Greenspan Wins Dynamite Prize

by Dollars and Sense

From the folks at the Real-World Economics Review (formerly the Post-Autistic Economics Review); they initially called this the "Ignoble Prize in Economics," not knowing that that name had already been taken (much as they, ahem, kind of stole the name our textbook series--Real World Macro, Real World Micro--has had for more than twenty years, but we still like them). So glad Larry made the top three!

Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers have won the first–and hopefully last—Dynamite Prize in Economics.

In awarding the Prize, Edward Fullbrook, editor of the Real World Economics Review, noted that "They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy."

The prize was developed by the Real World Economics Review Blog in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, "Black Swan" event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.

The prize winners were determined by a poll in which over 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review . Each voter could vote for a maximum of three economists. In total 18,531 votes were cast.

Fullbrook cautioned that not all economics and economists were bad. "Only ‘neoclassical’ economists caused the GFC. There are other approaches to economics that are more realistic—or at least less delusional—but these have been suppressed in universities and excluded from government policy making."

"Some of these rebels also did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach. In their honour, I now call for nominations for the inaugural Revere Award in Economics, named in honour of Paul Revere and his famous ride. It will be awarded to the 3 economists who saw the GFC coming, and whose work is most likely to prevent another GFC in the future."

Dynamite Prize Citations

Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.

Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.

Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.

In total 18,531 votes were cast. The vote totals for the other finalists were:

Fischer Black and Myron Scholes 2,016

Eugene Fama 1,668

Paul Samuelson 1,291

Robert Lucas 912

Richard Portes 433

Edward Prescott and Finn E. Kydland 403

Assar Lindbeck 375

The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.

For further information and interviews email: pae_news@btinternet.com

Labels: Alan Greenspan, Dynamite Prize in Economics, larry Summers, Milton Friedman, Post-Autistic Economics Review, Real World Economics Review

 

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2/22/2010 04:18:00 PM 0 comments

 

The Ignoble Prize for Economics

by Dollars and Sense

The Real-World Economics Review (formerly the Post-Autistic Economics Review), has opened voting for what they are calling the Ignoble Prize for Economics, for "the three economists who contributed most to enabling the Global Financial Collapse." Here are the details:

Twenty-two economists were nominated for the prize. Through consultation with contributors to the Real-World Economics Review Blog, the following short list of ten, including two pairs of economists, has been selected for the ballot.

Dossiers of short-listed of nominees for the Ignoble Prize for Economics:

Fischer Black and Myron Scholes
They jointly developed the Black-Scholes model which led to the explosive growth of financial derivatives. The importance given to their hypothetical calculation of derivative prices was baneful not just because it was bogus, but also because it meant that relevant and often urgent real-world economic research was widely neglected by the profession.

Eugene Fama
His "efficient market theory" provided the moral umbrella for all sorts of greed, predatory behaviour and incompetent corporate management. It also provided the rationale for deregulation. And his theory’s widespread acceptance meant that "discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse." In these three ways Fama’s work created the environment which made possible the GFC.

Milton Friedman
He propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of the financial theories with unrealistic assumptions that facilitated the GFC. In short, he opened the door for everyone subsequently to theorize without fear of having to be attached to reality.

Alan Greenspan
As Chairman of the Federal Reserve System from 1987 to 2006, he both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation. Before a Congressional committee on 28 October 2008 Greenspan confessed that his theoretical beliefs of 40 years were now proven to be without foundation, hence his total confusion and failure at his job.

Assar Lindbeck
By working to make the Riksbank Prize in Economic Sciences ("Nobel Prize in Economics") almost exclusively a prize for neoclassical economists, this Swedish economist has contributed significantly to the conversion of the economics profession and of world public opinion to market fundamentalism.

Robert Lucas
His development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman's proposition that monetary factors do not affect the real economy and, in the name of "rigor", distanced economics even further from reality than Friedman had thought possible.

