About two weeks ago, I discussed the possibility in this post, The Looming Unemployment Bomb. To recap some key points:
When you look at this multimedia visualization, you can see why joblessness represents an even bigger threat to economic recovery than the credit crisis that triggered this mess. Watch the black death of unemployment sweep over the country in 30 seconds or less. And notice the data feed: It does not even include the latest unemployment figures. The visualization gives you a snapshot through September 2009 when the unemployment rate reached 8.5 percent.
In fact, the current official unemployment has reached 10.2 percent and still rising. When you count real unemployment, the one that includes discouraged workers who have stopped looking for jobs and those marginally working part-time jobs, the true unemployment rate (also known as U-6 - Alternative measures of labor underutilization) is closer to 17.5 percent.
Paul Krugman has joined the ranks of pessimists with a Double Dip Warning:
I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing (…) The chances of a relapse into recession seem to be rising.
The stimulus has run its course, and all leading indicators suggest a continuing downward trend. One problem is that the econometric forecasting methods used by Washington assumed an unemployment rate of 10.3% by the end of next year. In fact, we arrived at this level a year earlier, and the worse case turned out worse than expected and sooner than expected.
The problem with the stimulus may not be the stimulus, although Krugman advocated for more robust aid, but the TARP bill that was cobbled together in the closing months of the Bush administration. If you recall, then Secretary of the Treasury Hank Paulson sounded the alarm in the form of a one-page memo that would have given him unbridled power to distribute the almost $800 billion in TARP funds with no controls. The compromise bill rushed through Congress did not anticipate the chicanery that would render it ineffective. Here is what the TARP bill should have accomplished:
Rule #1. Never leave it up to banks to decide for themselves what to do with public funds. Tell them how and where the funds should be allocated. The purpose of the funds was to unlock frozen credit markets. Why this did not happen? The banks used the money to improve their balance sheets when they should have been making commercial loans.
Rule #2. When banks are bailed out with public funds, make sure banks get out of the lobbying business. How is the public interest served when public money is used to buy influence that may go against the public interest! Post-bailout lobbying smacks of double-dealing, self-dealing, and conflict of interest. That is why current reform efforts are stalled in Congress.
Rule #3. No bonuses or wage increases until all public money has been paid back. The hubris of Wall Street offends us and turns upside down our basic values: We should reward merit, not failure, nor entitlement.
Rule #4. Community banks play a larger role in distributing commercial loans to local businesses than big banks. Why were these NOT included under TARP?
On the subject of reform, I have two more pet peeves. First, there are other professions - doctors, lawyers, real estate brokers, and teachers - that undergo some form of accreditation or licensing. Why not those on Wall Street to whom we entrust our assets, our retirements, indeed our lives. The same fools who authored the credit default insurance swaps that brought down AIG are the SAME fools who authored the junk bond crisis 25 years ago. When you recycle fools back into the system, you perpetuate their culture.
Second, if a bank is too big to fail, it is too big to exist. The regulatory system installed during the Great Depression and dismantled in 1999 must be restored and the Glass-Steagall Act reinstated. Regrettably, our diversified financial institutions are bigger, more arrogant, and more dangerous than before. To suggest that it is too unrealistic to put the genie back in the bottle is unacceptable.
Excellent points, Octo.
ReplyDeleteWell, glad to see that you are proposing support for local community banks...
ReplyDeleteThe STARK reality is that our economy has been leveraged for years: government debt, corporate debt, and personal debt.
When you realize that Germany is running government debt at 44% of GDP and numerous countries are at rates of 100 plus percent of their GDP we are truly at a very scary point.
I have competitors who are running way late on their deliveries and appear to be canceling them: the goods are sitting in bonded warehouses at customs because they cannot afford to pay the duties.
That is good for me because we are way up on shipping from last year but retailers are all clamoring about their margins and the expected retail price: They all want me to give them 10 or 20% off.
So far, after 17 calls, the highest increase I have heard of sales for November over last year is 4%! That is just increase an increase in gross sales and says absolutely nothing about profits: I expect sales to increase and profit margins to drop.
We are going to lose a lot of retail businesses in the first quarter of 2010 and then we will watch suppliers drop out the balance of the year.
You are not only going to have to put the genie back in the bottle BUT you are going to have to find a totally new bottle for the genie.
The connection between Wall Street/Stock Market and our economy is totally and absolutely non existent any longer.
TAO: The connection between Wall Street/Stock Market and our economy is totally and absolutely non existent any longer.
ReplyDeleteThe Fortune 1,000 has been trending in this direction for a long time. "Free markets" are a myth. All sloganeering about government getting out of the way to let the wisdom of "laissez-faire" prevail ... is bunk.
Government subsidizes corporations and advances their interests on all levels. Corporations demand protection from competition, demand assurances that make business conditions safe and predictable for themselves, and demand intervention in the form of tax dollars when times are bad (but not for hard-pressed citizens who are forced to shoulder all burdens and hardships).
Globalization has turned corporations into sovereign entities that are no longer beholding to their government, their people, or their customers. Corporations push trade deals and other favors that make it easier for them to dominate world economies and dominate markets without having any obligations to their country or its people.
Globalization has killed ethics and morality. American style capitalism has turned into a pernicious evil as despicable and oppressive as any.
This myth of "free markets" is perpetuated by our news media, the PR industry, and our political culture that creates the "ILLUSION" that corporate culture is benevolent, rational, necessary, and desirable.
That is why there is now a total disconnect between Wall Street and Main Street.
We need a second stimulus.
ReplyDeleteAnd this is perfect:
Second, if a bank is too big to fail, it is too big to exist. The regulatory system installed during the Great Depression and dismantled in 1999 must be restored and the Glass-Steagall Act reinstated. Regrettably, our diversified financial institutions are bigger, more arrogant, and more dangerous than before. To suggest that it is too unrealistic to put the genie back in the bottle is unacceptable.
This is the reform we need if we're going to have long term stability. Even if we were to weather this current crisis and begin seeing unprecedented job growth next week, we're likely to wind up back at ground zero when everything collapses again 10 years down the road.