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'