The GOP's December Surprise
Is the GOP cooking the books to avoid recession till after Election Day?
Is the worst over? Are we on the road to recovery? Will the next president take office against a backdrop of economic improvement, as Bill Clinton did in 1993? Or has something deeper and more intractable gone wrong?
Early this year, the optimists, including Citigroup chairman Bob Rubin and Treasury secretary Hank Paulson, argued that the slowdown was short-term and that a "stimulus" package should be "targeted and temporary." This with rare haste the Democratic Congress enacted. As a result, most taxpayers got one-time $600 checks in May, prefigured by bubbly messages touting "Good News!" if you filed your taxes electronically.
The rebate isn't the only little Dutch boy thrown headlong at the dike this election year. Government spending, especially for defense, will be up: Military spending as a share of gdp is expected to grow by $75 billion in fiscal 2008, enough to neutralize a 0.3 percent decline in gdp. Dick Cheney was secretary of defense for Bush 41; just before the 1992 election he engineered a big run-up in outlays, as the military restocked following the first Gulf War. (It was exposed in the first Clinton "Economic Report.") Is the Pentagon up to that trick again? I'd be astonished if it were not.
Under intense pressure from panicky bankers, Ben Bernanke cut interest rates relentlessly from August 2007 through the spring of 2008. I don't accuse Bernanke of playing politics. But it's worth noting that this is what usually happens. In presidential election years when Republicans are in office, the Fed regularly and predictably pursues a more expansionary policy than when Democrats rule—after controlling for differences in the rates of inflation and unemployment. (I made these calculations myself; see the chart.) Maybe they just can't help themselves.
But much of the ordinary effect of interest cuts on new lending—like a rebound in construction and automobile sales—didn't happen this time. That's because the fall in home prices (and therefore the value of collateral) overwhelmed the benefit of cheaper money to the banks. And the banks barely cut mortgage rates, so consumers saw no benefits at all. Lower interest rates did cut the value of the dollar, however, and that promotes exports and foreign investment. (These days New York Times real estate listings come with a currency converter.) It also boosts the stock market, since multinational firms can report their (unchanged) foreign income as higher dollar earnings.
Possibly all this stimulus will ward off the two-quarter decline that has historically defined a recession. Don't be surprised: Republicans haven't had an election-year slump since 1960. On the other hand, the National Bureau of Economic Research, which has the official call, may describe the early spring as a recession anyway. Republicans will welcome that, too, so long as they can plausibly call the summer a "recovery." Even if they can't stop a recession, they may be able to make it short and shallow enough, this year, to put John McCain in the White House. But all this brings up an important question—what of next year?
You get what you pay for
How Fed's election-year rates varied from nonelection years when the incumbent was:
1984-2004. Source: Galbraith et al report, page 20.
No matter how effective the stimulus, two enormous clouds remain for whoever becomes president: the housing slump and the banking crisis. Both are far from being finished yet.
The problem with a housing slump is inventory. Unlike factories and Internet startups, shuttered houses don't go away. No one declares them obsolete. They aren't boxed up and sent to China. They remain, a drag on the market, decaying and pulling down property values for years. Here in Texas, housing values slumped with the S&L crisis and the oil bust of 1985 and did not recover until around 1993. That slump clobbered the oil patch but was barely felt anywhere else. This slump is the reverse—it's driving down housing prices just about everywhere except Texas, where the scars of the last bubble helped keep the recent one under control.
Nationally, the subprime debacle is blowing away the homeownership gains of the last few years. Those abusive mortgages were deliberately targeted at vulnerable, even desperate, people who could be steered into financial death traps. Lenders didn't care, because with the help of fraudulent appraisals, the loans could be off-loaded quickly in packages bought by greedy or gullible investors, including your pension fund. Poor people got hit on the front end; 1.5 million homes entered foreclosure last year. Middle-class people got it on the return volley.
