Did Obama Save the Economy?

"Two years ago, the McKinsey Global Institute looked at the recoveries of 32 countries that had undergone a financial crisis. Their analysis was grim. It was also correct. Contrary to the hopes some held for a quick recovery, MGI warned that financial crises tended to lead to long, slow recoveries as households, businesses and governments dug their way out of debt. But in a report released last week, MGI delivered some sunnier news — at least for the United States. If you look at the 10 largest developed economies in the world, the United States is the furthest along the path to recovery.

Looking back to their sample of 32 past instances with post-financial crisis recoveries, MGI zeroed in on Finland and Sweden’s experiences in the 1990s as the most relevant to our current moment. Those examples 'show two distinct phases of deleveraging. In the first, households, corporations, and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises. In the second phase, growth rebounds and government debt is reduced gradually over many years.'

Most economies, the authors say, are barely even in phase one. In the United Kingdom and Spain, for example, total debt is still rising. But not in the United States. Here, 'debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. U.S. households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.'"

Read the Washington Post, U.S. recovering faster than its peers.

So much for the myth of expansionary austerity.

The Fed Enabled a Ponzi Scheme

It has been a year since the collapse of Bear Stearns, which was the beginning of the deleveraging.

Listen to NPR, Book Reveals Bear Stearns' 'House Of Cards.'

In short, for twenty years Bear Stearns and other financial banks became fabulously wealth using billions of dollars in fed money borrowed overnight for very low rates and using that borrowed money to buy risky notes, such as subprime mortgages. The profit was in the spread, that is, the difference between the cost to borrow the money and the return on the risky investments. And the riskier the investiment, the higher the profit.

It was a Ponzi scheme in that new money instead of profit was always needed to payoff older promises because the profit was used to finance lavish salaries and bonuses. It worked fine so long as new loans were available, but it depended on refinancing billions of dollars everyday.

But, like a house of cards, it wasn't structurally sound.

In short, our government, through the Fed, enabled a Ponzi scheme and is now using the U.S. Treasury to prop up the scheme.

And companies know that the government will bail them out. Read, The New York Times, The Looting of America’s Coffers, which states:

"Sixteen years ago, two economists published a research paper with a delightfully simple title: 'Looting.'

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a "total disregard for even the most basic principles of lending," failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors "acted as if future losses were somebody else’s problem," the economists wrote. 'They were right.""

The full title of the research paper is Looting: The Economic Underworld of Bankruptcy for Profit.

Where is the outrage! Are taxpayer really such foobs?

Oh, sorry, you are worried about the earmark bogeyman created by the Republi-cons to distract you from the cause of the economic mess.

Why do I pay my taxes?

UPDATE: Read The New York Times, A Tsunami of Excuses, for more proof that greed caused the economic mess.

Leveraged Beyond Imagination

What's going on in the economy? It is deleveraging. We were living in a house made of credit cards and it was not very structurally sound.

Here is a fuller explanation. I am not sure of the original source, but you might find it informative.

"Former FED chief Paul Volcker hits the nail on the head when he says “There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something.”

When he says “leveraging beyond imagination” he means it. In fact, there is really no way to adequately describe it, since the investment vehicles designed to conceal the extent of the leveraging are so complex. Even trying to describe it simplistically can be a chore, but I’ll try:

The bankers, who make loans to people by issuing them “credit” are allowed to count the debt they hold as assets on their balance sheets. Then they are allowed to use those “assets” (i.e., the money owed to them) to make even more loans.

This would be the equivalent of you lending someone $1,000. So you put that thousand dollars on your balance sheets as an asset, and you give someone else a loan of $800 from the $1,000 you are owed, by issuing them a spendable credit.

Then you put that $800 on your balance sheets as an asset, since it is owed to you, and lend someone else $600 on the $800 you are owned, by issuing them a spendable credit.

Then you put that $600 on your balance sheets as an asset, since it is owed to you, and lend someone else $400 on the $600 you are owed, by issuing them a spendable credit.

Then you put that $400 on your balance sheets as an asset, since it is owed to you, and lend someone $300 on the $400 you are owned, by issuing them a spendable credit.

That’s called leveraging debt. (I know that’s a simplistic example, but it will do for the sake of this commentary.)

Now, you only started out with a single $1,000 loan. That’s all of the money you had. But suddenly you have $3,100 in “assets” on your balance sheets even though in reality there is only the original $1,000 you lent out. The rest is simply credits you’ve issued to others, that are “owed” to you.

