Entries for November 2008

Before we all start loading up on Elmo Live! toys and Wii Fit games, might be a good time for an economic reality check. As Bruce Kasman of JP Morgan gloomily sees things:

"Economic reports continue to beat the drum of a deep and synchronized global downturn. Industrial activity readings are pointing towards the first double-digit annualized decline in global manufacturing output since the mid-1970s. And this week’s key national November business surveys—including a collapse in Germany’s Ifo and Japan’s Shoku Chukin—should combine with a further slide in the US ISM survey next week to reinforce the message that business confidence is approaching a three-decade low as the quarter ends. With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since WWII appears to be on track."

Hey, good news for Alan Greenspan, Barney Frank, Chris Dodd and those Wall Street quants who never figured housing prices could plunge across the country: America's financial fiasco isn't your fault. At least that's the claim of Ayman al-Zawahiri. Al Qaeda's #2 has this to say about the credit crisis:

"This crisis is one of ... the series of American economic hemorrhages after the strikes of September 11... And these ... will continue as long as the foolish American policy of wading in Muslim blood continues. The ones shouldering the burden are taxpayers, whose money was spent to rescue senior capitalists and to protect the fraudulent interest-based system from collapse."

Me: I really love it that these murderers of average Americans try to reach out to average Americans by looking out for them as taxpayers. Oh, and I might think more highly of Al Qaedanomics if they didn't want to take us back to the boom times of the 7th century.  Current betting market odds of Osama Bin Laden being captured or killed by next summer? A far-too-low 16 percent.

1) Greg Mankiw reveals the academic rankings of the Bush economists vs. the Obama economists. Shocker,  Austan Goolsbee is just #653 (with a bullet I am sure)? Don't the rankings count snappy talk-show patter?

2) Stan Collender (Capital Gains and Games) makes a great point about a Big 3 bailout. We didn't want to spend money on their cars, why  would we want to spend money on the companies that make the cars we don't want. (Full disclosure: The only new cars I have ever purchased have been Fords. Never a problem, my union brothers.)

3) Free Market Politics has a string of outstanding posts. I can't pick just one!

Barack Obama has said he'll do "whatever it takes" to boost the economy. But I think what Obama really means is that he'll do "pretty much whatever it takes." Could you imagine him, for instance, pushing this economic recovery plan formulated by Nobel Prize-winning economist Robert Mundell, revealed in a must-read post on Larry Kudlow's must-read blog.

As Kudlow describes it, Mundell would "like to see a complete corporate tax holiday for one year. He then favors corporate tax reform that would drop the current top rate from 35 percent to 15 or 20 percent. He believes this would generate badly needed business investment and job-creation to fight recession." (Mundell would also like a stable dollar.)

But given that Obama even seems to be waffling on not raising income and investment taxes until the Bush tax cuts expire at the end of 2010, a big corporate tax cut seems unlikely. Also, a new blog post by Robert Reich neatly sums up liberal thinking on tax cuts and probably provides a window into Obama's world view: "Conservative supply-siders, meanwhile, will call for income-tax cuts rather than government spending, claiming that people with more money in their pockets will get the economy moving again more readily than can government. They're wrong, too. Income-tax cuts go mainly to upper-income people, and they tend to save rather than spend."

No, the reason you would want to cut taxes, be it on labor, corporations or investment, is to create long-term incentives for growth (savings and investment) and create confidence among individuals and companies. I think that is how you should grade any economic idea right now: Does it build confidence?  A lack of confidence is what's killing the economy right now ...

The media and Wall Street might be thrilled with Obama's economic picks, but not some left-of-center folks. Here are some Daily Kos comments today on the Paul Volcker/Austan Goolsbee selections:

1) "Goolsbee's straight out of the University of Chicago's "free trade" think tank."

2) "Goolsbee' s about as solidly right wing as they come."

3) "Volcker is a questionable choice because he seemed more than willing to let jobs die on the altar of taming inflation."

