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Stiglitz: the 'mess' left by Greenspan

by Jerome a Paris Fri Nov 16th, 2007 at 11:26:16 AM EST

Greenspan `Mess' Risks U.S. Recession, Stiglitz Says

Nov. 16 (Bloomberg) -- Joseph Stiglitz, a Nobel-prize winning economist, said the U.S. economy risks tumbling into recession because of the ``mess'' left by former Federal Reserve Chairman Alan Greenspan.

``I'm very pessimistic,'' Stiglitz said in an interview in London today. ``Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.''

This is nothing new in this, and it has been extensively chronicled by some (including by me - see some links at the bottom). But now the clouds are really gathering:

What Greenspan did is simple: he tainted money, and debt, by making it over-abundant, cheap and too easily available.

And the first to suffer are those whose business it is to handle that good: the financial world. Fair game, one may say, given how much they have profited from these years of easy money, being the first at the trough and gorging avidly on it. The problem, of course, is that the financial world, beyond its self-ascribed mission to capture and concentrate as much wealth as it can, still has its (now side-) mission of financing the real economy, and the wounds it has inflicted upon itself in recent years will handicap it to do its other (some quaint souls may say - real) job.

Citigroup Pushes Bank Borrowing Costs Above Companies

Nov. 16 (Bloomberg) -- For the first time in at least a decade, the world's biggest financial institutions are paying more to borrow in the corporate bond market than industrial companies.

Bonds of banks, brokerages and insurance companies yield 1.49 percentage points more than U.S. Treasuries, matching a record high set in October 2002, according to indexes compiled by New York-based Merrill Lynch & Co. The average industrial bond trades at a yield premium of 1.34 percentage points.

Investors are demanding extra compensation for the risk of owning Citigroup Inc., Merrill Lynch and Barclays Plc on concern that the $50 billion in losses already reported from subprime mortgages will increase.

This does not quite mean that banks have funds that cost them more than they can lend them out (because of leverage effects from capital-to-lending ratio requirements), but it is not a healthy situation, as you can imagine. It cuts the profitability of banks, and it does limit their lending activities. In the first instance, it's a good thing, as bank had become incredibly aggressive in their lending practises, almost throwing money at their clients, and that is now thankfully over. But the backlash is going further and cutting activity a lot more. This is not very visible in the "normal world", but a number of markets (for commercial paper, for leverage debt, for acquisitions) are still closed or strictly curtailed.

And it's inevitably going to come to "normal" lending to companies (for investment) or households (for consumption).

Goldman Sees Subprime Cutting $2 Trillion in Lending
By Kabir Chibber

Nov. 16 (Bloomberg) -- The slump in global credit markets is likely to force banks, brokerages and hedge funds to cut lending by $2 trillion, triggering the risk of a ``substantial recession'' in the U.S., according to Goldman Sachs Group Inc.


``The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized,'' Hatzius wrote. ``It is easy to see how such a shock could produce a substantial recession'' or ``a long period of very sluggish growth,'' he wrote.

Goldman's forecast reduction in lending is equivalent to 7 percent of total U.S. household, corporate and government debt, hurting an economy already beset by the slowing housing market. Wells Fargo & Co. Chief Executive Officer John Stumpf said yesterday that the housing market is the worst since the Great Depression.

Remember that massive and growing debt has been the only way consumers manage to stay afloat in the face of stagnating incomes (growth being captured by the very rich via company profits and asset price increases). Now that this "solution" to income stagnation is closing, things will get tough.

  • housing prices are going down, destroying the feeling of (virtual) wealth for many, and threatening (very real) foreclosure pain for those stuck with unsustainable debt levels;
  • consumption is set to suffer as house equity withdrawals become unavailable and other lending practices tighten;
  • unemployment is set to go up as the construction sector (and the financial services behind it) shrinks, and retailers begin to suffer from stagnating sales (see for instance Starbucks, which thought it had a recession-proof model, see lower sales for the first time ever);
  • and, of course, on top of that, oil prices have gone up, making gasoline and, now, heating, a lot more expensive, further taxing available incomes.

But hey, as the Economist points out (about increasing oil prices, but it's true for all the other income-cutting tricks):

Higher oil prices have some unavoidable direct consequences on companies' production costs and on prices paid by consumers for oil-derived products. Wider damage to jobs and output depends on how well these increased costs are absorbed. If workers insist on higher cash wages to maintain their spending power, firms' costs will take an additional hit, resulting in lay-offs, higher unemployment and depressed demand. To the extent that workers take it on the chin, accepting higher oil prices as a temporary tax increase that lowers their real take-home pay, the collateral damage will be smaller. The rigidity of the 1970s economies, where union power and indexed contracts meant wages were unyielding, only magnified the adverse effects of oil shocks. Today's flexible jobs markets allow oil shocks to be absorbed less harmfully.

