Bankers and regulators have not come anywhere close to responding with necessary vigor to the worst economic crisis in 70 years. There is a lot of evidence that financial weaknesses brought us to the brink of a great depression... The proposed changes are like a dimple
—Paul Volcker, from his anti-Tim Geithner, anti-Larry Summers Bankers Shame World Tour
You may ask yourself, How did I get here? ...
Into the blue again
After the money's gone...
And you may ask yourself
How do I work this?
And you may ask yourself
Where is that large automobile?
And you may tell yourself
This is not my beautiful house!
And you may tell yourself
This is not my beautiful wife!
Same as it ever was...Same as it ever was...Same as it ever was...
—Talking Heads, Once In A Lifetime
This is my last column for 2009. The past year was notable for what didn't happen. In 2008, oil hit $147 a barrel and the financial system melted down. It was an election year featuring the most important contest since Franklin Delano Roosevelt defeated Herbert Hoover in 1932 to become the 32nd President of the United States. Illinois Senator Barack Obama, a relative newcomer, was swept into office on a wave of Change We Can Believe In. The stage seemed to be set for major reforms in areas of dire need, for initiating the long, painful transition to a sound economy, for a new way forward in 2009.
And then nothing happened. It was just more same old same old. It was as if Bush & Company had never left. (Time's Man of the Year Ben Bernanke never did leave.) In a Bush-like demonstration of his resolve & toughness, the President recently escalated the war in Afghanistan. %^#%@&! No foreign occupier, from the 19th century invasions of the British to the Soviets in the 1980s, has ever won a war in Afghanistan. There's not even any oil in Afghanistan!
It was as if the oil price shock had never happened. Those charged with guiding energy policy decided to solve our oil problem through long-term science projects that may never pay off. The people Obama appointed to guide economic policy were obviously there to serve Wall Street's interests, so bailed out Too-Big-To-Fail bankers were still running the show. Wall Street made record profits while working stiffs found themselves out in the cold. Unemployment hit levels not seen since World War II. Job losses are continuing despite flawed government reports to the contrary. Foreclosures went up and up.
Nadda, zilch, zip—No Change We Can Believe In was clearly the biggest story of 2009.
Things didn't stay the same, they got worse, as they are bound to do when you pile one outrage on top of another. Here's a perfect example that just came to light. Based on a Washington Post story, Barry Ritholzt reports that the Citigroup TARP Repayment is A Tax Dodge—
The ongoing transfer of wealth from the middle class to the top 1% continues unabated.
The Treasury Department, via the IRS, has made a terrible deal with Citigroup for TARP repayment: They repay $20 billion in TARP money, and in exchange we give them keep $38 billion in tax abatements.
The looting of the Treasury, begun in panic under George W. Bush, continues in ignorance under Barrack W. Obama. [My note: I don't think it's ignorance, Barry.]
“The government is consciously forfeiting future tax revenues. It’s another form of assistance [to Citigroup], maybe not as obvious as direct assistance but certainly another form. I’ve been doing taxes for almost 40 years, and I’ve never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts.”
—Robert Willens, an expert on tax accounting
We can talk about Peak Oil, Climate Change, Reform of Health Care or Reform of Big Finance until we're blue in the face, but without the possibility of meaningful policy changes, it's all for naught.
I believe 2009 was a year we will live to regret. I will speculate on some of the possible consequences of No Change at the end.
A 2009 Theme — Economy and Oil
This year I spent a lot of time trying to dispel the notion that an immaculate economic recovery is just around the corner. The American economy has been unsound, is unsound and will remain unsound under current policy. I am particularly struck with how similar optimistic attitudes about future GDP & jobs growth are compared to equally delusional glass-half-full views of our oil future.
I have also tried to show that an extended downturn in the global economy takes the peak oil question off the table for some time to come. I am not saying the oil supply problem has been solved; it has merely been postponed. A prolonged downturn in global oil demand pushes new oil price shocks some years into the future (Figure 1).
