March 5 closing Dow Jones Industrial Average = 6,594.44, down 281.40. At closing on January 19, Inauguration Eve, the DJIA stood at 8,279.63. It has plunged 20.4 percent. Upon 44's election it stood at 9326.24 (closing bell, Nov. 3), from where, in a scant four months, the DJIA has fallen 29.3 percent. A New York Times article detailing the DJIA carnage notes that GE common stock, at $6 per share, sells for less than the price of a pair of GE incandescent light bulbs. Oilman & takeover artist T. Boone Pickens (age 81) has joined Warren Buffet (age 78) in calling this the worst economy he has ever seen.
National Journal columnist Stuart Taylor calls 44's proposals "grandiose and unaffordable" and details why 44's numbers simply do not add up. Bush 41 Council of Economic Advisers Chairman Michael Boskin explains why Obama's radicalism is killing the Dow in a crisp WSJ op-ed. Charles Krauthammer finds intellectual dishonesty in 44's budget that goes beyond traditional budgetary legerdemain done by all politicians:
And yet with our financial house on fire, Obama makes clear both in his speech and his budget that the essence of his presidency will be the transformation of health care, education and energy. Four months after winning the election, six weeks after his swearing-in, Obama has yet to unveil a plan to deal with the banking crisis.
What's going on? "You never want a serious crisis to go to waste," said chief of staff Rahm Emanuel. "This crisis provides the opportunity for us to do things that you could not do before."
Things. Now we know what they are. The markets' recent precipitous decline is a reaction not just to the absence of any plausible bank rescue plan, but also to the suspicion that Obama sees the continuing financial crisis as usefully creating the psychological conditions -- the sense of crisis bordering on fear-itself panic -- for enacting his "Big Bang" agenda to federalize and/or socialize health care, education and energy, the commanding heights of post-industrial society.
Clever politics, but intellectually dishonest to the core. Health, education and energy -- worthy and weighty as they may be -- are not the cause of our financial collapse. And they are not the cure. The fraudulent claim that they are both cause and cure is the rhetorical device by which an ambitious president intends to enact the most radical agenda of social transformation seen in our lifetime.
Steve Forbes fingers mark-to-market & short selling rule changes as key factors; SF notes that had MTM accounting rules been enforced in the 1990s banking crisis every major bank would have cratered. A Washington Post front-pager sees Team 44 looking to private investors to help market recovery by forming an alliance with hedge fund and private equity investors. The tool is the Term Assets Securities Loan Facility, or TALF (the "S" is excluded, I suspect, to make for a pronounceable acronym):
Here's how a typical TALF deal would work: A hedge fund uses $1 million of its own money and gets a $9 million loan from the Fed, payable after three years, to buy a $10 million asset-backed security, which finances consumer loans. Hoping that the market for these assets recovers, the hedge fund would hold the asset for three years.
If the security rises in value to $11 million, the investor would keep the profit, essentially doubling the initial investment. The government, meanwhile, would consider the deal a success because consumer lending was spurred.
If the value fell below $9 million, the hedge fund would lose its down payment but nothing more. The Treasury, using bailout funds approved by Congress, would cover the next set of losses, with the Fed ultimately on the hook for anything more.
But there is a kicker:
If Fed and Treasury officials decide to extend the TALF model to the purchase of toxic assets, this would require expanding the approach from recently issued loans to those that are years old.
Each step away from the original target of the TALF -- recently issued, highest-quality assets -- may force the government to protect itself, which would involve offering less to private investors, officials said. But if the government goes too far in shielding itself, it may fail to generate interest by private investors. Striking the right balance -- among lenders who issue loans, investors who buy them and taxpayers who are facilitating the transactions -- has been one of the greatest challenges in developing the program, officials said.
In a March 2, 2009 letter to Senator Charles Grassley (R-Iowa) the Congressional Budget Office (CBO) analyzed the American Recovery and Reinvestment Act of 2009 (ARRA). CBO sees a net short-term small benefit and after 2015 a net negative impact. An earlier letter to Senator Judd Gregg (R-NH) from CBO suggested that little benefit would accrue in 2009, with most coming after 2010. A schizoid budget office, just what America needs....
What are signs saying at this point? On the upside, economist Larry Kudlow sees signs of incipient economic recovery in five months of increased consumer income, affordable housing and--most important, in LK's view--the rerun of a positive "Yield Curve" (the relation between debt instrument cost and time to maturity) in the market for Treasury bills:
When short-term rates moved above long-term rates back in 2006, Ben Bernanke rushed to tell us that it would not signal a recession since interest rates were too low and historical precedence would not apply. By the middle of 2006, this curve had turned decisively negative, and roughly a year and a half later the economy headed into recession.
However, the Treasury curve has right-sized since February 2008, roughly a year ago. Today, 10-year govies are roughly 3 percent, while the 3-month Treasury bill is about 0.25 percent. This, of course, is a sign of monetary ease — usually with about a one-year lag the economy responds to this therapy. Well, it’s about a year right now.
Noteworthy is the factoid that nearly every post-WWII recession has been preceded by an inverted Treasury curve and an oil shock. Sound familiar? Then the economy heals as oil prices come down and the Treasury curve normalizes. Also sound familiar?
But on the downside, financial maven Nouriel Roubini, who saw the financial meltdown coming, sees an imploding global economy that has rendered America's financial system "effectively insolvent." He sees monetary policy paralyzed:
Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
NR sees the stimulus bill doing little good:
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
And economist Irwin Stelzer sees ghosts of the 1931 Smoot-Hawley tariffs whose imposition triggered a global trade war that contributed to the Great Depression in America and depression worldwide:
The fact is that an America in recession, with Democrats in control of the White House and Congress, is likely to produce a trade policy that periodically lurches towards protectionism but then pulls back from the brink of a trade war; threatens retaliation, but leaves that weapon safely in its holster in most cases; and tries to appease everyone with a say-one-thing-but-do-another series of actions. In the case of the latter, we have an ideal representative in Barack Obama. The world economy will be well served if he uses that talent to fend off pressures from his left for another "virtual declaration of economic war on the rest of the world," as Richard Hofstadter characterized the work of Messrs. Smoot and Hawley.
But in the long run it will take more than the president's ability to appease protectionists without doing serious harm to the world's trading system. Support for free trade has dwindled not only because the recession creates a shortage of jobs. It has dwindled because free trade creates losers as well as winners--cheap garments mean unemployed seamstresses in North Carolina. The losers are innocent bystanders, the victims of collateral damage. And their plight has not been effectively alleviated by the myriad job retraining programs on offer. Until we find some way of sharing the winners' gains with the losers, support for free trade will continue to atrophy. All suggestions welcome.
Economist Diana Furchtgott-Roth identifies some rich taxpayers that 44 plans to soak and finds...working wives:
Amanda is marrying Henry, who owns an electrical supply store and has taxable income of $160,000. Amanda’s taxable income as a nurse is $50,000. Unmarried, he is in the 28% bracket and she is in the 25% bracket. When they get married, they will be taxed at 33%—rising to 36% in 2011 if Mr. Obama’s proposed tax hikes take effect.
So, a nurse making $50,000 gets a stiff tax increase because she had the temerity to marry a husband making more money. (Hey, Michelle, care to have a heart-to-heart with Hubby?)
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