Monday, March 9, 2009

A Gloomy Economic Outlook.

When economists talk about an economic downturn, they often use the alphabet to try to paint a visual picture of their words. So, for example, one economist will say that our current recession will look like a V: sharp downturn followed by an immediate sharp upturn. Another economist will say that our current recession will look like a U: sloping sharp down turn, curving around the bottom a bit, then gradually but fairly quickly sloping back up.

One well-respected economist last week used the "L" word: sharp downturn, then flatline. His article has received a good deal of attention, and the link is below.

Here are the highlights:

The economist is named Nouriel Roubini, and his article, published in Forbes, was titled "The U.S. Financial System Is Effectively Insolvent."

He essentially says that people who keep saying they think we've hit bottom, or they're seeing improvement in some signs, are simply mis-reading the signs. For example, an upturn in retail sales in January reflects massive write-downs by the stores following the disastrous Christmas season which left them with winter-style unsellable inventory that they had to dump.

He notes that the downturn is international. This is not just a U.S. problem, although it certainly may have been caused by the looting, pillaging, and raping by the Wall Street Criminals.

"In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S."

"There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession."

He lists many reasons for his use of the L-Word. First, manufacturing within the U.S. continues to be in free-fall. Initial unemployment claims remain astronomical month after month.

Exports have fallen radically in Asia: 40-50% in Japan, Taiwan, Korea, and China.

Although he uses the L-Word, he doesn't exactly use the D-Word (Depression), although he doesn't not use it either:

"With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe."

He does not hold out much hope for fiscal stimulus or monetary stimulus efforts by the U.S. because:

" (1) the problems of the economy are of insolvency/credit rather than just illiquidity;

(2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut;

(3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and
(4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.

Nor is he a believer in the Republican demand for tax cuts as having any ability to bring us out of this recession:

"Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)"

"Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year."

He calls the Obama stimulus plan "puny." Keep in mind that the moronic Republicans want this country to fail, the wealthy people with their private equity funds off-shore just waiting to swoop in like vultures and buy up everything we own, just waiting for our entire economy to collapse. And the Republicans not only opposed the "puny" stimulus plan, they now are calling for a freeze on spending to accelerate the complete collapse of the country. How do you define treason?

He notes that China's economy is largely dependent on exports, and their investments for years have been to increase manufacturing capacity to steal all the American jobs, investing in machinery and equipment to make more crap to export to the U.S. Except that now too many people in the U.S. are unemployed (because their jobs were taken to China) and can't afford to buy anything.

He notes that in past years, cheerleaders have ignored the lack of savings by individual American families by explaining that their "savings" could be found in the equity in their inflated homes and inflated 401k or stock accounts. But stocks are down 50%, houses are down 25% and have another 20% to fall (according to his numbers -- I think there are regional differences), so finally we all get to see that the lack of savings by American families is actually a disastrous situation. Of course one of the main reasons people have no savings is because they paid so much for their bubble homes, all of which "investment" is now gone. Looking at debt to assets ratios, most Americans have a negative savings rate.

He writes that the stock market will keep going down for the rest of the year "as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression)." There's that D Word again.

He refers to the fallout in the financial markets and financial firms as being a "massacre." Not for the insiders. They stripped their companies bare with grossly excessive "compensation" packages, golden parachutes, inflated pensions and other benefits, and took all that money out of the U.S., parked it in secret private equity funds, and will start spending it as soon as the intensity of the moment dies down.

"In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure)."

He argues that the debate over "nationalization" is just silly, because in reality the U.S. taxpayers have more money in these institutions than anyone else does. For example, AIG is 80% owned by the government because of the bailouts, of $165 billion of taxpayer money. That money has gone to pay creditors of AIG because AIG sold $500 billion of toxic credit default swap protection (they sold insurance but did not have the money set aside to honor their obligations). Of the $165 billion AIG bailout, in fact the money went straight through to Goldman Sachs (remember Hank Paulson, former Secretary of the Treasury who demanded the bailout -- his homebase). The second largest recipient of AIG bailout money was Merrill Lynch, the company with the $2.0 million drapes in the insider's offices. Why would my government give money to Merrill Lynch given how they have raped the public?

And he mentions the on-going problem that we still don't know where that bailout money went. I think it went in the front door, and out the backdoor into the pockets of the insiders. All under the Bush administration's authority.

"So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today."

"And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent."

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for

Okay, now here's my question: where'd all that money go? Let's get a formal prosecutor appointed, with a team of prosecutors working under his direction with subpoena power. Appoint forensic auditors to go into the offices of the big boys and trace their financial transactions for the last 10 years. They made billions, and billions have disappeared. Let's go find every penny paid to any executive, and to all the politicians, and have that money attached and paid into a public trust account. To bail us out of the disaster that we face because of the biggest criminal heist in the history of the world.

We know it's a crime. But we don't understand why nobody in the government has arrested anyone. Is it because all of our politicians are corrupt? Have they all taken money to do nothing? Is there an agreement in place? Do they all have private equity accounts offshore too? We need an independent prosecutor with subpoena power to operate completely independently of Congress because too many of them are corrupt, and have a long history of taking money from Wall Street, from the suspected criminal enterprise.

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