Figure 1 — My schematic showing the timing and severity of future oil shocks. I believe the next one is due around 2012 ±1 Year when demand once again rises enough to test the available production capacity.
Oil consumption in the United States was down to 18.499 million barrels-per-day the last time I looked (last week). The high point was August, 2006 when demand reached 21.434 million barrels. That's nearly a 3 million barrel-per-day difference. My idea back in 2006 was for America to reduce its oil consumption by providing alternatives to oil, not by blowing up the economy. A crash was already in the cards in 2006, but I didn't know it.
The sole reason for being concerned about a ceiling on the future oil supply is its recessionary effects on world economies over time. The bad news is that we're in a prolonged global economic recession now, a downturn that was partially triggered by an oil price shock but whose underlying cause was a decades long credit/debt explosion that culminated in the collapse of the Housing Bubble. Over-leveraged banks and consumers fueled enormous, unsustainable consumption.
It was our spendthrift consumption that caused a massive spike in global oil demand, which in turn exposed the oil supply ceiling we've seen since 2004. We pushed tomorrow's demand forward. We spent tomorrow's money today. Now it's time to Pay The Piper.
I share this view of an economy crippled for some time to come with that well-known radical Paul Volcker, who recently did a lengthy interview with Der Spiegel.
SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?
Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis...
SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.
Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy...
Volcker: It's amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It's hard to deny that we need some forward looking financial reform.
I took on Volcker's challenge throughout 2009: I tried to squash that pervasive warm & fuzzy feeling that the economic crisis is over, that the miracle of unfettered economic growth will pick up where it left off.
Decline of the Empire
In the past I have portrayed unwarranted optimism in terms of an almost religious faith in human cleverness. But that's not the whole story. Such optimism often masks deceit, which is another big part of the Human Repertoire. The obvious ineffectiveness & corruption of our society's governing institutions comes to mind. You may recall President Obama's remarks in his first address to Congress on February 24, 2009—
The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins...
You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.
But credit has stopped flowing the way it should.
Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.
That is why this administration is moving swiftly and aggressively to break this destructive cycle, restore confidence, and re-start lending... we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times.
... I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you – I get it.
[My note: I first commented on this back in No, We Can't?, written on March 5, 2009. God knows, that seems like a long time ago. And yet my thesis was correct in every way. I don't need the "?" in the title anymore.]
No, Mr. President, I still don't think you get it. These statements are deceitful in so many ways that it's hard to sort them all out. And the fact that Obama made these statements in February at the height of the so-called "credit crisis" does not excuse them, as Salon's Andrew Leonard contends. Obama's story was wrong then and it is wrong now.
The major banks that Americans depend on? America's dependency on the "major"—Too Big To Fail—banks is the problem, not the solution. Taxpayers have now assumed the financial risk when these banks fail. But the banks themselves have not been forced to change the way they do business. We will be on the hook when they blow up again sometime down the road if people like Tim Geithner get their way.
In so far as our dependency on these banks is nothing to be concerned about, I guess we needn't worry that they are getting bigger (Figure 2).
Ensure that the banks have enough money? Problem solved! They are not having any problems making money now.
Meanwhile, in the U.S., our less-vibrant recovery is also being driven by government spending, but our banks aren't lending. Still overloaded with bad loans from the boom, and still finding relatively few companies and consumers with the capacity to borrow more, banks are hunkering down and buying risk-free Treasuries.
Part of the problem is that buying Treasuries is a safe way to make pots of money right now: You can borrow at 0.25% and lend at 3%+ and make a huge spread with little risk. So banks have little incentive to take more risk by lending to private borrowers who are still in a tenuous position, especially with the banks' balance sheets still in disarray.
Obama's promise is being fulfilled. The Federal Reserve is ensuring that the major banks Americans depend on ... have enough money by lending them money at virtually no cost, which allows them to make 3% or more on longer-term Treasuries or other riskier investments via the dollar carry trade. Not only does this re-capitalize the banks, but it allows the Federal government to support its ever-growing debt by subsidizing bank purchases of that debt. A clever sleight-of-hand!
