Roubini says double-dip too!

On the other hand, Paul Krugman isn't talking about double-dips, but a decade long depression.

I've got an expanded blog article titled "Recession Watch: one dip, two dips, ... we all fall down", which includes current macroeconomic data on America's descent into recession and opinions on what this all means by Krugman, Roubini, Joe Stiglitz, and Ken Rogoff.

None of this should be a surprise to those paying attention, but I suspect most people -as usual- aren't.

Recession Watch: one dip, two dips,... we all fall down

The trend lines are undeniable; the US economy is heading into another recession.  Debate between economic analysts entail whether what is occurring is an entirely new recession, a double-dip recession, or the continuation of even larger economic contraction that began initially with the 2008 financial crisis (which some would argue is an extension of the 2001 recession) and has properties that are unlike previous recessions.  Each of these arguments have some validity in explaining the current situation, but all conclude that this new decline, while not likely to be as severe as the 2008 crisis, will last longer in duration and given the current political weaknesses of the major industrial nations, be more difficult to mitigate.

Leaving aside the debt crisis and economic malaise that is occurring in Europe for the moment or the possible hard landing that has been predicted about China and the entailing risks these situations pose to the global economy, America's economic position is clearly weak.

First, the jobs position is dismal.  Last month, zero jobs were added and only a fraction of the jobs necessary to compensate for population growth alone have been achieved in the previous four months.  The NY Times summarizes:

Over the last 50 years, every time that job growth has been as meager as it has been over the last four months, the economy has been headed toward recession, in a recession or in the immediate aftermath of one.

The collapse of job creation is not about businesses fearing regulatory uncertainty, creeping hyper-inflation, or the need for further tax-cuts to stimulate big businesses already bloated corporate coffers, but rather it is due to insufficient aggregate demand.  People without jobs, people forced to take inferior paying jobs, people concerned that they may lose their jobs, people forced to subsidize their spouse, adult children, parents, and/or relatives, and people loaded with debt, aren't engaged in making major purchases, because they can't afford to.  Consider the following:

But the latest indicators suggest that even if the economy does not continue to worsen, it appears to be too weak to add enough jobs each month — roughly 125,000 — even to keep pace with population growth. Anything less, and the share of the population that is employed will continue to fall.

The stimulus program offered by Mr. Obama was insufficient to meet the full demands of the  financial crash of 2008.  This blog has been saying for the past three years (here, here, and here) that the weak recovery was an illusion.  Joseph Stiglitz said back in 2009 that, "We need a larger and better designed stimulus."  Paul Krugman has been waging a public policy crusade to convince the public that a second more robust stimulus is needed.  President Obama, instead of listening to these and similar minded economists, decided to split the difference and offer everyone a little of what they wanted: a little bit of tax cuts and some stimulus over a couple years.  The problem was that while averting a more severe recession, it failed to create enough power to re-inflate the economy to pre-recessionary levels.  Now that the stimulus dollars have been used, the economy is drifting back into negative territory and with a recalcitrant Republican dominated House of Representatives, there is virtually no chance that anything of substance being passed.

Other indicators such as GDP, consumer confidence, consumer consumption, factory employment diffusion index, and housing are all trending downwards.  Volatility in the market place, with abundant talk of debt crises across the western hemisphere, has investors and business worried.  Last month Asian banks cut credit lines to French banks.  Central banks across Europe, Japan, and America have made the unexpected move to offer dollars to European banks to ensure liquidity.

What had been in 2008 a financial crisis has migrated into a sovereign debt crisis.  Nouriel Roubini expands:

We are running out of policy bullets. The policymakers don't have monetary bullets; they don't have fiscal bullets; they cannot even backstop their own financial system. That's why it's more scary than a year ago, two years ago, or three years ago -- when we had all these policy bullets. Now we are running out of them.