Today's economy has been doing well, because all the pain is borne by workers, who have been trained not to complain, and "take it on the chin" in the name of higher economic efficiency and growth. For the economy to do well, all is needed is strong corporate profits. and those that protest against that (like French train workers this week) are subject to a propaganda deluge describing them as "extremist militants", "unreconstructed leftists", "privileged", "conservative", "reactionary", bent on protecting outdated, unaffordable and undeserved rights, and making them the real obstacle to prosperity, not those that engineered an economy that ensures that more work for all creates more income - for a select few.

Stiglitz, to get back to him for a second, also has harsh words for Bush, Greenspan's sidekick in this giant robbery of the middle classes for the profit of the haves and have-mores:

He also faulted President George W. Bush for cutting taxes in 2001, widening the government's budget deficit and allowing political support for free-market trading to wane.

``The richest country in the world cannot live within its means,'' Stiglitz said. ``It's a real example of macro economic mismanagement. The working out of this global imbalance will cause global problems. The depth of the conviction on free markets in the United States is not very great. We have increased those subsidies, doubled them, under President Bush.''

Subsidies (free money) - for corporations, of course. The Bushistas love free money. They don't pay for it of course - the middle classes do.

:: ::

Some diaries - now almost 3 years old.
The US - a finance-based economy on crack
Greenspan's bubbles - a graph
Greenspan's bubbles - more graphs
Greenspan's bubbles. No - his 'monster' (says Morgan Stanley)
Scary financial story on CDOs - 'no one knows if they work'
Greenspan's Bubbles: 'Too late to escape the consequences'

yes, still doing it.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 16th, 2007 at 11:33:14 AM EST
Still reccing, but spitting and kicking.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 16th, 2007 at 04:19:29 PM EST
[ Parent ]
Not much impact over there this time. It's just hard to read the mood of the site sometimes. Bad timing or bad topic...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 16th, 2007 at 05:24:59 PM EST
[ Parent ]
Once again a bit of special pleading. Stiglitz was in the government (Clinton's) when Greenspan ran the fed. That's when his speaking up might have had some effect.

Instead he waits until not only has the horse left the barn, but the barn is in flames to point to Greenspan. There is a movement in the US right now for right wingers and centrists to try to distance themselves from a failed administration.

I'm not sure what the theological position on deathbed conversions is...

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Nov 16th, 2007 at 01:19:44 PM EST
Depends who's on the bed.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Fri Nov 16th, 2007 at 01:51:34 PM EST
[ Parent ]
Stiglitz was fired by Lawrence Summers, and did start writing about these things really vigorously early in the Bush presidency (and, in muted form, before that), so it's not quite the same as those that have been jumping ship in the past couple years.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Nov 16th, 2007 at 02:37:52 PM EST
[ Parent ]
Greenspan during the Clinton years was also a very different character, publicly, from the Greenspan of the Bush presidency.  For some reason, he was all about fiscal responsibility when a Democrat was in the White House, but, the moment tax cuts were on the table, he jumped ship.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Fri Nov 16th, 2007 at 03:26:17 PM EST
[ Parent ]
the two actions are of a piece.

when a democrat was in a position to expand social welfare spending, greenspan's call for responsibility was meant to forestall it. right wing strategy, same as dole filibustering universal health care in '93-'94.

once bush was in office, he could be trusted not to waste money on the non-rich, so greenspan opened up the floodgates. same strategy, just different tactics in a differnt context.

and when a democrat gets back in power, the money will be gone, and so those social welfare programs will be impossible to fund. game, set match.

by wu ming on Fri Nov 16th, 2007 at 03:50:03 PM EST
[ Parent ]
You don't seem to realize that serious people just have to feel alarmed when leftists are in power wasting money that isn't theirs to spend.
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 16th, 2007 at 04:23:20 PM EST
[ Parent ]
It's a shame, too.  Greenspan could've had, along with Clinton, quite an enviable legacy on the nation's finances.  Nothing radical in change, but a debt-free America would've been pretty nice right about now.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Nov 17th, 2007 at 10:28:14 AM EST
[ Parent ]
This diary is a fine summary of what's been in my discussions the past several weeks.  "Immobile" workers indeed, taking it on the chin for the good of "the economy" of which they have no part.

Please don't badmouth Stiglitz, he's been saying the right things and backing them up with real stats for many years, even if he was totally dissallusioned by his years in power.

