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Tuesday, January 15, 2008

Reckoning: The Economic Consequence of Mr. Bush by Joseph Stiglitz

Reckoning
The Economic Consequences of Mr. Bush

The next president will have to deal with yet another crippling legacy of George W. Bush: the economy. A Nobel laureate, Joseph E. Stiglitz, sees a generation-long struggle to recoup.

by Joseph E. Stiglitz
December 2007

http://www.vanityfair.com/politics/feature...currentPage=all

The American economy can take a lot of abuse, but no economy is invincible.

When we look back someday at the catastrophe that was the Bush administration, we will think of many things: the tragedy of the Iraq war, the shame of Guantánamo and Abu Ghraib, the erosion of civil liberties. The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page.

I can hear an irritated counterthrust already. The president has not driven the United States into a recession during his almost seven years in office. Unemployment stands at a respectable 4.6 percent. Well, fine. But the other side of the ledger groans with distress: a tax code that has become hideously biased in favor of the rich; a national debt that will probably have grown 70 percent by the time this president leaves Washington; a swelling cascade of mortgage defaults; a record near-$850 billion trade deficit; oil prices that are higher than they have ever been; and a dollar so weak that for an American to buy a cup of coffee in London or Paris—or even the Yukon—becomes a venture in high finance.

And it gets worse. After almost seven years of this president, the United States is less prepared than ever to face the future. We have not been educating enough engineers and scientists, people with the skills we will need to compete with China and India. We have not been investing in the kinds of basic research that made us the technological powerhouse of the late 20th century. And although the president now understands—or so he says—that we must begin to wean ourselves from oil and coal, we have on his watch become more deeply dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.

Remember the Surplus?
The world was a very different place, economically speaking, when George W. Bush took office, in January 2001. During the Roaring 90s, many had believed that the Internet would transform everything. Productivity gains, which had averaged about 1.5 percent a year from the early 1970s through the early 90s, now approached 3 percent. During Bill Clinton’s second term, gains in manufacturing productivity sometimes even surpassed 6 percent. The Federal Reserve chairman, Alan Greenspan, spoke of a New Economy marked by continued productivity gains as the Internet buried the old ways of doing business. Others went so far as to predict an end to the business cycle. Greenspan worried aloud about how he’d ever be able to manage monetary policy once the nation’s debt was fully paid off.

This tremendous confidence took the Dow Jones index higher and higher. The rich did well, but so did the not-so-rich and even the downright poor. The Clinton years were not an economic Nirvana; as chairman of the president’s Council of Economic Advisers during part of this time, I’m all too aware of mistakes and lost opportunities. The global-trade agreements we pushed through were often unfair to developing countries. We should have invested more in infrastructure, tightened regulation of the securities markets, and taken additional steps to promote energy conservation. We fell short because of politics and lack of money—and also, frankly, because special interests sometimes shaped the agenda more than they should have. But these boom years were the first time since Jimmy Carter that the deficit was under control. And they were the first time since the 1970s that incomes at the bottom grew faster than those at the top—a benchmark worth celebrating.

By the time George W. Bush was sworn in, parts of this bright picture had begun to dim. The tech boom was over. The nasdaq fell 15 percent in the single month of April 2000, and no one knew for sure what effect the collapse of the Internet bubble would have on the real economy. It was a moment ripe for Keynesian economics, a time to prime the pump by spending more money on education, technology, and infrastructure—all of which America desperately needed, and still does, but which the Clinton administration had postponed in its relentless drive to eliminate the deficit. Bill Clinton had left President Bush in an ideal position to pursue such policies. Remember the presidential debates in 2000 between Al Gore and George Bush, and how the two men argued over how to spend America’s anticipated $2.2 trillion budget surplus? The country could well have afforded to ramp up domestic investment in key areas. In fact, doing so would have staved off recession in the short run while spurring growth in the long run.

But the Bush administration had its own ideas. The first major economic initiative pursued by the president was a massive tax cut for the rich, enacted in June of 2001. Those with incomes over a million got a tax cut of $18,000—more than 30 times larger than the cut received by the average American. The inequities were compounded by a second tax cut, in 2003, this one skewed even more heavily toward the rich. Together these tax cuts, when fully implemented and if made permanent, mean that in 2012 the average reduction for an American in the bottom 20 percent will be a scant $45, while those with incomes of more than $1 million will see their tax bills reduced by an average of $162,000.

The administration crows that the economy grew—by some 16 percent—during its first six years, but the growth helped mainly people who had no need of any help, and failed to help those who need plenty. A rising tide lifted all yachts. Inequality is now widening in America, and at a rate not seen in three-quarters of a century. A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago. Some 5.3 million more Americans are living in poverty now than were living in poverty when Bush became president. America’s class structure may not have arrived there yet, but it’s heading in the direction of Brazil’s and Mexico’s.

The Bankruptcy Boom
In breathtaking disregard for the most basic rules of fiscal propriety, the administration continued to cut taxes even as it undertook expensive new spending programs and embarked on a financially ruinous “war of choice” in Iraq. A budget surplus of 2.4 percent of gross domestic product (G.D.P.), which greeted Bush as he took office, turned into a deficit of 3.6 percent in the space of four years. The United States had not experienced a turnaround of this magnitude since the global crisis of World War II.

Agricultural subsidies were doubled between 2002 and 2005. Tax expenditures—the vast system of subsidies and preferences hidden in the tax code—increased more than a quarter. Tax breaks for the president’s friends in the oil-and-gas industry increased by billions and billions of dollars. Yes, in the five years after 9/11, defense expenditures did increase (by some 70 percent), though much of the growth wasn’t helping to fight the War on Terror at all, but was being lost or outsourced in failed missions in Iraq. Meanwhile, other funds continued to be spent on the usual high-tech gimcrackery—weapons that don’t work, for enemies we don’t have. In a nutshell, money was being spent everyplace except where it was needed. During these past seven years the percentage of G.D.P. spent on research and development outside defense and health has fallen. Little has been done about our decaying infrastructure—be it levees in New Orleans or bridges in Minneapolis. Coping with most of the damage will fall to the next occupant of the White House.

