Accounting Losses Represent the Past; Layoffs Represent the Future

Accounting losses report about actions that have been taken and the consequences of those actions. The announced layoffs, in the thousands, give us an indication of what is in store for us in the future. The announced layoffs mean:

• Retail sales will continue to be soft. Say goodbye to Christmas volume, and hello to special sales, even before Thanksgiving.
• Industrial production will continue to decline. Will foreign companies produce all cars in America?
• There will be more declines in housing prices and increases in foreclosures - the American dream is on hold.
• The wealth of Americans will continue to decline which will only mean, more layoffs.

Not only is Ben Bernanke speaking gloom and doom, but Hank Paulson is also now on record saying that a long and difficult period of economic retrenchment is what’s in-store for the U.S. The amazing thing to me is how Paulson seems to carry out what ever seems to be on Bernanke’s mind.

Remember, there was a time when Paulson was letting Lehman Brothers (LEHMQ.PK) go, implying that the rescues were over. Then, Bernanke had a meltdown and called Paulson, who arranged a meeting with congressional leaders. This was a meeting in which Bernanke is reported to have scared the daylights out of all present. Since then, Paulson - the free-market Paulson - has been bailing out everyone he can, while Bernanke is flooding the world with billions and billions of dollars. We should have Carl Sagan reciting these numbers to the world!

The bottom line is that the Bush administration will be remembered, and not exactly fondly, for a long time. The team that wanted to get out-of-town before the roof fell in didn’t make it, and January 20, 2009 now seems to be so far away.

Most of the responses we are seeing to the financial and economic crisis seem to postpone real action so that the in-coming administration will have to make the hard decisions as to what the new world of finance and economics is going to look like. In addition, this seems to be across the board - Iraq, Guantanamo, education, justice, health, and so on and so on. The President has all but disappeared!

According to the Wall Street Journal, the only person lobbying for a position in the new (Obama) administration is Ben Bernanke. On Tuesday, the Journal argued that Bernanke all but submitted his resume to the Democrats by coming out in favor of the new stimulus plan being offered by the Democrats in Congress, which has been supported by Obama (See the Wall Street Journal article, “Bernanke Endorses Obama"). Everyone else wants out.

Therefore, we are going to have a sustained period of economic stagnation or decline. Layoffs are going to increase for a while rather than decline. How bad the economic conditions are going to get is still anyone’s guess, but the extent of the financial dislocation certainly carries with it an ominous black cloud. Little is being done about it, and we still haven’t seen the future.

The financial people have thrown about everything they have at the problem because they do not want to be accused of not providing enough “stuff” to keep the financial markets going. Now, we move to the real economy - output, employment, and dislocation! This is raising the cries for a fiscal response.

Here is where the other side of the frivolous and undisciplined behavior of the Bush administration comes home to haunt all of us. Since it has been in office, the monetary authorities kept interest rates exceedingly low while at the same time ignoring the housing bubble. When things seemed to get a little tough, the Fed drastically lowered its target interest rate. In effect, it shot off almost all of its ammunition. Not having much else it could do, the Federal Reserve flooded the world with liquidity. The monetary authority expended its resources before the battle really began and has little more it can do except direct intervention in institutions, not markets, with newly printed money.

In terms of fiscal policy, the irresponsibility of this administration was also present. The problem now is how to add additional stimulus upon an already mammoth budget deficit. No one really knows whether a new stimulus program will do anything toward reducing the severity of the economic decline. Again, it is a case where the ammunition was used up before it was really needed.

This is where the lack of discipline kills you. When you really need something, you find that what you need is not there and this leaves you with little you can do going forward. The “free market” tools that could have been used to speed about a recovery have been frittered away in easy living. Now, the only recourse is greater direct government intervention into the economy in an effort to prevent the worst.

On a final note, one of the implicit assumptions connected with the free market model is that there is a moral structure in the society, which underlies behavior and allows the free market to be free. This moral structure leads to people acting responsibly with respect to commitments and relationships.

What we have seen in the last seven and one-half years is an administration that has underwritten fiscal prodigality and monetary laxity, behavior that has been emulated throughout the economy. In effect, the administration has undermined the moral fabric of economic prudence. Now the administration is washing its hands of its waywardness and scurrying for the door. It is someone else’s problem.

And the layoffs will grow.

I believe that a lot of the uncertainty is over. The future is not going to be pleasant. The question is just how unpleasant will it get? Not only does the economy need to be rebuilt but the moral fiber of the markets also needs to be reconstituted.

Comments

[anarchist:]

yeah, amen to what he said!

2008 Oct 23 08:32 AM

[Smarty_Pants:]

Restoring the moral fiber of the markets is a simple task. Induce unbearable pain where it belongs in the form of losses and bankruptcies.

"The worst" is what the market needs now to eliminate the problem. How far backward that moves us is beside the point now. What is needed is to get things to a place where sensible business decisions will begin moving things forward again.

Government interventions merely postpone the day when normalcy returns and compound the problem.

2008 Oct 23 10:06 AM

[axelrod608:]

Great article. Clearly the proposed "stimulus" is just warming up the paddles for a "code blue" attempt to save a dying patient.

I see George II as the living Manchurian Candidate. With an Ivy League MBA he knows how to run a company/government and also knows how to run one into the ground to certain bankruptcy. And every policy of his administration has been a fiscal disaster. Every one, without exception.

If this nation does not stop worshipping at the altar of credit and debt, we will be thrown into the world's debtors prison. As best I can predict, there will be no chance of escape if that happens.

The administration's minions - Pauson and Bernanke - are working feverishly to reinflate the credit bubble. If they are successful, the eventual pop will terminally wipe out the American economy, along with most American assets.

2008 Oct 24 02:52 PM