And middle-class homeowners are now getting hit a second way: in the declining value of their homes. You don't have to be holding a subprime to find yourself underwater. That means that home-equity loans will dry up. (As of April, California homeowners in default were already a median of eight months behind on those loans.) Many people will be tempted to walk on their houses and mail the keys to the bank. Incidents of the foreclosed expressing themselves to their lenders by yanking the plumbing and the wires on the way out the door are on the rise, as is arson by desperate homeowners, according to the Los Angeles Times. Will students, small businesses, and other borrowers still be able to get credit when this is over? God only knows.
The mechanisms of mortgage finance and home-equity drawdown haven't simply been damaged. That well has been poisoned. Having largely outsourced mortgage originations to companies like Countrywide who didn't care whether the borrowers had good credit, the banking system cannot easily go back to its old method of making loans to creditworthy people and contenting itself with the interest paid back over many years. And who would trust them, anyway, if that's what they claimed they wanted to do?
Then there's another problem: The banks no longer trust each other. Last August, as mortgage-backed securities unraveled, finances froze up worldwide. Why? Because banks knew how much undisclosed junk they had on their own books. Who could say what the next fellow had? Overnight lending between banks—the process that ensures that every bank has funds when it needs them—fell apart. This is a very big deal. If banks will not lend money to each other, why (except for the blessings of federal insurance) should anyone else leave their money to them? Economists like me wait entire careers to study events such as these—which should provide no comfort to anyone else.
Since August, America's big banks have been wards of the Fed, and those in Europe equally so of the Bank of England and the European Central Bank. The system survives because central banks keep the lending windows open, and the result is that—except for one instance in Britain—the public has not pulled out of the banks. Let's be clear. The private financial markets did actually fail. It's only the fact that the public trusts government that keeps the system from dissolving in panic. But even if the Fed and its counterparts can hold the line, the problem of mistrust among the big bankers won't go away soon. And that means we're at the end of the age of credit expansions, for now.
As for next year, good luck. No matter who becomes president, there probably won't be another tax cut. Instead, cries for "fiscal responsibility" will be heard. States and localities, hit in 2008 on their property taxes, will cut their spending. Consumers, hit hard on their home equity, will cut back on new borrowing (which they probably couldn't get anyway) and pinch pennies however they can. Businesses won't even think about new investments.
In this situation, more cuts to interest rates—the only applicable tool the Fed has—don't work well. And they weaken the dollar, which raises inflation. What is gained by cheaper money will be lost in higher gas and food prices. But if the Fed reverses field and defends the dollar, exports will slump and the housing crisis will get worse. There's no easy way out.
Thus far the dollar has fallen, but it hasn't collapsed. Will it? There are two big threats. The first is the financial crisis itself, which is a problem of trust not only in the ordinary borrower, and not only in the banks, but in the American dollar. Why is the rest of the world nervous? Because the fundamental trust that they have always had—that the United States was a safe place to put your money—has come into question.
The second threat, not often mentioned, is our reckless foreign policy, including the invasion of Iraq, bellicosity toward Iran, and the ongoing subtext of hostility toward China. Since the Middle East has the oil and China holds our debts, all this is spitting in the soup, big time. It may not by itself wreck the financial system. But it doesn't exactly build up the reserve of good will that we may need when the financial going gets tough.
For half a century much of the world believed that we provided security under which they too could prosper; many no longer think so. Today, our country, like our banks, has a problem of global trust. Unlike the banks, we have no higher power to keep things going if we screw up.
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How about 'cooking the books' since the invention of the printing press in the 16th century?
Listen - I can't stand Bush, and I wouldn't be suprised if this is all true, but let's PLEASE not just assume that Democrats are always going to be better.
chawston,
Your point is well-taken. However, at this point, it is a fairly safe assumption they will do better...
Recession my backside. This is going to be one giant depression. Hoover's Depression was an annemic expression.
The following article shows adjusted GDP minus government spending and adjusting exports by decline of the dollar and internal consumption by decline of purchasing power
http://thepoliticsofdebt.com/?p=390
The picture is bad, but I don't see other similar studies around.
What has transpired over the last year really should come as no surprise to any of those involved, save those who were lied to when agreeing to the treacherous terms buried under reams of legalese. If the fox is allowed to guard the henhouse then no one should be surprised when thier nestegg is empty. Those at the Feds,in the banks, brokerage houses and government legislative committees are ultimately responsible for this massive heist of our country's wealth whether they profited or not. Yet, here we are letting them tell us what happened and instructing us how to fix it. What a tragic end to such a great social experiment called America.
