Coyote Blog

Kevin Drum quotes the Financial Times:

US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury's $1,000bn (£680bn) plan to revive the financial system.

....Wall Street executives argue that banks' asset purchases would help achieve the second main goal of the plan: to establish prices and kick-start the market for illiquid assets.  But public opinion may not tolerate the idea of banks selling each other their bad assets. Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.

Wow, no one could have predicted this.  Except for anyone who spent 5 minutes with the numbers:

There is an interesting incentive to collude [in the Geithner plan] between banks and investors.  The best outcome for both is for investors to pay a high price to banks and then have the bank kick back some portion to the investor.

I will confess that I did not take the next logical step and consider that the ultimate collusion would be for banks themselves to be the investors, but the incentives for doing so were dead clear (part 1, part 2).

I will stick by my original conclusion -- Taxpayers are hosed at any price.

By the way, can anyone tell me what the evidence has been for the contention Barack Obama is "really smart," because I sure don't see it.  Yeah, he went to an Ivy League School, but so did I and there were plenty of people there I wouldn't trust to run a lemonade stand.  Sure, he gives a nice prepared speech and seems to have invested in that vocabulary building course Rush Limbaugh used to peddle on his show, but what else?  All I see is a typical Ivy League denizen of some NGO who thinks he/she can change the world if only someone will listen to them, who just comes off as puerile if you really spend any time with them.  I will go back to what I wrote on inauguration day:

Folks are excited about Obama because, in essence, they don't know what he stands for, and thus can read into him anything they want.  Not since the breathless coverage of Geraldo Rivera opening Al Capone's vault has there been so much attention to something where we had no idea of what was inside.  My bet is that the result with Obama will be the same as with the vault.

I had someone ask me whether the results in this post on the economics of Geithner's latest brainstorm were an artifact of the selected purchase price for the distressed asset of 150.  The answer is no.  Investors are willing to buy this asset on these terms at any price under 175, and banks are willing to sell for any price over 100.  Here is the graph of expected values as a function of the purchase price

Note the taxpayer gets hosed at any price  (kind of the Obama-Geithner update on "unsafe at any speed")  Two things I had not realized before:

• Without competition among investors to drive up the price, a very large percentage of the taxpayer subsidy goes to the investors rather than the banks.
• There is an interesting incentive to collude here between banks and investors.  The best outcome for both is for investors to pay a high price to banks and then have the bank kick back some portion to the investor.

Nobel Laureate Joseph Stiglitz has a great deconstruction of the Geithner toxic asset plan in the NY Times.  If you want to see how the new corporate state works, where the government works with a small group of powerful insiders to the benefit of those insiders and the detriment of everyone else, this is a great example.

Stiglitz walks through how the Geithner plan will operate, and I want to do so as well.  I have added a few tables to help illustrate his example a bit better.

Let's begin with a financial asset that was originally worth $200.    To make things simpler, we'll assume that with the current economy there are now two outcomes for this asset -- a 50% chance it recovers and eventually pays off its full value of $200, and a 50% chance it becomes effectively worthless  (more realistically, there is a range of outcomes, but this does not really effect the following analysis).

The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is "worth."

This is a classic expected value analysis.  At business school, you spend a lot of your time doing these (trust me).  Expected value is just the percentage chance of each outcome times the value of the outcome, on in this case 50% x $0 + 50% x $200 = $100.

So Stiglitz hypothesizes a situation under the new Geithner plan where a private entity might be willing to pay $150 for this $100 asset.  That's certainly a windfall for the financial institution that owns the asset currently, since the asset is only worth $100 on the open market.  But why would someone pay $150?  Well, it starts with this:

Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses

The actual percentages are 8% from the private purchasers, 8% "equity" from the government, and 84% in a government-guaranteed loan  (Equity is in scare quotes because most investors learned long ago that if you provide 80%+ of the capital in a risky venture, you can call the investment "debt" all day long but what you have really done is made an equity investment).

So let's look at how the purchase cost is divvied up based based on a $150 purchase cost:

But we have already posited how this will come out:  a 50/50 chance of $0 and $200 for the final asset value.  So we can compute the outcomes.