***

Ken Rogoff, Harvard professor and former chief economist at the IMF, has said, "the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."  As a result, Rogoff points out that many policy makers have badly misunderstood the overall problems associated with this second great contraction, as he puts it.  He offers the suggestion that, "If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions."

Solutions to both individual and national debt problems should be addressed as follows:

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

Another approach offered by Rogoff to reduce the painful deleveraging process and years of unnecessary slow growth, would be for central banks to pursue a policy of moderate inflation of 4-6% for several years.

At this stage, none of the policies suggested by Stiglitz, Krugman, Roubini, or Rogoff appear on the table in either Washington DC or the capitals of Europe.  Instead of sustained and ambitious solutions, we are left with blathering idiots telling us of austerity programs that will magically generate confidence, while keeping away the terrible bond vigilantes.  The incompetence and stupidity of our leaders is nearly blinding.

Quote of the Day: Roubini on Financial Regulations

Unless we make these radical [financial system] reforms, new Gordon Gekkos – and Charles Ponzis – will emerge. For each chastised and born-again Gekko – as the Gekko in the new Wall Street [movie by Oliver Stone] is – hundreds of meaner and greedier ones will be born.

- Nouriel Roubini, Gordon Gekko is Reborn, Project Syndicate

What Roubini is expounding, is that all the ethics and certification programs that have been touted for MBA students, will amount to nothing, unless the prime motivators for excessive risk and greed generation are curtailed.  He suggests four areas that must be effectively dealt with:

1. Compensation schemes for individuals must be realigned so that, "bonuses based on medium-term results of risky trades and investments must supplant bonuses based on short-term outcomes."
2. Reconstituting Glass-Steagall like regulations -which the watered down Volcker rule did not achieve in the recent financial system reform legislation- to separate the commercial banks, investment banks, and the institutions engaged in hedge fund-like casino capitalism.
3. The enormous conflict of interest that currently exists between financial firms and markets, needs to be resolved, permitting greater transparency to reign and allowing confidence in the overall market to be established.
4. Allowing all businesses, including their employees and shareholders, to understand that the government -that being the people's money- will not go towards bailing out their poor decisions; i.e. there should not exist too big too fail.

Since, the US government has not engaged in any meaningful regulatory scheme to ensure that the above occurs, and has in fact gone in the opposite direction in relation to some of these points, we can only assume that the concept of regulatory capture can now be extended to the US Congress as a whole and the office of the President of the United States.  The financial industry alone has spent $251 million this past year to manipulate the legislative process in their favor.  Collectively, they spent more than any other industry group between the months of April and June ($126 million).  Goldman Sachs and  JP Morgan Chase alone, spent in the first half of 2010 as much as they spent all last year (2009) chasing down congressmen, senators, and those involved in regulatory decision making.

The game is rigged folks.  If you think any of these rich, pretentious assholes in the corner office of these banks or in the House of Representatives care about the little people on the street or democracy, you probably still think voting for Democrats or Republicans will make a difference.  It won't.

Leading Economists Question US Growth

Despite the seemingly robust growth of 5.7% seen in the last quarter of 2009, a number of noted economists, who originally anticipated the great recession, have stated their concerns and pessimism for the future of the American economy.

In Bloomberg's news-wire, New York University professor Nouriel Roubini calls the released Q4 numbers “very dismal and poor.”  He explains that more than half of the 5.7% expansion "was related to a replenishing of inventories and that consumption depended on monetary and fiscal stimulus."  In his opinion, future growth for the US economy remains tenuous and he believes that although the economy will not trend back into a recession, for many Americans -especially those who remain or become unemployed- it certainly will feel as if the recession persists.  His title as Dr. Doom remains intact.

Princeton university professor Paul Krugman has been warning Americans since the first signs of the recession that a strong stimulus program, paralleled with a comprehensive regulatory reformulation between government and America's financial institutions, was necessary in order to have the country successfully rebound from the recession.  His January 28th NY Times column outlines this theme:

We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

He rebukes Mr. Obama and his economic team for their unwillingness to do more and warns "against the perils of complacency and false optimism."

