Salon: How the World Works

Uncle Sam needs to go shopping. Not us

Andrew Leonard — Tue, 02 Dec 2008 03:23:00 PST

When confronted with the news that Wal-Mart shoppers were so eager to take advantage of a Black Friday sale that they trampled an employee to death, most people are, quite naturally, appalled. My daughter, for example, was aghast: "What kind of country do we live in?" she asked, over and over again, unable to fully process the horror.

I have an answer to her query, but it is unlikely to satisfy her: We are a country that is supposedly desperately in need of more shoppers. Consumer spending makes up 70 percent of the economy, and consumer spending is undergoing a sharp, economically destabilizing decline. The less we shop, the worse it gets. No shoppers equals declining profits for businesses equals layoffs equals even fewer Americans with the wherewithal to shop. And so on. This vicious circle has led some observers to declare that shopping is an act of patriotism. Who can forget George Bush encouraging Americans to shop after 9/11? Ask not what your country can do for you, but what you can shop for your country!

One can even make the case that the Wal-Mart shoppers were especially rational consumers. Prices are absurdly low for a vast array of consumer items right now, and when money is tight, taking advantage of discounted offerings is not only prudent but a two-fer! Good for the economy and good for your pocketbook.

Seen from this light, the Wal-Mart stampede, while horrible and obscene in its localized impact, might also seem to be exactly what the entire economy needs. And come on -- the carnage is easily avoidable; just do your stampeding online. Give Santa a hand: Christmas is just three weeks away, and your friends and relatives aren't the only ones lusting after a present -- so is the U.S. economy!

But before you click that buy button, here are a few things to think about. First, it's not clear that snapping up discounted flat-screen TVs does anyone much good. Although retailers attempted to make hay out of numbers that showed Thanksgiving shoppers spent more this year than last year, several analysts pointed out, in their best Grinch fashion, that there isn't much profit to be gained for retailers when prices are cut low enough to entice shoppers in a foul economy. Second, when an economy is in free fall, the truly rational individual decision is to save, pay off your debts and hunker down till the storm blows over. Even if you are debt-free and cash-rich right now, it still might not make much sense to be a red-white-and-blue shopping maniac. All indications are that next year will be worse than this year, and you're going to feel pretty stupid if you do your part for the national economy this Christmas, and then find yourself laid off in January. Third: Suppose Americans do rush to the mall or Amazon.com this Christmas -- it's still unlikely that they will be able to effectively counteract the current recessionary headwinds. The numbers are just too bad. We are living through no ordinary business cycle downturn -- this has the potential to be the worst recession most of us have encountered in our lives. A reckoning is at hand.

There's only one shopper with a purse large enough to make a difference in this kind of mess -- and that's the U.S. government. It's time for Uncle Sam to go to the mall.

On Sunday, the New York Times' Louis Uchitelle laid out the numbers. The best guess is that the economy is currently contracting at a rate of 4 percent per quarter. (It could be worse. I've seen some estimates that go as high as 7 percent.) Uchitelle reports that "offsetting that contraction requires a federal infusion of at least $400 billion."

Just for fun, try dividing $400 billion by the roughly 300 million population of the United States. It comes out to about $1,333. If every man, woman and child spent $1,333 dollars above and beyond what they are currently spending, we could, maybe, pull the economy back up to zero growth. But, of course, it's ridiculous to imagine every American having the cash to go on a spending spree like that. We got into this whole mess by using cash extracted from wildly appreciating home equity valuations to buy whatever we needed or wanted, from healthcare to a new SUV to a second home. That's gone. For American consumers to buy $400 billion worth of goods now would require maxing out a ton of credit cards, and digging themselves even deeper into debt at a time when credit card companies are raising interest rates as fast they can.

But let's suppose you are not underwater on your mortgage, you don't have any credit card debt, you're gainfully employed, and you are staring at a $499 price tag for a 32-inch flat screen HDTV from Sony? Where's the harm in a little consumer gratification that might lend a helping hand, however pitiful, to the larger economy -- if you can afford it?

Doesn't that decision depend on just how bad you think things will get in the future? Right now, the U.S. economy is shedding about 250,000 jobs a month. That number will undoubtedly go up. Are you really so confident that your earning power next year is secure enough that you can blithely ignore a blistering recession? Remember, purchasing discounted consumer electronics isn't going to help out the larger economy that much. What this economy really needs is for Americans to start buying fully tricked-out Chevy Tahoes and Ford Expeditions again. And that's just not going to happen in the near future, for a variety of reasons, chief among them: You'd have to be friggin' crazy to think that buying an expensive car right now is a smart economic decision, no matter how low the price of gas gets.

But then we get smacked in the face again by the paradox of the American economy. All those individual Americans making smart economic decisions have brought the economy to a grinding halt. The smarter we are, the worse it gets.

It sure seems like the current predicament is a case where a reliance on free-market economics built on individuals' exercising rational choice breaks down. Doing what seems best for the individual is sending an ailing economy spiraling down to the hospice. But to jump-start the economy, we're asking everyone to go out and spend their cash at exactly the time when it seems most sensible to stuff it under the mattress.

Cue the federal government. Since it is government's responsibility to take care of the collective, the government is the only actor in the economy that can make the rational decision to spend hundreds of billions of dollars creating jobs and giving individual Americans the necessary confidence, and foundational support, to be active consumers once again. And that doesn't mean another round of tax breaks, which most of us will use to pay off our credit card debt or sock away in savings accounts. It means buying bridges and roads and public transportation systems and schools and hospitals and alternative energy plants and whatever else seems to make sound infrastructural sense.

Yes, we do need a shopping stampede -- but in Washington, not Wal-Mart.

Dow plunges again, Friedman fans despair

Andrew Leonard — Mon, 01 Dec 2008 13:34:00 PST

It would be tempting to blame Ben Bernanke's bleak assessment of the current economic situation, in a speech in Austin, Texas, on Monday, for yet another debilitating market swoon -- the Dow closed down 679.95 points -- but it would also be unfair, even if the most precipitous portion of the plummet came after he finished speaking. As I noted earlier today, there are plenty of good solid reasons for investor despair right now, and we don't need downbeat pronouncements from the Fed chair to make us feel any gloomier. Sorry to say, but a 680 point drop in the Dow is a quite rational response to the current crisis.

Nonetheless, there was an interesting tidbit in Bernanke's speech that could inspire despair in a segment of the population that probably overlaps quite neatly with fat cat investors: the beleaguered acolytes of Milton Friedman.

On Saturday, Paul Krugman noted that Friedman's greatest contribution to the economic corpus, "A Monetary History of the United States," co-written with his wife, Anna Schwartz, argued that the Great Depression could have been averted if the Federal Reserve had moved more quickly to expand "the monetary base" (which Krugman defines as currency plus bank reserves). But Krugman observes that in this crisis, the Fed has been "spectacularly aggressive" in expanding the monetary base and so far, "it doesn't seem to be working."

"I think the thesis of the Monetary History has just taken a hit," writes Krugman.

In Bernanke's speech on Monday, he talked about the speed with which the Fed had lowered interest rates.

By way of historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed not only to cushion the direct effects of the financial turbulence on the economy, but also to reduce the risk of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, leads to further economic damage. Unfortunately, despite the support provided by monetary policy, the intensification of the financial turbulence this fall has led to a further deterioration in the economic outlook.

In other words, despite being "exceptionally rapid and proactive," the Fed's effort doesn't seem to be working.

Expanding the monetary base and lowering interest rates aren't exactly the same thing, but they are both monetary policy tools employed to goose an economy into expansionary action. So the lesson to be drawn from their simultaneous failure is identical. Monetary policy alone will not get the U.S. back on the right economic track. Massive government spending is back in fashion, as are the theories of John Maynard Keynes, whose star went into eclipse as Friedman's ascended ever higher.