Although it railed against entitlement programs for the needy, the administration enacted the largest increase in entitlements in four decades—the poorly designed Medicare prescription-drug benefit, intended as both an election-season bribe and a sop to the pharmaceutical industry. As internal documents later revealed, the true cost of the measure was hidden from Congress. Meanwhile, the pharmaceutical companies received special favors. To access the new benefits, elderly patients couldn’t opt to buy cheaper medications from Canada or other countries. The law also prohibited the U.S. government, the largest single buyer of prescription drugs, from negotiating with drug manufacturers to keep costs down. As a result, American consumers pay far more for medications than people elsewhere in the developed world.

You’ll still hear some—and, loudly, the president himself—argue that the administration’s tax cuts were meant to stimulate the economy, but this was never true. The bang for the buck—the amount of stimulus per dollar of deficit—was astonishingly low. Therefore, the job of economic stimulation fell to the Federal Reserve Board, which stepped on the accelerator in a historically unprecedented way, driving interest rates down to 1 percent. In real terms, taking inflation into account, interest rates actually dropped to negative 2 percent. The predictable result was a consumer spending spree. Looked at another way, Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. “Qualified at birth” became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with “teaser” initial rates, and went to town on the proceeds.

All of this spending made the economy look better for a while; the president could (and did) boast about the economic statistics. But the consequences for many families would become apparent within a few years, when interest rates rose and mortgages proved impossible to repay. The president undoubtedly hoped the reckoning would come sometime after 2008. It arrived 18 months early. As many as 1.7 million Americans are expected to lose their homes in the months ahead. For many, this will mean the beginning of a downward spiral into poverty.

Between March 2006 and March 2007 personal-bankruptcy rates soared more than 60 percent. As families went into bankruptcy, more and more of them came to understand who had won and who had lost as a result of the president’s 2005 bankruptcy bill, which made it harder for individuals to discharge their debts in a reasonable way. The lenders that had pressed for “reform” had been the clear winners, gaining added leverage and protections for themselves; people facing financial distress got the shaft.

And Then There’s Iraq
The war in Iraq (along with, to a lesser extent, the war in Afghanistan) has cost the country dearly in blood and treasure. The loss in lives can never be quantified. As for the treasure, it’s worth calling to mind that the administration, in the run-up to the invasion of Iraq, was reluctant to venture an estimate of what the war would cost (and publicly humiliated a White House aide who suggested that it might run as much as $200 billion). When pressed to give a number, the administration suggested $50 billion—what the United States is actually spending every few months. Today, government figures officially acknowledge that more than half a trillion dollars total has been spent by the U.S. “in theater.” But in fact the overall cost of the conflict could be quadruple that amount—as a study I did with Linda Bilmes of Harvard has pointed out—even as the Congressional Budget Office now concedes that total expenditures are likely to be more than double the spending on operations. The official numbers do not include, for instance, other relevant expenditures hidden in the defense budget, such as the soaring costs of recruitment, with re-enlistment bonuses of as much as $100,000. They do not include the lifetime of disability and health-care benefits that will be required by tens of thousands of wounded veterans, as many as 20 percent of whom have suffered devastating brain and spinal injuries. Astonishingly, they do not include much of the cost of the equipment that has been used in the war, and that will have to be replaced. If you also take into account the costs to the economy from higher oil prices and the knock-on effects of the war—for instance, the depressing domino effect that war-fueled uncertainty has on investment, and the difficulties U.S. firms face overseas because America is the most disliked country in the world—the total costs of the Iraq war mount, even by a conservative estimate, to at least $2 trillion. To which one needs to add these words: so far.

It is natural to wonder, What would this money have bought if we had spent it on other things? U.S. aid to all of Africa has been hovering around $5 billion a year, the equivalent of less than two weeks of direct Iraq-war expenditures. The president made a big deal out of the financial problems facing Social Security, but the system could have been repaired for a century with what we have bled into the sands of Iraq. Had even a fraction of that $2 trillion been spent on investments in education and technology, or improving our infrastructure, the country would be in a far better position economically to meet the challenges it faces in the future, including threats from abroad. For a sliver of that $2 trillion we could have provided guaranteed access to higher education for all qualified Americans.

The soaring price of oil is clearly related to the Iraq war. The issue is not whether to blame the war for this but simply how much to blame it. It seems unbelievable now to recall that Bush-administration officials before the invasion suggested not only that Iraq’s oil revenues would pay for the war in its entirety—hadn’t we actually turned a tidy profit from the 1991 Gulf War?—but also that war was the best way to ensure low oil prices. In retrospect, the only big winners from the war have been the oil companies, the defense contractors, and al-Qaeda. Before the war, the oil markets anticipated that the then price range of $20 to $25 a barrel would continue for the next three years or so. Market players expected to see more demand from China and India, sure, but they also anticipated that this greater demand would be met mostly by increased production in the Middle East. The war upset that calculation, not so much by curtailing oil production in Iraq, which it did, but rather by heightening the sense of insecurity everywhere in the region, suppressing future investment.

The continuing reliance on oil, regardless of price, points to one more administration legacy: the failure to diversify America’s energy resources. Leave aside the environmental reasons for weaning the world from hydrocarbons—the president has never convincingly embraced them, anyway. The economic and national-security arguments ought to have been powerful enough. Instead, the administration has pursued a policy of “drain America first”—that is, take as much oil out of America as possible, and as quickly as possible, with as little regard for the environment as one can get away with, leaving the country even more dependent on foreign oil in the future, and hope against hope that nuclear fusion or some other miracle will come to the rescue. So many gifts to the oil industry were included in the president’s 2003 energy bill that John McCain referred to it as the “No Lobbyist Left Behind” bill.

Contempt for the World
America’s budget and trade deficits have grown to record highs under President Bush. To be sure, deficits don’t have to be crippling in and of themselves. If a business borrows to buy a machine, it’s a good thing, not a bad thing. During the past six years, America—its government, its families, the country as a whole—has been borrowing to sustain its consumption. Meanwhile, investment in fixed assets—the plants and equipment that help increase our wealth—has been declining.

