The Recovery Was Too Expensive 44 comments
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Now that Bernanke is taking victory laps for electro-shocking the economy back into an upright position, inquiring minds want to know what this statistical recovery has cost us.
The concern here is that a few hundreds of billions in temporary growth have been achieved at the cost of several trillions of dollars of stimulus and thin-air bailout money.
The calculations and the implications are explored below. Here are the quotes around which this piece was written:
Fed Chief Says Recession Is ‘Very Likely Over’
WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that it was “very likely” that the recession had ended although he cautioned that it would be many months before unemployment rates would drop significantly.
“From a technical perspective, the recession is very likely over at this point,” he said, adding that “it’s still going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was.”
What he means by this is that the myriad statistical shucks and jives applied to the economic body will come up with something that the government will gladly call "growth" but which many people, notably those living off of paychecks, will be hard pressed to detect in their daily lives.
The US is now in a managed recession. While the government and Federal Reserve now have a firmer grip on the matter than they did a year ago, this management assures two things; a very poor use and allocation of resources (along with the usual amounts of fraud and self-dealing) and an increase in the downstream risks we face.
Where we faced a pretty dramatic set of events associated with the probable (and necessary) implosion of big chunks of an entirely too bloated and redundant financial system, our fiscal and monetary authorities have willingly risked the US's solid credit rating for a temporary reprieve from economic pain.
Essentially we traded a rapid return to growth (at any cost) for an increased chance of a future monetary crisis. There are others who share this view, such as William White the former chief economist at the BIS who worries that past problems have been traded for future imbalances that are larger than what they replaced.
Of course, "growth" achieved at the expense of going further into debt is not really growth at all.
Here's what I mean by that. Suppose that your salary had been cut and you called this decline in income your personal 'recession.' If you borrowed money to make up the difference, would you say that your income had 'grown'? Probably not, but the statistical wizards down at the BLS certainly would. They do not factor out the impact of debt when measuring this thing they call growth.
I think that it is important that we ask ourselves, "okay, how much did we borrow and how much 'growth' happened as a result?"
For the sake of argument, let's assume that the economy will grow by 3% this quarter and 3% next quarter. On a roughly $14 trillion economy that pencils out to a $420 billion yearly rate of increase in the economy.
And how much did it cost us to force this return to growth?
It came at the expense of a nearly 20% expansion in the total expenditures of the federal government. If it were only this $512 billion increase in outlays, we might be tempted to think we got a good deal.
But, between here and the end of the calendar year, another few hundred billion in deficit spending will occur. So let's call just the increase in deficit spending alone an $800 billion dollar hit to the bar tab .
If that were all, we might still be tempted to call this a bargain. But at the same time that outlays were increasing, revenues were plummeting. As we see below, there was a more than 16% drop-off in federal receipts amounting to a shortfall of some $365 billion which we must add to the tab.
Now the price of our $420 billion in economic 'recovery' is over a trillion dollars. In fact, if we wish to just take the increase in federal debt this year, we might peg the price tag at $1.668 trillion federal dollars:
click to enlarge
Is a $420 billion yearly increase in GDP worth a four-fold higher increase in federal debt? Before we answer that, let's look at how much the Federal Reserve has poured into the furnace.
Off the Books Exposures
This $1.668 trillion (so far) increase in federal debt is just the tip of the iceberg. Lurking beneath the waves are the implicit and explicit guarantees of several trillions of dollars worth of bank debt, Fannie and Freddie bonds and mortgage backed securities, FHA mortgages, and whatever has been promised to the Chinese (et al.) behind closed doors to keep them from fleeing the scene.
The total of all the off-the-books stimulus and various guarantees stands at more than $3 trillion right now.
The Federal Reserve
Of course, the federal government has not been operating alone. The Federal Reserve has printed an unprecedented amount of money out of thin air which it has used to buy a lot of "assets" of questionable worth from stricken financial institutions.
As we can see below, another $1.2 trillion in 'funny money' needs to be taken into account when we are assessing the true cost of our economic 'recovery.'
However, the chart above merely shows the amount of actual cash injected so far and leaves out the additional $5 trillion in other program commitments that the Fed has either promised or made.
Adding it all up
In direct stimulus or bailout money roughly $2.8 trillion has been spent so far which has translated into the possible $420 billion in yearly economic expansion. A further $8 trillion has been either made available or committed to be used if necessary. $11 trillion exchanged for $0.42 trillion.
Does this sound like a good deal to you?
While it's easy to play Monday morning quarterback, I am reasonably certain that if you gave me $2.8 trillion in cash and another $8 trillion in guarantees that I could have achieved a lot more than $420 billion of temporary incremental economic activity.
Of course, I wouldn't have poured a single dime of that money into any of the black holes masquerading as banks that are now, regrettably, even larger than too-big-to-fail. Instead I would have poured the money into farms, communities, new forms of transportation, energy infrastructure and the like.
Unwinding the mess
As I recently wrote, the notion of how to unwind all of the Federal Reserve thin-air money injections, plus reducing and then finally removing the federal government deficit spending from the economy is going to be a tricky matter indeed.
The NYT article continues:
Mr. Bernanke said the consensus of forecasters was for moderate growth for the rest of this year and next, particularly as credit markets thaw, consumer confidence takes time to heal, and the federal government begins to unwind a series of federal spending and lending programs intended to mend the economy.
