text:
Fed Chairman Ben Bernanke confessed he was puzzled by the economy's weakness, "admitting that the recovery was weaker than expected and that beyond temporary factors like supply chain disruptions in Japan and high energy prices, he was at a loss as to what was causing the soft patch." The Soft Patch Spring of 2011 follows the Summer Swoon of 2010, according to a Credit Suisse analysis.
Concerns about a soft patch in the economy are intensifying, and with good reason. Payroll growth stumbled badly last month, and the ISM Manufacturing Index fell sharply. First quarter GDP was soft and recent figures raise doubt about a widely forecasted Q2 rebound. The stutter in the economic data is reminiscent of last summer's "double-dip" scare, which, in hindsight, turned out to be a garden-variety growth slowdown.
… The current slowdown, as of now, appears less dangerous than the one that we experienced in the summer of 2010. Financial conditions are more supportive of growth than they were a year ago. Consumer sentiment is higher. The labor market is on firmer footing, despite last month's jobs disappointment. Retail demand is trending at a faster clip. Household wealth is higher. An extra year of economic growth, profits, retained earnings, and cash holdings has added a layer of insulation for the corporate sector, which makes it better able to withstand the occasional cooling in final demand.
Even though things seemed better than 2010, Credit Suisse concluded in another circular that the risks of the 2011 Spring Soft Patch were not inconsiderable. "Members of the Federal Open Market Committee will gather next week (June 21-22) amid a notable slowdown in domestic economic activity, resurgent concerns about the Eurozone periphery, and an impasse in government debt ceiling negotiations. The skies are also clouded by accelerating core inflation rates."
Bernanke's hope is that the underlying causes were transitory and that the coming challenges would pass. His apparent plan was to remain in a holding pattern and wait on events. "In his speech last week, Bernanke also strongly implied that neither a new stimulus program nor a near-term tightening move (whether it be a balance sheet adjustment or an actual rate hike) is on the table." However, the Fed Chairman's speech did little to calm observers. The DOW, S&P 500 and NASDAQ all lost significantly on the uncertain note he sounded in his conference. On thing Bernanke seemed determined to fight at all costs was deflation, something a "determined Central Bank" should do. While there was no mention of a QE3, the Chairman argued that imposing debt limits was the wrong thing to do.
Speaking to an audience that included Republican Congressman Paul Ryan, Fed Chairman Ben Bernanke called the status quo "unsustainable" while warning that failing to raise the debt ceiling could have disastrous consequences. A few weeks from the end of QE2, Bernanke gave no hint as to the path for monetary policy after June 30.
That wait-and-see attitude, couple with the note of doubt in his recent speech suggests that the confidence he once reposed in his bag of solutions has been shaken by events. "Humbled by a question on his stark criticism of Japanese policymakers before the "lost decade," Bernanke said he's "a little more sympathetic to Central Bankers now than ten years ago." Still, Bernanke avoided responding on whether the U.S. could be entering its own lost decade by highlighting the success of his QE policies in averting deflation. "A determined central bank can always do something about deflation." Fighting deflation was the one fixed point in his universe at all events.
The discussion underscores how little economists really know about how the global economic system works. In particular it illustrates the limits of the Fed Chairman's understanding. Bernanke's actions have been based on a model which, like other economic models, contain large gray areas. Stuff happens in the economy that cannot be accounted for in these paradigms. There are some things to which the answer is "I don't know". To the question, 'why is there a soft patch?' there are only a bunch of maybes. Ben Bernanke really has no choice but to make a multi-trillion dollar bet on the workings of his model and most of the world has no alternative but to hope that he's right. Bernanke is not infallible. Consider this video from the past.
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91 Comments, 91 Threads
2. Annoy Mouse
"The plan was to remain in holding pattern and wait on events."
The whole world is in a holding pattern waiting for the other shoe to drop. This economic malaise could have been avoided if the Feds just acted like adults and tightened their belts a bit. If they could have put more effort removing regulation and being pro-business, something that would have required little more than a bully pulpit, the uncertainty in business and consumer spending wouldn't have ventured into a man made depression. Now to invest or to divest?
Osama Bin Obama has instead terrorized the status quo in his bid to make America reflect the fantasies of his crappy education and upbringing.
We need another Reagan.A kindly old man who believes in and loves America.
June 22, 2011 - 4:50 pm Link to this Comment -
3. Eggplant
I'm a clueless engineer but even I can see this is a setup for QE-3.
My 401-k is currently all cash and have gone short with all my F-U money. After the markets have crashed, the pigs will squeal for QE-3. That's when I go all-in with something like IBM common stock and maybe physical silver. Then the ride up begins with the constant question being repeated:
"Will it continue to go up with QE-3 or will something break and crash the markets before QE-3 ends?"
June 22, 2011 - 4:54 pm Link to this Comment -
How do your tell the difference be between "deflation" and things getting back to "normal" after a period of government-imposed stimulus run amok? After all, that is what happened in the "housing crisis."
And why you call it a housing crisis when in fact you have far too much of something is another question. Is a food surplus, with overflowing grain elevators as sometimes occurs, the same as a famine and do you react to it the same way?
The definition of a fanatic is someone who redoubles his efforts when the goal disappears from view. The definition of insanity is doing the same thing over and over and expecting a different result.
June 22, 2011 - 5:03 pm Link to this Comment -
5. Langley
"The discussion underscores how little economists really know about how the global economic system works."
No. Anyone willing to see the truth knows what is going on.
If someone has been lying to himself (and others) that person will be unable to see reality.
There are no contridictions.
June 22, 2011 - 5:06 pm Link to this Comment -
6. Josh
I think that The Bernank has almost singlehandedly kept the wolf from the door for about three years now.
However neither he nor I nor anyone else has any idea of what tomorrow will bring.
I don't approve of much that he's done, I've been horrified by most of it, at the time. But, so far it has mostly worked, in that it has not exploded – yet. Dirk Nowitski should have had it so good.
When they write the history of this period, whatever happens, and assuming there is a pencil and paper left to write it with, he's going to have been The Man. I salute him. And hope he succeeds.
June 22, 2011 - 5:10 pm Link to this Comment -
7. rhhardin
Monetary policy is not the problem.
Fixing the credit market counterparty lockup was necessary in 08, but it's been all mission creep since then.
A lot of repealing is needed legislatively and regulatively before economic transactions become attractive again.
A trade only happens voluntarily when both sides come out ahead. Regulation and legislation are taking a huge bite out of the middle, leaving the two sides unable to both come out ahead on the deal. So the deal doesn't happen.
That's what we're seeing.
June 22, 2011 - 5:24 pm Link to this Comment -
8. Blast From the Past
Democrats aspire to be aristocrats and end up low rent Road Show Bourbons. 150 years ago they deplored the shiftless nature of those who they claimed to be natural slaves. Today they still express shock that the flogged beast does not want to gallop down the track.
June 22, 2011 - 5:24 pm Link to this Comment -
9. blert
Deflation in credit-based asset pricing is the ONLY way that the leveraged class can come down to Earth.
So he's the Col Klink of central bankers.
BTW, when priced in gold or silver, the markets are in a terrible bear tear.
He also is oblivious to the ultimate equation: money-printing = hyperinflation.
Neither money-printing nor sovereign debt spewage corrects the fundamental problem: the national economy is no longer profitable.
When it happened to Ramses he reached peak pyramid.
The Wan is ideologically committed to ruining the profitable fraction of our economy. As long as he is in the saddle the economic state vector points to hell.
June 22, 2011 - 5:26 pm Link to this Comment -
10. Tony
President Obama is "responsibly ending this war" in Afghanistan.
If the Commander in Chief announces strategic decision to surrender this field, it is irresponsible to leave troops in danger.
If this isn't the re-enactment of Vietnam, announcing a date certain when we are out of Dodge, abandoning our allies… ?
Surrender never delivers Peace.
June 22, 2011 - 5:31 pm Link to this Comment -
11. jfsanders031
What the Bernank means when he says he doesn't know is that he doesn't like the answer he would have to otherwise give. The gig is up on fiat currency. This is a trip to entropy caused by none other than a lack of TRUST. When people (called "the economy" by economists) lose trust in the system they stop participating in the game. No players no game. All of the big boys have just about unwound their bets and have retreated to the side lines and are waiting to see if this great nation goes the way of Socialism or Free Market.
Govt is distorting the playing field and choosing winners and losers. In a game such as this only suckers and those previously chosen winners will play.
What the world doesn't understand do to their lack of experience in being free to choose is that if the U.S. goes greek they will get sucked down by the whirlpool. Individuals will always survive in some sort of fashion but govts are unable to move and will resort to war in order to survive.
IF we can return to the rule of law and the law applies to all equally then this can and will be averted. No one except the truly insane (leftist/Marxist) would choose such a road willingly.
June 22, 2011 - 5:32 pm Link to this Comment -
12. Joe Hill
Josh@6 The Bernank should be hung for treason. When the bubble finally sprung a leak and started its inevitable correction he got out his pump and started reinflating it just as fast as he could. Obomber joined in with with a fiscal policy that is known not to work by every economist that studied the Japanese lost decade or the Great Depression itself. The balloon has to deflate and there are not enough fiat greenbacks in the universe to keep it inflated without destroying the economy in the process.
