The Presidents Economic Recovery Advisory Board, a giant step toward recovery.

We are very heartened by the announcement of the Presidents Economic Recovery Advisory Board to be composed of the full range of economic thinkers and business interests. This is a complete break with the past practice of advocates controlling the conversations. It is the seat at the table that progressives need and the assurance they will be heard. Most of all, it is the place where it will be determined whether a policy is working or not working.

Progressive demand side economics will work, so it will thrive in such a venue. In the Bush II administration the response to the policy’s not working was to apply more of the same medicine. Tax cuts were supposed to engender prosperity. When they did not, and interest rates were at an all-time low, no adjustment was made to policy. You had literally the lowest taxes and the lowest interest rates and the highest deficits all operating to produce a tepid economy and greater and greater insecurity, yet there was no adjustment, only entrenchment of the official line.

This is a healthy policy framework. Policy is key to economic performance. As we’ve documented here at Demand Side, Democrats have produced markedly better economic performance when they have been in the White House. We have not had a president with the demand side vision, the interests of the middle class, so well defined and so prominent in his thinking since Harry Truman.

The economic stimulus package now under consideration is not clear in its details. We suspect that help to states and localities, conspicuously missing from Mr. Obama’s most recent list, is going to be omitted from the package. Possibly this is simply politically not do-able. That would be unfortunate. The scale of the package that is being talked about is appropriate. The importance of mortgage debt stabilization, of creating the infrastructure sector as an engine of growth, along with the green energy sector, is very encouraging, but the baggage carried over from the flailing TARP, the liquidity fetish of the Fed, and the various obligations to private banks already on the books will not be helpful. The stability of the dollar is in our view a question.

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Plus the counterfactual to Obama’s employment of Clintonistas

With the crisis a day theme continuing now with a bailout of CitiGroup, it is easy to get caught up in the tactical issues.  Today we have Joseph Stiglitz to talk about the strategic context.

Then, in place of the idiot of the week, we’re detouring into the political realm in the Rachel Maddow memorial holier than thou counterfactual corner.

First, though, leading into Stiglitz comments, I want to make sure that we take the opportunity of this hard time to make some judgments on what works and what doesn’t.  History is the crucible of the economic experiment.  Let’s take a moment to look at the facts as they go by.

The monetary policy remedies applied by the Federal Reserve and the supply side support to the major financial institutions by the Treasury have not worked.  They have not staved off the collapse of this sector.  It exists now in a zombie state, still paying its employees, sometimes one company combines with another in what is called consolidation, but the function we need a financial sector to perform is not happening except under the direct supervision or through the offices of the government.  Thus, without a viable brain and nervous system, the real economy is staggering.

We do not know whether demand side help to Main Street would work, becaues it has not been tried.  We could have had foreclosure mitigation or forced write-downs of mortgage debt and other debt, but it hasn’t been tried.

We know that the monetarist stimulus package did not work, because we did try the checks from helicopters.  We do not know if demand side infrastructure spending, help to the long-term unemployed, increased food stamps, assistance to state and local governments or health care reform works, because we have not tried it, with the notable recent exception of extension of unemployment benefits.

The good news is some of these demand side remedies are now on the table, though not all.  We are eager to prove our forecasts are not all doom and gloom.  We hope to do that soon, and they could change dramatically as soon as the dimensions and details of the president-elect’s program are more clear.

We’ll go into that more on Friday’s forecast.  But here is Joseph Stiglitz.

STIGLITZ

Joseph Stiglitz

Now there has been a great deal of hand wringing by a few, though by no means all, on the progressive left on account of the composition of the Obama team as it comes to be formed.  Particularly with regard to the number of Clinton era figures that are emerging as key players in the first Obama government, beginning with Hillary Clinton herself, but also including Larry Summers and Tim Geithner, who will be point men on economic policy at the National Economic Council and the Treasury Department  respectively. The Rachel Maddow holier than thou memorial counterfactual corner

Our quizzical look at some of the odd fetishes of the media and others.

Number one:  Hillary Clinton will be the next Secretary of State.  What happens absent this event?  Clinton returns as junior senator from New York after sold out in persuading her supporters to support Obama, apparently to a life of noble obscurity.  Disgruntled Hillary supporters remain on the fringes, ready to criticize and backbite.

Counterfactual Bonus, Hillary does not criticize Obama during the primary on the subject of foreign policy.  Absent this, “A” Clinton apparently would not have wanted the nomination, since the campaign is an exercise in drawing comparisons and “B” McCain would have the subject clean.

