My Recessionary Confessional

Now that the economic data have stopped cliff diving we can all catch our breath and reflect on the current recession.   Better yet, the purveyors of NPR's Planet Money podcast have set up a phone line where we can leave a recessional confession: 

Did you help break the global economy, or even the local one? Planet Money has a new call-in line for your confessions. It's (202) 371-1775.

If anything the call-in approach provides the platform for a great thought experiment.  Most of us observing the financial system cratering under its own gruesome weight feel (rightfully so) like hapless bystanders.  Digging deep enough reveals a thread to the current crisis in just about everyones' personal life.

The cynical Fausto is willing to admit his role.  I didn't run a hedge fund nor did I leverage a PhD in mathematics into developing synthetic CDO's or credit default swaps.  No, my story is a lot like yours.

I am guilty of turning my home into an ATM by way of a home equity line.  Sure we spent the majority of the credit on "capital improvements" but there was plenty of discretion on our part. A few niceties here and there quickly added up.  I'm not proud of my role in running up the U.S. trade deficit while helping to scuttle personal savings rates.  

I'm one of the more fortunate consumers traversing the real economy.  The equity line is almost paid off and the home value was spared the fate of other declining neighborhoods, keeping the underlying mortgage in the money so to speak.  All I can do is resolve to keep the personal debt to a minimum and maintain a glide path of more prudent savings, and all that.  There is it is, not very sexy.  That's how I contributed to the mess. 

TARP Prognosis

The first of several assessments of the TARP program by the Congressional Oversight Panel has been released . The take away number is available without even clicking on the report link:

The total value of all direct spending, loans and guarantees provided to date in conjunction with the financial stability efforts (including those of the FDIC as well as the Treasury and the Federal Reserve) now exceeds $4 trillion. 

You want fries with that?   That represents about 28% of current GDP. We are throwing a monumental amount of resources at the financial crisis. Keep in mind that 4 large doesn't even include the dollars allocated to ARRA spending ($787 billion) which would bring the total effort to a third of GDP. 

One can only hope that Bernanke's green shoots are the real thing.

Feel Free To Panic

"You better get on your knees and pray,
panic is on the way"
- Oasis

It's official, we are in a recession. So says the NBER, the organization that is assigned the noble duty of charting the boom and busts of the U.S. economy.

I'm only playing up to the hype that permeates the media and internets, there's no reason to panic yet. We just went through one of these recessionary periods seven years ago, no big deal. Anyway, economists say that recessions happen on the margins so most of you may end up doing fine. There is plenty of reporting on how the economic downturn is impacting our lives and fleshing out just where those margins are. A small sample of what I've found interesting over the last twenty-four hours.

It's Raining Bad News in Columbus
A follow up to my earlier post on the extreme duress being placed on State finances by lagging tax collections. Articles on GONGWER and the Plain Dealer add more information about the precarious position the Strickland administration is in. They are looking at another round of cuts followed by a new budget process that will require seismic changes in program spending to stay afloat. Ted can't even think about having the General Assembly freeze the final phase on cuts to the income tax lest he be branded "tax hike Ted". That ambitious plan to reform school funding is becoming more of a challenge every day.

Credit Market Bummer
Ignore the stock market for now and pain it is inflicting on your 401k. Market volatility is up so the wild swings in market value are becoming common place. The Volatility Index (VIX) has been averaging 40 as compared to the once normal 20. The real problem has been with the more pertinent credit markets. The untouchable ether where all financial activity comes to being.

Calculated Risk has continued to follow several key indicators and the news in the past few days is disconcerting. Credit markets are still exhibiting troubling signs including what CR called a "stunning flight" to Treasuries on Monday. This trend combined with other bad news (TED Spread up), indicates the problems that were caused by the collapse of the financial system have not gone away.