4) "How do create/Keep 2.5MM Jobs with someone who's paranoid about inflation. The Voice in the chorus argument doesn't hold since he's the chair."

5) "I can only assume that Obama is not his own man at this point, or is ignorant of the real persons he is nominating. Volcker is an advocate of Americans "trimming" their standard of living. He is wall street bankers personified, a plutocrat. Google Volcker and standard of living."

Me: First of all, use of the word "plutocrat" is usually my signal to sign off. Second, it seems to me that most liberals want infrastructure spending,  green energy investment, and healthcare reform.  Obama's picks seem to be on that wavelength. But anyone waiting for them to tear up NAFTA or put tariffs on Chinese goods or push tax rates back to 90 percent, keep waiting.

No one can complain about Paul Volcker and Austan Goolsbee being part of this new Economic Recovery Board. Top notch folks. But who else is going to be part of it? Maybe it is time for some economic bipartisanship, yes? How about John Taylor, Greg Mankiw, Glenn Hubbard, Martin Feldstein, Larry Kudlow, Arthur Laffer, Lee Ohanian, Brian Wesbury, the economics department of George Mason University ....

Who is Timothy Geithner that upon news of his impending nomination by Barack Obama, Matt Drudge would wonder -- in huge headline type --  if he was the man would "save the economy?"

Timothy Franz Geithner. New York Federal Reserve President. Technocrat. Bureaucrat. Career civil servant. Didn't like Paulson's financial regulation overhaul. Engineered the Bear Stearns "rescue." Heartily agreed that Lehman shouldn't be saved. Kinda thought Lehman should be saved. Worked at Henry Kissinger's consulting firm. A moderate Republican turned registered independent turned Obamacrat. Has a master's degree in international relations from Johns Hopkins. Put together the AIG rescue plan. Just 14 days younger than Obama. Dartmouth guy. Has lived in Japan, India and Thailand. Had a "general understanding" of the complex issues involved when Long-Term Capital imploded (via Alan Greenspan.). Worked at the Treasury department under Robert Rubin and Lawrence Summers. Faced a "steep learning curve" when he came to the Fed (via Gerald Corrigan.). Good softball player. Self-deprecating sense of humor. Thinks income inequality and entitlements and too little saving are big problems. Not an economist. Never run a company. Married with a couple of kids. Surfs.

Enough answers for you? I dunno, I still have a few questions I would love to ask him. "Please describe your role during the the demise of Lehman." "How has the AIG bailout been good for taxpayer?" "What role did did Fannie and Freddie play in the subprime mortgage bubble?" "What role has government policy played in creating the housing and credit crisis?" "How does tax policy affect economic growth?" "What should be done to fix Social Security?" "Should the government more directly aid homeowners?" "What is the growth potential of the U.S. economy?" "Should unions represent more workers and how would that affect productivity?" "Should China be pushed to strengthen its currency." "Does America need a stronger dollar?" "How do budget deficits affect real interest rates."

But this is the most important one: "Mr. Geithner, the job of the New York Fed is to -- now I am quoting its own web site -- 'supervise and regulate financial institutions in the Second District [Wall Street]. Its primary objective is to maintain safe and competitive U.S. and global banking systems.' You have been in your current post since 2003 and during that time the U.S. financial system has come close to complete disintegration. Why do you deserve a promotion?"

OK, so the Fed said it will purchase a) up to $100 billion in GSE debt and b) up to $500 billion in mortgage-backed securities backed by the GSEs. Why is this important? Michael Feroli of JPMorgan Chase says "it will measurably improve conditions in the mortgage markets and will have beneficial effects on housing and the broader economy." Ed Yardeni says the plan "significantly increases the odds of a recovery in housing and in the economy. We should all give thanks to the Fed."