What’s the impact of all this down the road? The growth rate in America’s standard of living will almost certainly slow, and there could even be a decline. The American economy can take a lot of abuse, but no economy is invincible, and our vulnerabilities are plain for all to see. As confidence in the American economy has plummeted, so has the value of the dollar—by 40 percent against the euro since 2001.

The disarray in our economic policies at home has parallels in our economic policies abroad. President Bush blamed the Chinese for our huge trade deficit, but an increase in the value of the yuan, which he has pushed, would simply make us buy more textiles and apparel from Bangladesh and Cambodia instead of China; our deficit would remain unchanged. The president claimed to believe in free trade but instituted measures aimed at protecting the American steel industry. The United States pushed hard for a series of bilateral trade agreements and bullied smaller countries into accepting all sorts of bitter conditions, such as extending patent protection on drugs that were desperately needed to fight aids. We pressed for open markets around the world but prevented China from buying Unocal, a small American oil company, most of whose assets lie outside the United States.

Not surprisingly, protests over U.S. trade practices erupted in places such as Thailand and Morocco. But America has refused to compromise—refused, for instance, to take any decisive action to do away with our huge agricultural subsidies, which distort international markets and hurt poor farmers in developing countries. This intransigence led to the collapse of talks designed to open up international markets. As in so many other areas, President Bush worked to undermine multilateralism—the notion that countries around the world need to cooperate—and to replace it with an America-dominated system. In the end, he failed to impose American dominance—but did succeed in weakening cooperation.

The administration’s basic contempt for global institutions was underscored in 2005 when it named Paul Wolfowitz, the former deputy secretary of defense and a chief architect of the Iraq war, as president of the World Bank. Widely distrusted from the outset, and soon caught up in personal controversy, Wolfowitz became an international embarrassment and was forced to resign his position after less than two years on the job.

Globalization means that America’s economy and the rest of the world have become increasingly interwoven. Consider those bad American mortgages. As families default, the owners of the mortgages find themselves holding worthless pieces of paper. The originators of these problem mortgages had already sold them to others, who packaged them, in a non-transparent way, with other assets, and passed them on once again to unidentified others. When the problems became apparent, global financial markets faced real tremors: it was discovered that billions in bad mortgages were hidden in portfolios in Europe, China, and Australia, and even in star American investment banks such as Goldman Sachs and Bear Stearns. Indonesia and other developing countries—innocent bystanders, really—suffered as global risk premiums soared, and investors pulled money out of these emerging markets, looking for safer havens. It will take years to sort out this mess.

Meanwhile, we have become dependent on other nations for the financing of our own debt. Today, China alone holds more than $1 trillion in public and private American I.O.U.’s. Cumulative borrowing from abroad during the six years of the Bush administration amounts to some $5 trillion. Most likely these creditors will not call in their loans—if they ever did, there would be a global financial crisis. But there is something bizarre and troubling about the richest country in the world not being able to live even remotely within its means. Just as Guantánamo and Abu Ghraib have eroded America’s moral authority, so the Bush administration’s fiscal housekeeping has eroded our economic authority.

The Way Forward
Whoever moves into the White House in January 2009 will face an unenviable set of economic circumstances. Extricating the country from Iraq will be the bloodier task, but putting America’s economic house in order will be wrenching and take years.

The most immediate challenge will be simply to get the economy’s metabolism back into the normal range. That will mean moving from a savings rate of zero (or less) to a more typical savings rate of, say, 4 percent. While such an increase would be good for the long-term health of America’s economy, the short-term consequences would be painful. Money saved is money not spent. If people don’t spend money, the economic engine stalls. If households curtail their spending quickly—as they may be forced to do as a result of the meltdown in the mortgage market—this could mean a recession; if done in a more measured way, it would still mean a protracted slowdown. The problems of foreclosure and bankruptcy posed by excessive household debt are likely to get worse before they get better. And the federal government is in a bind: any quick restoration of fiscal sanity will only aggravate both problems.

And in any case there’s more to be done. What is required is in some ways simple to describe: it amounts to ceasing our current behavior and doing exactly the opposite. It means not spending money that we don’t have, increasing taxes on the rich, reducing corporate welfare, strengthening the safety net for the less well off, and making greater investment in education, technology, and infrastructure.

When it comes to taxes, we should be trying to shift the burden away from things we view as good, such as labor and savings, to things we view as bad, such as pollution. With respect to the safety net, we need to remember that the more the government does to help workers improve their skills and get affordable health care the more we free up American businesses to compete in the global economy. Finally, we’ll be a lot better off if we work with other countries to create fair and efficient global trade and financial systems. We’ll have a better chance of getting others to open up their markets if we ourselves act less hypocritically—that is, if we open our own markets to their goods and stop subsidizing American agriculture.

Some portion of the damage done by the Bush administration could be rectified quickly. A large portion will take decades to fix—and that’s assuming the political will to do so exists both in the White House and in Congress. Think of the interest we are paying, year after year, on the almost $4 trillion of increased debt burden—even at 5 percent, that’s an annual payment of $200 billion, two Iraq wars a year forever. Think of the taxes that future governments will have to levy to repay even a fraction of the debt we have accumulated. And think of the widening divide between rich and poor in America, a phenomenon that goes beyond economics and speaks to the very future of the American Dream.

In short, there’s a momentum here that will require a generation to reverse. Decades hence we should take stock, and revisit the conventional wisdom. Will Herbert Hoover still deserve his dubious mantle? I’m guessing that George W. Bush will have earned one more grim superlative.

Anya Schiffrin and Izzet Yildiz assisted with research for this article.

Joseph Stiglitz, a leading economic educator, is a professor at Columbia.

12 comments:

Michele Kearney said...

