This Seems Bad

Not that I understand economics, but I don't like the sound of this:

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Krugman goes on to explain why this shouldn't sound very good, and isn't.

Obama's Foresight

Andrew Sullivan posts a letter Obama wrote to Bernanke and Paulson on March 22, 2007. It highlights his depth of understanding of the economy--or at least of his advisors' understanding. Considering how callow and mercurial his primary and general election foes have been, it is really impressive.

Dear Chairman Bernanke and Secretary Paulson,

There is grave concern in low-income communities about a potential coming wave of foreclosures. Because regulators are partly responsible for creating the environment that is leading to rising rates of home foreclosure in the subprime mortgage market, I urge you immediately to convene a homeownership preservation summit with leading mortgage lenders, investors, loan servicing organizations, consumer advocates, federal regulators and housing-related agencies to assess options for private sector responses to the challenge.

We cannot sit on the sidelines while increasing numbers of American families face the risk of losing their homes.

And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.

Working together, the relevant private sector entities and regulators may be best positioned for quick and targeted responses to mitigate the danger. Rampant foreclosures are in nobody's interest, and I believe this is a case where all responsible industry players can share the objective of eliminating deceptive or abusive practices, preserving homeownership, and stabilizing housing markets.

The summit should consider best practice loan marketing, underwriting, and origination practices consistent with the recent (and overdue) regulators' Proposed Statement on Subprime Mortgage Lending. The summit participants should also evaluate options for independent loan counseling, voluntary loan restructuring, limited forbearance, and other possible workout strategies. I would also urge you to facilitate a serious conversation about the following:

* What standards investors should require of lenders, particularly with regard to verification of income and assets and the underwriting of borrowers based on fully indexed and fully amortized rates.

* How to facilitate and encourage appropriate intervention by loan servicing companies at the earliest signs of borrower difficulty.

* How to support independent community-based-organizations to provide counseling and work-out services to prevent foreclosure and preserve homeownership where practical.

* How to provide more effective information disclosure and financial education to ensure that borrowers are treated fairly and that deception is never a source of competitive advantage.

* How to adopt principles of fair competition that promote affordability, transparency, non-discrimination, genuine consumer value, and competitive returns.

* How to ensure adequate liquidity across all mortgage markets without exacerbating consumer and housing market vulnerability.

Of course, the adoption of voluntary industry reforms will not preempt government action to crack down on predatory lending practices, or to style new restrictions on subprime lending or short- term post-purchase interventions in certain cases. My colleagues on the Senate Committee on Banking, Housing and Urban Affairs have held important hearings on mortgage market turmoil and I expect the Committee will develop legislation.

Nevertheless, a consortium of industry-related service providers and public interest advocates may be able to bring quick and efficient relief to millions of at-risk homeowners and neighborhoods, even before Congress has had an opportunity to act. There is an opportunity here to bring different interests together in the best interests of American homeowners and the American economy. Please don't let this opportunity pass us by.

What if.

Do I Have This Right?

Later on, I'll run it past the professor. But here's my understanding of the problems that led to the chaos we're seeing on Wall Street. Below, Krugman and Reich say why they're down on the bailout, which is one piece. Underneath the bailout, though, is the fundamental problem which needs to be fixed in the long term. Based on what I've read, these were the problems.

1. No Money in the Bank. Financial companies are not required to secure their debt with any assets, as FDIC-insured banks are. I believe the assets-to-debt ratio for banks cannot exceed ten to one (for every ten bucks in debt, they have to have at least a dollar in assets). Financial companies regularly had ratios of 20- and 30-to-1. They were "over-leveraged" and at massive risk.
   
2. Lack of Transparency. Financial traders were making deals no one really understood, and as a consequence, no one knew how much debt they were carrying. For financial markets to function, investors need to know how much debt a company has to make sound decisions. Because the finances were buried and byzantine, no one realized just how deeply at risk companies like Lehman and Merrill Lynch were. (And apparently, part of the problem with the bailout is that no one knows what the situation is now, either.)
   
3. Too Big To Fail. Normally, the market would punish companies that were insanely overleveraged. If that didn't happen because of a failure of transparency, these companies should suffer the fate of stupidity, like Enron: a quick death. But because these companies had pieces of so much of everyone else's money, letting them fail would send ripples throughout the world.
   

This was a massive shell game financial companies were playing, regulators were ignoring, and politicians were abetting. I understand that the risk was plain to anyone who wished too look, but of course, when the money's that good, who bothers looking?

Reich and Krugman: No Deal

I don't know nothin' bout economics, but I do know that Paul and Robert do... Krugman and Reich have looked at "the bailout of bailouts" and they're not impressed.