There's debt and there's debt. We have to convince ourselves that rebuilding and upgrading our various infrastructures (mental as well as physical) are worth the significant increase in debt that we will show in official government deficit. The Conservatives will howl that we are throwing money at the problem. Can it be any worse than throwing money at billionaires?
If the banks don’t trusting each other, it may be wise to put some of that hard earn cash under the mattress.
i have little doubt that no rate increases will occur before the election. That way, stupid republicans can blame it on the dem's when rates DO increase.
They've been 'cooking the books' since 2001. I'm not saying the Democrats have been clean but the level of 'cooking' has been dramatic. In order to delay the larger affects of the recession.
As Kevin Phillips pointed out, the governments have been cooking the books for years - on GDP, the poverty rate, inflation and unemployment. It is all pollyanna statistics. Galbraith could have pointed that out.
The only thing that has kept up GDP figures is military spending, which is not productive spending, but destructive spending. It doens't create further value, in essence. Unlike buying machinery to make parts, or electric tractors to harvest corn.
I have been thinking about the mattress a lot. Getting out of index funds, going cash, putting cash in safer banks - because Galbraith is right here - there was almost a collapse of the banking system. And that massive Debt - $45 Trillion in Credit Default Swaps market - is still out there. We already know subprime lost almost half a trillion. No one can take those kind of losses and bounce back.
Nothing the Repubs and their cohorts do comes as a surprise to me. I'm sure they are cooking the books until after the election. They have been cooking the number of job losses for a few years so why would anyone be surprised at this.
Dunno if you Yanks have noticed but your dollar's [deleted]ed.The Australian dollar is worth more than the Yank version,gold's through the roof and the Euro is the obvious winner.
So if the Democrates get in and it will be better with them ( both parties suck in my opinion) if they screw up will they blame the Republicans or themselves? Hmm?
Interesting piece. I sent it to a friend but I'm not sure it was readable. Is it possible to have a send to a friend pop-up or something?
They have been cooking the books since this country went bankrupt in 1933. They have been cooking the books since they started taking money out of social security to finance the government and intitlement programs. They have been cooking the books since they went off the gold standard, they have been cooking the books... well you get the message.
Google "shadow government statistics" and be very, very frightened. The U.S. economy is much worse off than you have been told. Real unemployment is over 10%, inflation is closer to 15%. We have been lied to, big-time!
Start stockpiling food, water and gold - hard times are comin'.....
Try reading the prophetic Iron Heel by Jack London to understand where we seem to be headed.
There is no mention of Phil Gramm of TX and his sneaky little bill that allowed many subprime investments to go unregulated...you know, the same Phil Gramm that's now in the McCain camp as financial advisor.
Also, let's not forget the wars in Iraq & Afghanistan, which have been a huge drain on our economy (although a select few individuals have greatly benefitted.)
You get what you pay for? Most people borrowed in good faith to buy a home.They were not treated the same by lenders.Government policy has pushed the dollar to near worthlessness and the worst is yet to come,no matter who is elected president.McCain admits he has no idea how economics work so he will continue the flawed policies of the current occupant of the White House.If the current financial crisis stops at less than a full blown depression it will be nothing short of a miracle.
The GOP charge against the Dems have always been that they were the party of "Tax and Spend". Why have the Dems not used the charge that the GOP is the party of "Borrow and Spend". One is clearly a better way to spend (if spend we must) than the other.
That being said, only Bush can wreck the dollar like he does the country. Damn the Republicans for giving him to us.
Actually, nakis, they have been 'cooking the books' since Richard Nixon took America off the gold standard so that they could pay for the Vietnam War. It's a lot easier to print bogus money to pay for a mistake than to own up to the idea that it was a mistake to begin with. Republicans are notorious for this type of behavior. Democrats are also notorious idiots when it comes to this type of thing. Johnson wasn't a real genius when it was apparent that Vietnam was a really stupid move by another Democrat, Kennedy. Enter the Bushes, father and son and their stupid mess, Iraq. Once again, we have a stupid idea backed by money that is worth...nothing.