And that's a topic we will be returning to in considerably more detail as the weeks go by.

It's official: We're in a recession

Andrew Leonard — Mon, 01 Dec 2008 11:24:00 PST

Tell us something we didn't know. The National Bureau of Economic Research, the organization that "officially" decides when recessions begin and end, has finally declared what most of us have suspected for quite some time. The United States economy is experiencing a recession.

What may surprise some people is NBER's announcement that the recession started way back in December 2007. How can that be? In the second quarter of 2008, the economy grew at a rate of 2.8 percent. We still haven't experienced two consecutive quarters of negative GDP growth, which most people believe is the quantitative measure that defines a recession.

But most people are wrong. As the NBER notes in its statement, "A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion." Using a variety of criteria, the NBER has now decided that the peak occurred in December 2007.

As for the trough? Your guess is as good as the NBER's. They don't do forecasts. And we're not there yet.

But here's the fun part. Although I did my best do ignore economic news last week, it was impossible to avoid the showdown between Amity Shlaes and Paul Krugman over whether FDR made the Great Depression worse, or led us out of the morass with the New Deal. I'll dig into that ever popular parlor game between left and right economists later this week. But meanwhile, Barry Ritholtz reminds at the Big Picture that back in July, Amity Shlaes defended Phil Gramm's "nation of whiners" comment by arguing that the former senator was correct to say that Americans were only experiencing a "mental recession." Her reasoning was that since the U.S. hadn't experienced two consecutive quarters of negative GDP growth, the U.S. wasn't actually in recession.

Most of us who were paying real attention to the economy this summer thought such a line of argument was silly. One can even argue that Barack Obama was elected president of the United States in large part because it was clear that McCain and his advisors were willfully ignoring just how big a ditch the economy was driving into. But the footnote to today's NBER announcement is that we can now definitively say that Shlaes was wrong, back in July. Her understanding of current economic affairs proved embarrassingly limited.

And this is a person we're supposed to take seriously as she attempts to rewrite the history of the 1930s?

The month the U.S. economy died

Andrew Leonard — Mon, 01 Dec 2008 08:45:00 PST

October continues to solidify its reputation as the month the U.S. economy dropped dead in its tracks. On Monday, the Commerce Department reported that construction spending declined by 1.2 percent in October. (The Associated Press describes the drop as "larger-than-expected" -- a formulation that is beginning to sound a little silly when applied to economic data from October.)

Let's see, what else happened in October? Manufacturing activity fell to a 26-year low, sales of new homes dropped by 5.3 percent, sales of existing homes dropped by 3.1 percent, residential housing construction fell by 3.5 percent, and non-residential construction dropped by .7 percent. Moral of the story? The housing sector has yet to reach rock-bottom.

And in an entirely related piece of news, the Dow Jones Industrial Average had fallen 377 points by 11:45 EST. Call it "rational non-exuberance." The more data we get, the more clear it is just how far off the rails the U.S. economy went in October.

From the AP:

[Economists] believe the country has slipped into what could be the worst recession since the 1981-82 downturn. The current economic slump is being worsened by the most serious financial crisis to hit the country since the 1930s as banks struggle to deal with billions of dollars of loan losses, beginning with troubles with mortgage debt that reflect a record level of foreclosures.

There was some kerfuffle in the econo-blogosphere last week over whether Barack Obama had appointed too many economists as advisors. Personally, I think the new president is going to need every last one of them.

On break

Andrew Leonard — Mon, 24 Nov 2008 08:14:00 PST

I apologize for abandoning my post while titans like Citigroup totter and Barack Obama rolls out his new economic team, but I'm huddling with family this week. I'll be back on Monday.

Obama makes the smart pick for Treasury: Dow goes wild

Andrew Leonard — Fri, 21 Nov 2008 12:54:00 PST

Reuters/Larry Downing

New York Federal Reserve president Timothy Geithner testifies at the U.S. House Financial Services Committee about financial market regulatory restructuring in Washington July 24, 2008.

Jim Cramer will be devastated, the Lawrence Summers-hating left will be relieved, and How the World Works is flat out delighted: NBC News and the Wall Street Journal are reporting that Barack Obama's pick for Treasury secretary will be New York Federal Reserve Bank president Timothy Geithner.

My reason is simple: Back in 2006, while most of the financial establishment was pooh-poohing the possibility that the global economy was at any risk from a systemic shock, Geithner was actively warning that unregulated derivatives posed a threat to financial market stability.

Here's what I wrote in September 2006, after mulling over a speech he gave in New York that attracted a fair amount of attention in the blogosphere:

For the most part, as is typical of central bankers, Geithner stakes out a careful, cautious stance that treads familiar ground: the difficulty of striking the right balance between regulatory supervision and unfettered market efficiency. But his caution surrounds a dangerous core: Geithner acknowledges that the explosion, over the past 10 years, of hedge fund trading in exotic financial instruments may well have contributed to the general resilience that the U.S. (and global) financial system has demonstrated in response to external shocks since the Asian financial crisis of the late '90s. And yet he surmises at the same time that the very flexibility of the current system may actually make it more vulnerable to a really, really big shock. Financial panics start when traders and bankers who call in loans or sell off their holdings at the first sign of trouble set off a cascading effect in which everybody else follows their example and the system implodes under the strain. Paradoxically, Geithner appeared to be saying, the more flexible the system, the more quickly such a cascade could happen, and the harder it could be to stop. "The same factors that may have reduced the probability of future systemic events, however, may amplify the damage caused by and complicate the management of very severe financial shocks. The changes that have reduced the vulnerability of the system to smaller shocks may have increased the severity of the large ones." That's a subtle argument, and we're not going to know whether it holds water until the flood is already 5 feet high and rising. Naturally, given my own fixations, the first thing that came to my mind was yesterday's editorial in the New York Times worrying about the proliferation of mortgage-backed securities, and wondering what would be the consequences of all the current musical-chairs-like trading in mortgage risk in the event of a prolonged housing bust. Will that be the backbreaker?

As we are all too well aware now, the proliferation of mortgage-backed securities and their derivatives did indeed break the back of the global financial system. Before the storm fully broke, Geithner made heroic efforts to get Wall Street's biggest financial institutions to voluntarily come together to rein in the wild west world of credit swaps. But without the active support of the White House or a succession of Bush administration Treasury secretaries, he was just one man attempting to bring order to an entire territory of outlaws.

Now he gets a chance to be the top sheriff, with the full backing of an administration determined to find a new balance between regulatory supervision and market freedom. It's a smart pick.

And while it's always foolish to read too much into any particular swing of the Dow Jones Industrial Average -- there's no ignoring Friday's late afternoon skyrocket: The Dow jumped 494 points.

Whether we should be happy that Wall Street is happy is, of course, a valid question.

How to think positively about a crashing stock market

Andrew Leonard — Fri, 21 Nov 2008 09:53:00 PST

I remarked to my 14-year-old daughter this morning that after the 10 percent decline in the Dow Jones Industrial Average over the last two days, stock prices have dropped back to around where they were when I started putting money into college funds for her and her younger brother back in 1997. She winced. As did I when I saw a story in the Financial Times this morning reporting that hedge fund investors had withdrawn $40 billion worth of their investments in October, and even bigger numbers were expected for November and December. Redemptions on such a scale force hedge fund managers to sell their holdings whether they want to or not, inevitably putting ever more downward pressure on stocks. Where will it end?

