Radford Free Press

Allow me to rant:

Floyd Norris has a regular column over at the New York Times. I often disagree with his analysis, based as it is on old school neo-classical mechanics and common or garden market dogma. So with that as a warning here’s a link to his blog today:A Bull Vanishes - Floyd Norris Blog - NYTimes.com

Typically, he looks to market conditions as some sort of magical entrails that might give us information about what the economy is doing or where it is going. Then he ends by saying he’s given up predicting the market.

The purpose of bringing this up, and sounding churlish in the process, is not to denigrate. It is to highlight the fact that the set of phenomena we clump together and call ‘the market’ is a woefully poor information source. It is a mix of guesswork, insider dealing, outmoded analysis, shamanism, wooly eyed optimism, opportunism, one-upmanship, and half-truths. All wrapped in the self-serving fog of smug hubris known as Wall Street. Notice how those folks are all ‘experts’? Nothing that flows from that mire can be viewed as an accurate information source until verified umpteen times. They lie for a living. Companies jig and re-jig earnings and balance sheet reports; analysts are in the pay of companies so they gloss over reality [if they even know it]; rating agencies take fees from those they rate and thus compromise themselves; bankers hand off bad debts to unsuspecting ‘clients’; shareholders sit passively while their stocks are trashed by arrogant CEO’s; economists cling to theories that are based on laughable assumptions, but still opine as if they knew real economics; customers buy trash and pretend it is worth something; advertisers pervert the language and then bemoan standards; homeowners don’t save money and then want to retire well off; and regulators are stripped of the resources to intervene and are staffed by friends of the inmates they are charged with regulating.

And from this mish-mash we are to extract information pertinent enough to opine sagely about exactly when the ‘market’ will bottom out?

Joe the Plumber would be a better forecaster than anyone on Wall Street. And he was an idiot. At least we know what a fool he is. These experts are yet to be de-frocked.

Look at the way asset prices have behaved.

While home prices were roaring ahead into completely unsustainable territory no one did anything. Nothing. All the various interested parties tried to make believe that the insanity would go on for ever. They were making a buck after all.

Look at the auto industry.

They persisted in making SUV behemoths even while gas prices surged on worldwide demand. And they have the nerve to use private jets to go cap in hand asking for our money!

Look at Wall Street.

It’s disappeared into a hole and will never come out. Yet all those gurus and experts still pop up with reputations untarnished and bank accounts bulging as if nothing happened.

Look at the journalists who covered the whole sorry mess.

They fawned all over the titans of industry in the good times; sold their souls for stories rather than analyse the data; bought the perpetual spin of government and corrupt politicians; and now want us to believe that they have value as critics of the establishment.

In short every single piece of our economy’s elite bought the inflationary cool-aid. Now they are scared as all hell about the result of their negligence: deflation.

Nothing could be more pernicious than a prolonged period of deflation. Yet there is a good chance these fools have steered the economy precisely onto the deflationary rocks. In deflation the assets you own are worth less in the future than now. Not through use or expenditure for productive purposes, but because the value of the product they produce is worth less. That house you bought drops, rather than rises, in value. The economy shrinks. That means there is less to go around. We all suffer from the effort to put the inflationary genie back in the bottle. Wages fall. Prices fall. Confidence and investment falls.

As the comedian said: its a right sorry mess you’ve gotten me into.

Let’s hope we manage to avoid it.

Our problem is sorting out the adults from the children so that we know who to give the keys to. Clearly Paulson is a child. His bailout plan turns out to have been no plan at all. First it was an asset re-purchase program. Then it morphed into a shareholder stake. Then it became funding for bank mergers and industry consolidation. And now we hear of bankers paying themselves off as they leave the job [see this article for an example: Cheating Banker?]. These ‘unintended consequences of the bailout are either not unintended at all or are simply the results of massive naivety. Either way the sooner Paulson goes the better off we are. Nowhere in his jumbled plan was there a directive to get money to bank customers. You know: via loans! Whoops. I understand we need to save the banks. They’re vital to the economy. But what about bank customers? After all just as we all need banks, they need us too! Where’s the plan to save us?

