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Posts Tagged ‘Roubini’

Vice President Biden said it very clearly – we “misread how bad the economy was”.  That’s the good thing about Joe Biden; he just tells you straight, just like it is.  He doesn’t try to finesse things or put the right political spin on things – he just blurts out the truth as best he knows it.  It’s kind of refreshing, isn’t it?  A day or so later. President Obama tried to correct Joe’s statement by saying “we had incomplete information”.  Apparently Paul Krugman wasn’t suffering from incomplete information, nor was Nouriel Roubini. Back in January, Nobel Prize winning economist Krugman criticized the Obama plan saying that we needed a stimulus package twice as big as the Obama plan. Meanwhile, Nouriel Roubini, the economist who predicted the worldwide economic meltdown, thereby earning the title of Dr. Doom and simultaneously qualifying for a Nobel Prize himself, also said that the Obama stimulus was insufficient.  So how is it that noted economists like Krugman and Roubini had enough information to come out and say that the Obama plan wouldn’t be enough?  How can the President of the United States have incomplete information? It seems that the truth lies more in Joe’s words – they just didn’t realize how bad things were – despite being told how bad things were by these preeminent economists.  In other words they chose not to listen to Krugman and Roubini. I wonder who they did listen to? Geithner? Bernanke? Summers? In any event, they got it wrong and the time has come to correct it.

Now of course the Republican Party has a different opinion.  The are more or less saying, “See, we told you a stimulus wouldn’t work”.  Their plan is to  just  remove all the rules, regulations, and taxes from businesses and restart a free for all economy with no rules – the sort of thing created by Clinton and Bush that created the worldwide meltdown.   Here’s an analogy: let’s suppose your house is on fire and the Obama Fire Department arrives with garden hoses. They spray water on the fire but it doesn’t go out.  Then the Republicans show up – not the Republican Fire Department (because they don’t have one), just a bunch of gawkers who hang around sniggering and making comments like, “See, we knew you can’t put out a fire with water!!  That’s why we don’t even try!  Say, why not try gasoline? That might work!”  The thing is this: we need firehoses, not garden hoses.  It’s a big fire.  Joe was right.  So was Krugman and Roubini. Obama needs to admit it.  They thought unemployment would peak at 8%.  It didn’t. We’ll probably break through to 10% unemployment within a month.  It could go a lot higher.  Meanwhile only 10% of the stimulus money has even been spent. Do I detect a certain lack of understanding here? The house is on Fire!! Break out the firehoses and put the fire out!!  Now!!

Meanwhile, perhaps the Republican “Fire Department” could just step back and keep out of the way. If you’re not part of the solution then you are part of the problem, and we don’t have the time or the luxury to start playing politics while our economy continues to go up in smoke.  I’m glad Joe Biden gets it. He needs to have a talk with President Obama – a Joe Biden kind of talk – and let him know, in no uncertain terms, that we don’t need finesse right now. We don’t need to calculate the exact cost of the remedy and then determine not to spend a penny more.  What we need is Stimulus Part II – and this time, let’s use the firehoses.

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As economists now start talking about the U.S. entering a Depression rather than a Recession, the discussion still centers on the effects of our overly exuberant Real Estate Bubble.  It was a bubble that sucked in the entire world as other countries either emulated the U.S. policy of giving mortgages to people who really couldn’t afford them, or they invested in U.S. toxic mortgages, or both.  In retrospect, the popping of such a ludicrous bubble was inevitable – so why didn’t we all see it coming? Why weren’t the governments of the world raising the alarm in 2003 or 2004?  It’s probably because most of us don’tbb recognize bubbles until they pop; and then we say, “Oh yeah, it was a bubble all right.”

If we care to look a little more carefully at our economy – if we dare – we would probably find that we have been the beneficiaries of other simultaneous bubbles.  For example the War Bubble.  After the 9/11 attacks, the U.S., which already was spending enormous amounts of money on defense, geared up for the War on Terror, the War on Afghanistan,  and the War on Iraq.  The Defense Department budget grew, we created a separate line item in the budget for the Global War on Terror, and we created the Department of Homeland Security with its own huge budget.

The 2009 U.S. budget calls for a Department of Defense budget of $651 billion. The 2009 budget also calls for a Homeland Security budget of about $38 billion.  Combining these we have total planned expenditures for war, in some way or other, of about $700 billion.  It is interesting to note that some economists predict that the total cost for the Iraq War alone could eventually reach $4 trillion. Now were talking real money!

