Editore"s Note
Tilting at Windmills

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February 27, 2008
By: Kevin Drum

ECONOMIC UPDATE....Yesterday: Google shares plummet. Today: Fed Chief signals yet more interest rates soon to come. Coincidence? I think not. Apparently Google even controls the Fed now.

So what happened? AP put it this way on Tuesday: "Consumer confidence plunged, the wholesale inflation rate soared, the number of homes being foreclosed jumped, home prices fell sharply and a report predicts big increases in health care costs." Bernanke puts it this way:

"The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee.

....There are dangers that the economy will weaken even further. "The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further," Bernanke cautioned.

Fasten your seat belts.

Kevin Drum 12:22 PM Permalink | Trackbacks | Comments (41)

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Comments

If the wholesale inflation rate soared, should he really be signaling more rate cuts?

Posted by: SP on February 27, 2008 at 12:25 PM | PERMALINK

Jenga!

"Simplifying highly complex circumstances, the various risk models that empowered the greatest leveraging of risk in the history of finance no longer function as expected - or as required to maintain highly leveraged exposures to a multitude of escalating risks. And it was all just only a matter of time. The overriding flaw was to ignore that a runaway bubble in market-based finance ensured that various market and credit risks all coalesced into one massive,unmanageable, highly correlated, unhedgable, undiversifiable association of interrelated systemic risks." CREDIT BUBBLE BULLETIN The breakdown of Wall Street alchemy by Doug Noland http://www.atimes.com/atimes/ Global_Economy/JB20Dj03.html
Posted by: MsNThrope on February 27, 2008 at 12:27 PM | PERMALINK

"Yet more interest rates soon to come"? I don't think I'll ever understand this stuff.

Posted by: paul on February 27, 2008 at 12:28 PM | PERMALINK

Kevin - I think you mean 'more interest rate cuts' not 'more interest rates'.

Posted by: Matilde on February 27, 2008 at 12:28 PM | PERMALINK

Hey, we can just keep borrowing trillions from China! There is no possible downside!

Posted by: Gore/Edwards 08 on February 27, 2008 at 12:28 PM | PERMALINK

I think "increases in health care costs" should have read "decreases in insurance companies' investment portfolios' value". But either way it's put, rates go up.

Posted by: jon on February 27, 2008 at 12:37 PM | PERMALINK

Like I said a while back - Kevin you need to go out and stock up on nibblies while you still have cash. You can't buy nibblies using food stamps.

For the life of me I can't understand why the feds are only realizing just now that food and gas prices have gone up! My trips to the grocery started becoming more expensive about 6 months ago.

Posted by: optical weenie on February 27, 2008 at 12:45 PM | PERMALINK

I was hoping Kevin meant "interest[ing] pi[rates]". You know, to help stop global warming.

Posted by: jerry on February 27, 2008 at 12:49 PM | PERMALINK

Maybe Google stock is just overvalued.

Posted by: AJ on February 27, 2008 at 12:53 PM | PERMALINK

No amount of antidepressants, or interest rate cuts, is going to resolve the coming debilitating misery of the economy.

Posted by: Brojo on February 27, 2008 at 12:56 PM | PERMALINK

The market, and the economy, are just reacting in advance to the McCain Presidency.

Posted by: gregor on February 27, 2008 at 12:56 PM | PERMALINK

ECONOMIC UPDATE....Yesterday: Google shares plummet. Today: Fed Chief signals yet more interest rates soon to come. Coincidence? I think not. Apparently Google even controls the Fed now.

Besides having a great search engine, just what does Google do? Sell advertisement by positioning listings? Maybe. But I've never been compelled to purchase something I wasn't already looking for just because I found a convenient link.

Internet advertising, like direct mail, is an act of faith.

Posted by: Jeff II on February 27, 2008 at 1:03 PM | PERMALINK

But I just saw on FOX that this is the strongest economy since the roaring twenties. What gives?

Posted by: Orson on February 27, 2008 at 1:08 PM | PERMALINK

Given the current state of the economy, I don't think that a further lowering of interest rates will put us at risk of greater inflation. In fact, I don't see a clear cause and effect relationship between interest rates and inflation.