And the auto industry CEO’s? Every last one should be forced to live a a trailer park. And that’s being kind.

We do not need a bailout any longer. We need a strategic economic plan that combats deflation and limits the extent of the damage the experts have done. We need a new New Deal.

We also need to take a good hard look at those experts. Just what expertise did they have? And how can we avoid replicating that evidently awful intelligence and poor judgement? We need a new economic elite.

Less hubris. Less extravagance. Less time in the corporate jet. More time on Main Street.

Maybe then we can avoid deflation.

We can hope! … /end rant

Addendum: I realize this was a mess, but sometimes venting makes you feel better … no? And I also realize that I just spent a whole ton of effort ranting about the most important single thing in all our working day lives [getting the economy back on track] and felt no need to mention George W Bush once. Why would I? He has no relevance, except, maybe, to Barney.

OK this is fun. This is leadership we can believe in:
Paulson, Bair clash over aid to troubled homeowners - MarketWatch

That’s right. Sheila Bair from the FDIC and Hank Paulson from our heroic Treasury Department [aka an annex of Goldman Sachs] openly disagreed on a fundamental part of the ongoing strategy to jump start the economy. That is they had a public spat.

Bair wants to save homeowners who made stupid decisions. Paulson wants to save banks who made stupid decisions. The trouble is that Paulsen has the money and Bair doesn’t. So they argued in public.

Our beloved leader is too busy packing his books back in the White House library to intervene and impose any form of leadership. So the underlings had to go straight to the taxpayer’s representatives in Congress. As if they had any insight.

What an ugly mess.

Well we know at least one thing: somewhere along the way we taxpayers will bail out someone who was stupid. That’s a great lesson to teach our kids.

For those of you who need a ghoulish fix on economic data. Here’s a morsel:
Home builders’ mood shows more anguish than ever - MarketWatch

Yes that’s right. The National Association of Home Builders began tracking their members attitudes towards their industry’s outlook in 1985. Like a lot of people they publish an index to track that outlook. The index is a scale of between 1 and 100. With 100 presumably representing wild eyed optimism and 1 representing suicidal tendencies.

Well lock up the guns.

The index just fell to a record low of 9. That’s right 9. The high was 72 about three years ago.

And some people think real estate will recover soon! I would say it’s time to look for bargains, offer about half what is being asked for, even then you’re being generous. Then hold on. Someday that house will be worth something. Not just yet!!

Addendum: I expect housing starts to fall to 1940’s levels when we see the next numbers published. The housing industry is in a depression, not a recession.

There’s some good stuff in this article in today’s New York Times:On Washington - The Great Bailout Debate

We need clarity, and given the ridiculous nature of American transitional politics we won’t get any. Right now we need leadership … oh well.

The fact remains that saving GM is a hopeless cause. It’s a dead company. It reminds me of the great line from Monty Python: ‘if it hadn’t been nailed to the perch it’d have fallen over’. It’s dead I tell you!

The American auto industry has had calamitous leadership for decades. It has lived, like America as a whole, in denial about the onrushing realities of the 21st century. Global wage competition; oil price increases; and environmental disaster have all been avoided by managers, union leaders, and politicians here in America for decades. Instead we lived in the warm haze of the Reagan illusion. Morning in America was not a new dawn it was a desperate attempt to slip back beneath the covers, go back to sleep and deny change.

Reagan lied.

We listened.

And here we are.

Guess what? The world caught up. Those naughty people invested. They innovated. They saved money [there’s a thought!]. They did not think the world revolved around them - they engaged one another. Old Europe is a muddled mess of partially deregulated and overly controlled economies. It’s people may have massive misgivings about the Brussels bureaucracy. But at least it doesn’t fritter away its energy on a politics built around religious issues; abortion; gun rights; gay marriage; and tokens like a flag. Those much maligned Brussels folk think about economic things. Gasp!