ECONOMY
In Need Of A Jump-Start
Congress returns this week to focus on a plan to "jump-start the economy and try to shorten the slowdown that many economists say has already begun to take hold." House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) have openly expressed their desire to work with President Bush to pass an economic package aimed at buttressing consumer confidence and avoiding a recession. "We want to work with the president in a bipartisan way to develop a fiscal stimulus package" that is "timely, targeted, and temporary," Pelosi said in a statement yesterday after meeting with Federal Reserve Chairman Ben Bernanke. The Fed Chairman, who has signaled his plans to cut interest rates by a half percentage point at the end of the month, reportedly told Pelosi that some stimulus is needed, a shift from last week when he said his thoughts on a fiscal stimulus were "inchoate." Both the administration and Congress appear to agree on the need for immediate action. Treasury Secretary Henry Paulson said any stimulus package should be put into effect swiftly, and House Financial Services Committee Chairman Barney Frank (D-MA) added that any stimulus package has to "get money into the economy quickly."

CURRENT STATE OF ECONOMY: With plummeting home sales, oil near $100 a barrel, and slowing employment, the current economic environment is perilous for a growing number of Americans. "We begin the new year with America's economy in the worst shape and the middle class at its most uncertain since the days immediately following 9/11," said Sen. Charles Schumer (D-NY). A Labor Department report last month showed the nation's unemployment rate jumped to five percent, a two-year high. "Sales at U.S. retailers stalled in December, capping the weakest holiday shopping season in five years." Additionally, economists at Goldman Sachs, Merrill Lynch, and Morgan Stanley have said the United States is probably slipping into a recession. "With signs of economic stress abounding, Bush's approval for handling the economy was 33 percent," compared with 36 percent in November. A new Washington Post/ABC News poll reports that "concern about the economy has jumped to the front of voters' minds as optimism about the nation's direction has dipped to its lowest point in more than a decade."

STIMULUS PLANS: Congressional leaders are insisting that conservatives not inject their desire to extend the Bush tax cuts for the wealthiest Americans "into negotiations of a short-term rescue package intended to dampen the impact of a recession." But some Republicans are insisting on keeping long-term tax cuts on the table. "[I]t isn't too soon to talk about making permanent the Bush tax cuts. ... I think that has to be part of the discussion," said Rep. Dave Camp (R-MI). The President is reportedly "weighing a tax rebate targeted at low- and middle- income Americans, according to a government official. Bush probably will announce the plan in his Jan. 28 State of the Union speech. Meanwhile, Democratic leaders in Congress are designing their own package, which may include public works spending, aid for the poor and a tax rebate." Leading Democratic presidential candidates John Edwards, Hillary Clinton, and Barack Obama have unveiled stimulus plans of their own. By contrast, Republican candidates Mitt Romney, John McCain, and Rudy Giuliani "are much more skeptical about short-term government rescues." The Center for American Progress has recommended that any stimulus plan adhere to four principles: 1) stem the decline of home values, 2) ensure the stimulus contains immediate impact, 3) target the benefit to those recipients most likely to spend it, and 4) strengthen the economy in short-term ways that inure to America's long-term economic benefit.

Michele Kearney said...

THE MOGAMBO GURU
Gold in the time of economic cholera
There are those of us who wonder aloud, and say, "Is the last 25 years truly indicative of gold's seeming long-term $1,500 per ounce value? Perhaps not! Let The Mogambo speak about this and other matters!"

Michele Kearney said...

THE BEAR'S LAIR
Tears on Wall Street
Bank write-offs, some of US$15 billion and upwards, are expected when fourth-quarter earnings come out from Wall Street this week. The big question is: Where will the horror end. The answer: Not before the landscapes of Wall Street and the City of London have been transformed beyond recognition. - Martin Hutchinson

Michele Kearney said...

CREDIT BUBBLE BULLETIN
Mortgage crisis to
corporate debt crisis
Increased pricing for credit default swaps last week pointed to further havoc in the US financial system and Fed chairman Ben Bernanke's words of support offered little comfort. Evocations of the 2002 debt crunch are superficial as subprime woes evolve into a full-fledged corporate debt crisis.

Michele Kearney said...

Fears About Economy Increase
Debt Crisis Grows; Top Mortgage Firm Sold at a Bargain

By Anthony Faiola and Tomoeh Murakami Tse
Washington Post Staff Writers
Saturday, January 12, 2008; A01
http://www.washingtonpost.com/wp-dyn/conte...1103959_pf.html


Major banks and mortgage companies yesterday sharply accelerated an industry consolidation that is set to change the landscape of American lending, while a convergence of events exposed fresh worries about the U.S. economy.

New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.

And rising concern that U.S. investment houses, particularly Merrill Lynch, may yet suffer far greater losses, helped set up a wide market sell-off.

Echoing the heightened concern, Treasury Secretary Henry M. Paulson Jr. said yesterday that the U.S. economy had slowed "rather materially" at the end of 2007 and that "time is of the essence" in launching an economic stimulus package to stave off a recession.

Meanwhile, a broad shake-up of the U.S. lending industry is speeding up. Bank of America agreed yesterday to buy the troubled Countrywide Financial for $4 billion, a bargain-basement price for the nation's largest mortgage lender, which, analysts said, could have even more substantial mortgage-related losses ahead.

"There are signs" that the economy "is slowing down fairly rapidly," Paulson told Bloomberg Television. Congressional Democrats have promised to work with the Bush administration to pass a series of economic measures meant to boost consumer confidence and fend off a sharp downturn, perhaps including tax rebates for low- and middle-income Americans and tax cuts and other fiscal measures to boost investment. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon," Paulson said.

Some saw the rescuing of Countrywide from possible bankruptcy, as well as news that J.P. Morgan Chase is in "very early talks" with about a half-dozen regional banks, including Washington Mutual of Seattle, as evidence of a much-needed consolidation that in the long run could fortify the lending industry and eventually ease the nation's credit crunch.

At best, however, that dawn remains some ways off. Economists said the market drop yesterday signals that Wall Street is increasingly betting on a recession and failed to respond to vows by Federal Reserve Chairman Ben S. Bernanke that the central bank would act aggressively to prevent one.

The Dow Jones industrial average of 30 blue-chip stocks plunged 246.79, or 1.9 percent, to 12,606.30. The Standard & Poor's 500-stock index, a broader market measure, lost 19.31, or 1.4 percent, to 1401.02. The tech-heavy Nasdaq composite index declined 48.58, or 2 percent, to 2439.94.