The question poses its own answer. It has to end at some point, doesn't it? There is only so much that can be redeemed. According to the FT, some hedge funds are now sitting on huge piles of cash. Naked Capitalism's Yves Smith sees this as a hopeful sign: "One bit of good news: enough funds are [so] heavily in cash in anticipation of these investor demands that observers believe that markets will suffer considerably less from forced selling."

If you think of hedge fund deleveraging as a huge sucking force dragging down the market, then you also have to imagine that at some point, that suction will come to an end. Once the wary and fearful have redeemed all their investments, there should be bargains galore. Long before the recession ends, the stock market will likely spring back.

In another rare outburst of optimism, Felix Salmon argues this morning that the current phase of the crisis is not a full-blown financial meltdown. He cites the relative stability in one key measurement of credit tightness -- the TED spread.

The TED spread today is 213bp -- more or less exactly where it's been for the past few weeks. Which says to me that for all that financial stocks are being crushed, this is no reprise of the financial crisis we saw in the wake of Lehman's collapse. Rather, it's an old-fashioned economic crisis, which severely erodes the equity of leveraged banks, but where money still flows and even the occasional IPO can get away if it's priced at a discount. Or, to put it another way: it's a bear market, not a financial meltdown. Which might be little solace to anybody whose stocks have been crushed of late, but which might help reassure policymakers at least a little.

You know times are tough when you are relieved to learn that we are only experiencing one of the worst bear markets since the Great Depression, and not an unthinkable meltdown certain to destroy civilization as we know it. Now that that's settled, I can go on to worry about other things, such as the fact that unemployment in California jumped a full half a point in October, up to 8.2 percent. That's the highest its been out here since 1994.

The Citigroup lesson: Big is not necessarily better

Andrew Leonard — Fri, 21 Nov 2008 06:56:00 PST

The perils of Citigroup, an "icon of capitalism," according to the Wall Street Journal.

Executives at Citigroup Inc., faced with a plunging stock price, began weighing the possibility of auctioning off pieces of the financial giant or even selling the company outright, according to people familiar with the matter.

A little over two months ago, when investment banks started to drop like flies, there was a rousing debate in the blogosphere on the question of how much of our current woes could be traced back to the repeal of the 1930s-era Glass-Steagall Act by the Gramm-Leach-Bliley Act of 1999. A number of respected economic voices, including Tyler Cowen, Bradford DeLong, and Justin Fox, made the provocative case that we should be thankful for the repeal of Glass-Steagall's separation of commercial banks and investment banks, because at that time, the big commercial banks, including Citigroup, JPMorgan Chase, and Bank of America, seemed relatively immune to the credit crunch. Who else would have had the capacity to swallow up Merrill Lynch and Bear Stearns, if not for these liberated giants?

I think that this thesis has taken a bit of a hit in recent days. Citigroup appears to be in big trouble, and JPMorgan Chase and Bank of America both experienced debilitating stock slides on Friday, potentially also putting them in some jeopardy. If there is a lesson to be learned right now, it might be that big is not necessarily better. If you're too big, you can't be allowed to fail, and if you're really, really big, like Citigroup, there is a very limited pool of possible rescuers.

As in, in the case of Citigroup, a pool of one. Now Brad DeLong says it is "Time for the Government to Buy Citigroup."

Cheap oil's victims

Andrew Leonard — Thu, 20 Nov 2008 16:24:00 PST

The price of a barrel of oil dropped under $50 dollars on Thursday. Good news for automobile drivers and stressed out airlines, perhaps, but very bad news for some countries for whom oil production is the economic mainstay. For example:

Russia.

The Guardian reports:

The oil slump, however, exacerbates Russia's already severe economic problems. Since May Russian markets have lost 70 percent of their value. Russia's central bank, meanwhile, has been spent $57.5 billion in two months trying to prop up the country's ailing currency. "If the current trend continues with the government supporting the rouble, oil prices falling and a slowing economy we are going to have a major crisis," said Chris Weafer, an analyst with the Moscow brokerage Uralsib.

Iran.

Also from the Guardian:

Iran is especially vulnerable because 80 percent of its revenue comes from oil. The IMF calculated recently that for Iran to balance its budget, the price of crude oil must not fall below $95 a barrel. With prices now below $50 the shortfall could be staggering. The effect of declining oil prices will be felt both domestically and internationally. Ahmadinejad is expected to stand for a second presidential term next June but the lack of cash will restrict his plans to replace subsidies with direct cash payments - widely seen as a vote-buying tactic. US and UN sanctions imposed over the nuclear issue are already limiting Iran's ability to issue letters of credit and thus increasing its cost of trade.

Venezuela.

It's a Guardian hat trick!:

Hugo Chavez has reduced Venezuela's support to foreign allies and is poised to make deeper cuts at home and abroad as plunging oil revenues hit his self-styled socialist revolution. The government has warned of austerity measures after years of breakneck spending on social programmes, nationalisations, arms and diplomacy, an exhilarating splurge when there seemed no end to petro-dollars. South America's energy giant relies on oil for half of its exports and 95% of government revenue, leaving Chavez's ideological and political ambitions vulnerable to a crunch.

How the World Works does not feel particularly inclined to shed tears for Vladimir Putin, Mahmoud Ahmadinejad, or Hugo Chavez. But a cascade of imploding economies around the world is unlikely to have salutary effects on the overall health of the global economy.

(Thanks to The Oil Drum for the links.)

As goes Detroit, so goes the Dow

Andrew Leonard — Thu, 20 Nov 2008 13:14:00 PST

The Dow Jones Industrial Average plunged even further on Thursday, closing down another 444.99 points, or 5.5 percent. Who gets the blame this time?

On Wednesday, the New Yorker's James Surowiecki defended a Detroit bailout by arguing that the financial markets were freaking out over the possibility of a Big Three bankruptcy:

More important, the financial markets are clearly telling us that the automakers' failure would be hugely important to the economy. They're telling us both figuratively -- just look at the massive sell-off we've seen in the past week and a half -- and literally, since, day in and day out, traders and money managers are talking about how the fear of a G.M./Ford bankruptcy is dragging the market down.

The Economist's FreeExchange blog promptly disagreed:

This seems far too credulous for Mr Surowiecki. Sure, the issue of the car manufacturers is probably weighing on markets. So is a lot besides. Housing data, price data, bad signs out of the commercial real estate arena, continued pain for financial institutions, scary Chinese manufacturing data, and so on. Markets have a lot on their minds. On the other hand, markets have known for some time that the automakers are in dire straits. People have been speculating about bankruptcy and predicting share values of near zero for months. Markets should have built in a decent probability of failure some time ago.

But did they? While there is again no shortage of bad economic news today, clearly the big story of the day has been the decision by the Democratic congressional leadership to postpone a vote on any auto bailout until Dec. 8. The decision followed news reports suggesting a bipartisan group of senators had come up with a deal to provide temporary bridge loans to automakers, which briefly sent stock prices sharply higher. But once news began to trickle out that Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi saw no chance of a vote happening today, prices began to decline again. And after the House leadership press conference giving the auto industry a deadline of Dec. 12 to come up with a viable plan, the market went into free fall.

Just sayin'.

Democratic leadership: No bailout for Detroit

Andrew Leonard — Thu, 20 Nov 2008 11:57:00 PST

What are the Democrats up to?

Contradicting news reports suggesting that a bipartisan group of senators had come up with a deal to offer loans to U.S. automakers, Democratic leaders of the House and Senate were adamant in a just-concluded press conference: No bailout for Detroit until automakers come up with a plan showing how government aid will put them on a path to survivability. Senate Majority Leader Harry Reid gave the carmakers a Dec. 2 deadline to present this plan and raised the possibility of a new session of Congress on Dec. 8 to review the new plan and possibly approve a rescue.