So here we are. With a car industry that is several decades behind that of India and South Korea in terms of technique and labor productivity. With a health care system foisted on us as an anti-labor policy by GM back when it was the machismo figure head of American industry. With a dependence upon an energy source that we have no control over. With a social contract that we can no longer sustain. And with a lifestyle way beyond our means.

And we are concerned with shoring up one of the primary causes of our troubles?

As the professor in the article says: given the amount of capital that the American Big Three have raised from gullible, I should say pathetically supine, shareholders over the past few years they could now own, lock, stock, and barrel all the assets of the competitors now crushing them in the open market. They didn’t buy those assets. They didn’t even see the need to emulate the strategies or labor policies of their competitors. They didn’t adjust their product lines [’Americans like muscular ugly cars!’]. They didn’t see the need for fuel efficiency. In fact they fought against higher fuel standards. They poured money down the SUV drain. They built unproductive factories. They missed every market turn. They became sheep in the market protected by wolf-like union pressure on the Democrats and managerial pressure on the Republicans. They became the poster child for industrial failure.

Why?

Because of Morning in America. Because of the belief in the ability of America to stop the clock and even to turn it back to the 1950’s. When all was right with the world and there was no competition, no gas shortages, and the stars and stripes ruled the waves.

They bought the Reagan illusion and institutionalized it. They allowed themselves to pretend all was like it always was.

They were stupid.

Let them collapse. And let Reagan go with them. It’s time to move on and catch up with the world.

Not all the jobs cuts announced at Citigroup this morning will be outright layoffs. Like all inept managers the Vikram Pandit team has sought to obfuscate as much as possible on that figure. Here is the New York Time’s coverage:Citi Plans Asset Sales and Job Cuts

The damage will be felt most here in New York and then in London. Those asset sales are a veil. The new owners, if someone can be found for the assets, will inevitably shrink the workforce as a way of recouping whatever premium they paid to acquire the assets. So Pandit trying to make nice with his employees is merely displaying the lack of courage that we have now come to expect from the financial sector’s managers. These are the fools who acquired the assets, who staffed their empires and who reaped the benefits. Now they are trying to cover for the years of abysmal intellectual and management failure that culminated in the recent Wall Street meltdown.

OK, so Pandit wasn’t at Citi when it was empire building, but his last year has been one of caution and stutter rather than courage or fortitude. He has dodged rather than stood tall. The employees are always the ones who pay for senior management’s foolishness, error, terpitude, or hubris. That seems a timeless characteristic of our economy.

And the spill over into New York City will be huge. With the financial services sector in a tailspin, the entire city will suffer through 2009 and well into 2010. The boom times are over.

Thanks guys.

Here is the text of an e-mail I sent this morning the TPM’s editor Josh Marshall. He is having genuine trouble with the notion of a GM bankruptcy.

Josh:

We have to let GM go! The entire company: management, unions, and shareholders have become so horribly out of step with the market for cars that there is no way of helping them. It is a dead company. The notion that we should bail out GM to protect the American ’strategic’ manufacturing base is also wrongheaded: there are plenty of cars being made here in other parts of America far more efficiently, so we have that base secured; and doesn’t the idea of maintaining a manifestly rotten manufacturing base in GM sound as though it would actually weaken our strategic capability? Surely we want a better base than our erstwhile competitors, not a less efficient one.

There is no doubt that the world needs non-oil based cars. I have no doubt America will be in the forefront of that new wave of technology: the local market here is what drove GM to greatness and it will have the same effect for someone else. There is equally no doubt that GM is not capable of being that manufacturer, not in its current form. That is a matter of historical fact. For us to nationalize GM the way you suggest is merely to postpone, at vast cost, the final recognition of its financial and intellectual bankruptcy. Were the government to take over GM’s assets and get rid of its dysfunctional management and labor contracts, who would we install to run it? Toyota? Nissan? Ford or Chrysler? Why would they do that without owning the assets? Even with the enormous credit problems the country has, were the GM assets to be worth anything like the amounts of money being discussed for the bailout someone like a Toyota would have come forward to make an offer. The opportunity to consolidate the market is so massive for a healthy car maker, and the payoff so rich that were it viable it would be done.