As you read the economic news, it will be important to remember, first of all, that blips -- occasional good numbers, signifying nothing -- are common even when the economy is, in fact, mired in a prolonged slump ... the odds are that any good economic news you hear in the near future will be a blip, not an indication that we're on our way to sustained recovery.

In addition, he sternly chastises the Obama administration for engaging in budgetary gimmickry and sleight of hand policies, such as reining in non-military discretionary fiscal expenditures, while calling for increases to defense, nuclear, and homeland security budgets.  A subject Glenn Greenwald described as the Sanctity of Military Spending.

Joseph Stiglitz, another Nobel Prize winner in economics and professor at Columbia university, is equally unimpressed by the current state of affairs and has been condemning both governments and business alike in their meekness to effectively manage and resolve the underlying problems.  He too calls for a second government backed stimulus in the USA, to reduce chronic unemployment, which when including the under-employed and discouraged workers represents a rate of approximately 19%.  He states that, "I don't think anyone would describe the current situation as a strong recovery."  Furthermore, Stiglitz questions the underlying premise of using GDP as an adequate economic metric:

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth - all of which might lower GDP growth.

Robert Shiller, professor at Yale University, has written an article in the NY Times that discusses the underlying psychological elements affecting both consumers and investors.  He reminds people that,

business recessions are caused by a curious mix of rational and irrational behavior. Negative feedback cycles, in which pessimism inhibits economic activity, are hard to stop and can stretch the financial system past its breaking point.

The article notes that a majority of Americans do not believe that any recovery will occur for at least another two years.  Unless the population becomes convinced that serious attempts have been made to re-align risks, stabilize the economy, and pursue a long-term plan for future growth and prosperity, there will be  little realized improvements. 

The past ten years have been a disaster for the American middle class and average person.  The time for tepid half-measures and voodoo-economics has long expired.  Mr. Obama was elected to take on the institutional forces that have corrupted government and driven the entire economy to near collapse.  As all four of these economic professors indicate, serious and sustained actions are required to convince everyone that America has a plan for success that will work in everyone's interest.

Roubini: into the buzzsaw

Our dried voices, when

We whisper together

Are quiet and meaningless

As wind in dry grass...

(T.S. Elliot, The Hollow Men)

I have long chided those who persistently have advocated that contrarian 'realists', to which I include Nouriel Roubini, were somehow less sophisticated and learned than the Svengali's of high commerce that opportunistically advertised and sold the benefits of casino-capitalism. Whether those persons were the Chairman of the Federal Reserve, the droves of market speculators, or propagandists in the business news departments, their understanding of the "free-market" and predictions have been proven to be at best abysmal and at worst criminal. It needs to be said and repeated frequently, that the world we were promised was the exact opposite to what we in fact received. Individual retirement accounts vaporized, long-term investments liquidated, businesses laid to waste, economies decimated, and in a few cases like Iceland, whole nation states brought to financial ruin.

So when Roubini, who constantly has been calling a spade a spade talks, I think everyone should listen. In yesterday's Globe and Mail (Canada) he summarized what he thought were the underlying weaknesses in the global economy that make the momentary upticks in growth irrelevant given the scope of future problems.

First, he outlines his reason for pessimism:

U.S. data – rising unemployment, falling household consumption, still declining industrial production, and a weak housing market – suggest America's recession is not yet over. A similar analysis of many other advanced economies suggests that, as in the United States, the bottom is quite close but has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

He then outlines four topics that will constrain future growth:

1. Individuals forced to save and re-capitalize themselves.

2. A financial system that remains both broken and inherently unstable

3. Business still face overcapacity, weak profits, and deflationary pressures

4. The re-leveraging of the public sector through large fiscal deficits and debt accumulation risks

He concludes that a double-dip recession is highly possible, given the existing uncertainties. Merely because one's position is unpopular does not make it any less factual or prescient. In that vein, I would also add that given the current retreat from globalization and the looming Malthusian resource threats (eg. water, commodity prices, & ecosystem instability) we should prepare ourselves for long-term stagnation and dismiss the boom-years as an artifact of irrational exuberance.