According to Nouriel Roubini, the NYU economist who predicted our current economic meltdown, the total amount of losses in the financial sector, due to bad real estate loans and bad business loans will be about $3.6 trillion.  So what does this have to do with defense spending? The similarity is this: the frantic economic activity during the Real Estate Bubble: borrowing, buying, and selling, injected trillions of dollars into the economy that trickled down and trickled up to all levels.  In the case of the War Bubble a very similar thing is happening. The U.S. government has borrowed a lot of money from China to finance the Iraq War. However, this cost has not been obvious to the American public because a vast amount of this money was spent either in the U.S. or paid to U.S. contractors involved in the war efforts in Iraq and Afghanistan.  For many Americans, employees of Raytheon, Northrop Grumman, Halliburton, and many, many others, their weekly paychecks have come, either directly or indirectly from the War Bubble.  In short, we have been living on two bubbles: a Real Estate Bubble and a War Bubble. Now, we are about to pop the War Bubble.

As the U.S. pulls out of Iraq and the Obama administration scales back much of our defense spending to more rational levels it seems inevitable that we will all feel the impact as defense contractors scale back.  Defense and war related jobs will be lost.  Hundreds of billions of dollars per year that had been flowing into the economy and trickling up and trickling down will stop flowing.  If the Real Estate Bubble doesn’t send us into Depression, the ending of the War Bubble – combined with the popping of the Real Estate Bubble certainly will.

Unless, of course, the Obama administration takes preemptive action and pumps a lot of money into the economy right away.  The Obama administration’s current plans are to pump about $825 billion into the economy to create new jobs.  The question is this: is that enough? Is this really enough to compensate for the double bubble economy that has been driving our economy throughout the Bush administration? I don’t think so.  He’ll need to put in more money – lots more.  Our economy is now in a screaming nose dive.  Now is not the time to be stingy. Obama should be thinking trillions, not billions.

Even more important, Obama needs to think about creating a stable economy, and a stimulus that builds roads and bridges is nothing more than a temporary fix, a finger in the dike, because it doesn’t create long term, self-sustaining businesses. It’s called a stimulus, but what is it that is being stimulated? There is not an infinite, unending consumer market for roads and bridges.

We also need a science and technology stimulus because that is where we have a chance to find and create the next generation high tech industries that can be the foundation of a 21st Century, self sustaining economy.  This is the best opportunity to get the U.S. away from a bubble economy.  So far, I don’t see much evidence of such a concept, and while the roads and bridges stimulus thing will help in the short term, we need to recognize that ultimately it’s only a Roads and Bridges Bubble.

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Nouriel Roubini was one of the few people who very accurately predicted our current economic meltdown.  Recently he wrote that the cause of the meltdown was “the bursting of a huge leveraged-up credit bubble”.  He goes on to say in this recent article that he believes the economy will get worse before it gets better. The question we should be asking ourselves is why? We know that the nation’s banks made terrible decisions about granting credit, not only for houses, but also for credit cards, auto loans, furniture loans – you name it. If you could walk and breathe you could get credit to buy almost anything. In retrospect the result of all of this is obvious: a lot of people who couldn’t possibly pay back their loans didn’t pay back their loans.  For a long time the banks new that they shouldn’t give loans to non-creditworthy people, so why did they change their minds? The banks had found a way out of their potential liability – they sold the loans. A whole industry of derivatives and credit default swaps emerged.  Loan obligations were sliced and diced and sold and resold and insured and eventually very few people in the banking industry actually had the ability to understand the true value of the new derivatives they had created.

There was one other really bad problem with these loans – they had exhorbitant interest rates.  Even people with good credit would have had a hard time making the required payments. As Roubini said, it was a bubble, and it has burst with devastating results.  The Secretary of the Treasury raced to solve the problem of our collapsing banking system (they had loaned out their money and it wasn’t being paid back) by creating the TARP fund, a $700 billion government fund that was a way to funnel money to banks. About half of that money has been doled out, but the economy is still on the ropes.  Why? Because the banks have their money back, and they have no desire to loan money in this economy! Who would? So we sort of have an economy of self-fulfilling prophecies where the banks are afraid to loan money to businesses because they don’t thinks the businesses will be able to pay them back and businesses are  failing because they can’t borrow any money and the banks are saying, “See, we knew they would fail!”