We have doubled our national debt to no purpose other than the political one of buying a few votes. The Bernank ought to be buried alive under the mountain of greenbacks he has printed.
June 22, 2011 - 5:33 pm Link to this Comment -
13. Morton Doodslag
"Still, Bernanke avoided responding on whether the U.S. could be entering its own lost decade by highlighting the success of his QE policies in averting deflation."
"…averting deflation"???
Monster. Most American wealth resided in the homes of its citizens, and that has deflated into a black hole. Our real estate assets which bankers like Bernanke, and hucksters from Bush to Obama once touted as the best investments around for the average Joe have drained all the blood from most American's bank accounts. The inky people who've gotten wealthier, or avoided deflation are the banking filth and the political filth who still don't get it. The bankers kept getting paid their astronomical salaries, the politicians kept shoveling the loot into the trucks and driving off, while the average Ameican has been wiped out.
This lying weasel should be tarred and feathered and run out on a rail. Let him seek burn treatments through Obamacare. What a witless, evil bastard.
June 22, 2011 - 5:35 pm Link to this Comment -
14. no mo uro
"How do your tell the difference be between "deflation" and things getting back to "normal" after a period of government-imposed stimulus run amok?"
Your thought is spot on accurate, but applying it only to the past decade or two is shortsighted.
The above sentence of yours applies to the West since the "progressive" era of Wilson et al. Had the Depression been dealt with in an honest and strong fashion, the adjustment would have happened then and would have been a whole lot easier to fix. Honest and truly educated folks know the government run stimulus is 90+ years old.
Instead, the mess got propped up by ever newer generations of Wilson clones – FDR, LBJ, etc., even some Republicans at times, and was cheered on by a public imbued with a new ethic borrowed from the French and not the American revolution – the notion of outcome egalitarianism guaranteed by government force.
And so here we are, as you point out. But it has been a lo-o-ong time building, longer than your post implies.
The readjustment of the American (and most of the West's) mindset in terms of an accurate valuation of what their labor and assets are REALLY worth in terms of justifying a standard of material living is what we are experiencing now. The screeching and outrage will be awful. And the hurt will be much more than if we had an honest political class who worked hard at letting us down from those artificial heights instead of cynically and dishonestly telling the pretty lie for all these years.
And those who call it "deflation" or who come up with conspiracy theories to explain how all that money is still there but the middle class is being preyed upon just don't get it. This isn't to excuse the aristrocratic socialist ruling class and their public sector sycophants and worker bees for their faults, or their role in dropping the ball and using government to try to stave off their own "revaluation", which, though they don't believe it, will occur eventually as well. But we've run out of money, and things are going to have to be revalued. "I don't wanna" isn't going to stop it.
June 22, 2011 - 5:51 pm Link to this Comment -
15. rhhardin
Most American wealth resided in the homes of its citizens, and that has deflated into a black hole.
What came before was obvious and unsustainable asset inflation, so this is a pretty obvious correction to that.
Meanwhile, if you have a house, you still have a house, which is what you paid for.
If you want to move to another house, it too has come down in value, so you can move to another house just as if asset prices were still sky high.
Except: there's no financial instrument that lets you substitute one house for another as security for an underwater mortgage. You have to convert your negative equity temporarily into negative cash, which you can't do.
There's the lockup: you can't move if you're underwater in your mortgage.
I'd suggest some creative financial types dream up an instrument that makes house substitution possible, eliminating the most pressing problem from a fall in house prices.
June 22, 2011 - 5:53 pm Link to this Comment -
JH@12: a fiscal policy that is known not to work by every economist that studied the Japanese lost decade or the Great Depression itself.
I posted some of this before, but Taiwanese economist Richard Koo makes the comparison with Japan (1995-2005) and reaches some interesting conclusions: see here, and here, and more here.
June 22, 2011 - 6:24 pm Link to this Comment -
17. Eggplant
Josh @ 6 said:
"I think that The Bernank has almost singlehandedly kept the wolf from the door for about three years now. … When they write the history of this period, whatever happens, and assuming there is a pencil and paper left to write it with, he's going to have been The Man."
I've been wrestling with the ethics of The Bernank and his use of dishonesty and money printing to keep our economy alive. I understand and to some extent accept the argument of sacrificing a hundred people today so 10,000 might live to see tomorrow. Has The Bernank actually done this or did he really allow 10,000 people to survive with the consequence that 100,000,000 will die needlessly? More likely the 100,000,000 were doomed no matter what The Bernank did and all he really did was provide them with a few more years of life at enormous cost.
Call me "old fashioned" but I'm convinced that "honesty is the best policy".
June 22, 2011 - 6:27 pm Link to this Comment -
18. Langley
"I've been wrestling with the ethics of The Bernank and his use of dishonesty and money printing to keep our economy alive."
What the Fed and Feds have done is keep the nation un-dead. Like vampires siphoning off the life's blood of living things these unclean entities have been surviving on the living and their children.
Life implies death.
Capitalism requires failure.
Government (through force) is able to upset the natural order, prolong the suffering and make the eventual end much worse.
June 22, 2011 - 6:49 pm Link to this Comment -
19. blert
The Benanke wants all the bad credits to go away — and his solution is to destroy the dollar.
This is to put bankers before all.
The agency problem, the capture of a regulator now an international crisis.
The only thing the Bernanke lacks is a balloon to take him home.
June 22, 2011 - 6:51 pm Link to this Comment -
no mo uro #14:
Yes, it's bigger than just the past 20 years but bigger than just financial policy. It's Affirmative Action Programs, Social Justice, eco-mania, lawsuit insanity, Social Security, The Great Society, the Supreme Court as our true rulers, the Peace Movement, compassion toward our enemies and hostility toward our friends, Science Projects, an endless parade of Special interest Groups, Vote Buying, the unaccountable Federal Reserve, and so on, ad infitium, or close enough for government work.
It's Design Margin.
And its people who cannot see because they won't. If I can look at a report in 2006 from our local Economic Development Council and see that we had added 25,000 new houses in the county but only 5000 new people and predict an invasion of White Elephants disguised as real estate "investment" then why can't the people do so who are paid to know about that stuff?
June 22, 2011 - 6:53 pm Link to this Comment -
21. Josh
In short, I think that The Bernank has bet that "honesty" is NOT the best policy, and that it may turn out he is correct.
That his printing of more fiat currency was the best possible move, given the strange situation, and that quite possibly it can go on a long, long time without doing any more damage than it already has. IF this is true, they will have to rewrite the text books, there is no doubt.
But Bernankianism will completely obsolete Keynesianism.
And YOU were THERE!
Or it could all go right down the shithole first thing tomorrow morning, I'm sure not promising it won't, but unlike most here and many places, I'm hoping and praying and even believing, that we will continue to levitate for some time, and eventually land smoothly and gently.
June 22, 2011 - 7:28 pm Link to this Comment -
22. Annoy Mouse
Well from the point of view from a rube, I see all of this money pumping as a means to protect the wealthy elite from the consequences of their actions. It is circling the wagons to make sure the status quo vampires don't lose for all of their risk taking… on the backs of the rest of us. May they go to hell.
June 22, 2011 - 7:43 pm Link to this Comment -
23. Unsk
When you look at our economic collapse, ya got to ask the question " Qui Bono? " Who Benefits?
Bernacke clearly had a hand in the making of this crisis, and he and his friends weren't ones to "let this crisis go to waste".
He's been lying and scheming well before 2008, at least from the time he took over the Fed in 2005 and probably before. In May of 2008, he told Congress that the subprime mortgage crisis was only a $100 billion problem. He had to know at the time that what he said was an outright friggin lie, and just four months later, in the middle of a presidential election , he brought on the collapse with his TARP con. That con was years in the making. Bernacke was around for all of CRA, Fannie and Freddie's shenigans, CDS, MERS, and the relaxing of reserve requirements.The long list of unproductive parasites that RWE listed above all benefitted from the growing cancer in the our government, but it was the Wall Street Bankers that really hit it big. Bernacke, Geithner, Paulson and all the other jackals granted to the Big Banks and their masters not only trillions, but the power to ride herd on the entire economy and suck it dry. The depression we are experiencing now is not the biggest problem we face, it's the controls and powers granted the corporatists that will enslave us in the future.
June 22, 2011 - 7:47 pm Link to this Comment -
24. Insufficiently Sensitive
He was 'confident that the bankers and regulators were looking at the loans and making sure the underwriting was being done right'.
What with HUD and Fannie/Freddie going all-out to insure that the underwriting was NOT being done right, in order to temporarily transfer real estate to high-risk buyers who were only worthy of loans because F@F were buying the poisoned instruments as fast as the lenders granted them, Bernanke was either blindingly ignorant or blindingly cynical.
Well, is he still in that situation? What has he learned?
June 22, 2011 - 8:13 pm Link to this Comment -
25. Victor
Each one of our troops in Afghanistan costs American tax payers $ 1 million per year.
90% of the Afghanistan economy comes from foreign military and aid
Afghanistan is not a country–and never has been–it is a tribal quagmire
We need to cut out all foreign aid and focus upon American fundamental interests first.