What would it be like if Hillary Clinton were not the presumptive Secretary of State?  We’d have Sarah Palin hour every night.  At least this is an interesting soap opera.

Number two:  There are no leaks from the Obama transition.  Absent the leaks, we would have either the most bizarrely authoritarian operation or one that did not communicate to anybody.  Can you imagine not talking to Capitol Hill?  Politicians love to talk.  And the news media would have gone into cardiac arrest.  As it is, the leaks are fairly reliable, since I don’t see many being shot down.  The one exception is the Axelrod statement that the campaign team was frustrated by the leaks.

Number three:  Clinton era people are populating the Obama administration.  I don’t think Obama ran on being liberal.  That was who McCain tried to run against.  But Obama ran on being practical and having an ambitious energy, jobs, and health care agenda.  Absent the Clintonistas in the Cabinet means the presence of the left wing progressives.  Not the best transition team.  And not the people you want to run up the flagpole first.  There are further appointments to be made.  Lefties will be much more acceptable if they join a group of established faces than if they are the group joined by the established faces.

And finally, let’s observe that the Progressive Left were not the only people who voted for Barack Obama, there was also a key number who opted for change from the middle.

It is our view that the policy outcomes are the proof in the pudding.  With Clinton at State, we have Kerry as head of the Senate Foreign Affairs Committee.  With Geithner and Summers on board, we also bring on board a great swath of the business community.  Progressive prospects improved dramatically with the replacement of Dingell as chair of the House Energy and Commerce Committee with Henry Waxman.  Even Lieberman as head of Homeland Security, as bad as that smells, brings a Senate vote in the near term.

We hope and expect that health care reform, a stimulus package on an appropriate scale, big new infrastructure spending, and aggressive action on climate change will happen in the first two years.  It will happen with seasoned and capable administrators in place.  And the contrast with the incompetence and corruption of the previous administration will be complete.  These will be sufficient to carry the off-year elections more forcefully into the Democratic camp.

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Monday, November 24, 2008

Plus John Kenneth Galbraith, Robert Reich, Paul Krugman, Barack Obama and Monday’s backcast looking back at the oil price bubble.

Monday’s Backcast.

But before we get to that, this podcast is being recorded before any announcement regarding Citi Bank and a bailout.  Regardless of the scenario going forward, the demise of this emblem of the American banking system displays without doubt the failure of the Bernanke-Paulson approach.  Bernanke’s clear intention was to save the banking institutions and avoid deflation.  He did this by flooding them with liquidity and turning over the Fed’s balance sheet to their bad paper.  In the end we see that the basic financing function of a financial sector is absent from the scene, but the banks themselves were not saved, and the dreaded deflation was not avoided.

Returning the financial sector to its Glass-Steagall form is the way to structure the market, empower the regional banks — who are sturdy and willing to lend — and relieve the taxpayer of the burden of insuring the colossal losses of the Wall Street players.  Until these massive zombie corporations are cleared from the field, there will be no recovery in that sector.

This continuing catastrophe has begun to deal crippling blows to the economy.  We have several takes on the situation, from Paul Krugman, Robert Reich, and John Kenneth Galbraith.  The latter from fifteen years ago.

First, with oil prices stabilizing below $50 per barrel, today’s backcast comes from February 2008.  At a time when we really had to reach to find anybody else who saw the commodities bubble…. I guess that goes for today, too…. In any event, we put up this inside a podcast on February 24, 2008.

COMMODITIES BACKCAST

Now back to the continuing and accelerating financial crash and economic meltdown.

First, from the great John Kenneth Galbraith, writing in 1993.

The possible positive lines of action against recession are three: taxes can be reduced to enhance the flow of consumer and investment spending, or so it is hoped; interest rates can be lowered to enhance investment spending and consumer purchases of houses, automobiles, refrigerators and electronics, or so it is also hoped; the Government can undertake direct, forthright job creation. This is the holy trinity. Prayer and repetitive prediction of recovery apart, there are no other lines of action.

Tax reduction has its proponents, notably among those who pay the taxes. Unfortunately, its relation to recovery is theoretical. There is the difficult question as to whether the revenues released will be spent or invested; they may be held as cash or unused bank balances. And tax reduction would increase the deficit, concern with which has now reached near paranoiac proportions. Again, better the recession.