Richard Portes
As Secretary-General of the Royal Economic Society from 1992-2008, he helped suppress worries expressed by non-mainstream economists about developments in the financial sector. In 2007 he wrote a Report for the Icelandic Chamber of Commerce giving a clean bill of health to Icelandic banks only a few months before they collapsed. When investigators called attention to the real state of Icelandic banking, he wrote a series of letters to the Financial Times defending the soundness of Icelandic banks and imputing professional incompetence to those who doubted it.

Edward Prescott and Finn Kydland
For jointly developing and popularizing "Real Business Cycle" theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes.

Paul Samuelson
Through his textbook Economics: An Introductory Analysis (19 English language editions and translated into 40 languages), he popularized neoclassical economics, contributing more than any other economist to its diffusion and thereby to the deregulation of financial markets which made possible the GFC.

Larry Summers
As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), he worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also worked with Greenspan and Wall Street interests to torpedo efforts to regulate derivatives.

Procedures
The voting is being conducted using PollDaddy. Its system uses cookies to prevent repeat voting. A voting box showing the short-listed candidates and a link to their dossiers will remain till voting closes near the top of the right-hand column on the home page of the Real-World Economics Review Blog. Voting is open to all interested parties. Each voter can vote for up to three of the listed candidates. The ballots are secret. Voting will remain open for several weeks. No results will be announced before closing the poll.

Labels: Alan Greenspan, Edward Presscott, Eugene Fama, larry Summers, Milton Friedman, Paul Samuelson, Real-World Economics Review, Robert Lucas

 

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2/02/2010 11:20:00 AM 0 comments

 

Two Views of the Crisis

by Dollars and Sense

A brief, clear comparison from Simon Johnson on the Baseline Scenario blog:

There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008. The heart of the world’s financial system, in and around the United States, suddenly became unstable. Presumably this instability had a cause—and most official statements begin with “the crisis had many causes”—but this is less important than the need for immediate and overwhelming macroeconomic policy action.

The official strategy, for example as stated clearly by Larry Summers is to support the banking system with all the financial means at the disposal of the official sector. This includes large amounts of cash, courtesy of Federal Reserve credits; repeated attempts to remove “bad assets” in some form or other, and—the apparent masterstroke—regulatory forbearance, as signaled through the recent stress tests.

But most important, it includes a massive fiscal stimulus implying, when all is said and done, that debt/GDP in the United States will roughly double (from 41% of GDP initially, up towards 80% of GDP).

Not surprisingly, funneling unlimited and essentially unconditional resources into the financial sector has buoyed confidence in both that sector and at least temporarily helped shore up confidence in financial markets more broadly.

And now, in striking contrast to the dramatic action they call for on the macroeconomic/bailout front, the official consensus claims relatively small adjustments to our regulatory system will be enough to close the case—and presumably prevent further recurrence of problems on this scale. If the exact causes and presumed redress are lost in mind-numbingly long list of adjustments, so much the better.

This is, after all, a crisis of experts—they deregulated, they ran risk management at major financial firms, they opined at board meetings—and now they have fixed it.

Maybe.

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense. In this view, the underlying cause of the crisis is much simpler—the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

We’ll double our national debt (as a percent of GDP), and for what? To further entrench a rent-seeking set of firms that the government determined are “too big to fail,” but will not now take any steps to break up or otherwise limit their size.

We need to disengage from a financial sector that has become unsustainably large (see slides before and after #19; the cross-country data should be handled with care). We can do this in various ways; there is no need to be dogmatic about any potential approach—if it works politically, do it. But the various current proposals for dealing with this issue—both from the administration and the leading committees of Congress—would make essentially zero progress.

As moving in this direction does not seem imminent, the probable consequences or—if you prefer—collateral damage looks horrible. You can see it as higher taxes in the future, lower growth, a bigger drag on our innovative capacity, fewer startups, and less genuinely productive entrepreneurship. Plenty of people will be hurt, and they are starting to figure this out—and to think harder about what needs to be done and by whom.

