Four More Years

Obama’s an accomplished individual. Smart, cool, in control. But his standout quality is probably his ability to create euphoria. Create it, sustain it, ride it. Watch the people celebrating with him at his victory rally in Chicago and you could easily believe that the USA had just won a war or beaten a recession.

Unfortunately for Obama, reality doesn’t have much time for speeches. The economy was dire going into the election. Coming out of it, you can almost hear the engine failing.

Let’s take the first indicator of failure – the stock market. The market mood darkened in September and October, then dropped abruptly as news of Obama’s victory sank in. I don’t actually think that’s because Wall Street hates Obama. I think it’s more that as the election hoopla dies away, investors realise how little they can expect from the government, how bad the economic situation really is. And, for that matter, how bad the political situation is. The House remains solidly Republican, the Senate comfortably Democrat – and the whole divisive status quo guaranteeing gridlock for another four years.

Over the next few weeks, you’re going to hear a lot about the fiscal cliff. In January 2013, a whole lot of things happen together. George W. Bush’s tax cuts expire. A payroll credit expires too. Some automatic spending cuts are imposed across the board. (These last cuts, of course, aren’t thanks to some outbreak of sanity in Washington, but a bad compromise cobbled together in the course of 2011’s debt ceiling crisis.)

The fiscal cliff is huge, and real. Its impact is potentially around 5% of American GDP. By contrast, George Osborne’s fiscal tightening amounts to little more than 1% a year. If you want to get your head round what a comparable tightening would imply in the British context, then just imagine that the basic rate of tax increases by 10 pence in the pound overnight. Or that spending in the NHS is halved, again overnight.

No economy is strong enough to take that kind of punishment. The British economy is struggling to come out of a double-dip recession even with its own weak-as-milk pace of tightening – and, indeed, I think a triple-dip recession is highly probable. The fundamentals of the US economy are in some ways better than ours (less reliance on the finance sector, less proximity to European travails) but a 5% cut in economic demand overnight? The result will be crippling.

Although the US jobless rate has improved slightly in recent months, that’s only because dispirited workers have left the jobs market altogether. The US employment rate is a horror story. Piling a massive fiscal shop on top of those weak fundamentals, and you’re going to see a massive rise in unemployment. (If you look at U6 unemployment data for the US it’s hovering close to 15%, a shocking stat.)

You might think that the solution is obvious. If the fiscal cliff is so bad, then simply decrease the slope. Go for a slow-but-sure Osborne-style tightening so the budget deficit floats gently lower. And sure enough, there are plenty of economists, living comfortably in their ivory towers, who suggest just such a solution.

But that solution is not available. The IMF – hardly a sensationalist organisation – says that the elimination of America’s long run fiscal gap requires both a 35% increase in all taxes and a 35% cut in all entitlements. The fiscal gap is heinous, but it’s only the first step. It doesn’t even take America where it needs to go.

It gets worse. If fiscal policy can’t save America, how about monetary policy? Alas, and just like in Britain, monetary policy is all out of gas. Interest rates can’t go any lower. quantitative easing (QE) has reached its limits. (And, in any case, QE is little more than a way to rescue Wall Street at the cost of inflation for the rest of us.) The worst thing that could happen to America is that Ben Bernanke, the unelected Chairman of the Federal Reserve, tries to rescue things. The best thing that could happen is that he goes on holiday for four years, having left his Blackberry in the office.

The Princeton Professors Economic Experiment

In short, America’s problems are profound and there is no way to deal with them except one that imposes huge short-term costs on the economy and the people. I don’t think it’ll get quite as bad as it has done in Greece – the US economy has a lot, lot more about it than that – but most of the pain still lies ahead.

And in matters of finance, everything is circular. So the government needs to raise taxes and slash spending to sort out its debt problems. The result: a huge reduction in demand and heavy job losses. The result: countless homeowners being unable to service their mortgages and a huge rise in ‘jingle mail’, as homeowners send their house keys to the foreclosing banks. The result: an already weakened banking system sinking further under a tide of ill-advised boom era lending. And of course, as all this happens, the economy will shrink, which means that the US government has to slash spending yet further in a desperate effort to keep its deficit reduction efforts on track.

These words might seem apocalyptic, but I’ve been saying these things for a while. (My book, Planet Ponzi, has the whole story, and it’s out in paperback now.) What’s more, we’ve already seen disaster scenarios such as these come true in well-managed countries of the developed West. Spain had a much lower debt to GDP ratio than the US. It had better supervised banks and less casino-banking. But we all know the state that Spain is in: a death-spiral that even Germany may not be able to help with.

And the signs are everywhere in America. Go-go stocks have lost their lustre. Facebook trades at little more than half its IPO price. Apple, for so long a do-no-wrong stock market darling, is down more than 20% from its recent highs. Businesses are hoarding cash, because they don’t dare invest it, don’t dare return it to shareholders.