For policy makers in Washington the more significant question than the actual date of the end of the recession will be when to begin unwinding the myriad of lending programs that were hastily created in response to the crisis.
Even as economists in the US are beginning the long process of figuring out exactly how they are going to unwind the mess, there is another framework for understanding out there that suggests that their efforts are doomed to failure even before they begin.
For this story, we turn to an excellent article in the Boston Globe about Hyman Minsky, the economist who got it right, decades ago, and was completely ignored by the majority until very recently.
Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.
Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place.
The notion here is that all of the rescue efforts so far, as well meaning and as clever as they may have been, amount to little more than lurching back up the cliff over which we just recently lurched.
Conclusion
The US, and most of the rest of the world, is now rejoicing the end of the recession. Growth has been forced upon the system.
However, this growth comes at an enormous cost in terms of borrowed and dedicated funds and only now are the early questions being asked about how to recall all of these extravagant gifts from the parties to whom they've been given.
We've achieved some very temporary economic growth amounting to perhaps $420 billion at the expense of $2,800 billion spent and another $8,000 billion committed.
Instead of using the crisis to ask some hard questions about the stability and sustainability of the prior system - and using the answers to make some quite obvious changes - the entire crisis seems to have offered little in the way of insight to those in charge.
As the prior stimulus and gifts are unwound from the system, a massive headwind to growth will result. The alternative is a massive tailwind of inflation, the early signs of which we might already be seeing in our commodity and equity markets.
Both could have been avoided by recognizing that we were on an unsustainable path and allowing the unnecessary elements to die a dignified death. Certainly we would have lost an unneeded proportion of our financial machinery - and the attendant campaign contributions - but that would have ultimately proved to be to our long-term benefit.
Instead we are left with an unchastened financial industry already back to slinging great globs of risk and surreal bonuses about as if nothing had ever happened at all.
And we are left with the discomforting notion, known well seemingly everywhere but in the public centers of power, that perhaps we have given up too much to obtain so little.
It recalls a quote by Benjamin Franklin which we might paraphrase into, “They who would give up future prosperity for temporary economic growth, deserve neither prosperity nor growth.”
Disclosure: No positions
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This article has 44 comments:
"We've achieved some very temporary economic growth amounting to perhaps $420 billion at the expense of $2,800 billion spent and another $8,000 billion committed."
How does the temporary nature of these actions escape so many people? Mind boggling.
The answer is you attempt to fight off higher interest rates and see if you can dodge the inflation bubble that follows. The commitment for this current fiasco to save the world’s Illuminist banks has already caused an official debt responsibility for the US of more than $23 trillion or about 40% of world GDP. That is staggering and it is official. I wonder what the real figure is? It is also wise to remember that the Federal Reserve, and other reserve banks worldwide, all international, are responsible for the carnage we are witnessing.
The public is now paying for their gambling and corruption as central banks, who started this scam, transfer the debt to the taxpayers by buying up toxic garbage, guaranteeing losses and making sure none of the key Illuminist banks don’t go under. The Fed, privately owned, won’t let us look at their books, so we can tell what they are paying for these almost worthless assets. We are told it is a state secret.
There is no recovery my friend. If you wrote one hot check, then wrote another to cover the first one, how long will you be able to keep one step ahead? It's the game the U.S.A., G-20, OECD and IMF are playing each and every day.
I think in a few months it all comes tumbling down. Eighty percent of Americans think this "recovery" stories that they get from Ben and other is pure B.S. Why? They are the ones out there working more for less, or unemployed for the last year.
I wish the G-20, OECD and IMF LOTS OF LUCK! They'll need it.
Your other posts, such as those showing how the Fed is monetizing the debt by sleight of hand, have been similarly excellent.
I think this post continues in that line of taking a step back and looking at the big picture and asking some of the hard questions that need to be asked -- and then coming up with some hard facts to give guidance as to an honest answer to those questions.
It does seem to me, however, that a few of the numbers might be out of whack a little bit here. Even if my instincts are correct, however, it doesn't really change the basic premise you are making here, but might warrant tweaking the numbers a little bit.
For instance, the chart on the additional outlays Defense Military and "Other" which I'm guessing probably would have been roughly the same with or without the stimulus package and bailouts. The mainstream economists might even contend that Social Security, Medicare, Medicaid & Unemployment would have had higher expenses without the stimulus package, though I imagine the extended unemployment benefits would probably far outweigh the benefits saved by keeping the Goldman Sachs employees off the unemployment rolls. ;)
I think a similar case could be made that the dropoff in revenues would have been a cost due to the recession, with or without the bailouts and stimulus. In fact, I imagine they would say revenues would have plummeted further without them. Whether or not they caused the whole fiasco in the first place is a separate issue, of course.
I'm not sure, but it also seems to me that the extra $ trillion on the Fed balance sheet may be a manifestation of some of the other bailout money counted elsewhere.
But it's hard for me to try and keep up with the accounting on all of the various programs and hundreds of billions and even trillions of dollars being thrown around hither and yon. Sorry if I'm confusing things here, but even if not, it doesn't really change the basic premise. We're overpaying in the extreme for the benefit received.
Thanks again for all your work, and for sharing it with us and anyone else who will listen.