Economics and The Great Recession

Economists across the world have been grinning from ear-to-ear saying the recession is nearly over, “we’ve past the worst,” and there are clear indicators of improvement. Arguments have been bandied about that tell the greedy and the absent minded that “green-shoots” are rising, the rate of job losses has declined, there are fewer surplus’ to be seen in manufacturing circles, and consumer sentiment has improved. While these arguments all have an element of truth, taken in context with actual events that have unfolded not merely in the past eighteen months but in the past two decades of globalization, a substantially different set of conclusions can be reached.

I’ve never trusted economists and their dismal science as a whole. One of the fundamental aspects of ‘real’ science, and not the statistical bloviations of financiers, is the concrete capacity to first, adequately explain a physical phenomenon and second, to accurately predict physical events before they occur based on the prior’s explanation. Let’s first review how they did leading up to this current recession:

1. Alan Greenspan former chairman of the US Federal Reserve (1987-2006) and an adherent of Ayn Rand, in March 2007 said he saw only a one third chance that a recession could occur that same year. The US recession officially began December 2007.

2. Greenspan’s successor, Ben Bernanke, stated in July 2007, only months before the beginning of the largest economic downturn since the Great Depression of 1929, he believed that despite a host of potential economic perils the US economy would pull through 2007 and into 2008 in relatively good shape. It did not.

3. Mark Perry, professor of economics at University of Michigan-Flint, stated in his popular economics weblog Carpe Diem in October 2007, “Economic variables identified by the NBER as the most important recessionary indicators… provide no support for the notion that the U.S. economy is headed for recession.” In fact he believed, “Most current economic indicators suggest a healthy economy, expanding at the average rate of an expansionary economy.” A year later stock markets across the planet crashed.

4. Martin Feldstein, a professor of economics at Harvard and the president of the National Bureau of Economic Research (NBER), stated in November 2007 in the NY Times that, “My judgment is that when we look back at December with the data released in 2008 we will conclude that the economy is not in recession now.”

5. April 2008, Alan Greenspan was given the opportunity to re-evaluate his previous stances and provided the eager public with another kernel of his vast sagacity in the belief that a decline in “U.S. home prices will probably end well before early [2009] as the number of houses on the market diminishes, aiding an economic rebound.” As of today, “US home prices fell 6.8 percent in April from a year earlier as rising unemployment and record foreclosures kept buyers out of the market.”

6. Greg Mankiw, a Harvard University economist and another Bush-bot adviser, recently stated in the NY Times, “It is fair to say that this crisis caught most economists flat-footed. In the eyes of some people, this forecasting failure is an indictment of the profession. But that is the wrong interpretation.” I’m sorry but this isn’t the Gong Show; you’re wrong again.

The above aren’t drama queen’s like Jim Cramer or for that matter anyone affiliated with CNBC. Rather, they supposedly are the best America has to offer in understanding economics and as such, were given pedestals in government and chairs in academia to pursue policies in the public interest. As the above summation reveals, none of them came close to accurately analyzing the existing trends or predicting the evolution of the current recession. If any person in ‘real’ science were to give such glaringly inaccurate and poor predictive analysis they would be fired and dismissed as dunces and crackpots.

In the past few months, the schemers, speculators, and accumulated greedheads, have been positing the argument that we are at the end of this so-called recession. Again, I think we need to re-evaluate the terms we are using. Richard Posner, a conservative jurist and author of a recently published book “A failure of capitalism,” has called this current situation a ‘depression’ due to,

The intensity of the anxiety that it has aroused, the enormous costs that the government has incurred to try to stop the downward spiral of the economy, the possibility that those costs will bite us as the economy begins to recover and by doing so will knock the recovery off its path, and the further possibility that the recovery will be extremely protracted because of long-term changes in consumer preference.