“Small enough to fail” may well prevail eventually—at least sensible ideas have won through in past US episodes—but it will take a while. The official consensus always seems immutable, right up until the moment it changes completely and forever.

Go to the original blog for links, including the slides he mentions.

Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers

 

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6/23/2009 09:57:00 AM 0 comments

 

The Global Financial Community

by Dollars and Sense

An excellent article by Prabhat Patnaik on networkideas.org, the website of International Development Economics Associates, starts off with Lenin and goes on to talk about the role that the IMF and the World Bank play to create a "group of core ideologues" to exert "peer pressure" on elites to adopt a belief system that is friendly to global finance capital. This helps to explain why Obama picked the economic advisers he did:

How people like Summers, Geithner and Rubin come to occupy such important political positions within the U.S. system is pretty obvious. American Presidential elections require massive amounts of money, a good chunk of which invariably comes from Wall Street. The story doing the rounds for a while was that Obama had got most of his funds from small donations of $100 each garnered through the internet; but this was complete nonsense. Obama like others before him had also tapped Wall Street and the appointment of the trio, who had organized Wall Street finance for him, was a quid pro quo. The elevation of members of the global financial community to run the American economy therefore should cause no surprise.

I love the light tough of his title. Anyhow, here's the beginning of the article, which is well worth reading. Hat-tip to LF.

The Global Financial Community

By Prabhat Patnaik

Lenin in Imperialism had talked about a financial oligarchy presiding over vast amounts of money capital through its control over banks and using this capital for diverse purposes, such as industry; speculation; real estate business; and buying bonds, including of foreign governments. The finance capital that Lenin was talking about belonged to particular powerful nations; correspondingly, the oligarchies he was referring to were national financial oligarchies. He talked for instance of French, German, British and American financial oligarchies. But in the current epoch of ''globalization'' when finance capital itself is international in character, the controllers of this international finance capital constitute a global financial oligarchy. This global financial oligarchy requires for its functioning an army of spokesmen, mediapersons, professors, bureaucrats, technocrats and politicians located in different countries.

The creation of this army is a complex enterprise, in which one can discern at least three distinct processes. Two are fairly straightforward. If a country has got drawn into the vortex of globalized finance by opening its doors to the free movement of finance capital, then willy-nilly even well-meaning bureaucrats, politicians, and professors will demand, in the national interest, a bowing to the caprices of the global financial oligarchy, since not doing so will cost the country dear through debilitating and destabilizing capital flights. The task in short is automatically accomplished to a large extent once a country has got trapped into opening its doors to financial flows.

The second process is the exercise of peer pressure. Finance Ministers, Governors of Central Banks, top financial bureaucrats belonging to different countries, when they meet, tend increasingly to constitute what the distinguished Argentine economist Arturo O'Connell has described as an ''epistemic community''. They begin increasingly to speak the same language, share the same world view, and subscribe to the same prejudices, the same ''humbug of finance'' (to use Joan Robinson's telling phrase). Those who do not are under tremendous peer pressure to fall in line; and most eventually do. Peer pressure may be buttressed by the more mundane temptations that Lenin had described, ranging from straightforward bribes to lucrative offers of post-retirement employment, but, whatever the method used, conformism to the ''humbug'' that globalized finance dishes out as true economics becomes a mark of ''respectability''.

But even peer pressure requires that there should be a group of core ideologues of finance capital who exert and manipulate this pressure. The ''peers'' themselves are not free-floating individuals but have to be goaded into sharing a belief-system. There has to be therefore a set of key intellectuals, ideologues, thinkers and strategists that promote this belief system, shape and broadcast the ideology of finance capital, and generally look after the interests of globalized finance. They are not necessarily capitalists or magnates; but they are close to the financial magnates, and usually share the ''spoils''. The financial oligarchy proper, consisting of these magnates, together with these key ideologues and publicists of finance capital, can be called the ''global financial community''. The function of this global financial community is to promote and perpetuate the hegemony of international finance capital. And here the most critical issue concerns the relationship of this global financial community to the politics of particular countries.

