Posts Tagged ‘financial times’

‘The market is rational and the government is dumb’

3 August 2011

The above quote is a favorite of former House Speaker Dick Armey (R-TX). He even used to write it on the blackboard on the first day of class when he was an economics professor. Armey has been out of government for years, but as a founding member of a Tea Party group, he’s been a big influence on that wing of the Republican Party. Not surprisingly, he seems pleased with the pounds of flesh they’ve extracted in the new Budget Control Act of 2011.

Armey and I have different ideas of “dumb.” He favors slashing government spending during our Little Depression and also favors a balanced budget amendment that would supposedly compel further slashing. I think those things are time-tested recipes (the times being 1932 and 1937) for worsening a depression. What do the markets think?

The stock market is on track for its eighth straight day of decline (as of 11:55 a.m., the S&P 500 is down 0.5%, and its biggest drop, 2.6%, was yesterday, when the Budget Control Act finally passed). 10-year Treasury bond prices have been rising, and T-bond interest rates falling, over the same span, now down to 2.57%. How to interpret those numbers?

Hard to do, because nobody (as far as I know) takes scientific polls of market participants to ask them why they did what they did. Armey would probably say, as some commentators have, that stocks have tanked because the $2.1 – 2.5 trillion in cuts over a decade aren’t enough. I would say, as have others, that the market is reacting to the dismal state of the economy and to the likelihood that, as basic macroeconomic theory tells us, the spending cuts will make it even more dismal.

What about bonds? The rosy view would be that T-bond prices have improved because the debt-ceiling vote means no default through 2012 and the spending cuts reduce the overall burden of debt. Armey and I might actually agree that the unrosy view is correct: T-bonds are in higher demand because of a worldwide “flight to safety,” as grim economic news causes people to move away from risky, cyclical assets like stocks and toward safe assets like T-bonds. Again, is the grimmer news the “failure” to slash spending more or the weakening economy?

I’m thinking Armey’s quote fits right now, except it’s the budget bloodletters who are dumb and the markets are rationally reacting by anticipating that they will cause further hemorrhaging of the economy.

P.S. At least one market participant agrees. From the Aug. 2 Financial Times:

‘Jim Reid, strategist at Deutsche Bank, . . . has warned the US could be approaching a “1937 moment” – when authorities removed post-Depression stimuli from still-fragile markets and triggered another recession. This risk, he says, has in fact only been magnified in the markets’ eyes by agreement on raising the US debt ceiling.’

(Hat tip: Brad DeLong)

Dispatches from a runaway American dream

3 August 2010

Edward Luce’s recent Financial Times feature, “The crisis of middle-class America,” is a must-read.  It seems to be excerpted (lots of “. . .”), but it still contains a ton of detail about two seemingly comfortable middle-class families who’ve seen their living standards fall gradually and then, after the 2008 crisis, abruptly.  The piece is mostly a human-interest article, light on statistics and technical explanations, but there is this illuminating quote from Harvard economist Larry Katz:

‘“Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”’

Here’s hoping this article is part of a much longer series.  Although the early verdict on the 2000s seems about right — two recessions with a bubble-driven recovery in between — people still tend to view the 1980s and 1990s as Prosperity Decades.  Based on aggregates like rising real GDP and falling unemployment rates, they were, especially the ’90s.   And as the long economic expansion of the Clinton years took hold, the warnings of some economists of a “silent depression” of eroding real wages and disappearing middle-class jobs (especially for non-college-educated workers) became increasingly ignored.  Ditto for the wave of warnings about “downsizing” in the mid-’90s, as eloquently reported by The New York Times (and followed up a decade later in a book by William Baumol, Alan Blinder & Edward Wolff that seems to have gotten far too little attention).