In general, I'm in agreement with you. But I get a little annoyed on Seeking Alpha with all the "ditto heads" and permabears and really, perhaps Bernanke deserves some real kudos. Who knows, my point is we cannot.
We are but fallible humans (actually meaning-making animals) seeking to do the best we can for ourselves in our social contracts. I think it's better to live in gratefulness for what has been done than perenial cynicism.
If we recover but need to fight inflation due to easy money policies and outright funny money it will undoubtedly prevent any recovery if not another downturn. If we just let inflation rise we are tempting a bout of stagflation to take hold.
So essentially all our money has gone for naught asides from the belief if we didn't feed rich incompetent people running the banks billions we would be worse off. Let me tell you, the only thing I am absolutely certain of is that they most certainly would be worse off.
While some Libertarian and Austrian School enthusiasts might embrace the noble notion of a great cleansing destruction of the inefficient and inappropriate elements of the economy if only governments had stood aside and allowed the market (in the form of the deflationary collapse mentioned above) to do its thing unimpeded, more grounded individuals will appreciate that the nature and scope of the destruction would have been well beyond the ‘creative destruction’ of a mild recession. Not only would the destruction and suffering be too deep to contemplate but this very chaos would delay any prospect of recovery and reform of the economy. In short, Mr. Martenson is wrong to suggest that there was, practically speaking, a different course than the one taken open to central banks and governments when the crisis broke last year. This is not to say that waste, errors and possibly even inappropriate favoritism might not have occurred in the details followed; simply that the broadly correct course was taken.
Mr. Martenson is right to observe that the economic stabilization and partial recover currently in evidence is, in reality, dependent on not only the stimulus of the past year but also the continuation for the time being of such artificial support. He would be correct if he had also suggested that now, when the crisis has passed but true recovery based on sound factors internal to the unaided economy itself is not yet achieved, is the time for serious thought and action to place the economy on a sound footing.
Mr. Martenson alludes to Hyman Minsky. Minsky was a very interesting thinker (how could he be otherwise given that he drew with inspiration on such disparate sources as Marx, Schumpeter and Keynes for his concepts; and did so with intelligence and perception). Minsky argued that Keynes had been misapplied during the quarter century following WW II because the core of Keynes’s insight was not a bag of monetary and fiscal tricks and tools to fine-tune the economy when recessions threatened but rather it was that the economy was inherently unstable because markets were driven by intrinsic uncertainty about the future and consequent dynamic shifting of market sentiment as populations changed their educated guesses, often instantaneously, about the likely future course of the economy. Interestingly, as can be seen in the Boston Globe article referenced in Mr. Martenson’s piece, Minsky’s thoughts have also been inappropriately reduced to a set of emergency tools by many commentators as evidenced by the term “Minsky Moment”. Minsky suggested that the role of government and central banks was not simply to flood the economy with effective liquidity at moments of recessionary crisis ‘moment’. In fact Minsky observed that one of the key errors of central bankers and governments after WW II was to simply smooth over such mini-crises thereby allowing structural problems in the economy to persist, multiply and deepen. Does this not describe the situation we now face?
Minsky implies that governments have a broader continuing role to play. They could not fundamentally end the business cycle and attempts to do so (as distinct from jumpstarting the economy in crisis) only made matters ultimately more unstable and potentially more dangerous. The broader role Minsky implied for government was to broaden and deepen the public sector, not simply to better perform tasks that the private sector did not address or addressed poorly but also so that the public sector would be a big enough factor in the total economy so that it functioned effectively as a counterbalance to swings in the free market private sector. If not tied to the business cycle, this enhanced public sector would grow and diminish according to a different cycle than the business cycle thereby helping to keep the general economy from falling into bouts of manic/depressive swings and without interfering inappropriately with the working of market forces in the private sector. These will be seen as very radical approaches by many but isn’t it just these very questions we should be considering now? It will be folly if we simply allow the economy to limp back into some semblance of 2005 like normality. Then Mr. Martenson will have been right to observe that the massif stimulus was a very expensive respite from the deep crisis we are in as that crisis will fall down harder upon us within the coming decade and we will have even fewer resources with which to address it then.
The forgoing does not suggest that a major thrust of action that must begin now is control and orderly discharge of the 20 trillion dollar or more of derivative related asset assumed value which is now judged to be substantially worthless. Monetizing it raises the fear of hyperinflation; repudiating it the fear of catastrophic deflation. While modest attempts at both partial monetizing and partial repudiation will occur, the basic thrust will be over time to reflate the market value for a portion of this derivative mass where appropriate and to write off other portions against future profits from other sources. Good luck with all this!
There are also international trade, economic development, ecological and other factors in need of urgent attention as part of the needed fundamental upgrading of the global economy but I have already tried your patience enough with this long post.
My fear is that in our impatience and relief now that the immediate crisis has passed we will not only neglect to ask the deeper questions and make the difficult structural measures, some of which I suggest earlier in my comments, but we may even choose to lose sight of the 20 trillion dollar or more problem. This would be tragic.
I agree the immediate crises is past, however we are not off the field yet and one more hurdle to go. Confidence in the dollar not only at home but around the world, visa a vis as a reserve currency. Against the backdrop of what the Treasury and Fed are doing, a forced devaluation is now a distinct possibility. Is it not? If this where to occur then the current deep recession would morph into a deep depression.
P.S. May I suggest you form some of your thoughts into a package and post them as an instablog on this site?