That’s what former FED chairman Paul Volcker refers to in the below article as “credit alchemy” – the art of making money out of thin air by granting loans based on previous loans, based on previous loans, based on previous loans, ad infinitum.

In reality there is nothing backing up those loans but the “promises to pay” of each of the previous debtors. Of course, to keep the debt pyramid going, you have to make more and more loans, which by definition means you have to make riskier and riskier loans.

But wait. There’s more. If you were a bank, people probably invested in your stock. After all, you were a genius. You were able to turn $1,000 into $3,100 – at least on your balance sheet. And as investors saw what a great businessman you were and how you were able to operate so “profitably,” they invested more and more money in your bank by purchasing its stock. This gave you even more money to loan out, on the same leveraged basis you used in the first place. So your balance sheet continued to swell. Now, instead of $3,000 it’s $30,000. Or $300,000. Or $300 million. Or $300 billion. You get the idea. It continues to grow as you continue to use the money coming in from the purchase of your stock to make even more new loans and then to leverage that debt by using it to make even more new loans. Thus, the “assets” on your balance sheet continue to grow. Everyone begins to believe it can never end. You have figured out the key to infinite wealth. But those assets are not real. They are bloated figures based upon the fact that you have leveraged $1,000 into tens of thousands of dollars, then hundreds of thousands of dollars, then millions of dollars, then tens of millions of dollars and finally billions of dollars. Every cent on your now bloated balance sheet was predicated upon your amazing ability to leverage that original debt into more and more debt, then convince investors to throw more money at you, all of which you are able to leverage and then show on your balance sheet as “assets.”

Then you come up with a great idea: You’ll take advantage of some new laws that have been passed, and begin packaging up all of those loans you’ve issued into “securities” (now there’s an oxymoron for you) and sell them to investors around the world, promising “safe” returns on their investments. After all, if you’re making 6% on the loans you made, you can now promise investors a nice safe” 3% or even 4% on their investment and still rake in 2% or 3% at no risk to yourself. In short, you’ve sold your risk off to others. And as the schmucks (er…ah…I mean investors) buy more and more of your packaged “securities,” believing them to be a safe, easy way to make 3% or 4% on their money, you rake in even moremoney with which to leverage even more loans, with each leveraged loan adding even more phantom “value” to your balance sheet.

But as you make loan upon loan upon loan, you have to reach further into the bottom of the barrel for people to lend to. In other words, you have to relax your lending standards in order to bring in new herds of people wanting to borrow money from you. Then you repeat the process: You package those loans up as “securities” and sell them off to investors through the large investment funds that average people like you and me buy into with our 401k and IRA monies.

This is what essentially happened. The money-changers said packaging and selling the highly leveraged loans – now numbering in the trillions of dollars -- as “securities” would further “spread the risk” and make the investments even safer. Large mutual funds and other types of investment funds began purchasing these “securities” on behalf of investors, as average men and women poured money into these funds through their 401ks and IRAs. But in reality it merely concealed the risk, skillfully transferring it from the Wall Street bankers to the average “Joe” investor. Most investors never realized the “securities” they had invested in through their 401ks, IRAs, or in their mutual fund investment programs, were in reality a pyramid of largely unrepayable debt.

But then a curious thing happened: Some of the riskier debtors began defaulting on their loans. And when the risky debtors started defaulting on their loans, a series of ominous events began to transpire:

- As the defaults began to grow, investors got nervous and gradually stopped investing in the bank’s stock, as the true value of bank’s balance sheet slowly began to drop with each new defaulted loan. This gradually began to dry up the new supply of money needed by the banks to continue making loans and leveraging them.

- The large funds and their investors stopped purchasing the packaged debt-based “securities” being offered by the banks. After all, as more people defaulted on their loans, the value of these “securities” began to drop. Th e large Wall Street funds that had purchased these “securities” began to lose money for their investors. And as their investors reacted by beginning to pull out of the funds, the funds simply stopped buying up the bad debt disguised as “securities.” This further dried up the new supply of money needed by the banks to continue making loans.

- Even relatively good debtors, now unable to extend or refinance their loans because the banks no longer had such huge pools of money to lend, began defaulting on their loans. So good loans as well as risky loans began to go bad. And since these loans were interconnected to all of the other loans through the process of leverage, the whole system began to “unwind” or “deleverage.”