So there is a huge built-in subsidy here.   Now, I don't personally think the government needs to be injecting equity in banks.  But  I understand there are a lot of people who support it.  So perhaps the $50 subsidy of the banks in the above example is warranted.  But why the $6.5 subsidy of Geithner's old pals in the investment world?  This is a pure windfall for them, like finding money laying on the street.   Even Vegas does not tip the odds so far in favor of the house.

I agree with Stiglitz's analysis:

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a "partnership" in which one partner robs the other. And such partnerships "” with the private sector in control "” have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it's the kind of Rube Goldberg device that Wall Street loves "” clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

Update: I posted an update on the plan and these numbers here.

If I have not been convincing enough, Q&O has more on why you really, really should be planning for inflation.

Look, I would love to have a good all-electric vehicle with a 100-mile range.  I love the torque of electric motors, and have had a blast every time I have driven a Prius.  But to get over-focused on all this mess is to miss the real problem American auto manufacturers have failed to deal with (via Carpe Diem)

If went back in time and showed US auto makers this chart in 1995, they would have said "holy cr*p!  We're screwed!"  And they were.  American auto makers still made cars like they were in the 1950's auto industry.  Asian manufacturers made cars like they were in the modern PC industry.

The answer to all of Obama's spending in trillion dollar chunks is obvious.  All we have to do is make our currency work just like that of Zimbabwe, and we will be fine.  We could pay off a trillion dollars with 10 bank notes (I bought just one the other day on eBay for $30 or so).

The problem, of course, is that this is what the Obama administration actually appears to be doing.

I don't generally give investment advice, because I am not really qualified to do so and I make enough mistakes with my own investments that it seems silly to give other people advice.

But these are extraordinary times, and I do want to pass on one general piece of advice: Be ready for inflation.  If you are under forty, you probably don't even remember any real inflation, so you may need to seek advice as to how to handle it.

I just do not see how there is going to be any way to avoid a substantial uptick in inflation over the next couple of years. Crazy-large deficit spending, huge inflation of the money supply, absurdly low interest rates, massive government money-printing efforts, and government-mandated tilts in the balance of power between labor and management towards the unions can only add up to inflation,

Now, if we were really in the next Great Depression, as the Obama administration tried to tell us in its early weeks (mainly in order to pass pet legislation in a mood of total panic), then we might not see much immediate inflationary pressure. But I think most of us are realizing that the whole depression thing was over-sold. We are likely already on the first steps towards a recovery (if the Administration does not keep doing stupid stuff to kill it) and this recovery will become obvious by the third quarter (for their budget, the Obama administration is forecasting this now to be a milder-than-average recession). When the recovery starts, inflation is going to slam home hard and fast.

The smart money already knows this. That is why the government (as is the UK government) is having a hard time finding takers for long-term government bonds fixed at 4 or 5 percent. Such low rates could easily be under water after inflation.

So, find ways to hedge inflation.  Here are some general ideas:

• If you need to borrow money, now is a great time if you can borrow long and fixed (as with 30-year mortgages).  With high inflation, the amount you owe effectively goes down every year.  Borrowers love inflation!
• Avoid buying long-term bonds at fixed rates like the plague.  Again, you want to be issuing such bonds, not buying them.
• Consider various US government inflation-adjusted bonds, or shorter maturities on traditional bonds
• Equities tend to be a good inflation hedge.  Revenues and earnings go up with inflation, so equity prices and dividends tend to as well.  There will be, though, certain industries and companies that will not manage well in this environment.
• Gold is OK, but I have always thought of gold as dead value.  Sure, it can hedge inflation, but it gives no real return.  Commodity producer stocks (e.g. oil companies) may be a better bet.
• International stocks are really dicey in this kind of environment.  Added to the underlying risk of investing in less developed markets is the currency question, which basically boils down to -- we know the US is screwing up its currency, but will other countries screw theirs up worse?  If you think there is a country out there who is less likely to inflate their currency, by all means consider equities and bonds denominated in that currency.  You get the underlying return plus an exchange rate boost   (all things being equal, if the US has a lot of inflation and others don't, the value of the dollar will fall.  Thus investment returns in, say, Euros will return more dollars in the future.)

These are just some ideas, and I am not positive they are all good ones.  Talk to someone more knowledgeable than me, but whatever you do, I think you need to be planning for inflation.

