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There has been a lot of talk recently about an end to the current recession: how we dodged the bullet of depression and have entered a period of stabilization. Echoing similar arguments during the Bush years, the economy’s continued hemorrhaging of jobs is rationalized as a new “paradigm”. Bush’s “jobless” recovery has become Obama’s “job-loss” one. Obama and his economic team have been quick to give credit to the stimulus for a slowing in the economy’s contraction to -1% in the second quarter down from -6.4% in the first quarter. It is unlikely that this is true. The stimulus so far has consisted of non-stimulative tax cuts and some money for infrastructure projects. Neither of these would be sufficient to produce the observed result. The stimulus has also been used to help out hard pressed state budgets. This could account for some slowing of the economic contraction but again not that much.
I should point out parenthetically that state finances this year have been kept from collapsing by a series of one offs, rainy day funds, job and program cuts, and, of course, money from the stimulus. Next year state budgets look like pure disaster. Nor is there much more in the way of aid from the stimulus for these budgets.
At the same time that relatively little money from the stimulus has been used in a stimulative fashion, the banking industry has received some $7 trillion in help from the government. Even though banks have held on to much of this, just the bit sloshing over the sides represents more than what we have seen from the stimulus.
I have been highly skeptical of all the greenshoots cheerleading because it consistently ignores the fact that none of the problems underlying the housing bubble and the financial meltdown have been addressed. We are propping up exactly the same corrupt financial system, pumping trillions into it, and expecting a different result. What we are seeing, however, by players like Goldman is more of the same.
One crucial aspect of all this, that from the beginning has been largely neglected is the housing situation. Programs for it are usually the smallest and the last announced and their purpose has been less to help homeowners than to support the unrealistic asset values on bank balance sheets to make them look less insolvent than they are. In the absence of cramdowns and any real action, housing in America has been quietly falling apart.
As of March 2009, 26% of residential mortgages are underwater, or if you prefer, upside down, that is homeowners owe more on their mortgage than the house is worth. By 2011, according to a Deutsche Bank report, 48% will be. Most of this increase will not be in doubtful loan categories but in prime conforming ones. Deutsche Bank also predicts that house prices will continue to fall another 14% through the first part of 2011 for a total decrease of 41.7%. Upside down subprimes are expected to go from 50% to 69%. Option adjustable rate mortgages (ARMs) will go from 77% to 89%.
This is already showing up elsewhere. Fannie Mae is asking for $10.7 billion from the Treasury to cover its most recent losses. The accompanying press release noted that Fannie currently has $171 billion in non performing loans on its books.
The housing crisis is rapidly worsening. It is moving from problem mortgage classes to all mortgages generally. Essentially half of US homeowners will not be homeowners at all. They will have no positive equity in their homes. They will be renters but with some tax deductions and responsibilities that regular renters do not have. The question is can we expect them to make good on losses to the banks for what was largely a bank created housing bubble? Would they even be able too? There is also the point that states and municipalities have done what they could to slow foreclosures. But can they continue to do so? As more mortgages go upside down, the number of non performing loans will increase. This will put more pressure on efforts to limit foreclosures. At some point barring an indefinite foreclosure moratorium, we could see a foreclosure tsunami. This could result in an even faster collapse in housing prices putting even more mortgages underwater creating a vicious spiral.
If you look at falling employment, the high levels of consumer debt, and what is happening in housing, what we are seeing is not a new paradigm but a roadmap to depression. It is frightening that our elites, Democratic and Republican, remain oblivious to all this. None of our leadership, none, has a clue about what is coming. They continue to believe in the very system and people that produced this mess. They think that trillions are OK for an unproductive, wealth destroying financial sector and that a nudge and some spin are all that are needed for the real economy where Americans live. As a result, the risk for depression in 2011 remains very high.
43 Comments
This is precisely why I utterly failed to understand from the onset why anyone would agree to bailouts without being lock-step tied to fundamental reforms of the underlying institutions and systems being bailed out.