Portable Alpha, Sinkable Pension
The WSJ had a very interesting but short article on the plight of the Pennsylvania State Pension Fund. It looks like that fund and some others are taking huge losses from market downturns. Now, one would expect a pension fund to see a decrease in earnings and value considering the current market conditions. Unfortunately the managers at the PA pension fund had been imbibing the same elixir that other financial risk takers were drunk on. Using a hedging strategy called portable alpha the pension fund managers asserted they could beat the market and never pay the price for excessive risk taking. That decision hasn't worked out to well, they've lost billions in the last quarter alone.

The scope of problems and extreme difficulty the current financial crisis has created for public finance is impressive. There will most likely be more stories such as this one in the coming months.

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Nat City Gets TARPed

It was only a matter of time for National City Bank. The subprime inflicted damage and bad financial outlook took its toll on the local banking mainstay. The news we had all been waiting for finally hit this morning. The buyer, PNC a Pittsburgh based bank with backing from the U.S Treasury, is plopping down a mere $5.6 billion for National City. The deal is being aided with funding from the government bailout program (from Marketwatch):

PNC also said it plans to sell $7.7 billion of preferred stock to the Treasury under the government's Troubled Asset Relief Program, or TARP.

The U.S. Treasury giveth and PNC taketh your locally headquartered bank away. Talk about unintended consequences of of the bailout plan. The very plan that was designed to salvage the banking system has also hastened the loss of local prestige and an untold number of good paying jobs. This new facet of the Treasury plan includes using up to $125 billion in funds to shore up large banks, like PNC. As usual with corporate mergers,Northeast Ohio gets caught on the short end of the deal.

The Cleveland bank whose name is festooned on several downtown buildings and inside Cleveland Browns Stadium has been in trouble since early this year. The cash infusion from a private equity firm this spring wasn't enough to keep National City's stock price from sliding into Hades and setting off warning bells in the local business community.

As we are seeing first hand that the Treasury program is a neutral arbiter of the needs of the macro level players of the financial system. The bailout was not intended to rescue the real economy. The inhabitants of the ground floor are powerless observers of the sea changes that are happening as the financial sector reconfigures itself. The worried looks on the faces of Nat City employees that I see on East Ninth Street and the North Coast Express have turned to quiet resignation. There's not much that can be done other than wait and see if their jobs will be eliminated (some probably have an inkling). The damage to the 401k plans has already been done and now careers of hundreds of employees, taxpayers and consumers are about to be drawn into the turbulence.

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Post Bailout: Thermometers and Barometers

It will take months to really know if the government plan to rescue our sick financial system is a master stroke or dismal failure.  For now any progress in improving the credit markets is not that apparent to the casual observer.   Some of the indicators that signal relief in the credit markets have shown some improvement.  As reported by Calculated Risk some signs of improving liquidity in the credit markets are popping up.  Most notably some spreads like the TED have improved and the yield on treasuries has increased a little.  Paul Krugman seconds the notion that things are happening.

Unfortunately the economic reality that you and I reside in is headed for a slide.  That sinking feeling was amplified by decline in retail sales (reported as a 1.2% decrease) weakening industrial production and the sorry picture painted by the Fed Beige Book.  The question amongst talking heads and economists is not if there is a recession but, how long and how deep the recession will be. I hope Wall Street enjoys their bailout because the rest of us will be hanging on for the rough ride ahead. 

There's a great new podcast from the elitists at NPR called Planet Money.  Check it out, they're doing a good job of disseminating information that is fit for consumption even if you're economically challenged.

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Talk to Krugman's Hand

I'm one of the many Paul Krugman acolytes who is thrilled over his winning the Nobel Prize. I'm an avid reader of his columns, blog and books. I even manage to peruse some of his academic stuff when I'm feelin' wonky. He of course won the prize for his work on international trade patterns and economic geography not the column. Although most of the attention he has received in the popular press is for his regular column in the NYT and the complimentary blog where he has offered scathing reviews of the Prez and his people.

Krugman has been able to train his analytical thought processes and liberal philosophy on the destructive inclinations of Bush era policies and create a narrative for what went wrong in the intervening years of the Bush presidency. He was just on This Week with George S. and was forced to match wits with that well known economic genius George Will. Dr. Krugman somehow managed to rebut Will's assertion that the troubles in the financial markets are attitudinal not systemic.