Given this grim economic outlook for GM there are only two ways forward: the way you suggest, which is essentially a social service where the taxpayers cover the cost of GM’s ineptitude for some period until it finally passes away; or the bankruptcy route, which is ugly immediately, but allows us to clean out the industry and leave space for those new technologies to emerge more quickly.

One final thought: if the government is to get into the manufacturing business as you suggest, why doesn’t it invest in the new companies, like Tesla, who seem to have the technologies? It was government money and support that developed the Internet, so why not energy efficient cars? Why waste that money on patching up the 20th century rather than staking out the 21st?

For the macabre amongst you here are today’s economic statistics:A Record Decline in October’s Retail Sales

Not to put too fine a point on it: this sucks.

I have to love the idiot comment part way down this article. An analyst, whom I will not name, says that we don’t seem to have ‘found the bottom yet’.

Well duh! That’s because we are nowhere near the bottom.

Let’s think this through, rather than be a stock analyst-come-cheering section for Wall Street.

With consumer spending dropping like a stone, retail sales were off a record amount in October, businesses are facing a grim holiday season. The chart to focus on here is not the retail sales themselves but the inventory to sales ratio. That ratio is rising steeply. This means that manufacturers have tons of stuff they cannot sell. Presumably they miscalculated the drop in sales. Carrying unsold inventory is a nightmare: the cost of making the product is already on your books but you have no revenue to offset it. Plus your balance sheet is bloated so you have to borrow from the bank, and pay interest costs, to carry that inventory. What do you do? Cut back production to reduce inventories. That means cutting work hours or even laying off workers.

The point I am driving at is that the drop in retail sales will put in place a ripple effect that will cause the economy to contract more over at least the next month or two.

So, of course we haven’t found the bottom yet!

The current trajectory suggests more bad news in both November and December. Beyond that it is impossible to tell, although I think the first quarter will be pretty grim also. This looks as if it will be a nasty, sharp, and steep recession. Much worse than the last two. I expect unemployment to creep up to between 8% and 9% by late next year, although I doubt we will reach the 10.5% of back in the early 1980’s.

So button up. This is going to get worse rather than better. 2009 will be remembered as a very bad year!

The economic news is now a stream of bad, followed by worse, then followed by terrible happenings. There have been precious few, if any, bright signs, and I doubt that we’ll get anything positive until well into the first quarter of 2009. The employment outlook is getting worse by the day. Retail sales are collapsing: Best Buy calls the drop in sales a ’seismic shift’. Circuit City is in bankruptcy. GM and Chrysler look set to follow. The situation when Obama takes over in late January will no doubt be worse. So what to do next?

Well, the options for traditional economics are limited. The Federal Reserve Board would typically reduce interest rates to stimulate the economy. Lower rates encourages borrowing, which stimulates sales and thence investment and employment. The problem right now is that due to the ineptitude of the Bush regime, and the extreme problems we’ve had in the credit markets, interest rates are already very low. In fact after inflation they are negative! So traditional policy is severely restricted on the monetary side.

That leaves old fashioned fiscal policy. This is where Bush’s ineptitude really comes into play. Because of the reckless tax cuts a few years ago we have been running large Federal deficits for a while. Tax cuts are all well and good if they are accompanied by spending cuts. But Bush never cut spending. On the contrary, he increased it. So even when the economy was doing relatively well we had a deficit problem. Now that we need to boost the economy, which implies letting the government pump money into the economy over and above the amount it takes in, we find ourselves already doing that! We need to stimulate something that is already dangerously out of balance.

This conundrum will no doubt be used by some more conservative politicians as an argument against bold action. All of a sudden our Republican friends will shed their Bush ideology and try to present themselves as fiscal conservatives once more - they were anything but during Bush’s tenure - which means only modest stimulus. The danger with this position, apart from the hypocrisy, is that modest won’t do. We would run the risk of repeating Hoover’s errors.