It made absolutely no sense. Even if you consider the purpose of direct-spending stimulus vs. tax-cuts as that of capitalizing on Keynesian multiplier-effects, you have to have a healthy functioning financial system to take advantage of them. Otherwise as soon as the money imparts its first-order effects on the economy and gets funneled through the banking system it will just turn to clay like all the other liquidity that’s been dumped in.
Regulation first, money second. It should come as no surprise that doing it the other way around just perpetuates the same game that you didn’t regulate properly to begin with.
Totally.
I was just reading this
The Real Economy vs. the Make Believe World of the Government and Financial Giants
Terrific post, Hugh. Particularly this:
Conversations with contacts in and around a ‘global corporation’ recently confirmed my own sense that the underlying economic factors are more grim than the government can admit. We are undergoing a fundamental economic shift, but apart from Obama’s discussion of a ‘green jobs’ sector (the Congressional equivalent is the ‘Apollo Initiative’), there really aren’t ways to regroup and reconfigure.
Here’s what no one says, and it’s incredibly simple:
– The mines are largely played out
– The forests are mostly cut down
– The fisheries are depleted, and in some instances have started showing serious signs of systems collapse
– The soils have been weakened
– Water quality in many regions has been severely impacted
– Water resources are under severe strain throughout much of the globe, including portions of the US
– The financial incentives shifted from productive economic behavior (aka, ‘wealth creation), to redistribution via managerial theft from large corporate structures
From approximately 1776 to 1976, the United States had abundant natural resources that it used to support a standard of living previously unknown in human history.
Resource depletion (and the increasing problems stemming from pollution) are probably the two underlying, key drivers of economic strain going forward — add in population pressures and global warming, and the future could be grim.
The economic conversation does not address the underlying resource depletion; all the institutions of US finance assume that resources will be extracted by those who control regulatory mechanisms, courts, and legislation.
This is now becoming outmoded.
Yet, this is the political and economic mantra of Inhofe, of Coburn, of Corker, and of too damn many Dems.
Larry Summers is the last person who should have his hands on economic decisions for this nation. But the old DC crowd doesn’t seem able to ‘think out of the box’.
I do **not** want to see militarization continue in the US government, but there are times when I wish that Dennis Blair and Gen Jim Jones — both of whom clearly take global warming seriously — would smack down Summers, Geithner, and the other economic soothsayers who are so ignorant of basic biology, physics, and population dynamics that they actually seem to believe that ‘money’ is a force of nature.
It isn’t.
It never was; it never will be.
The economic geniuses in DC are so caught up in their expertise that they don’t seem capable of stepping back and recognizing that in an era of resource depletion, you have to fundamentally, completely rethink basic economic activity, guidelines, market systems, and institutions.
In an era of space flight, global currency flows, and supercomputing, we’re stuck with economic institutions that still base their fundamental assumptions on the simple, one-on-one transactions described in the Edinburgh of Adam Smith, circa 1776.
This is an unmitigated disaster.
Thanks for letting me sound off.
Terrific post.
There is ample evidence to suggest that this was a feature, not a bug.
Further concentration of wealth, which only accelerates the destabilization of the nation’s ability to function. Whether the nation is suffocated beneath the oligarchic weight of parasitic behavior, or whether the nation can save itself by reforms and law enforcement remains to be seen; at present, it’s not looking very optimistic.
I recognize this from the perspective of the oligarchs, but what befuddled me was the general political support the whole shenanigan picked up as soon as the debacle was resurrected by Obama in the Senate.
People found themselves in a Hobson’s choice of their own creation, and a false one at that. The pervasive mood was well it’s this or nothing; without any notion that the choice wasn’t binary.
Nathan, Not so much regulation as just plain taking them into receivership, cleaning them up, turning on lending to Main Street again, getting them out of politics, then drawing up regulations, and finally, selling them off again to the private sector. I’ll never understand why Obama didn’t do that.
Great post, Hugh. I agree and seeing that nothing is being done about either the Housing problem or the real American Economy, I’ve been looking for the second dip any month now. When the next wave of foreclosures hits, and its plain that housing values aren’t going up, is when the second dip will hit and we’ll conclude that we have a depression.
