Mad Money
So, topic for discussion and debate on which I’m genuinely uncertain. Is the economy fucked? Or is it fucked with extra fucked, slathered in fucked sauce, and fucked for dessert? Are we, as a commenter wrote downblog a couple weeks ago (in rough paraphrase), "Like Argentina, a formerly wealthy country that went bankrupt, and we just don’t realize it yet?" (Was it you mds?) Or has it just been so long since we had a real man’s recession we mistake an acorn for the sky?
Another way of putting it is, "So, did Bin Laden win then? Did we bankrupt ourselves on an insane and criminal war in half the time it took the Soviets, in response to his ever-so-helpful prodding?" Or is it just a matter of wringing out the excess briefly so the economy can come roaring back. And, could Cato’s blog hire a non-hack economist to address the subject? No? Never mind then! (Still love you guys, my Cato foreign-policy homies! But your econ staff has not risen to the level of engagement a standard-issue Weekly Standard writer managed vis a vis Iraq in 2005. Alan Reynolds’ choosing today of all days to favorably cite an "excellent economist" from Bear Stearns may go down in history as the "We’re Winning" of the Recession of 2008.
Just saying! And other than that, it’s eerily quiet over there. You’ve got Tim Lee and Justin Logan and Benjamin Friedman doing their usual great work on civil liberties and foreign policy, but the site’s been a wasteland on money matters.)
On the bright side, I don’t see how we can blow another few trillion expanding the size of the Army and buying fancy new planes. On the down side, um, everything else.
Comment by Thoreau —
March 17, 2008 @ 11:17 pm
Here’s one way to pay for the war and hence avoid the economic damage of all those taxes:
Everybody who talks about winning in Iraq has to sell two kidneys and give the profits to the Treasury.
Comment by Avram —
March 17, 2008 @ 11:39 pm
Well, if we are in the crapper, I’m pretty sure we put ourselves there, with little to no help from bin Laden. Or did al Qaeda infiltrate American banks and arrange all those sub-prime mortgages?
Comment by Leonard —
March 18, 2008 @ 12:19 am
Thoreau, “nobody knows” is the answer. I think there’s pretty good reason to think the USA will withstand this shock, but then we’re operating in unknown territory. The Fed has been inflating for so long, creating so much malinvestment, that’s it’s impossible to know how much there is. The only way to find out is to watch the thing unwind.
If you want to parameterize the damage a little bit, according to the best guesses of “the market”, look at the price of gold, the anti-fiat money. Gold is where people go when they are afraid of inflation, and afraid of dollars, and also afraid of all the other fiat currencies because they’re linked to dollars… and afraid of the stock market because there’s too much bad paper there, and because economic slowdown looms. Take away stocks, bonds, and fiat money savings and you’re not left with much.
Currently gold has just topping $1000/oz, so, market is saying “somewhat fucked”. It’s still cheap in historical terms compared to the DOW, though. If gold hits $10000, Mr Market’s saying “really, really fucked”.
Comment by Jon Hendry —
March 18, 2008 @ 1:06 am
“Like Argentina, a formerly wealthy country that went bankrupt, and we just don’t realize it yet?”
With a dash of Miss Havisham.
Comment by weldon berger —
March 18, 2008 @ 1:55 am
On the bright side, I don’t see how we can blow another few trillion expanding the size of the Army and buying fancy new planes.
You jest, right?
Comment by The Editors —
March 18, 2008 @ 2:00 am
How fucked is fucked? A few days ago it was going to be the worst recession since the early 70’s. Yesterday I heard it compared to the 1950’s. And now we’ve crossed the Great Depression threshold. And it’s only Monday! I’m going to get ahead of the curve here and compare it to the comet impact that burst “the dinosaur bubble” c.150 million BC. Sell! Sell! Sell! I suggest a diverse portfolio of cave paintings, fur loincloths, very large wooden clubs, and raw meat to weather the coming troubles. Watch CNBC for further updates.
No one could have predicted that letting a semi-retarded dry drunk with a history of abject business failure run the country for 8 years might end up having negative economic consequences.
Comment by ML —
March 18, 2008 @ 2:03 am
This has been a long time in coming. I would trace this all the way back to the collapse of Bretton Woods. That’s probably a very controversial assessment, but I don’t think it would be controversial to trace this back at least to 1999 and the repeal of Glass-Steagall. That would make the problem much shallower; still, 9 years is a long time for things to go horribly wrong.