We'll learn a little more from the G-20 summit.
Earlier tonight, I learned that the FDIC will stop backing money markets as of this coming Friday.
To me, the stock market recent rise will continue, despite the next coming fiasco, of which I have little idea when it will happen, and yet, I'm convinced will happen. I believe we've seen nothing, yet. But, I'm playing the game right now as aggressively as I can so that I can take advantage of the next drop, maybe next year, maybe later.
In some sort of cognizant, sentient way, I believe the market already knows.
When the facts are plainly stated and known, down to the non-intense, safe harbored investor, who finally relented and got back in, compelled by the FDIC's decision to no longer insure their billions, that's when we'll see the next huge drop.
If stocks continue this bull rise, the underperforming still sidelined hedgies will be compelled to get back in. That's 2 to 4 trillion. And now, add in the ungauranteed, un-FDIC-backed money market funds.
The 3000 plus rise in the DOW will force underperforming hedgies to partake. Propping up the downswings. Their clients will force them to get back in the game.
We are in a tenuous period.
The brains at Goldman Sachs have to be loving this. They know...but so does little ole me.
Perhaps you can explain this to me:
When Mark Zandi of Moody's presented to the Financial Stability Committee in July he presented a table showing that the Fed had deployed $2.7 trillion to "fight the credit crunch".
To my simple way of thinking that should be reflected as $2.7 trillion extra on the Fed's balance sheet, unless they just gave the money away without getting a pledge of collateral (regardless of how they value the collateral).
What did I miss?
200 years ago, on the small island of Bahrain in the Persian Gulf, the main commodity was pearls. Wealthy merchants retained boats and divers to harvest pearls from the sea.
The merchants would employ the divers on an insufficient wage, and then lend them money to make ends meet. These divers soon acquired debts that could not be paid, and as a result, effectively became indentured. When they died, these debts were inherited by their children, so that the children also became indentured servants simply by their birth.
Sounds horrible doesn't it? When I told this story to my wife, she became appalled by the injustice of it.
Then I asked her, what is the difference between this and the situation that the government has created for each American citizen right now? In the same way, our children will be responsible for this debt at birth. They will be born indentured.
In fact, there is no difference, just that the super-criminals that created this debt (without any agreement from us) are doing it on a much larger and more heinous scale. And they will probably never see justice.
Without rescuing the banks, the global financial system would have collapsed, which is what happened during the Great Depression.
Last fall AT&T was forced to 24 hour commericial paper deals because the banks would lend for longer terms.
The cost of not doing anything (laissez-faire) would have cost many multiples of the money spent.
Get real.
On Sep 18 04:29 AM Andrew Butter wrote:
> Excellent article.
>
> Perhaps you can explain this to me:
>
> When Mark Zandi of Moody's presented to the Financial Stability Committee
> in July he presented a table showing that the Fed had deployed $2.7
> trillion to "fight the credit crunch".
>
> To my simple way of thinking that should be reflected as $2.7 trillion
> extra on the Fed's balance sheet, unless they just gave the money
> away without getting a pledge of collateral (regardless of how they
> value the collateral).
>
> What did I miss?
IThe US deficit would probably have been larger without the stimulus because the recession would have been deeper and last longer.
Second of all, US Treasuries are bought by Americans, not just foreigners. To the extend that the debt is owed by the US government to US citizens, it's a wash at the level of national accounting.
Stop the debt is evil routine ...
On Sep 18 08:49 AM Edvard wrote:
> Putting this in simple terms by analogy (that is based upon historical
> fact):
>
> 200 years ago, on the small island of Bahrain in the Persian Gulf,
> the main commodity was pearls. Wealthy merchants retained boats
> and divers to harvest pearls from the sea.
>
> The merchants would employ the divers on an insufficient wage, and
> then lend them money to make ends meet. These divers soon acquired
> debts that could not be paid, and as a result, effectively became
> indentured. When they died, these debts were inherited by their
> children, so that the children also became indentured servants simply
> by their birth.
>
> Sounds horrible doesn't it? When I told this story to my wife, she
> became appalled by the injustice of it.
>
> Then I asked her, what is the difference between this and the situation
> that the government has created for each American citizen right now?
> In the same way, our children will be responsible for this debt at
> birth. They will be born indentured.
>
> In fact, there is no difference, just that the super-criminals that
> created this debt (without any agreement from us) are doing it on
> a much larger and more heinous scale. And they will probably never
> see justice.
Your entire thrust is wrong. The government is the problem. Each intervention increases the structural distortion. We are now suffering from a long series of interventions; and the government is now putting at risk the very foundations of the US political system. The US economic and political system has reached a brick wall from which there is no escape.
Through the stimulus and quantitative easing, they have an effective stranglehold on the media, on manufacturing and on finance. They are picking the winners and losers, rewarding failed organizations and robbing from the prudent, thus destroying any moral basis of the market and the economic system.
In addition to these distortions, what little important authority that is legitimately given to them by the populace they are not doing, for this we see Madoff's, mini-Madoffs, etc, co-location, high-frequency trading, flash-trading, shall I go on?
Now they provide stimulus so efficiently that for each $8,000 that reaches the home buyer, $35,000 somewhere disappears. Well, I could go on and cite many cases, such as the ACORN funding that was to be $8.5 billion to facilitate fraud and criminal activity. Thank goodness some in the House and Senate have stopped this lunacy (even though 77 Democrats in the house voted in support ACORN).