Let’s look at the outcome of the past six months for America:
1. The June 2009 US employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000
2. Unemployment has risen from 7.2% to 9.5%
3. Underemployment rate has risen from 14.8% to 16.8%
4. Aggregate number of hours worked per week has dropped precipitously
5. There has been more than 6 Million jobs lost since the start of the crisis
6. The DJIA remains 42% below its 2007 peak of 14,200
7. Personal savings of those with jobs has risen to 6.9%

The UK, the Eurozone, Japan, and all emerging markets are in worst shape than the USA. The UK output is expected to decline by 4.3% in 2009. The ECB announced in June that it expected Eurozone GDP to decline by as much as 5.1 percent this year. Eastern Europe is still a brewing concern with its capacity to further undermine major Western European economies and financial sectors. Japan faces historic levels of unemployment and continuous month-to-month declines in exports. The numbers offered by the Chinese simply don’t add up and their vaunted domestic middle-class population is not in any position to become uber-consumers. Unlike previous recessions and regionalized meltdowns, the rancid fruit borne by the collusion of national governments and international finance industries now encumbers the entire globe and all industries.

Despite these obvious facts, the OECD has declared “green sprouts” are rearing, the worst is behind us all, and in 2010 the 30-country organization will see 0.7% growth. The IMF, as of yesterday, boosted its 2010 global growth forecast to 2.5 per cent. Ben Bernanke back in February assured congress that, “there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.” Given the track record of these “experts,” does anyone really believe them?

Nouriel Roubini, one of the few economists who got it right, has stated that the U.S. recession will last at least two years and could drag on as long as the one that plagued Japan in the 1990s. Joseph Stigiltz who has done an excellent job of analyzing the roots of this current calamity states the little spoken but obvious fact:

So the real risk, I think, is that things will be even worse [than] before the crisis. The reason I say that is the way that we have gone about rescuing the banks and restructuring our financial sector has resulted in the too-big-to-fail banks becoming even bigger.

The best argument I have discerned is that there will not be a sustained recovery or minmally a return to the previous norm! One has to consider the fact that we have seen a fundamental and systemic failure of capitalism across the globe and neither the American nor any other nation’s economy will simply revert to “business-as-usual.” For the past decade, the American consumer, who represents 70% of the US economy, was sopping up an inordinate level of consumables from China, Japan, and the rest of the world. They built it and the Yanks bought it. Now that has stopped.

Americans are losing their jobs at record levels, they are seeing whole domestic industries disintegrate with no chance of those jobs returning, health care costs are increasing, and the value of their homes are collapsing. US Housing prices as of April 2009, have witnessed an 18% year-over-year drop and a reduction of 32.6% from their peak three years ago (S&P/Case-Shiller index). Currently, ten percent of homeowners have mortgages that are valued more than their homes are actually worth. Foreclosures increased 18% in May 2009 and thus remain unabated. The US banking industry, on the other hand, has an additional $1.8-trillion exposure to commercial real estate and faces potential losses of approximately $200-billion. The implication is that commercial real estate, "Is headed for a crash that could eclipse even the devastating slump of the early 1990s." The American consumer has wisely started to save again; however, this new propensity towards frugality during a severe recession reduces the likelihood that a recovery will occur anytime soon or can be maintained.

Robert Reich states, “This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.” Therefore, the growth and consumption that occurred during the roaring nineties and the dismal decade of the zeroes will not be repeated. A new equilibrium will have to be established with diminished expectations, reduced (if any) growth rates, and an end to the culture of excess that has permeated government, business, and individual want.

As John Connor says in Terminator Salvation, "If we stay the course, we are dead! We are all dead!"