In what is undoubtedly good news, the US Bureau of Economic Analysis (Dept. of Commerce) has announced that REAL GDP grew by
approximately 3.5% in the third quarter of 2009. That is up from the second quarter growth of .7%. It appears that the economy may be rebounding from the so-called “Great Recession”. However, as with everything, the devil is in the details and the details show that this occurred because of government support. This will be good news for those folks that supported the Stimulus Plan. Details underlying the growth still show that the private sector, however, has yet to pick up slack. This means the growth has not worked its way through the economy in a way that makes it firmly sustainable. The increase in Consumer spending seem rooted firmly in the cash-for-clunkers program as well as the tax credits to first time home buyers. These programs have ended so now we have to look for sustainable consumer spending in areas not financially supported by government programs.
Policy makers will now focus on whether the recovery, supported by federal assistance to the housing and auto industries, can be sustained into 2010 and generate jobs. The record $1.4 trillion budget deficit limits President Barack Obama’s options for more aid, while Federal Reserve officials try to convince investors that the central bank will exit emergency programs in time to prevent a pickup in inflation.
“A lot of this is thanks to government support,” Kathleen Stephansen, chief economist at Aladdin Capital Holdings LLC in Stamford, Connecticut, said in an interview on Bloomberg Television. “The consumer, in fact private demand in general, is not ready yet to pick up the growth baton from the government.”
There has yet to be any signs that improvements will be permanent. The Labor Market, traditionally sticky, has yet to turn around in a fundamentally good way.
A report from the Labor Department showed 530,000 workers filed claims for jobless benefits last week, more than anticipated and signaling the job market is slow to heal even as growth picks up.
There is an extremely good piece over at Naked Capitalism that explains the situation right now called “The choice is between increasing or decreasing aggregate demand” written by Edward Harrison of Credit Writedowns.
(It’s a bit wonky so be forwarned.)
As I see it, the issue we are debating has to do with how the government responds when large debts in the private sector constrain demand for credit in the face of a severe economic shock and fall in aggregate demand. In short, if private sector debt levels are so high that a recession precipitates private sector credit revulsion, how should government respond?
This is a good question as it gets to the heart of what to do next if you’re the government and it reflects reality on the ground which are the constraints facing the economy due to continuing credit market problems. The one thing that the discussion fails to address is the fact that quantitative easing by the Fed is not feeding into the credit markets as much as it appears to be feeding a bubble on Wall Street eagerly supported by the Great Vampire Squid and other enemies spawning in the unfathomable deep. The article focuses on the paradox of thrift and the question “Do we really want the private sector to save at the moment?”
The deal is, we’ve plenty of money circulating through the financial markets at the moment because of actions by the FOMC and of course, the Treasury. The problem is where it’s going. Easy money is financing merger activities and arbitrage rather than underlying investment that promotes long run economic growth. This is the same bubble-producing activity that brings us to no good ends. We really don’t need savings as much to fund business as much as we need business to feel like it can make commitments to job-producing, goods and servicing producing capital investments funded by the financial sector that should be forced to stop its casino banking activities. If anything, we need savers to step up and buy government debt, sort’ve an any bonds today movement to stop our reliance on foreign sources and free ourselves of obligations to human rights violators like the Chinese and Saudis.
This comes back to the policies of Geithner and the necessary Fed butt kicking that should go along with the cheap tax payer funds. Let’s just look at the most recent example where the Funds are coming but I doubt they’ll be accompanied with an agreement with teeth. We’re basically nationalizing another finance sector behemoth GMAC. Here’s the news from the FT of England. (Funny how I always have to go abroad to get the bottom line on these big taxpayer-funded wall street welfare deals, isn’t it?)
GMAC, the car financing company, is set to receive up to $5.6bn in a new capital injection from the Treasury, filling a hole identified in the “stress tests” earlier this year and paving the way for the government to become the majority shareholder.
The company, formerly the financing arm of General Motors, was one of 19 institutions to submit to a capital adequacy programme led by the Federal Reserve and completed in May. That determined that GMAC had a shortfall, which will now be provided by the government in the form of preferred equity, according to two people familiar with the situation.
Companies receiving huge injections like this should be prepared for more than just a government partner and taxpayer funds. Funds 
should come with HUGE strings attached and not just restraints on executive pay. We should not be financing M&A activity or arbitrage profits. We need these funds to go where they will create long term REAL value. Geithner keeps giving these guys they keys to our cars without any parental instructions. We already know they’ve crashed the car a few times. Why aren’t we providing the guidance and ground rules to prevent another disaster? We are we perpetuating the conditions that led to failure the first time out?
Oh, and this is an even more interesting question … now that we’re heavily subsidizing parts of our economy will our trading partners and debt holders continue to smile and hold the bag? Another eye opener from the FT.
China is preparing to launch a trade investigation into whether US carmakers are being unfairly subsidised by the US government, according to people familiar with the matter.