We can live very well with trade with Canada, Australia, UK and NZ the Anglo-sphere
Forget the barbarians–focus upon the American interests
June 22, 2011 - 8:15 pm Link to this Comment -
26. Joe Hill
Josh@21 – monetary policy is not the solution to bubbles but rather the cause of them. In a democracy no politician wants to tell his stupid constituents that they are idiots for thinking housing prices or any other asset can continually and indefinitely go up in price faster than the underlying rate of currency inflation. So instead of doing that they facilitate that delusion. When the bubble bursts the politician also cannot tell his idiot constituents, "Tough luck dorkus, I rigged the tax structure, leaned on the banks and did everything else in my power to pump that bubble up but it burst anyway and you are going to have to take your hosing like a man." Instead what the politician does is try to screw his prudent constituents, prop up the banks, and try to let the air out of the bubble slowly.
The longer it takes to let the air out of the bubble the longer otherwise usable assets are tied up and unavailable for useful and productive purposes and the longer the economy takes to recover and get back to growth. It is not rocket science. The government spending to substitute for real demand does not case the economy to grow because the government is going to spend the money in all the wrong places like propping up the UAW and bloated local government bureaucrats. That is where the stimulus money went and that is why it did not stimulate growth.
What this economy needs right now more than anything is creative destruction. It needs those underwater houses on the market. It needs the banks holding those underwater mortgages to go belly up not propped up by the Fed. It needs government shrunk and it needs to take a long hard look at the Fed as an institution. It also needs to look at the crony capitalism that allows institutions to allegedly get too big to fail because by buying into that idea we have introduced moral hazard of the first order into the system.
June 22, 2011 - 8:29 pm Link to this Comment -
27. Anarch
I question the wisdom of holding the press conference. Generally the free flow of information is good. However, too much information (Inability to process) as well as the interpretation of information (including the manner the information is communicated) can have adverse consequences. In this case Big Ben was attempting to show confidence, "Steady as she goes". Unfortunately, the statement everyone is going to take away is, "I don't know".
June 22, 2011 - 8:31 pm Link to this Comment -
28. Walt
Call me old and cranky
But I do not like Bernanke
And I really do not like his QE2
Printing money like it's tissue
Means inflation will not miss you
And life savings will go down the china loo
Why one man has all the power
To make men and women cower
At the thought of what it is he doesn't know
He sits in that big Fed building
Picking lilies fit for gilding
The producer, star and writer of the Ben Bernanke ShowJune 22, 2011 - 8:58 pm Link to this Comment -
29. Josh
jh @ 26: Josh@21 – monetary policy is not the solution to bubbles but rather the cause of them.
However, the bubble bursting is not the worst of our problems. Our problem is that while we were blowing bubbles, we were indeed surviving on bubbles while the foundation washed away. The 10,000,000 jobs in China are the problem today. I have no idea if The Bernank perceives that or agrees with that or not. He may indeed be cranking his monetary organ until the roof falls on him. But what *can* the Fed do about 10,000,000 jobs in China, he can't impose tariffs or legislate domestic content. What he can do is inflate the currency and try to tilt the table. Is that a good idea? Probably not. Does he know it's not a good idea? Will he do it anyway, good idea or not?
What would you do?
What would I do?
What I would not do is to allow major institutions to crater, without being absodamnlutely sure of what I was doing. What I would do is persecute, … er yeah … the 1,000 or so leaders of wall street who enriched themselves a trillion bucks or so in the exercise, while letting it happen, while making it happen. Strip them penniless and imprison them for life, then posthumously try them in court for every civil and criminal statute in the book, they have no defense so why waste time listening.
June 22, 2011 - 9:19 pm Link to this Comment -
30. Joe Hill
I happen to be 60 years old, born in 1950. The average price of a new home that year was $8,450. The whizzbang Ivy Leaguers who run the fed allegedly aim for a 2% inflation rate. Now my math isn't all that great and I realize a new house today might be bigger and better and have more appliances than a 1950 house but how do you get from $8,450 to $268,000 (the average price in 2006) in 56 years if you are even remotely close to your 2% long term target? That is like a 30X increase and while I understand the power of compounding that still doesn't get you anywhere in the neighborhood.
If the Fed could do its job we would be looking at average house price in the $30,000 range not 9X that. I grew up thinking Milton Friedman was the cats pajamas and Keynes was an idiot but in my old age I believe a managed economy whether it is managed by monetarists or socialist crony capitalists is eqally dangerous.
The Bernank is a clueless disaster. The economy is pumped full of money and when the correction to the housing bubble is finally complete inflation is going to take off at an unprecedented rate. When the Fed tries to suck the excess money back out of the system we will be thrown right back into recession with tight money and high interest rates or the there will be uncontrollable inflation.
It is like living in a city with high levees. They protect yo from the seasonal floods but expose you to catastrophic ones when the are breeched or topped. The government by trying to protect the banks and the speculators which includes a lot of average people who bought into there is no end to the bubble thinking only makes the pain worse and longer in the end.
June 22, 2011 - 9:43 pm Link to this Comment -
31. cthulhu
I consider myself an easygoing pragmatist.
If inflation — which we all agree to be an entirely monetary phenomenon — exceeds 10%, we should erect scaffolds in front of the Federal Reserve and change 100% of its Board of Governors.
Right now, the incentives for the Fed are all over the place. The President, who wants free money for his Treasury, appoints the Chairman. The banks, who want social risk and private profit, appoint the Board. Congress approves a charter that has no meaningful penalties for misbehavior, and so on.
An unyielding personal backstop to the options available would be a great help to concentrate the attentions of the Fed.
June 22, 2011 - 9:43 pm Link to this Comment -
32. westerncanadian
29. Josh said
'But what *can* the Fed do about 10,000,000 jobs in China…
It's the jobs in the U.S. that matter. Interfering with the Chinese labour market isn't Bernanke's business and is a waste of time.
You create jobs by increasing national wealth. Adam Smith wrote a manual describing how to increase national wealth. Going back to Adam – "The demand for those who live by wages, therefore, naturally increases with the increase of national wealth and cannot possibly increase without it."
You don't increase national wealth by printing money and you can't possibly create jobs only by printing money. It's hard to see how the largely consumption-based economy of the U.S. can create wealth. However if Americans concentrated on making, as they surely can, the things they are best at making then wealth would be created, even if they couldn't do some of these things as well as the Chinese. If Americans also concentrated on making things that the Chinese can't make, then even more wealth would be created.
The faster that wealth is created, the faster jobs are created. It's not the absolute size of the economy that creates new jobs, it's the relative rate of increase in national wealth. A giant economy that does little but consume stuff won't increase national wealth and won't create new jobs, no matter how much money you print.
June 22, 2011 - 10:03 pm Link to this Comment -
33. Thrasymachus
#16 YBR Koo appears to be a straight-up Keynesian, and he gives the most coherent explanation of it I have seen. He thinks the government needs to run a large stimulus for years. But there are two problems with this-
1) You get a huge government debt. Japan is now, what, 200% of GDP? This has to be paid off someday, somehow, by someone. The private balance sheet problem becomes the public balance sheet problem.
2) Japan is a homogenous, high-trust society. The US is neither. The government spending keeping the economy going is a transfer of wealth from net taxpaying groups, to net tax-consuming groups- cash beneficiaries and government employees. This strikes at the deepest divisions of America.
June 22, 2011 - 10:19 pm Link to this Comment -
Most important, as one would expect, capital expenditure (business investment) was the leading contributor to growth in the early stages of the recovery, while public expenditure was on net contractionary[.]
(scroll down to pp 2-3 for bullet list of what went right for the Japanese economy.)
Richard Koo is saying that (beginning minute 6 on the video) public expenditure can keep money circulating to sustain some minimum level of activity *while* the private sector is paying off debt – fixing its "balance sheet" problem. Once that happens, then private expenditure will pick up and public expenditure can be reduced. This is the gist of the 'spend more' position during the specific circumstances of a "balance sheet" recession. The policy question becomes how to sustain some minimum level of economic activity during the "balance sheet" correction phase, which can last for an uncomfortably long time.
From zerohedge:
The economic impact of the government stepping in to borrow and spend money that would ordinarily be borrowed and spent by the private sector is reduced by the amount the private sector would have borrowed and spent. But during a balance sheet recession, the private sector is not borrowing and spending—in fact, it is paying down debt. Consequently, any money borrowed and spent by the government is fully reflected in higher final demand. It is therefore only natural that the elasticity of fiscal stimulus would be dramatically larger during such a recession.
We have shown…that fiscal stimulus can be a potent tool during a balance sheet recession.
Unfortunately, participants in the US fiscal debate remain oblivious to this point and continue to discuss the pros and cons of fiscal policy using fiscal elasticities measured when the economy was not in a balance sheet recession.
This implies that economists are heavily underestimating the elasticity of fiscal stimulus during such recessions—just as their counterparts in Japan did a decade ago—making policymakers reluctant to implement further stimulus. This reluctance leads to further economic weakness.
From the comments: There is no way to stimulate US economy the way it is now.
"Stimulation" is not the issue – the issue is buying time to allow the private sector to unwind its debt, which is what Bernanke has been doing. With no help from Congress. He has the unfortunate aura of a man who has been singled out.
June 22, 2011 - 10:32 pm Link to this Comment -
T@33: Zerohedge makes this argument.
Also I would not argue that Koo is a standard Keynesian since he is predicating his "spend more" dictum on the specific circumstances of "balance sheet" recessions, which as he points out are somewhat anomalous events.
I tend to agree with point 2. however. That's a problem.