Next, there is monetary policy: the reduction of interest rates by the Federal Reserve. This is believed to have a peculiar magic. It calls for no big bureaucratic effort, carries no threat of taxes — and a special intelligence is taken to characterize those who are associated occupationally with money.

But monetary policy works against recession by reducing interest rates and therewith rentier income. This is by no means welcomed by those who enjoy such income. …

Additionally, there is the sad fact that in a recession monetary policy doesn’t work. The elasticity of the response to reduced interest rates is then very low. People and firms spend and invest, or fail to do so, pretty much as before.

Finally, there is direct Government expenditure and employment. For those resting comfortably in recession, this is the worst of all. It could raise prices, risk inflation. Much worse, it promises higher taxes at some time yet to come. …

John Kenneth Galbraith, 1993

Now, Robert Reich, Obama economic adviser and Labor Secretary under Bill Clinton, writing on October 26 in the American Prospect, on income disparity and depressions.

The specific financial machinations that lead to collapse are always different, but inequality at the levels America reached in 2006 (the last year for which we have data) is a reliable sign of danger. The richest 1 percent of Americans last year took home 23 percent of total national income. Back in 1980, the richest 1 percent took home 8 percent of total income. The last time the top 1 percent took home more than 20 percent of total income was in 1928, just before the Great Crash.

I’m not predicting another Depression, but the parallels between what’s happening now and what happened 80 years ago are striking. In the 1920s, wealth and income began concentrating at the top for a number of reasons: a huge consolidation of industry that richly rewarded certain investors and executives; the emergence of Wall Street as a driving force in the economy as the nation shifted toward debt financing, generating large gains for financiers; and increasing globalization, putting large sums of money into the hands of those commanding the heights of international commerce.

What was the response of Washington to this increasing concentration of income? President Calvin Coolidge slashed taxes on the highest income earners. At the same time he pursued anti-union policies that reduced the bargaining leverage of blue-collar workers, resulting in lower wages for them. The only way most Americans could maintain their slice of the pie was to go deeper into debt. Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled.

Robert Reich.  Reich is not included in the company of the official Obama economic team, many of whom will be announced tomorrow at the president-elect’s news conference, but he has been front and center in the media.  One supposes he must have some sort of mission for the transition team, and we hear him coming down hard on the current administration, particularly on their inability or unwillingness to help Main Street.

Now, here is the issue du jour, the vacuum of power in the last days of the Bush administration.  Point man on this issue was Paul Krugman.  Actually, Demand Side suggested months ago that the new administration had to be open to governing prior to inauguration.  It may not be politically wise, logistically possible, or legally do-able, but it is economically essential.

Here, Paul Krugman, excerpted from Friday’s New York Times, under the head,

The lame-duck economy

NYT November 21

….in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the Republican Party’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum here in the U.S., these are hopeful times.

There is, however, another and more disturbing parallel between 2008 and 1932 - namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.

It’s true that the interregnum will be shorter this time: FDR wasn’t inaugurated until March; Barack Obama will move into the White House on Jan. 20. But crises move faster these days.

How much can go wrong in the two months before Obama takes the oath of office? The answer, unfortunately, is: A lot. Consider how much darker the economic picture has grown since the failure of Lehman Brothers, which took place just over two months ago. And the pace of deterioration seems to be accelerating.

***

The Obama Team will likely be officially announced by the time you get this podcast.  At present the likely composition is Tim Geithner at Treasury, Bill Richardson at Commerce, Larry Summers as head of the Economic Council, Austan Goolsbee as Chair of the Council of Economic Advisers, Jason Furman at NEC, Peter Orzag as Budget Director. Summers is suspect.  It was his T’s  “Targeted, Timely, Temporary” mantra last January that convinced lawmakers to do “checks in the mail” stimulus.  It should have had the fourth T — “Timid.”

But at least there is a return to competence with the Obama team, and an apparent willingness to (like Roosevelt) listen and experiment until something works.

The question is, Where is Paul Volcker?  One hopes he has the portfolio of reconstructing the financial sector.  As we noted the accelerating meltdown  — now including Citi — demonstrates, the Bernanke strategy of liquifying the banks with a fire hose has failed, not only to salvage a the financing function of the economy, but to save the banks themselves, and to prevent the dreaded deflation.