I don’t suppose Mitt Romney thinks of it like this, but you could argue that the 2012 election was a heck of a good one to lose. America has outrun financial reality for decades now. Debt-fuelled, government-funded. The future bought on the never-never.

But the debts are falling due. Reality is knocking at the door. And the fiscal cliff is only the start.

The British calling in the calvary

A hundred years ago, a generation of men – many of them volunteers – fought an unprecedently bloody war for almost invisible gains. The men were heroes, but the generals commanding them were too often blunderers, too little conscious of the ever-mounting casualties. David Cameron is right to demand that our schoolchildren are reminded of the Great War and the vast sacrifices involved.

He’s right, but he’s also showing some chutzpah. History remembers those men as ‘lions led by donkeys’. Heroes betrayed by blundering and unimaginative leaders. We are not – thank God – at war on that scale now, but in economic terms we are deep in our own version of trench warfare and David Cameron has too little idea how to lead us out.

The current recession is the longest and (almost) the deepest in modern British history. Its costs are borne, primarily, by those least able to afford them. Those responsible for the damage – the bankers, the regulators, the New Labour generation of politicians – have been largely untouched. The fraudsters who manipulated LIBOR, who missold subprime assets, and so much else, are sitting in Monaco, instead of in jail. The politicians in charge now too often rely on soundbite and deflection; there’s still a shocking lack of transparency and accountability.

The British people bear all this with a huge amount of dignity. High inflation, stagnant wages, crazy property prices, an economy that seems only ever to move sideways? ah well, could be worse. Mustn’t grumble. We’re lions, led by donkeys.

What time is Murray Playing?

But it’s not just in Britain where an economic Great War is laying waste to lives and savings.

In the US, a presidential election is unfolding that will do nothing to solve the fiscal crisis that is engulfing the country of my birth. The fiscal problem has become so bad, the politicians can’t even talk about it. Republicans won’t raise taxes. Democrats won’t cut benefits. The result is a fiscal jam so bad that serious economists estimate true US indebtedness at over $200 trillion. That’s more than three times the total GDP of Planet Earth. And virtually no one talks about the issue.

In Europe, meantime, the latest rescue of the latest crisis is beginning to fail. Again. Spanish bond yields have fallen from their high of nearly 8.00%, but they’re still glued close to the 6.00% mark. And a country in deep financial crisis, mounting debt and deepening recession cannot fund itself at that rate for long. Meanwhile, the wealthy Catalans are beginning to reconsider their ties to the rest of Spain. The ratings agencies are cutting their ratings, again. Italy is in pretty much the same position, only a step or two behind. Germany is beginning to backtrack on the deals that averted the crisis that loomed earlier this summer. The slow-mo European crisis is getting ready for the next hideous encore.

Welcome to Spain - nearly 60% youth unemployment - this will not end well

 

 

You might think that nothing changes, but you’d be wrong. A year or two back, the IMF believed that a £1.00 cut in government spending would only reduce economic activity by £0.50, as new private sector growth surged into the gaps created. That clearly hasn’t happened. We’ve had the exact reverse pattern where increasing austerity has led to increasing recession… and an increased deterioration of government finances. The IMF now estimates that the same £1.00 cut actually depletes the economy by £1.30. The task ahead of us is getting worse.

It’s the same with the banks. Forget the pre-Thatcher miners or the teaching unions under Labour – if you want real government largesse, the financial sector still outshines the rest. When you hear of the Bank of England ‘pumping money into the economy’, what it is actually doing is propping up the trading profits of the same handful of bloated institutions that created this mess in the first place. And those self-same institutions are still not lending, the economy still not moving. Meantime, the stock of dubious debts and inflated assets rises just that little bit more. A burden that the rest of us will have to pay for: through absent growth, stagnant wages, high inflation, and a hopelessly unsustainable property bubble.

Amidst such confusion, it would be easy to think that there’s no fix out there. Easy and wrong. We don’t need rocket-science, we need common sense.

Although I don’t like a lot about what the current government is doing, I do like its approach to the deficit. Under George Osborne, the government is still borrowing 8p in every £1.00 generated by the economy. So when you earn £100 at work, the government has just borrowed £8. Since that’s obviously nuts, government borrowing needs to come down. At least Osborne has got that part right.

But then consider monetary policy. The Bank of England is widely expected to announce an expansion of its quantitative easing programme to £425 billion. Which is just a fancy way to say it’s printing £425 billion of new money, which is a sure fire way to create inflation. (Just ask Zimbabwe.) It’s craziness – or, in fact, craziness doubled, given that the intended effects of the policy (boost lending and encourage investment) have clearly not happened.

