“My forecast is actually for some improvement beginning around the middle of the year,”

TO BE NOTED: From Real Time Economics:

"By Brian Blackstone

The U.S. economy should find its footing around the middle of the year even after another “significant” contraction in the first quarter, Federal Reserve Bank of Minneapolis President Gary Stern said Tuesday.

Still he warned in an interview with The Wall Street Journal and Dow Jones Newswires that, when the recovery does come, it will be hard to discern right away.

“My forecast is actually for some improvement beginning around the middle of the year,” Stern said. “That doesn’t mean we’re going to take off to exceedingly rapid growth.”

But the inevitable worries about double-dip recession won’t get a very receptive response from Stern, who is in his third recession since becoming head of the Minneapolis Fed 24 years ago. His tenure, the longest of any current Fed official, spans the chairmanships of Paul Volcker, Alan Greenspan and Ben Bernanke.

“One of the things I’ve observed coming out of the last two recessions is that there’s always a lot of concern about (how) ‘this is a very fragile recovery’” and worries that “if the Fed doesn’t do just the right thing…the whole thing will collapse again,” he said, leading to talk of “double dips, triple dips.”

Stern knows from experience how hard it is to spot the trough of a business cycle. Recalling his days as the Minneapolis Fed’s research director in 1982, he said that he told the Minneapolis Fed’s directors that there was “no sign of the recession ending” in November of that year. Of course, the National Bureau of Economic Research eventually determined that the recession did in fact end that
same month.

Even if his recession-dating record isn’t spotless, Stern knows his history, and “if you look at history I don’t know if we’ve ever had a double dip,” with the possible exception of 1980 and 1982, he said.

Still, Stern expects the employment market to play out this time much as it did coming out of the last two recessions in 1991 and 2001, with job growth slow to catch up to rising output.

Stern disputes comparisons between the current economic downturn and the Great Depression.

To be sure, “these are in my judgment historic times in the financial sector,” Stern said. Noting that there used to be five major, standalone investment banks in the U.S., Stern said, “if you had told me 13 months ago we were going to have zero at the end of March, I’d have said no way.”

On the other hand, “I wouldn’t rush to the Depression when it comes to the economy for comparisons,” Stern said.

“For those of us who were around for ‘80-’82 and ‘73-’75, what’s happening in the economy and a lot of the rhetoric that goes with it rings more familiar,” he said.

Stern also said that he sees some signs that credit market conditions have improved since late last year, though the gains are of the uneven “two steps forward, one step back” variety."

"We are now in Stage I : Bonds are going up. "

From La Philosophie de l'Investissement:

"Re-visiting the Business Cycle

We are now in Stage I :
Bonds are going up.

I also suspect( I AGREE ) we are in the bottoming process for stocks and commodities which should be complete sometime during 2009

Posted by Celal Birader at 23:35

"money managers continue to hoard cash near levels not seen since 2001"

From Bloomberg:

"By Sarah Jones

Jan. 21 (Bloomberg) -- Concerted efforts by central banks and policy makers have helped lift global investor sentiment this month, even so money managers continue to hoard cash near levels not seen since 2001, a Merrill Lynch & Co. survey showed.

Pessimism on global growth has more than halved in the last three months( SOME DIMINUTION IN THE FEAR AND AVERSION TO RISK ), according to the survey of managers who collectively manage $597 billion. Twenty-four percent expect a weaker economy over the next 12 months, compared to 65 percent in October.

“Investors are long on hope but short on conviction,” said Gary Baker, head of equity strategy for Europe, Africa and the Middle East at a Banc of America Securities-Merrill Lynch press briefing in London. “People want to be optimistic( TRUE ). There is still huge darkness out there, particularly in Europe.”

The MSCI World Index is up almost 6 percent since tumbling to a five-year low on Nov. 20, as the Federal Reserve slashed borrowing costs to as low as zero percent, and the Bank of England cut interest rates to a level not seen since its founding in 1694.

The benchmark of 23 nations had rebound as much as 23 percent before companies from Alcoa Inc. to Deutsche Bank AG fueled concern the global recession will wipe out profit growth.

Even so, earnings expectations and risk appetite has improved from last year, the survey of 205 fund managers showed. A net 55 percent expect to see further deterioration in earnings in January, that’s up from a low of 71 percent in November.( GOOD NEWS )

Cash held in investor portfolios remained at the highest levels since 2001, with 44 percent of those surveyed “overweight” in the asset class.