(Just a tip: If a law was passed in 193x, and that law concerns the financial sector, don’t touch it. It’s probably there for a reason.)
So I’ll try the fucked sauce, thanks.
Comment by The Editors —
March 18, 2008 @ 2:04 am
“Coming troubles” s/b “routine and necessary short-term corrections as part of a temporary and natural cyclic downturn”. Sorry for any damage my careless wording may have caused to your stock portfolio.
Comment by Turkey Turkey Turkey —
March 18, 2008 @ 2:15 am
The American economy is seriously fucked but Iraq didn’t play a large part in fucking it over.
Even if Cheney hadn’t invaded Iraq, the economy still would have tanked on account of the real estate bubble, subprimes, and hedge fund mismanagement.
Iraq is really just an economic sideshow compared to the disaster created by domestic greed and the abject failure of regulatory oversight.
Comment by TGGP —
March 18, 2008 @ 2:27 am
Vietnam didn’t turn us into Argentina. I say avoid pessimistic bias. It’ll likely be shitty for a while, but not world-changing shitty.
Comment by bad Jim —
March 18, 2008 @ 4:51 am
Although the collapse of the American economy would suck for us Americans, it might benefit the planet. Just think of the vast quantities of waste that our newly impoverished population could no longer afford to generate.
Just kidding, of course. We’ll weather this storm and put off the apocalypse for a bit.
Comment by quasibill —
March 18, 2008 @ 8:45 am
As others have noted, the current mess can be traced further back than 2001, although there is plenty that was done wrong in the new century. For example, the MBS fiasco can be traced back to at least the 1950s, when the government started trying to create a market for these toxic messes.
And even if it was mostly from this century, it’d be hard to lay too much blame on W’s head (and this coming from an ardent anit-war type) because the real damage was done by the federal reserve (and is continuing to be done by them – MZM is up over 30% from 1/2007 to 1/2008!) and they’re not directly accountable to the White House.
If things were left to wind themselves out naturally at this point, it would be a painful, relatively short correction that would wipe out a lot of million and billionaires, and cause a massive restructuring of our economy (the financial sector would shrink tremendously, as would some related sectors). But I don’t think things will be left to wind themselves out naturally, so I suspect things will be much worse than that.
Comment by Alex Knapp —
March 18, 2008 @ 8:46 am
We are fucked like Japan was fucked circa 1989-1991, when property values dropped 60% and the Nikkei about the same. Japan, as you may be aware, managed to come roaring back, and our economy is much more resilient than theirs.
I don’t expect the next two or three years to be particularly FUN, though.
Comment by mds —
March 18, 2008 @ 9:23 am
Okay, first, once upon a time Ben Bernanke was an inflation hawk. “Respectable” economists were so pleased with his selection, because he’d target inflation with a vengeance. Now he’s vigorously socializing the risks of dumbshit decisions by investment bankers (which makes them dumbshit like a fox in retrospect), slashing interest rates like crazy, and holding out the prospect of running the printing presses once the rest of the Fed’s $800 billion is used up on guaranteeing more worthless shit. I wouldn’t have thought Bear Sterns and their ilk were that crucial to the global economy. So, given that Bernanke is doing the complete opposite of what everyone figured he’d do, in order to bail out Wall Street while the White House hollers about the dangers of doing too much to fix the problems on Main Street, why would we not presume that this gang of crooks have their puppeteer’s hand up Bernanke’s ass? Greenspan was “independent,” yet colluded with his fellow Republicans in the Great Social Security Swindle.
And though I know Keynes is a dirty word to some, the now-standard fiscal stimulus tools available to the government to deal with recessions are hampered by the multi-trillion dollar hole blown in the budget by W’s tax cuts and W’s war of choice. So there’s plenty of blame available for the head that wears the crown.
No, but I like it.
Comment by Derek Copold —
March 18, 2008 @ 9:45 am
Argentina is an inapt analogy. You’re talking about decades of irresponsible governance, the likes of which even the most outrageous Haliburton conspiracy theory can only dream of.
We have our problems, and, in the long run, we’d be better off letting a lot of people face the consequences of their poor decisions, but we’re not in banana republic territory–yet.
Comment by Dave Intermittent —
March 18, 2008 @ 9:50 am
But Jim, buying more planes is economic stimulus, and didn’t WWII end the depression? It would be irresponsible not to buy planes, and useless missle defense systems, and submarines to take out the Al-Queda fleet….