Macroeconomics is the study of economic aggregates, so macroeconomists and the macro debate tend to focus on aggregate statistics, even though the bottom line would seem to be how individual people (be they rich, poor, middle class, black, white, old, young, etc.) are doing.  The debate over the economy’s performance during the 1980s, which inevitably took a partisan cast as a debate over Reaganomics, generally came down to aggregates.  On the pro side, an eight-year economic expansion, falling unemployment, low inflation, a booming stock market, and faster productivity growth than in the 1970s.  On the con side, unemployment and poverty rates that skyrocketed in the early ’80s recession and stayed high for much of the decade, rising inequality, and stagnant median real incomes.   Either way, people looked to aggregates, which left a lot out.  For example, were median incomes stagnant because the incomes of most people were stagnant or because there was a relative increase in the number of poor households even as other people’s incomes rose?  And how much of the decade’s prosperity trickled down to families who were at the bottom and middle rungs on the economic ladder when the decade began?  Based on the standard aggregated data, including the Census data on income percentiles, we don’t know, because we’re not comparing the same people over time.  Reagan defenders and others inclined to ignore the issue of inequality make that excuse again and again:  “It’s not the same people!”  Which is true but raises the question, So why don’t we just study the same people over time?

An ideal study would combine scores of case studies like the ones in the FT article with analysis of longitudinal data on particular families surveyed over time. There are longitudinal data sources out there (e.g., the National Longitudinal Study, the Panel Survey of Income Dynamics), but I confess I haven’t seen whatever macro studies have been done with them.  Seems to me way too much of what we “know” about the macroeconomy is based on aggregates like per-capita GDP and way too little on studies of actual households.  But the only to measure the American dream, I think, is one household (or one person) at a time.

Now here’s something you’ll really like . . . a July 1974 live version of the rock classic that inspired the title of this post:

Still too big to fail

11 June 2009

. . . and too big to regulate.  JP Morgan Chase, Goldman Sachs, Morgan Stanley, and seven other megabanks got permission from the Obama Administration to repay their combined $68 billion in TARP debt to the government.  The government made a profit on the loans, and the banks are now out from the under the thumb of the TARP restrictions on executive pay and hiring.  Win-win, right?

Well, no, not for the taxpayers who are still implicitly on the hook for these ten behemoths should anything go wrong.  They are no more regulated than they were before the crisis, and there is no FDIC-like resolution system in place that would allow for the orderly failure of these financial supermarkets should they become insolvent (again?).   It would be rational for their managers to conclude that the institutions are still “too big to fail” and to return to reckless decision-making a la “heads I win, tails the taxpayers lose.”  Today’s Financial Times has an excellent editorial on the matter.   Wish I’d written it myself; the next best thing is to cut and paste most of it here:


Motor city is shrinking

4 June 2009

Neil Young saw it all coming in 1981, on his re*ac*tor album:

Everyone has an opinion on GM’s Chapter 11 bankruptcy filing this week, as well as the Obama Administration’s bailout/buyout of the carmaker.   Robert Reich gets it right, I think, in a Financial Times column, “General Motors holds a mirror up to America.” Reich asks what the goal of the bailout is, and rejects a few possible answers before concluding that it’s basically a cushion, designed to give GM’s workers and community some time to adjust to still-harder economic and psychological blows ahead.  People are queasy about the idea of bailouts, but they sense that they could be next and so do not protest too much.


Rearranging the icebergs on the Titanic

3 April 2009

OK, the Geithner 2.0 plan officially looks wretched.  When I’m agreeing with the top Republican on the House Financial Services Committee, you know there’s a problem.  And the problem is not merely that the plan is a lousy deal for the taxpayers because it throws lavish subsidies at institutional buyers of toxic assets and grossly overpays the banks who would sell those assets; that’s all been said before.  The new problem is that it wouldn’t even remove toxic assets from the banking system! As the Financial Times reports:

‘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.’

Can you say “playing with the house money”?  Unfortunately, that would be your house and my house.

It’s not completely clear that Geithner’s Treasury will allow this to go forward, as a Treasury official says that a bank’s supervisors will weigh in on whether the bank is healthy enough to buy assets.  But Geithner and Obama have implied that all of our big banks are fundamentally sound (shades of Herbert Hoover, John McCain, and Lake Wobegon), so I suspect that the ink is already wet on those supervisors’ rubber stamps.

Seems like we’ve made literally zero progress since Halloween 2008:  captured regulators attempt to prop up insolvent banks with hundreds of billions of dollar bills and won’t even consider that some of them might need to be closed.  Cue Mark Fiore’s “Zombie Bank” cartoon.