Or take the banks. It’s pretty obvious that bankers don’t need our sympathy. (Many of them, in fact, need jail terms.) Far from coddling the banks any further, we should force them to play by the same rules that all the rest of us have to live by. If a bank goes bust, it should be left to fail. Small depositors should be protected. Everyone else should get no sympathy. Instead, we pump money into the system and pretend we’re helping the broader economy. It’s insanity squared.

I wrote a book about these matters: Planet Ponzi, which is out now in paperback. That book tells you in detail, and in easy, everyday language, just how bad the problems are – and what we need to do to fix them.

I didn’t write the book because I wanted to make money, but out of belief – even passion. I’ve been involved in the financial markets for thirty years. Over that time I’ve seen a kind of sickness take hold. A belief in the power of debt. A belief that any problem is OK, so long as you can defer the reckoning. The sickness isn’t confined to Britain (though we are now the world’s most indebted country). The problem is equally bad in Europe, maybe worst of all in the United States.

The cure for this disease is, in essence, simple. It’s total transparency, total accountability. That needs to apply to politicians: no more false promises, no more evasions of responsibility. But the same magic formula needs to apply to banking and the media. And we, the voters, need to retain our sense of anger. When we hear politicians evading an important question, we need to demand a real answer. When we see bankers grossly manipulate the financial markets, we need to reject any outcome that does not end up with one or more bankers doing some serious jail time.

I first conceived of writing Planet Ponzi, when the first tremors of the financial quake were starting to strike. I thought the issues covered in the book were the most urgent matters facing the Western world since the end of the Second World War. I still do. It’s not too late to turn things around – but we can’t delay our actions any further. Planet Ponzi has got to stop. We still need our lions, but it’s time to lose the donkeys.

QE has created the worlds biggest housing and equities bubbles in the UK markets

Last week, the Bank of England declared its intention to print another £50 billion. Hardly anyone noticed. That £50 billion will bring the Bank’s total money printing to around £425 billion, or about one quarter of British GDP. No one cares. This evening, the U.S. Federal Reserve will announce its own plans for another round of “quantitative easing” aka QE infinity – a euphemistic term for “destroying the currency.” Not to be left out, the ECB has announced plans for unlimited bond buying (though Germany has, thank goodness, set some limits.) Given that the bonds the ECB wants to buy are issued by increasingly bankrupt Mediterranean governments, the ECB too is doing what it can to wreck the currency it’s charged to protect.

Given such public sector diligence, it’s hardly surprising that the private sector is getting creative all over again. And while creativity is normally thought of as a good thing, the same ingenuity in the hands of Wall Street is always a disaster. Take one recent news story. New rules, due to come in place next year, will force derivatives-traders to post collateral for their risky bets. Proper collateral. You know: U.S. Treasury bonds and the like, stuff you can rely on. Trouble is, the derivatives market is huge and good quality collateral is scarce. (Which is a good outcome, right? It would mean that only the most necessary derivatives trades get done.)

QE1 a failure, QE2 a failure, QE3 ??, money printing is all Bernanke knows...

Only that’s not how Wall Street sees these things. When they see the phrase “good quality collateral,” they instantly think, ‘how can we fake things so that crappy collateral manages to sneak through anyway?” And, what do you know, they’ve come up with a solution called collateral transformation. That solution is twisted enough that I won’t even describe it here — but suffice to say that it’s like the subprime markets all over again. It’s worse than that, actually, because at least with subprime there was a house at the end of the chain. Here, there’s dodgy collateral supporting a derivatives trade backed by a financial security backed by something else altogether. It’s subprime squared or subprime cubed.

But enough of all that. The Bank of England (and the Fed and the ECB) are all thrilled to the bottom of their inflation-creating hearts because the financial markets are boosted by all these interventions. The German stock market index, the DAX, is up 46 percent in the past twelve months and has almost doubled from its 2009 lows. Doubled. Would you like to write down on a sheet of paper all the good things that have happened to the German economy since 2009? If you do, you can use a very small sheet and still have room for plenty of doodles. The simple fact is that these financial market interventions have almost nothing to do with the real economy.

That same basic point is obvious in a million different ways. The London property market is hitting new heights — just when the British economy is spluttering to get out of its double-dip recession. The FTSE index is romping away — but George Osborne is hastily rewriting his budget projections as corporate tax revenues fall far short of what was expected. In the U.S., Apple, Inc. is hitting new extraordinary heights, even as the latest U.S. jobless figures show that people are quitting the labor force on a historically unprecedented scale.

That’s not to say that monetary expansion has no effect, just that the effects are almost entirely destructive. So property inflation is bad (that’s part of what got us into this mess), but it’s one of the most obvious symptoms of Mervyn King’s policies. Bubbliness in the financial markets is also terrible (that’s the other major part of what caused this mess), yet there they are once again, bubbling away, utterly disconnected from the brutal truth of the real economy. And of course as the major currencies fight each other in a race to the bottom, the commodities produced by the rest of the world, with their strengthening currencies, becomes more expensive too. Inflation starts to get baked in.