My very first Diary here: Obama has Intentionally Committed Us to a ‘Lost Decade’
If we’re to believe him, it’s because he can’t count. I guess basic arithmetic isn’t a required prerequisite for Harvard Law.
Honestly, the steps you described would be necessary to clean up the balance sheets, and find real market prices for their assets. However, strong regulation and re-regulation was/is absolutely necessary. Appropriate accounting rules, conservative leverage ratios, transparent indexes on OTC derivatives, limits on shorting, etc.
Yup.
These people need to take more art classes, or spend a few months building wooden boats, or do something completely different than they’ve ever done before.
As someone who, for a few too many years, wore a set of blinkers that valued academic achievement above most other criteria, I used to sympathize with these folks. Now, I view them as bearing self-inflicted wounds that are socially irresponsible.
I think the people with the high SAT scores and great grades are in the highest risk group, and Geithner, Summers, et al fit that intellectual straightjacket.
They have received a lot of bennies for being ’smart’ and rising to the top of their organizations. Consequently, they’re oblivious of how narrow their own thinking really is.
The thing about Obama that still gives me hope is his stories of his travels; he knows that corrupt governments ruin lives, that sometimes $5 can be a fortune, that what matters over the long term is the quality of relationships.
Summers and Geithner don’t seem to ‘get’ any of those factors.
Ironic, but their ‘expertise’ is oddly blinding them to many possibilities that I suspect a soils scientist, a geneticist, or a chemical engineer would stumble on within 4 weeks or so.
The box has worked so well for them that they have not had much motive to know that any part of the universe exists outside of it. Therefore, why would they want to think ‘outside’ of it? They’re kind of like Medieval Europeans; they’re successful at being successful, but I don’t see any symptoms of innovative thinking.
Here’s hoping that I’m cutting them short, but I’m incredibly skeptical of their ability to rethink the US economy or regulatory structures. (But I’d love to be wrong for all our sakes.)
Think of what he’s up against.
There are still some GOP and Blue Dogs in Congress, as well as deeply entrenched staff and employees around DC, who are a huge, HUGE force of inertia.
Obama can’t do it all by himself.
But he does need some new econ advisors — the sooner, the better IMVHO.
Our financial system needs to be reset and restructured. That is what systemic failure means. Our financial institutions needed and still need to be nationalized. Only then can we assess how deep and big the problem is, what parts can be fixed, what parts need to be shed, how much it will cost. At the same time, we need to institute new rules that limit leveraging, securitization, and the other ways markets have been rigged and gamed. We need to simply outlaw instruments like CDSs and higher order CDOs. We need to keep any remaining CDOs simple, vanilla, and with clear titles. We need to eliminate the tens even hundreds of trillions in other swaps. We need TBTF broken up and Glass-Steagall re-enacted. we need to penalize high volume traders. We need pension funds to stick to low risk investments. We need to outlaw firms like Goldman and MS whose only function is to distort and rip off markets. We need to get rid of the clown brigade of Geithner and Summers and some others like Goolsbee. These guys have made careers out of being wrong. And of course we need a real stimulus, one that will put Americans back to work and re-inductrialize the country in a sustainable way, and help for homeowners, and that means cramdowns. Banks fight cramdowns because it would force them to re-evaluate their assets in a way that would show how bankrupt they are. They would rather see tens of millions of American families lose their homes first. But this will precipitate the very depression that most of us would like to avoid or if that is no longer possible at least mitigate the consequences of one.
Obama puts lipstick on pigs and calls that “change we can believe in.”
Hugh, if you have already written a separate post about this comment, I’ve not seen it. If you have not yet written one, *please* write a new diary just unpacking the content in this comment.
Particularly this:
I’m highly skeptical of the necessity and desirability of re-industrialization: Reevaluating Unemployment: Is Progress Destabilizing our Economy?
I agree. I mentioned regulation, myself, as one of the steps.
Right on, again Hugh. I couldn’t agree more.
Agreed.
