Is it game over? If communism came to an end twenty years ago with the collapse of the Soviet Union, is capitalism coming to an end with the current worldwide economic collapse, with giant banks around the world effectively insolvent as a result of free-market enthusiasm for gobbling up shares of imaginary assets? Sure credit markets have seized up and we seem to be in a liquidity crisis – but one must not confuse the symptom with the cause of the disease. It’s a solvency crisis. Money does not flow through the system when there is no money available. It may not matter when, or if, confidence returns, and the impulse to borrow and lend flowers in the sun or whatever. There may not be much there to work with. But all that can be left to the economy wonks. The distinction may not matter, day to day, as individuals work on how best to make it through the shutdown of so many of the elements of the life they once knew – what they assumed would always be there. You adapt – you have to.
And then, of all things, we elected Barack Obama – a man who talked about sharing the wealth and common sacrifice, and community. That last word scares the free-market capitalists to the core. Everyone working together for the common good sounds nice, but the root of the word community is the same root as communism – common. Any given day on the preeminent business channel, CNBC, you can see the crew of Cassandra-types there, angry about this new class warfare – they call it the War on Achievement – where taxes on those who earn more than a quarter million a year revert to previous levels. They say that will shut down capitalism – no one will want to succeed at anything, as the government will just take away everything you earn. Why bother? They are saying this is the end of everything, by which they mean the end of what they say is the system that made America what it is, and then conquered the world – free-market capitalism.
Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds.
And here’s Kudlow in the National Review:
President Obama’s massive mortgage-bailout plan is nothing more than a thinly disguised entitlement program that redistributes income from the responsible 92 percent of home-owning mortgage holders who pay their bills on time to the irresponsible defaulters who bought more than they could ever afford. This is Obama’s spread-the-wealth program in action.
Team Obama is rewarding bad behavior. It is enlarging moral hazard. It is expanding its welfarist approach to economic policy. And with a huge expansion of government-owned zombie lenders Fannie Mae and Freddie Mac, Team Obama is taking a giant step toward nationalizing the mortgage market.
And that will be the end of free-market capitalism. As you remember from mythology, Cassandra spent a night at Apollo’s temple, and at the temple those nasty snakes licked her ears clean, and then she was able to hear the future. She told them Troy was going to fall, but no one believed her. The snakes have been licking Larry’s ears – he’d be the first to tell you, although he might not put it that way.
But maybe Obama is just trying to contain the damage, as free-market capitalism seems to be imploding on its own, starting long before he was elected, maybe before he even decided to run. And on Friday, February 27, things got even worse, with a bit of a trifecta:
Wall Street ended another unforgiving month with a steep loss – one that left the Dow Jones industrial average at less than half its record high.
The day’s news unsettled investors. Citigroup Inc. agreed to turn over a big piece of itself to the government, a move that fanned worries that other banks would face crippling trouble with bad debt. General Electric Co. slashed its quarterly dividend by 68 percent. Both companies are part of the Dow Jones industrial average, which fell 119 points.
And the government’s gross domestic product report showed that the economy fell at a 6.2 percent annual pace at the end of last year, a much faster than expected pace.
Everyone was relieved when the Dow only dropped only 119 points – one wag on CNBC said down was the new up. There could have been a market crash and there wasn’t, but after the markets closed – “Regulators on Friday closed Heritage Community Bank in Illinois, and Security Savings Bank in Nevada, marking sixteen failures this year of federally insured institutions.”
You sort of get used to such news – happens every week. And this is the system Kudlow says no one should touch – let people do what they will and it will all work out.
But the Associated Press notes something odd. It seems the economy is moving in reverse faster than the government can measure – things are not only worse than they seem, when they finally manage to gather all the accumulated data, they have to go back a revise the figures downward, way downward:
The contraction for the fourth quarter of 2008 had been estimated at 3.8 percent just a month ago. Then the Commerce Department raised it to an astonishing 6.2 percent Friday – the largest revision since the government started keeping records in 1976.
That was the economy’s worst showing in a quarter-century and raised the prospect that the nation could suffer its worst year since 1946.
“Consumers are just hunkering down and saying ‘game over,’ and businesses in response are cutting back on investment and employment,” said Brian Bethune, economist at IHS Global Insight. “It’s a negative feedback loop.”
And Kudlow is worried about Obama, and frightened to death Obama will nationalize the banks, and ruin everything.
Obama will not do that – because of folks like Kudlow and their sensitivities. What they did do with Citigroup was, actually, worse. Barry Ritholtz explains:
… for about 100% of the market value of Citi, plus insurance guarantees worth as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.