His brutal honesty in assessing the dismal failures of movement conservatism as exercised through the current occupiers of the administration has made him a lightning rod for the wrath of conservative bloviators. I've lost count of how many times Bill O'Reilly has referred to Krugman as a socialist. I'm sure there will be plenty more howling from right wing pundits that were already reeling from Al Gore's Nobel Prize selection last year.

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The Dukes of Moral Hazard

I've been too busy enjoying the splendid early fall weather to comment on the new bailout law. I don't have much to provide in the way of insight now that we have officially entered a new frontier in American finance. Sure I'm fine that the U.S. Treasury is going to leverage hundreds and billions of dollars to unstick the financial system.

I like some other observers (Krugman) don't see exactly how buying the assets in question will actually work in the end. I also don't get the connection between the new found support from members of Congress and the billions of dollars of crazy tax breaks inserted into numerous sections of the final bill. Congress peoples from both ends of the political spectrum implored that doing the bailout would be an irresponsible use of taxpayer funds. Some of the staunch free market advocates in the house insisted that any government intervention would lead to that nasty old moral hazard condition. The market got us here and it would lead us out free of any socialized fixes. It's amazing what a subsidy for wooden arrow makers here and a break for race track operators there will do to bend those ideological leanings. The real travesty will of course be the lack of any tightening, no rethinking the way we regulate financial markets.

In the end the Treasury plan as passed may have an effect and start to loosen up the credit markets like a big dose of fiscal Metamucil. A quick check of the TED spread every week will verify if this is happening. That's great for the large financial firms (in college we referred to them as financial intermediaries) since they comprise the core of the financial monolith or shadow banking system.

What about all of us mortals that occupy the fiscal purgatory of the real economy? The bailout for us has yet to arrive. Unemployment is up (159,000 jobs lost last month), credit is drying up, and the rate of inflation has yet to show signs of subsiding. The fate of local governments as seen by their budget outlooks for next year is looking more grim. What will the Federal government do for them? Does our economy get an enema next? For now all we can do is hold on and hope for relief. I fear that the money for the Main Street bail out was already spent.

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My Proposed Addition To MOAB 2008

Let's be frank the House Republicans know that approving the President's Mother of All Bailouts plan is another stake in the heart of the free market bonanza that they so adore.  Why not just come out and state what this bailout says about the conservative view point of financial market regulation.

The original section 21- Definitions becomes Section 22.  My proposed new section is as follows:

Sec. 21  U.S. Government's Renouncement of Free Market Ideology

Recognizing the irreparable harm that deregulated markets have caused to the American financial system and taxpayer the United States government shall no longer adopt, emulate or embrace any of the following ideologies or principles in design or creation of subsequent laws governing financial or commercial activities:

1) Efficient Market Hypothesis or any other delusional belief that market prices always reflect an accurate value of an asset and that market players always act in a rational manner. 

2) Limitless use of leverage, speculation, arbitrage, hedging, short selling and securitization of debt in formulation of laws governing the financial sector or agency rule making.

3) Any other Friedmanite beliefs in weak regulatory frameworks, self regulated and self correcting markets and blind faith in an unchecked free enterprise system.  Any dependence on Reaganomics, Rubinomics or Voo Doo Economics in any shape or form.

This should dissuade the government from allowing us to get bit in the ass for at least another seven to ten years.  You know the adage, everything old is new again.

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Wall St. Turd Could Sink Akron Sewer Plan

I really appreciate Michael Douglas' enthusiasm in yesterday's editorial on the bright prospects of the Akron Sewer system lease plan. Douglas whom doubles as the ABJ's editorial page editor when he's not extolling the virtues of the greater NEO region's economy thinks the time is right for leasing the City sewer system. Never mind that the financial markets are facing turmoil not seen in generations and credit is drying up faster than the Aral Sea. The Douglas piece actually points to the failing capital markets as a sweetener to completing a lease deal:

If anything, the arrangement is just the kind of pedestrian deal that investors could use, no credit default swaps, no derivatives, no financial instruments that baffle even Ben Bernanke. What appeals to investors is the steady flow of revenue, a chance to bolster the foundation of their operation.