The media rewriting of this story is one of the most important parts, as J. had chronicled over and over recently.  One senses a perfect storm building.  A Goldman Sachs banker in an unamed Asia country told me today, "Our house is divided, but we're all ready to pounce.  Something we've never seen before is happening."

For me, the scariest part of J's analyses over the past weeks has been the role of the media.  It's not spin, it's not coverup, it's not misdirection, it's something deeper but more professionally achieved, which i can't quite grasp yet.  When i spoke with bankers in NYC last week, i couldn't help the feeling that i was talking to ostriches.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin

by Crazy Horse on Fri Nov 16th, 2007 at 03:39:34 PM EST

The media echoes give me this taste of fatal obstination. On the money, on the empire. Same thing, anyway.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 16th, 2007 at 04:26:06 PM EST
[ Parent ]
To me it's more like information known but being released slowly so as to achieve a certain effect, and I'm not quite sure what that overall effect is yet.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Fri Nov 16th, 2007 at 10:31:32 PM EST
[ Parent ]
...I'm not quite sure what that overall effect is yet.

You mean that "Scum also rises" effect, or the crotch rot on the society effect or the Theft of the Commons effect or the "I've got all the money so your inflation/stagflation problem won't effect me" effect?

So many effects, so little left on the shelf to choose from.

The one effect that is getting more and more commented upon by friends who I write with is how effective the Bushites have been in driving us all into apathetic 'nothing but writing in blogs' effect.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Nov 18th, 2007 at 07:19:17 AM EST
[ Parent ]
One guess is that they don't the shi$#@ to hit the fan so fast it wakes everyone up.

I can swear there ain't no heaven but I pray there ain't no hell. _ Blood Sweat & Tears
by Gringo (stargazing camel at aoldotcom) on Sun Nov 18th, 2007 at 09:00:29 PM EST
[ Parent ]
...the role of the media.  It's not spin, it's not coverup, it's not misdirection, it's something deeper but more professionally achieved ...
It goes with that quivering sensation that we are all imbued with from pre-childhood on in this GOD Blessed country of AMERICA - anyone can be president, anyone can become a multi-millionaire. The implication is that this is immanently fair, the most fair, in fact, the most noble of all traditions in the best of all possible classless places.

(Perhaps anyone can be, but not everyone can be. And a certain adherence to being whiteanglosaxon has a certain unspoken something to do with it.)

Notwithstanding, the press are certain that they can be a part of this, especially since their bosses are part of this and who wants to be out of favor with the boss? By the time that they figure out that they are traitors to their class and that they are being tools in a well greased system...well, can't go to far ya know...gotta think of my pension and the kids...Besides, if I don't do it, someone else will who isn't as sensitive and who isn't on our side, ya know.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sun Nov 18th, 2007 at 07:15:04 AM EST
[ Parent ]
I'm still getting over the Economist quote.

What "rigidity" and "flexibility" mean, clearly spoken.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 16th, 2007 at 04:35:10 PM EST
Yes, funny that.  Rigidity is always about wages, and not prices, in the business press.

Business had better start checking that attitude, because the Boomers are out the door in a couple years, and they're going to be short on workers.  Something tells me Gen-X and the Millennials aren't going to be too stupid to figure out the wage issue here.

But, to be fair, many business are getting religion on that very quickly, if the 60 Minutes reports about my generation's "flaws" are to be believed.  (How dare we not wear three-piece suits and accept low wages and longer hours?)

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Nov 17th, 2007 at 10:24:22 AM EST
[ Parent ]
"The richest country in the world cannot live within its means", Stiglitz said.

"National Debts" are less the result of imprudence on anyone's part as opposed to the inevitable consequence of the exponential growth of an insane monetary system based upon money as debt.

While one or two national economies, through either luck or judgement, may operate temporarily at a "surplus", and others may operate incompetently or worse, the global aggregate of money, and hence of debt must, mathematically, increase.

The problem is that the global economy is at last hitting the buffers of finite resources.

"Productive" Corporates actually do create streams of "money's worth" with a value in exchange.

Banks do not: they create money upon money, in the form of IOU's backed by not very much of value at all.

So investors may lend directly "peer to peer" to "productive" corporates with some confidence of repayment in something of value through the medium of money.

A Central Bank's ability to set an arbitrary "price of money" - which bears no relationship to its actual cost - is actually irrelevant if banks are not prepared to lend to each other and thereby keep the money they create flowing through the system.

I believe that the banking system will, during the next 6 months to a year, become so divorced from the productive economy upon which it is a parasite that it will literally become impossible for even the most ostrich-like press to ignore.

You can't fool all the people all the time.

All Greenspan did was bring forward the inevitable by a a couple of years or so: the outcome has never been in doubt.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri Nov 16th, 2007 at 05:12:34 PM EST

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