If the banks decide not to invest the hefty reserves they hold at the Central Bank, reserves the Fed printed money to create, the Fed will now pay interest on those reserves. There is so such a thing as a free lunch!
Credit is the lifeblood of the economy? Only if credit supports the production of wealth-creating goods & services, good paying jobs, and savings that support future investment. If credit exists to support debt-based consumption and bank profits, bankruptcy must be the end result.
If it weren't for the massive infusion of printed from the Fed & borrowed money from the Treasury, America's bankruptcy would be obvious for all to see. See my Don't Buy Stuff You Can Not Afford. Enlarging public debt to solve a problem rooted in excessive private debt merely kicks the bankruptcy can down the road.
The President was careful not to say Debt is the lifeblood of the economy. Debt, once it becomes excessive, is a burden for Main Street, not its lifeblood. On the other hand, crushing debt is the lifeblood of Wall Street.
The President wanted those banks to be confident once again. We know what happens when the banks are confident: they charge usurious rates of interest on misleading upwardly-adjustable loans. Or they create opaque "risk-free" financial instruments to disguise the over-leveraged bets they make during the Bubbles Fed monetary policy encourages.
Paul Volcker, chairman of the President's Economic Recovery Advisory Board, said Tuesday that he hadn't seen "a shred of evidence" that recent innovation in financial markets had provided any benefit to the economy. ... Dismissing recent innovation in derivatives, Volcker said, "The most important financial innovation I've seen in the last 25 years is the automatic teller machine."
[My note: In A Short History of Financial Euphoria, John Kenneth Galbraith puts the lie to the idea that financial "innovations" are something other than new ways to disguise excess leverage.]
Whenever you hear the complaint that banks are not lending, bear in mind that few Americans are demanding more credit. Small businesses are not in trouble because they can't get loans. Small businesses are in trouble because they lack customers.
President Obama’s plan to help small businesses create jobs is drawing lukewarm reaction among small business owners, who are grateful for the help, but believe the initiative misses the forest for the trees.
While the plan tries to assist small businesses by providing tax incentives for hiring and borrowing money, it doesn’t address the fundamental problem many businesses face—a lack of sales.
Few business owners are likely to take out loans to buy inventory or spend to expand their operations and hire new workers—no matter how sweet the incentives—until they see an increase in consumer demand. But consumers are unlikely to spend more because they don’t feel secure in their jobs and real wages aren’t climbing.
Look at the data regarding commercial and industrial (C&I) loans for small businesses (< $50 million in sales) collected by the Fed in a recent survey (Figure 3 and Figure 4).
Figure 3 — Small business demand for C&I loans. 44.6% of respondents say their loan demand is moderately weaker, while only 8.9% say it is moderately stronger.
Figure 4 — Available lines of credit for small businesses. 85.5% of respondents say lines of credit remain unchanged, while only 8% of banks have tightened available credit.
Obama's remarks to Congress described the rationale—I should say the pretense—for making the Big Banks whole at taxpayer's expense. Obama's view that America will have a credit-driven recovery reflects a Finance-centric view of the American economy. He gets this idea from Tim Geithner, Larry Summers, and other Friends of Bob Rubin. The President is responsible for this farce because he hired these people.
One of these corrupt noteworthies, Larry Summers, recently told us job growth would resume in the spring of next year.
"I believe that, as do most professional forecasters, that by spring, employment growth will start to be turning positive," Summers told ABC's "This Week." "Make no mistake, we were losing 700,000 a month when President Bush turned the economy over to President Obama. The number last month was 11,000," he said.
"These things happen in stages," he said. "First, GDP goes up. That has happened. Then, hours that are worked by workers who already have jobs go up. That's starting to happen. Then employment goes up. We got very close to that this year, this month, with only 11,000 jobs lost. And then unemployment starts to come down. ... Most professional forecasters are now looking for a return to job growth by spring."
Summers also said the recession was over. "Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be," Summers said on ABC.