No. My inclination is to invoke the famous words of Marshal Foch, the French military commander who repelled the German attack in World War One. When he was appointed the French were in full retreat and the German army was within a few miles of Paris. His reaction: “Hard pressed on my right. My center is yielding. Impossible to maneuver. Situation excellent. I attack.”. Bold. Foolhardy. And remarkably successful. His legacy is that he saved France by ignoring caution, by setting aside the wise advice of his subordinates, and facing a dire situation full square on. That’s what Obama must do.

No half measures. We need a massive stimulus package in the order of half a trillion dollars. Damn the deficit. Extend unemployment aid; launch energy initiatives; put a massive public works program in place; cut low income taxes to put money into peoples pockets; and get health care legislation launched to lower costs. All at once. No piece meal attack. This is not a war of attrition. It is blitzkrieg.

Obama gets power late January. We need this stimulus within weeks.

Go for it.

The conversation is now quickening. The topic is GM. I suppose in a broader sense the topic is actually what to do about American owned car companies since they are all suffering in one way or another. Here’s a New York Times story today to set the stage:News Analysis - G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout

Here’s my take on GM:

I tend toward bankruptcy. This is because I see no plausible route whereby taxpayer money will be sufficient to stave off bankruptcy in the longer term.

GM is not just financially bankrupt, it is intellectually and managerially bankrupt. It is a company whose management completely and willfully sought to develop a product set that appealed to ever smaller segments of the world market [think behemoth SUV’s]; who sought to thwart improvements in emissions standards; who negotiated self-destructive union contracts; and who are still to this day advocates of the denial of man-made global warming. These are appalling managers who cannot and should not be trusted with a dime of public money.

In view of this terrible record an injection of taxpayer cash would need to be accompanied by a turnover of management and direct ownership rather than ‘loans’ or any other such fictions.

I doubt whether the current administration, the Bush team, will allow any such thing. So I say let GM go bankrupt.

As a matter of politics it looks as if the Democrats are piling in to give away cash to the car companies in order to shore up and reward their constituencies. That’s fine. It mimics the way Republicans have just handed over half a billion dollars to banks whose managers are just as devoid of current and sensible ideas as their automobile counterparts.

But we should think that good politics is necessarily good economics. In this case the two conflict. In the long term [economists love to hide in the future!] there can be no doubt that whoever makes cars needs to be more sensitive to the environmental impact of their product and to the cost of running those cars. Getting away from oil is therefore a priority. Some car companies have made significant steps in that direction. They just aren’t American owned. Many of them employ large numbers of Americans to make those efficient cars here in America. So the technology is here also. It is the management of that technology, or more technically: the governance structure within which the technology is deployed that we need to address. I have no doubt that America will have a strong car industry in the future. It will be smaller until its costs and products are in line with the rest of the world. And it may not be American owned. Getting form dinosaurs like GM to that future is the relevant question.

In a market driven society like ours the correct option to the kind of abysmal failure that GM represents is bankruptcy. Unless we want to restructure the economy along European style social democratic lines, which I am not opposed to, then we have to use the best tool available. That would be Chapter 11.

Of course the disruption and chaos caused by losing our largest manufacturing company would be huge. The social cost in the communities concerned would be massive. But that’s where the government has a legitimate role: huge targeted re-education, welfare, wage loss, housing, health and retirement programs could be put in place with the same money now being talked of as a cash infusion. By making direct use of the money the taxpayers can be assured that the objectives of their intervention, the mitigation of social damage, are being achieved without an ancillary loss caused by the inevitable waste that would result from handing over piles of cash to inept managers.

Once GM enters bankruptcy the people who are most to blame for its failure: its management, unions, and shareholders will be forced to make decisions that they would only delay were they the beneficiaries of taxpayer largesse. Other once mighty industries have gone through this process. I am not advocating it as painless. But it is the correct solution.