Hire Krugman as SECTREAS…
Fire Barker Larry Kudlow…
State judiciaries can stop the onslaught by refusing to foreclose mortgages whose chain of title cannot be proved. Devices like MERS (Mortgage Electronic Registration System)were used to circumvent land records and permit the shuffling of mortgages behind the scenes which in my state had been illegal. I am trying to expedite an appeal which presents this issue. I’ll let you know how I make out.
As for judges, they are people like the people here. They think changing administrators or something is the way to go. They do not see the solution as creating facilities by which to empower themselves. Judges, of course, have the power. I’m not sure they will use it. It may be the same for we the people.
The problem for the states next year is going to be breathtaking.
California is just the warm-up.
Of course, the least in society will bear most of the pain.
Yeah, I fear the same thing about California.
great thread here – especially post 5 – Obama’s support for the bailouts is undergoing erasure from history, and many (D) fans will demand that you prove it.
a truly epic, world historic waste of resources and opportunity, diverting trillions to the banksters as all the crises enumerated in #3 loom.
What choice is there? We need to create goods producing jobs here, both to employ people in reasonably good jobs and to avoid sending wealth over to China to purchase them, increasing our indebtedness at the same time. I am not talking about a return to rampant consumerism or heavy smokestack industries. I am talking about a green, post-oil, future looking sustainable economy.
Green post-oil economy is where we have to go. But we also need to consider shorter work weeks for people as a matter of law. Reducing full time to 32 hours per week would do wonders for unemployment and also for family life. It’s been clear for a long time that Americans have been working much longer hours than people in other developed nations. That may be a factor in the differences in life expectancy that we see and not just the differences in health care.
Becuase Paulson was protecting his fortune. Nothing else.
Recommended.
Thanks Hugh.
I live in a note secured by a trust deed state, No judicial foreclosures. Foreclosures vary from state to state, what works in one does not in another.
Demand the note. With MERS they are not-retrievable.
Recommended. This diary and all comments above should be on the front page of FDL, and hopefully picked up by the MSM (yeah, I know…)
Not long ago I read a blurb that the income from tax revenue was way down. Duh. Hundreds of thousands of jobs lost, and with them all employment taxes, i.e. income tax withholding, FICA for Social Security, and Medicare tax withholding. At the same time, the former employees go on the rolls for unemployment benefits constituting a major expenditure from gov funds.
I’m no economist nor expert but anyone who has managed a household knows that no income and mounting expenses equals disaster.
Geithner, Summers, Greenspan, Rubin have indoctrinated minds incapable of recognizing simple reality; they cling to their version of delusion and impose it upon all America.
Yes, Hugh, depression is guaranteed (if not already here). The banks should have been allowed to go under, the Fed should be abolished, and those $$$$ trillions should have been invested in job creation, for jobs are the backbone of America’s economy not survival of banksters.
Excellent post and comments. Recommended.
One of the main engines of the manufacturing sector in the U.S. economy has been government contracts to produce weapons and related support systems. The country sustained itself after the 2nd World War boondoggle extravaganza with the onset in 1946 of the Cold War and the new age of permanent war production footing even in peace time.
Since the diminution of the Cold War as prime mover, the “war on terror” was invoked to start a new era of war-making directly and by proxy that would further fuel production and underscore how illiterate American leaders had become. What we’re experiencing today is the result of the cumulative dry rot over the years that this approach to economic policy inevitably yields.
Glad to see you’re still posting about how citizens are being screwed by Obama’s ‘economic team’ policies and actions; I’ve been ‘offline’ as I’ve been preparing for what’s coming down.
“And, it may not be lost on anyone that the four consecutive quarters of economic contraction was unprecedented in the post-WWII era; ditto for the -3.9% year-on-year trend. In other words, while nobody is willing to go out on the limb and call this a depression (the same academics that brought you “The Great Moderation” during that last great albeit leveraged economic expansion are now labeling what we have endured over the past year-and-a-half as “The Great Recession”). This does go down as the worst economic performance both in terms of duration and intensity since “The Great Depression”.
