960, perhaps allowing the economy to adjust from WWII and Korea}

    So again, we find the “unprecedented numbers” assertions are simply false. Additionally, the percentage job losses in the 1948 and 1957 recessions were very similar, if a bit smaller than 1953. So its hardly a one time precedent either.

    Third: A better question is why the recessions from 1970 to 2002 saw so few job losses.
    {FM note: since the opening assertion is bizarre, why read on?}

    I’d suggest that we could find this answer in the maturation of the baby-boomer cohort of job entrants. Given the sheer size of that generation, jobs were being forcibly created against the face of downturns due to the high levels of family formation, first home purchases, and births of children, all events which cause prolonged levels of spending by workers on homes, appliances, furniture, apparel, food, and other items. Since 2001, the front edge of the baby boom generation has been taking full advantage of retirement opportunities upon hitting age 55 (initial government pension age), leaving numerous vacancies for the relatively small generation born in the 1970’s and early 1980’s to begin filling. Fewer people entering the work force, fewer jobs needed. In 2009, we are a couple of years into baby boomers hitting age 62, and almost a decade into them hitting age 55. The Civilian Labor Force in 2009 is 8.5% larger than 2001, but those not in the Labor Force are 12.9% greater in number. That change is retirees, especially males; Labor Force non-particpation is up 20.6% among males over 20 since 2001, while it is under 10% for women. I’d suggest this represents the longer tenure of male baby boomers, who are more likely to have worked the 30 years necessary to claim early retirment. Male non-participation is up 10% in the last two years, while female non-participation is up just 2%.

  6. Jeffrey Immelt is quoted: “We’re at least to 1974-75 … Once you break through ‘74-’75, you don’t stop ’til you get to 1929.”

    Now this sort of comment just goes to show you the limited familiarity even prominent CEO’s have with the economic history of the US.

    There were certainly intermediate size financial panics and longer recessions in the past than just the 1974-1975 recession. 1893-1896, 1907, 1920-1921 are all excellent examples.

    Additionally, the 1979-1982 economic catastrophe was worse than 1973-1975 by most measures. 6 quarters of negative GDP vs. 5, just 1% total growth in GDP from Q4 1978 to Q4 1982 for a total duration of 16 quarters of low growth vs. 7 quarters low growth in from Q3 1973 to Q1 1975, 10.8% maximum unemployment in 1982 vs. 9% in 1975, 10% decline in industrial production from March 1979 peak to December 1982 trough vs. 13% from November 1973 to May 1975 (sharper, but much shorter).

  7. You still aren’t making the citation correctly (not that Rosenberg is quoted as citing anything but the base CPS). Your numbers are from Table A-6 here:

    I notice that you drop part time workers, as if they don’t count, even though plenty of people only want to work part time and the number of part time jobs has increased. My boss is one of those men over 20 who has gone to part-time work since November of 2007, but the reason he did it was that our company was bought out and he is now a multi-millionaire and no longer needs to work except at tasks he finds fun. Its too simplistic to just drop part-time workers.

    “the convention among economists is to consider typical post-war recessions as starting after 1960, perhaps allowing the economy to adjust from WWII and Korea”

    That’s just bizzarre. The US Government has good economic monthly and quarterly data from at least 1948 for most economic indicators, and for many, from 1929 or earlier. To ignore everything from before 1960 is very strange for economics as a social science, since you are eliminating quite a bit of your data points for recessions (you lose the recessions of 1944-45, 1948-49, 1953-54, 1957-58, and 1959-60 – 5 of the 11 post 1940 recessions are just droppped by this methodology. Statistical compression of the time series of data is always highly suspect as being a method of surpressing unfavorable data points. Post-war recessions as normally discussed 15 years ago covered the period 1948 to 1992.
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    Fabius Maximus replies: Rosenberg’s numbers were full-time employment, supporting his statement “And almost all of the January plunge was in full-time employment”.

    You raised 2 points; both were wrong. As usual in my experience with folks having your belligerent attitude, you neither retract or apologize — but go on to other stuff.

    You can chatter on, but I will neither read or respond. Anything violating the comment policy (brief, topical, civil) will be snipped or truncated.

  8. FM Note: This is class troll behavior: posting “controversial, inflammatory, irrelevant or off-topic messages in an online community with the intention of provoking other users into an emotional response or to generally disrupt normal on-topic discussion.”

    His comments are just nonsense. I suspect everyone other than Andrew understands this, but for the slow ones in the class let’s explain one more time. Any further trivial comments like this wil be deleted as taking the thread off-topic.

    Rosenberg: “The Household survey was even worse than the payroll report {establishment survey}, if that is possible – showing a record 1.24 million job plunge. The data go back to 1950, and we have never seen something like that before; even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years.”

    * “we have never seen something like that before” refers to the “1.24 million job plunge.”
    * “even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years” means that a monthly change of .86% is significantly larger than one of .74% (June 1981).
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    FM: “41 is greater than 40 … this decrease is less than that of Jan 2009”

    The words in your quote from Rosenberg were “The data go back to 1950, and we have never seen something like that before” and “even in per cent terms (-0.9%), there has not been a decline of this magnitude in over 40 years”

    Quite obviously from the data points I cited and you deleted, we HAVE seen a number of months like that before, and the decline in 1981 is close to the magnitude of the current decline. The closest months since 1960 to the -0.74% decline in 6/81 are the -0.86% decline in 1/09, the -0.62% decline in 9/81, -1.02% in 1/68, and the -0.72% decline in 4/61. I’d say that puts 1981 in the same magnitude. And the artificial distinction of 40 years is precisely made by Rosenberg to exclude several months from the period of 1948 to 1968 which saw even larger percentage declines. This sort of rhetorical device helps feed the frenzy of “a new great depression coming”, rather than bringing context to the fact that there have been about a dozen months since 1948 with just as large or larger a percentage decline in terms of magnitude.

  9. Here’s another way of looking at how bad job losses actually are.

    Table A8 of the CPS has a heading for “job losers as a percentage of the civilian labor force”.

    It shows for the past few recessions the effect of job losses on unemployment growth vs. overall unemployment growth as follows (unemployment not from job losses is from new entrants, re-entrants, and people voluntarily quitting):

    Year: Job Losers, Overall
    1969-70: 1.2 to 2.9% (1.7% points), 3.4 to 6.1% (2.7% points)
    1973-75: 1.7 to 5.2% (3.5% points), 4.6 to 9.0% (4.4% points)
    1979-80: 2.2 to 4.3% (2.1% points), 5.6 to 7.8% (2.2% points)
    1981-82: 3.6 to 6.6% (3.0% points), 7.2 to 10.8% (3.6% points)
    1979-82: 2.2 to 6.6% (4.4% points), 5.6 to 10.8% (5.2% points)
    1989-92: 2.2 to 4.4% (2.2% points), 5.0 to 7.8% (2.8% points)
    2000-03: 1.7 to 3.5% (1.8% points), 3.8 to 6.3% (2.5% points)
    2007-09: 2.1 to 4.5% (2.4% points), 4.4 to 7.6% (3.2% points)

    Unemployment from people losing their jobs has been about average for a recent recession.
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    Fabius Maximus replies: You totally miss the point. We are 15 months into this recession and the economy is still falling. Most recessions are over or nearly so by this point. Also, IMO the graphs I linked to in the previous comment show the relative jobs impact more clearly.

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