"I almost feel like we're in the first innings of a bear market," said Jim Herrick, director of equity trading at Robert W. Baird. "It's really hard to see the light at the end of the tunnel."

Jitters were also stirred by a New York Times report that Merrill Lynch may take a $15 billion write-down when it reports earnings next week, exceeding the $12 billion that had been predicted. In addition, American Express shares shed 10.1 percent of their value after the company warned that it would take a charge of $440 million in the fourth quarter, in part to cover higher delinquencies.

As companies continue to be squeezed in the credit crunch, the landscape for financial institutions has increasingly become a matter of survival of the fittest. Wobbling mortgage lenders are searching for bailouts, and banks relatively unscathed by deteriorating mortgage assets are cautiously looking for discounted takeover targets.

Bank of America, at least on paper, is getting Countrywide on the cheap -- picking up the lender at a mere 31 percent of its book value. Yet even at that price, analysts fretted that Bank of America may still be taking on too much risk and exposing itself unnecessarily to what could be a far deeper cache of bad debt on Countrywide's books.

Other factors that will determine whether the United States is able to avoid a recession, or at least blunt its pain, are developments in the labor market, whether consumers continue to tighten their purse strings, and how much money financial institutions will be losing in the months to come as the shake-out continues.

Joe Brusuelas, chief economist at the research firm IdeaGlobal, said the magnitude of these losses may be staggering.

"We haven't even scratched the surface of what the losses will be," Brusuelas said. "I don't think we're anywhere near the end. Rather, we're still at the beginning of this."

On the plus side, some economists said, U.S. institutions are moving to deal with a bad situation far faster, for instance, than Japanese banks did after the collapse of that nation's real estate market in the early 1990s. Major U.S. financial institutions have written off $68 billion as they come to grips with the depths of their troubles.

"This all signals that we're moving in the right direction," said Art Hogan, chief market analyst for Jefferies & Co. "But we're going to have more bumps in the road ahead, especially next week, when many financial institutions will report their earnings and probably more write-offs."

Economic concerns deepened yesterday after the release of data showing an unexpectedly larger U.S. trade deficit in November, $63.1 billion. Analysts had hoped that the weaker dollar would help U.S. companies export America's way to a narrower trade gap. But while exports did stage a relatively robust uptick, they were more than offset by a 16.3 percent rise in the nation's bill for foreign oil.

The widening deficit has serious political ramifications, particularly in an election year in which globalization and free trade have become popular pi¿atas on the campaign trail as a blame for America's economic woes. Critics of free trade, as well as those who have pressed the Bush administration to get tougher on China in particular, have blamed those policies for zapping millions of jobs from the United States.

Protectionist fires are likely to be fanned by more revelations yesterday that major U.S. financial institutions are searching for cash infusions from sovereign wealth funds, the investment arms of foreign governments. Such funds in Asia and the Middle East are flush from the industrial revolution in China and soaring oil and gas exports in the Persian Gulf states.

To date, sovereign wealth funds have invested nearly $30 billion in Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns. Citigroup and Merrill are to get up to an additional $14 billion combined, the Wall Street Journal reported this week. Such deals are emerging as flashpoints for some critics, who insist that it is not in U.S. interests to have the nation's key financial institutions part-owned by foreign government entities.

In addition, Congress is considering bills that would clear the way for economic sanctions on China if it continues to prop up its currency, which some analysts say is being artificially undervalued by as much as 40 percent against the dollar to ensure that Chinese exports remain cheap.

In an interview yesterday, Commerce Secretary Carlos M. Gutierrez said the trade deficit with China had actually narrowed slightly in November and warned against slipping into a new era of protectionism.

"If the discussion were to translate into isolationist and protectionist policies, I think that would be bad for our economy and bad in terms of the message that we are sending to the world," Gutierrez said.

Staff writer Dina ElBoghdady contributed to this report.

Michele Kearney said...

http://www.savannahnow.com/node/429661

As economic stimulus talk grows, so do doubts over effect
Exchange | Intown
Kevin G. Hall and Renee Schoof | Monday, January 14, 2008 at 12:30 am

WASHINGTON - As President Bush and Congress weigh the need for a stimulus package to ensure the slowing economy keeps growing, experts warn there's insufficient evidence the effort is needed and it could do more harm than good.

No one can yet say with certainty that the U.S. economy is about to enter a recession, defined as two consecutive quarters of negative economic growth. And by the time that becomes clear, a stimulus plan could be too late to do much immediate good.

"I just don't see anything useful getting done quickly, and the first half of the year is the critical period," said David Wyss, chief economist for Standard & Poor's.

Driving talk of a stimulus package is last Friday's weak employment data, which showed anemic growth of 18,000 non-farm payroll jobs, the weakest in four years. If that's followed by similar numbers in coming months, it would point to weaker consumption. And because consumer spending drives about two-thirds of U.S. economic activity, it could point to a recession.

It's why Bush admitted Jan. 7 that there were new "economic challenges" and it's what has led his aides to confirm he's weighing a stimulus package. Former Treasury Secretary Lawrence Summers and Harvard University economist Martin Feldstein earlier had called for targeted measures to keep the economy out of recession.

Bush's last stimulus package in 2001-2002, amid a recession and after the Sept. 11 terror attacks, included tax breaks for businesses to spend on equipment, inventories and hiring. It also extended unemployment benefits, expanded food-stamp programs and provided one-time government checks to about two-thirds of citizens. Most of those ideas are under discussion again.

For political reasons, a stimulus package seems almost certain. Bush doesn't want to sink his party's election chances with a sluggish economy or, worse yet, one that's in recession. Yet on strictly economic terms, the case for a stimulus package isn't clear.

Aides to President Bush said he's not expected to discuss any stimulus plan until the State of the Union address Jan. 28.

For starters, December's employment data may have been an aberration.

James Paulsen, the chief investment strategist for Wells Capital Management, part of the large national bank Wells Fargo, points to an unusually large number of people who fell into the category of "not at work due to Bad Weather" during the Labor Department's recent reporting period. The December figure of 187,000 was about 59,000 people above the historical average for that month.