June 22, 2011 - 10:46 pm Link to this Comment -
36. Nimrod
Bernanke's own text [Principles of Macroeconomics by Robert H. Frank and Ben S. Bernanke 3rd 2007] suggests it may be too late to spend our way out of what he calls a recessionary output gap. I.e. the book implies maybe no more QE's will work. In other words, we may be stuck with a lower GDP for awhile and Keynesian spending will do no good.
[His definition of an output gap is Y*-Y the difference between the economy's potential output and its actual output at a point in time. If this is positive he calls this a recessionary output gap.]
Then he says: "Over the longer run, price changes by firms eliminate any output gap and bring production back into line with the economy's potential output. Thus the economy is "self correcting" in the sense that it operates to eliminate output gaps over time. Because of this self-correcting tendency, in the long run actual output equals potential output, so that output is determined by the economy's productive capacity rather than by the rate of spending. In the long run, total spending influences only the rate of inflation. [and not output. It seems he is saying that after self correcton occurs, spending only escalates inflation and doesn't promote output.]
I'm not sure whether we are suffering from a potential output deficiency or an actual output deficiency because I don't have a feel for these concepts. He gives some examples: "unfavorable weather conditions [...] would reduce the rate of potential output growth in an agricultural economy, and a decline in the rate of technological innovation might reduce the rate of potential output growth in an industrial economy. Similarly, [...]increased capital investment, or a surge in immigration could produce unusually brisk growth in potential output…"But then he goes on and [surprise!] becomes anti-Keynesian: "In particular, when a recesson results from slowing growth in potential output, the government's best response is to try to promote saving, investment, technological innovatioon, human capital formation, and other activities that support growth."
Alas, would that he had followed his own advice.
His next chapter is all about Keynes. His book thus seems desultory.June 22, 2011 - 11:05 pm Link to this Comment -
37. truepeers
The discussion underscores how little economists really know about how the global economic system works.
Richard, your fellow Aussie, Steve Keen, has been making the case that the core intellectual failing of mainstream neoclassical economists is that they don't appreciate the importance of the acceleration and deceleration in the level of debt (especially household debt) in fueling or constraining economic growth. The neoclassical simply posits that one man's debt is another's credit and so debt levels have no overall macroeconomic influence.
Keen argues in his most recent blog: "They are profoundly wrong on this point because neoclassical economists do not understand how money is created by the private banking system—despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers." http://www.debtdeflation.com/blogs/2011/06/11/dude-where%E2%80%99s-my-recovery/
June 22, 2011 - 11:09 pm Link to this Comment -
38. Josh
jh @ 30: how do you get from $8,450 to $268,000 (the average price in 2006) in 56 years
about 6.1% compound interest.
remembering we had a couple of years of heavy inflation, there you go.
wc @ 32: You create jobs by increasing national wealth
I'm not sure how to understand that. If you have one gold miner, does it trickle down? I'm not sure that wealth is a metric, not monetary wealth. And in a society of automation, services, entertainment – goods may not require a lot of jobs. What if one guy can produce all the goods and services a country needs and sells them for pennies – wouldn't the country be "wealthy"?
June 22, 2011 - 11:19 pm Link to this Comment -
39. Gordon Walker
"A determined central bank can always do something about deflation."
Yes, by turning it into stagflation!
As a retired state school teacher I know that the problem is the parasitic load of public sector employment. Your Education department(s) at federal and lower levels have done far more harm than good for decades now (as do our equivalents in France and Britain). Sack them all! The same should go for your EPA.
Then someone should create a searchable database of all public sector jobs, with a single paragraph description for each job, and stick it on the internet so that we can assess the value of each of them.June 22, 2011 - 11:33 pm Link to this Comment -
40. westerncanadian
39. Josh
Here's my take on a country's wealth (courtesy of Fischer and Dornbusch).
The stock of goods that contributes to the production of goods and services is wealth, also called physical capital.
The stock of physical capital includes assembly line machinery , chairs, TVs, houses, railroad tracks, airports, airplanes, schoolhouses, office buildings – all the physical things needed to produce goods and services. Physical capital is distinguished from land because physical capital is produced whereas land is naturally available. Land may be considered to be a factor of production but part of the land in the U.S. owes its productivity to past investments made in clearing trees and rocks and in creating proper drainage. This land is more like physical – produced – capital than a naturally available factor of production. Land and physical capital are difficult to disentangle and the economics of both are the same.
Land and physical capital together make up the tangible wealth of an economy. Tangible wealth can be touched. Tangible wealth and financial wealth are different. Financial wealth has value only because it is ultimately a claim on tangible wealth, but it is not the same as tangible wealth.
Similar to the distinction between tangible wealth and financial wealth is the distinction between physical and financial capital. A person about to open a business may say he has capital of $10 million because he borrowed that much from the bank and his relatives. But this is financial capital – money and other paper assets. If the financial capital is used to buy office equipment and machinery, then the businessman has aquired physical capital.
The act of increasing (producing) physical capital that in turn produces goods and services for which there is a demand, will increase the demand for people who hire themselves out for wages. The faster that an economy is able to increase its capital stock, the bigger the demand for wage earners will be. Any and every barrier to the production of capital stock will also be a barrier to job creation.
At least, that's how I see it from my perch in Canuck land.
June 23, 2011 - 12:33 am Link to this Comment -
41. JC in KZ
Following 40. westerncanadian, above.
If the value in producing goods and services (in the form of sales price minus cost of inputs, as a function of demand) is uncertain, then the act of increasing physical capital will be delayed or acted on at the lowest end of the margin for error.
This in turn inevitably results in a lower, "softer" demand for people who hire themselves out for wages. For economists who estimate the demand for wage earners as being the average of the low and high ends of the margin of error, this result is referred to as "surprising!" And they are "unexpectedly!" wrong in their predictions.
The rest of us hayseed-chewers understand: "it's the uncertainty, stupid."
June 23, 2011 - 2:35 am Link to this Comment -
42. no mo uro
"Now my math isn't all that great and I realize a new house today might be bigger and better and have more appliances than a 1950 house but how do you get from $8,450 to $268,000 (the average price in 2006) in 56 years if you are even remotely close to your 2% long term target? That is like a 30X increase and while I understand the power of compounding that still doesn't get you anywhere in the neighborhood.'
What Josh said, plus a couple of other things-
-Mortgage interest deduction which inflates value of real estate as an investment over other types of investing
-various state, federal, and local guaranteed first-time loan programs
-Fannie Mae
-Freddie Mac
-post WWII entitlement mentality
-blue-state government transfer of wealth from the productive private sector to the nonproductive public, allowing vast numbers of public functionaries to live in owned housing at the expense of private enterprise and innovation
-magnificent marketing job by the housing industry and the government to indoctrinate people to believe that everyone should be in an owned home or they are a loser
-a construction industry which built roughly 10% more houses than there are people to live in them
June 23, 2011 - 2:55 am Link to this Comment -
43. stoicheion
"So he's the Col Klink of central bankers."
Great line blert, I love it. If I knew how to work GIMP I would stick his face on Col Klink and post it to YouTube.
I'll bet he has most of his money in gold. He'll claim it is for conflict of interest purposes but we all know better.
We need a flash mob at his house with everybody leaving copies of their foreclosure notice under a brick on his driveway.June 23, 2011 - 3:29 am Link to this Comment -
44. stoicheion
"I think that The Bernank has almost singlehandedly kept the wolf from the door for about three years now."
I'm an American. A Wolf at the door means a wolf skin cape or maybe boots, depending on size of course. Bring them on!
June 23, 2011 - 3:35 am Link to this Comment -
45. Stephen
"A trade only happens voluntarily when both sides come out ahead. Regulation and legislation are taking a huge bite out of the middle, leaving the two sides unable to both come out ahead on the deal. So the deal doesn't happen."
This is a monster of a problem. It drives outsourcing and offshoring. With those you can pay to get a job done, like originating mortgages or providing phone support, and your obligation is fulfilled the minute you pay the invoice. When you hire employees to do the job your liability for whatever bad stuff happens on the job is open-ended.
Employees have become the scariest thing in the world for American businesses.
June 23, 2011 - 5:30 am Link to this Comment -
46. CornFuzed
"The discussion underscores how little economists really know about how the global economic system works."
Economists do really know how the system works, and have known since Adam Smith and later Ludwig von Mises explained it in detail. The situation is that most economists work for governments and as such compromise themselves by that fact. Sorta like 'it all depends on what your definition of is is "
June 23, 2011 - 5:36 am Link to this Comment -
47. Smoking Frog
Joe Hill @30I happen to be 60 years old, born in 1950. The average price of a new home that year was $8,450. The whizzbang Ivy Leaguers who run the fed allegedly aim for a 2% inflation rate. Now my math isn't all that great and I realize a new house today might be bigger and better and have more appliances than a 1950 house but how do you get from $8,450 to $268,000 (the average price in 2006) in 56 years if you are even remotely close to your 2% long term target? That is like a 30X increase and while I understand the power of compounding that still doesn't get you anywhere in the neighborhood.
If it were going up at the same rate all those years, the rate would be 6.37% a year, but that's not what happened. Which is not to say that 6.37% would be acceptably low. I'm just saying that the rate was not uniform – it accelerated over the past 20 years or so.