The talk on Sunday was all good, particularly on increasing the scale of the proposed stimulus package.  We again call for citizen sacrifice in the form of adopting the blue ribbon panel on infrastructure’s proposal for an 83 cent per gallon gasoline tax, phased in, to produce $250 billion in needed surface transportation infrastructure each year for the next 50 years.

We could say more, but we want to squeeze in the Saturday broadcast of our favorite president elect.

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But the news is grim and grimmer. Competition with quants is no competition…..Bush II rescues Hoover from the bottom.

Forecast Friday

GDP

Crash

The bad news up front.

Then the good news: On inflation and unemployment, in the ongoing battle of forecasts, Demand Side has beaten the Fed Governors soundly and the consensus of professional forecasters surveyed by the Philadelphia Fed.

With regard to GDP, we have done well, but not as well as we would if the measure reflected reality. The 2.8 percent growth number recorded by the BEA — Bureau of Economic Analysis — for Q2 2008 still sticks in our craw. We note here again, whining if you will, that the GDP deflator necessary to produce this number bears very little relationship to any other measure of inflation.

And after our report on the differences between the others and us, we finish with a carol from Doctor Doom, Nouriel Robini.

Now, the bad news.

Demand Side puts forward forecasts that are optimistic, because our intention here is always to do better than the competition, and in this case, as long as we have leverage to the down side, we will do better. Plus, looking forward, it is always easier to get credibility if you are somewhere near the others. But our real view is grimmer than this. Any optimism needs the boost from aggressive policy measures that to date we just have not seen. We’re hopeful for a new Obama Administration, but it will be very difficult to get done what needs to be done absent a complete collapse and a mobilization of the body politic by virtue of desperation. On Monday we’ll give you the scale of the action that is needed in dollars.

The short form of our success is this:

We anticipated the recession a year ago because we saw that the economy was fundamentally weak, and had floated along for years only on massive debt, household and federal, that was bound to buckle. The collapse of the housing market would mean a reversal of the boom’s employment profile and a reversal of the wealth effect of rising home values.

We anticipated the inflation of the first three quarters of the year because we saw the commodity bubble, from oil to agriculture to metals. Though to be perfectly honest, we anticipated a response to the inflation from the Fed that did not materialize, a response more like what the European Central Bank did. But the Fed was preoccupied in its futile efforts to save the financial sector.

Now we anticipate a near depression because we see the crash. We see that the monetarist remedies dumped on the economy by the Fed and Treasury have not saved the patient. Trade has collapsed, lending has dried up, deflation is upon us, and the financial sector has crashed. We do not have to predict this. It has happened.

The difference from other forecasters, I think, may be that they are extrapolating history from spreadsheets and data points and trend lines. We are extrapolating from historical events.

Be clear, George W Bush will be remembered as the man who rescued Hoover from the dustbin of history. Ben Bernanke will be the last Regent of the Federal Reserve. Henry Paulson? He will join Laurel and Hardy in the slapstick hall of fame. If we have time, we’ll slip in some observations on Bernanke from Brad DeLong, the Berkeley economic historian, and I think we have a list of Paulson pratfalls here somewhere.

So.

On to the numbers. This month we’ve put up inflation numbers that are flat as far as the eye can see, at one percent core and two point five headline. Those are optimistic. The pessimistic is to the downside now, with potential deflation looming.

And when I say we’ve put them up…. No. They are not yet on the website. That comes this weekend.

Then last week we predicted ten percent unemployment for Q2 of next year, again substantially more negative than others, but not as big a number as we might have. This corresponds to 15 percent in the more descriptive U-6 measure.

And today, we see Real GDP declining 3.5 percent in the fourth quarter, 4.5 percent in 2009 Q1 and another negative 3.0 percent in Q2 before recovering to -0.5 and then a positive 2.5 in Q4. To be fair, many forecasters see grim times in 2008 Q4. Ours diverge to the downside in 2009. Again, the post probably outlook is about half again as bad as we’ve put up here, and it is well within the realm of possibility that GDP measured rationally could exceed minus six percent annualized in one or more of the next three quarters.

As it is, our optimistic assessment suggests that before we climb back into positive territory on the back of huge public spending in late 2009, we will have experienced a recession lasting twenty-four months and costing four percent of output and three million jobs.

Our net real GDP number, which takes into account the federal borrowing that is typically ignored in GDP numbers — remember one hundred percent of growth under Republican presidents since 1980 has been borrowed — our net real GDP number is very grim. Minus 7.5 to 9.5 percent through 2009, meaning federal deficits of 6.5 percent of GDP — optimistically.