The move comes at a time of heightened trade tensions between the two countries after the US imposed duties on Chinese tyres last month. Many warned this would prompt Beijing to retaliate.
Few vehicles are actually exported from the US to China, but the move would have symbolic power by turning the tables on Washington.
US labour groups have long accused Beijing of unfairly subsidising its exporters. However, through a “countervailing duties” investigation, China would assess whether the US was open to the same charge. The investigation could lead to import duties.
Every one seems to recognize that the Treasury is setting up a system of monopolies that are not healthy for the long term prospects of our economy. Without the systemic changes I harp on continually, we’re bound to get some improvement in the big names, while the underlying fundamentals will belie real change. Is this the game plan? Make the big picture look good while setting up the same house of cards while no one is looking? Economic policy as slight of hand?
Here’s where the smart people are seeing the need to change the system that’s currently under construction by the Treasury Department and the administration economic wonks.
Key officials and lawmakers are reaching a “growing consensus” on the need for a strong mechanism that would allow the government to dismantle troubled financial giants, the chairwoman of the Federal Deposit Insurance Corporation said on Monday.
Sheila C. Bair said administration officials, top bank regulators and lawmakers all agreed that so-called resolution authority needed to be a priority so financial firms do not take on excessive risk, thinking the government will save them, Reuters reported.
“We need to end ‘too big to fail,’ ” Ms. Bair said in remarks to the American Bankers Association annual convention.
The Obama administration plans to send new language to lawmakers shortly on resolution authority, which is seen as a potential deterrent to banks growing too big and complex.
So, the law is in the works, but will it be the usual symbolic effort with no real teeth to it?
The new draft bill is expected to take a tougher stance toward troubled financial firms than the administration’s original plan, and may remove some language that would allow for temporary bailouts.
The strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm’s outstanding loans, an administration official said.
Ms. Bair also said she wanted bank regulators to have input in the proposed Consumer Financial Protection Agency, which would have broad power to protect consumers from risky financial products like high-interest mortgages and credit cards with excessive fees.
“I’m hoping that bank regulators can have some say in those rules,” Ms. Bair said.
The C.F.P.A., as proposed, would have the power to write and enforce rules for both banks and nonbanks that provide financial services. It would strip the current bank regulators of their consumer protection roles, which Ms. Bair has opposed.
We need to watch this proposal carefully and ensure that when the sausage gets made, it’s the pigs that go into the ingredients and not the taxpayers and consumers.
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Filed under: Bad Bank, Economic Blogs, Economic Stimulus, Economy, Financial Meltdown of 2008, Wall Street and the Bonus Class, financial bailout | Tagged: banks, GMAC, Sheila Bair, Too Big to Fail
Wonky pieces at Naked Capitalism I don’t understand, but cartoons with pigs in them I get.
well, that is the bottom line
The Great Depression predates me, so I’m not working from living memory, but just general Depression impression: while the GD got off to a spectacular start in 1929, did the economy not do a jagged decline for three years till it hit rock bottom in 1932? And is that not the process we’re experiencing right now?
Some of the worsening of the Great Depression came from bad monetary policy. They pulled a lot of money in during that time period without the realization of what it would do to the economy. Also, there were mistakes made in fiscal policy too. Since those mistakes won’t be remade, I doubt it will dip quite so deeply, but there is a possibility we could slide more or (more likely) keep scuttling along and not really going any where substantive.
Back in my commercial banking days of the 1970s, I remember being informed that the government had asked all large banks not to participate in “unproductive loans”, since credit was tight. What was considered unproductive? Mergers and acquisitions. Yet, for the past 25 years, our economy has been fluffed up with nothing but M & As, resulting in numerous job losses and more and more “too big to fail” institutions.
As a start, I would like to see all those mergers unwound. Think of the new jobs that would be created! Good paying jobs, too, not to mention the return of competition. Enforcement of regulations is only part of the issue. We need to bring back the Sherman Anti-Trust Laws and Glass-Stegall, IMO.
The Sherman Anti-trust Laws still exist. It’s just the Justice Department ignores them.
I hoping this current legislation will contain some of the Glass-Stegall provisions for solid firewalls between speculative and fiduciary activities, but I’m not holding my breath. We have to watch this go through Dodd and Frank and then of course, Geithner and Summers like hawks!
Sherman Anti-Trust exists on the books only these days. If memory serves me correctly, I think Reagan was the last Pres. to halt a merger based on S A-T. The problem I see is that almost everyone in Congress has no financial or economics background whatsoever, and the economic advisers–regardless of who’s been Pres.–have no experience outside of Wall Street. They’ve never worked for, or been responsible for managing, a manufacturing company or even a service company. To them, everything is theoretical.
I think that the Clinton administration used it against Microsoft, but then the Bush administration didn’t continue enforcement of the court’s orders based on the successful adjudication.