Reid and House Speaker Nancy Pelosi reiterated the words "viability" and "accountability" again and again, clearly mindful that public sentiment in the country is running strongly against yet another government handout. Reid made three separate references to the corporate jets the CEOs of Ford, G.M. and Chrysler had flown in to attend committee hearings this week.

"The executives of the auto companies have not been able to convince the American people that this bailout will be their last," said Reid.

Rep. Barney Frank, as is his wont, made the most pointed observation: The money that Congress authorized to bail out the financial industry has not been used for the purposes that it was intended for. The Democratic leadership refuses to repeat that mistake.

But immediately following that press conference, a very disappointed Sen. Carl Levin of Michigan announced that a bipartisan subset of senators had indeed come to an agreement that would use money already authorized from the Department of Energy for retooling the auto industry to build more fuel-efficient cars as a bridge loan to keep the Big Three going. Levin argued that if his proposal was put to a vote today, it would pass. But he conceded that the Democratic leadership had already declared no vote would happen today.

Earlier, Pelosi brushed off a question asking why the leadership was unwilling to use the funds already authorized by the Department of Energy. She noted instead that the White House had the authority to use TARP -- the Troubled Asset Relief Program -- to fund any immediate bridge loans, if it so desired.

So what's going on here? A game of chicken with the White House -- with Reid and Pelosi denying the application of Department of Energy funds and challenging the Bush administration to use TARP funds instead? Or can we take them at their word -- that enough is enough, and there will be no further government action until the auto industry CEOs, in Reid's words, "get their act together" and demonstrate that they have a real strategy for returning to sustainable profitability?

The only thing that seems clear at this moment is that the situation remains highly fluid.

Worst of all possible bailouts?

Andrew Leonard — Thu, 20 Nov 2008 10:57:00 PST

The Associated Press is reporting that a bipartisan group of senators has come up with a compromise deal to keep beleaguered U.S. automakers afloat, although it is unclear whether the full Senate will pass it.

Worst of all possible bailouts?

It temporarily would divert to troubled automakers money from a program that currently finances the development of fuel-efficient vehicles. The aim would be to cover their immediate expenses.

So the plan is to take money aimed at giving the Big Three a fighting chance to compete in a world where climate change and declining fossil fuel resources are immense challenges, and use it just to keep G.M., Ford and Chrysler from declaring imminent bankruptcy. If ever the phrase "bail out" was appropriate, in the sense of futilely bailing water out of a doomed sinking ship, this would be the case.

When the news first filtered out on the wires, the Wall Street Journal reported an immediate stock rally, but by early afternoon sentiment had already turned sour again on a day marked by immense volatility.

And no wonder. New jobless claims spiked to their highest point in 16 years, the Labor Department announced on Wednesday. Signs of serious stress are now emerging in the market for commercial real estate mortgage-backed securities. There is absolutely no doubt, as economist Brad Setser conceded this morning, that "this is the biggest financial crisis since the depression."

So, in this climate, the possibility of a General Motors declaring bankruptcy is obviously terrifying to financial markets, but the news that Congress may only go so far as to subsidize ongoing expenses for another month or two does very little to build confidence.

The short and sweet argument for an immediate rescue plan for the Big Three goes like this: Economists agree that we need a big, fat, honking economic stimulus plan to juice the economy right now. Not two months from now, not six months from now. Right now. Classic Keynesian economics are the order of the day. Goldman Sachs is suggesting something on the order of $300 billion to $500 billion -- anything less would have little effect.

Letting a G.M. collapse would, effectively, be the polar opposite of a stimulus -- it would accelerate job losses and pummel the economies of Michigan and Ohio, two states that are already in big trouble. So if you support a stimulus plan, as do most economists, Democrats, and President-elect Barack Obama, one would think that you would also probably support trying to avert, in the short term, a U.S. automaker implosion.

However, I don't think it makes any sense to support a solution that doesn't include a comprehensive restructuring of how the Big Three do business. Sell the corporate jets. Ax the current management. Force corporate mergers. There are numerous smart proposals for some kind of government-administered bankruptcy that keeps Ford, Chrysler and G.M. going in some form but as markedly different entities than as currently exist. Perhaps some form of consolidation, along with liquidation of various assets, and sacrifices made by all the stakeholders -- labor, shareholders, management, bondholders, etc. And of course, there's my hope, as bashed today by Sen. James Inhofe, that any new regime would be structured to make sense in terms of limiting greenhouse gas emissions and conserving on fuel consumption.

But so far as I can tell, there's nothing like that included in the current compromise besides a desperate attempt to pay automaker bills in a desperate economy. No wonder stock traders appear, at this writing, unimpressed (although who can guess what the final tally on a crazy day like today will be?).

My prediction: Chances are good that we will find out exactly what will happen when a major U.S. industry collapses in the middle of a fierce recession. And then we can argue about something else.

Sen. James Inhofe calls out Andrew Leonard

Andrew Leonard — Thu, 20 Nov 2008 08:27:00 PST

I can rest in peace now, my work is done. Republican Sen. James "global warming is the greatest hoax ever perpetrated on the American people" Inhofe called me an example of "environmental thuggery" today.

The news comes from Federal Times reporter Gregg Carlstrom, who was covering the auto bailout discussions in the Senate press galleries on Thursday morning.

[Inhofe] was railing against the fuel-efficiency requirements the "environmental lobby" wants added to any bailout ("The auto bailout appears to be an effort to make the auto industry a subsidiary of the Sierra Club," he said). And he mentioned your Nov. 12 post "As goes General Motors, so goes the world?" as proof.

Carlstrom says Inhofe actually uttered the words "Andrew Leonard." I was tickled pink two months ago when Paul Krugman namechecked me, but (sorry Paul) I find this far more meaningful. I have long considered Inhofe to be one of the planet Earth's worst enemies. To earn his ire is my greatest achievement as a blogger. I can't decide whether to retire in triumph or change the name of this blog to "Environmentalist Thug."

(As a side note, one can only marvel at the consistent message of Republican senators opposed to any bailout of the Big Three. The first line of argument is, don't help out any more ailing industries. The second line appears to be, if you do help them out, don't require any conditions that might make them more competitive in a carbon-constrained future.)

(And as a further side note, since I am aware that many of my readers are also virulently opposed to any bailout of the Big Three, I will recommend a visit to James Surowiecki's Balance Sheet blog, where he succinctly explains the economic rationale for a bailout.)

(And lastly -- hot off the wires: California Democrat Henry Waxman, who could be considered the anti-Inhofe on environmental issues, has won election to the chairmanship of the House Energy and Commerce Committee)

Like a phoenix, Orange County rises again

Andrew Leonard — Thu, 20 Nov 2008 07:01:00 PST

There is hope for Orange County, "The Subprime Lending Stupidity Capital of the United States." The L.A. Times reported on Wednesday that the Federal Deposit Insurance Corporation had leased 200,000 feet of office space in Irvine, Calif., for "a temporary office that will manage receiverships and liquidate assets from failed financial institutions in the western United States." (Thanks to Calculated Risk for the tip.)

Too many ironies here to count. The FDIC, I think, is making a wise operational decision to locate its office near where the action is, (or was) -- Orange County was the living, breathing heart of dodgy subprime lenders. But it's also a sound financial decision.

In choosing Irvine, the agency is benefiting from Orange County's depressed office market, which has been hurt by the collapse in recent years of New Century Financial Corp., Ameriquest Mortgage Co. and other financial companies.

What does Orange County get out of the bargain? Jobs -- 600 of them, a welcome boost in a cratering local economy.