With that, on to the competition. How do the professional forecasters and the projections from the Fed governors compare to Demand Side?

With regard to GDP, the 16 Fed Governors at their October 28 meeting came in with projections predominantly in the zero to zero point three range for 2008. One lone voice saw minus 0.3 GDP growth and a couple held out for positive 0.4. Rember, this is for 2008, as projected two months before its end. These figures have been migrating downward over the year. I’m not going to go back and look it up today, but if memory serves, they go down about a point every quarter.

Demand Side, on the other hand, predicted a negative 1.75 percent for 2008 in November of 2007. And we keep complaining about the plus 2.8 in Q2, because it keeps our number from coming in right on the money.

If you look at the Fed minutes where they describe the governors’ projections, you see a bar chart illustrating the current projection and a dotted line around the previous projection. The Fed Governors are always moving completely out of their previous area. In this case to the left, downward.

For 2009, one observation remains in the dotted area, while 15 move out and downward. Still, as of the last days of October, all Fed governors came in at minus 1.0 or above for 2009. Demand Side projects a minus 1.75. It’s optimistic.

The experience is similar with regard to the unemployment rate. The Fed governors’ projections have consistently migrated out of the dotted area, in this case upward. Demand Side’s November 07 numbers correspond to the Governors June 08 numbers. To be fair, both the Governors and Demand Side have fled upward over the past few months. The 16 governors are now distributed around a 7.3 percent unemployment rate for 2009. Demand Side sees 8.5 in the offing. Optimistically.

In terms of inflation, the Fed’s governors are migrating downward along with the collapsing of demand, though not so dramatically as Demand Side did last time out. Headline comes in very low, both for the remainder of 2008 and for 2009 and out years. This is a deflationary projection and very inconsistent with the positive GDP numbers in those out years.

Core inflation — what we have argued is similar to wage growth — comes into line with headline in the Governors’ assessment in a manner that we have not seen since pre-Bush days. We don’t know what to make of that. We have continued to see deterioration in the labor market contributing to a differential between core and headline inflation, though we may have to revisit that next month.

Now, the competition with the professional forecasters surveyed by the Philadelphia Fed.

The purpose of this exercise is to emphasize that Demand Side’s forecasts have consistently outperformed those of the Fed and the consensus of forecasters. We apologize for not keeping our web site more up-to-date. On one hand, why change if we are still to the good. On the other, why be accurate if you are not relaying that information to people who can use it. Once again, we’ll be up with the new numbers and charts on Saturday.

I guess it has been our preoccupation to prove the Demand Side strategy as being better, not because of any particular brilliance on our part, but because we are using a far superior conceptual description of the economy and we are avoiding the error of applying the tools of thermodynamics to human behavior. On the web site, you’ll see our history of past calls and so on. As I think about it right now, however, it seems that is not very useful.

What I think we’ll do is put up the optimistic forecast along with the policy moves that make that optimistic forecast possible. Then, on a separate page, we’ll put up a baseline forecast, which takes into account only those policy moves that have been enacted or are clearly in the making.

Back to the Philadelphia Fed. Again, the professional forecasters have been migrating toward the Demand Side numbers. For example, in the spring, the consensus called for a positive 2.8 GDP growth in Q4. Demand Side in November 07 saw a minus 2.5. Now in the fourth quarter, the consensus has moved fully 5.7 points to the downside in six months and sees a minus 2.9. I guess since we’re already one month into Q4, the issue is clearer. Make a point that Demand Side has moved down now to minus 3.5.

The average for 2009 growth is forecast by the consensus to be minus 0.2 percent. That is down substantially from their plus 2.8 percent six months earlier. Six months before that, however, Demand Side projected 1.1 percent growth for 2009. In August it became clear that the authorities were blundering around and we revised that down to minus 1.0 for the year. Our current figure is minus 1.75.

Okay, to finish up. The consensus of professional forecasters six months ago predicted an unemployment rate of 5.2 percent for Q4. Now that we’re halfway through it, those forecasters see a 6.6 percent unemployment rate. Again, a year ago we saw 6.0 for Q4. Now we project optimistically 7.5 percent. For 2009, Demand Side sees an average of 8.0 percent. Survey says 7.4 percent. Notably in the second quarter, when we call for a 10.0 percent rate annualized, the survey says only 7.4.

So, enough of that. It’s much better visually. Look for it by Sunday at Demandside dot net.