Reason asked Norman Borlaug about the claim that organic farming is better for the environment and human health and well-being.  His answer:

That's ridiculous. This shouldn't even be a debate. Even if you could use all the organic material that you have--the animal manures, the human waste, the plant residues--and get them back on the soil, you couldn't feed more than 4 billion people. In addition, if all agriculture were organic, you would have to increase cropland area dramatically, spreading out into marginal areas and cutting down millions of acres of forests.

At the present time, approximately 80 million tons of nitrogen nutrients are utilized each year. If you tried to produce this nitrogen organically, you would require an additional 5 or 6 billion head of cattle to supply the manure. How much wild land would you have to sacrifice just to produce the forage for these cows? There's a lot of nonsense going on here.

If people want to believe that the organic food has better nutritive value, it's up to them to make that foolish decision. But there's absolutely no research that shows that organic foods provide better nutrition. As far as plants are concerned, they can't tell whether that nitrate ion comes from artificial chemicals or from decomposed organic matter. If some consumers believe that it's better from the point of view of their health to have organic food, God bless them. Let them buy it. Let them pay a bit more. It's a free society. But don't tell the world that we can feed the present population without chemical fertilizer. That's when this misinformation becomes destructive...

I want to add a big "ditto" to this answer in reference to the whole food miles and locally grown food movement.  There is a lot of evidence that trying to get all of our food locally will actually increase energy use.  It will certainly harm the environment by increasing land use.

Why?  Because currently, economic incentives push farming of a particular food item towards the land that is best-suited and most productive for that item  (government subsidies, both direct, e.g. farm programs, and indirect, e.g. subsidized water for agriculture in arid areas like Arizona and SoCal, interfere with this, but that is a different subject).  The locally grown food movement seeks to shift crops from large productive farms located in the best soils and climates for that crop to smaller farms located in sub-optimal growing areas.  This HAS to increase agricultural land use, prices, and in many case, energy use.  More here.

On September 12 last year, I linked an article in the Arizona Republic that I declared to be ridiculous wishful thinking on the part of the author, completely disconnected from how people have responded to price changes in the past:

The worst oil shock since the 1970s has put a permanent mark on the American way of life that even a drop in oil's price below $100 a barrel won't erase.

Public transportation is in. Hummers are out. Frugality is in. Wastefulness is out....

As prices come falling back to earth, Americans aren't expected to drop their newfound frugality. The jarring reality of $4-a-gallon gasoline stirred up an unprecedented level of consumer angst that experts say will keep people from reverting to extravagant energy use for years to come - if ever again....

"I see a permanent shift," said Kit Yarrow, a consumer psychologist at San Francisco's Golden Gate University who has studied how high oil prices have affected Americans' buying behavior. "Historically, when gas prices come down, people use more. But we've learned a lot of new things during this period and it will be hard to go back to our gas-guzzling ways."

Thank God for consumer psychologists.  From the LA Times last week:

Americans have cut back on buying vehicles of all types as the economy continues its slide. But the slowdown has been particularly brutal for hybrids, which use electricity and gasoline as power sources. They were the industry's darling just last summer,  but sales have collapsed as consumers refuse to pay a premium for a fuel-efficient vehicle now that the average price of a gallon of gasoline nationally has slipped below $2.

"When gas prices came down, the priority of buying a hybrid fell off quite quickly," said Wes Brown, a partner at Los Angeles-based market research firm Iceology.

Prices matter.  Nearly every other form of communication, from advertising to public education to presidential fireside chats to go-green guilt promotion campaigns pale in comparison to the power of prices to affect behavior.

Postscript: I studied a lot of marketing in business school and was a marketing guy for years in corporate America.  I wonder how a marketing guy and a "consumer psychologist" differ?  The only differences I can think of are 1) a marketing guy's pay will suffer over time when he is this wrong and 2) I found in marketing that bringing facts to the table often yielded better forecasts than simply applying my personal biases and wishful thinking.  About 10 seconds of looking at how consumer focus reverted away from conservation after the oil price collapse in the 1980's might have given these guys a hint.   Particularly since the price shock of 2008 was far shorter and less severe than the shocks of the 1970's.  Here is my measure of gas price pain (I have not updated it for the recent price collapse):

MaxedOutMama echoes many of my thoughts on recent economic activity and the shameless way our President has been manipulating these issues:

In January, I was writing that fundamentals had taken an upswing, and that the US economy was going to try to resurge in the third quarter.