Pretty good deal, eh?
Yeah, but it wasn’t nationalization, per se. Free-market capitalism lives on – but then, so did the corpses in Night of the Living Dead.
But one must not ignore the housing market – more about getting hosed than getting housed. Michael Larson looks at the grim news:
We got a real one-two punch of dismal housing data this month, with today’s new home sales report looking just as ugly as yesterday’s existing home sales release.
Not only did the pace of sales fall to the lowest level since at least 1963, but a key measure of supply exploded to a record high. The raw supply of homes for sale is clearly dropping. But because sales are falling even faster, we’re not seeing any net improvement in the market. Result: Prices continue to fall, with new homes now going for the least in more than five years.
It really does all come down to jobs, jobs, and jobs. Lower mortgage rates are nice. Tax cuts are nice. But with the labor market deteriorating so sharply, we’re unlikely to see a meaningful improvement in the housing market. If anything, sales and pricing will deteriorate further.
This is quite an economic system we have here.
Of course, we could be under attack. This could be a Fire Sale:
In the film Live Free or Die Hard, fire sale was used as a fictional hacker term meaning a crippling cyber-warfare attack on the infrastructure of the United States that would disrupt all power, public utilities, water, traffic, and other computer-controlled systems. The term is used because “everything must go.” It is based on three steps. In the first step all the transport network is taken down, in the second step all the utilities are disconnected and in the third step, nuclear facilities, banks, and the stock exchange are hacked and then all the information is washed. The theory is that if you take down the infrastructure one system at a time, it will eventually be able to recover, but if you take down everything at once the entire system will be destroyed and there is no turning back.
But that was just a silly movie. Perhaps it was moderately popular for a time because things feel that way. HBO has it in running in regular rotation now – they get it. Something seems wrong. Someone may be messing with us.
But it may be the free-market capitalists themselves. There was always something odd about those Collateralized Debt Obligations – those CDO things, all those mortgages and credit card debts bundled into something you could buy as a sound investment. People would pay their debts, or most would, and if you bundled enough of such promises to pay together, those who didn’t pay wouldn’t matter that much, and this was a great asset to own – a sure thing. So wise men created all sorts of Asset-Backed Securities like that, so large that the small pimples of bad debt would not matter much in the great scheme of things, and these became what was traded, really, by anyone who knew anything. It was free-market capitalism at its purist – new and not yet regulated, and the real source of the world’s wealth for almost a decade. Investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds had their money. For Larry Kudlow – heaven.
But it just didn’t work out. See the Financial Times:
But now, at long last, one shard of reality has just emerged to piece this gloom. In recent weeks, bankers at places such as JPMorgan Chase and Wachovia have been quietly sifting data trying to ascertain what has happened to those swathes of troubled CDO of ABS [Asset-Backed Securities].
The conclusions are stunning. From late 2005 to the middle of 2007, around $450bn of CDO of ABS were issued, of which about one third were created from risky mortgage-backed bonds (known as mezzanine CDO of ABS) and much of the rest from safer tranches (high grade CDO of ABS.)
Out of that pile, around $305bn of the CDOs are now in a formal state of default, with the CDOs underwritten by Merrill Lynch accounting for the biggest pile of defaulted assets, followed by UBS and Citi.
That is a chunk of change, but wait. There’re more:
The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.
I dare say this might be an extreme case. The subprime loans extended in 2006 and 2007 have suffered particularly high default rates and the CDOs that have already been liquidated are presumably the very worst of the pack.
Even so, I would hazard a guess that this is easily the worst outcome for any assets that have ever carried a “triple A” stamp. No wonder so many investors are now so utterly cynical about anything that bankers or rating agencies might say these days.
But it was a totally free market. It just happened to bring down the world’s economy.
The economist Paul Krugman offers this:
Why is this important? A recurring theme of those who believe that the financial system can be rescued with fancy financial engineering – a group that, sad to say, apparently now includes the Obama administration – is that the losses on toxic assets aren’t really as bad as people say; that lack of liquidity and “irrational despondence” have led to an undervaluation of these assets, and that if we can just calm things down and get cash flowing again all will be well.
It’s just not that easy to fix, no matter what you do – and it is not a liquidity issue, or an investor confidence issue. There was nothing there, no matter what the rating agencies had to say about the assets in question – that they were Triple-A and carried no real risk. The world of Kudlow and Santelli is a strange place.