From here
Please keep posting and educating others.
Honestly I’m not sure. As I note in the diary, I think we’re running up against the limits of our economic paradigm. Much in the same way we created a lot of unnecessary strife by trying to push the gold-standard beyond it’s usefulness and ability; I think we may now be doing the same thing by pushing industrialization-era compensation schemes and metrics beyond their usefulness and abilities.
Some interdisciplinary work between economists, sociologists, and engineers in think tanks might be in order, otherwise the condition of permanent unemployment may be continually wrongly treated as a disease rather than as an accomplishment; if that makes any sense.
Certainly people will need to be employed, but our entire system is predicated on their always being a new enterprise that can be as broadly participated in as the mature markets that came before it, and that condition hasn’t held up.
Great observations.
There was criminal activity on Wall Street during the years preceding the melt down. Here is a great exchange between two smart guys that are not actually owned by anyone.
http://www.salon.com/opinion/f…..print.html
http://www.salon.com/opinion/f…..index.html
http://www.salon.com/opinion/f…..index.html
This and the whole comment were terrific, Nathan.
But I think that many of us didn’t care, didn’t know, didn’t pay enough attention to the unbelievable corruption and criminal conduct that has captured the old paradigm, per torgo2009’s comment.
If I’m at all correct in my hypothesis of what’s going on at a systemic level; symptoms like corruption were probably necessary to keep the fiction going.
Here in Hawaii our idiot Republican governor’s answer is “cuts, cuts, cuts” plus “lay-offs, lay-offs, lay-offs.” With an educational system that’s competing for the bottom of the barrel with the likes of AL, MS and LA, Gov. Lingle is cutting funding for schools, as well as that for environmental efforts, public works and human resources.
Never a thought about raising taxes, even on those making more that $250,000. Republicans: they’re not “what’s for breakfast,” they’re out to lunch.
Re ReaderOfTeaLeaves @ 9:
I book I’m currently reading, and highly recommend, is Shop Class as Soul Craft by Matthew Crawford. The author has a PhD in philosophy and headed a “think tank,” but hated it, and opened a motorcycle repair shop.
The book is a meditation on the “value” society places on “intellect” over competence in manual labors, and notes the imagination, perseverance and effort required for jobs like electrician, plumber, auto mechanic, etc.
Crawford initially had a part of this published in the NYT, so you can probably search there for a sample. It’s terrific, and I highly recommend it.
Green Industry as hyped by Obama (he hyped clean coal too, but I digress) certainly presents a viable transition phase to wahtever may come next. Just as cash for clunkers became a huge success, cash for wind and solar would do even more wrt economic stimulus and job creation. Unfortunately, federal money has not been forthcoming that is needed to begin a large scale nationwide, wind and solar and jobs program. (Tax credits for home-based systems is a no-brainer.)
Big Oil, Dirty Coal and Dirty Pols are impeding progress on these fronts.
Programs like cash-for-clunkers are not viable in the long-run. You can’t subsidize people buying new cars forever without eventually inflating the base price of the new car to reflect the expected subsidy.
it was never his aim. witness the people he appointed to handle economic and financial matters.
thanks for the clarity, hugh. i really appreciate your diaries and comments enormously.
I see your point, but nothing lasts forever. Same can be said for tax credits I and many others have suggested for homeowners who install home solar installations. Eventually, prices would be inflated to weaken the benefit of the tax credit. The benefit, like cash for clunkers, is that citizens become instantly motivated to do good things like spend money and improve the environment.
We must move away from big oil and coal as much as possible. A massive government investment is required. Big Oil is still pulling too many strings on our puppet dancers.
This is the beginning of all economic ends with no end in sight. Real reform means revolution in all areas economic..you can’t cure a sick person until you take away their poison.
Thank you, Hugh.
I appreciate the bad news/reality more and more.
If you get sick of telling us how poorly things are working out, I wonder if you might help us prepare for the future.
Tips for the Depression maybe?
Hugh,
You are about to slip off the list.
What you say is important.
Thanks.