[My note: Rolling Stone's Matt Taibbi reports that "the president's economic czar, Larry Summers, was paid more than $5.2 million in 2008 alone as a managing director of the hedge fund D.E. Shaw, and pocketed an additional $2.7 million in speaking fees from a smorgasbord of future bailout recipients, including Goldman Sachs and Citigroup." In other cultures, excessive "speaking fees" are called "bribes."]
The level of dishonesty in his remarks to ABC is breathtaking. Contrast this drivel with what Paul Volcker said above.
Summers cites the Bureau of Labor Statistics jobs numbers to demonstrate the effectiveness of Obama's economic policies. It is utter nonsense to claim that only 11,000 jobs were lost in November. To cite only one counterexample, the private data collecting firm Automatic Data Processing, using a far more extensive database than the BLS' survey, announced that 169,000 jobs were lost in the private sector in November, 2009. The BLS put the number at 18,000.
The President had made sure that an economic policy of the bankers, by the bankers, and for the bankers did not perish from the United States. Americans are being played for suckers—it is a confidence game, a con, carried out by the "major banks we depend on" with the direct support of the Federal Government, which is no longer distinguishable from the banks themselves.
Ineffectiveness, bad faith and corruption are endemic in America's public institutions. Our hijacked government can no longer be an agent of meaningful change. The Vicious Circle of Futility I described in Decline of the American Empire now appears to be a permanent feature of the American landscape. (Figure 5 with the original caption). Also look at Decline of the Empire—Now What?
Figure 5 — As problems become more intractable over time, our resistance to making real changes to confront those problems, our social inertia, becomes more entrenched. Thus the solution to debt-based economic problems is more debt. The solution to liquid fuels problems is marginally more fuel efficient cars, not alternatives to driving. We study an expansion of the rail system instead of building one to provide an actual alternative to flying or driving between cities. We dream of hypothetical biofuels in the far-off future to solve an oil supply problem in the here & now.
Decline of Empire stuff pops up everywhere you look. For example, USA Today reports that For feds, more get 6-figure salaries.
The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data. Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted...
When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.
The trend to six-figure salaries is occurring throughout the federal government, in agencies big and small, high-tech and low-tech. The primary cause: substantial pay raises and new salary rules.
Salaries for federal civil servants are soaring as tax receipts plunge and deficits explode. Main Street is reeling. Do you want to say this is inappropriate? crazy? outrageous? That Our Nation's Capital is killing the Golden Goose is nothing new. This has been going on for years now.
The Department of Transportation could play a major role in weaning America off foreign oil if it were tasked with doing so. We obviously have an oil problem. Most of the oil we consume is used in transportation. But the Decline of Empire solution is to ignore our perilous oil dependency and pay DOT employees more money during the worst economic downturn since the Great Depression.
The List Again
It is hard to stand idly by and watch this country go downhill. Without further ado, I give you The List from my Paul Krugman's Free Lunch Theory. I've added a few new items at the end.
The United States is an economy & a society*
- whose automobile industry is a shambles
- whose manufacturing base has been in decline for decades
- where “full” employment (~5%) likely will not return until sometime in the 2016-2020 period
- where non-wealth-creating consumption (PCE) makes up about 71% of GDP
- whose total (public & private) debt-to-GDP ratio is north of 350% and is now rising faster than defaults, asset sales or payments can pare it down due to increased public debt (or 240% if you don't double count banks loans to (non-financial) private firms)
- where real income actually declined over the last decade
- where “over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.”