“The fear factor remains,” said Baker. Investors “have firepower to act, but are unconvinced by the modest recent equity rally( THIS IS WHY WE NEED TO ATTACK THE FEAR AND AVERSION TO RISK ), suggesting it is a bear market rally in both sentiment and markets.”

Investors preferred emerging markets and Japanese regions at the expense of the U.S. European equities remained the least favored by money managers.

Pessimism on banks continued to rise as investors remained overweight in so-called defensive stocks including pharmaceuticals, telecommunications and consumer staples.

The survey of 205 fund managers was conducted between Jan. 9 and Jan. 15. As of this month, Merrill Lynch has changed the format of its survey and will no longer publish full historical data.

For Related News and Information:

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net."

Some diminution is evident, but not enough. However, this is the beginning of a large amount of money that is waiting to be invested.

"social, cultural, political and economic implications of the growing dependence of the private sector on the state and on taxpayers will be profound"

From Peston on BBC:

"What would you think about lending a few bob to a giant FTSE-100 company?

And when I say "you", I mean all of us, as taxpayers.

Because the next phase in the government's attempt to stem the contraction of credit - that pernicious trend that's driven us into recession - will probably be to put a "sovereign wrap" around bonds and tradable paper issued by big companies.( OVER EVERYTHING )

It's the unfinished business of the Treasury and the Business Department, likely to be unveiled later this month, following the £11bn package of guarantees for bank loans to smaller businesses unveiled yesterday.

Broadly, taxpayers would be guaranteeing loans made to companies by pension funds, mutual funds, insurers and other financial institutions.( THE ONLY WAY TO END A CALLING RUN, FOLLOWED BY A PROACTIVITY RUN, ARE GOVERNMENT GUARANTEES )

And the idea would be to funnel the cash in these funds to the biggest 350 or so British companies.

One reason for doing this is that we're about to see a big bulge in the maturing of loans to companies. As I pointed out in the post "2009 is payback year", for European companies in aggregate there's a trillion dollars of bonds that have to be repaid or rolled over during the coming 12 months.

And although the corporate bond markets have recovered a bit in the past few weeks (the putative "green shoots" which Shrita Vadera now wishes she hadn't pointed out), we as taxpayers are probably going to have to lease our creditworthiness to companies, in order to persuade big investors to back those companies in sufficient size and at the right price.

Which means that the £600bn of loans, guarantees and capital provided to date by British taxpayers directly to our banks would be augmented by substantial guarantees( YES ) from us for borrowing by giant businesses.

In this instance, we'd be following where that recent convert to the alleged benefits of massive state intervention, George Bush's America, has been leading. In the US, there's already colossal support from taxpayers for corporate borrowing from investors in the form of commercial paper - with the US central bank, the Federal Reserve, buying the stuff and acting as de facto market maker.

As I noted in "The New Capitalism", the social, cultural, political and economic implications of the growing dependence of the private sector on the state and on taxpayers will be profound.

If you knew that you were lending to the vendor of your knickers, or the provider of your broadband service, would that change your attitude to them?

As swathes of the private sector receive vital financial support from taxpayers, the balance of power between citizen and big business( AND THE INVESTOR CLASS ) will change. But for better, or for worse?"

For better, if we do this right.

"Longer Treasury bonds are the better bubble candidates. "

From Accrued Interest:

"2009 Forecast Episode II: Deflation Strikes Back

This is Part II of a indeterminate series on the Accrued Interest 2009 Forecast. Here I'll focus on general interest rates and Treasury Bonds.


The question on many lips is are Treasury bonds a bubble? I've already said that fighting deflation will be the major theme of 2009. Deflation will remain the primary concern of the Fed until housing prices start to recover. I don't see that happening until 2010( I DISAGREE ). Until housing prices start to rise, we'll see persistently poor final consumer demand( I DISAGREE ). This in turn keeps the velocity of money low and thus the money supply contracting.


I have a very simplistic mental model for Treasury rates. Real interest rates should reflect the opportunity cost of money. Thus a short-term Treasury rate should be the opportunity cost plus an inflation premium. Longer-term rates should reflect both opportunity cost, inflation, and a term premium. When economic growth is weak, opportunities are less, and thus interest rates should fall.


If we have negative inflation, then short-term Treasury rates should be extremely low. Near zero makes sense for T-Bills (although negative yields is questionable at best). Less than 1% makes sense for the 2-year. So I see no bubble on the front end of the Treasury curve. Not that there is a ton of upside on the 2-year at 0.75%, but could it go to 0.50%? Sure.