Last I read and heard nobody wants to lend anyone money for any reason, no matter how "pedestrian" the project happens to be. As commonly mundane as public infrastructure appears to be the area of leasing public assets to private entities is still relatively new. Once again the allure of free education for Akron's youth (use of funds) has overridden the need to actually consider the potential pitfalls (source of funds) of a lease agreement.

The potential for a $200 million dollar fund that a lease deal would generate will continue to shrink as the concessions are heaped on to make it voter acceptable. The Mayor has already mentioned limiting rate increases, maintaining staffing and continuing capital improvements to the system as requirements for a potential lease deal. These will all detract from the ability of a private company to actually make money on their end of the deal and lessen the chance of finding a suitor.

Before the City can even get to the point of creating a higher education fund linked to a leasing deal the dynamics of the market will have to change considerably. Transferring public assets into the realm of private debt has already lost its cache after the events of the past week. Consider this observation from Naomi Klein writing on the condition of the free market ideology post meltdown:

For years, the global investment banks have been lobbying politicians for two new markets: one that would come from privatizing public pensions and the other that would come from a new wave of privatized or partially privatized roads, bridges and water systems. Both of these dreams have just become much harder to sell: Americans are in no mood to trust more of their individual and collective assets to the reckless gamblers on Wall Street, especially because it seems more than likely that taxpayers will have to pay to buy back their own assets when the
next bubble bursts.

In the end the idea of combining the Akron Sewer System with another regional governmental entity is the safest way to go. Not just safe but downright pedestrian.


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Throw a TARP Over It

The mania of self regulated markets is now history as the Federal Government announced the grand daddy of all bail out plans. Sec. Treasury Henry Paulson outlined with sparse detail this new tax payer funded catharsis and a asked Congress to act quickly on implementing the cleansing.

Historic Measures
All told the Temporary Asset Relief Plan (TARP) will utilize upwards of $800 billion (that's six and a half years of Iraq) to buyout bad mortgage backed paper held by the multitude of financial institutions. This doesn't include the hundreds of billions being dedicated to insuring the money market funds that are also exhibiting signs of strain despite the long held belief these funds where almost as liquid as cash.

TARP is a fitting plan for Paulson and Bernanke's attempt to cover up the carnage left in the wake of a decade of a self regulated maelstrom. Understanding the implications of this historic measure on the U.S. economic system is not easy to grasp. The plan will attempt to stanch the flow and get the markets back to terra firma. It is a rehabilitative measure not a stimulus plan for the greater economy.

The real economy has yet to stop shuddering. The indicators that us mere mortals are exposed to like unemployment and inflation are still blinking red. The just released unemployment rate for Ohio hit a 16 year high of 7.4% in August. Inflationary pressures still abound at the grocery store and the gas station. Local and state governments are all facing budgetary disasters in the next year or two if the economics that feed their coffers don't improve. My fear is that the TARP may have arrived just in time to cover the corpse of the greater U.S economy left slain on the ground. How much pain will we have to endure before it is revived?

Electionomics
I have one admonition for all of the talking heads in cablenewsland. Stop wasting time trying to determine if either Obama or McCain have offered any solutions to the current financial problems. It's not the job of a the president to personally concoct plans such as the rescue program announced this week.

What really matters is the candidate's philosophy on how the American financial system should function under a regulatory regime and what that regime (if any) should look like. We are looking for leadership under the current duress of our times not electing a newly anointed John Maynard Keynes of the 2000's. Who the next president taps to provide counsel on defining financial policies and formulating new frameworks for governance is the real indicator of economic wisdom. That's judgment we can bank on.

Which of the two men would make the right choices and pick somone like a Keynes to see past prevailing and failed philosophies (like self regulated markets) and work toward re-stabilizing the financial landscape? Everything I am observing and absorbing says that Obama is that person.