But we can pay for our patriotic fervor with paper. Worthless paper, to be sure, but something that sounds impressive when you attach billions and trillions to it. And the illusion was that we would always agree that something that was worthless, i.e. the dollar, was always going to be worth 'something.' Now, it seems, some party poopers out there in the real world have decide the dollar is actually just a piece of paper with pretty green ink and pictures on it
and not much more. Definitely not worth a piece of gold or a barrel of oil. It's not really even constructed in the dimensions needed to wipe your behind on after nature calls. Now, everybody is going to realize what the 'trickle down' economy of the Gipper, old Ronnie Raygun, was all about. They get the trickle and we get the down. The smoke and mirrors have disappeared and, PRESTO!, we're all screwed.
The 'net - net' number of 62,000 for jobs 'lost' in June is bad, but...
The 'net - net' of job losses + job gains, is really MUCH, MUCH worse. The problem is the losses are HUGE > 155,000 in 'real' (read 'living' or 'family' wage jobs:
* - 43,000 construction
* - 33,000 manufacturing
* - 9,000 travel/transportation/utilities
* - 69,000 professional services
offset by 'hair net and name tag' type jobs (bellman, counter help, waitress)
* + 24,000 hotel & food service
and, for those 'small government' blowhard admin apologists
* + 29,000 government
It's all there on the Department of labor's website, Go to B-1 Employees on nonfarm payrolls for the 'read 'em and weep' details.
Sure the Republican's are keeping it secret as to the REAL NATIONAL DEBT with the help of the DLC Republicrats because the deficit is 57.7 TRILLION. The private war funding should never have been allowed.
What is the Real National Debt?
Hopefully, all this failure and corruption in our government, so egregious and flaunted in recent years, has awakened the American populace. The Dem-publican system is fatally flawed and America pays the price. Our election system is fatally flawed and needs to be scrapped, taking away the ability of the powerful delegates (Dem-publicans) and prejudiced Secretary's of State to determine who is President. We need a third party. The Libertarian Party holds the principles of the Founding Fathers, tempered only by common sense and the well-being of the American populace. Take a look, America. The Libertarian Party is growing by leaps and bounds for a reason. Raise the Barr 2008.
I like the chart of party in power versus interest rate changes in election year. Could the rate changes be a product of economic policies introduced by the governing party, rather than overt/covert manipulation of the Fed? Could it be that after 3 years of Republican rule, that loosening of monetary policy is more likely than after 3 years of Democratic rule?
Cooking books, like cooking data, as in the fraudulent hockey stick graph depicting runaway global warming? Relax, in the long run were all dead. I don't think California girls are going to enjoy living under sharia law, but we all have to do are multicultural duty.
I'd like to know how the U.S.' economic downturn stands in comparison with Argentina's a decade ago. (seriously, in context.) No one ever talks about it, and I think it's crazy to not look at Argentina as a prime example of banking nonsense aftermath...
Your analysis is on the money.
Unfortunately, more inflation is inevitable. As a debtor, the government has a quiet interest in inflation - to reduce the real value of thir debts. If a big bank starts to fail, the government will buy it. This will be explained as intended to avoid a collapse of the financial system. It will indirectly encourage other big banks to think that if they start to fail, then they will also be bought by the government.
I am already a print subscriber (#12569TCE712PBOO1# MRJS 311 MJ1877 J/F 10), and a repeat donor to your fund. I tried to sign up for the online edition, but, apparently it is only possible if I am willing to have you charge my credit card automatically each year, which I refuse to do. I have had problems getting companies to stop taking money from my credit card when I wanted it stopped, so will not agree to that, even if it means that I will never be able to access articles online. Do not promise to do the right thing. I trust no one except my wife.
I would love to vote Libertarian. But, I cannot.
The Libertarian Party have shown themselves to be lovers of bigotry and hate. Some Libertarian Party people on the NewsHour, in 1980, said their party was out to crush the company store. The current Libertarians want to own the company store.