Another day, another heart-stopping Dow plummet

Andrew Leonard — Wed, 19 Nov 2008 14:39:00 PST

On Wednesday, the Dow Jones Industrial Average closed below 8000 for the first time since March 2003, dropping 427.47 points, or 5.1 percent.

Why, you ask? Pick your poison.

Housing starts dropped for the fourth straight month, signalling that the housing market has yet to stabilize. Housing permits also dropped -- promising further declines to come. (The 4.5 percent drop in housing starts translate to an annual rate of 791,000, the lowest such number since the Commerce Department began keeping records in 1959.)
The minutes of the last meeting of the Federal Reserve Board of Governors indicated that the Fed is open to another rate cut, pushing the Fed Funds rate down to its lowest point in 50 years, because current economic problems "could persist for some time."
The CEOs of Ford and GM told the House Financial Services Committee that bankruptcy would mean liquidation of their respective enterprises.
Citigroup announced it was buying $17.4 billion worth of toxic assets previously squirreled away in "Structured Investment Vehicles," (SIVs) an acknowledgement that the reeling financial giant had no other option but to assume the debt on its own books.
Consumer prices fell in October at the sharpest pace in 60 years.

So, to recap: The U.S. financial sector, housing industry, and auto industry are on life support, the Federal Reserve is gloomy, and a massive wave of deflation is breaking over the entire economy.

Two questions:

1. Should we be reassured that the Dow is only down to where it was five years ago?

2. Will there be anything left for the Obama administration to try and fix, when it takes over on January 20?

A California earthquake shocks Detroit

Andrew Leonard — Wed, 19 Nov 2008 11:52:00 PST

Not only do Detroit's Big Three appear to be on the verge of going down, but their biggest defender, 81-year-old Rep. John Dingell, D-Mich., may be about to lose his powerful post as the chairman of the House Energy and Commerce Committee. The Wall Street Journal is reporting that California's Henry Waxman won a Democratic Steering Committee vote to take over the chairmanship.

It's not a done deal yet; the full House Democratic Caucus will vote yea or nay on the decision on Thursday. But if the rank-and-file membership upholds the Steering Committee vote, you can expect environmentalists to be doing some more dancing in the street. Many activists consider Dingell to have been a steadfast opponent of tougher fuel economy standards. His 2007 proposal to tax carbon emissions was widely viewed as a sneaky political maneuver aimed at equating climate change action with big new taxes. Waxman, on the other hand, favors an aggressive approach to tackling climate change and other environmental issues.

On Tuesday, Barack Obama reiterated his support of a federal cap-and-trade system for limiting greenhouse gas emissions, in a video message sent to a California global warming summit. It will be a lot easier to get such legislation through the House if Waxman is calling the shots, instead of Dingell.

Why does a solar power company want a piece of GM?

Andrew Leonard — Wed, 19 Nov 2008 11:15:00 PST

The early reaction to the surprise $1.3 billion dollar bid by Germany's SolarWorld to buy the German carmaker Opel from General Motors has not been kind. It's "a great gag" said one German auto-industry analyst, strongly implying that the bid was just an exercise in public relations sensationalism. Another analyst professed "big amazement," noting that Opel's workforce was 16 times the size of SolarWorld's. And for what it's worth, a spokesperson for GM maintained that Opel, which has been part of General Motors since 1929, "is not for sale."

SolarWorld's ostensible goal is to redirect Opel towards producing "green" cars boasting energy efficient and low-emission engines. Whether that's a realistic business plan or a P.R. stunt, I don't know. But I do think there is some interesting symbolism in the gesture. SolarWorld, an integrated producer of silicon wafers, solar cells and solar panels, is one of Germany's fastest growing companies and one of the the largest solar companies in the world. It recently opened a huge facility in Hillsboro, Oregon. It is a prime example of the kind of energetic, ambitious, job-creating green company to emerge from Germany's vigorous government support for and subsidization of renewable energy.

Democratic politicians are tearing their hair out trying to figure out how to keep U.S. automakers from shedding thousands of jobs in economically ailing Midwestern states. But the real challenge is to create new jobs in new industries. Germany has succeeded to a great extent in achieving such aims in the solar sector, to the point that companies such as SolarWorld are now spouting brash rhetoric about plans to pick some flesh off GM's rotting carcass. But Where are the new American companies looking hungrily at the industrial infrastructure of the Rust Belt?

Perhaps a contender will soon emerge from California, where, even in the teeth of a brutal recession, Governor Arnold Schwarzenegger is pushing aggressively forward with plans to spur the growth of renewable energy. On Monday, GreenWombat's Todd Woody reports, Schwarzenegger issued an executive order requiring that California power utilities get fully a third of their energy from renewables sources by 2020.

California currently requires the state's Big Three investor-owned utilities -- PG&E, Southern California Edison and San Diego Gas & Electric ( -- to secure 20 percent of their electricity from green energy sources like wind, solar and geothermal by 2010. Monday's move turns what had been a 33 percent renewables goal into a mandate and extends responsibility for meeting it to every electricity retailer in California.... California's aggressive renewable energy policies already have had one desired consequence: spurring the creation of green collar jobs. OptiSolar, which earlier this year signed a long-term contract to supply PG&E with 550 megawatts of electricity from a massive photovoltaic solar farm, employs 500 people at its Bay Area headquarters and factory. CEO Randy Goldstein said his company will hire another 1,000 for its new Sacramento factory.

Why the South opposes a bailout for Detroit

Andrew Leonard — Wed, 19 Nov 2008 08:44:00 PST

When Michigan Sen. Carl Levin makes statements supporting a bailout for U.S. automakers, he is generally dismissed as a spokesperson for his constituents -- Michigan, of course, is ground zero for the Big Three. No state in the union employs more autoworkers.

So how come Richard Shelby, R-Ala., doesn't get the same treatment? In Congress, Shelby is the most outspoken opponent of a bailout, routinely declaring that the Big Three are "dinosaurs." But if there was truth in advertising, every time he opens his mouth there should be a disclaimer: Sen. Shelby represents the interests of his constituents -- non-union employees of foreign-owned automobile manufacturers.

Alabama ranks sixth on the list of states with the most autoworkers -- by last count 130,000 jobs directly or indirectly depended on the auto industry. Hyundai, Honda and Mercedes-Benz all have state-of-the-art plants in Alabama, producing, among other things, the kind of low-gas-mileage luxury sport utility vehicles that most U.S. consumers are currently reluctant to buy. Toyota manufactures engines for its Tundra trucks and Sequoia SUVs in Alabama. Scores of other parts suppliers thrive, employing non-union labor in a right-to-work state. Alabama also ranks sixth, nationally, in production of cars and light trucks in the United States. All Honda Odyssey minivans sold in the U.S. are made in Alabama. The Hyundai Santa Fe SUV is made in Alabama.

So who do you think would benefit most from a collapse of Ford, GM and Chrysler? How about states such as Alabama and the rest of the South, which have long been busy turning the industrial Midwest into the Rust Belt, well before outsourcing and offshoring and globalization became working-class swear words.

Emptywheel, blogging at FireDogLake, was one of the first observers to pounce upon this, in a post last Thursday, "The Ideological Battle Over the Auto Overhaul Heats Up":

In other words, Shelby isn't opposed to car companies that are stupidly committing and recommitting to SUVs. Rather, he's just opposed to car companies that make SUVs with union labor.

Alabama's emergence as an automobile industry powerhouse has been rapid. Mercedes-Benz opened its first factory in the state in 1993. Today, according to the Alabama Automobile Manufacturers Association, "Motor vehicles were Alabama's top export in 2006 at over $4.9 billion -- equivalent to 35 percent of the state's total exports," and the automotive industry accounted for 13 percent of the state's manufacturing gross domestic product.

