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Irrational exuberance

May 11, 2009

Reaching to pluck planes from the sky, squid attempts to create a new reality,
irrationally exuberant.

It is of course sensible to use fiscal stimulus to offset a fall in private demand, and to some extent this can be effective – with a lag. But if you lose control over public spending and borrow too heavily (helped by the fact people like to hold your currency), it ends badly.

From the beginning, we’ve expressed concern here that the entire Summers Plan was overweight fiscal, i.e., not enough resources for recapitalizing banks and addressing housing directly (for the context of this assessment, see our full baseline view). Back in December/January, this was a strategic choice worth arguing about; now it’s a done deal and following the (very) limited recapitalization outcome of the bank stress tests, it seems likely that household and firm spending will remain sluggish. If that is the case, the Administration’s logic implies throwing another big fiscal stimulus into the mix – and the Summers’ team is already preparing the groundwork.

As far as growth is concerned, we’re around the inflection point in the cycle, that’s the sentiment,” Trichet said today at a press conference at the Bank for International Settlements in Basel, Switzerland.

Pakistan’s Prime Minister Syed Yousaf Raza Gilani said the army will defeat Taliban militants after his government disclosed that troops backed by helicopter gun ships in the northwest killed more than 700 guerillas in the past two weeks.

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19 Comments leave one →
  1. cometman permalink*
    May 11, 2009 7:55 am

    Feeling a little exuberant myself this morning, although not irrationally so. Just had a nice weekend is all. Nice visit with the folks, got the yard all cleaned up, got the garden tilled and the peas put in (even though I don’t like peas – but they are fun to grow), got some flowers to plant to add a little color since the azaleas aren’t quite ready to come out yet, AND the Sox, Celts and Bruins all kicked ass last night. Woo-Hoo!

    • Stemella permalink*
      May 11, 2009 4:37 pm

      Excellent on all the above, but especially about getting the garden worked. That always makes me feel exuberant too.

  2. cometman permalink*
    May 11, 2009 8:17 am

    The exuberance only lasts however until you click on the news. This op-ed from David Michael Green at CommonDreams was quite good in summing up the Obama administration so far. Green shoots down both those who equate Obama with Communism and those tout Obama as the second coming of FDR, saying he’s more of a go along to get along don’t rock the boat equivocator like Bill Clinton.

    There is always plenty of work to be done in this very imperfect world, and the last thing we need is another Clinton who wasted eight years of a presidency avoiding risk at all costs and accomplishing nothing. I’d also obviously have a problem with that under ‘normal’ post-Bush circumstances, where so much wreckage so desperately needs to be undone. But I really object to this embarrassingly centrist, ultra-cautious pussyfooting when there are so many critical conditions in crisis mode, screaming out for attention.

    I cannot believe I live in a world massively threatened by environmental catastrophe, and my government is barely even talking about half-measures, let alone moving heaven and earth with fierce urgency to save the planet. And the oil guys aren’t even in the White House anymore.

    I cannot believe I live in a world where the economy is imploding and the guy in charge of the country where the recession is rooted has hired agents of the very criminal crowd responsible for the problem to produce a solution, and that, shockingly, the ‘solution’ once again benefits wealthy elites while doing little for the rest of us.

    I cannot believe that I live in a country with a crumbling healthcare system, and the solution being offered by the “change” candidate-now-president – to the extent we will see one at all – will forego the obvious model of universal coverage adopted by all other developed countries in the world, and will instead slap Scotch Tape on the train wreck of the existing for-profit healthcare disaster, in an attempt to hold it together a little longer.

    I cannot believe that I live in a world where the Taliban is within spitting distance of capturing nuclear-armed Pakistan, and my government can’t even get serious enough about peace in the Middle East to show some real security guarantee carrots and foreign aid sticks to its client state in the region, forcing it to end an illegal and deeply antagonizing annexation masquerading as a forty year occupation.

    I cannot believe I live in a country where individuals who knowingly broke the law and ruined the national reputation by torturing are exposed by the president, only for him to then turn around and deploy magical powers which supposedly allow him to exonerate them in advance.

    This is Obama’s America? This is Obama’s America.

    And I particularly enjoyed the rhetorical flourish near the end:

    The biggest irony may just be this: That Barack Obama’s instinct for the capillary could be the one thing that has the capability of reaching deep down into the toilet bowl, down through the pipes and into the sewer system, and dragging the shit-encrusted Republican Party back to the surface, miraculously offering it a magical elixir of renewed viability despite its own immensely successful attempt at party suicide.