Reich
It's not likely to do all that much good because no one knows how much bad debt there is out there. Even if the government bought a lot of it, investors and lenders still couldn't be sure how much remained. After all, big banks have already written down hundreds of billions of bad debts, and that hasn't restored confidence in the Street. [ Link ]

If everything goes extremely well, markets move upward, and the risky loans become far less risky, it's possible that taxpayers (that is, the Treasury) might actually make money. But if the bottom falls out, American taxpayers could be on the hook for trillions of dollars. What then? The federal debt soars. What then? Interest rates go out of sight. What then? Foreigners lend us less money. What then? We're cooked. [ Link ]

Krugman
So, here’s my problem: what we have now are a bunch of financial institutions in trouble, because they’re highly leveraged, and have mortgage-related assets on their books. And they can’t raise cash because nobody wants to buy those assets. The Paulson plan will in effect create a market for toxic paper, thereby supposedly unfreezing the markets.

But what if the institutions are fundamentally broke, even if the liquidity squeeze is relieved? [ Link ]

The Treasury plan ... looks like an attempt to restore confidence in the financial system — that is, convince creditors of troubled institutions that everything’s OK — simply by buying assets off these institutions. This will only work if the prices Treasury pays are much higher than current market prices; that, in turn, can only be true either if this is mainly a liquidity problem — which seems doubtful — or if Treasury is going to be paying a huge premium, in effect throwing taxpayers’ money at the financial world. [ Link ]

Wealth and Quintiles

Over at BlueOregon, I posted the second of my "myth-busters" series recently, this one on wealth. I won't reprint it here, but I will offer the key graph that illustrates the point: the poorest 40% of Americans lost nearly 60% of their actual wealth between 1983 and 2004. The graph is particularly potent because you see them hanging way below the zero line.

As with the first myth-buster, this one drew insightful, entertaining comments, including this one by David Wright:

From the report you cited, it looks to me like the top 10% of Americans went from holding 68.2% of total wealth in 1983 to holding 71.3% of total wealth in 2004. An increase, to be sure -- their piece of the pie got about 4.5% bigger over those 20 years (put another way, they got 3.1% more of the total pie)....

Rich people have a whole lot of the pie. Poor people have not much of the pie at all. And while the slices have shifted a bit over the past 20 years, that fundamental situation does not seem to have changed very dramatically, in real terms, despite the alarming numbers you quote.

Numbers are flexible, and it's not always obvious what they mean or how to interpret them. But where David's analysis is technically true, it conceals rather than reveals the impact at both extremes. Examining the dollar effect (this was a post about wealth) by analogy is helpful.

Let's say there are $100 and 100 people in 1983. Ten of those people have $68 and one has $34. Sixty people share $6. (These are figures taken from the report I cited.) That $100 appreciates 75%. In 2004, ten of those people have $125 and the richest of them has $60. The poorest sixty share $7, and of those, the poorest 40 share just 35 cents--less than the 90 cents they shared in 1983.

Put another way: if US policies has changed so that instead of the already-rich garnering 3% more of the pie they had lost 3% that instead went to the poorest 60%, that group would share $14. Could the richest 10% have squeaked by with 65% of all US wealth? What if they had to squeak by with, say 60%? Would that catastrophically damage the economy?

(Incidentally, David does a similar calculation and factors in population growth. But remember, these are mean figures, so it doesn't matter how much the population changes. The analogy relies on the 100 to stand in as the average or mean of the sub-population.)

Trickle-Down Econ -- With a Bonus Chart!

At BlueOregon, I'm getting taken to task for my dim understanding of econ. Never mind that my brilliant post has purty graphics. Here's a bonus graphic I couldn't work into the piece, partly because it only weakly communicates the central point. But still, a graph's a graph:

Read the post there.

Class War

The Clinton tax returns turned out to be a yawner, more or less. There were some interesting dealings in there, but surely standard fare for anyone earning $109 mil. Big money deals interestingly, and although it's obscene if you look at it from the perspective of the two-jobs, no-health-care, wage-earner from Altoona, it's legal in Bush's America. But what struck me was the tax rate the Clintons paid--$33 million on the $109 earned. That's a total rate of 30.3%.

Now, I'm not a two-job, no-health-care wage-earner from Altoona, but I have a fairly standard income for an American--more than the $26k that is the single-earner median, but not quite enough to put me in the mid-quintile, either. And in 2007, I paid 27.5% of my income in taxes. I make .2 percent of the Clintons, yet I pay only 2.8% less of my income in taxes.

