naked capitalism

frances snoot says:

"In a couple of years, we can signal all clear and then raise taxes on the middle class in order to reduce the deficit again, much as we did in 1993."

Mr. Harrison: how can you possibly applaud the policies set forth by Ms. Rommer and Mr. Summers?

The gamble that Team Obama made was to put taxpayer money into criminal banking institutions in order to pay off illicit gambling bets, trillions of dollars have been lost. No one was prosecuted, not even Mr. Bernanke who was acccused of obfuscating justice with Mr. Paulson in the Merrill Bank of America merger.

Now, the banks are still insolvent! The derivative blowout cannot be paid off. It is outrageous is scope and quantity. It is astronomical.

The government has been protecting the biggest banks from failing by making losses public after privatizing the gains. Team Obama is now standing by these banks in the face of national insolvency.

What middle class will pay these bills in three years? If the middle class (what is left of it ) could pay for the deficit, then why was Geinthner sniveling over in China last month?

Here is what GEAB has to say will happen this summer:
http://www.leap2020.eu/GEAB-N-36-is-available!-Global-systemic-crisis-in-summer-2009-The-cumulative-impact-of-three-rogue-waves_a3359.html

Your links begin with a sobering look at California's default possiblities, then you remind your readers of an unfortunate piece you wrote concerning the looting of our country, terming it,
"a nefarious line of argument" to disagree with Washington's reckless and criminal activities.

Your collegue, Mr. Simon's, had a prescient view of what would become the country due to the deficit bailout policies for big banks:
http://economix.blogs.nytimes.com/2009/04/23/irreversible-damage-why-little-action-on-banking-can-do-great-harm/#more-9455

I am not differentiating here between bailouts or stimulus because if we do go into sovereign default this summer or early fall, which IMHO is highly likely, then the allocations will be forgotten in the general milieu.

Carlosjii says:

Louise Yamada: the structural bear has several years to go to complete the repair process.

Louise Yamada: It is almost uncanny the degree to which 2002-08 has tracked 1932-38. Investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far — topped only by 1929-32 — the structural bear has several years to go to complete the repair process.

Until proven otherwise, it could be a bear-market rally but we'll take what we can get. The 2002 low has been exceeded. That could be a very serious event. We don’t know whether it turns out to be a bear trap or if we have new lows ahead. I have no great compunction to be heavily invested. I think you have to be very agile and maintain trailing stop losses on any position.

I don’t think we can proclaim we are out of the woods yet. It’s the rallies and retreats that create consolidations, which eventually form bases for a new bull. For now, hone your trading skills. Best case, we are in an era of a trading range.
at http://www.istockanalyst.com/article/viewarticle/articleid/3275485

Harlem Dad says:

Edward,

First, I want to thank you for doing such a great job filling in for Yves. Not an easy job. Well done.

Second, I have a question. I understand the position that, given the situation we are in, it doesn't make sense to become a deficit hawk too soon. As much as I find it distasteful, I get it that raising taxes on the Middle Class is the way to go.

My question is, what Middle Class are you talking about?

Elizabeth Warren speaks of the Collapse of the Middle Class quite eloquently here: http://www.youtube.com/watch?v=akVL7QY0S8A

It's the Middle Class that are swamped with credit card and mortgage debt right now. It's the Middle Class that are losing their jobs, their homes, their IRAs, 401(k)s and their Pensions.

Lloyd Blankfein and his Army of Oligarchic Crybabies are doing fine. Yet they are the ones being bailed out by us.

On whom will you raise taxes? 25 percent of $100,000 yields more Bailout Bucks for Blankfein than does 50 percent of $30,000.

There is so much that I don't know. Despite the tone of bitterness in my question, it is genuine.

Upon whom will taxes be raised to pay Wall Street's mistakes?

Tim in Sugar Hill

Edward Harrison says:

bobo bobo is right about my about face post Lehman. But, I am not a fan of Larry Summers. Here's how I see it.