Some might argue that we have given unfair preference to the financial industry were we to allow a GM failure. This is not the case. However large an employer GM is, even including all its feeder suppliers etc, it plays a much smaller role in the total economy than the financial industry. The focus of the bailout of the banks was to bolster the credit system rather than to save specific companies. The fact that a number of rotten and inept management teams were saved was collateral damage within that larger goal. Also the fact that the Treasury and the Federal Reserve Board have wandered off topic and have been less than transparent in their activities should not detract from the main objective. The financial bailout was aimed at a systemic problem. GM represents a significant but localized problem.

Consequently it can be allowed to fail.

Having taken last week off I return today and find the economy not much changed from a week ago! In other words things are still grim. Already there has been an outbreak of right wing chatter that attempts to paint Obama’s victory as too modest and restricted to amount to a mandate for dramatic change. The notion, apparently, is that America remains a ‘center-right’ kind of nation and therefore any wild imaginings harbored by the newly empowered liberal majority are dangerously self destructive.

That’s just plain wrong.

Paul Krugman writes today about one aspect of this: Op-Ed Columnist - Franklin Delano Obama?

Krugman has also urged to be bold in interpreting his mandate. I couldn’t agree more. Anyone who suggests that Obama’s win is limited and therefore not supportive of bold progressive thematic programs is entirely missing the point. Last week’s win was dramatic in that it came in the face of fierce accusations of Obama abetting ’socialism’ and favoring ‘redistribution’. The election was fought mainly over economic policies within the backdrop of the manifest failure of right of center ideology. Especially anything tainted by ‘free market’ driven deregulation.

Given the intense scrutiny of Obama’s policy bias during the last few weeks to claim that the country did not embrace that bias is just plain stupid. I understand why Republicans are saying it: they fear years in the political wilderness and shudder at the repudiation of the Reagan legacy. So it’s natural for them to try to misdirect us now.

But they are hopelessly wrong. The election was, indeed, a repudiation of Reaganism. It was an overt embrace of Obama’s progressive bias. And it was a strong mandate for radical action.

It is the Republican party that now has to recalibrate its platform to the newly expressed center-left preference of America.

Meanwhile Krugman is right: now is not the time for half measures. The economy desperately needs attention on a grand scale. Hopefully Obama gets that message.

The irony in today’s news is that just as the economy is declining into what will probably be a nasty recession, there are the first flickers of hope that the worst case scenarios everyone has been playing with - depression era stuff - are almost certainly now not going to happen. Here’s the New York Times reporting:Wall Street Rises After Report on Economy

The key comments here are that the Commercial Paper market is coming back to life and that the spreads on LIBOR are returning to more normal ranges.

Commercial Paper is the short term loan of preference for most of large corporate America. For instance GMAC funds a good percentage of its loans by borrowing commercial paper. If that market dries up the way it did recently then no matter how keen GMAC is to make loans it simply has no way of doing so. Worse: as its pre-existing commercial paper borrowing comes due for repayment it had no way of re-financing it. That was a major source of concern for many large companies. To the extent that the commercial paper market is now coming back to life a significant part of the credit crunch will ease.

That same goes for LIBOR spreads. Those spreads had reached extraordinarily high levels reflecting the complete lack of confidence that banks had in each other. Now that major governments around the world have pumped money into the market in sufficient amounts to abate concerns of both illiquidity and insolvency banks are now beginning to lend to each other. That will also ease the credit crunch.

None of this will stop the downward spiral in the non-financial parts of the economy. That decline is now being driven by consumers who are under siege as unemployment rises and wages stagnate. As long as consumers dig in and stop spending the economy will falter. It looks as if consumer sentiment is still falling so the prospects for this holiday season are grim. That’s why many firms are bracing for the worst and retrenching. Slashing the workforce is the first and easiest way of cutting operating expense. So we can expect unemployment to rise sharply in the next two or three quarters, probably peaking at around 8% to 8.5% next fall. As long as workers fear for their jobs they won’t spend, so the prospects are for slow sales through the spring at least.

Thus we can also expect two or three quarters of contraction in GDP.

In short a nasty recession. But not a depression!