"I think this suggests that perhaps many reports for December were 'downside' weather distorted," he wrote in a Jan. 4 note to investors.

Paulsen and some other economists believe economic growth during the last three months of 2007 may prove stronger than forecast, perhaps as high as 2 percent. That would mean proof of a recession wouldn't be apparent until at least June. And on the heels of 4.9 percent growth in the third quarter of 2007, it suggests strong tailwinds could lead to slower growth but not a recession.

That view was shared by the National Federation of Independent Businesses. On Tuesday, it released its December survey of economic trends affecting small businesses, which found that its members still plan to add jobs and boost spending.

"Overall, no recession in the data, just slow growth with, unfortunately, higher-than-desired inflation," wrote William Dunkelberg, the federation's chief economist.

Aides to President Bush said he's not expected to discuss any stimulus plan until the State of the Union address on Jan. 28. Leading Democrats in the House of Representatives and the Senate confirm that they, too, are crafting a stimulus package.


"Democrats' top priority is addressing the struggles middle-class Americans face every day. We're exploring a number of options designed to strengthen the middle class and solve our broader economic problems," said Jim Manley, a spokesman for Senate Majority Leader Harry Reid, D-Nev.

But no one is sharing details.

"It's really hard to be optimistic about the process because it is an election year," said Vincent Reinhart, a former top Federal Reserve economist now working for the American Enterprise Institute, a conservative policy research group.

Experts fear that a stimulus could come with a cost to long-term economic well-being.

When Bush got a stimulus package through Congress in 2001, he did it with a budget surplus. For the 2007 fiscal year, which ended last Sept. 30, the federal deficit swelled to $163 billion, a stark number but one not historically high as a percentage of the total economy. Reinhart fears the president and Congress could pile on to the deficit.

"Anytime you start from a hole, digging usually isn't the strategy to get out of it," he said.

Michele Kearney said...

Fears About Economy Increase
Debt Crisis Grows; Top Mortgage Firm Sold at a Bargain

By Anthony Faiola and Tomoeh Murakami Tse
Washington Post Staff Writers
Saturday, January 12, 2008; A01
http://www.washingtonpost.com/wp-dyn/conte...1103959_pf.html


Major banks and mortgage companies yesterday sharply accelerated an industry consolidation that is set to change the landscape of American lending, while a convergence of events exposed fresh worries about the U.S. economy.

New indications emerged yesterday that the spiraling subprime mortgage crisis is spreading from home loans to credit cards, potentially engulfing a far broader segment of Americans. At the same time, the U.S. trade deficit soared to a 14-month high, fueled by soaring oil prices.

And rising concern that U.S. investment houses, particularly Merrill Lynch, may yet suffer far greater losses, helped set up a wide market sell-off.

Echoing the heightened concern, Treasury Secretary Henry M. Paulson Jr. said yesterday that the U.S. economy had slowed "rather materially" at the end of 2007 and that "time is of the essence" in launching an economic stimulus package to stave off a recession.

Meanwhile, a broad shake-up of the U.S. lending industry is speeding up. Bank of America agreed yesterday to buy the troubled Countrywide Financial for $4 billion, a bargain-basement price for the nation's largest mortgage lender, which, analysts said, could have even more substantial mortgage-related losses ahead.

"There are signs" that the economy "is slowing down fairly rapidly," Paulson told Bloomberg Television. Congressional Democrats have promised to work with the Bush administration to pass a series of economic measures meant to boost consumer confidence and fend off a sharp downturn, perhaps including tax rebates for low- and middle-income Americans and tax cuts and other fiscal measures to boost investment. "If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon," Paulson said.

Some saw the rescuing of Countrywide from possible bankruptcy, as well as news that J.P. Morgan Chase is in "very early talks" with about a half-dozen regional banks, including Washington Mutual of Seattle, as evidence of a much-needed consolidation that in the long run could fortify the lending industry and eventually ease the nation's credit crunch.

At best, however, that dawn remains some ways off. Economists said the market drop yesterday signals that Wall Street is increasingly betting on a recession and failed to respond to vows by Federal Reserve Chairman Ben S. Bernanke that the central bank would act aggressively to prevent one.

The Dow Jones industrial average of 30 blue-chip stocks plunged 246.79, or 1.9 percent, to 12,606.30. The Standard & Poor's 500-stock index, a broader market measure, lost 19.31, or 1.4 percent, to 1401.02. The tech-heavy Nasdaq composite index declined 48.58, or 2 percent, to 2439.94.

"I almost feel like we're in the first innings of a bear market," said Jim Herrick, director of equity trading at Robert W. Baird. "It's really hard to see the light at the end of the tunnel."

Jitters were also stirred by a New York Times report that Merrill Lynch may take a $15 billion write-down when it reports earnings next week, exceeding the $12 billion that had been predicted. In addition, American Express shares shed 10.1 percent of their value after the company warned that it would take a charge of $440 million in the fourth quarter, in part to cover higher delinquencies.

As companies continue to be squeezed in the credit crunch, the landscape for financial institutions has increasingly become a matter of survival of the fittest. Wobbling mortgage lenders are searching for bailouts, and banks relatively unscathed by deteriorating mortgage assets are cautiously looking for discounted takeover targets.

Bank of America, at least on paper, is getting Countrywide on the cheap -- picking up the lender at a mere 31 percent of its book value. Yet even at that price, analysts fretted that Bank of America may still be taking on too much risk and exposing itself unnecessarily to what could be a far deeper cache of bad debt on Countrywide's books.

Other factors that will determine whether the United States is able to avoid a recession, or at least blunt its pain, are developments in the labor market, whether consumers continue to tighten their purse strings, and how much money financial institutions will be losing in the months to come as the shake-out continues.

Joe Brusuelas, chief economist at the research firm IdeaGlobal, said the magnitude of these losses may be staggering.

"We haven't even scratched the surface of what the losses will be," Brusuelas said. "I don't think we're anywhere near the end. Rather, we're still at the beginning of this."