I cringe when I see these government-centric solutions. The solution is simple. Let those who have failed suffer the consequences. In fact there is no other solution.
That money will have to paid back, by my children, and their children, and their children and so on, wherever they live in the world. There is no escape. This is debt that the American people never authorized. How you can say that is not the same, is beyond me.
On Sep 18 08:59 AM American in Paris wrote:
> Yes, there is a big difference because you don't understand finance.
>
>
> IThe US deficit would probably have been larger without the stimulus
> because the recession would have been deeper and last longer. <br/>
>
> Second of all, US Treasuries are bought by Americans, not just foreigners.
> To the extend that the debt is owed by the US government to US citizens,
> it's a wash at the level of national accounting.
>
> Stop the debt is evil routine ...
> Yes, there is a big difference because you don't understand finance.
IThe US deficit would probably have been larger without the stimulus because the recession would have been deeper and last longer.
Second of all, US Treasuries are bought by Americans, not just foreigners. To the extend that the debt is owed by the US government to US citizens, it's a wash at the level of national accounting.
Stop the debt is evil routine ... >
The problem is that this whole problem was *caused* by the "irrational exuberance" fostered in large measure by our central bank pumping hundreds of billions after hundreds of billions into the economy, holding interest rates artificially low thereby pressuring people who otherwise would have been investing in traditional safe interest bearing instruments, ie. those living off of the interest on their lifetime savings, to gamble on ever riskier assets.
Now the fix, engineered by the very same characters that engineered the mess in the first place, is to explode the debt and the easy money even more.
It is a vicious cycle of ever increasing debt that necessarily ends badly, much as the heroin addict can only increase his fix for so long before catastrophe eventually strikes.
Mr. Martenson's series of short videos entitled "Crash Course" www.chrismartenson.com... does a good job of explaining things in visual terms that makes a very strong case for the unsustainability of the current paradigm.
One of the videos, on exponential growth, is a little over 6 minutes long, gives a pretty good indication of why it is unsustainable. If interested, you can view it here: www.chrismartenson.com...
But either way it's a drop in the bucket; I agree completely with your quadruple whammy scenario.
On Sep 18 12:58 AM Dave Wrixon wrote:
> The cuts are coming. Yesterday Obama canceled Bush's Toy Missile
> system whose only purpose was to annoy the Russians. Was it because
> of a more stable World or could the US simply not afford it? Watch
> out, it will be the Blue Water Fleet next. Don't want to fall victim
> to Somali Pirates because you run out fuel! But it won't stop there.
> Americans will face a Quadruple Whammy of increasing Inflation, Higher
> Interest Rates, reduced Social Benefits/Services and Higher Taxes.
On Sep 18 01:21 AM bob adamson wrote:
> Mr. Martenson draws our attention to some interesting articles and
> budgetary information but his premises about the options facing governments
> last year when the crisis broke and now when it has been abated,
> albeit through the aegis of massif governmental fiscal and monetary
> stimulus, are flawed. The practical choice facing the central banks
> and national governments of the G8 from the late summer of 2009 to
> March of this year was to allow unimaginable collapse and chaos to
> ensue (i.e. allow first the banking system to implode occasioned
> by the realization that 20 trillion dollar or more of derivative
> related asset assumed value was substantially worthless and then
> watch first the general financial system and then the general global
> economy implode in an unprecedented deflationary black hole) or
> stabilize this 20 trillion dollar or more asset problem by massive
> governmental fiscal and monetary stimulus (i.e. give a governmental
> guarantee, backed by infusions of money and credit by government
> insofar as required, that this 20 trillion dollar or more void would
> not be allowed to collapse). There was no third thrifty option.
>
Thank you all for the excellent comments and discussions.
Mr. Adamson:
While I think there are a number of excellent points made in your response, I see your characterization of either the government did what it did or collapse would have resulted as a false dichotomy.
In truth there was a third (and fourth and fifth...) option.
The "thrifty" option, with a long-term benefit attached, would have been to make the bondholders of the banks eat the losses, not future taxpayers.
Perhaps then these bondholders, having been burned badly, would have been far more careful in their due diligence and/or fiduciary responsibilities in the future. This would have excellent long-term benefits for our financial markets and system.
No one has yet satisfactorily explained to me why the bondholders of Citi, standing north of $300 billion, were not made to suffer any losses while the Treasury signed off on a $300 billion asset guarantee. The "thrifty" option would have been to wipe out the bond holders, nationalize the remaining portions of bad assets, and then let a restructured Citi start over again.
Instead we now have larger banks than before, with more concentrated risk, and with a very nearly explicit guarantee from the government/Fed that they will backstop all future losses as well.
Moral hazard writ even larger, is how I see that. And since it was moral hazard that got us into this mess in the first place I completely reject any and all notions that the government took either the least costly or best course of action in the bailouts.
Switching slightly, in several comments above I see the *belief* that a global catastrophe would have resulted (without all the government actions) being presented as though it were fact. It's not a fact. We simply cannot know.
But I do know that the same rescues could have been performed in the same dollar amounts only with the responsible parties being dinged instead of everybody. I see it as something of a colossal failure that this was not done.
