by Damozel | The economic unravelling has felt a bit to this ignorant layperson a bit like being diagnosed with a dire illness: at present we've still seen---relatively speaking---mild initial symptoms; and though we've been bluntly advised that there is much worse to come, we're all still in the emotionally numb early stages before the effects really kick in. Will we be able to cope with the pain? we try not to ask ourselves. We're not used as a nation to pain. And will we recover? Yes, they are telling us; provided that we change our way of life. Our way of life! Can we? It's the only one we know.
Nobel prize winning economist Paul Krugman (yes, I do plan to refer to him in that fashion for a long time to come) says it's now clear that rescuing the banks was only the first step: there's lots more to come. Now it's the nonfinancial economy that needs emergency aid. (NYT)
Just this week, we learned that retail sales have fallen off a cliff, and so has industrial production. Unemployment claims are at steep-recession levels, and the Philadelphia Fed’s manufacturing index is falling at the fastest pace in almost 20 years. All signs point to an economic slump that will be nasty, brutish — and long.
How nasty? The unemployment rate is already above 6 percent (and broader measures of underemployment are in double digits). It’s now virtually certain that the unemployment rate will go above 7 percent, and quite possibly above 8 percent, making this the worst recession in a quarter-century.
And how long? It could be very long indeed....
Now the housing bubble has burst in turn, leaving the financial landscape strewn with wreckage. Even if the ongoing efforts to rescue the banking system and unfreeze the credit markets work — and while it’s early days yet, the initial results have been disappointing — it’s hard to see housing making a comeback any time soon. And if there’s another bubble waiting to happen, it’s not obvious. So the Fed will find it even harder to get traction this time. (NYT)
Krugman argues that the right thing for the government to do is step in. Time to put aside the conventional wisdom about spending, he says; "concerns about the deficit should be put on hold." (NYT) As he points out, a John McCain spending freeze wouldn't do the job.
[T]here’s a lot the federal government can do for the economy. It can provide extended benefits to the unemployed, which will both help distressed families cope and put money in the hands of people likely to spend it. It can provide emergency aid to state and local governments, so that they aren’t forced into steep spending cuts that both degrade public services and destroy jobs. It can buy up mortgages (but not at face value, as John McCain has proposed) and restructure the terms to help families stay in their homes.And this is also a good time to engage in some serious infrastructure spending, which the country badly needs in any case. (NYT)
As someone whose childhood hometown---where my mom still resides--- was picked as Forbes' Magazine's most vulnerable town in America to the recession, I'm feeling a certain tranquil despair over the thought of what's to come. It's been some years now since the town's major industry packed up and sent all its jobs overseas, but unemployment is now over 12%, and the deleterious effects on this sleepy little [former] mill town are quite apparent when I go home to visit.
I would like to feel some hope that Obama and the Democratic Congress so feared by The Wall Street Journal will find short-term solutions that will help my little town (and the rest of us) get all of us through the worst of what's to come with as little pain as possible. I think we all realize there will BE pain. We've just not reached the point where we're all feeling it yet.
I'm not sure Bush's pep talks are going to be enough, you know? In fact, it's sort of a joke; I keep wanting to hear him say, "Wall Street got drunk" one more time, like he did back in July before we could quite believe we were ailing as badly as we clearly are.
One of the more bearish commenters at Calculated Risk explained why we're nowhere near rock bottom yet.
Remember the following shoes to drop:
- Continued deterioration of housing; upstack to alt-A, Option ARM, Jumbo Prime, prime
- Commercial Real estate bust
- Surge in credit card defaults
- Bankruptcy of auto manufacturers
- CDS implosion
- Bursting of the bond/treasury bubble
- Rising unemployment, providing a negative feedback loop for all of the aboveEven if all of these don't come to pas, we have much pain ahead. Mr. Market hasn't priced in the full extent of the damage. (Comrade Gavshire Hathway)
At the start of the Depression, President Hoover kept trying to balance the budget - by cutting spending and raising the top marginal taxes from 25% to 63% - while the economy kept getting worse. It's unlikely that balancing the budget will be a priority in 2009.
I don't know. I just hope that the only very faint silver lining will materialize and we'll see some reasonable regulation (and enforcement) put into place.