Usually, a Libertarian/Austrian approach is warranted – that means no easy money and letting banks fail. Were I in office in March, after Bear failed, I would have prepared for more failures and prepped the FDIC to start seizing insolvent institutions, such that by the time Lehman failed, the system would have been more prepared. There is nothing wrong with having let Lehman fail. That's an integral part of the capitalist system. What was a problem with Lehman is that we were unprepared for the aftermath.

And that's where I part ways with the Austrians. Paul Samuelson said it fairly well in his recent interview at the Atlantic: "For really depressed situations, unorthodox central banking is needed."
http://correspondents.theatlantic.com/conor_clarke/2009/06/an_interview_with_paul_samuelson_part_two.php

I would actually say it differently: "For really depressed situations, unorthodox fiscal policy is needed." That WaMu, Wachovia, and Downey were seized was entirely appropriate. Citigroup should have been seized as well.

But, we should realize that having Lehman fail without prepping adequately put us on a path toward a deflationary spiral – a path we were not necessarily on before that. And, depression requires unorthodox methods because the spiral makes society incur a deadweight economic loss if it isn't arrested. To my mind, the real need is for government to prevent worst-case scenarios by cushioning the fall and picking up the slack while the private sector works off debt. This is the only major way in which I would disagree with the Austrian dogma.

That said, fiscal deficits have to be repaid once the economy is on solid footing again. And the only way to do that is to raise taxes or cut spending. I have suggested cutting spending (i.e. reducing entitlement spending). Raising taxes is not the way forward.

So, to summarize, Lehman put us into a deflationary spiral, which could only be arrested through unorthodox policy. I believe fiscal policy is most effective here. But, otherwise, I would leave things alone.

One other point, my general inclination on regulation at this point is for us to ENFORCE the laws already on the books and not jump to a whole new set of regulation before we have had time to think them through. Had we actually enforced the regulations already on the books and used the oversight already legally mandated, none of this would have happened. It was the recklessness of the likes of Alan Greenspan which created an atmosphere of easy money. And now we are all paying the price.

bobo bobo says:

Edward Harrison: But, we should realize that having Lehman fail without prepping adequately put us on a path toward a deflationary spiral – a path we were not necessarily on before that. And, depression requires unorthodox methods because the spiral makes society incur a deadweight economic loss if it isn't arrested.

——–

No, that's not right. Deflation is not the outcome of doing a controlled unwind of the big banks that are troubled. The government can keep them operating in bankruptcy chapter 11, with super senior DIP loans and super senior priorities for trades entered with them. And government backstops for little people's insurance contracts, annuities, checking accounts, savings accounts, CDs, money market funds, money market accounts, and stable value fund investments. A desire to keep the system running does nothing to justify giving money to banks. Fear of system breakdown is just a standard scare tactic used by wall street what they want. Someone like Teddy Roosevelt or Andrew Jackson wouldn't fall for that tactic. Alas, no politician seems to have the balls and brains of Teddy and Jackson.

Fighting deflation doesn't require giving money to banksters. The Treasury/Fed can print money and give it to plenty of people other than the big banks. They could print it, and give it to bigger unemployment benefits, R&D subsidies, subsidies for domestic manufacturing, seeding "good banks" run by retired bank exeucitives with good track records for prudent lending, etc. If one's goal is to increase the money supply to prevent liquidity from drying up, there are plenty of ways to do it without subsidizing the politically powerful banks. A desire to fight inflation does nothing to justify giving money to banks.

frances snoot says:

Romer is not entirely guiltless, here are her words:

"The first issue is what it would mean for the policy to work. The President gave a
very concrete metric: he wanted a program that would raise employment relative to what
it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the
blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric
meaningless: they complain that because we never observe the outcome under the no-
stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and
appropriate metric to use. Exactly what any macroeconomist would ask of a policy is
what are its effects, holding constant all the other forces affecting the economy. "

http://news.uchicago.edu/files/newsrelease_20090227.pdf

So, how is the difference between the 600,000 jobs that might be "saved" and the 3-4 million that were promised to be a meaningful metric to be explained with Ms. Macroeconomics at the helm?