Inflation, and also indebtedness. The ECB wants to protect Europe by buying up ever larger chunks of poor-quality debt. But who are they kidding? Next year, Spain and Italy alone have to refinance more than €600 billion. The same again, give or take, the year after. And those numbers are as nothing compared with the amounts of private sector (mostly financial) debt that has to be refinanced. A trillion euros next year, €1.2 trillion the year after. These numbers can’t be rolled over by more smoke-and-mirrors. They can only be funded by sound public finance and strong private sector business growth. Needless to say, we don’t have either.

In truth, the lessons aren’t difficult to see. We need sound money and an end to financial engineering. If the rules say that derivatives trades need sound collateral, then any scheme which looks to evade those rules needs to get kicked into touch. (Or more. Rules need to be enforced or there’s no point in having them. In a sane world, the banks and bankers currently busy on ‘collateral transformation’ need to be stopped and held accountable.) Central banks need to forget about the ‘health’ of the financial markets altogether. It’s not their health that matters, it’s ours.

People will say — correctly — that coming off these drugs will produce one hell of a withdrawal period. That’s true, but it’s not a reason to keep someone on heroin. Quite the opposite. The Western world needs to relearn some simple lessons. If you make a bad loan, you’ll lose money. (You won’t get rescued by the taxpayer.) Investment banks are there to deliver useful services to real companies. (Anything else is yet another Ponzi scheme, and probably fraud.) Businesses will succeed by making and marketing fantastic products at competitive prices. (Financial engineering is meaningless and will always destroy value in the end.)

QE addicted market participants line up for another central bank fix

These lessons are obvious, but our policy-makers don’t hear them. Maybe George Osborne does to some extent, and Vince Cable too. But they’re swimming against a tide of denial. That tide is running as high as the global equities and fixed income markets. One day soon, the tide will drown us.

The post garnered a remarkable number of comments, the majority of which agreed strongly with the view I expressed. Just one thing disturbed me, however, which was the number of people who assumed I was taking a partisan position. To remind you: the article argued strongly for a full and open enquiry into the Fast and Furious affair. I guess a lot of people reasoned as follows, ‘The Republicans are bashing the Democrats over this enquiry, this guy Feierstein wants an enquiry, so he must be a Republican.’

I don’t blame people for making these assumptions. Our whole country has become infected with this kind of logic. Our entire political debate has caught the virus. Yet it makes no sense. No sense at all. Here are two facts and one conclusion. Fact One: A federal agent has been shot dead. Fact Two: there are allegations — which may be true or false — that the gun used to shoot him was in circulation only because of an ineptly managed operation conducted by the Bureau of Alcohol, Firearms and Tobacco. Conclusion: These allegations are serious enough to deserve an open investigation, period. Partisan bickering and political spin is simply a diversion from the action that a dead federal agent deserves — and the truth that the American people require.

I say all this because I’m about to call attention to another government department. That department is the Bureau of Labor Statistics. Now I know that Republicans are currently bashing President Obama over his jobs record. I know that Obama is bashing back. But, people, the issue at stake is the creation of jobs in America and the way those things are being recorded and reported. The issues I’m about to address were present under George W. Bush. They haven’t changed under Barack Obama. The depression which struck this country in the wake of financial crisis might have peaked under a Democrat, but it was born in a Republican era. If you yourself are so partisan that you want to make fine distinctions about these things, you should go ahead and make them. Me: I see two peas in a pod.

Good. Preamble over. Here’s the issue. The number of jobs created in America stood at 80,000 in June. That wasn’t nearly enough to budge the jobless rate, which remains stuck at a high 8.2%. (Mitt Romney’s comment: ‘another kick in the gut to middle-class families.’ Barack Obama’s rejoinder: ‘a step in the right direction’ whilst he acknowledged, ‘it’s still tough out there.’)

But let’s put the partisan spin-factory to one side, and instead have a think about the number of jobs being reported. Businesses are born and businesses die. When a business is occupied with either of those processes, it has better things to do than call up the BLS and discuss hires and fires. The BLS therefore estimates the net impact on the joblessness figures of the birth and death of businesses. You can read its full discussion here, but the key line says:

‘There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.’

A non-sampling method: that’s geek-speak for ‘guess.’ We don’t know how many new jobs are being created or lost by business churn, so we’ve got to guess. And you want to know the BLS’s estimate for the number of such jobs ‘created’ (net of losses) in June? Answer: 124,000. In May, the answer was over 200,000.