"Smaller government" usually---almost ALWAYS---means no welfare, no human rights, no worker protection, no environmental protection, and the powerful do as they please, with all the rest of us paying for it.
So, I will vote Green. They have no more chance than the Libertarians, but so what? If everyone voted for the independent parties, then the Republicrats would have to take notice!
Never happen, of course, but it is a nice fantasy!
you sound like my grandfather in the 60's
How do you people think the goverment gona get new troops to send to Afganistan next year? Out of need, they'll send your starving and malnutrient babies to war!!!
If the US pulled out of Iraq and Afghanistan and stopped playing corporate socialist the US could muddle it's way out of the economic problems. Isn't bailing out the banks the same as Japan's strategy in the early 90's. The difference is that Japan is a creditor nation with a powerful manufacturing sector. It seems the only thing America is manufacturing now is false economic stats and armaments.
American politics is ruled by Israel, the military industrial establishment and the bankers. These groups have agendas which are inconsistent with the interests of the average American. Now add to this influence of the globalists who want to de-industrialize the US and you have a recipe of disaster for the middle and lower classes in America.
When have politicans openly talked about the pitfalls of globalization, special interest groups (lobbyists) muzzled media etc. They prefer less difficult issues such as pro life or pro choice.
The problem with America is the politicans understand that confusing the public with political differences between the two parties creates enough confusion in the public that the real issues never have to be addressed until the people feel the pain.
They are distracted by disease, for example,foreigners are buying up American office towers and businesses and fail to pay attention to the symptoms. The disease is financial mismanagement and corruption by government, Wall Street, the Federal Reserve and big corporations. The symptoms are high gas prices, falling housing prices, job losses, lying and corrupt politicans and media.
My prediction though, is that soon, they will figure it out when they are at home, unemployed or retired with no money.
Then they will be buying into the next round of political rhetoric about a North American Union or the Peace and Prosperity Partnership. I just love the catchy anacronisms the politicans dream up. Sort of like Freedom Fries. It will be prosperity for Mexico and big corporations and a partnership from hell for the US and Canada. The upside of this is that Americans will have more time in apartments to enjoy Monday football and the latest sensation on American Idol.
Does anyone truly believe that we have come to this point because mistakes have been made by the Grand Oligarchy
Party.I believe it was, and is a purposeful endeavor to shut down the US Gov't.,while accumulating large treasure thru oil, war profiteering, etc... All the while creating the need for expansive Privatization. Why just control the country when you can actually buy it.I started to suspect this when that ACTING president Ratgun was in charge.
I am a HVAC\R contractor in Sacramento. I have gone as far as waiving my labor and charging for freon and parts simply to generate a call every 2-3 days!! It has N been so bad ha on a 101 degree day I get no work1 I drove big rigs in late 80's Old imers told me of making 9 hr in he 60's and affording new homes, autos,pools,etc, And twenty years later He still made 9 hr and couldnt afford a new anyhing 1
What is happening to uor once-great country couldn't possibly be any clearer. For the fourth time in their history, the American people are in the process or relearning a lesson they should have learned nearly a century-and-a-half ago during the Grant administration:
CONSEVATIVE PHILOSOPHY OF GOVERNANCE DOES NOT WORK - PERIOD
It never has. It never will.
At three times in our past, the "plutocracy" (today we refer to it as the "looney right wing") seized all three branches of our government. Three times in our past they drove this country into the economic dirt.
Well, I'll be....It's happened again!
I need a drink.
Tom Degan
Goshen, NY
www.tomdegan.blogspot.com
Two
I think we must stay
I think we must stay optimistic even though we are having a hard time today. Living in recession is not easy as it we struggle hard to meet our ends. Tax day is upon us – every year it descends like the virulent pestilence it is. Tax day induces migraines and ulcers for many. Those that can't get to them by the 15th should file for a tax extension. It's far better to get an extension than have to get quick payday loans for late penalties. Well, if you did everything right, then you won't have to worry about things like Tom Daschle, Nancy Killefer, and Tim Geithner did – their screw-ups on taxes cost Daschle and Killefer jobs, and has gotten Geithner an endless list of ridicule. You do not want to need debt relief from IRS penalties over missing tax day.