The numbers that came in for January and February did show what P-Nat projected, which was a gradual bottoming pattern overall and the beginning of some upticks. Bloomberg today:

Orders for U.S. durable goods unexpectedly rose in February on a rebound in demand for machinery, computers and defense equipment.
...
Combined with reports showing improvements in retail sales, residential construction and home resales, the figures indicate the economy is stabilizing after shrinking last quarter at the fastest pace in a quarter century. Stepped-up efforts by the Obama administration and Federal Reserve to ease the credit crunch may help revive growth later this year.

Last night Obama took credit for these events, but the stimulus package had nothing to do with it - the effects of that haven't even hit the economy yet. Very little of that package will be felt in the first half of 2009, in fact, and less than 25% of the effect will be felt in 2009. I would also like to point out that at the time the stimulus bill was being debated, the administration was claiming that the economic emergency was so dire that the representatives and senators shouldn't even be allowed to read the thing before they voted on it. Instead, this was what was really going on in the economy.

She also shares my concerns that the recovery may in fact be undone by recent government actions, not the least of which is the Weimar Republic-like printing of money to buy back government bonds and help fund a mushrooming deficit.  In fact, she and I must be fairly attuned, as she wrote:

Last week I was so sick at heart that I didn't think I could continue writing this blog.

I too felt almost exactly the same last week.  Never have I been so depressed about the direction of domestic policy (I might have felt about the same around 1978, but I was only 16 and had other things on my mind).  Every day last week there seemed to be a new policy directive crazier than the last.  I had a real feeling like I was living through the last half of Atlas Shrugged, where an increasingly desperate government initiates a series of policies with disastrous long-term effects crafted just to survive a little longer in office.  The only difference was several years in the book seemed to have been compressed into about a week of real time.

Fortunately, I am basically a happy soul and I seldom stay depressed long.  I just did what I always do when I despair for the world - spent some time with my family and concentrated on what I could fix, namely the health of my own business.

A couple of questions about AIG:

1.  Is there any real legal difference between the contractual commitment by AIG to pay bonuses to employees and their contractual commitment to pay off mortgage bond guarantees to companies like Goldman Sachs? **

2.  In a bankruptcy, how senior would contractual promises of deferred compensation to employees be?  Everyone comes after the government, of course, but would such claims be more or less senior to, say, commitments to pay counter-parties?

** before claiming one commitment was outrageous and unjustified, one needs to be clear which commitment he is referring to, since both commitments in retrospect seem crazy to me.  It is just that one party (ie Goldman Sachs), which has the added advantage of being represented by many of its former employees in the Treasury department, has convinced Congress and the Administration that not paying them carries systemic risk to the economy.

That seems to be the new key to government largess:  Carrying systemic risk.  It used to be one wanted to be poor or female or black to merit special consideration in the government spending sweepstakes.  But nowadays, in our post-racial society, the key is to be the one who can wrap himself in the flag of "systemic risk."  Here is .

A bit over a week ago, I forecast that we had passed the economic bottom and would soon be back on the way up.  The IBD lists a number of reasons why I may be correct:  (ht:  Carpe Diem)

"¢ A broad rally in stocks, confirmed last Thursday, continuing into this week and led by the beaten-down financials.

"¢ A surprising 22% surge in February housing starts to a seasonally adjusted annual rate of 583,000 units.

"¢ A back-to-back jump in retail sales ex autos, in both January and February.

"¢ A return to profitability at several major banks, including Citigroup, Bank of America and JPMorgan.

"¢ A doubling in the obscure but important Baltic Dry Index, a key indicator of global trade flows.

"¢ An upwardly sloping yield curve, which Fed research suggests all but ensures a rebound by year-end.

"¢ A Housing Affordability Index that has hit an all-time high.

"¢ A two-month improvement in wholesale used-car prices, measured by the Manheim Index.

"¢ A rise in Monster's Employment Index in February, suggesting a turn in the job market may be around the corner.

"¢ A 4 1/2-year high in the dollar against other major currencies, on a trade-weighted basis.

