If the real economy, the economy of making goods and services that improve people’s lives is to recover, we need to make banking boring again. We need to focus on how to create goods, services, productive processes and real businesses. These means giving up the gin, poker, and roulette games of high finance. It will take real reform, but I am not optimistic of the chances for real reform. (see here for why) Today, Paul Krugman writes:
Much of the seeming success of the financial industry has now been revealed as an illusion. (Citigroup stock has lost more than 90 percent of its value since Mr. Weill congratulated himself.) Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.
But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.
Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.
Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.
via Op-Ed Columnist – Making Banking Boring – NYTimes.com.
The real roots of the current crisis are structural changes in the American economy in the last generation. We continued to fuel “prosperity” from increasing consumption of the middle and upper classes. But, the during this period the middle class saw flat real incomes. To keep increasing our lifestyle, we had to borrow. Why? Because while the middle class of the last 30 years has been increasingly productive, it has not shared the benefits of that productivity. Read the full story at: Mind the Wage Gap | The American Prospect. An excerpt below the fold: Continue reading
A “recession” is actually well-defined. A recession’s start and end are officially (in the US) declared by the National Bureau of Economic Research. A “depression”, though is more subjective. Personally I think we are now in a depression, but not one as big as the Great Depression –maybe we should call it the “little Depression” or “the newer depression”.
What is the difference between a recession and a depression?
THE word “depression” is popping up more often than at any time in the past 60 years, but what exactly does it mean? The popular rule of thumb for a recession is two consecutive quarters of falling GDP. America’s National Bureau of Economic Research has officially declared a recession based on a more rigorous analysis of a range of economic indicators. But there is no widely accepted definition of depression. So how severe does this current slump have to get before it warrants the “D” word?
A search on the internet suggests two principal criteria for distinguishing a depression from a recession: a decline in real GDP that exceeds 10%, or one that lasts more than three years. America’s Great Depression qualifies on both counts, with GDP falling by around 30% between 1929 and 1933. Output also fell by 13% during 1937 and 1938. The Great Depression was America’s deepest economic slump (excluding those related to wars), but at 43 months it was not the longest: that dubious honour goes to the one in 1873-79, which lasted 65 months.
via The definition of depression | Diagnosing depression | The Economist.
In economics, “games” are not about recreation and fun. Instead, “gaming” a system is figuring out how to get around the intent and profit by out-smarting the rules. It looks like the Geithner-Summers plan to bailout the banks and get rid of their “toxic assets” is ripe for gaming. From Jeff Sachs of Columbia Univ via Huffingtion Post and the Calculated Risk:
Two weeks ago, I posted an article showing how the Geithner-Summers banking plan could potentially and unnecessarily transfer hundreds of billions of dollars of wealth from taxpayers to banks. The same basic arithmetic was later described by Joseph Stiglitz in the New York Times (April 1) and by Peyton Young in the Financial Times (April 1). In fact, the situation is even potentially more disastrous than we wrote. Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.
via Jeffrey Sachs: The Geithner-Summers Plan is Even Worse Than We Thought.
More people are coming around to the idea that the recovery will not be a typical V-shaped recovery like the recessions of the 50’s-80’s. Instead we’re looking at the U-shaped recessions of 1991 and 2000-01. Worse yet, it may be L-shaped like the Japanese recovery from the banking crisis of 1990. Even if we bottom-out later in 2009, the recovery will be slow.
Roger Altman, former deputy Treasury secretary, writes in the Financial Times: Why this will not be a normal cyclical recovery (ht Jonathan)
The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out …
What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks.
via Calculated Risk.
What he’s saying (and I agree) is that consumers (households) are too far in debt to begin spending soon. In addition, their assets which are overwhelmingly their house, 401k, and IRA’s have all lost significant value. Savings must increase to achieve a sense of personal security. That means consumption must stay low or drop. No increase in consumption means a slow recovery.
The following has been circulating on the inter-tubes. It rather pithily captures the essence of different economic systems. My favorite is the AIG Venture Capitalism description.
March 2009 Unemployment report came out. At first glance, it appears slightly worse than analysts expected: 8.5% and 663,000 jobs lost. At second look, it’s actually worse. First, from Calculated Risk: Employment Report: 663K Jobs Lost, 8.5% Unemployment Rate
From the BLS:
Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Since the recession began in December 2007, 5.1 million jobs have been lost, with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. In March, job losses were large and widespread across the major industry sectors.
Graphs & Three reasons why it’s worse than it sounds: Continue reading