    Instinct for the capillary! Ha! That is one of the best descriptions for Obama and the Democratic party I’ve heard in a long time. Read that article yesterday and mulled it over for a bit and just when I started thinking it might be too harsh I saw this: Healthcare industry to offer cuts of $2 trillion. Sounds pretty good on the surface huh? Until you read the article. The healthcare industry isn’t “cutting” anything – they are simply mentioning that they will increase costs a little less quickly and that will “save” around 2 trillion bucks.

    The White House projects that the savings after five years under the proposal would mean about $2,500 a year in lower healthcare bills for a family of four. Within 10 years, the savings would “virtually eliminate” the nation’s budget deficit.

    Despite such predictions, many aspects of the plan remain unclear. The groups did not spell out how they plan to reach such a target, and in a letter to Obama they offer a broad pledge, not an outright commitment.

    In addition, White House officials said, there is no mechanism to ensure that the groups live up to their offer, only the implicit threat of public embarrassment. And it would be difficult to track the promised savings, other than the imprecise measure of comparing current projections of healthcare cost increases with future actual costs.

    Nonetheless, White House officials were optimistic about the offer from industry officials who have previously tried to put up obstacles to healthcare reform.

    Of course the health care industry doesn’t even bother to mention what the current projections for healthcare increases are, so when they come out and tell us about the next enormous price hike, we’ll just have to take their word for it that it’s lower than it would have been before their PR people managed to get an article placed in major newspapers around the country like the WAPO and the Boston Globe. And yet somehow the White House seems to know already how much every family will “save”.

    Just more smoke and mirrors, more words with no actions behind them.

    • Stemella permalink*
      May 11, 2009 4:52 pm

      I’ve started thinking of hopey changey as, “Status Quo O” – Squo- because his policies and actions, regardless of the rhetoric, are so reminiscent of the Clinton era.

      I really did hope that Squo would tackle the health care crisis in this country in a substantive way, as he has promised umpteen times. But I’m guessing they (the policians, big pharma and insurers) want to squeeze the maximum profit out of the baby boom as they now cross the boundary into senior citizenship and keep it up for the next 15 or so years. Once that monster generation has passed through, then they’ll adjust the system, but not before then. That’s my hunch. There is simply too much money to be made off that huge wad of people getting sick and dying, even though that puts enormous pressure on everyone else following that generation. They just suck.

  3. triv33 permalink
    May 11, 2009 8:32 am

    Being on SSD, I was stimulated to the tune of $250 last week. My exuberance was immediately offset by the loss of my husband’s glasses. I still have twenty bucks burning a hole in my pocket, whoo-hoo!

    • cometman permalink*
      May 11, 2009 8:35 am

      Don’t look a gift horse in the mouth. With $20, you could own half the Chrysler corporation!

      • triv33 permalink
        May 11, 2009 8:48 am

        You know, after careful consideration, again I’m going to have to go with the wiser investment…Powerball Lottery Tickets. :-}

  4. cometman permalink*
    May 11, 2009 8:47 am

    Things get curiouser and curiouser with Sir Allen Stanford. The British press is reporting that Stanford is a DEA informant.

    A Panorama investigation has suggested that Sir Allen was shielded from an earlier inquiry into his activities because he co-operated with a US Drug Enforcement Administration (DEA) attempt to track money laundering by Latin American drug cartels.

    ~snip~

    Panorama claimed some US officials were aware of Sir Allen’s cartel links as long ago as 1990. It reported that Sir Allen, paid a $3.1 million (£2.05 million) cheque to the DEA in 1999 after that sum was invested in his bank by another Mexican drug gang, the Juarez cartel of Amada Carillo Fuentes.

    According to Panorama, whose investigation will air on Monday, Sir Allen was initially investigated by the SEC over suspicions he was running a Ponzi scheme in the summer of 2006, but the inquiry was over by the winter of that year.

    The BBC claims the decision to close the investigation followed a request by another government agency.

    Panorama says it is aware of “strong evidence” that Sir Allen was a “confidential agent” for the DEA as far back as 1999 and turned over details of money laundering by clients from Colombia, Mexico and Ecuador.

    Rodney Gallagher, a British financial investigator, who knew Sir Allen in the 1980s said it was clear to him that the Texan had “a very close relationship with the DEA” and occasionally hired former agency staff to work for him.

    So here it sounds like the fraud investigation was put on the back burner because the DEA trumped the SEC and the FBI. Whichever acronym was pulling Stanford’s strings, this latest news can’t make him very happy. If the choice was being seen by the public as a massive fraud who ripped off $8 billion in a white collar crime or being seen as a snitch who was ratting out drug cartels to the DEA, I think I’d chose the former.