This is the effect on wealth re-distribution of 28 years of GOP rule. To compound matters, median incomes are flat, the services we need to get buy--health care and education--are far, far more expensive, and thanks to Bush's Folly in Iraq and his tax cuts, we have inherited debt substantial enough to keep us all well-taxed through our lifetimes. Oh yeah, threre's also gas prices and their damage to the pocketbook and inflation, Bush's second recession of his regime, and a collapsing housing market--Americans' last source of liquidity. Hey, at least no one can declare bankruptcy anymore!

As always, seeing stats like these make me want to hoist a baseball bat and head into some board rooms. What is it about Americans that makes us so lax in our protest--or even simple recognition--of these facts?

"Yeah, pretty much" (aka "Let them eat cake")

As a follow-up to my memoir post below--actually, sort of a lead-in to the next installment, here's George Will from Sunday's roundtable on This Week with George Stephanopoulos:

"I think this is a center-right country and [McCain's economic] proposal was a center-right proposal. Mr. Obama correctly said, 'McCain is offering us a 'You're on your own society.' To which John McCain should say, 'Yeah, pretty much.' We believe we are the party of individual responsibility and individualism."

The topic was bailouts, of mortgage-holders and financial corporations, and Will demonstrated a stunning level of contempt for bilked ARM-holders. He observed, derisively, (paraphrasing) "it's right there in the title, adjustable rate."

This is where we are in 2008, a party led by men (mostly, and almost uniformly white, and probably cigar smokers to boot) who feel contempt for the middle class and poor. They are getting worse about disguising the fact, as their populist rhetoric about God and gays--a fig leaf that covers the real agenda--no longer fans the flames of passion. It was inevitable: as the imbalance of wealth shifted ever more precariously to the top 1%, eventually poverty would affect enough of the bottom end to force a political correction. Whether that correction happens this year, as I expect, or later, this kind of comment makes it ever more likely.

You can only tell the poor to go Cheney themselves for so long before they Emma Goldman the rich.

The Bush Gas Tax

Be advised: I'm bad at math. Mrs. Donier, my seventh grade algebra teacher, would be the first to tell you. Nevertheless, here's a mathy sort of post that, while possibly not accurate in the particulars, should effectively make the larger point. Story of my life.

The superstructure of the argument goes like this: an effective way to influence behavior is to meddle with incentives. Gas prices were so low for so long ($20 a barrel a decade ago) that Americans got used to burning it like kindling. Safe to say that we'd be a lot further down the road to greener technologies if the purchase of gas had hurt our pocketbooks--and by extension, Detroit's bottom line. One of the ways to accomplish this is a gas tax--which is what may have cost Ross Perot his credibility in '92 (that and being insane). Well, thanks to Bush's catastrophic policies, his wars and his tax cuts for the rich, that's effectively what he's accomplished.

Let's look at the stats. When he came into office, the euro and dollar were trading about even--though the euro was already starting its thumping. (1 euro equaled 1.07 dollars.) Crude was going for $23, and a gallon of gas sold for $1.50. Now the price of crude is $97, gas sells for $3 (as of Nov 5), and one euro gets you $1.47.

Since the price of oil is pegged to the dollar, our cost rises and falls with the cost of crude. But in Europe and in economies not pegged to the dollar, gas prices fluctuate not only in dollars, but in terms relative to their currency.

In Germany, the price of a liter of unleaded cost 1.04 euros per liter in March 2002 (most recent figures I could find) and 1.37 now. (In France it went from .96 to 1.30, Spain .81 to 1.06, etc.)

In other words, the health of the euro has kept down the increase of gas prices in tax-heavy Europe, while prices have gone up 100% here. In Germany, it increased 32%, France 35%, and Spain 31%.

It's not exactly like assessing a gas tax, but the effect is the same. And while gas prices would have gone up in any case, policies of the Bush administration have affected gas prices here far more than in Europe. A rich irony--Bush, trying to protect and enhance US oil companies, has created the financial circumstances for a green revolution. One case where his incompetence has actually had positive effects.

Uh Oh ... Better Buy Gold!

First we have the very volatile stock market, which today lost 3% of its value:

The Dow Jones industrial average dropped 387 points today and other stock prices tumbled around the world as the U.S. and European central banks pumped more than $100 billion of extra money into the financial system to counter tightening credit conditions in panicky markets.

What do I care about those rich bastards anyway, right? Well, I don't, except that I worry that the sky is falling, and it's just one part. Far more worrisome is this delightful little nugget:

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US Treasury bonds if Washington imposes trade sanctions to force a yuan revaluation.

Two Chinese officials at leading Communist Party bodies have given interviews in recent days warning, for the first time, that Beijing may use its $1,330bn (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress. Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession.

Even if this doesn't signal a US economic collapse (don't you believe it, goldbugs!), it sounds like China may be ready to start calling in some markers, and that can't be good. Oy.