So, in crude terms, the net jobs growth reported by the BLS — the same one being lambasted by Romney and praised by Obama — is only in positive territory at all because of some number that’s simply a guess. A smart guess probably. One made by intelligent statisticians… but still. In this economy? With Europe in turmoil, China slowing, the country heading for a fiscal cliff which could thrust us back into recession, plus massive uncertainty over the path of healthcare costs per employee? The BLS has never been in this position before, because the economy hasn’t been. And after all, who in their right minds would be hiring new staff given these conditions? Most savvy businesspeople will be watching, waiting… deferring spending and hiring.

The truth is employment in the U.S. might be growing or shrinking. We just plain don’t know. What we do know is that if you add together the unemployed, workers discouraged from seeking work, plus those working part-time when they’d prefer to be working full time… you have an ‘underemployment’ rate of at least 15% — while our labor force participation rates are kicking around decade long-lows. These things are terrible economic news, but they’re terrible on a human scale too. Let’s consider the graduates looking to repay the more than $1 trillion in government-guaranteed student loans. These graduates are America’s future. Those BLS data points represent human lives, human potential. And the outlook is grim.

Vangelia Pandeva Dimitrova

To repeat, I’m not making a partisan point here. I’m making a bigger one. The American economy is in deep trouble. The reported data we have is unreliable. What we do know is that we have too much debt, too much money printing, a culture of total irresponsibility on Wall Street and consequently an absence of credibility in the financial and political promises that underpin our economy. All this, plus a political culture which is not addressing these things in a mature and responsible way.

This country’s in a mess. And partisan bickering will never pull us out of it. We all need to change our mindsets. I voted for change in the last election and I believe that today’s DC landscape is the most polarized in my lifetime. Are things better? Are we going to be offered a real choice in this election year? And where can I get a refund?

I published this article in today’s Huffington Post.

How low can a political system sink? Pretty low it would seem. A recent Rasmussen poll suggests that around two-thirds of us would happily fire every single member of Congress, a spectacular lack of confidence in our lawmakers. These are unprecedented levels of disdain and the sad thing is that they’re largely justified.

Frozen solid!

The conventional analysis of this malaise has to do with partisanship in Washington. Too much money, too many special interests, too many lobbyists, too many non-competitive electoral districts leading to a new breed of politicians who pander only to the increasingly extreme demands of their base. The Constitution was never intended to foster such gridlock. Remember that the authors of that Constitution lived in a nation without political parties — in a world where parties of the modern sort were unknown. It was 1796 before the party system had really taken hold and even then, that politics was more fissile, more fluid, than anything we have now. Indeed, you could argue with conviction that the country has never had a more gridlocked, mutually hostile and partisan Congress. At a time of great economic peril, that’s a terrible position to be in.

There are wider consequences too, best expressed in the Russian proverb that the fish rots from the head. If our national leadership is incapable of showing transparent, accountable leadership, what hope is there for the other institutions and organizations that together create the nation?

One recent example would be shocking if repeated injury hadn’t more or less robbed us of the ability to be shocked. The Fast and Furious scandal matters. For a number of years, the Bureau of Alcohol, Tobacco and Firearms allowed guns to ‘walk.’ The idea was to allow suspect purchasers to acquire guns in the belief that these weapons could be tracked back to high-level figures in the Mexican drug cartels.

I don’t know if that was a completely dumb idea or not. I’m not qualified to comment. What I do know is that many dozens of Mexican citizens are alleged to have been killed by these weapons and at least one U.S. Federal agent, Border Patrol Agent Brian Terry, was shot dead. One ATF official told a congressional oversight committee, “The ATF armed the [Sinaloa] cartel. It’s disgusting.”

But these things happen. In a big country, with a complex government, sometimes people do stupid things. That’s not, in itself, the issue.

How's about a little love and a lot of Executive Privilege?

The issue is what happens next. Is there a transparent investigative process, whereby the facts are investigated and the appropriate people dismissed or (if found to be in breach of the law) punished? Of course not. The House voted to cite Eric Holder for contempt of Congress in a battle over which documents should be released to the inquiry. Holder claims he’s just a proxy for Obama and the entire attack is partisan. Nancy Pelosi argues that it’s all part of a giant conspiracy to undermine democracy. Just in case things hadn’t sunk low enough, Rep. Trey Gowdy tells Pelosi that she’s “mind-numbingly stupid” and suggests she “schedule an appointment with a doctor.”

And an American officer has been shot dead by guns that walked out of the country under the direction of our ATF officials. And Mexican drug cartels have bolstered their armories. And our southern neighbor has descended that little bit further into violence and anarchy. Yet all our politicians can do is call each other names and bicker at each other.

So much for the head of the fish. The rest of that fishy body isn’t smelling too good either. Barclays, a British bank that scooped up Lehman’s U.S. operations and has a huge presence on these shores, has admitted manipulating the LIBOR “Fixings.” Those markets are multi-multi-trillion dollar markets and if the banks are rigging them for their benefit, you can bet your house that you’re one of those to have lost money as a consequence.