On the plus side, some economists said, U.S. institutions are moving to deal with a bad situation far faster, for instance, than Japanese banks did after the collapse of that nation's real estate market in the early 1990s. Major U.S. financial institutions have written off $68 billion as they come to grips with the depths of their troubles.

"This all signals that we're moving in the right direction," said Art Hogan, chief market analyst for Jefferies & Co. "But we're going to have more bumps in the road ahead, especially next week, when many financial institutions will report their earnings and probably more write-offs."

Economic concerns deepened yesterday after the release of data showing an unexpectedly larger U.S. trade deficit in November, $63.1 billion. Analysts had hoped that the weaker dollar would help U.S. companies export America's way to a narrower trade gap. But while exports did stage a relatively robust uptick, they were more than offset by a 16.3 percent rise in the nation's bill for foreign oil.

The widening deficit has serious political ramifications, particularly in an election year in which globalization and free trade have become popular pi¿atas on the campaign trail as a blame for America's economic woes. Critics of free trade, as well as those who have pressed the Bush administration to get tougher on China in particular, have blamed those policies for zapping millions of jobs from the United States.

Protectionist fires are likely to be fanned by more revelations yesterday that major U.S. financial institutions are searching for cash infusions from sovereign wealth funds, the investment arms of foreign governments. Such funds in Asia and the Middle East are flush from the industrial revolution in China and soaring oil and gas exports in the Persian Gulf states.

To date, sovereign wealth funds have invested nearly $30 billion in Merrill Lynch, Citigroup, UBS, Morgan Stanley and Bear Stearns. Citigroup and Merrill are to get up to an additional $14 billion combined, the Wall Street Journal reported this week. Such deals are emerging as flashpoints for some critics, who insist that it is not in U.S. interests to have the nation's key financial institutions part-owned by foreign government entities.

In addition, Congress is considering bills that would clear the way for economic sanctions on China if it continues to prop up its currency, which some analysts say is being artificially undervalued by as much as 40 percent against the dollar to ensure that Chinese exports remain cheap.

In an interview yesterday, Commerce Secretary Carlos M. Gutierrez said the trade deficit with China had actually narrowed slightly in November and warned against slipping into a new era of protectionism.

"If the discussion were to translate into isolationist and protectionist policies, I think that would be bad for our economy and bad in terms of the message that we are sending to the world," Gutierrez said.

Staff writer Dina ElBoghdady contributed to this report.

Michele Kearney said...

America's inflated asset prices must fall
By Stephen Roach

Published: January 8 2008


The Financial Times


The US has been the main culprit behind the destabilising global imbalances of recent years. America's massive current account deficit absorbs about 75 per cent of the world's surplus saving. Most believe that a weaker US dollar is the best cure for these imbalances. Yet a broad measure of the US dollar has dropped 23 per cent since February 2002 in real terms, with only minimal impact on America's gaping external imbalance. Dollar bears argue that more currency depreciation is needed. Protectionists insist that China - which has the largest bilateral trade imbalance with the US - should bear a disproportionate share of the next downleg in the US dollar.

There is good reason to doubt this view. America's current account deficit is due more to bubbles in asset prices than to a misaligned dollar. A resolution will require more of a correction in asset prices than a further depreciation of the dollar. At the core of the problem is one of the most insidious characteristics of an asset-dependent economy - a chronic shortfall in domestic saving. With America's net national saving averaging a mere 1.4 per cent of national income over the past five years, the US has had to import surplus saving from abroad to keep growing. That means it must run massive current account and trade deficits to attract the foreign capital.

America's aversion toward saving did not appear out of thin air. Waves of asset appreciation - first equities and, more recently, residential property - convinced citizens that a new era was at hand. Reinforced by a monstrous bubble of cheap credit, there was little perceived need to save the old-fashioned way - out of income. Assets became the preferred vehicle of choice.

With one bubble begetting another, America's imbalances rose to epic proportions. Despite generally subpar income generation, private consumption soared to a record 72 per cent of real gross domestic product in 2007. Household debt hit a record 133 per cent of disposable personal income. And income-based measures of personal saving moved back into negative territory in late 2007.

None of these trends is sustainable. It is only a question of when they give way and what it takes to spark a long overdue rebalancing. A sharp decline in asset prices is necessary to rebalance the US economy. It is the only realistic hope to shift the mix of saving away from asset appreciation back to that supported by income generation. That could entail as much as a 20-30 per cent decline in overall US housing prices and a related deflating of the bubble of cheap and easy credit.

Those trends now appear to be under way. Reflecting an outsize imbalance between supply and demand for new homes, residential property prices fell 6 per cent in the year ending October 2007 for 20 major metropolitan areas in the US, according to the S&P Case-Shiller Index. Most likely, this foretells a broader downturn in nationwide home prices in 2008 that could continue into 2009. Meanwhile, courtesy of the subprime crisis, the credit bubble has popped - ending the cut-rate funding that fuelled the housing bubble.

As home prices move into a protracted period of decline, consumers will finally recognise the perils of bubble-distorted saving strategies. Financially battered households will respond by rebuilding income-based saving balances. That means the consumption share of gross domestic product will fall and the US economy will most likely tumble into recession.

America's shift back to incomesupported saving will be a pivotal development for the rest of the world. As consumption slows and household saving rises in the US, the need to import surplus saving from abroad will diminish. Demand for foreign capital will recede - leading to a reduction of both the US current-account and trade deficits. The global economy will emerge bruised, but much better balanced.

Washington policymakers and politicians need to stand back and let this adjustment play out. Yet the US body politic is panicking in response - underwriting massive liquidity injections that produce another asset bubble and proposing fiscal pump-priming that would depress domestic saving even further. Such actions can only compound the problems that got America into this mess in the first place.

China-bashers in the US Congress also need to stand down. America does not have a China problem - it has a multilateral trade deficit with over 40 countries. The China bilateral imbalance may be the biggest contributor to the overall US trade imbalance but, in large part, this is a result of supply-chain decisions by US multinationals.