Comment by quasibill —
March 18, 2008 @ 10:00 am
Well, except for the fact that Japan circa 1989-1991 was a net creditor, whereas we are a net debtor. Similarly, Japan in 1989 was dominated by a relatively older generation that had a cultural affinity for thrift, whereas we in the U.S. currently have an average negative personal savings rate.
No, I suspect that our economy is substantially LESS resilient than Japan’s circa 1989-1991. That’s not to say that the correction/recession/depression/whatever will affect everyone equally, but the inevitable conclusion is that the average standard of living for a USAian is about to drop (is dropping) precipitously. When the process is done, my guess is that we’ll be something like Spain, France, or Italy.
Here’s a useful graph for understanding what’s been going on:
http://www.itulip.com/forums/showthread.php?p=30746#post30746
HMX is the poster’s precious metals “basket” that is used to correct for loss of the value of a dollar.
Comment by Gsnorgathon —
March 18, 2008 @ 11:30 am
“Now he’s vigorously socializing the risks of dumbshit decisions by investment bankers …”
.
Isn’t that what American capitalism is all about, though? I.e., socialism for the rich?
Comment by Volum Hussein Recessionista —
March 18, 2008 @ 12:21 pm
“it’d be hard to lay too much blame on W’s head”
But since it’s his invasion and occupation, his expansion of gov’t, his tax cuts, his GWOT, his economic team making the rate cuts and his congress and cronies assisting in deregulation… who the fuck else’s big stinking shitpile mess could this possibly be?
I’ve thought long and hard about this, and I can’t think of who else has been running this country for the last seven years.
(PS: Iraq is a $3 trillion dollar “sideshow”??)
The Editors:
No one could have predicted that letting a semi-retarded dry drunk with a history of abject business failure run the country for 8 years might end up having negative economic consequences.
woooo!!!! Best comment of the year…ok, day!
Comment by Tim —
March 18, 2008 @ 12:30 pm
Let’s see:
Japan in 1998:
oil Krakatoa, East of Java.
Comment by Eric Scharf —
March 18, 2008 @ 1:01 pm
I know fuckall about high finance, but it seems to me that the concept of “price discovery” has an excellent application to discussions of Iraq.
Comment by diana —
March 18, 2008 @ 1:05 pm
Don’t know much about prime lending rates but I say we are fucked, and can un-fuck ourselves if we elect someone reasonably competent in 2009. If we don’t, we are super-fucked, and I’m looking into moving to Australia, which looks like a great country with a solid economy, except for that driving on the left side of the road thing.
But I’m the optimistic sort.
Comment by Jon H —
March 18, 2008 @ 1:41 pm
Turkey: “The American economy is seriously fucked but Iraq didn’t play a large part in fucking it over”
Au contraire mon uh, turkey: Iraq drove up energy costs by destabilizing the region. That drives inflation which cuts into peoples’ ability to pay their debts like, say, mortgages.
Comment by Thomas Allen —
March 18, 2008 @ 2:02 pm
Isn’t that what American capitalism is all about, though? I.e., socialism for the rich?
Modern “Conservatism” = Socialize the risk and privatize the profits.
Comment by Nell —
March 18, 2008 @ 2:05 pm
ML: I don’t think it would be controversial to trace this back at least to 1999 and the repeal of Glass-Steagall.
It shouldn’t be, but you’ll get heat for that from the people who want to tie this only to Bush.
There are other Clinton-era and Schumer-wing-of-the-party policies that have contributed, having to do with SEC oversight and loosened accounting rules. There are myriad other large and small ways in which finance capital has been allowed to have its way politically (as far as I can see, a continuous policy since at least 1981).
Comment by Nell —
March 18, 2008 @ 2:15 pm
On the role played by Bush’s trillion-dollar war: Stiglitz and Bilmes attributed only 5% of the increase in energy prices since 2002 to the invasions and occupations, and they view that as a very conservative estimate.
The biggest effect of the the war spending is due to every dollar of it being borrowed (and unbudgeted: again, it has been funded almost entirely with “emergency supplementals”, a huge abuse of a loophole in the budget process that is designed to minimize Congressional oversight. Congress is complicit in this, which means Democrats are complicit ever since January 2007). The result of the whole expenditure being borrowed is the way in which, in combination with the tax cuts, this kind of debt constrains the government’s ability to respond to the crisis.
Comment by quasibill —
March 18, 2008 @ 2:15 pm
mds -
I don’t necessarily disagree that the same gang of crooks is repsonsible – I just think that you have the chain of command backwards.