So what happens? Answer: not much. It’s been fined a little fraction over 1% of its market cap. The Chief Executive — who’s already pocketed over £100 million in pay over the past few years — resigns (but will probably get a huge payoff). No one goes to jail. No one ever does, more deflection and more diversion.

Or ING, a foreign bank trading out of New York, is fined for fraud, breaking sanctions aimed at Cuba and Iran. The fine was big, but who goes to jail? Nobody. Instead the bank says in a statement that it, “it took a provision of €370 million ($462 million) in the first quarter of the year to cover the penalties, set up a team to prevent and detect money laundering, closed its representative office in Cuba in 2007, and ended relationships with sanctioned entities.” Gee, shucks.

Where did I put that 1.6 Billion..? Look under my keyboard.

Or MF Global, run by Jon Corzine, formerly of Goldman Sachs and close to the Obama White House. The firm went bust and around $1.6 billion in client money has gone walkabout. If someone takes money that isn’t theirs, that is theft. I’m not talking about the law, necessarily, I’m not a lawyer — but I am talking about ethics. If someone or some group of people conspires to deprive clients of $1.6 billion, that person or group of people should be wearing orange and looking out of windows with bars on them. But what actually happens? Nothing.

The solutions are so simple. We need transparency and accountability at the top. We need accountability and transparency all the way down. Forget about creating new laws when we never enforce existing ones. If you mess up, you bear the consequences of your actions. If a federal operation goes wrong, it is investigated swiftly and rigorously, with appropriate outcomes for those involved. If your firm goes bust, nobody bails it out. If you breach the law, you go to jail. If you steal a thousand bucks, you receive a light sentence. If you steal a thousand million bucks, you should get the cell next to Bernie Madoff and the same release date: 14 November 2139.

Is that going to happen any time soon?

Nope. It won’t. But meantime, two-thirds of us are right. We need to fire this Congress and start again. The pledge of allegiance talks about justice for all. We need to honor that pledge at the moment we are doing the opposite.

 

This was published  in the Huffington Post 

Two bits of news in the last couple days. One, Ben Bernanke, Chairman of the Federal Reserve, has decided to extend Operation Twist, a policy whereby the Fed sells short-dated government paper in order to buy the longer-dated sort. It sounds boring but it involves $267 billion, so it’s kind of consequential all the same. Oh, and traders warn that the disappearance of the Fed’s holdings of short-dated government paper could gum up those markets, thereby causing costs greater thany any likely benefit. But still, mere reality doesn’t deter Bernanke, who asserts, ”We are prepared to do what’s necessary. We are prepared to provide support for the economy. Additional asset purchases would be among the things that we would certainly consider if we need to take additional measures to strengthen the economy.”

So: $267 billion of your money is being put at risk on a complex long-dated debt operation of dubious benefit, while the leader of that operation comments that much more money might be needed down the road. That’s news item one.

Money printing is all I know.....

News item two: Moody’s announced a mass downgrade of American and European banks. Goldman Sachs and Morgan Stanley took a hit. So did Bank of America, JP Morgan and Citigroup. So too did a raft of European banks, including some of the biggest. The markets didn’t react much to these downgrades, but only because the credit failings of these banks has long been baked into the price. Credit default swaps on two nationalized British banks, RBS and Lloyds, are already priced at junk levels. Anything Moody’s says now is like a punch line delivered long after the party guests have departed. In reality, the truth is probably worse even than Moody’s is suggesting. Many of these banks will see further downgrades, some of them sharp, before this crisis is done.

Now these things are connected. They’re connected in the simplest of ways. The central banks are committed to a policy of debasing the currency, manipulating interest rates and artificially inflating asset bubbles. Meantime, the Western financial system is in parlous shape. Well, duh! Of course. You don’t fix lousy banks by printing wild sums of money to prop up the markets. You fix lousy banks by writing off bad loans, forcing shareholders and creditors to take the hit. You clean up and move on. It’s so obvious a child could see it.

But not Ben Bernanke. Part of the problem is a kind of academic groupthink. Two of the world’s leading central bankers are Ben Bernanke of the Fed and Mervyn King of the Bank of England. King was a visiting professor at Harvard and then MIT, where he shared an office with the then Assistant Professor Ben Bernanke. They come from the same intellectual hutch, the same narrow world-view.

And please note, that world view is born of academic theory, not practical reality. It’s born of an obsession with the Great Depression in the 1930s … forgetting that everything, but everything, has changed since then. Back then, trade was limited, international finance modest, government finances strong, consumer credit exceptionally low, derivative markets all but non-existent. Not one of those things is true today. Government finances are shot to hell. Derivatives markets have bcome too big to regulate and too vast to fail. Consumer credit is terrifying. And the whole world is connected in one lethal stew of poor credit, mistrust and non-disclosure of losses.