Thanks again. There's more discussion of this article back at my website as well.
On Sep 18 12:35 AM JeffDB wrote:
But it's hard for me to try and keep up with the accounting on all of the various programs and hundreds of billions and even trillions of dollars being thrown around hither and yon.
=================
Don't feel bad. The accounting is so bad that the Gov. Accounting Office issued this statement in their 2007 report to Congress.
quote:
GAO is responsible for auditing the financial statements included in the Financial Report, but we have been unable to express an opinion on them for the 10th year in a row because the federal government could not demonstrate the reliability of significant portions of the financial statements,
www.gao.gov/new.items/...
===================
While we can certainly debate many of the numbers and their impact on other numbers or double counting, etc. we can't debate the damage to our future.
The private sector can never grow again, enough to cover the burden placed on it. Congress has been aware this was coming for years. In 2007, Bernanke's testimony to Congress basically said you can't grow or tax out of the coming entitlement crisis.
That was before this crisis even was believed to exist. Also, it was believed we had until 2015-17 before Medicare and S.S. would go cash flow negative and force us to borrow to buy the bonds back in the trust funds so they could make up short falls.
Now, because of this crisis and the loss of payroll taxes, that crisis has been moved up and morphed with this one. We started borrowing for Medicare last year and now we are borrowing for S.S. To add fuel, boomers are retiring and while they haven't hit the Medicare age they are draining S.S. faster. About 3.5 to 5 million people will retire each year for the next 20 and the gov. projects retirees will grow from the current 37 million to 71 million due to longevity increases.
Just reading the summary of that 2007 report will tell you how bad things already were before this crisis. Lower in the report is some data on how much each of us are obligated by the government spending and commitments. Again, that is how bad it was. Think about how since then we have about doubled the public debt and when rates rise, the CBO says interest on debt will quadruple from under $200 billion to $806 billion.
Yes, I agree. In fact, I believe there is much danger in the system and the markets right now. For those interested please see my latest blog posts at EconomicGreenfield.com
quote
Under GAO’s alternative simulation, closing the fiscal gap would require spending cuts or tax increases, or some combination of the two, equal to 8.1 percent of the entire economy over the next 75 years, or about $63 trillion in present value terms. To put this in perspective, closing the gap solely through revenue increases would require an increase in today’s federal tax revenues of about 44 percent, or to do it solely through spending reductions would require a reduction in today’s federal program spending (i.e., in all spending except for interest on the debt held by the public, which cannot be directly controlled) of about 31 percent to be maintained over the entire 75-year period.
www.gao.gov/new.items/...
==============
A good deal of the report is still about the inability to get good data from the various government departments. However, this shows how bad things are. Neither option is viable with a falling dollar, wage stagnation, lack of jobs, lack of private sector growth.
Growing government spending at the same time private sector growth and spending is negative and will be for years, doesn't solve anything. The CBO projects trillion (or 2 trillion) deficits for the next 10 years and yet this report is projecting based on one of those choices or a combination, NOW. Every month we wait, destroys that projection more and more and yet, there is no way to stop it without a major depression.
Not stopping means a major depression later when it collapses under its own weight. If we can't fix this even if we stop now, we can't fix it later with it growing as fast as it is.
Prepare you investment strategy for several different scenarios but, make sure you have those contingency plans ready to go within months to a couple of years, based on what I am reading and hearing from some respected analysts like Marc Faber and Gerald Celente.
Corporate taxes right now are about 8% of total spending. Personal income taxes are about 35% of spending. The rest is mostly borrowed.
Given baseline budgeting for entitlements, there's little question that Bernanke didn't really do anything other than kick the can down the road. The fact that he considers this a victory shows how shallow and bureaucratic his thinking really is.
The fact is, all we really did was hasten the collapse of the federal government. The key flaw in peoples thinking is the perception that things that change gradually will always change gradually. When this thing stops, it's going to stop like a june bug stops when it hits your windshield.
I suspect that political considerations are more pervasive than we suspect. If we all just believe it is over, than I guess it must be over. Say if we all believe that bubbles can form, then I guess they can't form.
In response to your ‘Author’s Reply’ I would first like to thank you again for the useful links to other articles and data and for your interesting analysis. On your suggestion that the opening paragraph of my initial response to your article draws a ‘false dichotomy’, the thrust of my response, read as a whole, was that there are various stages in responding to the current crisis and that the actions of the central bankers and governments of the G8 necessarily will differ at each stage. It follows that we must be clear both as to the nature of the crisis and what stage we are at in order to draw intelligent assumptions about what is best to be done at any specific stage.
My opening paragraph which you quoted focused on the state of affairs as they had become inescapably apparent by late summer of last year. For the reasons stated in that paragraph I see no practical alternative open to the governments and central bankers of the G8 other than the massif stimulus in fact provided from October to March while the clear and present threat of economic collapse continued. In short, the first order of business was to stabilize the economy. We should not be surprised that there was some fumbling in details of the response or that some of the investment banks and their key executives were treated lightly at that stage. The risks were great, timelines for deciding upon and taking unprecedented action very tight and cooperation by the very banks and their key executives needed at that time.
