Financial Crisis, parte deux
Jenson Hagen
We should not be trying to get back to 4.4% unemployment. We should
learn our lesson and get back to reality as soon as possible. What is
the reality? Our economic woes are not even close to being over. We
got kicked in the teeth with Subprime mortgages, but we still have
another two-year deluge of prime and alt-A mortgages resetting.
We are 'delugional' if we think that this second round of resets won't
hurt. Nearly half of these mortgage holders have missed more than one
payment and the mortgages haven't even started resetting en masse. What's going to happen when the resets happen?
We have built up an enormous trade imbalance that normally would get corrected through renegotiating trade agreements and allowing currencies to recalibrate. It's still full steam ahead with pushing more manufacturing into China and then importing the final products. A healthy dose of U.S. Treasury issuances has only helped China to maintain an artificially high currency value. How many Christmas presents that you received this year came from China? How many can you return to the store?
The Fed's balance sheet looks like a teenager experimenting with Meth. Oh, you can get really high once, but when you go to shoot up again, your opiate receptors are burnt and your brain is Suisse Credit. A speedy response by the Fed is not what we need anymore. It's solid, sustainable economic activity built on a long-term vision, not massive Fed monetization. We should not try to reach our former highs by selling off our manufacturing base, welcoming one-sided trade practices and diving deeper into debt. We need to restock our manufacturing jobs, reimport sensible trade practices and rebalance our budgets.
I expect the next twenty years in the U.S. to resemble the past twenty years in Japan. Two giant money bubbles burst, and leading economists believe economic disaster in Japan will have been worse there because their Fed didn't act quickly enough. The Fed under Greenspan's direction is largely to blame for our mess. And somehow acting quickly to the mess will allow it to unwind in a few short years? Our arrogance will lead us down a long and messy trail if we allow it.
When you create an artificial, unsustainable frenzy of economic activity and the economy ends up being largely supported by massive government intervention, you should have your head examined to think that you can reach those prior highs anytime soon. Is that what people expect? Do we really think that the risks that come with more debt will return our economy back to its former stature? The Japanese haven't come remotely close to their former highs after twenty years of work and government debt that far surpasses their annual GDP.
We have several more years of financial problems to work through, but it will be decades before our economy settles onto a sustainable path.
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Jan 13, '10
A lot of us talked about this when they were first offered. Based on your past postings, people just don't digest this like they do other issues. That's what I don't get. Everyone does a budget. Why hasn't anyone been able to put this in language that people can and will engage with? The whole thing has the feel of a mass delusion.
Have to run before "Comrade" shows up.
Jan 14, '10
Jenson I have read your few articles, you are good writer. True informations in your articles with facts. Total rate 8.5/10 Keep it up!
Jan 14, '10
While I don't think a wholesale return to volume manufacturing of commodity products for what would largely end up being just our tariff-protected domestic market is the answer, I do agree repeated injections of borrowed cash from government ISN'T the answer. And hopefully cooler heads will prevail in Washington, DC as Obama and his minions try to push a 'second stimulus' through Congress.
Volume manufacturing of unique high-value/high-margin products (like semiconductors, biotech, perhaps eco-energyware like solar cells and things that haven't been invented yet, etc) where US can still have competitive advantage in world market even at relatively higher costs, okay (think Germany) But volume manufacturing vanilla computers and computer components, TVs, iPods, many automotive components (vs auto assembly), and most other relatively low-margin everyday commodity widgets, I don't think so.
Most of the latter class of products would have to be protected by tariffs in order to be cost-competitive. Manufacturing volumes would thus be constrained since we'd be at a cost disadvantage in the world market (meaning we'd have difficulty selling where most of the growth is...) - making it difficult to reach economies of scale and drive down costs further. Many of our manufacturing capabilities might even become LESS competitive over time.
Computer automation has enabled the commodization of manufacturing capacity and manufacturing efficiency to soar since the US manufacturing glory days of the 1940s, 50s, and 60s when armies of people were required to manufacture products. Thinking we're going to return to those days is akin to watching colorized Leave It To Beaver reruns...
9:05 a.m.
Jan 14, '10
I disagree somewhat. The US needs to continue to provide fiscal stimulus (such a the developing jobs bill), which means increasing debt and borrowing, for the next year or so. Then we can tighten our belts and work on getting the budget in balance.
We do need to let the value of the dollar fall slightly and encourage the Chinese to let the value of the yuan rise. But we do not want to encourage other countries not to use the US dollar as their main international currency.
We do need to push to open foreign markets to our goods and services (as in more and better trade deals). We do need to prepare ourselves better to sell in foreign markets through improved foreign language programs in our schools. We do not need to become more protectionist or increase our tariffs generally.
Jan 14, '10
Dave Porter commented: The US needs to continue to provide fiscal stimulus (such a the developing jobs bill), which means increasing debt and borrowing, for the next year or so. Then we can tighten our belts and work on getting the budget in balance.
Why? We've been increasing debt and borrowing for decades - through good times and bad...
Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant.
Will you still be in favor of tightening our belts and working on getting the budget in balance 'a year or so' from now if the economy is still in the doldrums with unemployment as high or even higher than today? Or will the time for tightening our belts and balancing the budget always just be over the next hill? (i.e., like Japan thought in the 1990s...)
Jan 14, '10
There is something in the economic models that started about August, and is trailing off, but is still there, and it's positive. I'm a bail-out skeptic, but, lost for any other interpretation, it looks like Obama's handling of the economy has been well played this first year.
If you want to talk about the deficit, let's put Shrub on trial for treason. Clinton left the budget in good shape and, I would contend, that Baby Bush ran up the deficit he did PRECISELY so that the coming real-estate/bank bubbles would take a far greater toll and leave us with fewer options. BHO has been left with a game of chicken, and it looks like driving head on into deficit territory for the first few is what he has to do, and exactly what the opposition think he would never do. Sure, some of his appointments in the matter seem to be rotten to the core, but the bottom line is that it could well be saving us at the moment.
10:42 a.m.
Jan 14, '10
well said alcatross . . . well said! it's a sobering reality, but a reality we must face.
Jan 14, '10
Obama : the nation must continue to "spend our way out of this recession."
Jan 14, '10
This is a pretty grim view of our future economy, but as things are changing so quickly, who can really predict the future at all?
8:43 p.m.
Jan 14, '10
The government can spend as much as they want just as long as it takes money from wealthy investors now as taxes instead of borrowing that same pot of money and handing wealthy investors an IOU in the form of a debt security.
Why the hell do wealthy individuals get a promise for repayment while the middle class only gets taxed?
8:44 p.m.
Jan 14, '10
Well, I was referring to Garry's article about spending our way out of the recession.
Jan 14, '10
"US needs to continue to provide fiscal stimulus"
I agree a lot with Jenson (I hope not just becuase he's as ominous aas I am.)
Yes, we need stimulus, but we tried the buckets-of-money a year ago and low interest rates to banks, but we still have the same two problems as a year ago: 1) 10%+ unemployment 2) Banks still refusing to lend - So forget CapEx or the ability to transact assets and establish some kind of value.
Now, without too many transactions, on big things sellers are freaking and just dropping the price to make something happen. If banks don't loan they freak more and drop the price again - even if it is not an accurate reflection of value. Then banks freak and are less likely to lend.
Plus now we have even more debt to finance with no economic value added for it. Then we are going to add on health care? Especially when to get it passed they had to exempt almost everyone ffom paying for it - so more debt.
Regardless, good job Jenson. You're one of the few posters here that stays in the fact-domain and doesn't call names.
Thank you for being an honest intellectual. Go short T-bills!
9:42 p.m.
Jan 14, '10
The Federal Government has a program that allows homeowners to refinance their existing loans to 30-year fixed loans without doing an appraisal to mitigate against these balloon payments. It is totally under-promoted, but well worth exploring for many of the people who are in the situation you have described here.
makinghomeaffordable.gov
Jan 15, '10
I think there is a very strong correlation between the situation today and the "belt tightening" in '37. It stalled the recovery and I think pulling back too soon today will do the same. Perhaps the missing element is that the stimulus today is not designed to alter the underlying problems in a way that will reveal a different, and more opportune, playing field post-stimulus. As example, think of a focused stimulus effort that would dramatically reduced our foreign oil consumption (30% of the trade imbalance) through targeted reinvestment in infrastructure. Every reasonable stoplight becoming a blinker at 10 PM, mandatory tire pressure checks at gas stations, tax breaks for car pooling, and a much smarter traffic control system overall. All of these things sound rather pedestrian, but could have dramatic effect if ramped up all at once. After the attendant jobs ended, the overall position of the dollar would be stronger, effecting our debt ratio. And of course the 800 lb gorilla in the room is a $33 billion a year war boxing our economic options in. As far as protectionist remedies I think we have to be honest and admit that China's artificial support for their currency is protectionism, even if not covered by trade pact directly, so some form of response is merited, even if it is unappetizing to the ideologues. In short, although the situation is dire, and the prospects for a quick consumer based recovery are dim, there are things we can do outside the box to right the ship and take some of the burden off of the consumer credit/consumption engine as the only vehicle of recovery. The key is to ask more of our stimulus plans than that they just stimulate consumer spending and focus more on macro-economic repositioning of our economy as a whole. Gasp!– Government controlling the "heights of the economy", the road to serfdom, I know, I know, but drastic times call for drastic measures, and I think that means coordinated strategies that go beyond (but don't exclude) the free markets' capacities.
Jan 16, '10
I would say this is a fairly honest assesment, but really we shouldn't be consuming so much.
Jan 17, '10
Sometimes you don't get a very big one, and you need to make what you have stretch. Tonight, surprise the family with "Penis Helper". From Penis Tuscan Style to Cocktail Weenie Peenie (our Asian recipe), you won't get an "oh, no, not again" from your family!
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