    • Stemella permalink*
      May 11, 2009 5:06 pm

      Maybe that’s why Stanford tried to turn himself in at the Fed courthouse recently. Maybe he wants protection from some of the Druglords who may very well like to seek retribution. What a fucking mess. The whole think reeks of Bush family drug war black operations. Wouldn’t be surprised at all to find out Blackwater was involved with this crap somehow. Arrest this asshole already!!

      • cometman permalink*
        May 11, 2009 9:49 pm

        Reminds me of that weird piece of testimony from Harry Markopolos regarding Bernie Madoff a few months back where he made a point to publicly mention the Russian mob and assure them he wasn’t the one out to take their money. There are some pretty shady characters involved in a lot of these frauds. Also makes me think of the BCCI scandal which we never got all the details of when Clinton sort of brushed the whole thing under the rug.

  5. cometman permalink*
    May 11, 2009 9:15 am

    Icelanders remain rationally exuberantly pissed off. Michael Hudson has more on the current situation there, with British trying to get the IMF to bail their sorry deregulating asses out while footing Iceland with the bill, even though it was British deregulation that allowed the problem to spread from Iceland to the UK in the first place.

    It is supposed to be merely incidental that the largest IMF shareholders, the United States and Britain, happen to be the major creditor nations and their banks the main beneficiaries of IMF loans. But in a Parliamentary question-and-answer session on May 6, Britain’s Prime Minister Gordon Brown spilled the beans. Under pressure for his notorious “light-touch regulation” as Chancellor of the Exchequer (1997-2007), he undid half a century of rhetorical pretense by announcing that he was pressuring the IMF to bail out Britain in its nasty dispute with the Icelandic owners of a British bank that went under. He was in a position to know the nitty-gritty of who owed what and which nation’s monetary authorities were responsible for which banks. So when he said that he was strong-arming the IMF and other organizations to force Iceland’s government to pay for his own government’s mistakes, he must have known this was breaking the unwritten law of pretending that the IMF is not the servant of creditor nations in bilateral disputes with smaller economies.

    And it looks like Iceland and Britain have their own version of the TARP (otherwise known as CRAP) program:

    After the bank crisis last autumn, the Independence Party fell, and its coalition partner for the last six years, the Social Democrats, took charge of the administration. The government divided the failed Icelandic banks into “good” and “bad” parts so as to save what could be salvaged for Icelandic depositors to back their deposits (the “good” bank). The government then commissioned two British accounting firms to survey the loan portfolios of Landsbanki and Kaupthing to evaluate their assets at “fair value.” But much as the U.S. stress test surrendered to the banking system’s insistence on blue-sky optimism regarding what will be left over on high-risk loans and gambles, so the Icelandic contract defined “fair value” as it would exist if the global financial collapse was completely reversed and everything went back to normal as if nothing had happened. Under this assumption the good and bad bank assets would be worth much more than is the case under today’s real-world conditions. This dangerously over-states the net worth of Iceland’s failed banks.

    And better late than never, Icelanders are pissed:

    Belatedly, the population is now up in arms – two weeks after the election! To stabilize the currency, Iceland has agreed to IMF conditionalities that prevent the government from pursuing the counter-cyclical Keynesian fiscal policy that Mr. Obama is leading in the United States. Unless the debt pressure is alleviated, Icelandic homeowners and businesses will be obliged to run down their savings each month until they are depleted – at which time they will lose their homes and forfeit their businesses to foreclosing creditors.

    So on Saturday afternoon, May 9, a “pots and pans” protest was conducted outside of Iceland’s Parliament in Reykjavik. The scenario is much like that of the color revolutions staged by U.S. neoliberals throughout the post-Soviet states. But Iceland’s kitchen-utensil revolution is organized as a protest against neoliberal policies. The protesters have picked up the thread where it left off last October a similar set of protests dislodged the Independence Party from power. The National Labor Association has broken from the new Social Democratic coalition government, reflecting the growing anger among Icelanders at their debt squeeze.

    Mr. Brown’s statement that he intends to use IMF leverage to deepen Iceland’s debt position by forcing its government to bail out British depositors has rubbed salt in this wound – precisely by demanding for his country what Icelanders are not receiving from their government! Its citizens want to know what pressure the country is responding to if it intends to put the interest of foreigners before their own. This double standard has motivated the population to act in a more confrontational way than would have occurred had the problem been merely domestic. Icelanders want to be told the magnitude of the financial problem – and apparent dishonesty and crony dealings – that the government is keeping secret. The answer may at long last move Iceland out of its post-feudal oligarchy. Its neoliberal privatizations and pro-financial policies may turn out not to be as entrenched and irreversible as the kleptocrats had hoped would be the case.