- The bank’s bloated balance sheet suddenly began to deflate like an Aero Bed with a bad leak. Seemingly overnight, our hypothetical bank loses two-thirds of its supposed “value.” In reality, what happened is that the true value of the bank is suddenly exposed. People begin to see that the “emperor has no clothes.” Everything that had appeared to be “assets” on the bank’s balance sheet was in reality unrepayable debt.

- The average “Joe” begins to see the value of his 401k or IRA plunge, losing as much as half, or two-thirds, or even three-fourths of its value, depending largely upon the extent of its involvement in the debt-based “securities” packaged by the banks and sold to the bi g funds on Wall Street, or in investments leveraged off of those debt-based securities by the funds themselves.

Hence, we have witnessed not only banks going under as their bloated balance sheets crashed back to earth due to the loan defaults, but also the stock market plummeting and taking everyone’s 401ks and IRAs and mutual fund investments down with it.

The problem is this: Once this process starts it is hard to stop. After all, at this point literally trillions of dollars are involved in this unwinding debt pyramid. And because investors from around the world purchased those debt-based “securities” (chiefly the large investment funds that average workers invest their retirement funds through), the entire global financial system is being affected.

And the untold story is that many of these large global investment funds used their investments in those debt-based securities as “assets” with which to leverage even more investments. So you have highly leveraged investments that were based upon other investments made up of highly leveraged debt. Oy, vey!

Finally, you can top off this unholy witches brew of leverage with the use of the futures markets which allowed banks and investment funds to leverage their “assets” even further by betting on the future value of investments. With all of that, and more, you have “leverage beyond imagination” as former Fed chairman Volcker puts it.

That’s why many analysts now say the “unwinding” of these investments is unstoppable, no matter how much money the governments of the world throw at the problem. After all, they are simply adding to the problem by using brand new debt-based “promises to pay” (ultimately backed by the already beleaguered taxpayer) to stop the unwinding of older debt-based “promises to pay.” It’s kind of like throwing buckets of water on a drowning man, hoping it will somehow help keep him afloat.

How will it all end? Badly I’m afraid. While everything is de-leveraging now, causing a deflation in the prices of oil, stocks, commodities, real estate, and the value of what were once trillions of dollars worth of assets, we know from Amos chapter 8 that it is all going to end in inflation. In other words, higher and higher prices for smaller and smaller portions, with the poor going into economic bondage to the system. But out of it all, we will most certainly see a new global economic system emerge. And Biblically, that means we are now very close to the events that kick off the end of this old flesh earth age."

Kinda scary isn't it.

The Myth of Expansionary Austerity

UPDATE XI:  "[W]e’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end."  Read The New York Times,  Death of a Fairy Tale. 

UPDATE X:  The chart says it all.  From the Washington Post, The consequences of austerity in one chart?:

The article, quoting Joe Weisenthal, notes that the "UK was recovering on a fine trajectory right up until early 2010, at which point UK growth hit a brick wall. What happened in 2010? That’s when conservative David Cameron came to power with an agenda of reigning in the debt."

As I said before, and before,Obama should call the Republi-CON bluff.

UPDATE IX: Just ask the PIIGGS, "austerity policies have been an utter failure." Read The New York Times, Pain Without Gain.


UPDATE VIII: "Despite meeting terms for bailout money [i.e. austerity measures], Portugal is going deeper into debt because its economy is shrinking." Read The New York Times, Portugal’s Debt Efforts May Be Warning for Greece.

So much for expansionary austerity.


UPDATE VII: "Look at Britain [or Italy or Spain] to see the tragic effects of a very bad idea." Read The New York Times, The Austerity Debacle.

UPDATE VI: "Once again, when politicians and policy makers decided to focus on deficits, not jobs, they proved Keynes right about a slump being the wrong time for austerity. " Read The New York Times, Keynes Was Right.


UPDATE V: From The New York Times, The Hijacked Crisis:

[The markets are] "signaling, as clearly as anyone could ask, that unemployment rather than deficits is our biggest problem. Bear in mind that deficit hawks have been warning for years that interest rates on U.S. government debt would soar any day now; the threat from the bond market was supposed to be the reason that we must slash the deficit now now now. But that threat keeps not materializing. And, this week, on the heels of a downgrade that was supposed to scare bond investors, those interest rates actually plunged to record lows.