That said, as stability and partial recovery solidifies we need to return to the very ‘moral hazard’ issues to which you refer. Even more importantly, we need to consider and take concrete measures to begin the restructuring of the economy to place it on a sounder footing. You and I will both, I think, agree that if the economy simply returns to some semblance of that in 2004, albeit supported by ongoing fiscal and monetary stimulus, further disasters await. We may well differ on the best direction for the restructuring to which I refer but will agree that this is an urgent topic for consideration and debate.
On the ‘moral hazard’ aspect, as a Canadian it is not for me to say how the US Government should now proceed to recover part of the expense it incurred in preventing the implosion of its major investment banks several of which remain insolvent save for the continuation of government support. If Canada faced a somewhat analogous situation there would be great pressure across the political spectrum to nationalize the banks in question, reorganize their affairs and then privatize the reorganized banks in an orderly fashion. I say ‘somewhat analogous situation’ because New York is a global financial centre in that its major investment banks have a unique global function. London and the City banks may remain on a precarious equality with their US counterparts in this global role but there is no Canadian equivalent. While some form of legislation mandated expedited bankruptcy proceeding may be considered by some US citizens for some of your major investment banks as a way to deal with the moral hazard question along the lines you suggest, set off against that desire must be concern for disruption of the fragile recovery and for the continuation of New York as a global financial center. Good luck with that!
In short, I didn’t mean to imply that the issues you raise shouldn’t be addressed; only that these need to be addressed at an appropriate time and that that time was not in the winter of 2008/09.
As one who was close to the "crash of "'87 and the subsequent real estate bubble of the 1990's and the "saving & loan crises", I concur with Stalins apocryphal reply of one of his finance ministers. From 1987-88 to 2007-08 is 20 years. A generation. Economic calamity is not unlike the cycles of war. They both come about every generation with the maturation of a new generation. The coming economic calamity was noticed by many people. Some wrote about about and were called bad names (not anymore) others sat it out (such as I) and were called bad names as well.
Now, the people who present when the act(s) of procreation of this calamity, was being committed are now in custody of the orphans that were produced. Should the Fed feed these little monsters and let them grow to be the instigators of the next economic calamity in 20 years? Should the Fed be foster parents at all to these little bastards of financial lust?
We'll know in another 20 years (maybe).
But what would the cost have been in those same dollars if we had done nothing? None of us can know, and cannot even estimate because our nation's treasure is impossible to value. Potential value of the labor of an educated work force, research and development capacity of our labs and higher education institutions, mineral extraction capacity are intangibles but certainly have some value.
It seems to me the conclusions talked more about the possibilities of "development" of our overall economy from the destructive aspect of capitalism evolving in favor of simply increasing by 1 or 2% what we have done before that didn't work.
This may be more philosophy or history, but the USA has faced and dealt with crisis in pragmatic terms. It has usually involved someone or some group doing "something" instead of doing nothing. Bernanke can point to the same improving indicators now that people used before to predict doom.
"we are really getting only limited value from
> this bailout" but this is really an impossible statement; isn't it?
> How do you know what might have happened if the fed's actions hadn't
> been taken?
>
> In general, I'm in agreement with you. But I get a little annoyed
> on Seeking Alpha with all the "ditto heads" and permabears and really,
> perhaps Bernanke deserves some real kudos. Who knows, my point is
> we cannot.
>
> We are but fallible humans (actually meaning-making animals) seeking
> to do the best we can for ourselves in our social contracts. I think
> it's better to live in gratefulness for what has been done than perenial
> cynicism.
Both parties are corrupt elitists and Obama is bought and paid for by Wall Street just as Bush was.
On Sep 18 08:54 AM American in Paris wrote:
> It isn't an excellent article. It is an excellent of right wing demagoguery.
>
>
> Without rescuing the banks, the global financial system would have
> collapsed, which is what happened during the Great Depression.<br/>
>
> Last fall AT&T was forced to 24 hour commericial paper deals
> because the banks would lend for longer terms.
>
> The cost of not doing anything (laissez-faire) would have cost many
> multiples of the money spent.
>
> Get real.
Well, of course there will always be a consumer segment, but the U.S. seems to waste a lot of energy and money in non-productive things such as consumerism and warfare. The lack of productivity is seen in the movement towards a purely service oriented economy. I would have liked to have seen this crisis start to put us on another track.
As always, many of the comments go together with the original article to make reading all this very worthwhile - thank you all.
Part of the GDP figures include the promises people make to pay their mortgages and credit card debt. So it's fine if we are "producing" an expansion of debt rather than manufacturing stuff in factories; it still looks good on paper.
George Orwell let us know that:
War Is Peace
Freedom is slavery
Ignorance is strength
And for years I've been envisioning a t shirt that adds:
Debt is prosperity.
On Sep 18 01:10 AM David in D wrote:
... The borrowing, in the case of the nation, comes from itself.
Speaking of overly simple depicitons, this is more of a transfer of wealth away from the nation as a whole to the very few, the select few financiers who created the problems. I think the operative phrase might really be "Too rich to fail."
> it's better to live in gratefulness for what has been done than perenial
> cynicism.
Oh, thank you SO much for picking our collective pocket, Goldman Sachs guys!
My post is not to question or debate the premises of your contributions, but rather to commend and thank you for the beauty and structure of your writing. It makes up significantly for the "slash and burn" type of posting that all too regularly pops up on SA. I might add that you offer interesting insight... Regards.