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Panic Free Market Malaise Roundup

Odds and ends on a day that hasn't stopped providing news on the financial melty-ness.

John McCain the self proclaimed ignoramus on all things economics assured us today that the fundamentals of the financial markets are sound. Why doesn't that remark provide me any comfort?  The Dow thinks otherwise and so do the employees of Lehman and the investors holding shares of WaMu and AIG.

The Dow of course is just one indicator of the health of our financial system.  Krugman and Calulated Risk are suggesting that we pay attention to the TED spread, an indicator of credit availability (liquidity).  Both agree the widening spread is an indication of more market malaise to come.

Angry Bear postulates why The Eurpoean banks don't go belly up in large numbers and at the same time.

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GSE Bailout, the Quick Run Down

I was one of the lucky few to sit through the 11AM announcement on the 'Big Bailout' of mortgage lenders Freddie Mac and Fannie Mae. Treasury Sec. Henry Paulson gave a run down of the plan to force these two giant-ass financial institution into federal conservatorship and be privately run no more. This move represents the third or fourth wave in the housing crisis and there is more to come. As average Americans trying to enjoy the beginning of the NFL season we are left pondering the impact of this news

Here is a quick run down of the nine point plan that Paulson outlined during today's annoucement. I wrote them down myself as I listened so I'm not linking to any sources just yet. In no particular order of importance:

1. The companies will be open for business tomorrow albeit under a different structure.
2. Both GSE's can continue to issue MBS.
3. The FHFA, a newly created regulatory entity will assume oversight of both GSE's
4. The CEO's of both companies are out
5. New guys start tomorrow, they are from the financial sector.
6. Stock dividends are gone, duh.
7. A lobbying moratorium is in place, no more privte jets.
8. The Treasury will inject capital by purchasing new preferred stock and opening a line of credit.

I am missing one point in the plan from my notes but the details can be read here, here or here.

So what does this mean to the presidential election? It depends on your philosophy on private versus public enterprisewhen it comes to the housing market I guess. Maybe the real question on this dilemma can be summed up in one phrase, "it's the liquidity stupid". More on that later.

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The Bankruptcy Reform I Told You So

Remember that one time in 2005 when Congress did the bidding of the credit card companies and passed a bankruptcy reform law? It was supposed to help credit card companies and other financiers of short term credit mitigate the abuses of the bankruptcy system. In return there was an explicit (by my recollection) reciprocation offered by said firms to lower rates and fees associated with their business line.

That seemed like a load of bull crap from the start but the GOP controlled Congress was on a roll back then and the bill written by the same firms that would benefit from its passage was passed and signed into law. It even had plenty of help from moderate Dems like some guy named Ted Strickland. The whole sordid affair of the influence peddling in the case of this wretched law has been well documented in books like The Broken Branch by Ornstein and Mann.

Fast forward to 2008 were the stories of our collective economic anxiety and oil price angst fill pages of newsprint on a daily basis. The NYT ran a piece on the strangle hold that credit providers maintain over their hapless borrowers and the massive growth of revenue generated from the endless credit cards and loans that we consumerist Americans seem to be so addicted to. The payoff is the empirical indication that the bankruptcy reform law did not save us money but rather made money for it's supporters. The article cites a study conducted at a little known institution called Harvard University:

Not surprisingly, such practices generated dazzling profits for the nation’s financial companies. And since 2005, when the bankruptcy law was changed, the credit card industry has increased its earnings 25 percent, according to a new study by Michael Simkovic, a former James M. Olin fellow in Law and Economics at Harvard Law School.

The“2005 bankruptcy reform benefited credit card companies and hurt their customers,” Mr. Simkovic concluded in his study. He said that even though sponsors of the bankruptcy bill promised that consumers would benefit from lower borrowing costs as delinquent borrowers were held more accountable, the cost of borrowing from credit card companies has actually increased anywhere from 5 percent to 17 percent.