Sometimes, these M&A and LBO activities seem like an endless contrived cycle of lumping together then splitting apart. Unclear if they add tangible value to the economy, but they do keep the bankers and lawyers busy and paid.
http://money.cnn.com/2009/10/28/autos/clunkers_analysis/index.htm
I brought this up from downstairs. The ideas being brought forward from backtrack and bunch never seem to look at the long run.
At first it looks like the cash for clunkers helped.
Now people who really could not afford new cars and might not be able to keep up the payments put themselves in a position to lose their transportation. People who did not may not be able to find parts to fix their cars that are paid off.
We financed this with tax money.
We need more people who can look down the road and have an idea of the consequences of actions.
WOMEN WITH INTELLIGENCE AND EXPERIENCE,MEN WHO SUPPORT THEM AND COUNTRY BEFORE PARTY ALWAYS
PUMAS,BUBBAS,EQUALISTS AND THOSE PEOPLE RULE
A big problem I’ve seen growing is the lack of legislators who actually think of long term consequences to legislation. It seems that everything is — the legislation du jour — is just thrown together with the idea of the wait and see approach. I believed that ‘cash for clunker’s’ program to have been a real bad idea; sure it’s nice to buy a new car but can you always get it fixed easily (& aren’t hybrids even more costly to fix) and then what about the registrations and such that people weren’t aware of. I guess we were lucky our 13 yo car didn’t qualify for the program; we have a VW so it’s a mixed bag sometimes.
Who really got helped here? & are the dealers getting their reimbursements from the feds in a timely manner? That story seemed to just slip into oblivion.
Who got helped? Obama. It made the GDP look like it went up, while unemployment is still going up at the same time.
Besides, the people who took advantage of the $4500 for Clunkers and the $8000 for buying homes, will have to declare that credit as regular income on their returns. Whole lotta people don’t know that.
The $4500 for the Cash for Clunkers program does not count as taxable income for the buyers.. It does count as taxable income for the dealers.
Mary, I heard about the clunkers credit needing to be reported, but also the home owner’s one? That’s bunk!
Also, in WI we just had domestic partner benefits extended to regular healthcare policies, some contract ones were already in effect. Anyhoo, when we inquired about it, that’s when we learned that there is extra money tagged onto your income, and those details still hadn’t been worked out yet! Basically, they wanted you to sign up for your family coverage before finding out the details, and of course, you couldn’t get your coverage changed if you decided to change your mind later on.
My best friend who’s been doing taxes for 25 years, not a CPA but licensed by the IRS, says all the literature she’s getting from new training classes shows both “credits” as being included in regular taxable income.
The income tax preparers are freaking out over all the details required by this new health bill when passed, individual and corporate.
Thanks for another great post and explanation Dak. Would be good to have increased aggregate demand from an improving employments picture rather than subsidies from clunkers and housing credits. It may be the initial path if we’re optimistic and believe the administration and government are channeling investments to the right large business sectors as well as small businesses. Though it’s not clear right now where those sectors of new employment would be.
If we’re being pessimistic, the promising 3.5% GDP (though it could signal a bottom) also reflects the significant additional debt burden we’ve taken on. And the large fiscal deficits could still upend the dollar and permanently alter its role in the global economy. The nation would be a different kind of superpower if our strength came primarily from our defense establishment and not our economic power. Just thinking out loud. Sorry to ramble.
yup, that’s the problem. Read Macroblog at the Atlanta fed. 56% of the current unemployment is from permanent job loss. We’re funding industries that aren’t going to bring back jobs. That’s really bad policy.
http://macroblog.typepad.com/
and it just underscores to me that Obama has no desire to bring those jobs back. It’s gonna take along time to convert those factories to green ones … how is that going btw? I haven’t heard anything about that? We were hoping to get some in the Midwest, but the companies went down south instead.
Meanwhile Kohls main distribution site moved from its original location from WI to Chi-town suburbs. Another big loss for WI (this happened a fe weeks ago). & yet another building stands empty.
Dak, I love your pieces… and you turned me onto Naked Capitalism and Planet Money.
I listened to the whole 4 part series on “The Century of Self” which was eye opening and explained at least for me, why soooo many individuals from the hippie generation voted for Reagan. I wish they’d do a part 5, revisitation with the Obama voters in mind. To me this election was more than a co-opting of lifestyle, but a spiritual or moral filler, for a world increasingly filled with human being with empty souls. Literally, all one had to do be spiritually/morally superior was to vote for the so-called first Black president (can’t remember who was the first, Harding?). You could rectify history in more ways than one and become superior morally to the Bush generation. The Shrub had made it about being a great consumer, which at least one could argue was an ongoing process — shop and shop some more, where for Obama it was even easier — all you had to do was show up to vote for him, then bang, you are superior moral being beyond reproach.
We keep pushing consumerism … most countries find a way to be happy and satisfied that’s less reliant on hoarding junk
Public unveiling of public option not open to the public WTF
http://dakotawarcollege.com/archives/10635
now thats O-transparency at work