So let’s keep this simple. I argue the Great Depression has almost nothing to teach us. The academic central bankers who have guided us into this crisis, and have been printing money throughout it, are only making the problem worse. The mess our banks are in is in large part due to the failures of these same central bankers, the like-minded Nobel laureates and the same old recycled economic advisors.

The recipe for recovery is simple too. You need to rip the bandages off. It’ll hurt, but the patient will get better. Banks (and central bankers) need to face up to their losses. If shareholders and bondholders have lost money, then tough. Why on earth should taxpayers pick up this tab? Because the banks have hired expensive lobbyists to purchase politicians’ favor? I don’t think so.

We are currently in the midst of a major depression. Unemployment (measured by U-6) is at almost 15%. The economic projections in the White House’s budget are clearly powered by the kind of substances that President Clinton once smoked (but did not inhale). The government deficit is in meltdown, yet hasn’t remotely engineered the kind of growth-led recovery we had been led to expect.

I’m not surprised. Here on Planet Ponzi we hold these truths to be self-evident. That the Fed is becoming impotent; it’s running out of bullets. The Fed is out of touch with reality, printing trillions of dollars without the consent of the people of America. That the Fed is taking on a giagantic risk position in long-dated securities, which will have catastrophic consequences if — or rather when — interest rates rise. That existing policies have clearly, plainly and unequivocally failed — yet are still being implemented seemingly without end.

It’s time for a change, and the change can’t come too soon.

I published this in todays Huffington Post

But, guys, there are some big issues out here. You know, real ones that affect real things in the real world. Issues that may shape the fate of the United States for a generation and more and that pose more peacetime danger to the national fabric than I have been aware of in my lifetime. Yet these things are barely being discussed: hardly spoken of, when we shouldn’t responsibly be talking of much else.

There are a huge number of dangers to pick from, but here’s my economic top 10:

1. The Eurozone crisis. The Eurozone is close to collapse. The euro, the world’s second currency, will in my view not survive the coming years, certainly not in anything like its present form. Europe remains a vital American trading interest. Our banks and firms are tied up with its creditworthiness and prosperity. And right now, that’s a little too much like being tied to an anvil. While swimming in the ocean.

2. Money-printing. The Federal Reserve remains committed to ‘monetary loosening’ at the slightest provocation. The list of disasters which that loosening has already, vastly, contributed to includes: the dotcom bubble, the housing bubble, the failure of the subprime mortgage market, the failure of Lehman, AIG, Bear Steans and their many crummy peers, a wildly out of control fiscal deficit, and much more. But Ben Bernanke would like to loosen whenever the opportunity presents. Financial firms are now QE addicted.

3. The fiscal situation “fiscal cliff.” The United States deficit is out of control. Senior, sane, respected economists regard the U.S. as being effectively bankrupt. The Congressional Budget Office’s own long-run forecasts of the national debt are hardly more encouraging. In the CBO’s words, “By 2021, debt would exceed 100 percent of GDP. After that, the growing imbalance between revenues and noninterest spending, combined with the spiraling cost of interest payments, would swiftly push debt to unsustainable levels.” [See page 13 of report]. They don’t use the word “bankrupt,” but it’s what they mean.

4. The costs of healthcare. I want a country that guarantees acceptable healthcare for all its citizens. I also want a healthcare system which doesn’t kill the federal government and threatens to suffocate private enterprise. Other countries manage this trick. Why can’t the United States? (Clue: possibly because our politicians prefer partisan sniping to constructive thought.)

5. The pension time-bomb. And while we’re on the subject of out-of-control public spending, why are our putative future presidents not discussing the fact that numerous state pension funds look to be heading for failure. Sure, that might feel like a state-level problem today, but when such problems become sowidespread and so dangerous, they start to become federal ones.

6. Tax insanity. I like small government and the price mechanism. Like it, vote for it, believe in it. But that’s quite a different thing from having a big government and paying for a small one. We’re in a fiscal hole and we need to pay our debts. That means paying tax. And, hey, the billionaires don’t even mind chipping in.

7. Wall Street. You thought that monster had been put back in its box? Come on, you didn’t really. JP Morgan is a supposedly well-managed bank. It is a well-managed bank in comparison with its peers. But it still just lost $2 billion fooling around with financial derivatives that it, of all firms, should understand: because it invented them. But no. Give Wall Street funds, opportunity adding in moral hazard… and it’ll always create a bomb. They get the bonus, you get the costs.

8. Lousy assets. And more broadly, there continues to be a frightening number of poor-quality financial assets floating around our economy and financial system. Mortgages that are underwater. What happened to Fannie, Freddie and the humongous guarantees? Toxic remains from the subprime collapse still sitting on corporate balance sheets — and still so radioactive, they glow in the dark. The Federal Reserve probably now has the biggest stockpile of these assets, by the way, and it bought them with the money that they curate on your behalf. Bet you’re pleased about that.