June 23, 2011 - 5:41 am Link to this Comment -
no mo uro #42:
Add to your list the overall tax policy. It is really bad to buy a home as an investment and then sell it at a loss – which I have done. But I have bought mutual funds as an investment and had the value decrease by $100K or $200K+ in the space of a year AND had to pay taxes as well. I lose $250K in value in a given year and the Fed Govt says "By our tax laws you did not lose $250K but in fact made $85K in capital gains, now pay the taxes on the gains you no longer have."
Then add other policies, like limitations on oil drilling and unwillingness to use military power to protect national interests. The price of homes went through the roof more than once when oil prices went up and there were gasoline shortages and people realized that the majority of land out there was unbuildable due to the cost and availability of commuting.
June 23, 2011 - 6:03 am Link to this Comment -
49. LarryD
Isn't preventing deflation the whole point of the Federal Reserve?
June 23, 2011 - 6:03 am Link to this Comment -
50. anton
The wolf grows more hungry each day, the longer the reckoning is delayed the worse it will be. A short sharp recession was deferred in favor of a gradual Sovietization of America and the enrichment of the Bankster Class.
June 23, 2011 - 6:25 am Link to this Comment -
51. epignosis
We seem to have subscribed to a decades long fallacy – Let's find a way to give increased product to those who produce little. Those whose consumption is more than their production. That will elevate their standard of living. Everybody gets a nice house and free health care.
Damn the economic law of gravity. We can, by fiat, have a higher standard of living (more consumption) per capita than the rest of the world while simultaneously engaging in free trade to foster availability of lower cost goods.
Oh, we can do it for a while, but then the bill comes due. The only way out of this mess is to allow gravity to level the great waters. Our consumption has to equalize our productions.
Attempts to redistribute more products to poor producers will always have the same result. It' just the old fallacy of 'everyone contributes to the great storehouse according to his ability, and receives from the storehouse according to his need'.
It will always destroy productivity for reasons that everyone here at BC should understand. Why work hard or increase individual productivity to contribute to the great storehouse, if you can receive from the storehouse without working hard?
The first step along the path was the SSA of 1935. Social Security was intentionally designed as a Ponzi scheme to permit redistribution and resist efforts to dismantle by later administrations. It destroys liberty by robbing the fruits of production from the producer, in favor of the non producer.
Since then, every major intervention of government has been to build upon this gateway drug to public addiction to other people's money.
What we now see is the collapse of the pillar of water supporting this deception on a global scale. Our consumption will be equalized with our production. In the end, our fiat currency will purchase about half of what it once did.
There is nothing The Bernank can do to prevent this.
June 23, 2011 - 6:30 am Link to this Comment -
Y'all take a look at this John Stossel article on what has been happening in Canada and Puerto Rico.
WesternCanadian – Bravo! I had no idea!
June 23, 2011 - 6:45 am Link to this Comment -
53. Steve C.
There are known unknowns and there are unknown unknowns. The Fed and the US government have gone way past the boundaries of unknown unknowns. At this point, one would expect an undercurrent of panic among the best and the brightest, similar to the panic of late 2008. Instead what we see is puzzlement because they don't understand why all the school solutions they've tried are failing.
"The knowledge problem" writ large. And these guys are too dense to follow the first law of the rule of holes and put down the damn shovel.
At least for now, it looks like Bernanke has tacitly admitted that QE2 didn't work and so QE3 is off the table. Now if he can only convince the President to put down his own shovel, we might get somewhere.June 23, 2011 - 7:39 am Link to this Comment -
54. tomw
15 RHARDIN: "I'd suggest some creative financial types dream up an instrument that makes house substitution possible, eliminating the most pressing problem from a fall in house prices."
Starker Like-for-like trades. Only problem is getting the banks to substitute one property owners name for another on a deed of trust… If they thought about it, they should jump on the option. 'twould keep their balance sheets in the black, or closer to being in the black, at the same time loosening somewhat the barrier to mobility of homeowners who are at the same time job-seekers.
tomJune 23, 2011 - 8:00 am Link to this Comment -
55. Aardvark
13. Morton Doodslag
"Most American wealth resided in the homes of its citizens, and that has deflated into a black hole. Our real estate assets which bankers like Bernanke, and hucksters from Bush to Obama once touted as the best investments around for the average Joe have drained all the blood from most American's bank accounts. This lying weasel should be tarred and feathered and run out on a rail. Let him seek burn treatments through Obamacare. What a witless, evil bastard."
My criterion for considering support for a political candidate is whether he or she gets what Morton is saying. The political/public-sector/banking/rent-seeking axis of evil has debt-hooked the country and its citizens, who now exist to service debt.
This is no longer a Republican vs. Democrat issue. Both parties are compromised and, as far as I can tell, willing to continue the decline has sold its city parking meter concession to J. P. Morgan, who was brokering a deal for foreign investors (Abu Dhabi). It's no longer possible to, say, close off a street for a festival or have free parking on Sunday. The parking has been 'privatized' for a bargain one-time $1.5 billion. Greece, of course, will be going through this process on a national scale.
And daddy won't you take me back to Muhlenberg County
Down by the Green River where Paradise lay
Well I'm sorry my son but you're too late in asking
Mister Peabody's coal train has hauled it awayJune 23, 2011 - 8:20 am Link to this Comment -
56. Aardvark
13. Morton Doodslag
"Most American wealth resided in the homes of its citizens, and that has deflated into a black hole. Our real estate assets which bankers like Bernanke, and hucksters from Bush to Obama once touted as the best investments around for the average Joe have drained all the blood from most American's bank accounts. This lying weasel should be tarred and feathered and run out on a rail. Let him seek burn treatments through Obamacare. What a witless, evil bastard."
My criterion for considering support for a political candidate is whether he or she gets what Morton is saying. The political/public-sector/banking/rent-seeking axis of evil has debt-hooked the country and its citizens, who now exist to service debt.
This is no longer a Republican vs. Democrat issue. Both parties are compromised and, as far as I can tell, willing to continue the decline. I hadn't realized, until I read this in Matt Taibbi's "Griftopia," that Chicago has sold its city parking meter concession to J. P. Morgan, who was brokering a deal for foreign investors (Abu Dhabi). It's no longer possible to, say, close off a street for a festival or have free parking on Sunday. The parking has been 'privatized' for a bargain one-time $1.5 billion. Greece, of course, will be going through this process on a national scale.
And daddy won't you take me back to Muhlenberg County
Down by the Green River where Paradise lay
Well I'm sorry my son but you're too late in asking
Mister Peabody's coal train has hauled it awayJune 23, 2011 - 8:22 am Link to this Comment -
57. Aardvark
Hmmm. something happened in the editing. Here's the full sentence:
This is no longer a Republican vs. Democrat issue. Both parties are compromised and, as far as I can tell, willing to continue the decline. I hadn't realized, until I read this in Matt Taibbi's "Griftopia," that the city of Chicago has sold its city parking meter concession to J. P. Morgan, who was brokering a deal for foreign investors (Abu Dhabi). It's no longer possible to, say, close off a street for a festival or have free parking on Sunday. The parking has been 'privatized' for a bargain one-time $1.5 billion. Greece, of course, will be going through this process on a national scale.
June 23, 2011 - 8:24 am Link to this Comment -
58. cfbleachers
Epignosis is right on the mark.
When you force feed a center-right country a vat of the thin gruel of Keynesian Kitty Litter, then announce quarter after miserable quarter the "unexpected" dismal results, who are you fooling? The masses? Yourselves?
The dark matter that Bennie and the Jets seem to not understand in the slightest, that holds together the depressed numbers…is the fact that the largest and most important free market economy in the world is being mauled and manhandled by the Gangsta Gubment.
You force banks to loan money in an "easy credit" Ponzi scheme to unqualified and uncreditworthy borrowers, THEN…force the government backed, crony infused GEO's to back and bundle the derivative crap notes, THEN you take more taxpayer money to bail out the failure of the crapology derivatives, THEN you attack the remaining money in the pockets of "the rich", with such vengeance, hatred and spewed venom….and finally….you blame "greed" in the "capitalist system" as the bogeyman for all the "problems"…so, you create new punishing laws for them having made any money in the first place….and you stroke your chin and ponder why the hell you keep getting these "unexpected" crappy results.
Here's the dark matter. Anti-capitalism seeks to destroy capitalism. It is doing the very thing it sets out to do. The gravity that pulls capitalism together is a weak force when all the other forces are aligned against it.
You can't have Keynesian destructive bombs being detonated in every corner of our economy and expect the free market enterprise system to operate as a recovery mechanism. These systems and their intentions are diametrically opposed to each other. The PIIGS have been slaughtered because of this very reason. You can't have it both ways. You can't cross a donkey with a fish and expect to create a pack animal that can swim your canteen across the bay.
We are an infertile half breed economy at the moment. We are run by unelected department heads, czars and czarinas who are imposing by fiat that which we NEVER agreed to by representative electorate will.
The issue right now is not why things are this bad, the issue is….how in the world are they not already much worse. We are in an economic death spiral.
Either Keynesian or free market models must prevail over the other. We never got a chance to vote, because it was a clandestine operation to even make it an issue. The question was never called. It was illegally and unethically thrust upon us. We need to call the damn question. And save this nation from the liars and frauds and cowards who put us on the brink of disaster.