What can we learn from this? The current economic malaise that hovers around us has some root in the supplication of special interests as was the clear case with the 2005 law on bankruptcy reform. The lobbyists and campaign advisers that candidate X prefers to surround themselves with makes a difference to the poor saps that may end up at the wrong end of special interest crafted policies. A real critical difference if you are just trying to ride out the current economic tempest.

Schools For Sewers Headed To Ballot

As reported by the ABJ Mayor Don has elected to put his sewer lease plan on the ballot this fall and let residents decide if it will float or not. The move will apparently preempt the grassroots group, Save Our Sewers, from placing their own measure on the ballot and give the City deference in deciding the ballot language. Who would have though there are people with an affintiy for sewers? Plusquellic's quotes in the ABJ story highlight his building mayoral indigence with the SOS people:

Plusquellic said he decided to ''call their [SOS's] bluff'' and ask City Council to put the issue on the November ballot before the group resubmitted its petitions.

***
Plusquellic called SOS a group of ''naysayers'' with ''no principles or morals'' that wants to make the city look bad.

The second statement sounds like a case of the final term blahs. These guys sometimes get more salty as their tenure begins to wind down. Each criticism of a proposal such as this elicits a nasty response and is perceived as a threat to their mayoral legacy. I remember seeing this type of reaction from Mike White during his last term as mayor of Cleveland. Although he tended to fire people when he was in a bad mood.

In the end let this thing go to vote. The SOS folks have a good point but I'm not sure it will resonate with voters. If the scholarship aspect is made to be the key element of the initiative and residents can be assured rates can be capped then this plan may get approved. The education facet of the plan is great but there is another side to this transaction.

If the opponents are sharp enough they will focus on the pitfalls of privatizing a City service and future impact on other services. Not to mention the chances it will be a foreign entity that assumes the operation. Would the water system be next? The questionable outcome of creating $200 million from a lease and then not expecting rates to increase should also be front and center. An investor may be willing to front $200 million to operate the system but only if they can get that investment and a sizable return back over time. Unless commonly known economic precepts have been altered that means sewer rate increases and cutting operating and capital expenses would be in order. Would maintenance be deferred as means of accelerating the return on investment? Do you want poorly maintained sewers running underneath your street? All good things to ponder during your next trip to the bathroom.

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Petroblogging: Speculating on Speculation

Once again our eyes and ears are being bombarded by the 24 hour Oil News Cycle. This latest iteration of the quickly evolving narrative has turned to the effects of speculation on oil prices. We still have not spent as much time on the real culprit - demand - as I would like to see.

If you have the time and want some nuts and bolts understanding of how speculation is not the primary cause of our oily woes read this brief paper by Paul Krugman. It comes with some graphs and sexy economic terms like "contango" but it gets to the science of what's going on with spot (short term) and future oil prices. Dr. Krugman has been one of the few liberal voices urging readers to resist the overly simplistic and unproven case that speculators are the root cause of increasing (I hate the word skyrocketing, it is way overused. I once had a finance professor ban the word from all writing assignments) oil prices in lieu of other factors.

In the end the only sure way out of this mess is to use less of the cruddy black stuff not blame traders. Conservation is more than just a virtue its part of the solution. If you still want to blame speculation for the current situation in the oil markets, that's fine. Just consider yourself in the same camp as our double crossing Saudi friends who also share this view.

Drive less, pay less.

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Petroblogging: Greed's Oily Residue

Oil and all the woes it has been causing us seem to be ingrained in the collective conscious of America right now. I think the McClatchy news website will need to add a separate section just for oil stories the way things are going. Fighting for oil, crying about the price of gas and abject paranoia about speculative plots are just some of the noise we're getting inundated with lately. These things speak to the power of the petrodollar which leads to my attempt at petroblogging.

