Daily Investment Interpretations

February 15, 2009

2009-2-15:  Paul Krugman has written these new comments:
Permanent Link to Use, delay, and obsolescence. In this first write-up, he asks, "...how fast would the economy recover in the absence of a stimulus plan and a financial rescue? Would it, as Rush Limbaugh says, be over in a few months? Or are we talking about a sustained slump — and how sustained?" His answer comes from looking at historical data that shows that some of the pre-Depression slumps lasted a vary long time. He concludes that such a scenario could persist for a long, long, long, long time.
Permanent Link to Stressed for success discusses the fact that the four biggest banks: Citi, Bank of America, Wells Fargo, and J. P. Morgan need around $450 billion to make them viable. "Meanwhile, their combined market cap is only about $200 billion — and part if not all of that market cap surely represents the 'Geithner put,' the hope that stockholders will in effect get a handout from the feds." He concludes that either the taxpayers have to give a HUGE handout to the owners of these bank stocks or the public has to demand part-ownership of these banks. Problem is: government ownership of corporate America runs against our "culture".
    In relation to this, it might be worth mentioning that Japan's GDP worst since '74 . After two lost decades because of Japan's inability to avoid the kind of liquidity whirlpool we seem to be entering, Japan is plunging again.
    Meanwhile, the political party that is out of power is pushing the party lines that this worldwide financial collapse was caused by Representative Barney Frank and Senator Chris Dodd pressuring Freddie Mac and Fannie Mae to issue sub-prime loans so that everyone could enjoy the American dream of owning their own homes, and that the New Deal didn't work. In fact, Freddie Mac and Fannie Mae were prohibited by law from issuing sub-prime mortgages. According to its replacement CEO, testifying before Congress, Freddie Mac refused to lower its lending standards until 2004, after the mortgage party was well underway. Then, pressured by Citigroup to relax its lending standards if it wanted to retain Citigroup business, and seeing its 2004 annual profits halved as mortgage business went elsewhere, Freddie Mac caved in, pulling out again in 2007. As for the New Deal, from 1933 to 1937, the New Deal reversed the 1929-1933 downward employment trend that had brought the  unemployment rate to 25%, lowering the unemployment rate from 25% in early 1933  to 10% or 13.8% in early 1937 (depending upon who's telling the story). GDP expanded at a double-digit rate from 1933 to 1937, Then in early 1937, FDR, worried about the growing budget deficit and listening to budget deficit hawks (Republicans?), FDR reduced government intervention, and the nation sank back into the second phase of the Great Depression. 
    We're in a very dangerous place.
Later:  Stop the presses! This just in from Dr. Krugman: Decade at Bernie’s. This editorial explains that the rising wealth that Americans thought they had over the past debt-fueled decade was a mirage. Further, although government economists know what they need to do, they probably aren't going to be able to do it. He says, "So now we’re in trouble — deeper trouble, I think, than most people realize even now. And I’m not just talking about the dwindling band of forecasters who still insist that the economy will snap back any day now."