"¢ A sharp increase in the money supply, as measured by M2 and M1. Weekly M2 growth has averaged 10.1% year-over-year since the start of 2009, while M1 has grown at a 14.6% rate.

"¢ A two-month rally in the Index of Leading Indicators.

"¢ A growing body of evidence that the "liquidity crunch" is dead. Data show nearly $14 trillion in liquidity on the sidelines of the markets, ready to boost consumer spending, credit growth or further stock market gains.

Of course, this makes the entire argument for the trillion dollar plus stimulus bill moot.  If my company had started spending itself into debt to fight some sort of emergency, and then found the emergency did not exist, you can bet we would be spending every hour of the day to stop as much of that emergency spending as possible.  Not so in Washington.  Despite now forecasting an improving economy, and basing his budget on this being a milder-than-normal recession, Obama has not even suggested any roll-back in the massive spending and debt-creation program.  Which just goes to prove that the "stimulus" bill had nothing to do with stimulus in the first place, but was a leftish spending plan sold based on panic, in exactly the same way the Bush administration sold the Patriot Act.

In fact, much of Obama's remaining legislative agenda (including nationalization of parts of the health care system and a Co2 cap-and-trade system) include what are effectively large tax increases that cannot realistically be passed in the depths of a recession.  So expect a lot of talking up of the economy to prepare the way for these tax increases, not to mention the tax increases that will be necesary, but have not yet been proposed, to pay for the servicing of the huge debt and new spending we just took on.

One final prediction:  As the economy improves enough for the average person to see the improvement, expect the Obama administration to be spinning like mad.  Their first objective will be to take credit for the recovery.  This is absurd, as it appears that the recovery will start long before the first dollar of spending occurs.  The media may, however, let him get away with this.  If it does not, his second story will be that the confidence exuded by the passing of the stimulus bill created the recovery.  This is also absurd on its face, given the crash in equity prices after the stimulus bill was passed and the extreme general skepticism about the stimulus in poll numbers.

Postscript: By the way, I would argue the whole story of this stimulus bill is a microcosm of the climate debate.  Extreme panic was generated based on a fear that their might be some possibility of a catastrophe (ie a second Great Depression) and that on the precautionary principle, we spent a trillion dollars just in case.  Remember that in January, Obama said there will be - not might be - another 5 million job losses, a number we will come nowhere near.

As it turned out, there was never a realistic chance of a catastrophe, but the costs will remain, and all the while the panic over the issue was used as cover to pass a whole range of freedom-reducing initiatives.   Naomi Klein was half right in the shock doctrine -- there are folks who use emergencies to successfully push for radical change, but it is almost always the forces of more government control who win out, not the supporters of laissez faire.

Update: A similar list here from Forbes.

Thomas Sowell, via Carpe Diem:

The current political stampede to stop mortgage foreclosures proceeds as if foreclosures are just something that strikes people like a bolt of lightning from the blue-- and as if the people facing foreclosures are the only people that matter.
What if the foreclosures are not stopped? Will millions of homes just sit empty? Or will new people move into those homes, now selling for lower prices-- prices perhaps more within the means of the new occupants?

The same politicians who have been talking about a need for "affordable housing" for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?

The political meaning of "affordable housing" is housing that is made more affordable by politicians intervening to create government subsidies, rent control or other gimmicks for which politicians can take credit. Affordable housing produced by market forces provides no benefit to politicians and has no attraction for them.

In the wake of the housing debacle in California, more people are buying less expensive homes, making bigger down payments, and staying away from "creative" and risky financing (see chart above). It is amazing how fast people learn when they are not insulated from the consequences of their decisions.

I am not an economist, so anyone who invests any money on my prognostications is insane.   But here is my prediction, just for fun.

I think that if you fly down below the hysteria, there is good reason to believe that somewhere in February or early March we passed the bottom, in terms of the rate of job losses and output reductions.  Job losses will continue for several months, but at a declining pace, with the low point in employment occurring sometime in the late 2nd or early third quarter.  I am about 50/50 as to whether the unemployment rate will peak in the high eights or low nines.  We will see real recovery beginning in the third quarter.