There Will Be Blood in Congress
Big Oil and steadily increasing gas prices have created all sorts of problems for the average minivan driver. On the legislative and policy side there are multiple "fixes" being thrown into the mix in Congress. The Dems are thinking of a multi-faceted approach that includes a windfall profits tax on oil companies (this makes no sense), capping the Strategic Petroleum Reserve, taking away tax breaks and cracking down on energy market speculation. A windfall by definition is a one-time increase in profits. The profits Exxon and company are seeing are the normal thing now. So why would a windfall profits tax be applicable in today's situation?

The GOP is looking almost exclusively from the supply side with proposals that call for increased drilling (including in ANWR) and refinery building and the normal emphasis on converting resources to cash. The only proposal that will get widespread support is the cap on the strategic reserve. Politico has a really good run down on the various legislative proposals that are presented in a Factcheck.org fashion.

Is the Gas Tax Holiday Dead?
File this one under Panderer in Chief or When Economists Attack. The McCain/Clinton plan to lower gas prices for the summer driving season using voodoo economics has been fading in popularity, and that's not just my impression. Does it have to do with every economist in the world calling it a bad idea? It seems that the McCain advisers that hatched the plan ignored the cold hard facts of tax incidence theory and went straight for the lame gimmickry of the appeal of a tax holiday. Hillary of course glommed on to the gas tax holiday looking for anyway to get an edge on Obama. Now that she is all but cooked in the race for the nomination, her support of a holiday from gasoline reality doesn't mean much. Enough rational introspection from the media and even average citizens has appeared to relegate this one to the silly season column.

Bush Off to Visit His Saudi Overlords
While we are left to guess what the price at the Circle K station will hit tomorrow the Prez heads off to the Middle East to survey the damage of seven years of failed foreign policy. Every Bush or Cheney Mid East trip of course ends with the requisite stop in Saudi Arabia to engage in royal ass kissing. maybe this trip will be different. It would be nice to see someone going to bat for us and maybe ask the Saudis to increase oil production. Is it possible that W. will threaten to pull out of Iraq and let the crazy Iranians increase their influence even more? Will King Abdullah be scared shitless about growing Shia influence in the region stirring up unrest amongst the population of Shias that inhabit the oil rich eastern part of his kingdom? Maybe the King will choose to hold hands with W. and buy his allegiance with another shiny sword.

It's Not a Bubble
Professor Krugman takes the speculation on speculation to task in yesterday's NYT column. The theory that energy speculators are behind the rapid increase in oil and gas prices has taken hold recently and for good reason. The guys making all of the money on the oil boon are the ones closely connected to the markets and traders that seemingly create the frenzy that is pushing up the price of oil. Krugman refutes this notion with sound economic reasoning. His contention is that speculation requires hoarding of supply to be effective and currently the supplies of oil are at normal or below average levels. Sorry, the oil companies are easy to hate but our dilemma is driven by good ol' supply and demand principles. If we could only get that Iraq occupation thing to work maybe the price would go down.

We're Americans and we ain't drivin' 55 or taking the damn bus to work.

Demon Inflation

One thing the Pizza Riots of 2008 made clear is that times are tough. Crowds standing in line for hours for a 23 cent pizza demonstrates the squeeze rising food prices are having on ordinary people. It may also be that they are just suckers for a promotion.

Anyway the crunch at the grocery store and the gas pump and elsewhere is indicative of the strains inflation is placing on middle and working class folks. There seems to be a disconnect though between the pinch consumers are feeling and the haughty economic indicators that are released periodically. Despite the constant talk of recession and stimulus plans inflationary stress as divined from CPI and GDP doesn't appear to be echoing the hard facts we see on the ground. It has always seemed out of place that food and fuel prices are excluded from CPI when we are paying record prices at the pump and at the grocery store. The official definition of a recession has been described as two consecutive quarterly drops in GDP but that indicator actually increased by 0.6% at last release. So what is really going on?

The numbers are all based on lies is one answer being offered up. According to Kevin Phillips in an article published in this month's Harper's the CPI and other mainstream economic indicators are a numbers racket. In his piece titled Why the Economy Is Worse Than We Know Phillips puts forth a convincing case for what he terms the "Opacity" crisis in America. Basically over the past two decades the goal posts have been moved to make these key indicators more palatable for investors in the U.S dollar. The actual numbers if based on prior methods would look much more grim today:

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession.