Alabama's story is part of the larger narrative of the New South's emergence as an industrial playground for foreign manufacturers, eager to exploit non-union labor -- but still paying better wages than most local industries, thus partially insulating them from the threat of union organizers. It's a narrative that is going to come into clear focus during the next four years, if President-elect Barack Obama attempts to carry through on his promises to organized labor. Standing against him will be a phalanx of Southern Republican senators, led by Richard Shelby, opposing him not just on ideological grounds, but motivated also by clear financial incentives.

The high priest of the Royal Hawaiian Mint

Andrew Leonard — Tue, 18 Nov 2008 15:58:00 PST

In a world where Ron Paul acolytes preach death to the Federal Reserve and pray for a future in which every free man has the right to mint his own currency, Bernard von NotHaus, the co-founder of the Royal Hawaiian Mint Co. and creator of the Liberty Dollar (which, it must be emphasized, is not considered legal tender by the U.S. government) is practically a folk hero. Ron Paul himself referenced the Liberty Dollar when introducing his Free Competition in Currency Act in December 2007. Paul was upset that federal agents had busted the "private mint" in the fall of 2007.

(Or perhaps he was just pleased that von NotHaus had minted small denomination coins named "Ron Paul rounds.")

NotHaus is profiled by Barry Harbaugh in the current issue of the online art magazine Triple Canopy. It's a fun read, especially if you are curious about the intrinsic nature of money itself. But I'd like to know why Harbaugh left out a key detail. He notes that in July, von NotHaus "told me he was retiring, replacing himself as CEO, and moving back to Hawaii to work on a new project. 'It'll blow your mind,' he assured."

But he doesn't tell us what the new project is, an omission that a quick trip to Wikipedia rectifies instantly. Von NotHaus' new gig is high priest of the Honolulu Free Marijuana Church.

(UPDATE: I am abashed. The fancy-pants formatting of the article led me to believe that the article ended before it actually finished. There was one more paragraph, and sure enough, the Free Marijuana Church made an appearance. My apologies to Mr. Harbaugh.)

I encourage you to make your own jokes. Meanwhile I will strive to let the aroma of some vintage Maui Wowee distract me from pondering the mystery of what makes money, well, money.

Since the U.S. went off the gold standard in 1971, the strength of the U.S. dollar depends, fundamentally, in the faith that the rest of the world has that the U.S. government can make good on its debts. As we approach our first $1 trillion deficit, I suppose it's worth wondering whether we are approaching some kind of end game -- a dollar denouement. It's all about confidence, and confidence is in short supply right now.

Which is why I was tickled by one anecdote from Harbaugh's story about what happened to the value of the "coins" minted by von NotHaus after the Feds seized the bulk of his bullion. The remaining coins suddenly became much more valuable than the silver they were minted from!

"The problem with spending a twenty-dollar Liberty today," von NotHaus says, rolling a worn Ron Paul in his hands, "is that you can get thirty dollars for it on eBay." While Liberty currency is occasionally subjected to a "move up" to keep it in line with the price of silver, the FBI raid has inflated the value of the coins in such a way as to reinforce their position as numismatic pieces. Von NotHaus can now sell a T-1, a first-run Liberty from 1998, for seven hundred dollars. The day of the raid, the Ron Paul coppers were transformed into rare collectibles, and a sympathizer sent von NotHaus one hundred of them, which he sold for around five thousand dollars. Von NotHaus lost three thousand ounces of silver at Sunshine, and his income at the moment comes solely from what he sells on eBay. Liberty Dollar did about four million dollars in sales in 2006, but when I ask him how much he's made from the company, he claims to have no idea, joking, "But am I in it for the money? You bet I am."

If anything proves the fundamental point that the value of money is a social construct, and not an inherent thing tied to a particular amount of gold and silver, it's the soaring value of NotHaus' coins, now that they're rare and precious.

137 pages of Wayne County foreclosures

Andrew Leonard — Tue, 18 Nov 2008 12:09:00 PST

Sometimes, all the news you need is a two minute YouTube clip of a man leafing through some pages of newsprint.

137 pages of newsprint, to be exact, a current list of all the properties currently in foreclosure in Wayne County, Michigan.

The city of Detroit is in Wayne County, and according to one recent newspaper report, there are 45,000 properties in some form of foreclosure. But reading about it doesn't carry quite the same visceral impact as just looking at the list. Or, to be precise, watching someone else look at the list, and exclaim, in a tone of muted awe:

"We're talking Wayne County before the Big Three go under."

(Thanks to Stephen Pizzo for the link.)

The global economy and Detroit

Andrew Leonard — Tue, 18 Nov 2008 09:09:00 PST

On Thursday, Brad Setser, who follows international money flows more closely than anyone else in the econoblogosphere, noted that September's trade statistics detailed a sharp (month-to-month) 8 percent drop in U.S. exports. This is bad news, as Paul Krugman emphasized on Saturday, because export growth has been one of the few sectors of the American economy performing decently during the recent troubles.

On Monday, economist Menzie Chinn further dissected the numbers, noting with some alarm that the decline in capital goods exports -- 10 percent -- outpaced the overall numbers.

Why focus on capital goods exports (more so than say ag exports), given their volatility? Because they represent foreign demand for goods that can be used to produce things; as demand for capital goods goes down, so too should one's inferences about future growth prospects abroad. And that growth abroad (and the associated U.S. exports) has been what's been keeping the U.S. economy out of recession.

Of course, by now, most economists believe we are already well into a recession. But what I find most disturbing about September's numbers -- and remember, October is when the wheels really started to fall off the global economic bus -- is the suggestion that we are still only at the beginning of what could be a major unraveling of global trade flows. The obvious implication is that stresses on the U.S. economy will continue to grow worse.

Which brings us again to the topic of the week -- the fate of Detroit's Big Three. To bail out or not to bail out? To me the key question with respect to whether the government should attempt to keep these tottering giants standing is not whether they deserve to be saved, or even whether saving them now will prevent their ultimate demise a year or five years from now. The paramount question is what effect would, say, a G.M. bankruptcy have on the overall U.S. economy right now, as we head directly toward ever more perilous waters? As James Surowiecki writes in his Balance Sheet blog, even if "coming to G.M.'s rescue would only delay the inevitable until next summer... it might still make sense to put the twenty-five billion dollars into the company as a way of averting yet another massive trauma to the economy at a time when businesses and consumers are feeling incredibly fragile."

In the New York Times Economix blog this morning, Catherine Rampell explores the question of how many jobs would be lost in the event of a major "contraction" of the U.S. industry. She cites a study released by the Center for Automotive Research on Election Day.

The study... estimates "the economic impact -- in terms of jobs, compensation and tax revenues -- of a major contraction involving one or more of the Detroit Three automakers," under two separate scenarios. In both cases, there would be major short-term shocks to employment; depending on which scenario you use, a contraction of the Detroit Three would result in direct and indirect job losses of 2.5 million to 3 million in 2009.

That's a lot of jobs, right smack in the middle of the worst recession in modern times. I am one who has long believed that U.S. automakers deserved their comeuppance. But now is not the time to extract a Ford Expedition or Chevy Tahoe-size pound of flesh.

The perils of cheap oil

Andrew Leonard — Tue, 18 Nov 2008 04:00:00 PST

My kids and I drove to Southern California (from Berkeley) and back this past weekend to visit my grandmother. Three tanks of gas in total -- averaging roughly $2.35 a gallon. At 16 gallons a tank, the cost of gasoline for the whole trip came to about $113.