I am a tad less confident in this only because we have dragged out a number of reckonings (e.g. GM, some banks, some mortgages, etc) which should have occurred last year, which may delay the recovery somewhat vs. if we had just taken our medicine sooner.  The big wild card, of course, is what effect massive government borrowing and tax increases will have on the speed of the recovery, and, now that I have seen this chart, on inflation.

Just to show I am putting my money where my mouth is, I moved much of my savings to equities last Thursday.

It is a well-known fact that women, on average, make less than men in the US work force.  Whether that appalls you depends a bit on your political motivation, as well as your facility and honesty with data analysis.  The raw numbers tend to show a large gap, while numbers corrected for things like years in the work force, education, and industry selection tend to show a smaller gap.

A big driver of gender wage disparities is the industry in which males and females tend to work.  Male preference industries like construction and heavy manufacturing tend to pay more than female preference industries like health care and education  (yes, I know we could argue all day as to whether these industries are truly a preference or the result of some implicit cultural direction, but I am not going to touch that today).

But one thing I have never thought about, or heard discussed, is the issue of risk.  When we discuss securities and investments, we often talk about income in the context of risk -- the more risk one takes on, the higher the average returns one typically gets.  It may be, though, that we should talk about employment income in the context of risk as well.  After all, if one were looking at two fairly similar jobs, except the chance of layoff or job loss were much higher in one than the other, then one would expect the job with more job loss risk to pay more.

In this context, recent job loss numbers by gender are interesting  (a story, by the way, Mark Perry has been on for months but the MSM is only just now waddling in to notice).

This graph of the US monetary supply is un-freaking-believeable.  Someone please tell me that this is a data error or something.  I guess this is one way to bail out borrowers -- if you create enough inflation, then the real value of principle owed drops.  Sure looks like it is time to borrow long at fixed rates.  Are real interest rates about to go negative?

Via Phil Miller

By the way, this really gives the lie to the whole government stimulus effort.  They may be moving large amounts of money around, but they can't create value, and in the absence of real value creation all they are doing is inflating the currency.

The other day I was having a discussion with a smart, well-informed woman who tends to be a bell-weather for Democratic talking points.  When asked about the recession, I said something like this:

The story for banks, corporations, and people are all the same -- everyone has too much debt, everyone took on too much in expectation of things going up and up.  With flat or even down expectations, everyone is now trying to clean up their balance sheet.  They are spending less, building equity and reducing debt.  And the economy is going to slow as a result, no way around it.   I went on to say that I was not only opposed to the stimulus bill in particular, but I was offended that the government would try to interrupt this deleveraging process.  The government had essentially made the decision that if individuals won't spend, then the government will take their money in the form of taxes and spend for them.  And if no one wanted to have debt, the government would go about and take debt on in the name of everyone.

She responded that she thought it was ironic that after the government had worked so hard for so many years to tell people to save more, and that they are only doing it now when it was counter-productive.

Forget for now the whole Keynsian "saving is counter-productive" argument, and focus for a minute on the government communication effort around individual debt.  There is no doubt that to the extent that the government has verbally communicated on individual debt, is has generally been to encourage savings and not take on expensive consumer debt.

But verbal communications are generally the least effective form of communication in the economy (Ralph Nader and his theory that we are all zombies to corporate marketing notwithstanding).  In fact, markets don't communicate via words.  They commucate with price.  Prices are the giant semaphores of the free market, and they are extraordinarily powerful communication tools.  Do people drive less or turn down their thermostats after Jimmy Carter gives a fireside chat about energy conservation in his little cardigan sweater?  No.  People conserve more when prices go up.   When gas prices go up, prices are telling consumers that gas is now scarcer vis a vis demand, and it may be time to conserve.  The same goes for every other thing we buy.  In fact, the only things we actually run out of  (water in a drought, electricity during summer brownouts, gasoline in the early 1970s) are all commodities where the government interfered with and/or severely restricted the ability of retail prices to move with demand.  In these cases, the government tends to substitute public exhortations for pricing signals  (for example, you can't escape water use guilt ads in California).  But these never work as well.