There hasn' t been a lot scary talk on inflation because it's kind of been swept under the rug. To the average person it's much more pervasive than the rigged numbers we keep seeing each month. The article is meant to serve as primer to his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. The title sounds kind of gloomy but I think it will be worth the read. The notion that our economic system and method of wealth creation is built on a house of cards is more apparent now than it has been in years.

Job Losses Bad News For NEO

The latest round of bad economic news arrived this week in the form of more job losses. If that isn't enough to bum you out then the impact of the downturn in NE Ohio will. George Zeller from the Center for Community Solutions spells out out the impending hard times for NEO in his latest information release:

In Ohio, our year over year job growth has been a loss for the last
12 consecutive months. It is likely that we will see the same in the
March 2008 figures when we get them on April 18.

Of course, we have no evidence at all that Ohio or Cuyahoga County
ever recovered at all from the 2000s recession. Thus, the new federal
figures today for the whole country are not a good sign for us
locally. We have now gone more than one quarter with job losses in
the USA. In another two months, unless job growth resumes, we will
have two quarters of national job losses. Even then, until the
Conference Board sees two negative quarters of GDP, they probably
will not declare an official recession. But, there is obvious
significant weakness in the national economy right now, and that is
very likely to spill over into our local situation.

Therefore, despite a lack of a local component in today's new
figures, the national employment figures are discouraging for us in
Ohio and in Cuyahoga County.

Zeller has had the unfortunate role of chronicling our economic woes. As he mentions we are already vulnerable due to the lack of a true recovery from the previous recession. The take away here is that the ebb and flow of the Dow Jones Index and Fed bailouts are only a small portion of the economic picture. These latest indicators point to adeep and troubling times for NE Ohioans.

JP Morgan Takes Out the Trash

How bad is the outlook in the financial markets? If the fall of the great Wall St. powerhouse Bear Stearns is any indication then it's bad. More than Jim Kramer ranting bad.

JP Morgan Chase agreed to buy the beleaguered Bear Stearns today for the insane and even troubling low price of $2 per share. That blows my mind. Bear Stearns a mainstay financial giant was brought to its knees from the corrosive (explosive) impact of the credit woes stemming from the sub prime mess. The fact that JP Morgan was able to snatch them up for almost free ($236 million total price) is telling to how done Bear Stearns was. Even the unprecedented offer from the Fed to accept mortgage derivative securities as collateral for securing much needed liquidity couldn't save Bear from the Bear market.

Another gauge of the magnitude of this downturn is the type of victims it has claimed. The tech bust of the 2000 era killed off a lot of crazy IT and web concoctions that had no business plans and no way to make any money. I mean come on man Loudcloud was no Citigroup. The whirlwind we are reaping now is going right after the heart of the financial system and that's what makes this particular turmoil rather frightening.

Fed Takes Out the Trash

The guys who brought us the magic of the deregulated mortgage market are finding new and creative ways to make amends. The plan announced today by the Fed was ambitious enough to coax very a large gain out of the market and has the cutsey name Term Securities Lending Facility. The Fed is basically allowing large financial institutions to borrow liquidity (cash or safe Treasuries) and use the mortgage backed securities that have led to the liquidity woes as collateral. My favorite twist on the proposed credit line is this, any securities that hve a premium rating will be accepted as collateral.

This is of course is meaningless since many of the "premium" credit ratings were assigned with a wink from S&P and Moody's to the future detriment of investors. At this point in the game the mere act of accepting this garbage as collateral is soothing enough to the calm everyones' nerves for the time being.

The Fed is going to lend up to $200 billion as of his program. It would be nice to think the same helping hand may soon be extended to local government issuers who have been stung by the collapse of the auction rate securities market. A collapse brought on by the aforementioned players now on the receiving end of the Fed's generosity. For more information on that mess check out Mayor Bloomberg's little financial news site.