To say that the World Bank and the IMF are the main breeding ground for these key figures who are part of the global financial community and mediate the relation between particular countries and globalized finance is to state the obvious. True, the Fund and the Bank are not the only institutions; there are sundry business schools and departments of economics, of business administration, and of finance in prestigious Anglo-Saxon universities. But even for the products of the latter institutions, the Fund and the Bank often act as "finishing schools."

Read the rest of the article.

Labels: IMF, imperialism, larry Summers, Lenin, Prabhat Patnaik, Timothy Geithner, World Bank

 

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5/14/2009 12:19:00 PM 0 comments

 

AIG, Labor, and the Sanctity of Contracts

by Dollars and Sense

Today's main columnist in the New York Times business section, Andrew Ross Sorkin, echoes the comments Larry Summers made on TV this weekend with regard to the AIG bonuses and the sanctity of contracts. Sorkin quotes Obama: "[The issue of AIG bonuses] isn't just a matter of dollars and cents. It's about our fundamental values." Sorkin goes on:

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the "fundamental value" in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

Sorkin frets about whether government "abrogating contracts left and right" would lead companies to break contracts willy nilly. But it's more about the government, and companies, breaking contracts left, but not right. As Ali Frick points out at Think Progress, companies already seize opportunities to break inconvenient contracts—with unions. And the government, egged on by the right-wing, encouraged them to do so:

Yesterday on ABC's This Week, Larry Summers, head of President Obama's National Economic Council, called insurance giant AIG's plan to pay out $165 million in bonuses "outrageous" but insisted there was little the government could do about it. This despite the $170 billion in taxpayer funds that have been given to AIG. Summers cited the sanctity of contracts:

SUMMERS: We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.

Summers said that efforts by Treasury Secretary Tim Geithner had successfully "scaled back" the bonuses, but AIG chief Edward Liddy, defending the bonuses, told Geithner, "quite frankly, AIG's hands are tied."

Of course, not all contracts are sacrosanct. When Detroit's Big Three arrived in Washington last year to plead for federal bailout funds, the right wing demanded that the United Auto Workers ignore their contracts and accept "steep cuts in pay and benefits"—on top of the cuts they already shouldered in 2007. The UAW agreed to "make major concessions in its contracts," acceding to most of the right's demands:

UAW President Ron Gettelfinger emerged from the meeting to say the union would rework a retiree health care trust fund, eliminate the union's maligned jobs bank program…and cut additional measures that would loosen the union's trademark job-security protections.

Along with other commenters, the American Prospect's Robert Kuttner pointed out the government's double standard on contracts, telling George Stephanopoulos yesterday, "You don't think when the auto workers come in as part of the auto rescue deal, they're not being asked to abrogate contracts? Of course they are."

The Obama administration also supports rewriting mortgage contracts. It "has moved aggressively to pressure lenders to renegotiate the terms of mortgages," and Obama supports an idea to allow bankruptcy judges to change the terms of a mortgage to help homeowners stay afloat.

To his credit, Obama today ordered Treasury Secretary Tim Geithner "to use that leverage and pursue every single legal avenue to block these bonuses." But it's still clear that while workers' contractual benefits can be eviscerated in the name of bailout eligibility, millionaire bankers' bonuses are a more sacrosanct part of "a country of law" where "there are contracts."