It is the same with personal savings.  The government in its verbal communications may have been saying to save, but what were its actions saying?  The Federal Reserve followed a long-term policy over the last decade of keeping interst rates artificially low.  Low interest rates send a clear and powerful dual message -- save less (because the returns are low) and borrow more (because borrowing is relatively cheap).  Federal tax breaks from mortgage debt and  Federal programs to provide looser credit with lower down payments to less qualified buyers made debt even more attractive vs. savings.  And numerous federal programs helped encourage home buying, while local government zoning and anti-growth ordinances helped keep home prices going up and up.  Every action the government took said "save less, take on more debt."  Is it any wonder their actual verbal communication was ignored?

Arthur Laffer and the ALEC have a report out with lots of economic, tax, and regulatory data about the individual states.   This chart caught my eye:

They have a hundred pages explaining why these trends might be, but you and I already know, don't we,  just from looking at the names of the states.  It is fairly clear that the current Administration is emulating the policies of the bottom 10 in its recovery plans.  Which brings me back to the question I have asked before:  Where do we all migrate to for freedom when we have screwed up this country?

Cooler heads are looking at the world economic data, and starting to come to the conclusion, voiced by yours truly a number of times, that the US financial crisis was/is a symptom of a world economic slowdown, not the other way around

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.	-0.2%
France	-1.0
Germany	-1.6
Britain	-1.8
Italy	-2.6
Japan	-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American "illness has spread" to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

From an article about the Edsel:

total new car sales in the United States declined 31% from the 1957 to 1958 model years

Gosh, and we managed to get out of that without spending a trillion dollars.  Wow.

Postscript: Sometimes it is hard for fiction to top reality.  In vacation, the movie-makers tried to create the ugliest station wagon they could imagine.

They didn't even come close to topping reality

The narrative is that this recession is driven by a credit crunch.  So why is consumer lending arguably stronger than in any of the past 9 recessions?

Well, while I was gone this week, GM asked the government for another $21.6 billion, on top of the $17.4 billion taxpayers handed them just two months ago.   Reading between the lines of GM statements, it is probably not crazy to assume they are burning cash at the rate of $5-$8 billion a month, which means this new infusion would likely get the company only through May or June.  This burn rate should not be surprising, as GM was burning $2.5 billion a month before the recession even really started, and they have really done nothing substantial to restructure the company.  By throwing the company to Congress to help save its managers and equity holders, the company has subjected its restructuring not to hard-headed bondholder representatives in a bankrupcy, but to the vagaries of the political process:

When the president's auto task force meets today to begin trying to fix the broken U.S. auto companies, it must balance dozens of competing demands.

Yeah, I am sure that will go well.  GM can have its money as long as it puts a factory in West Virginia and names it after Robert Byrd. The bondholders are pissed, as well they should be.  The senior debt holders have first claim in a bankruptcy, so another way to look at this political process is that it is the action of all the other constituents of GM (employees, equity holders, managers) who are trying to get Congress to interrupt the typical subordination of interests in a bankruptcy and allow them to get ahead of the senior debt holders in the line for what limited value remains in GM's shell.

I am tired of Keynsians and their assumptions setting the tone of the economic debate.  Here is the question I would ask them:

I understand that you Keynsians think that there are under-employed assets in the country, and that you think the government can redeploy prvate investment capital to more productive use.

Ignoring the individual liberties issues assosiated with this approach, as well as the fact it has never worked in the past, answer me this:  How are we going to turn around the economy by forcing capital to flow to the assets, industries, and management teams that have proven themselves to be the least productive?

We send money preferentially to the industry (autos) that has been showing some of the worst returns on capital in the entire country, and in particular to the company (GM) that has performed the worst in the industry.  If we really wanted to create auto jobs, wouldn't we send the money to the company that has historically invested money the most productively? It would be as if venture capitalists were about to complete their 27th round of financing to keep Pets.com afloat.  I have been in a company that eventually failed and couldn't get new financing.  At the time we were trying to convince the investors that they should give us just one more round, one more chance to prove the thing out.  In retrospect, I am embarrased they funded us as long as they did.  They should have pulled the plug way earlier.  Investors have a saying "your first loss is your best loss."