- where home prices, which were the principal source of household wealth in a bubble economy, have likely not yet hit bottom
- where household wealth has fallen precipitously as a result
- whose overbuilt residential investment sector (new housing) will stagnate for many years to come
- where there are 23.1 square feet of shopping center space for every American
- where rising health care, food and energy costs are eroding household disposable income
- where over 45 million Americans lack any kind of health insurance
- where the cost of an college education has increased far in excess of the inflation rate for decades
- where wealth & income inequality is at its highest level since 1928
- where 49 million Americans went hungry at some point in 2008
- where 1 in 8 Americans and 1 in 4 children receive food stamps
- where total bank credit of all commercial banks is contracting, not expanding
- where several regional banks fail each week
- where the government insurance system for depositors (FDIC) is insolvent
- where “enormous budget deficits in nearly every State in the Union are ‘wreaking havoc’ on government employees, the services they provide, and the residents who need them most”
- where the Central Bank (aka “the Fed”) is accountable to no one, and is thus free to print money for any purpose it deems important, including monetizing the debt or bailing out too-big-to-fail (TBTF) banks
- where Congress has been “captured” by those they must regulate across all industries, and so does literally nothing or practically nothing in the name of reform
- where the Executive branch of government (i.e. the Treasury) mostly serves the interests of highly over-leveraged TBTF banks
- whose politically powerful TBTF banks drain huge amounts of capital away from wealth-creating activities
- whose negative current accounts (trade) balance exploded during the years leading up to the financial crisis and still shows a substantial deficit (exports versus imports)
- whose declining oil production peaked in 1970
- whose concomitant dependency on oil imports has been rising for decades (see trade balance)
- whose government debt must be funded by Asian & European central banks and oil exporters
- which is involved in one costly but pointless occupation (Iraq) and one pointless but costly foreign war, and is on the verge of expanding the war (Afghanistan)
- which does not have a functioning private real estate market
- whose main sources of mortgage financing, Fannie Mae and Freddie Mac, are now wards of the state which require constant infusions of taxpayer money to keep them afloat
- where "we're all subprime now!" — the Mortgage Bankers Association believes foreclosures will peak in 2011
* Not all items are documented (linked), but ample documentation could be provided.
Perhaps some of you can send this article, or just The List, to others. Pass it on. Every time tells you that a miraculous recovey is just around the corner, have them read The List and then ask them what they think.
I said that 2009 will be a year we will live to regret. (And if you don't live to regret it, then all your regrets are over.) I will finish up by listing some reasons why regret lies in our future. Here they are in no particular order—
- Fiscal & monetary irresponsibility will keep the dollar in free fall. See my The Future of the Dollar. The devalued dollar will erode the purchasing power of your savings (inflation). State & Federal tax receipts will plunge while GDP remains stagnant. This can mean only one thing: new taxes for you! (Somebody has to pay those exorbitant government salaries—why not you?—assuming you're one of the lucky ones with a job.)
- The longer the Fed puts the pedal to the metal on short-term interest rates, the more likely new bubbles become. The S&P 500 already appears to be in a bubble, despite Ben Benanke's denial (see Q&A #61 in his replies to Senator Bunning.) Asian real estate markets are quite bubblicious. The first rule of Bubbleology is: All bubbles crash. And when they do, the take the rest of us down with them.
- With an unreformed Financial system running the show, and with the Oligarchs getting more and more powerful, another blow-up of the America's banking system is inevitable. It is not a question of whether this will happen, it is a question of when this will happen.
- Resistance to putting our economy on a sound footing translates into fewer new jobs, many fewer good paying jobs, and stagnant or declining wages. We will become the new Japan, 1990s-style (except we won't have a thriving American market to export to.)
- As the economy continues to stink due to our inaction, a nasty reactionary turn in our politics becomes more and more likely. The Empire will continue its downward trajectory, but now it will have a fascist bent. The outcome of 2012's election may make things much, much worse (if you believe that's even possible, but of course it is.) New wars are likely. All the oil out there is our oil.
Maybe I'm being too pessimistic. Senators Maria Cantwell and John McCain want to reinstate the Glass-Steagall Act. This Depression Era legislation would have prevented bank holding companies ("regular banks") from using depositor money to gamble on mortgage-backed derivatives (e.g. collaterized debt obligations, or CDOs). These derivatives blew up after the Housing Bubble crashed.
Larry Summers, along with Bob Rubin and Alan Greenspan, was instrumental in pushing for the deregulation that enabled the financial meltdown, including the repeal of Glass-Steagle in 1999.
Is there reason to believe things will get better? I'll believe it when I see it. So, for now, it's...
This is my last column in 2009. To all my readers, thanks for putting in the time. I hope it was worth your while.
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