9. China. That the world economy hasn’t completely collapsed before now has been thanks to the growth-miracle that has been China. But Goldman Sachs and others are now slashing forecasts to 13-year lows. My own view is that China is pretty much ex-growth. The figures may not say as much, but in China figures and facts are two different things. (China’s financial and property markets have major problems of their own, but that’s another story.)

10. Political failure, public protest, unstable regimes. And the evil fruit of all these things – few of which are purely American in occurrence — are swelling into maturity across the globe. In Greece: riots. In Spain: mass protest. In Italy: disaffection. In France: a politics of non! In country after country, the old guard of politics are being swept aside by discontented — rightly discontented — electorates, but the new guard haven’t yet figured out that they might want to try brand new political strategies for these altered times. Strategies like, you know, telling the truth…

Would it be too much asking that we all start focusing on real issues? I am not holding my breath.

The book is by Suzanne Collins, who published her novel one day before Lehman Brothers collapsed: the moment that inaugurated the collapse of a fragile and bloated financial system. Since that day, a tiny coterie of the wealthy and powerful – notably the barons of the international financial system – seem to have done remarkably well for themselves, while ordinary citizens have suffered job losses, wage freezes, high inflation, perennial financial scares, and the destruction of value in their savings and pension funds. We aren’t yet battling each other to death in exchange for food, but give it time. We’re not even four years on.

Naturally, policy makers want us to believe that everything’s going to be OK. George Osborne’s tough talk about borrowing our way into crisis and earning our way out is intended to be Churchillian. This is going to betough, but with enough blood, tears, toil and sweat (he means yours, of course; no one’s expecting bankers to chip in), we’ll get through it.

Unfortunately, economies don’t respond well to stirring words. They respond to facts. And, as I’ve long predicted, and as the OECD’s latest data also suggest, the British economy is back in recession. We’re not earning our way out of anything. The economy is shrinking. Our debt is growing. The problem’s not smaller than it was; it’s bigger and getting worse.

That bad news isn’t restricted to the real economy. Mortgage approvals for house purchases have dropped sharply and are expected to fall yet further. Such falls will drive house prices down from their current (unsustainable) levels and will put further pressure on bank’s balance sheets and household confidence. And given that bank lending is already falling short of unambitious targets, the news is hardly better for a struggling corporate sector.

Bank of England figures have fueled predictions of further property price falls

This fundamental frailty comes in part from our own head-splitting debt hangover, but it comes also from Europe. Italy’s hopes of paying back its massive debts rest partly on swingeing austerity, but mostly on finding some path back to economic growth – a path it hasn’t been on for a decade and more. Alas, the OECD reckons that the Italian economy is contracting, not growing, which means its debt burden is increasing.

Anxiety over the Euro remains so acute that even government advisers – Steve Nickell of the Office for Budget Responsibility – admits to MPs that he checks William Hill for the odds of a euro collapse. (You can get odds here, if you’re worried.)

The authorities’ response to these things has been part-good, part-feeble. The good part is that we have a government which understands that debt is not a good thing, that money has to be repaid, that borrowing from the future to fund consumption in the present is an idiot’s game. An idiot’s game with a horrible ending.

Box office hit: Jennifer Lawrence as Katniss and Liam Hemsworth as Gale in a scene from the Hunger Games

The bad part is that the Bank of England still loves debt. Inflation is high? Hey, who cares, let’s print some more money. Let’s monetise our debt and try to to inflate it away instead of properly addressing and properly restructuring it.

Dilma Rousseff, the Brazilian president, talks about the world being swamped by a ‘monetary tsunami’. She’s right. And that tsunami is like an addiction to borrowing: you get the nice bits upfront (low interestrates, some impact on growth); you get the bad parts later (inflation, inflation, inflation.) You want to know why the price of gold is so high? It’s because professional investors are watching the progress of that tsunami. It’s still offshore, but it’s heading towards us and getting bigger all the time.

And meantime, where is the recovery going to come from? George Osborne does seem to understand, intellectually, that recovery will come from jobs growth from small and medium businesses. (The big firms will create jobs too, but they’ll also be cutting them, so the net effect is not reliably positive.) Yet that intellectual understanding isn’t matched by radicalism of action. The tax and regulatory burden facing small firms wanting to grow islike a massive weight that has to be rolled uphill before the firm can even think about generating sales and hiring new staff. And why, for example, is there not a huge effort to slash payroll taxes? If we want more jobs, why in God’s name are we taxing them?

Collins’ book, The Hunger Games, was the first of a trilogy. Which seems optimistic to me. A trilogy of misery – I’d take that like a shot. But I don’t think we’re in a trilogy. I think it’s a soap opera and we’ve only just introduced the characters. The OECD has just welcomed you to the double-dip recession. Next up: the triple-dip. You heard it here first.

This blog was published in todays Daily Mail