And don't even get me started on housing.  A deader, less productive investment asset can't possibly be identified.  A million bucks spent on a house produces 30 jobs for 6 months.  A million bucks spent on a factory expansion produces 30 jobs indefinitely.  For years, Democrats have hammered the Republicans over the jobless recovery of this decade, which in fact has shown a fairly unique jobs profile.  I wonder how much of this could be traced to the myriad incentives that were put in place to pour our available capital into these dead assets?  And now, with the bailout and the new mortgage bailout, the government is investing even more money to prop up the value of these non-productive investments.

One problem with the stimulus bill is that it is so diffuse, so poorly understood, and so impossible to measure, that it will allow its supporters to claim anything about its effects.  If no one knows what is in it, how do you measure effectiveness?  Long recession?  Those dang Republicans slowed the bill and kept the size too low.  End of 2009 recovery?  It's because of the stimulus bill (never mind that the money will not have even really been spent).  So, in the interests of setting a reasonable baseline, here is the pre-stimulus economic projections:

Via Carpe Diem.

In case you are not infuriated enough over this bill, remember that Obama is looking at exactly this data when he makes his proclamations of continued economic doom to scare folks into passing his pork-spending liberal wish list stimulus bill.    Remember when Obama said "My economic advisers have told me this recession will last 4-5 more months, and then we will start to see a recovery?"  Yeah, neither do I.  I remember him projecting another 5 million lost jobs.   Do you think if he said "the economy will start growing again in 5 months" he could have passed a 10-year "stimulus" bill?  Fat chance.  Maybe he is the new FDR, but with a new phrase "The only thing we have to promote is fear itself."

Carpe Diem also has a useful comparison to 1981:

Back then, we responded with tax cuts and a focus by the President on reducing the size of government.  Twenty-five years of prosperity followed.  Today we are responding with a trillion dollars of money for government bureaucrats, increases in welfare, and pork for favored corporations.  I am not hugely confident.

I think most readers of this site will understand the meme that somehow the recent Wall Street meltdown represented "unfettered capitalism under George Bush" is absurd.  The US financial industry is the most highly regulated sector of the economy, and George Bush was in no way a free market capitalist.  Bill Clinton, for example, had a better laissez faire record than Bush, in my scoring.

But those pushing for a Euro-Japanese style corporate state (e.g. Barack Obama) might beware.  It probably comes as no surprise the US economy has outperformed the EU and Japan over the last decade, but would you believe we have also out-performed them over the last year?  The chart below is from Paul Kedrosky, and shows GDP indexed to 4Q07  (the graph is not the way I would have drawn it -- the third small hash mark is actually the fourth, not the third, quarter).

As I wrote the other day:

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.

The mechanism for this recession seems pretty clear:  A bursting asset bubble has left both lenders and consumers over-leveraged, so everyone is trying to reduce their debt.  This means less consumer spending for a while, as well as tighter lending.

Running a small business over the last few months, I have found that the credit we need to expand is not unavailable, but is harder to get.  Banks and individual investors are asking for tougher terms, more collateral, and are being pickier about what they will fund.  All totally normal and unsurprising (though stressful if you are in the middle of it).

The one thing small borrowers like myself have in our favor:  Eventually, lenders have to lend and investors have to invest.  They simply cannot just put all their money in the vault or the mattress.  The money they hold, in deposits and CD's and whatever else, has a cost, as do their operations staff.  These costs have to be covered.  The only way they have of doing so (short of switching businesses) is to put their free cash to work.  They have to lend it and invest it.  It's  a useful thing to remember in this world dominated by the cult of victimization and helplessness  -- that even as a borrower, you have power.  Banks need you as much as you need them.

So, what does the government do now?  Well, very soon, the Obama administration is going to be marketing to banks and investors an additional trillion dollars of government bonds backed by the full faith and credit of the US taxpayer as an alternative investment to funding my business.  Uh, yeah, that's sure going to help.  On Thursday, I had some power with investors.  Given time, they were going to have to consider my business as a place to put their money to work.  Now, however, everyone can run out and park their money in a trillion dollars of new government securities that have features attached I can never match (e.g. the ability to print money or grab it at gunpoint to repay the loans).

But don't worry about me, I will figure it all out.  I just will not grow the business or hire as many people as I thought I could given new investment capital.  But everything will be fine for the country as a whole as long as you believe that Nancy Pelosi and Barack Obama, with their vast business experience, will invest this trillion dollars more productively than I, and other like me, would have.