But if I'd made that trip in July, it would have gouged twice as much out of my wallet. Gas prices in California are half what they were five months ago. And like every American who has gone for a drive in the last couple of months, I'm grateful for that. When layoffs mount and stock portfolios crash, every penny seems to count just a bit more than in flusher days. Bloomberg News reported on Monday that in October, the U.S. cost-of-living recorded its sharpest drop, month-to-month, in 60 years. I witnessed that, loud and clear, on California freeways this past weekend.

On Sunday, "60 Minutes'" Steve Kroft asked President-elect Barack Obama if the astonishing drop in gas and oil prices made dealing with energy issues "less important." Obama responded forcefully: "It makes it more important." He observed that there is a cycle of "shock and trance" in American attitudes toward energy. When gas prices go up, there's a "flurry" of activity, but when they go back down, well, never mind.

That's exactly what I want to hear from my president, because the truth is that the current low gas and oil prices are engendering a false sense of security. We are being set up for an even more painful energy crisis in the very near future.

Support for this thesis comes from the recently released World Energy Outlook from the International Energy Agency. The rate of production decline in existing fields is accelerating, to the point "that by 2030 the world needs to find and produce 45 million [new] barrels of oil a day."

You don't have to be a believer in peak oil to recognize that developing that much new production will be a huge and expensive task. But at the moment, investment in new oil production capacity is getting hammered by the double whammy of low oil prices (which makes existing facilities offshore and in, for example, the Alberta oil sands, uneconomic) and the unforgiving credit environment, which is making it very hard to get the financing necessary to undertake new projects.

James Herron, writing for Dow Jones Newswires, has a great look at how these factors are imperiling the prospect of squeezing new oil production out of the waning North Sea oil fields. Scores of smaller oil companies are finding that their business plans do not work in the current climate. The mere lack of action could even result in additional production declines.

But one danger specific to the U.K. North Sea is that a prolonged trough in the oil price could lead to aging pipelines and platforms needed to tap new fields being dismantled early. "Existing infrastructure is very important for companies to sweep up the remaining reserves," said Wood Mackenzie's Thomas. "There is a danger that as companies review capital expenditure and budgets and look to control their costs, they reduce investment. If that's sustained over a long period of time it could cause long-term damage to infrastructure."

OPEC, of course, has an obvious incentive for higher oil prices, but the same basic story comes through in the comments of Chakib Khelil, Algeria's energy minister and the current president of OPEC, as reported by the Financial Times.

"Our objective is to reach a price of $70-$90... Because it's the price of the marginal cost for new developments, whether that's Canadian bituminous sands, the Brazilian deep offshore or even Venezuelan heavy crude. If we don't have $70-$90 in the next few years then eventually we'll go much higher [in price] because we will have no production from these deep reserves, from the bituminous sands or from the kind of reserves that need $70."

Bloomberg News, also reporting on OPEC, notes that the drop in global demand for oil will likely result in a drop in global supply:

"The current financial situation has pressured companies to cut their planned capital expenditure, which has sharply influenced the supply forecast," the group said. "All regions contributed to the downward revision," according to OPEC, with the biggest contribution from former Soviet countries.

So where does that leave us? When economic growth resumes across the globe, demand for oil will surge once again. Only this time around, given the constraints presented by declining oil fields and the current apparent freeze in investment in new oil production capacity, the supply-demand equation will likely send oil prices shooting back up, perhaps even further than before.

Which is why now is the time, more than ever, for government leadership that promotes conservation, energy efficiency, fuel economy, and increased production of renewable energy. Waiting until the economy recovers before tackling energy would be a huge, huge mistake.

The bad economics of stopping gay marriage

Andrew Leonard — Mon, 17 Nov 2008 13:16:00 PST

In the Gospel of Mark, 8:36, it reads "For what shall it profit a man, if he shall gain the whole world, and lose his own soul?"

How the World Works proposes an updated version: "For what shall it profit a Christian nonprofit, if it stops gay marriage, but all its employees lose their jobs?"

Focus on the Family, the ultra-conservative religious nonprofit led by James Dobson, announced on Monday that it is eliminating 202 jobs -- "149 through layoffs and 53 by not filling vacant positions," according to The Gazette in Colorado Springs.

Meanwhile, Cara Degette reports in the Colorado Independent that Focus on the Family recently spent more than half a million dollars in a so-far successful effort to ban gay marriage in California.

In all, Focus pumped $539,000 in cash and another $83,000 worth of non-monetary support into the measure to overturn a California Supreme Court ruling that allowed gays and lesbians to marry in that state. The group was the seventh-largest donor to the effort in the country. The cash contributions are equal to the salaries of 19 Coloradans earning the 2008 per capita income of $29,133. In addition Elsa Prince, the auto parts heiress and longtime funder of conservative social causes who sits on the Focus on the Family board, contributed another $450,000 to Prop. 8.

Layoffs suck, though How the World Works isn't feeling a whole lot of Christian charity toward those who work for an organization that devotes so much time and energy to the cause of denying the right to a legal marriage to same-sex couples (not to mention attacking retailers for insufficiently "Christian" Christmas spirit). Instead, I am heartened by the thought of a new strategy for relegating Focus on the Family and its ilk to the dustbin of history: economic warfare!

If one accepts the argument that one reason the Soviet Union collapsed was because its economy simply could not keep up with the United States' huge outlay on defense spending, well then, couldn't a similar strategy be the ticket to defeating the evil empire that currently is headquartered in Colorado Springs? Spend 'em into submission. Focus on the Family is on the wrong side of history, and the free market will prove it.

Where did all the wealth go?

Andrew Leonard — Mon, 17 Nov 2008 10:32:00 PST

If you have the stomach for 10 minutes of schadenfreude, you might enjoy watching a series of clips edited together featuring Peter Schiff, president of Euro Pacific Capital, arguing about the economy with a bunch of arrogant and ignorant talking heads on Fox News and the Fox Business Channel. Thanks to Andrew Sullivan for the tip.

The pattern keeps repeating itself: During 2006 and 2007, Schiff made a series of astonishingly prescient predictions of the peril that the economy was headed for, only to be snickered and scoffed at by the likes of Ben Stein and my favorite supply-side genius, Arthur Laffer.

Arthur Laffer provides a heaping load of merriment. After one typical pronouncement of doomsday, Laffer, who can barely disguise his utter scorn, delivers himself of the following (dated sometime in 2006):

No I don't believe any of it whatsoever Michelle. Excuse me, but what he's saying is savings is way down in this country. But wealth has risen dramatically, the United States has never been in better shape, there is no tax increase coming in the next couple of years, monetary policy is spectacular, we have freer trade than ever before ... I think Peter is totally off base, and I just don't know where he is getting his stuff ... There is nothing out there -- we're going to have a nice slowdown but it's not going to be a crash.

The critical part of Laffer's spiel is the assertion, widely echoed by free market evangelists over the past decade, that the disastrous decline in American savings rates was irrelevant because it didn't take into account the vast appreciation of wealth as measured by home equity and stocks.

Now that such stock indexes as NASDAQ are trading at their 1997 levels and home prices are plunging at historically unprecedented rates, it's hard to argue with Schiff's assertion that all that wealth was just plain "phony."

Phil Gramm's legacy

Andrew Leonard — Mon, 17 Nov 2008 08:00:00 PST

I have only one comment to make on the New York Times' front-pager detailing Phil Gramm's role as the great deregulator during (and after) his tenure as a Republican senator from Texas.

Imagine how different the context would be if Gramm's good friend John McCain was the president-elect?

Michael "Liar's Poker" Lewis comes home

Andrew Leonard — Fri, 14 Nov 2008 11:24:00 PST

Michael Lewis is the master. The author of "Liar's Poker" connects the dots between then and now with an amazing cover story for Portfolio magazine, "The End of Wall Street's Boom."