The Fed is not directly accountable to the WH. But the individuals who are “inside” the Fed are amongst the largest campaign contributors *to all major candidates*. So instead of Bush having his hand up Bernanke, I think there is a group that has their hands up both.
Inflation is a monetary phenomenon. Absent growth in the money supply, the increase in price in one commodity *must* be accompanied by reductions in prices of other commodities. Don’t led these @ssholes fool you into thinking the hyperinflation we’re about to experience is related to them evil A-rabs. When you double the supply of money over the course of only a few years, only an economic illiterate doesn’t expect massive inflation, and these guys are not economically illiterate. They knew what they were doing, they knew what the results would be, and they did it anyway – because they profited handsomely off of it.
Look, I’d love to blame all this on Bush – I hate the war, the militarization, the incipient fascism, the secrecy, the whole nine yards of the man’s agenda. Also, the solution would be easy, then. But, while he certainly didn’t help, he’s not the prime mover behind this slow motion train wreck that we’re experiencing. It doesn’t matter who we elect next – the damage has been done. All that’s left now is to watch the shaky edifice collapse and hopefully prepare to build a sounder economy next time.
Comment by quasibill —
March 18, 2008 @ 2:19 pm
Worth repeating, although I’d say “modern capitalism”. This is precisely the point of Kevin Carson’s labels “vulgar libertarian” and “vulgar liberal”.
Comment by Jon H —
March 18, 2008 @ 2:43 pm
” Absent growth in the money supply, the increase in price in one commodity *must* be accompanied by reductions in prices of other commodities.”
Uh, no. Increased oil and gas prices will eventually cause other products to increase in price due to increases in transportation and manufacturing costs. Food costs will rise to account for increased cost of transportation and fertilizer. (Either that, or the price will stay the same and quantities will shrink, which is the same end result.)
This effect has been hidden in the official statistics because they exclude food and energy.
Comment by Jon H —
March 18, 2008 @ 2:44 pm
Note: I’m not saying inflation is all due to oil. I’m saying oil prices are a factor.
Comment by TGGP —
March 18, 2008 @ 3:25 pm
Dean Baker wrote a book about it, The Conservative Nanny State. Unfortunately he only uses it for “And they do it too!” purposes rather than advocating the abolition of the harmful policies he points out.
Comment by mds —
March 18, 2008 @ 3:31 pm
Oh, well, actually, I’ll gladly tie it to the Republican Party in collusion with Republican Lites like Clinton and Schumer. The causes of the current trainwreck lie in the unholy marriage of the Friedmanian mindset that the only thing worse than an unregulated monopoly is a regulated one, with the notion that big business needs to be bailed out of its unregulated recklessness by taxpayers. Too many Democrats have joined Republicans as the tools of Wall Street. The lack of effective fixes for the current trainwreck, however, is largely due to the current administration, which had us already leveraged out the wazoo and running large deficits when times were supposedly good. Not a lot of wiggle room is available for a recession, especially since the bailouts on the public dime have already started. Add that to an SEC whose new logo is a pair of lowered pants, etc. “We merely continued decreasing oversight from the previous administration” doesn’t strike me as a particularly compelling excuse.
Comment by Gene Callahan —
March 19, 2008 @ 4:56 am
“Iraq is really just an economic sideshow compared to the disaster created by domestic greed and the abject failure of regulatory oversight.”
There very well may have been some “failure of regulatory oversight,” but surely the bigger problem has been the repeated Fed bailouts for investment banks that took on excessive risk, with each bailout acting to persuade subsequent risk-takers that they could only gain if the upside was realized, while being protected on the downside by the assurance of a Fed rescue. In other words, the primary cause of the current crisis has been too much intervention, not too little.
Comment by mds —
March 19, 2008 @ 8:16 am
Indeed. Imagine a community that decided to eliminate many of its fire codes, and declined to police the rest. Imagine that the community fire department is then mandated to run around frantically putting out the much more frequent fires, but only at rich people’s mansions, while ignoring burning middle-class and below neighborhoods. After all, the high property tax mansions are extremely important to the local economy, and stopping such a fire from spreading also saves other mansions on the street. Clearly, such a community has been guilty of too much intervention, not too little.
Comment by Barry —
March 19, 2008 @ 3:15 pm
mds, just add that the unregulated business are in the repeated habit of storing large quantities of very flammable materials in poor storage conditions, and leaving large piles of highly flammable trash around.
Comment by digamma —
March 26, 2008 @ 5:43 pm
And he did it again today!