Flying Pink Unicorns

Update on the financial crisis:

Well the house voted to kill the big rescue package, the stock market dropped. No big deal, right? Shows that maybe fears were overblown? The Bush administration was crying wolf? Not on your life. If Congress doesn't act soon (within several weeks, as a practical matter very soon because they will surely recess to campaign), we are facing a bad financial calamity. No, not the 1930s and 25% unemployment and bread lines. But very high unemployment, and possibly pockets of real disaster.

First, some perspective. According to the media, there is a great deal of doubt as to whether we are in a recession or not. That's crap. We're in a recession, probably a severe one, right now. Proof?

1) The US has LOST more than 500,000 jobs thus far this year, a loss of about 65,000 jobs a month. This is abysmal, a recessionary number. The US Labor force is approximately 145 million or so, and grows each year. In order for the number of unemployed to merely remain constant, the US economy must add about 180,000 jobs per month, give or take. Thus relative to the growth in population, we have lost nearly a quarter of a million jobs per month. Do you think this happens absent a recession? Rarely, very rarely.

2) Big financial institutions are failing. Smaller banks are failing. There is a GIANT financial crisis. These things simply do not happen absent a recession. For example, in 1998, while the economy was booming, there was a big financial crisis based upon the Russian debt default and Thailand and other Asian countries having massive currency crises and defaulting. Internationally, it was a real big deal, depending on the country. Domestically, that "crisis," which Alan Greenspan called at the time the "worst in 50 years" was over without a trace. This time, not so much. You simply don't have a bad domestic financial crisis without a recession. In a growing economy, warts are hidden, leveraged financial companies make money and manage. But with a recession (or very very slow growth, below 1% say, the same thing for many purposes), the warts are exposed, and financial institutions fail.

3) The credit markets have about closed. Ford reported godawful sales today. The other auto companies will as well. Housing is completely down the toilet. The indicia are all there.

There is essentially zero doubt in my mind; we are in a recession. I haven't looked at the statistics, but I would expect that at the end of October that the US will report that the economy shrank at around a 2% annual rate for the second quarter of 2008. Its too early to guess a number for the 4th quarter, which started today, but I'd expect it to be negative, even if there's a financial rescue in the coming days.

Ok, so we're in recession. So what? Well, my loyal readers, recession + financial crisis = real problem. If credit markets stay frozen, municipalities can't borrow, businesses can't borrow, and even consumers have trouble getting car loans, recession can turn into rout. If a business needs money to buy a new product line to keep going, and the economy is weak and the business can't get the loan the weak economy can mean the difference between the business shuffling along until the credit crisis ends, and failing and putting its 5 employees out of work. That distinction, writ really large (ask former Lehman Brothers employees), is a huge problem, and a huge reason why we need to rescue the financial system.

And the House Republicans asked for a capital gains tax cut to solve the problem! Now if the issue was the STOCK market, that might make some sense. But since the issue is the CREDIT markets, a capital gains tax cut would do very little immediate good. The more I think about economics the less I like capital gains taxes, the government needs to raise revenue somehow, and capital gains taxes take some money from people or businesses that have made money, which though the GOP says it "punishes success" makes more sense, economically and otherwise, then taking money from people who DIDN'T make money.

The GOP in Congress has outdone itself in its irresponsibility. No real surprise.

Changes which were made in the Senate program include lifting the caps on deposit insurance to $250,000. That's a good idea. I don't think its any big deal-- anyone who had more than $100,000 in a small bank was criminally foolish, but still, for a business account that's an awfully small amount, and I'm just not opposed to lifting the cap to $250,000. Lawrence Lindsay (who I thoroughly disrespect as a Republican flunky for the most part) recently advocated lifting the cap altogether. I'm not opposed to that, either. But a $250,000 cap seems to make sense for now and for individuals (as opposed to businesses) really ought to be plenty in the vast majority of cases.

According to CNN.COM, the bill says, "the FDIC may not charge member banks more to cover the increase in coverage. But that doesn't prevent the agency from raising premiums to cover existing concerns with the insurance fund, according to Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm."

The Senate also added in extensions to various tax breaks. I thought we were told this had to be a clean bill. Of course there's room for tax cuts to entice the damn Republicans. At least the tax cuts/credits were not terribly harmful ones. I would have insisted on a massive stimulus program, and dared Bush to veto it. I would have had few if any tax cuts, a big extension of unemployment benefits, and hundreds of billions of dollars to spend on roads, bridges, ports, rail, airports, etc. The United States' infrastructure, as I've said before, is a bad joke for a big rich country. We could benefit enormously from this giant stimulus, not to mention the huge number of construction jobs created in the short term. I would have jammed it down the GOP's throat if I had the democratic votes. I would still like to see the Democrats pass a big stimulus package before the November election, but this is not to be.

I support the Senate package. This is not how I would construct the bailout exactly, but its not bad at all. Giving Paulson massive authority to buy these toxic assets and get them the heck off of Bank's balance sheets is a reasonably good way to get the banks to lend again. Whether it reopens the frozen credit and money markets is another matter entirely. But it might, as confidence hopefully is restored.

So call your house representatives, and tell them to support the Senate package when the House votes Friday.