by Mike Whitney
November 19, 2009
Things could get ugly fast.
With the Democrats backing-off on a second round
the Fed signaling an end to quantitative
Obama moaning about rising deficits.
There's a good chance that the stumbling
recovery could turn into another sharp plunge.
bank lending is shrinking
consumers spending is off
housing prices are falling
unemployment is soaring and the
wholesale credit markets are in a shambles
This isn't the time to slash government support
in the name of "fiscal responsibility".
Obama needs to ignore the gloomsters and
alarmists and pay attention to the Nobel laureates like
Joe Stiglitz and
Paul Krugman. They're the guys who know
how to steer the ship to safe water.
But there are troubling signs that Obama has joined the ranks of the deficit
hawks and is planning a policy-reversal that will pitch the economy into a
Here's what he said on his tour through Asia:
"I think it is important to recognize if we
keep on adding to the debt, even in the midst of this recovery, that at
some point, people could lose confidence in the U.S. economy in a way
that could actually lead to a double-dip recession."
So it's true. Obama has aligned himself with the
faux-prophets and dollar demagogues who think that the end is
But trimming the deficits now (when they should
be expanding) will lead to a viscous cycle of debt deflation that will
push-down asset prices, increase defaults, force more layoffs, slow consumer
spending, lower earnings and send the economy into a downward spiral.
The president is paving the way to a
double-dip recession, a slump that could be worse than the first.
Has Obama perused the jobless figures
Has he noticed the Fed shoving more than
a $1 trillion under the collapsing housing market with no sign of
Has anyone told our blinkered
accountant-in-chief that the entire financial system is propped-up
with $11.4 trillion of dodgy scaffolding that could buckle in the
first big gust?
Obama has either taken leave of his senses or
he's spending too much time listening to the cheerless Jeremiahs on the
He needs break their spell and seek the counsel
of the experts who get paid to crunch the numbers - real economists. Cutting
government spending and raising taxes - the two ways that deficits are paid
off - is the fast-track to disaster. Don't go there.
If Obama needs more proof that the economy is still flat-lining, he should
thumb through Fed chair
speech to the Economic Club of New York which was delivered on
Tuesday. The presentation was a sobering snapshot of lingering depression
with precious few glimmers of light.
Here's an excerpt:
"The flow of credit remains constrained,
economic activity weak, and unemployment much too high. Future setbacks
are possible....How the economy will evolve in 2010 and beyond is less
Access to credit remains strained for borrowers who are particularly
dependent on banks, such as households and small businesses. Bank
lending has contracted sharply this year, and the Federal Reserve's
Senior Loan Officers Opinion Survey shows that banks continue to tighten
the terms on which they extend credit for most kinds of loans...
Household debt has declined in recent quarters for the first time since
1951. For their part, many small businesses have seen their bank credit
lines reduced or eliminated, or they have been able to obtain credit
only on significantly more restrictive terms. The fraction of small
businesses reporting difficulty in obtaining credit is near a record
high, and many of these businesses expect credit conditions to tighten
The demand for credit also has fallen significantly... Because of
weakened balance sheets, fewer potential borrowers are creditworthy,
even if they are willing to take on more debt. Also, write-downs of bad
debt show up on bank balance sheets as reductions in credit outstanding.
Nevertheless, it appears that, since the
outbreak of the financial crisis, banks have tightened lending standards
by more than would have been predicted by the decline in economic
Many securitization markets remain impaired, reducing an important
source of funding for bank loans.
In addition, changes to accounting rules at
the beginning of next year will require banks to move a large volume of
securitized assets back onto their balance sheets. Unfortunately,
reduced bank lending may well slow the recovery by damping consumer
spending, especially on durable goods, and by restricting the ability of
some firms to finance their operations.
The best thing we can say about the labor market right now is that it
may be getting worse more slowly.
Chairman Ben Bernanke Speech Before Economic Club of New York)
Is this really Bernanke speaking, or is the Fed
Okay, so credit is tight. Consumers aren't borrowing and banks aren't
lending. Unemployment is rising and deflation is pushing down asset prices
while the burden of personal debt is rising in real terms. Bleak, bleak,
The only sign of improvement is that "things
are getting worse more slowly".
Now that's encouraging.
What the economy needs is a hefty dose of stimulus aimed at job creation and
strengthening demand. Only the government can provide sufficient resources
to rev up economic activity and put people back to work. Unfortunately,
the TARP bailout soured the public on
deficit spending due to the shabby (and possibly criminal) way it was
handled. That will make it harder to do what is necessary. The political
support for more stimulus on Capital Hill has vanished. But, without it,
another hard landing is certain.
Despite rumors in the media, stimulus works. It speeds up recovery,
minimizes unemployment and stops asset prices from overshooting on the
Here's an excerpt from "The effectiveness of
fiscal and monetary stimulus in depressions" a scholarly analysis of
stimulus by economist-authors Miguel Almunia, Agustin S. Benetrix, Barry
eichengreen, Kevin O' Rourke, and Gisela Rua:
"Where tried, fiscal policy was effective in
the 1930s....The details of the results differ, but the overall
conclusions do not. They show that where fiscal policy was tried, it was
Our estimates of its short-run effects are at the upper end of those
estimated recently with modern data....This is, in fact, what one should
expect if one believes that the effectiveness of fiscal policy is
greatest when interest rates are at the zero bound, leading to little
crowding out of private spending. It is what one should expect when
households are credit constrained by a dysfunctional banking system.
Given similar circumstances in 2008, this
underscores the advantages of using 1930s data as a source of evidence
on the effects of current policy."
effectiveness of fiscal and monetary stimulus in depressions"
by Miguel Almunia, Agustin S. Benetrix, Barry eEchengreen, Kevin O'
Rourke, and Gisela Rua, 18 November 2009 vox)
Stimulus works in multiple ways. It also helps
increase inflation expectations which is necessary to get people spending
In a deflationary environment, consumers
shut-down and stop spending. The Fed tries to spur economic activity by
convincing people that the dollars they hold will be worth less tomorrow.
That's why Bernanke keeps pointing out that the Fed will keep rates at zero
indefinitely. Regrettably, only the goldbugs take him seriously, which is
why gold prices have zoomed to the stratosphere. Personal savings rates are
There's been a sharp drop-off in consumption.
Bernanke's psychological experiment has flopped. The masses still believe
we're in recession. Without a gigantic fiscal expansion to jolt the economy
out of its lethargy, the severe contraction could drag on for a decade or
more. We're becoming Japan.
Obama's deficit cutting plan is madness. It offers no hope at all. It draws
from the half-baked theories of amateur economists on the Net who think that
massive liquidation and years of bitter retrenchment and high-unemployment
are the path to recovery.