By focusing incorrectly on the dollar and putting pressure on the Chinese currency, Congress would only shift China's portion of the US trade deficit elsewhere - most likely to a higher-cost producer. That would be the same as a tax hike on American workers. If the US returns to income-based saving in the aftermath of the bursting of housing and credit bubbles, its multilateral trade deficit will narrow and the Chinese bilateral imbalance will shrink.

It is going to be a very painful process to break the addiction to asset-led behaviour. No one wants recessions, asset deflation and rising unemployment. But this has always been the potential endgame of a bubble-prone US economy. The longer America puts off this reckoning, the steeper the ultimate price of adjustment. Tough as it is, the only sensible way out is to let markets lead the way. That is what the long overdue bursting of America's asset and credit bubbles is all about.

The writer is chairman of Morgan Stanley Asia

Copyright The Financial Times Limited 2008

Michele Kearney said...

Op-Ed Columnist
From Hype to Fear
By Paul Krugman
NEW YORK TIMES

http://www.nytimes.com/2008/01/07/opinion/...agewanted=print

The unemployment report on Friday was brutally bad. Unemployment rose in December, while job creation was minimal — and it’s highly likely, for technical reasons, that the job number will be revised down, showing an actual decline in employment.

It’s the latest piece of bad news about an economy in which the employment situation has actually been deteriorating for the past year. It’s no longer possible to hope that the effects of the housing slump will remain “contained,” as one of 2007’s buzzwords had it. The levees have been breached, and the repercussions of the housing crisis are spreading across the economy as a whole.

It’s not certain, even now, that we’ll have a formal recession, although given the news on Friday you have to say that the odds are that we will. But what is clear is that 2008 will be a troubled year for the U.S. economy — and that as a result, the overall economic record of the Bush years will have been dreary at best: two and a half years of slumping employment, three and a half years of good but not great growth, and two more years of renewed economic distress.

The November election will take place against that background of economic distress, which ought to be good news for candidates running on a platform of change.

But the opponents of change, those who want to keep the Bush legacy intact, are not without resources. In fact, they’ve already made their standard pivot when things turn bad — the pivot from hype to fear. And in case you haven’t noticed, they’re very, very good at the fear thing.

You see, for 30 years American politics has been dominated by a political movement practicing Robin-Hood-in-reverse, giving unto those that hath while taking from those who don’t. And one secret of that long domination has been a remarkable flexibility in economic debate. The policies never change — but the arguments for these policies turn on a dime.

When the economy is doing reasonably well, the debate is dominated by hype — by the claim that America’s prosperity is truly wondrous, and that conservative economic policies deserve all the credit.

But when things turn down, there is a seamless transition from “It’s morning in America! Hurray for tax cuts!” to “The economy is slumping! Raising taxes would be a disaster!”

Thus, until just the other day Bush administration officials were in denial about the economy’s problems. They were still insisting that the economy was strong, and touting the “Bush boom” — the improvement in the job situation that took place between the summer of 2003 and the end of 2006 — as proof of the efficacy of tax cuts.

But now, without ever acknowledging that maybe things weren’t that great after all, President Bush is warning that given the economy’s problems, “the worst thing the Congress could do is raise taxes on the American people and on American businesses.”

And even more dire warnings are coming from some of the Republican presidential candidates. For example, John McCain’s campaign Web site cautions darkly that “Entrepreneurs should not be taxed into submission. John McCain will make the Bush income and investment tax cuts permanent, keeping income tax rates at their current level and fighting the Democrats’ plans for a crippling tax increase in 2011.”

What “crippling” tax increase, which would tax entrepreneurs into submission, is Mr. McCain talking about? The answer is, proposals by Democrats to let the Bush tax cuts for people making more than $250,000 a year expire, returning upper-income tax rates to the levels that prevailed in the Clinton years.

And we all remember how little entrepreneurship there was, how weakly the economy performed, during the Clinton years, right? Oh, wait. (I’ve put some charts comparing job performance during the Clinton and Bush years on my Times blog, krugman.blogs.nytimes.com. It’s pretty startling how comparatively weak the Bush era looks.)

Never mind. The whole point of scare tactics is that they can work even in the face of inconvenient facts.

And what I’m not sure about is whether the Democrats are ready for the fight they’re about to face.

Not to put too fine a point on it, Barack Obama won his impressive victory in Iowa with a sunny, upbeat message of change.

But there’s a powerful political faction in this country that understands very well that any real change will create losers as well as winners. In particular, any serious progressive reform of health care, let alone a broader attempt to reduce middle-class insecurity and inequality, will have to mean higher taxes on the affluent. And members of that faction will do whatever it takes to scare people into believing that change means disaster for the economy.

I don’t think they’ll succeed. But it would be a big mistake to assume that they won’t.

Michele Kearney said...

Banking giant warns US economy in recession

http://business.scotsman.com/economics/Ban...nomy.3649002.jp

WALL Street banking giant Merrill Lynch claimed today that the United States, the world's biggest economy, was in recession for the first time in 16 years.

The bank's chief American economist David Rosenberg – who is widely respected on Wall Street – said a batch of economic data pointed to recession.

Merrill's point of view may be some way off being confirmed, with the country's National Bureau of Economic Research possibly waiting for around a year to draw any firm conclusions from the latest data.
President George Bush insisted that the US economy had a "strong foundation". But he warned that continued growth cannot be taken for granted.

Mr Rosenberg said figures on retail sales, manufacturing, personal income and employment backed up Merrill's claim.

He said that these four main barometers used to gauge the health of the economy "seem to have peaked around the November to December period, strongly suggesting that we are actually into the first month of a recession".

Normally, a recession is declared after two quarters of decline.

"According to our analysis, this (recession] isn't even a forecast any more, but is a present-day reality," he said.

But other observers disagreed, with rival bank Lehman Brothers issuing a document stating ten reasons why the US economy would not fall into recession.

However, Mr Rosenberg insisted recession was not about "labels".

The full article contains 230 words and appears in Edinburgh Evening News newspaper.Last Updated: 08 January 2008 10:32 AM

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Anonymous said...

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http://www.economicshelp.org/2008/01/what-went-wrong-with-us-economy.html