Labels: AIG, auto industry, bailout, contracts, financial crisis, larry Summers, unions

 

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3/17/2009 09:58:00 AM 0 comments

 

Neoliberalism, the IMF, Summers, & Geithner

by Dollars and Sense

Interesting post by Ken Hanly on lbo-talk, about Obama's new economics appointees: Timothy Geithner (to be Treasury Secretary) and Larry Summers (to be head of the National Economics Council, which coordinates economic policy throughout the executive branch):

Both Summers and Geithner worked at the IMF and favored the deregulation that caused the financial crisis and Geithner of course has worked with Paulson and Bernanke and also used taxpayer money to help JP Morgan purchase Bear Stearns.

http://www.tnr.com/politics/story.html?id=c85b418b-5237-4f54-891f-8385243162bd

Geithner also won solid reviews for his handling of the Bear Stearns meltdown in March, when he greased JP Morgan's purchase of the failed investment bank by insuring it against up to $29 billion in losses on Bear's dowry of toxic assets. As the economist Brad DeLong has written, Geithner seemed to strike the right balance between preventing a crisis (by effectively saving Bear's bondholders and counterparties) and discouraging irresponsible risk-taking (JP Morgan's bargain-basement purchase-price saddled Bear's stockholders with huge losses). Though some complain that JP Morgan itself made out too well, few disagree with the deal's basic contours.

The IMF is continuing neoliberal policies of the sort that prevailed during the time when Summers was there. The neoliberals are not dead they are just changing tack because they need to socialise losses for a while and government intervention is a means of doing this. There is a need to spread a few crumbs as well since not enough have trickled down to stimulate demand. The public also needs to pay for the worn down infrastructure of advanced capitalist countries. Here is what is happening due to the IMF in Hungary and Iceland:

http://www.socialistproject.ca/bullet/bullet155.html

This unfolding social crisis has returned the IMF to center stage. Typically, the IMF lends to those countries facing potential collapse and, in return, demands the fulfillment of stringent economic conditions. The scale of borrowing is already immense: Iceland ($2.4-billion), Ukraine ($16.5-billion), and Hungary ($15.7-billion) have been extended loans with Pakistan, Serbia, Belarus, and Turkey likely candidates in the near future.

The conditions that come with this latest round of IMF lending have been particularly opaque. The policies that Ukraine is expected to pass, for example, are not yet known despite the fact the country has essentially agreed to take a $16.5-billion loan from the IMF. Hungary has agreed to cuts in welfare spending, a freeze in salaries and canceling bonuses for public sector workers yet the final details have not been made public. Iceland was required to raise interest rates to 18% with the economy predicted to contract by 10% and inflation reaching 20%.

We can certainly expect that the conditions attached to loans in the poorer countries in the Global South will be much more stringent than those imposed on these European countries. There is little doubt that these countries will face massive job losses, intense pressure to privatize public resources, and slashing of state spending on welfare, education and health in the name of 'balanced budgets.' Whether these attacks on the social fabric are successful, however, will ultimately depend on the level of resistance they face.

Labels: IMF, larry Summers, neoliberalism, Timothy Geither

 

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11/25/2008 11:46:00 AM 0 comments

 

The High Priests of the Bubble Economy

by Dollars and Sense

Dean Baker via Yves Smith of Naked Capitalism; hat-tip to Ben Collins.

Dean Baker goes full bore after two deserving targets, Bob Rubin and Larry Summers, at TPM Cafe. Key excerpts:

Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe.

It is important to separate Clinton-era mythology from the real economic record. In the mythology, Clinton's decision to raise taxes and cut spending led to an investment boom. This boom led to a surge in productivity growth. Soaring productivity growth led to the low unemployment of the late 1990s and wage gains for workers at all points along the wage distribution.

At the end of the administration, there was a huge surplus, and we set target dates for paying off the national debt. The moral of the myth is that all good things came from deficit reduction.

The reality was quite different. There was nothing resembling an investment boom until the dot-com bubble at the end of the decade funnelled vast sums of capital into crazy internet schemes. There was a surge in productivity growth beginning in 1995, but this preceded any substantial upturn in investment. Clinton had the good fortune to be sitting in the White House at the point where the economy finally enjoyed the long-predicted dividend from the information technology revolution.