Now, keep in mind, our divergence will be much more extreme in the baseline because we factor in the crash which has wrecked the financial system, which you might date from the Lehman Brothers bankruptcy in September. We treat as historical fact the ineffectiveness of monetary policy, the compromise of the Fed’s balance sheet, and the ineptness at the Fed.

There’s nobody who knows Wall Street better than Henry Paulson. But Paulson is no Joseph P. Kennedy, who was an operator turned public servant who knew where the bodies were buried and earned the trust and respect of the nation.

Likewise, nobody knows the Depression like Ben Bernanke. Both of these guys were supposed to be the right person forr the job. Bernanke’s save the banks at all costs strategy has now placed monolithic zombie institutions at the center of the financial sector. There are no economies of scale for banks. In fact, there are diseconomies, as the Federal government gets dragged into the pit by insuring them.

Again, it is our view that the banking function can only be saved by returning to the Glass-Steagall system, where nobody was too big to fail and there were no bank holding companies, but businesses that operated in highly segregated markets of commercial banking, insurance, brokerage and investment banking.

We anticipated the recession because we saw that the economy was fundamentally weak under the credit slash housing bubble. We anticipated the commodity inflation because we saw the commodity bubble. Now we are anticipating the depression because we see the crash.

You can see it too, if you look up the Calculated Risk web site and find the chart comparing the major crashes since 1929. You’ll see that as of this 300th day of the bear market, stocks are off more faster than even in the 1929-32 downturn. Thanks in major part to the collapse in the past 45 days.

The chart shows a total 48.5 percent drop to date. The total drop in the 1973 oil crisis market was 48.2. The tech crash of 00-02 took twice as long to get only .6 percent deeper.

It may well be that the 70 percent consumer will need to become the 50 percent consumer, and the 30 percent public sector will need to become the 50 percent public sector to bring us out of this.

But that’s another day.

Taking us out is Nouriel Roubini

ROUBINI

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Roubini, Stiglitz, structuring the oil market, and George W., “Idiot of the Week” ……………… Nouriel Roubini’s 20 stresses

a postscript from Joseph Stiglitz on how it has gone global

Our short list of remedies

and regulation may be necessary to prevent excesses and fraud, but we need to restructure markets for other reasons — to make them efficient.  We’ll take a peek at the oil market.

And last but not least, Idiot of the Week.  Somewhere in Texas a village is missing its ….

Now a short form of Nouriel Roubini’s  RGE Monitor:

One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

· The US consumer is shopped-out …

· The US consumer is saving-less …

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to … 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising …

· The value of housing wealth is now sharply falling …

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. …

· The value of the equity wealth of US households has fallen by almost 50%,…

· The credit crunch is becoming more severe … [and] is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. …

· Consumer confidence is down …

· Real wage growth and real income growth has been stagnant …

· The Fed is reaching the zero-bound on interest rates …

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… .

· Tax rebates of over $100 billion failed to stimulate real consumption earlier … another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around [it will be different] (see our note from Joseph Stiglitz below)

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households …

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US …

· With consumption being over 71% of GDP a sharp and persistent contraction … implies a more severe recession than otherwise. …

· Monetary easing will not stimulate durable consumption and demand for residential housing ….

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling….

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollars. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”.

Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) as the last two and worse than any other post WWII recession.

Adding another implicit in Roubini’s analysis and from his testimony before the Joint Economic Committee a couple of weeks ago, big new fiscal stimulus is essential immediately (which seems less and less likely to occur).

Absent this stimulus to arrest the collapse of demand, investment and prices, several more pounds of flesh and muscle and bone will be extracted from the economy before January 20.

Joseph Stiglitz writing in Spiegal Online

under the title

Global Crisis — Made in America

A global financial crisis requires a global solution. Uncoordinated macro-economic policies, for instance, have contributed to Europe’s problems. When the European Central Bank refused to lower interest rates earlier this year, focused as it was on the threat of inflation, while America’s did, focused on the impending downturn, it led to a stronger euro. This in turn contributed to Europe’s downturn, though it made America’s GDP numbers look better for a while. Now, Europe’s downturn is ricocheting back on America: Europe’s weaknesses are contributing to America’s.

The same has happened when it comes to regulation. To too great extent, there has been a race to the bottom in accordance with the myth that deregulation breeds innovation. Instead, the innovation was greatest when it came to getting around the regulations designed to ensure good information and a safe and sound financial system.