    Can’t we get a little bit of that on this side of the pond? Throw all the bastards out. Cull the oligarchs!

    • cometman permalink*
      May 11, 2009 9:42 am

      Yikes. Just read the first link you posted about Summers and Gordon Brown and saw this at the end:

      Blanchard doesn’t show the US debt forecast – presumably that would be indelicate. But at the 13:13 mark, he warns that the US may be heading in the same fiscal direction as Ireland (!), “the [US budget] numbers are not great but we hope that something will be done.”

      Good thing I’ve got several extra pots and pans around the house.

  6. cometman permalink*
    May 11, 2009 12:04 pm

    Good article on the Afghan drug trade from McClatchy which discusses the fact that the US and the UK have turned a blind eye to the problem even as Afghanistan produces bumper crops since the West began occupying their country.

    Asked what American and NATO forces have done to halt the flow of opium and heroin in the southern provinces, Afghanistan’s minister for counter-narcotics, Col. Gen. Khodaidad, who like many Afghans uses only one name, had a quick answer: “Nothing.”

    The Afghan government hasn’t done much, either. Schweich said that at the highest levels of government the issue wasn’t always corruption, but political considerations.

    For example, he said, U.S.-backed Afghan President Hamid Karzai was seen in 2007 as “trying to prevent serious law-enforcement efforts in Helmand and Kandahar to ensure that he did not lose the support of drug lords in the area whose support he wanted in the upcoming election.” Schweich, though, added that Karzai has recently appeared to “adopt a more hands-off approach.”

    A spokesman for Karzai, Humayun Hamidzada, denied that the government was soft on drugs, and said it was waging “an active campaign against corruption and drug dealing.”

    Nobody seems to know exactly why the drug trade was allowed to grow so much in the last several years, or if they do know why they aren’t admitting to it. But somebody sure seems to have made sure production doesn’t stop. In light of the reports about Stanford being a DEA informant, it really makes you wonder. Seems like the authorities have plenty of info on who is producing and profiting from drugs all over the world, but yet the drug trade persists.

    I’m betting the money from the drug trade lines the pockets of a lot more people than just the “Taliban” or Latin American drug lords.

    • cometman permalink*
      May 12, 2009 2:15 pm

      Here’s another interesting tidbit on the Afghan drug trade from McClatchy. Evidently one of their reporters was threatened by US puppet Hamid Karzai’s brother:

      I was in my third week of tracking down former Afghan officials and asking them about drugs and corruption. Several had mentioned Karzai, President Hamid Karzai’s brother and the head of Kandahar’s provincial council.

      After talking with poppy farmers, a drug dealer and former officials in Kandahar, it was time to see Ahmed Wali Karzai.

      Sitting in his home, Karzai said up front that he had nothing to do with drugs. The political enemies of his brother, the president, were spreading rumors: “I am just the victim of their politics, that’s all,” he said.

      I flipped from one page to the next of my notebook, and started with specifics.

      Dad Mohammed Khan, a former national intelligence directorate chief of Helmand province, told me that Karzai had sent an intermediary to force him to release a Taliban commander who’d been arrested in a major drug-trafficking area. Khan was killed by a roadside bomb after our interview.

      “He died, so I don’t know if he told you that,” Karzai said, looking unhappy with the question.

      He added: “He’s dead, so let’s leave it there.”

      I moved on to a second former security official from the region — I had jotted a long list of names — who’d also made allegations about Karzai.

      Karzai said that the official “is alive, I can find him and talk to him.” He called for one of his men to bring a cell phone.

      He began to glare at me and questioned whether I was really a reporter.

      “It seems like someone sent you to write these things,” he said, scowling.

      Karzai glared some more.

      “You should leave right now,” he said.

      I stuck my hand out to shake his; if I learned anything from three years of reporting in Iraq and then trips to Afghanistan during the past couple of years, it’s that when things turn bad, you should cling to any remaining shred of hospitality.

      Karzai grabbed my hand and used it to give me a bit of a push into the next room. He followed me, and his voice rose until it was a scream of curse words and threats.

      I managed to record just one full sentence: “Get the (expletive) out before I kick your (expletive).”

  7. Stemella permalink*
    May 11, 2009 9:13 pm

    This article resonates for me: Why I’m Freaking Out

    Insofar as this burgeoning Millennial Depression goes, I’ve noticed there are two sorts of people: Ones such as myself, obsessively following every blog and every chart and chasing after every little Bloomberg article like a starving hunter in an African veldt chasing down every little rodent with a spear, and others who vaguely know that there’s a crisis going on but who are pretty much buying the stock markets’ rise and the mainstream media’s line that “Green shoots are sprouting, and everything will soon be back to normal.”