Rather than investment driving growth during the Clinton boom, the main source of demand growth was consumption...

The other key part of the story is the high dollar policy initiated by Rubin when he took over as Treasury secretary...

A lowered dollar value will reduce the trade deficit, by making US exports cheaper to foreigners and imports more expensive for people living in the US. The falling dollar and lower trade deficit is supposed to be one of the main dividends of deficit reduction. In fact, the lower dollar and lower trade deficit were often touted by economists as the primary benefit of deficit reduction until they decided to change their story to fit the Clinton mythology.

The high dollar of the late 1990s reversed this logic. The dollar was pushed upward by a combination of Treasury cheerleading, worldwide financial instability beginning with the East Asian financial crisis and the irrational exuberance propelling the stock bubble, which also infected foreign investors.

In the short-run, the over-valued dollar led to cheap imports and lower inflation. It incidentally all also led to the loss of millions of manufacturing jobs, putting downward pressure on the wages of non-college educated workers.

Like the stock bubble, the high dollar is also unsustainable as a long-run policy. It led to a large and growing trade deficit. This deficit eventually forced a decline in the value of the dollar, although the process has been temporarily reversed by the current financial crisis.

Rather than handing George Bush a booming economy, Clinton handed over an economy that was propelled by an unsustainable stock bubble and distorted by a hugely over-valued dollar...

While the Bush administration must take responsibility for the current crisis (they have been in power the last eight years), the stage was set during the Clinton years. The Clinton team set the economy on the path of one-sided financial deregulation and bubble driven growth that brought us where we are today. (The deregulation was one-sided, because they did not take away the "too big to fail" security blanket of the Wall Street big boys.)

For this reason, it was very discouraging to see top Clinton administration officials standing centre stage at Obama's meeting on the economy. This is not change, and certainly not policies that we can believe in.

Labels: Dean Baker, financial crisis, housing bubble, larry Summers, Naked Capitalism, Robert Rubin, Yves Smith

 

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11/13/2008 12:26:00 PM 0 comments

 

Co-centric Vicious Cycles

by Dollars and Sense

This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.

The European Central Bank and Bank of England, as expected, cut interest rates (with the BoE coming down an unprecedented 1.5% to 3.0%), but exceedingly poor corporate and consumer outlooks are pulling stocks down anyway. In Asia, both the Japanese Nikkei and Hang Seng in Hong Kong endured terrible losses. Obama is putting on a full-court press to contain the damage (expect him to name Clinton ex-Treasury secretary Lawrence Summers or New York Fed chair Timothy Geither today to head the Treasury Department), but if stocks continue their slide, he'll have to announce some sort of stimulus proposal, probably involving infrastructure spending, very soon. It remains extremely worrying that extraordinary measures, like the BoE cut, and circumstances, like the hurry-up Obama transition, have exerted only temporary effects on a downward spiral in global markets that has seen trillions wiped away from pension funds and other forms of wealth people really rely on (not just the ill-gotten gains of the filthy-rich), in just a few weeks: there will be a real shock when people get their fourth-quarter 401 K statements, even if they don’t spend much on Christmas shopping, which will itself deliver another body-blow to the economy. And, meanwhile, hedge fund redemptions continue, and that cycle of deleveraging shows no sign of abating: in fact, be prepared for an uptick in hedge fund bankruptcies. What you have here is a series of co-centric vicious cycles, all collapsing into each other. What anyone can do to stop it is still anyone's guess.

Tomorrow the employment report for October comes out, and I believe it will be horrible (expect 150,000 jobs to be gone). At this rate, the Obama administration could be worn out before it even officially takes office.

Labels: Bank of England, Barack Obama, european central bank, financial crisis, Larry Peterson, larry Summers, stock market, Timothy Geither

 

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11/06/2008 09:37:00 AM 0 comments