Nonetheless, I don't believe that another rate cut will by itself provide the lift that this economy sorely needs. The primary issue is that the recent rate cuts have not been passed on to consumers in the form of lower mortgage or consumer credit rates. In the economy we have today, with investment by businesses and governments basically nil, only consumers can save the day. Without freeing up some of the money consumers have been paying as finance charges, and with the price of necessities clearly rising, we certainly can't expect consumers to pull us out of this spin.

One other point I would like to bring up: We're going to start to here a lot about unemployment. In most localities, the unemployment rate still appears to be low, and if not low, certainly not on the high end. And some will argue that in the absence of high unemployment, we certainly shouldn't be cutting interest rates. The theory is that moderately high unemployment will put downward pressure on wages, forestalling inflation. This would be true, if all workers had the skill set required for all jobs. The real world doesn't work that way. High unemployment will drive down wages for unskilled work, and for those professions where there is an overabundance of available skilled workers.

The other problem with the current unemployment picture is that the figures are wrong. Increased outsourcing and subcontracting over the past 15 to 20 years have dramatically changed the definition of what it is to be "unemployed". Millions of workers formerly classified as full time regular employees are now not employees at all, but private contractors. When their services are no longer needed, they are out of work, but not "unemployed"; they don't show up in the employment statistics, and they aren't eligible for benefits. In effect, the unemployment rate, which for various reasons was never all that accurate, is now next to worthless.

Posted by: Dave Brown on February 27, 2008 at 1:13 PM | PERMALINK

"The economic situation has developed not necessarily to our advantage" -- Emperor Bernanke

Posted by: bcamarda on February 27, 2008 at 1:16 PM | PERMALINK

I visited with a friend of mine yesterday who owns an insurance agency. He tells me that his business selling life, auto, and property insurance is in the tank. People are canceling right and left. I asked if his problem was unique to him or his company. He is a very popular figure in our community, and has been in the business for years. He told me that as near as he could tell his company was competitive on rates, and everybody told him that he and his staff were first rate.

Most telling he told me that folks leaving him are not buying new policies. When asked the folks canceling were telling him that they just can't afford insurance at any price.

This guy is a Republican. He kept talking about nobody having any money to buy insurance. He wanted to know where all the money went. I reminded him of all the plant closings and asked if he still thought shipping jobs to China was such a good idea. In the past that kind of a comment would have evoked the standard chamber of commerce response that shipping jobs to China is a great idea because it reduces costs for all of us. Yesterday he agreed with me.

Maybe his complaints were unique to his little business and our part of the metro, but I can't shake the image of a canary in a coal mine.

Posted by: corpus juris on February 27, 2008 at 1:24 PM | PERMALINK

But, but, but just yesterday our prez said that there isn't a recession, and he doesn't think there will be one, neither.
Maybe that's why stocks tanked - all the world knows that whatever W says, the opposite is true.

Posted by: gifgrrl on February 27, 2008 at 1:33 PM | PERMALINK

Well if some of these companies that have made billions of dollars in profit would spend just a little of it wala no problem.Can someone explain how this money giveaway can work.

Posted by: john john on February 27, 2008 at 1:37 PM | PERMALINK

I wasn't around during the 70s, but I seem to remember learning that

Recession+High Inflation=Stagflation

Somebody please convince me other wise.

Could somebody with more economic training explain also what effect our devaluing currency/trade deficit might have?

Posted by: Dan Trubman on February 27, 2008 at 1:52 PM | PERMALINK

Things must be really bad if the feds are admitting any bad news.

Posted by: taxpayer on February 27, 2008 at 1:53 PM | PERMALINK

Instead of giving tax incentives to invest in plant and equipment in China, maybe we should be providing businesses incentives to invest in America? How about rebuilding our electric power grid? What about improving our bridges and streets? What about research and development in ... I don't know...domestic energy production? Maybe we should be looking a little things that put people to work and make our economy hum. You know like our tax incentives are making China and India hum. What do you think?

Posted by: corpus juris on February 27, 2008 at 1:57 PM | PERMALINK

corpus juris: I reminded him of all the plant closings and asked if he still thought shipping jobs to China was such a good idea. In the past that kind of a comment would have evoked the standard chamber of commerce response that shipping jobs to China is a great idea because it reduces costs for all of us. Yesterday he agreed with me.

No vindictiveness on my part (or not much anyway), but it's nice to know that people who are only indirectly affected by job exports are starting to feel the pain. It's amazing how fast that can convert someone from a slogan spouter to a pragmatist.