The Agonist has a number of suggestions for improving the system. Among them are requiring the cadre of wealth-manipulate to be properly educated about how the system works and teaching them the concept of "fiduciary duty."
I would make it mandatory for all bankers, hedge funds, all bank employees and executives and pretty much anyone who works in a 'securitized' or derivative market to get licenses to work in the securities market, whichever aspect of the market they choose to work in. Why? Well, for starters, to prove they have a basic understanding of what it is they are dealing with. You want to write CDSs? Well, you have to take a test proving you understand the risk to your institution and the counter-party. You want to securitize home loans? Credit cards? You take a test proving you understand the process. Why? So you gain insight into when it might, just might, be getting a little out of whack....
Another key reason for this is that all of them need to relearn the idea of "fiduciary responsibility." When I was an asset manager I was on the hook if I accepted 'little grannies' order for writing 1000 call options on her deceased husband's Exxon stock. If it was not in her interest I couldn't take the order. And believe me, this happened more than you think. And I lost a lot of clients because of it. (Of course, there were also guys who didn't care, but they usually washed out of the business quickly enough.)...
Finally, everyone in the investment business, instead of having to take obligatory exams on new bullshit Patriot Act money laundering laws--which actually made it harder for new business to start up, not to mention the fact that anyone with half-a-brain and a sound understanding of fiduciary responsibility knows who's laundering and who's not--should take mandatory classes on financial prudence, what systemic risk is, what causes it, etc. . . .
Amen to that. I can't understand---being only an ignorant
layperson---how it is not a gross breach of fiduciary duty for
corporate Boards of Directors to allow executives to drain so much
money from their companies. The more I learn about that culture, the
more I'm astonished. What, specifically, do these people do that
makes them worth so much more than other people whose contributions to
society are so much easier to verify?
Clearly, the domination of American industry by mind-bogglingly over-compensated corporate freebooters is going to have to end. Deb's commented on this numerous times. The Agonist, listing suggestions for economic reform, says very much the same thing Deb's been saying for weeks.
It is simply obscene that Lehman Brother's filed for bankruptcy but in those proceedings their executives were allotted $2.5 billion in bonuses. Are you fucking kidding me?...They should disgorge every last penny possible from Fuld, the former CEO. And they've already found a work-around for the executive compensation limits Congress enacted, in case you were curious. Who would enforce these provision? Well, one would hope the Justice Department would, although it's probably been FEMAfied to the point of emasculation.
Finally, The Agonist suggests that we put some of the bite back into anti-trust law. Yes, why haven't these been enforced? Never mind; that's actually one question I know the answer to, thanks to Deb. And I agree with this:
If it is too big to fail, it is too big to exist. I repeat: if it is too big to fail, it is too big to exist!
Enforce anti-trust. Break up Wal-Mart, the media conglomerates, the mega-banks, the mega-retailers, Microsoft and quite possibly Google. ATT? You bet. Other phone and cable companies? Oh yeah. We're not a national-socialist state, but we're getting there. Let's have real competition in key markets! No more duopolies (like Wal-Mart and Costco) or the cable companies, or the phone companies. Remember how prices for telecommunications fell through the floor in the eighties and early nineties because there were 7 or 8 good telecom companies? Enforce anti-trust laws so we have real competition. The laws are already on the books and this is not anti-capitalist. Just ask Teddy Roosevelt!
Yes, "the conservative's Roosevelt" took great pride in being a trust buster. Let's bust up some of those giant conglomerates. As a quality-of-life side effect, we'll start having choices again.
And we'll doubtless have to look back at "the liberal's Roosevelt" too. Roosevelts for everyone!
For me, the silver lining in all this---faint though it be---is that it is an opportunity for Americans to start reexamining our financial system so that we can eliminate the rot and excess. We've all become pretty detached from one another and our communities---maybe this will force us to start pulling together again. Anyway, I am going to hope for this. What else is there to do?
Memeorandum has more on the Krugman piece.
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We do need to change our way of life.
In particular, we need to stop letting the wealthy get wealthier while the rest of the nation gets poorer. They can get wealthier only if the rest of the nation does, too.
That one change in the way we live would do wonders for the financial crisis.
Posted by: Charles | October 17, 2008 at 07:49 PM