Financial markets are supposed to be a means to an end — a more prosperous and stable economy as a result of good allocation of resources and better management of risk. But instead, financial markets didn’t manage risk, they created it. They didn’t enable America’s families to manage the risk of volatile interest rates, and now millions are losing their homes. Furthermore, they misallocated hundreds of billions of dollar.

…. Joseph Stiglitz

***

On November 7, the Center for American Progress opined in its thought for the day.

The full set of policies we need can be divided into four categories: stabilization, stimulus, recovery, and growth—an agenda that will deliver the prosperous economy we all desire. ***

Which leads to our list, familiar to listeners:

Stabilize  home values through the many means already suggested.

Two:

Reduce debt burdens of homeowners, credit card holders, and other consumer debt holders.

Three:

Prevent further damage to States and Municipalities by filling the holes in their budgets with federal grants and loans.

Four:

Help the stressed through extending unemployment benefits and increasing food stamps.

Five:

Large, new infrastructure projects, with ongoing funding

Six:

Enact universal health insurance

Seven:

Fully fund alternative energy R&D

Eight:

Follow through on the volunteer corps idea for supporting college education

***

There is a lot of concern and there should be that spending cannot ignore the federal budget.  In particular, it would not be a good idea to undertake the ongoing infrastructure projects without identifying the funding.  We’ll leave aside the necessity for huge new infrastructure to combat global warming.  Economically, infrastructure spending would have immensely greater impact as stimulus and recovery if it were clearly seen as being long-term, not flash-in-the-pan.  It would leverage private investment by companies tooling up and positioning themselves to contract for the infrastructure.  It would create stable, community-building jobs and job bases.

At the same time the energy market needs to be structured.  We’ll get into this need to structure markets in a more general way soon.  But in particular, with regard to infrastructure financing, the auto bailout and global warming, let’s consider energy.

The oil price is too low.

In full view of the collapse of the environment, coal and oil are priced at the cost of extracting, distributing and collecting profits.  Not one cent of the price reflects the cost of killing the planet.  Absent the price signal, the First Law of Economics dictates that consumers will overuse fossil fuels and under-use alternatives.

The American auto fleet needs to be turned over into fuel efficient cars.  Absent a clear price/cost need, in a down economy, people will cling to their SUVs and simply drive them less if the price of oil goes up.

The economics of alternative energy investment needs to be strong.  It is weak in a cheap gasoline market.

When the price signal is broken, the market is broken.  The market itself occurs in the moment of purchase and sale, which includes the price and the participants.  A stable market structure creates standardized products and transparent terms for this transaction.  A fully functional market includes all costs, but they need to be included in this moment, or the market is not fully functional and a non-market mitigation mechanism has to come into being.

There is compelling reason to introduce the costs of burning fossil fuels into the price that is charged for gasoline.  We can do that by instituting a stiff tax on a per-gallon basis.  We should encourage states that do not already do so to extend their retail sales taxes to gasoline.

In 2007 the blue ribbon commission on surface transportation reported to the Congress that a gas tax of ultimately 83 cents per gallon, phased it, would provide $250 billion dollars per year for 50 years.

In funding infrastructure this way, we are essentially trading imported oil for domestic jobs and creating an efficient, sensible, sane base to our economy.  It would structure a useful market which included all costs and was not run for the benefit of well-connected corporations.  But even if the gas tax money were returned to the taxpayer in the form of rebates on other taxes, it would structure an energy market that worked.

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Now, speaking of the corporate connections, idiot of the week

Unfortunately for George W, there are no WMDs and there is no free market.  Were we to substitute something like corporate dominated market or corporate oligarchy for free market, it would come much closer to reflecting reality and also Bush’s believes.

But whatever you call it, it has failed.  It is appropriate only for nostalgia, a newsreel, to broadcast such a speech.  Highly inappropriate for the lead-in to the G-20 meeting where the victims of the current scheme were gathered to assess survival possibilities.

Whatever you call it, it has failed.  The Bush hands off the market has failed.  Tax cuts as a route to prosperity has failed.  Bush has been the front man for the most inept, corrupt and intellectually vapid administration in modern history.  He has led the nation and the world into blind alleys on the environment and the economy.  He has not only disembowelled American prosperity, but its integrity and its standing in the world as well.  He leaves with the economy in flames, and his last act is to obstruct the fire department from reaching the scene.

George W. Bush.  Idiot of the week.

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