It is well worth reading to the very end. The bulk of the piece focuses on one hedge fund manager who saw the collapse coming and bet against every one else, but the piece stretches much further than that. It's an obituary, a denunciation, and a startling elucidation of the subprime fiasco.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they'd be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn't expect was that any future reader would look on my experience and say, "How quaint."

For Obama and the economy, it's 60 votes or bust

Andrew Leonard — Fri, 14 Nov 2008 07:11:00 PST

It is rarely a good sign when I am greeted by four Wall Street Journal "News Alerts" before six a.m. out here on the West Coast. The EuroZone is in recession, Freddie Mac announced losses of $25.3 billion, U.S. retail sales went off the cliff in October, and Sun Microsystems announced plans to lay off 18 percent of its work force.

I think I need another cup of coffee.

But the most dispiriting news of the day came from a New York Times article, "Chances Dwindle on Bailout Plan for Automakers." Not because I feel particularly strongly about a GM rescue, one way or the other, but because of the reason provided by Senator Christopher Dodd, D.-Conn., on why neither an automaker bailout or a lame-duck stimulus plan is likely to be enacted.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said he did not believe there would be enough Republican support to get the 60 votes needed to move a bill forward. "Right now, I don't think there are the votes," he said...

In the modern political era, the Democrats assume they will need 60 votes to pass anything, based on their fear of a Republican filibuster. Personally I would like to see this theory tested in practice a little more often, just so the general public gets a clear sense of exactly who is obstructing legislation, but I will concede that the current Democratic majority in the Senate is so razor thin as to make that a moot point.

The majority will be significantly larger in the new Congress, but still not up to 60, barring a surprise in Georgia and a recount victory for Al Franken in Minnesota. What this means is that Obama's chances for success, on anything will hinge on being able to convince two or three Republicans to cross party lines. Everything. A new stimulus plan, health care, climate change -- the works. For at least two years, the power to steer the U.S. economy is going to be controlled not by the President who gained 63 million votes, not by the majority party in both the Senate and the House, but by that rarest of nearly extinct creatures, the moderate Senate Republican.

Maine, with its two moderate Republican Senators, is about to become the most important state in the union.

UPDATE: For further reading:

Energy analyst Geoffrey Styles crunches the Senate numbers with a focus on energy.

Felix Salmon delivers a superb post tying together bailouts, past and future, with the Bush and prospective Obama administrations.

Birth control in a Frito?

Andrew Leonard — Thu, 13 Nov 2008 14:43:00 PST

Like vampire-hunters certain that they have finally found the magic stake that will annihilate their Satanic foe once and for all, Greenpeace and the Center for Food Safety are touting a new study purporting to show increased reproductive infertility in generations of mice that have been fed a steady diet of Monsanto's genetically modified corn.

From a news alert released by the Center for Food Safety:

Mice fed the GE corn diet had fewer litters, fewer total offspring, and more females with no offspring, than mice fed the conventional corn. The effects were particularly pronounced in the third and fourth litters, after the mice had consumed the GE corn for a longer period of time. The authors attributed the reduced fertility to the GE corn feed, and said it might be related to unintended effects of the genetic modification process.

Greenpeace, in typical fashion, is breathless:

Mice! Forget about birth control -- try GE maize instead!

The study, conducted by a team led by Dr. Jurgen Zentek, professor of veterinary medicine at the University of Vienna, and sponsored by the Austrian Ministry of Health, Families, and Youth, is a serious effort, and Monsanto isn't ignoring it. A release posted to Monsanto's home page on Tuesday notes that Zentek's study has not been peer-reviewed, and maintains that Greenpeace's press release "is inconsistent with over a decade of reputable, peer-reviewed, scientific studies, including multi-generational studies, which demonstrate and confirm the safety of GM crops." Nonetheless, Monsanto promises to "examine" the report "fully."

How the World Works does not consider either Monsanto or Greenpeace to be reliable narrators. Neither side has demonstrated any ability to approach the topic of genetically modified organisms with what I personally would consider to be an open scientific mind. While it is more than a little bit disturbing to learn that, according to Bill Freese, science policy analyst at the Center for Food Safety, no U.S. "regulatory agencies require any long-term animal feeding trials before allowing genetically engineered crops on the market," it is also quite true that this is just one, un-peer-reviewed study. The leader of the research group, Dr. Zentek, was appropriately cautious in interpreting his own data.

The trial indicates that dietary interactions with the host organism have to be further evaluated. Regarding the sensitivity of the topic, studies are needed to extend the database using standardized feeding trials with clear endpoints such as reproductive performance and a backup by genomic, proteomic and metabolomic traits.

More study is required! Now there's a conclusion How the World Works can fully support, before agreeing with Greenpeace's declaration that Zentek's study is "a good enough reason to close down the whole biotech industry."

The Wal-Mart trade deficit

Andrew Leonard — Thu, 13 Nov 2008 11:19:00 PST

Here's a stunning number: The Census Department reported on Thursday that the U.S. trade deficit declined to its lowest level in a year, to $56.5 billion. But Calculated Risk observes that the bilateral trade deficit with China rose to an all-time high of $27.8 billion. Fully half of the U.S. trade deficit is accounted for by one country -- China.

The first conclusion to take from this is simple: No wonder China's government announced a $586 billion economic stimulus plan last weekend. China exported $33.1 billion worth of goods to the U.S. in September, but how shaky is that crown? The U.S. economy is in free fall.

The second takeaway is a little more subtle. Among all the bad economic news today, I saw one headline that was tinted optimistically: "Wal-Mart Remains Upbeat." The retailer reported a 9.8 percent rise in profits for the third quarter of 2008, and CEO Lee Scott professed himself "optimistic about the upcoming holidays."

Wal-Mart's recipe for success is no secret:

Wal-Mart, which is often viewed as a barometer for the retail industry, has benefited from its low-price position as shoppers curtail discretionary purchases and seek bargains. In contrast, sales at department stores and specialty retailers have been lagging, in part because of their bigger exposure to discretionary merchandise.

But how does Wal-Mart get the lowest price? In significant measure, by sourcing production of its goods in China. A rough estimate holds that fully 10 percent of the annual trade deficit between the U.S. and China is accounted for by one company -- Wal-Mart.

The Wal-Mart effect may partially explain the seeming disjunction between the U.S.'s failing economy, shrinking overall trade deficit, and yet growing trade gap with China. The worse things get in the U.S., the more Americans are relying on goods "made in China" just to get by.

Unemployment meteor threatens planet

Andrew Leonard — Thu, 13 Nov 2008 06:59:00 PST

Last week, we learned that the unemployment rate in the U.S. had jumped to 6.5 percent in October, a 14-year-high.

Today's numbers portend far worse for November.

New claims for jobless benefits hit 516,000, the highest since Sept. 29, 2001.
The four-week average for new claims is at its highest level since 1991.
The number of continuing claims -- workers drawing benefits for longer than one week -- is at a 25-year high.

Where is the pain worst? No surprise there: Michigan and Ohio, due to automobile industry layoffs, according to the Wall Street Journal.

(And if you really want to sink into the gloom, consider Dan Gross' argument, presented in Slate a couple of weeks ago, that the numbers we pay most attention to don't take into account how many people are underemployed in the U.S.)

When George W. Bush took office, he inherited an economy headed for recession, and while one could criticize him for how he handled it, only the blindly partisan could attempt to blame him for having caused it. The same goes for Barack Obama, with one difference. The recession he's inheriting looks to be the worst most of us have experienced in our lifetimes.

During the campaign, we heard a lot of jokes about how the only time you ever saw a black president in the movies was when the Earth was faced with imminent destruction. Well, guess what -- there's a meteor headed our way.