On Sep 18 11:44 AM bob adamson wrote:
> Mr. Martenson
>
> In response to your ‘Author’s Reply’ I would first like to thank
> you again for the useful links to other articles and data and for
> your interesting analysis. On your suggestion that the opening paragraph
> of my initial response to your article draws a ‘false dichotomy’,
> the thrust of my response, read as a whole, was that there are various
> stages in responding to the current crisis and that the actions of
> the central bankers and governments of the G8 necessarily will differ
> at each stage. It follows that we must be clear both as to the nature
> of the crisis and what stage we are at in order to draw intelligent
> assumptions about what is best to be done at any specific stage.
>
>
> My opening paragraph which you quoted focused on the state of affairs
> as they had become inescapably apparent by late summer of last year.
> For the reasons stated in that paragraph I see no practical alternative
> open to the governments and central bankers of the G8 other than
> the massif stimulus in fact provided from October to March while
> the clear and present threat of economic collapse continued. In short,
> the first order of business was to stabilize the economy. We should
> not be surprised that there was some fumbling in details of the response
> or that some of the investment banks and their key executives were
> treated lightly at that stage. The risks were great, timelines for
> deciding upon and taking unprecedented action very tight and cooperation
> by the very banks and their key executives needed at that time.<br/>
>
> That said, as stability and partial recovery solidifies we need to
> return to the very ‘moral hazard’ issues to which you refer. Even
> more importantly, we need to consider and take concrete measures
> to begin the restructuring of the economy to place it on a sounder
> footing. You and I will both, I think, agree that if the economy
> simply returns to some semblance of that in 2004, albeit supported
> by ongoing fiscal and monetary stimulus, further disasters await.
> We may well differ on the best direction for the restructuring to
> which I refer but will agree that this is an urgent topic for consideration
> and debate.
>
> On the ‘moral hazard’ aspect, as a Canadian it is not for me to say
> how the US Government should now proceed to recover part of the expense
> it incurred in preventing the implosion of its major investment banks
> several of which remain insolvent save for the continuation of government
> support. If Canada faced a somewhat analogous situation there would
> be great pressure across the political spectrum to nationalize the
> banks in question, reorganize their affairs and then privatize the
> reorganized banks in an orderly fashion. I say ‘somewhat analogous
> situation’ because New York is a global financial centre in that
> its major investment banks have a unique global function. London
> and the City banks may remain on a precarious equality with their
> US counterparts in this global role but there is no Canadian equivalent.
> While some form of legislation mandated expedited bankruptcy proceeding
> may be considered by some US citizens for some of your major investment
> banks as a way to deal with the moral hazard question along the lines
> you suggest, set off against that desire must be concern for disruption
> of the fragile recovery and for the continuation of New York as a
> global financial center. Good luck with that!
>
> In short, I didn’t mean to imply that the issues you raise shouldn’t
> be addressed; only that these need to be addressed at an appropriate
> time and that that time was not in the winter of 2008/09.
The value of GS is not based on their brains, skills, etc. It is the sheer fact that everyone knows they are insiders with the U.S. Government sham. When GS falls the U.S. Government will have fallen too, so GS is seen as a safe bet right now.
On Sep 18 02:15 AM Mayascribe wrote:
> No doubt in my mind that we're going through a rubber band recovery.
> The question is when to get out of the way of this government sponsored,
> globally sponsored slingshot recovery.
>
> We'll learn a little more from the G-20 summit.
>
> Earlier tonight, I learned that the FDIC will stop backing money
> markets as of this coming Friday.
>
> To me, the stock market recent rise will continue, despite the next
> coming fiasco, of which I have little idea when it will happen, and
> yet, I'm convinced will happen. I believe we've seen nothing, yet.
> But, I'm playing the game right now as aggressively as I can so that
> I can take advantage of the next drop, maybe next year, maybe later.
>
> In some sort of cognizant, sentient way, I believe the market already
> knows.
>
> When the facts are plainly stated and known, down to the non-intense,
> safe harbored investor, who finally relented and got back in, compelled
> by the FDIC's decision to no longer insure their billions, that's
> when we'll see the next huge drop.
>
> If stocks continue this bull rise, the underperforming still sidelined
> hedgies will be compelled to get back in. That's 2 to 4 trillion.
> And now, add in the ungauranteed, un-FDIC-backed money market funds.
>
>
> The 3000 plus rise in the DOW will force underperforming hedgies
> to partake. Propping up the downswings. Their clients will force
> them to get back in the game.
>
> We are in a tenuous period.
>
> The brains at Goldman Sachs have to be loving this. They know...but
> so does little ole me.
On Sep 18 09:17 PM Evelyn wrote:
> A friend of mine who considers me too pessimistic pointed out to
> me that the GDP numbers were improving. That ray of sunshine itself
> should be scrutinized. You know what's part of GDP? Debt! That's
> right. Debt.
>
> Part of the GDP figures include the promises people make to pay their
> mortgages and credit card debt. So it's fine if we are "producing"
> an expansion of debt rather than manufacturing stuff in factories;
> it still looks good on paper.
>
> George Orwell let us know that:
> War Is Peace
> Freedom is slavery
> Ignorance is strength
>
> And for years I've been envisioning a t shirt that adds:
> Debt is prosperity.
Who would reap the rewards if the best happens?
Do the profits or losses just stay there forever?
Could the Federal Reserve go into conservatorship?