    ~snip~

    In every economic crisis or mushrooming recession, the MSM and the leadership classes always talk up how great things really are, and how great things are going to get in just a little while, putting on a brave face and putting out optimistic talk—and that’s fine: That sort of mild deception is not only acceptable, it is in fact necessary. Putting on the happy mask is not the issue.

    The issue is, what’s behind the happy mask. In other words, what are the people in power actually doing, and do they have any sense that they know what they’re doing, or where they’re going? Or are they making it up as they go along? Are they on a path—even if it’s the wrong path, or one I don’t agree with—or are they lost in a wilderness and just going around in circles?

    That’s my problem. That’s why I’m freaking out.

    Sixteen months into this Millennial Depression, and less than a business quarter into Obama’s administration, it is inescapably clear that Team Obama hasn’t the slightest idea what it’s doing. To pretend otherwise is self-deception. The louts and Constitutional traitors of the Bush administration didn’t much know what they were doing either—but they were flat stupid. Team Obama doesn’t have that excuse.

    ~

    Team Obama does not have a clue what it is doing. Behind the happy mask of green shoots and hope we can believe in, there is nothing: Just a plastic, reassuring, empty smile.

    Read the article for specifics on banking, deficits, military and industry.

    • cometman permalink*
      May 11, 2009 9:42 pm

      That was a great article. I was glad that he noted the big interest spreads banks are getting right now. It’s something not too may people are talking about but it isn’t helping.

      The US is in debt up to its eyeballs, but unlike Japan, we have fat lending spreads. The benefit of the super cheap funding and the subsidies is not even partially being passed on to borrowers. Banks are increasing fees and not lowering spread commensurate with the fall in their funding costs. While some reduction in lending is salutary (too many weak credits got loans) the increases in charges are in many cases indiscriminate. High spreads are feeding the banks at the expense of enterprise.

      Not only does it fail to stimulate lending when the banks don’t pass on their savings to the consumer, but it isn’t exactly an incentive to save either because as the banks’ borrowing rate goes down, they pay out less in interest while their lending rates stay the same. These spreads plus all the bailout money they’re getting are letting the banks just sit there and fatten up for a while instead of lending to businesses to help stimulate the economy, which is what we’ve been told is supposed to be the point of all this and yet it still hasn’t happened. Talk to a lot of small owners and you’ll find that the banks have been significantly tightening lines of credit, which in turn makes it more difficult for businesses to offer credit to their customers.

  8. Stemella permalink*
    May 12, 2009 6:05 am

    Today in Major Fraud! no, not Flaud … Fraud!

    New York’s attorney general may soon announce that an associate of Henry Morris, a top fund raiser for the state’s former comptroller, has pleaded guilty to securities fraud and is cooperating with investigations, the Wall Street Journal said.

    Julio Ramirez has pleaded guilty to a criminal misdemeanor charge, and the U.S. Securities and Exchange Commission is expected to announce civil charges against him, the paper said, citing people familiar with the matter.

    The so-called “pay to play” scheme has ensnared Morris, who is accused of taking kickbacks to help investment firms win business with New York State’s pension fund.

    State Attorney General Andrew Cuomo earlier this month expanded a probe, which the SEC has joined, aimed at stamping out graft and “pay to play” practices involving gifts or campaign donations to win state and local government contracts.

    Though this guy may be a smaller fish among the pension fraud sharks at least it’s a start. I hope Cuomo follows it to the top. Given the SEC involvement, I somehow doubt it.

    • cometman permalink*
      May 12, 2009 9:05 am

      I haven’t seen any signs that the SEC is serious about getting to the bottom of anything. Mary Schapiro, the new head of the SEC, was part of the problem when she worked with FINRA.

      I keep reading article after article but at this point I’m not sure what else needs to be said – the problems are pretty clear, it’s obvious at this point what caused them, obvious who ought to be investigated, obvious who ought to be fired from their positions, and obvious what ought to be done to get back on track. But nothing of substance is being done as Geithner et al continue to rearrange the deck chairs. Lately I feel like we’re just sitting around waiting for the other shoe to drop.

      • Stemella permalink*
        May 12, 2009 5:26 pm

        Waiting for the shoe to drop…. (they’re stalling, stretching out in slowmo the inevitable) knowing several shoes will drop in time, but really wishing more shoes would fly zapatos style, especially at Wall, Broad, and K.

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