A response to the Economist article claims Ms. Romer fudged figures to get the 3-4 million total:

"Lots of folks know, Mr DeLong, that had Mrs. Romer used the Smets-Wouters model the multiplier would have been less than 1 and only 500k jobs would be created v. 'created or saved' and a lot of people know that these jobs will only be temporary; mostly Govt (not the '90% private' that Mrs Romers says in the Obama Plan); and actually prevent private sector job creation in the 'long run' as the Govt debt necessary to fund Mrs Romer's 'created or saved' jobs will crowd out the private investment necessary to create private jobs needed to expand GDP.
I welcome Mr DeLong's explanation as to specifically why the Feb 2009 Cogan, Cwik, Taylor & Wieland analysis is wrong and Mrs Romer's is correct. But we already know Mr DeLong will not respond…"

According to Ms. Romer's analysis, the stimulus policy won't work, add that to the bailout from hell, oh, and the Tarp initiative which Mr. Gibbs insists gives Team Obama precedent to run roughshod over US contractual law.

It is reassuring to know that Mr. Harrison dissed Summers and Geinthner. But please, don't recommend Romer either.

Matt Stiles says:

Ed,

With all due respect, your schizophrenia with regards to a "deflationary spiral" is completely unwarranted. At the risk of sounding too dogmatic I must say that if you really believe in liberty and free-markets, then the biggest deflationary spiral is what is required to correct the biggest inflationary spiral that preceded it. Only those who misallocated their resources in anticipation of further inflation can be hurt in real terms by deflation. And had it occurred without interference, the means of production would now be in competent hands, void of a debt burden and ample pools of cheap labour to hire from. We would likely already be on our way to recovery.

Perhaps you should have a read through Jörg Guido Hülsmann's booklet Deflation and Liberty. Deflation is nothing to be afraid of.

It can be read free here:
http://mises.org/story/3231

Keenan says:

Tortise writes that Dean Baker writes: There are millions of very smart people in the developing world who would be delighted to train to U.S. standards and work for the $170,000 year (net of malpractice insurance) that our primary care physicians."

Why in blazes import any more people here when we have college grads waiting tables due to this economic slump ?
Are you saying Americans won't become primary care physicians for $170K ? Like McCain said they wouldn't pick lettuce for $50 an hour ?

Todd Wood says:

In fact, the U.S. doctor shortage is a disaster in other countries. Doctors leave their poorer homelands where people suffer in abject poverty and come here. It is a disaster and harms many.

Diego says:

MarcoPolo,

"(Spain's) Growth wasn’t limited to housing, transport, construction and tourism. Huge industries have grown up along side of that; wine, power generation, food stuffs."

Wow, that was a fascinating in-depth analysis! So wine and food were behind the Spanish growth! Wow!

May I suggest you to look up which Western European country has the largest per-capita motor vehicle production, just behind Germany and several times Italy's or the UK's (or the US', for that matter)?

You'll see Spanish activity in almost every medium-tech and high-tech manufacturing sector. Spain is a world leader in composites for airplanes, stainless steel, windmills, high-speed rail, thermal-solar farms, high-tech ships, etc.

The fact that Spain is the sixth largest service exporter (its world market share is around 4%, almost the same as Japan) should help you overcome your prejudices, too. The first bank in the eurozone (Santander), the first telco in the world by number of subscribers (Telefónica) and the first renewable-energy utility (Iberdrola) are all Spanish.

This all is very much tangible and has nothing to do with housing, tourism and food stuff.

skippy says:

@Tortoise, I concur, The AMA and heath care juggernauts are in it for themselves and would stifle any attempts which diminish their egregious profitability. First do no harm my back side.

This is coming from some one who has many family members in the medical profession, at high levels.

Skippy…let them eat cake eh, the cake is the biggest lie of all, the cake is a lie!

Keenan says:

Tortoise – Your points are well made and no ire was directed to you. No offense was intended, my apologies if any was taken. Conventional medicine and its pharma industry partners-in- monopoly have indeed fought alternative therapies which threaten their dominance of the healing arts.

MarcoPolo says:

Diego, what would give you a better perspective than those books is cutting wheat with a sickle. But I won't argue with your post which is otherwise correct.

What I would say you have missed is the importance of EU subsidies – to all of those industries we both have mentioned – in creating the bubble.