As to my favorite soapbox: how many people realize that the housing bubble, which is bursting like all bubbles, is largely a product of the trade deficit?

Posted by: alex on February 27, 2008 at 2:00 PM | PERMALINK

Big Ben continues to enslave himself to titty babies of the Street rather than being serious when he says the Fed is worried about inflation. What a fucking hack.

Posted by: SocraticGadfly on February 27, 2008 at 2:02 PM | PERMALINK

As to my favorite soapbox: how many people realize that the housing bubble, which is bursting like all bubbles, is largely a product of the trade deficit? Posted by: alex

I'm sure very few of us because they aren't related.

Posted by: on February 27, 2008 at 2:16 PM | PERMALINK

person who (understandably) won't give their name: I'm sure very few of us because they aren't related.

In other news, the current account deficit is unrelated to the capital account surplus, and asset bubbles are never related to capital surpluses.

Posted by: alex on February 27, 2008 at 2:35 PM | PERMALINK

I reminded him of all the plant closings and asked if he still thought shipping jobs to China was such a good idea. In the past that kind of a comment would have evoked the standard chamber of commerce response that shipping jobs to China is a great idea because it reduces costs for all of us. Yesterday he agreed with me.

Well, one of my professors is a libertarian and was mentioning something similar in class the other day that surprised me. Also, I went to the bank last week to move some money around from a maturing CD and while I was waiting there were two people pulling into the drivethru wanting to know what their balances were-wanting to know if they had got their income tax refunds yet. I asked the teller about that and he said that the two top questions he gets asked all day are:

1) Has my income tax refund come in yet?
2) How can I borrow $5000 ?

Posted by: Doc at the Radar Station on February 27, 2008 at 2:36 PM | PERMALINK

I wasn't around during the 70s,

I was. I remember double-digit inflation, and I also remember what it took to extinguish it. I was just leaving school, trying to start my career, when the early-80's recession hit, touched off by prime rates in the neighborhood of 20%.

In order to stop inflationary expectations, the Fed deliberately engineered a massive economic downturn by sending interest rates into the stratosphere. Eventually, it worked - we've had a long era of low inflation. To get to it we went through a severe contraction. How bad was it? At that point you couldn't get a job at McDonald's.

Trust me, we don't want to go there again.

Posted by: jimBO on February 27, 2008 at 2:40 PM | PERMALINK

From the rather limited number of economic history classes I've taken, I remember the academic research implying that interest rates were probably slightly overly raised, but it does seem like it would be best to prevent this from growing out of hand with a small interest increase, at least not cutting it further It would seem that cutting the rates further would only push our dollar further down, which might help with our trade imbalance, but it certainly would be a painful transition, and hardly seems like a policy that would lead to short term, or even medium term stability.

But I could certainly be totally wrong, in fact, I would rather hope so.

Posted by: Dan Trubman on February 27, 2008 at 3:08 PM | PERMALINK

From TheStreet.com:

"The grim picture for banks was reiterated by FDIC's report Tuesday. It noted that non-current loans exceeded reserves for first time since 1993. Loans that are 90 days past due, jumped 32.5% to $26.9 billion, the single-largest increase in a quarter in 24 years."

http://www.thestreet.com/s/fdic-girds-for-bank-failures/newsanalysis/banking/10405078.html?puc=googlefi

Posted by: MarkH on February 27, 2008 at 3:13 PM | PERMALINK

"Fasten your seat belts"...then the next world are:
We're going down.

It isn't storm cells on the inflight radar (which would mean some turbulence), it's the loss of engines......

The old joke from the days of prop aircraft.
Transatlantic nighttime flight.
Passenger are treated to the sight of one of the 4 engines on fire; the prop spins to a halt and the flames sputter out.
Right Stuff Voice on the intercom from the pilot:
'No need to be alarmed; we got the fire out and this will make us 30 minutes late to our destination'
An hour later, an engine on the other wing catches fire, same thing. Right Stuff says, 'No need to be alarmed; we got the fire out and this will make us 2 hours late to our destination'.

One passenger turns to another, says,'Gee, I hope we don't lose the other two engines, we could be up here forever'.........

Posted by: Stewart Dean on February 27, 2008 at 3:18 PM | PERMALINK

Didn't he just lower rates yesterday? Hell in 2 months there won't be interest rates - and things won't necessarily be any better.

