DeLong Way Home

In response to the following articles sent by a friend and/or mentor:

Odds Increasing That We're Headed For A Great Depression The Business Insider November 17, 2009 Brad DeLong has long argued against the fears that we could head into something like the Great Depression. But now the UC Berkeley economist has turned a bit bearish on the economy.

From DeLong (see proceeding article): For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it -- that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. DeLong thinks that Democratic deficit hawks and Republican anti-stimulus politicians will effectively prevent the government from doing anything to ameliorate a deteriorating economic situation. What’s more, outrage against the bailouts coming from the left and the right will prevent the Obama administration from orchestrating anything like we saw last fall. “So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?” DeLong asks. ________________________________________ Chance of Great Depression Now 5%… J. Bradford DeLong's Grasping Reality with All Eight Tentacles [Ref. http://delong.typepad.com/sdj/2009/11/chance-of-great-depression-now-5.html] November 16, 2009

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it - that we know what to do and how to do it and will do it if things turn south. I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy -- a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more -- are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it. We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing proble afrer 2030.

The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments. We could cushion the impact of another big downward shock by recapitalizing the banks again. But the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system: the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible. So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do? [DeLong references the following Bloomberg article.] ________________________________________ Fed ‘Severely Limited’ Savings on AIG, Watchdog Says: Bloomberg [Ref. http://www.bloomberg.com/apps/news?pid=20601103&sid=a_O0IqdEksIw] November 16, 2009 The Federal Reserve Bank of New York “severely limited” its ability to save taxpayer money on American International Group Inc.’s rescue by refusing to compel banks to take concessions, said a Treasury Department watchdog. The Fed didn’t use its “considerable leverage” as regulator of several of AIG’s counterparties to force them to accept so-called haircuts on credit-default swaps, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said today in a report. The regulator gave up efforts to negotiate discounts from the banks after two days and opted to pay them in full for $62.1 billion in swaps, Barofsky said. “These policy decisions came with a cost -- they led directly to a negotiating strategy with the counterparties that even then-New York Fed President Geithner acknowledged had little likelihood of success,” Barofsky said.

Timothy Geithner, now Treasury secretary, was among officials who took over negotiations with the banks from AIG in November 2008. Lawmakers including Representative Darrell Issa have said the September 2008 AIG rescue was a “backdoor bailout” for banks that received billions in payments. The Fed contacted eight of AIG’s biggest counterparties by telephone last year to negotiate discounts, Barofsky said. While UBS AG, the Zurich-based bank, was willing to make a 2 percent concession, the Fed decided that all counterparties would receive full payment, he said. ‘Misuse’ of Power In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power that would have given an advantage to non-U.S. banks that the Fed doesn’t regulate, the Fed said.

Andrew Williams, a Treasury spokesman, said in an e-mail statement that Barofsky’s report “overlooks the central lesson learned from the unprecedented steps taken to support AIG.” “The federal government needs better tools to deal with the impending failure of a large institution in extraordinary circumstances like those facing us last fall,” Williams said. “It is for these reasons that the Obama administration has proposed a regulatory reform agenda that includes giving the government the emergency authority to resolve a significant, interconnected financial institution.”



My response is I’m surprised DeLong doesn’t already think we are in Great Depression II. On McNeil-Lehrer last night, there was a story about how Food Banks in Texas and D.C. are getting overwhelmed by people not just unemployed but underemployed without enough money to afford food. I’m sure you saw the recent study that one in seven in this country are going hungry. Mind you, that IS with unemployment insurance which was not available in Great Depression I.

Also, I don’t think we printed this massive amount of money to build up massive capital reserves for banks in Great Depression 1. If I’m not mistaken, the banks failed and there were runs on the banks so people had no money at all. Now imagine if these banks failed like they should have failed, the loans fail and/or failed like they should have and there was no unemployment insurance….and this guy thinks there was no chance of a Depression!

Unemployment for part-time workers, frustrated unemployed persons, etc. is 17.5 percent and 10.2 percent under U-3. That’s soon to increase based on the numbers I’m seeing. During the Great Depression 1, it was 25 percent unemployment. First, it may get there just yet. Second, if banks did fail and businesses had to take a good hard look at themselves, that unemployment number would have likely gone to 25 percent or more.

However you look at it, the Federal government is running the economy. They are the ones making it happen and hoping that the economy will eventually run on its own. The problem is that it cannot run on its own.

I spoke with an author at a book festival last weekend who wrote “Spread the Wealth” and the basic premise of his book is an historical perspective of “printing” money and the disastrous results it had during past recessions or down cycles. He said Bernanke’s philosophy to print money and take us out of this malaise is not political, it’s just bad economics. He forecasts the Dow dropping to 7,000-8,000 and advises on short-term bonds as well as gold.

Meredith Whitney was on Bloomberg yesterday saying we’re in for a “W” shaped recession (not as downward on the second part of the W) and she sees no way that is not going to happen.
It amazes me how some economists will not admit to a deflationary environment.

Some numbers change—consumer confidence, retail sales, housing starts, sales, etc. Some numbers have not changed—increasing unemployment, higher capital reserves and the amount of toxic debt that remains in these financial institutions. A large bank or two or three will need to be acquired or put into receivership; with the help of the Federal Government, they need to dump those crappy assets and sell them off before a normal debt-flowing economy can take over without government intervention.

And, when I say government intervention, that includes Goldman (Government) Sachs and Berkshire (Just call me King George) Hathaway lending out $500 million to preferred small businesses to use the capital and pull away from other small businesses that GS and BH—and, of course, zombie banks--won’t lend to. That seems real fair. Then GS and BH can invest in the “winners.”

In reference to the movie, we’re in “Zombieland.” The government will run the flow of money in this economy until it stops. When it stops, who knows? But one thing is certain—unemployed people, bearish consumers (people who can actually obtain credit) and that 70 percent of GDP necessary for a strong economy is not happening anytime soon.