What the market was saying — almost shouting — was, 'We’re not worried about the deficit! We’re worried about the weak economy!' For a weak economy means both low interest rates and a lack of business opportunities, which, in turn, means that government bonds become an attractive investment even at very low yields. If the downgrade of U.S. debt had any effect at all, it was to reinforce fears of austerity policies that will make the economy even weaker.

So how did Washington discourse come to be dominated by the wrong issue?

Hard-line Republicans have, of course, played a role. Although they don’t seem to truly care about deficits — try suggesting any rise in taxes on the rich — they have found harping on deficits a useful way to attack government programs.

But our discourse wouldn’t have gone so far off-track if other influential people hadn’t been eager to change the subject away from jobs, even in the face of 9 percent unemployment, and to hijack the crisis on behalf of their pre-existing agendas."

UPDATE IV: We are in a 'Great Contraction,' and problem No. 1 is too much debt.

"Until we find ways to restructure and forgive some of these debts from consumers, firms, banks and governments, spending to drive growth is not going to come back at the scale we need.

Our challenge now, therefore, is to deleverage the economy as fast as possible, while, at the same time, getting back to investing as much as possible in our real pillars of growth so our recovery is built on sustainable businesses and real jobs and not just on another round of credit injections"

Read The New York Times, Win Together or Lose Together, which quotes:

"Kenneth Rogoff, a professor of economics at Harvard, who argued in an essay last week for Project Syndicate that we are not in a Great Recession but in a Great (Credit) Contraction: 'Why is everyone still referring to the recent financial crisis as the ‘Great Recession?' ' asked Rogoff. 'The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe — something like a really bad cold. ... But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.'

Re-read 'The Great Stagnation' about our broken political system.


UPDATE II: We are not suffering through a normal "business-cycle recession, in which the drop is quick, and the recovery is usually similarly swift. That is not what we’re in. That is not what financial crises are. And mistaking one for the other has, in his opinion, cost us a fortune.

Financial crises are not about the business cycle falling out of whack. They’re about debt. Lots of it. And that’s why they’re so resistant to efforts to speed a recovery. Whereas you normally get out of a recession by lowering interest rates and persuading consumers to spend, the period after a financial crisis is marked by consumers trying to dig out from under a mountain of borrowed money. You can accelerate that process, but it’s hard to do. But first you must correctly diagnose the problem. . .

'Debt de-leveraging takes about seven years. That’s the essence,' [Carmen Reinhart, now of the Peterson Institute for International Economics] says. 'And in the decade following severe financial crises, you tend to grow by 1 to 1.5 percentage points less than in the decade before, because the decade before was fueled by a boom in private borrowing, and not all of that growth was real. The unemployment figures in advanced economies after falls are also very dark. Unemployment remains anchored about five percentage points above what it was in the decade before.'"

Read the Washington Post, Double dip, or just one big economic dive?

But whether it is a Republi-con double-dip recession or not, there is no argument that Republi-cons want Obama to fail, the American economy is just acceptable collateral damage to achieve that goal.


UPDATE: As I first stated in 2008, the economy is deleveraging. From The New York Times, We’re Spent:

"We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings. This pattern is a classic one. The definitive book about financial crises has become 'This Time Is Different: Eight Centuries of Financial Folly,' published in 2009 with exquisite timing, by Carmen M. Reinhart, now of the Peterson Institute for International Economics, and Kenneth S. Rogoff, of Harvard.

Surveying hundreds of years of crises around the world, Ms. Reinhart and Mr. Rogoff conclude that debt is the primary cause and that the aftermath is 'deep and prolonged,' with 'profound declines in output and employment.' On average, a modern financial crisis has caused the unemployment rate to rise for more than four years and by 7 percentage points. (We’re now at almost four years and 5 percentage points.) The recovery takes many years more."

And the article warns of the risk of austerity measures now:

"The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty. The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' Mellon said, according to his boss, President Herbert Hoover. 'It will purge the rottenness out of the system.'

History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day."

Of course, Republi-cons don't want an economic recovery just yet, even if unemployment remains high. It doesn't benefit their plans for the 2012 election, just as Bush couldn't admit the Iraq strategy failure until after the 2006 elections, even as soldiers died.

Another warning about the myth of expansionary austerity.

"The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts." Read the Washington Post, Wall Street analysts and economists have this recession recovery wrong, which notes the economic downturn was caused by a credit-crisis, not an ordinary run-of-the-mill recession, "far rarer, more protracted and much more painful [and] different from other cycles" and bubbles.