Our banking system has gone through many incarnations since the U.S. began. The current system of a U.S. Treasury and a Federal Reserve that works with private banks is a cobbled together operation that has certain weaknesses, like a propensity to creating credit bubbles and to creating what we have now: a credit vacuum.  It is time we took another look at the structure of our banking system, particularly with regard to creating a new type of bank, a Federal Direct Loan bank that would issue loans directly to consumers at low interest rates. This bank would compete with the private banks and keep them honest.  It would also be a lender even in the most difficult times, ensuring that individuals and businesses could obtain credit and therefore ensuring that the economy would continue to function even when the wealthy private bankers have decided that they don’t want to play.

Something tells me that this would not be a popular idea on Wall Street, but I’m guessing it might fare better on Main Street.

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There are some financial experts who say that we are standing on the brink of a precipice.  Nouriel Roubini, a New York University Economics professor, who predicted the current economic meltdown, says that “things are going to be awful for everyday people” in 2009. There are several other experts who agree with him.  Mr. Roubini attributes the economic disaster to the bursting of a credit bubble – not a housing bubble. I would add that the continuation of the disaster is due to the abject failure of the Bush government to take effective action to prevent or mitigate the collapse of our, and the world’s, economy.  The question we should ask is why? Why hasn’t the Bush government taken decisive action? One might say that perhaps George Bush is an indecisive man, but if we reflect only for a moment on his actions in Iraq we will quickly see that he can be very decisive.  So why hasn’t there been any decisive action taken to prevent the collapse of our economy? Why is it that the only action taken by the Bush administration was to protect the investment banks?

Remember when Barack Obama and John McCain were campaigning against each other and John McCain stated that raising the tax rate to what it was under President Clinton for people who make more that $250,000 was class warfare? Today there is anger in Congress that the Troubled Assets Relief Program (TARP) funds are not being used to combat the rising tide of mortgage foreclosures. Fed Chairman Bernanke predicts that 2.25 million homes will be foreclosed upon this year and the U.S. government is doing nothing to prevent it, even though the TARP was supposed to be used to alleviate the problem. My question is this: When a government that is run by the wealthy elite of America stands by and does nothing, refuses to help even when money has been made available to help the middle class and the poor, isn’t that class warfare?

It seems clearer than ever that our country is divided into two groups: the wealthy elite (the Elect?) who favor Hoover/Bush economics and the great mass of ordinary people who favor Roosevelt/Obama economics.  The question is this: who will prevail? It seems that Mr. Roubini and many others believe the Hoover/Bush group will prevail because otherwise they would be more optimistic about the economy for the next several years.  They might be right. Even as I write, legislation to provide a relatively puny bailout for the auto industry has been stalled by the House Republicans, the representatives of the wealthy elite, who are instead calling for the auto industry to file for bankruptcy. The fact that millions of ordinary Americans will promptly lose their jobs is apparently of no concern to them.

Here’s a question: is this just a difference of opinion on economic theory or is it something else? Could it be that it is really a difference of opinion about the purpose of government? Clearly this government acted urgently to save the wealthy elite owners of the banks, yet they drag their feet when it comes to saving the ordinary man.  Does anyone else see the long shadow of John Calvin standing over our Congress? Save the wealthy Elect, but when it comes to Katrina or Detroit, Asians caught in a tsunami or an earthquake, or Africans dying of starvation – well, just let them die. After all, if God has already decided who shall be saved and who shall be damned why should these wealthy Senators and Congressmen feel guilty? It’s not their fault is it?  The members of our Republican Theocracy has already saved themselves and their fortunes, and now they are about to strike against the poor once again.

My questions for the Republican Party is this: remember when that most famous Republican of all, Abraham Lincoln, said that America was a government “of the people, by the people, and for the people”? So what was that all about? Was he some kind of pinko socialist or communist or what?  What sort of mental gymnastics do you do to somehow claim that you are the party of Lincoln when you are, in fact, the party of the wealthy elite (Elect) and you stand against everything Lincoln stood for?  It is obvious that if he were alive today Abraham Lincoln would be a Democrat. Today’s Republican Party is nothing more than the failed party of Herbert Hoover and George Bush.

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