Posted by: ET on February 27, 2008 at 3:30 PM | PERMALINK

But I just saw on FOX that this is the strongest economy since the roaring twenties. What gives?

The problem is that our economy is too much like the 20s. Early 29 in fact.

Posted by: Walker on February 27, 2008 at 3:35 PM | PERMALINK

Dave Brown says:

I don't think that a further lowering of interest rates will put us at risk of greater inflation.

I agree.. generally, lowering interest rates increase economic activity (money is cheaper) and raising interest rates decreases economic activity. Inflation is sometimes the result of too much demand, ergo increasing rates in that case will decrease demand, and decrease inflation. But in our case, inflation is the result of oil prices, so I don't think it'll cause "stagflation."

Posted by: Andy on February 27, 2008 at 4:31 PM | PERMALINK

corpus juris writes:

I reminded him of all the plant closings and asked if he still thought shipping jobs to China was such a good idea.

I thought the current stagnant economic situation is the result of the subprime mortgage crisis/housing bubble and the high cost of oil. Explain to me how "shipping jobs to China" is related.

Posted by: Andy on February 27, 2008 at 4:34 PM | PERMALINK

We have to be careful to place blame where its due - contrary to what some say, we still haven't conquered the economic cycle. A recession *will* happen every so often - if it's not the subprime mortgage crisis, it'll be a stock bubble. Even if we had all manufacturing jobs in the US, we'll still get recessions. Understand the whole situation before you scapegoat easy targets like illegal immigration or shipping jobs to China.

Posted by: Andy on February 27, 2008 at 4:37 PM | PERMALINK

Andy: I thought the current stagnant economic situation is the result of the subprime mortgage crisis/housing bubble and the high cost of oil. Explain to me how "shipping jobs to China" is related.

Allow me. The current account (trade) deficit leads to a capital account surplus. Lots of cash sloshing around leads to people willing to lend it under almost any terms, and hence to asset bubbles. The insane mortgages have been indirectly financed by the savings glut in China and other places. For an historical perspective try, for example, petrodollars and the Latin American debt crisis of the 70's and 80's.

contrary to what some say, we still haven't conquered the economic cycle

Which doesn't mean we don't understand many of the things that make economic cycles and their effects worse. Analogously, the fact that we haven't eliminated death doesn't mean that medicine hasn't advanced.

Even if we had all manufacturing jobs in the US, we'll still get recessions. Understand the whole situation before you scapegoat easy targets like illegal immigration or shipping jobs to China.

It sounds like you're trying to destroy the argument in detail. Just because no one thing explains it all, doesn't mean that they aren't all contributing factors. In the absence of a silver bullet, they have to be attacked one by one.

Posted by: alex on February 27, 2008 at 4:54 PM | PERMALINK

How can a higher price of anything at all (like stocks) be objectively better on average for the public? I mean, whatever more the seller gets, the buyer has to pay, right? Just shows it's a Ponzi scheme (and SocSec isn't, since funded by cuts of a cash flow.)

Posted by: Neil B. on February 27, 2008 at 6:04 PM | PERMALINK

Damn, and I just got my annual ARM adjustment. A bit later and I'd be paying less.

Posted by: CJColucci on February 27, 2008 at 6:10 PM | PERMALINK

FYI... pursuant to a presidential signing order, the name was changed from Google to "the Google"

Posted by: anon on February 27, 2008 at 7:19 PM | PERMALINK

Google's money maker, advertising, is grossly overvalued.

Posted by: Luther on February 27, 2008 at 7:42 PM | PERMALINK

As to my favorite soapbox: how many people realize that the housing bubble, which is bursting like all bubbles, is largely a product of the trade deficit? Posted by: alex

You were saying?


02.28.08 -- 4:53PM // link | recommend (12)
Such a Shrewd Use of Money

From The Australian ...

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $US3trillion ($3.3 trillion) compared with the $US50-$US60-billion predicted in 2003.

...

Professor Stiglitz told the Chatham House think tank in London that the Bush White House was currently estimating the cost of the war at about $US500 billion, but that figure massively understated things such as the medical and welfare costs of US military servicemen.

The war was now the second-most expensive in US history after World War II and the second-longest after Vietnam, he said.

The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said.

--Josh Marshall

Posted by: on February 28, 2008 at 6:04 PM | PERMALINK




 

 

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