June 23, 2011 - 8:36 am Link to this Comment -
59. A Nobody
57 Aardvark,
That party duality reminds me of something Talleyrand is reputed to have said about the Bourbons- "they had learned nothing and forgotten nothing".
If anything surprises me today, it's the separation between me, the nobody, and my "betters". It's so much harder nowadays to effect any sort of change.
June 23, 2011 - 8:37 am Link to this Comment -
60. raven
We run a small manufacturing business. We cater to an upscale market, in home improvement. Currently we are living in an Alternate Economic Reality. translation- we are overloaded with work. We desperately need a bigger facility and some more help. BUT- we are on rural property so cannot erect another building or expand the work force legally.(blue state regs.) So we need to be in an industrial park = $$$$ If there was any sign of fiscal responsibility from the Gov., we might consider it- but as far as I can see, they have done nothing to alleviate the cause of the crash, and seemed to be determined to repeat it. So, expecting another major imminent downturn, we will not hire or expand, if anything, perhaps jam more equipment into our already tight space- (overhead on a machine is way lower than a human.)
Since we are making money, now we need to figure out what to do with it. Expand the biz? (see above) The stock market is being dominated by folks who make a New Orleans street hustler look like a paragon of virtue . The bond markets seem ready to implode at any moment.(pssst-buddy, wanna buy some muni's?) The interest rate on cash in the bank is zip-(thanks, Ben) The cost of living is going up and up.(thanks, Ben) All of this is in addition to my belief the Gov., in it's last debt throe's, will attempt to confiscate the largest pool of untapped money in the US- retirement savings. That will buy them a year or two before they are forced to stop paying entitlement benefits and the subsequent detonation of civil unrest. (the police state they are building does have a purpose, it is just different from the one they are proclaiming).
Somehow, the residents of the State Hospital for the Insane have managed to get past the cockpit door and are at the controls. We are passengers. Got a 'chute?
June 23, 2011 - 9:10 am Link to this Comment -
61. Marie Claude
35. Carol.Herman June 22, 2011 – 9:55 am
Merkel needs a vote of "no confidence" to end this charade.
If the german's pull out of the EURO, what will be left will be the "value" the PIIGS can muster. With the french stomping on the grapes. And, the Brussels LOONS losing the value of their world courts as well.
Blah, Blah, German banks are in worst position than the French's, as they host CDS too (Landesbanken)
"On comprend donc difficilement, l'analyse de Moody's, – radicalement différente, rappelons-le de celle de Fitch (à capitaux français) – sauf à imaginer de mauvaises raisons, telles, par exemple, que celles constituant à vouloir faire pression sur le G20 et la Commission européenne qui préparent une réglementation des agences de notation consistant, entre autres choses, à les soumettre à un agrément et à la supervision d'une autorité européenne"
"Selon des chiffres publiés le 6 juin par la Banque des règlements internationaux (BIS), les banques allemandes détenaient fin 2010 un total de 22,6 milliards de dollars (15,3 milliards d'euros) de dette publique grecque, contre 15 milliards de dollars (10,5 milliards d'euros) pour les banques françaises."
Good news when the "EURO" finds its value the old-fashioned way. In the hands of the greeks, and the others … all the debt will look like "small potatoes" … because everyone will have enough worthless EURO's to pay off the toxic steaming pile.
"As summarized in the following table, it seems that approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance (see the figures in red). Put another way, if one of the PIGs defaults, creditors who actually hold bonds from that country will absorb about 70% of the losses, while agents (primarily banks and insurance companies) that sold insurance against the possibility of default will have to cover the remaining 30%. That's not a trivial amount. (All figures below are in billions of USD, as of the end of 2010.)"
"The table above also hints at striking differences between how European and US creditors would be hit in the case of default by one of the PIGs. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts."
June 23, 2011 - 9:18 am Link to this Comment -
62. Marie Claude
Carol Herman part 2
Indirect US Exposure to the Euro Debt Crisis, part 2
the whole BIS document on the Greece debt exposures
Interesting to know that american banks are wetted through CDS insurances up to 56%, hence the red teppish scrolled for Merkel, and the different pressions from Obama and Geitner
good luck
June 23, 2011 - 9:19 am Link to this Comment -
63. Unsk
Another side of the collapse; Deep Capture has a long series of posts on the Al Qaeda affiliated SAAR network ( with mafia help ) of financial brokerages, funds and players that seemingly orchestrated the massive short selling of American Banks that led to the crash of '08: http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-16-the-deep-capture-of-america-and-some-clues-as-to-the-once-and-future-cataclysm/
The glaring takeaway in this post is that the SAAR network and its friends were investigated by the FBI up till 1999 but that investigation was terminated and never reopened. Even after 911, when there were clear links to Al Qaeda. Deep Captrue allleges that many members of Congress, the SEC and a good size of chunk of DOJ have been bought off by the Saudi 's who have blocked an investigation. Carol Herman's criticisms of Dubya really ring true here. The levels of corruption and the treason are just unbelievable, and nothing was done under Dubya and certainly not Buraq. Time for some show trials and massive executions. The stench is just too great.
Just a another reason why Bernacke's speech rings so hollow and false. How could anyone think the economy can come back when the FED has consolidated the banking industry into the hands of the most crooked big banks, cut loans to small business, cut real estate loans, raised interest on credit cards to the max ( a major source of small business capital), created a massive inflation of raw materials,food and energy precipitating both a huge shrinkage of household buying power and profit margin compression and let Obama and his minions heap ever more regulations and controls through Obamacare, the EPA, the Endangered Species Act enforcement, the NLRB, Dodd/Frank and oil drilling bans? And nary a word on the pervasive corruption in our financial industry? Does he really think we are that stupid? Obviously some are, like those who think the Bernack is saving us from collapse.
June 23, 2011 - 10:17 am Link to this Comment -
64. Nimrod
Just as HIV is an attack on cells that are designed to prevent attacks on cells [the crooks are attacking the police], so too our credit crisis was an attack on creditors and debtors by the retrovirus of defective collateralized debt obligations. The proximate cause [but for____, this would not have happened; if we did ___, we could predict this.] had to be loan repackagings and spurious ratings by Fitch, S&P, and Moody's.
The tools that create new money–the fractional banking system followed by successful loan repayments were being poisoned.
And the really arcane complexity, e.g., the synthetic arbitrage CDOs, partially synthetic linked CFOs, linked non-synthetic structures, blah blah, did not help
the cleanup.June 23, 2011 - 10:56 am Link to this Comment -
65. Don Rodrigo
47. Smoking Frog and Joe Hill:
Housing costs, like the cost of education and healthcare, have exceeded the average rate of inflation by a huge factor over the last half century.
June 23, 2011 - 11:30 am Link to this Comment -
wc@40: The act of increasing (producing) physical capital that in turn produces goods and services for which there is a demand, will increase the demand for people who hire themselves out for wages. The faster that an economy is able to increase its capital stock, the bigger the demand for wage earners will be.
Which isn't going to happen while business is paying down balance sheets. The goal is minimizing debt, not maximizing profit.
Ending the military adventures in the ME will bring an abrupt end billion dollar a day black holes. It's the single best thing Washington can do for the post-recession economy.
We may also see that public sector employees peak at one in six, if not decrease. We're not Puerto Rico (one in three) – yet.
June 23, 2011 - 12:00 pm Link to this Comment -
67. Whitehall
I've long predicted that the US government would neutralize its dollar debt to China by inflating the currency. That would also force them to float their currency against the dollar thereby ending much of their competitive advantage against the West and Japan.
TARP was probably needed to inject liquidity into a damaged or sabotaged part of our capital markets. I can understand and accept that. However, when the Fed steps in and buys Treasuries, the blame lies first with Congress for running deficits that no one else will loan against.
The Fed was cornered into QE1 and QE2 by the fiscal policy of the US. Why Benanke went along without too much fuss might be because of his academic leanings against deflarion or there might be darker reasons. In either case, an independent Fed run on more classical thinking might have let the deflation happen more so that the country followed Mellon's advice – "Liquidate, liquidate, liquidate!" Sharp and quick is far to be preferred over long and deep if one considers the overall health of the economy.
Yes, there are deeper, structural issues within the US economy and between countries via global trade that need correction. Most of those problems stem from social disarray and lack of virtue on the part of citizens.
I'd say "Good luck to that" except there is no place to escape to. The proper course for an upstanding citizen is to continue to fight for better government and institutions and set a good example for others, all the while covering one's ass against further "times of trouble."
June 23, 2011 - 1:09 pm Link to this Comment -
68. Orphaned Son of Liberty
Don Rodrigo@65
"Housing costs, like the cost of education and healthcare, have exceeded the average rate of inflation by a huge factor over the last half century."
What is different about society today (or 2006) from 1950? The answer to that question is the major reason why housing costs have outstripped inflation, IMELTHO. That answer is the predominance of two income households. In 1950 TIHs were few and far between. Today, it is almost impossible (certainly in the God forsaken confines of Silicon Valley) for a single wage earner to buy a house. All that occurred with the increase in TIHs were that most communities had two incomes to compete for each from the supply of homes, driving prices up at a much higher rate than that of inflation. If you looked at the rate of increase in household income, I bet youl'd find a much closer correlation to the increase in housing prices that what you find with actual yearly inflation.
June 23, 2011 - 2:01 pm Link to this Comment -
70. Make Believe Media
OSL/68—I give; what's IMELTHO?