See Hillary Bok on the Financial Times item:
If I’m reading this right, within four years of being issued, two thirds of these CDOs are in default, and their recovery rates are very, very low. That’s just staggering. It’s actually hard to understand how the banks managed to do this badly: you’d think they could have done better hiring people off the street and paying them to put all those nice little loan documents into piles at random, or tossing mortgages down the stairs and bundling them based on how they landed. They certainly didn’t need to hire people with advanced math degrees and pay them seven- or eight-figure salaries to get these kinds of results.
And how about those ratings agencies? They would have done a better job using a Magic 8-Ball to rate the CDOs. (“Signs point to junk!”)
I have been hearing for years and years about how the financial services sector pays such exorbitant wages because the people who work there are so immensely talented that they are cheap at $50 million a year. I never particularly bought that line before. But I never imagined that all those Masters of the Universe would do quite this badly. If we had paid them $50 million a year to go far, far away and leave our financial system alone, it would have been a bargain.
But Kudlow prefers such folks to the Obama crew.
But this is leading to what Kevin Drum reviews as a Global Meltdown – “exports plummeting in Japan, Italy rescuing its banks, Eastern Europe turning into a basket case, Russian GDP down 8%, etc. etc.”
But the bottom line was simple: there’s a world of economic pain out there, and economic pain frequently turns into political and national security pain too.
Drum notes that the White House is worried about the same thing, and has asked the CIA to begin preparing a daily report on the global economic crisis:
The CIA’s role in producing the report underscores the level of anxiety within the administration over how rapidly the economic downturn is spreading, as well as its potential to hobble foreign governments and trigger instability overseas.
The report, called the Economic Intelligence Brief, was launched at the request of the White House and delivered for the first time Wednesday.
[CIA Director Leon] Panetta said the document would survey major economic developments internationally and focus on how plunging markets and credit pressures are driving the decisions in nations including Russia and China.
The report covers “economic, political, leadership developments” in other countries as well as “the implications of those developments in terms of the U.S. economy,” Panetta said.
We’re not going to see pitchforks and torches in the United States, but we might in a few other countries before this is all over. This is a smart move by Obama.
Drum provides links to specific uprisings but suggests Michael Klare at Salon:
If you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania) and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations – none as yet in the United States —- your map would already look aflame with activity.
Obama’s new briefing is going to be a busy one.
Ah, free-market capitalism at work. And that’s what the Republicans run on (besides God and guns). Ron Beasley suggests that might be pointless now;
If you are a middle class American the Republican Party has been taking you for a really unpleasant ride for the last 29 years. The American people started getting it in 2006 and had pretty well figured it out by 2008. The Republicans have not figured out that middle class Americans have figured it out which is why they will probably find themselves even deeper in the wilderness for the foreseeable future.
He cites Daniel Larison:
It seems to me that conservatives and Republicans have assumed the GOP is the natural governing party, at least regarding the Presidency and to some extent as it relates to Congress since ’94, which is why so many have continued to insist that America is a “center-right nation” in face of mounting evidence that it is not and hasn’t been for a while. Symbolic gimmickry does stem in part from a lack of confidence, but it is more the product of a movement and party that have ceased to understand, much less address, most of the pressing concerns of working- and middle-class Americans. The party assumes that all it needs to do is show up, push the right pseudo-populist buttons and reap the rewards, and for the most part the movement cheers. See Palin, Sarah.
The GOP settles for offering “symbolic, substance-free BS” because enough conservatives are already persuaded that Republican policies obviously benefit the middle class, so there is no pressure to make Republican policy actually serve the interests of Republican constituents. It is taken for granted that this is already happening, but voters have been showing for several cycles that many of them do not believe this.
So what is it the real average American who has quit listening to Rush – the vast majority – have figured out. They are a lot worse off since the Reagan Revolution.
Yep, regulate nothing, lower taxes on corporations and the rich, and all will be well. Just look around you. People did look around. Did they think no one would notice?
As we all know, income stagnation is something that most conservatives and Republicans have spent years pretending was not happening, because it did not fit in with the assumption that working- and middle-class Americans were thriving as part of the “greatest story never told.” It is the failure to acknowledge and address all of these things along with the preference for using symbolic gimmickry that begin to account for the lamentable states of conservatism and the GOP.
Of course at this year’s CPAC convention, they have found their answer – Attendees See a New Sales Pitch, Not Change in Values, as Key to Success.
As Beasley says – “The best marketing in the world won’t sell a car with a pile of dog shit on the front seat.”