The other big news the new $200 billion lending facility to holders of consumer/small business-related asset-backed securities. Again, Feroli: "While previous facilities have generally been aimed at improving conditions for financial markets and financial institutions, this facility is more clearly geared toward directly providing credit to nonfinancial borrowers."

Goldman Sachs does the stimulus math this way: Take Obama's claim that his stimulus proposal would create 2.5 million jobs. According to Okun's Law (concerning the relationship between unemployment and GDP), an increase of 1.8 percent in employment requires a 3.6 percent increase in the size of the economy, or $530 billlion. Goldman says that the stimulus multiplier effect for tax cuts is 1.0 vs. 1.5 for spending increases. (Don't get me started.) So a $350 billion spending package would generate the same oomph as a $530 billion tax-cut package. So the stimulus needed would be $350-$530 billion.

Me: Of course, Democrats in Congress have years of pent-up spending ideas that they may wish to dump into any package. So I think the package will end up being about the same size as TARP, $700 bllion or pretty much the upper-range of what Sen. Chuck Schumer predicted. And don't forget a possible homeowners bailout with a mega-refinancing plan. That would be an additional $300 billion.

My guy Pete Davis of Davis Capital Ideas on why taxes are going up, all of which may explain why Obama waffled yesterday on keeping the 2001 and 2003 tax cuts until at least their expiration at the end of 2010): "With the deficit reaching $1 trillion ... there will be pressure to raise revenue. If a permanent fix to or repeal of the Alternative Minimum Tax is to happen, that will likely be "paid for" with a top rate tax increase. AMT repeal would require a 4%-point increase from the current 35% top rate." 

Me: This plays into the possibility of a "millionaire's" surtax, which would be left in place when the 2001, 2003 cuts expire. That would push the top rate to 44 percent -- higher than the top rate under Bill Clinton.

Citigroup is now a GSE, a Governmet Secured Enterprise. IHS Global Insight  puts taxpayers on the hook for just over $100 billion on the deal, not to mention the new $20 billion capital injection. And to think taxpayers could own the whole thing for $25 billion last week.

Obama's picks of Geithner and Summers were no surprise. (What no Goolsbee? Alas.) But the selection of Berkeley prof Christina Romer is interesting. Along with hubby, David, Romer wrote a fascinating paper on the wonderworking power of tax cuts. Their analysis found that "tax increases appear to have a very large, sustained, and highly significant negative impact on output ... [and] that tax cuts have very large and persistent positive output effects." The key, they found, is to also cut spending  so you won't get lured into raising taxes down the road. Bottom line: Cutting taxes good. Raising taxes bad.

The weekend NY Times story on Citigroup was not kind to Robert Rubin:

"Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration. Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street. As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues. ... But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy."

Me: How did Phil Gramm and Alan Greenspan get blamed for the credit crisis, but not Robert Rubin? Maybe because this story didn't come out before the election.

Economist Greg Mankiw asks a good question:

"What is going on here? Logically, it must be one of three possibilities:

1. The fiscal stimulus is going to be much smaller than is being reported.
2. The new administration is setting a low bar for itself when it comes to job creation.
3. The Obama team believes in very small fiscal policy multipliers.

Let me amplify the last point. ...  So let's say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. Traditional Keynesian models suggest a multiplier closer to 2.0.

Ok, here were go (from the WSJ):

1) Treasury agrees to inject $20 billion at 8 percent interest.

2)  The government agrees to backstop a $300 billion pool of assets, including MBS. "Citigroup must absorb the first $37 billion to $40 billion in losses from these assets. If losses extend beyond that level, Treasury will absorb the next $5 billion in losses, followed by the FDIC taking on the next $10 billion in losses. Any losses on these assets beyond that level would be taken by the Fed."

3) Citigroup would try to modify troubles mortgages in that pool as the FDIC has done with IndyMac.

Me: I am guessing the market will look at this as a positive tomorrow. It looks like we going the "all of the above" route -- capital injection, de facto asset cleansing ...