In My E… L… T… H… Opinion.
Held?June 23, 2011 - 2:39 pm Link to this Comment -
In My Extremely Less Than Humble Opinion
Don't you people have any stretch?
June 23, 2011 - 2:46 pm Link to this Comment -
72. Don Rodrigo
Obama has tapped the Strategic Oil Reserve to try to help bring down gas prices. The reserve is for national emergencies, but this is typical Obama mendacity. He and his minions really do think of America as a big plaything that they own, and can do with as they please, and no one is standing in their way.
In typical "audacious" fashion, Obama has claimed that the Lybian crisis was one reason to tap the reserve, even though we don't import Lybian oil. Why is Lybia a "crisis" for us when it's not even a "war" and we're not really "involved" there? This guy is redefining the meaning of scoundrel.
June 23, 2011 - 2:59 pm Link to this Comment -
73. Joe Hill
josh@38 "how do you get from $8,450 to $268,000 (the average price in 2006) in 56 years
about 6.1% compound interest."
So in other words the Fed, the folks in charge of our monetary policy and money supply have been missing their 2% target by a factor of 3X over a 56 year period. That is a pretty abysmal record and I would conclude the source of a lot of the systemic problems in our economy. The central bank has failed in its prime mission to protect the dollar as a store of value.
But to get back to Koo's argument that the government should step in to prop up demand until private consumers have unwound their debts and can get back to buying again it falls to pieces when you look at what government buys as opposed to what the consumer buys. Propping up the check disbursing industry by keeping local civil servants on the payroll of communities who can neither afford the check disburse nor the the check is not going to drive demand for the industries that can actually produce jobs. Same with the pothole filling industry, and the windmill industry.
The basic problem is the government is really only good at a few things like killing my enemies and building roads while it is poor to awful at managing the money supply and running car companies. Since in normal times it is already killing as many enemies as need killing and building roads the need building having it jump in to prop up demand simple ensures that it will either kill people who do not need killing or get involved in wrecking the auto industry aka the Chevy Volt.
The Fed was a mistake. TARP was a mistake and QE2 was and the stimulus were even bigger mistakes but the folks n government who skim off a little vigorish of every dollar passing through Washington liked them all. What a surprise.
June 23, 2011 - 5:43 pm Link to this Comment -
74. Joe Hill
larryd@49 "Isn't preventing deflation the whole point of the Federal Reserve?"
No preventing deflation of the assets of banks, brokerages, insurance companies, and pension funds of institutions that are too big to fail or hold the money of large unions is the purpose of the Fed per The Bernank. The rest of you can screw yourselves.
The actual purpose of the Fed was supposed to be to prevent deflationary or inflationary spirals caused by wild fluctuations in the money supply and in doing so to allow people to invest or borrow long term with the confidence that they will not get payed back with cheap dollars for the dear dollars they saved or lent. A money supply based on specie that cannot grow with growth in population and the economy tends to make dollars dearer over time and thus to inhibit economic activity while wildly accelerating money supplies is a effectively a default by the borrower as it permits him to pay back dear dollars with cheap ones. The Fed was supposed to shut William Jennings Bryan up but of course all anyone remembers about this incredibly important figure in US history is the Scopes Monkey Trial
June 23, 2011 - 6:21 pm Link to this Comment -
JH@73: Propping up the check disbursing industry … is not going to drive demand for the industries that can actually produce jobs.
The objective – during the recovery from a "balance sheet" recession – is not economic growth, which is not physically possible until debt is controlled, but the avoidance of economic contraction during the correction period. The danger is that any 'buying time' strategy will be abused by a corrupt financial system.
There is a lesson here – and it's neither economics nor ideology. The lesson is that the USA "construct" doesn't respond very effectively to reprieves. The crony corporatists escape richly deserved consequences. The strong suggestion is that "fast and deep" might well have been preferable to "prolonged and shallow" from both an institutional as well as a psychological perspective. Like it or not, the 2008 Congress chose the latter route, a context that makes the Richard Koo approach more practical, but still viscerally unpopular and quite possibly politically unfeasible.
As I wrote above, the single best thing the Obama administration can do for this economy is end the financial drain of ME wars.
June 23, 2011 - 6:39 pm Link to this Comment -
76. Joe Hill
Orphaned@68 "If you looked at the rate of increase in household income, I bet youl'd find a much closer correlation to the increase in housing prices that what you find with actual yearly inflation."
Average income 1950 $3,214, average household income 2010 $50,000~ per census. That is a 15X increase much of which is due to those wives added to the work force but housing went up more than 30X.
Wages have been relatively held down thanks to massive illegal immigration, H1B visas, and the flooding of the work force with women. Add to that most decent jobs now require an expensive college degree and several years of lost opportunity costs as a minimum requirement and it becomes clear that labor has been screwed in this country by somebodies policies over the last 60 years.
June 23, 2011 - 7:56 pm Link to this Comment -
77. Joe Hill
YBR@75 – the only contraction that the government stimulus money and the QE money avoided was a contraction in government which was already in short supply. Government spending is no substitute for private spending because government spends its money in none economically productive sectors like bridges to nowhere and thousands of regulatory bodies at the state and local level that in addition to eating out our substance are inimical to business formation and job creation.
It is like pouring sugar in a gas tank as it diverts money to deleterious uses.
June 23, 2011 - 8:40 pm Link to this Comment -
78. Subotai Bahadur
#60 raven
Since we are making money, now we need to figure out what to do with it.
When you live in a country where the rule of law has broken down, and where everything is subject to confiscation one way or another; you have to learn to live like in other banana republics. There are no financial instruments in this country that are safe today, as you point out. Everything inside our borders, and much outside cannot be considered safe private property.
Speaking ex cathedra from my solipsistic navel; I will offer my suggestions for free, which is probably more than they are worth. In addition to the measures you are taking:
After-tax corporate profits, if you have such, should be used to first stockpile physical possession of critical operating materials close enough to be used, and possibly setting your company up to be able to operate in an environment where electrical and other power is subject to interruption. That will get you through conventional to moderate hard times.
Second, lean times are coming. A cash emergency contingency reserve to keep you going if business falls apart for a length of time. The size of the fund and duration to plan for is something you will have to work out. And by cash, I do not mean demand deposits, which can be frozen or seized "for the good of the people".
Once this is done, if there are still profits coming in, you have a choice. Shareholders and/or partners/owners should recover as much as possible of their investment as can be paid out before triggering confiscatory taxation. That will enable them to make their own preparations for hard times. If there is corporate money left after that [not likely, unless you are doing really well]; I would suggest that the company invest in physical holdings of commodities that have a worldwide market, and that they be held overseas. That may or may not include precious metals. Do not buy shares. The paper is worthless. Only hold what you can touch and will be under your control. There will be holding costs, that may or may not be offset to a certain degree by appreciation; however if the owners/shareholders are declared Kulaks the commodities can be converted to something negotiable anywhere in the world, which may come in handy.
Personally, inside the country, with the understanding that anything can be confiscated; get as much out of debt as possible. I would have land away from [> 50 miles] urban areas in a community large enough to be relatively self sufficient; with access to water, arable land, and hopefully a certain ability to generate power. Cities are going to go seriously feral when hard times come, and you are not going to want to be anywhere near them. Once there, I would integrate yourself into the community so that you are considered one of them, and not one of the outsiders who are going to be making life exciting. There are a lot more factors to take into consideration, but this is not the time or place for a discussion of that length and political incorrectness.
And no, I did not take my optimism pill today.
Subotai Bahadur
June 23, 2011 - 9:33 pm Link to this Comment -
JH@77: Government spending is no substitute for private spending because government spends its money in none economically productive sectors
One last round for the record. There is no question that government sponsored resource allocation is inefficient. It's not intended as a substitute. It's intended as a bridge to buy time until the private sector recovers – and the bankers devise a new scheme to crash the system.
June 23, 2011 - 9:34 pm Link to this Comment -
80. Smoking Frog
Joe Hill @73 So in other words the Fed, the folks in charge of our monetary policy and money supply have been missing their 2% target by a factor of 3X over a 56 year period.
No. As I said, the rate accelerated far more recently, although, as I now see, my "20 years" was too long, depending on how you look at it. Look at this web page:
It's adjusted for inflation, so you wouldn't get my 6.37% from it, but it does show that the huge upward leap began in the late 1990s, and that the Fed has not been missing by a factor of 3X over a 56 year period. (If it had, that huge leap beginning late 1990s would not exist.)
June 24, 2011 - 2:52 am Link to this Comment -
81. Smoking Frog
Joe Hill @73 So in other words the Fed, the folks in charge of our monetary policy and money supply have been missing their 2% target by a factor of 3X over a 56 year period.
One other thing. Inflation from 1950 to 2006 averaged 3.8% per year. Inflation from 1997 to 2006 averaged 2.5% per year. (1997 was when the huge leap in home prices began.)
Home prices, beginning in the late 1990s, grew much faster than inflation.
June 24, 2011 - 3:12 am Link to this Comment -
82. Smoking Frog
Don Rodrigo @65 Housing costs, like the cost of education and healthcare, have exceeded the average rate of inflation by a huge factor over the last half century.
No. Look at the web page that I just recommended to Joe Hill.