But what else is left? Peter Hamby at CNN – Senator Calls Obama “World’s Best Salesman of Socialism” –
Sen. Jim DeMint of South Carolina, the only member of the senate to earn a perfect rating from the American Conservative Union, called President Obama “the world’s best salesman of socialism” on Friday in describing his prime time speech earlier this week. DeMint, a fierce opponent of government expansion, told the CPAC crowd that conservatives might have to “take to the streets to stop America’s slide into socialism.”
Good luck with that. And UCLA’s Mark Kleiman offers some musing:
During the Republican primaries, I was worried about Mike Huckabee: earnest but not priggish, funny, evidently not a hater, a non-terrible record as governor, compelling speaker. Yes, of course he believed, or at least said, some certifiably nutty stuff, but he didn’t say it in a nutty way. And I’ve remained concerned that Huckabee might use the next four or eight years to learn something about the substance of national policy – he’s poorly educated, but no one’s fool – and abandon some of the “populist” positions that made him anathema to the money-cons. The result might have looked a lot like a 21st-Century Reagan, while continuing to cover a fairly serious theocrat.
He says he has stopped worrying, after this:
“The Union of Soviet Socialist Republics may be dead,” said Huckabee, “but a Union of American Socialist Republics is being born.” Democrats, according to Huckabee, were packing 40 years of pet projects like “health care rationing” into spending bills. “Lenin and Stalin would love this stuff.”
Kleiman says he’s relieved. And Andrew Sullivan says that Obama has played the budget and spending game pretty shrewdly:
Look at how Obama has framed the debate since the election. Every single symbolic act has been inclusive and sober. From that speech in Grant Park to the eschewal of euphoria on Inauguration Day; from the George Will dinner invite to the Rick Warren invocation… And now, after presenting such a centrist, bi-partisan, moderate and personally trustworthy front, he gets to unveil a radical long-term agenda that really will soak the very rich and invest in the poor. Given the crisis, he has seized this moment for more radicalism than might have seemed possible only a couple of months ago.
Radicalism? Here’s how Obama is “soaking the very rich” these days:
If Obama’s tax plan is approved, a family making $500,000 a year would see its annual tax bill rise to nearly $132,000 from about $120,000, a 10 percent increase, said Clint Stretch, managing principal of tax policy at Deloitte Tax.
Kevin Drum adds some reality here:
Republicans who paint him as the second coming of Karl Marx just look like idiots these days. At the same time, let’s not go overboard. …
Over the past three decades, these families have seen their incomes double and triple while the rest of the country stagnated. Now Obama proposes to increase their tax bill by $12,000 – not even enough to get them back to the rates they were paying when Ronald Reagan left office. This is a very, very modest nod toward fiscal fair play, very much in keeping with Obama’s modest optics. You’d have to drink several pitchers of Rush Limbaugh’s Kool-Aid to think that this counts as soaking the rich.
And the canary in the coal mine for the Republicans might be in Germany:
A Berlin cashier who was sacked from a supermarket after 31 years of service because her employer accused her of stealing 1.30 euros ($1.65) has become a flash point of a debate about unchecked capitalism in Germany.
Leaders of Germany’s major political parties criticized the supermarket’s decision to fire Barbara Emme, especially because the 50-year-old who has become a German cause célèbre denies the charges that she kept bottle deposit receipts worth 1.30 euros.
Wolfgang Thierse, vice president of parliament and member of the Social Democrats, on Thursday called a court decision on Tuesday that upheld the cashier’s sacking “barbaric” and warned cases like this “destroy people’s confidence in democracy.”
Horst Seehofer, leader of the Christian Social Union, said the case raised questions about capitalism, which has come under attack in Germany in the wake of the global financial crisis.
“I don’t understand how a cashier can be fired because of 1.30 euros while managers who lose billions of euros can keep their jobs,” Seehofer told a rally in Bavaria on Wednesday.
Kudlow might want her arrested, and Santelli might want her executed, but note this:
The case of “Barbara E.” is starting to loom over Germany’s upcoming election campaign in a way that has similarities to “Joe the Plumber,” an ordinary Ohio voter who became a lightning rod in the 2008 U.S. presidential election.
“My phone has been ringing off the hook,” Emme told Bild newspaper on Thursday after she appeared on a late night ZDF television talk show on Tuesday evening.
Jim DeMint may say that conservatives just might have to “take to the streets to stop America’s slide into socialism.” These days someone might be there to meet them. People have figured out something is wrong.