June 24, 2011 - 3:17 am Link to this Comment -
83. Smoking Frog
Orphaned Son of Liberty @68 What is different about society today (or 2006) from 1950? The answer to that question is the major reason why housing costs have outstripped inflation, IMELTHO. That answer is the predominance of two income households. In 1950 TIHs were few and far between.
That's probably an overstatement. Here are the labor force participation rates for 1950 and 2010:
———— male — female
1950 — 86.4 — 33.9
2010 — 72.6 — 59.7If you could show that a much larger percentage of working women were single in 1950, or that a large percentage of them were married but in a household income bracket too low to buy a house, then maybe your statement wouldn't be an overstatement.
June 24, 2011 - 3:39 am Link to this Comment -
84. Whitehall
#78 Subotai Bahadur
Your suggest that one hold physical assets with global markets outside the country brings to mind (again) "Gone with the Wind."
Rhett Butler held large stocks of cotton in a Liverpool warehouse, safe from the confiscations of the Confederate AND Union governments. He awaited the war's end before cashing out and became a wealthy. powerful man in a devastated country.
A fictional treatment, true, but age-old advice.
However, moving to your arcadian communities with all the essential elements of life far from a large city implies the means to live there without local income. Big cities are big because they provide the economic opportunities that small cities lack.
I was born in Sharpsville, Indiana, "800 happy souls and a few more" but live in a city of a million, San Jose, California, embedded within the San Francisco Bay Area of over 6 million. What I could do to make ends meet in Sharpsville are beyond my imagination.
June 24, 2011 - 11:22 am Link to this Comment -
85. Orphaned Son of Liberty
Gordon @ 69, MBM@70
Sorry checked out of the thread when the new ones opened..
IMELTHO = In My Evidently Less Than Humble OpinionJune 24, 2011 - 1:34 pm Link to this Comment -
86. Subotai Bahadur
#84 Whitehall
Not Arcadian, nor quite as small as Sharpville. I already live [happily] in an appropriate community. We are into 5 figures, which is about the largest you want. As for living, things are going to be downgraded economically fairly quickly if TSHTF. Far closer to subsistence. Granting that we are fairly rural here, and most people with the land have some skills to make it productive, but things are going to get primitive. Specialist skills will become important.
You also need to be big enough to be able to support enough of a force to defend your home area. Being isolated does not work. Y'all have to sleep sometime.
Big cities [>50K] will be deathtraps. "Just in time" scheduling did not start with the auto industry. It started in the grocery business. The average city has a 3 day supply of food in stores and warehouses. It depends on constant replenishment, which may not be there. Water supplies, being centralized, may be interrupted. In a city, that is a death sentence for a lot of people. Power supplies will be less than reliable; and absent power, heat in winter will be non-existent. People stacked on people in apartments may as well be on desert islands. And in a urbanized area, you cannot create a large enough secure zone to give adequate warning against the feral two-legged critters so that you can defend yourself. There will feral two-legged critters, a lot of them. Police already are not able to protect from an imminent threat. If things go Tango Uniform, they will not be able to even come pick up the pieces.
The most complex and delicate machine ever invented by man is the human city. And its critical functions are non-redundant at a level that can support the population absent massive outside help in a crisis.
San Jose, California on a good day is barely functional. I have driven there during rush hours [plural intended]. I submit that you should have a secure place to bug out to prepared with like minded people there, a bug out bag ready, and a tendency to jump early with you and yours. Oh, and one of the dumbest things that has lodged itself in the American psyche is the idea that you can "run away to the mountains". The real mountains are one of the hardest environments to survive in, and they will not support any real number of people in the absence of a local support infrastructure.
I wish you well. BC-er's are the ones we need to have get through the hard times.
Subotai Bahadur
June 24, 2011 - 1:47 pm Link to this Comment -
87. Orphaned Son of Liberty
If anyone's still reading:
http://en.wikipedia.org/wiki/Household_income_in_the_United_Statesshows this:
Income Range (percent) Mean # Wage Earners
$0 to $25,000 (28.22%) 0.6
$25,000 to $50,000 (26.65%) 1
$50,000 to $75,000 (18.27%) 2
$75,000 to $100,000 (10.93%) 2
$100,000 or more (15.73%) 2So the top three groups, namely the bull of households who might pursue home purchases have a mean(!) of two wage earners. I do think this supports the proposition that two income households have squeezed single income households if not out of the market, at least to a low tier in it. Interesting subject..
June 24, 2011 - 2:46 pm Link to this Comment -
88. Joe Hill
Once more YBR I do not know what the difference is between a bridge and a substitute. If goverment is spending to make up for private non-spending then it is a substitute, and as a substitute it is about as effective as a bowl of deep fried cracklins for a Weight Watchers frozen dinner for a dieter. Government over-regulation as much as any balance sheet recession is what is stifling the economy and the first thing the government largesse was spent on was propping up state and local government. Or as TurboTax Timmy said we have to raise taxes or government will shrink. Well golly I would sure hate to see that happen.
Government spending is a bridge to nowhere.
June 24, 2011 - 5:29 pm Link to this Comment -
89. Carol.Herman
Back in the late 1930′s Wall Street couldn't find retail customers.
With our ZOMBIE ECONOMY, the same thing is back. You can't earn your living if you're selling stocks for a living. And, you ain't earning commissions.
This is true in real estate, too.
And, what it means to see a ZOMBIE ECONOMY … means it looks like an EKG on flat line.
Usually, when you see blips on an EKG, the patient has life. With an economy in flat line, there are no blips. You can't even work a hedge fund. Because there's nothing to hedge. No blips. Or spikes.
It's the same thing that happens when your well runs dry. You can pump. But you can't fill your bucket.
Ahead? It probably means obama becomes Hoover. And, one party can disappear for 40 or 50 years. While religious zealots have taken over key slots in the GOP apparatus. Well, like whore houses, politics isn't for everyone.
June 24, 2011 - 7:15 pm Link to this Comment -
JH@88: Government over-regulation as much as any balance sheet recession is what is stifling the economy and the first thing the government largesse was spent on was propping up state and local government.
The stimulus bill was a third "shovel ready" infrastructure, a third tax cuts, and a third state (and local) government spending. As such, the "stimulus" was a classic compromise among competing economic views.
The go-go market escalation after the so-called dot.com bubble in 2000 was governed by the same set of regulations as the current recovery period – with, of course, the notable exception of financial services who wasted no time in leveraging the opportunities afforded by legislative advantage.
The issue of regulatory burden is older than god and rises and falls with the business cycle. The megaphones come out during a recovery.
Tax reform presents far more significant opportunities for providing economic stimulus by creating a financially sound and stable operating environment that encourages capital investment. What remains to be seen is whether or not economic growth can be stimulated as effectively under the western system of regulated free market capitalism as is currently being implemented under the explosive State Capitalism of emerging economies, most notably China.
I am positive that the western way will prevail, eventually, but the immediate term future is murky. State-directed capitalism works well during the run-ups, which is where China et al are now. The inherent vulnerabilities are disguised until the down-turns. Mercantilism is ascendant right now, but I'm waiting for the shake-out. It will come.
June 25, 2011 - 10:11 am Link to this Comment -
91. Joe Hill
YBR – Agree tax policy important but while once we could build the Empire State building in 14 months, and it did withstand a bomber flying into it, the world trade center replacement is pushing 10 years now and has years to go. That is over-regulation. In China or India you can find the right guy to pay off a lot quicker and so they get things done. Their crooks are more efficient than ours.
June 25, 2011 - 4:03 pm Link to this Comment
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We had the entire place to ourselves tonight, just the four of us. Though I missed seeing everyone else that we spent the week with, it was nice to just be the four of us, like some of the old times.
We are leaving on our thirteen hour drive back tomorrow morning. There is a big part of me that doesn't want to leave, with the part of me not sure it could stay, very, very small. If the opprotunity to move down here is truly presenting itself...I'm left to consider it.
But then I'm disturbed by this 'if' word. Along with a comment I made tonight, about it taking liquor for 'us' to express our feelings. This is my own noose laid out for me to hang myself with. When I made that comment, from out of thin air, for whatever reason, I do not know now; I can only reason that I was making it about myself. And the horror of the comment is that I don't express my true feelings under the influence. I don't express anything that is true. I just express. ANd yes there are things that I'm thinking that I'm not expressing when I'm sober, that some part of me feels I should be.
Goddess, I'm rambling. Maybe I just need to write. So that is what I'm doing...so instead I'm going to leave the last few paragraphs and finish instead of deleting it all, as I want to so badly. Perhaps if I come back and read this tomorrow, I will be able to make some sense out of it, that I can't at three in the morning.
OK, on with this whole thing of not being able to express my true feelings...
There are lots of times when I don't think people are being completely up front with me, that they are holding out on me. OK, well I could go to the doctor and get some anti-anxiety medicine, but is that really going to solve the problem? I don't think so. I believe the problem could be that I'm not being up front and honest with what I'm feeling, and therefore that is why I believe others are doing the same to me.
I SO need to get this out, because I'm feeling so completely insincere right now. I'd like to say thay I don't know who I am at times, but I've been this person for so long. I don't want to be so closed up...


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text: I'd take a rattan bo staff. That way I'd turn into one of those zombie boss types that force you to reload the boss fight a million times. Only, this is 'real life', so you don't get to load from save after the first time my superpowered zombie mode kicks your butt.