Longer Treasury bonds are the better bubble candidates. One might be able to argue that in the short term, both growth and inflation will be negative, thus the equilibrium nominal short-term rate should probably be negative. But longer term, we'll eventually have both growth and inflation, and thus long-term Treasuries should not be approaching Japanese-like levels( I AGREE ).

So when the 10-year was pushing 2%, it felt bubbly. But still I resist the bubble label. To me, Treasury rates are clearly below "fair value" but given the extreme liquidity and economic circumstances, I doubt the 10-year can move above 3% until at least 4Q 2009. I think long-term Treasuries remain over-valued until its obvious that inflation is going to eventually become a problem.( A FAIR POINT. I BELIEVE PEOPLE WILL PULL OUT BEFORE THAT. )

What about Treasury supply you ask? Won't the massive debt load eventually push rates much higher? While acknowledging that supply is an obvious negative for prices always and everywhere, as it is, Treasury supply is clearly not overwhelming demand. The 3-year and 10-year auctions from last week went quite well.

Besides the theory that government debt crowds out private investment doesn't hold water right now. Private lending ain't happening in areas where the government isn't subsidizing. In essence, the Treasury is leveraging because the private sector can't.( TRUE. MULLIGAN DOESN'T SEE IT. )

Eventually, the Fed's programs will result in much higher inflation, and thus Treasury rates will rise substantially( I AGREE ). But I think this is a year or more away, too far away to recommend a short.

The problem for real money investors is that Treasury yields are so low, that you pretty much have to own something else. The yield advantage on short-term Agencies versus short-term Treasuries is so large that there isn't any logical scenario where the Treasury outperforms. Therefore I'm playing this by remaining underweight Treasury bonds, but owning stuff that can appreciate if Treasury rates fall. This includes bullet agencies, and some very high quality corporates( THESE MAKE SENSE. )."

He could well be right. I don't want to see another bubble burst, even in my bathtub.

taking steps to remove that fear and restoring investors’ confidence, could get the economy moving again much sooner than we expect.

Another James Surowiecki Post that I agree with:

"A (Mildly) Optimistic Take From an Unexpected Source

My friend and colleague John Cassidy has been one of the more bearish commentators on the U.S. economy for the past decade, which also means he’s been right more often than he’s been wrong in recent years. Given that these days even bulls are predicting a prolonged and deep recession, you might imagine that John’s take would be even more ursine than usual. But in the new issue of Portfolio, he actually switches gears, suggesting that, while the short-term outlook is going to remain dismal for months to come, he’s “less pessimistic than the conventional wisdom.” So much so, that recently he actually bought some stocks. (For John to do this is the rough equivalent of Larry Kudlow opposing a tax cut.)

Now, just because a pessimist has become an optimist (albeit hardly a giddy one: John suggests only that the U.S. economy will start to grow before the end of this year( I AGREE )), that’s not a sign that he’s necessarily right. But even if you set aside the economic analysis in the piece, the important point it makes is that the danger of extrapolating from current trends exists just as much on the downside as it does on the upside, and that just as in at the height of a bubble people have a hard time imagining that it will end, at the depths of a downturn it’s easy to assume that it will last forever.( TRUE )

I think extrapolating from the present is especially difficult in the current case, because of the incredible speed with which the economic crisis in the real economy occurred. While the U.S. economy has been weak for more than a year, it was limping along tolerably well until September, when the failure of Lehman Brothers, the resultant freezing up of the credit markets, and the failure of Congress to pass the first version of the TARP sent it into shock( TRUE ). Now, it may be that this happened because everyone in the U.S. suddenly realized just how flimsy the state of the economy was. But it seems more likely that it occurred because the fear( FEAR AND AVERSION TO RISK AND THE ACCOMPANYING FLIGHT TO SAFETY ) engendered by the bursting of the housing bubble and the turmoil in financial markets created a massive liquidity crisis( A CALLING RUN )—investors simply wanted (and want) to have their money in cash or government bonds( GUARANTEED ), rather than to lend it. And if that’s the case, then it’s possible that having the government pour liquidity into the market (as it’s been doing), and taking steps to remove that fear and restoring investors’ confidence, could get the economy moving again much sooner than we expect."

That's been my position all along.

“Sometime around the middle of the year there’s going to be pretty conclusive evidence that the economy has stabilized,”

I agree with this view. From Bloomberg:

"By Matt Miller and Jeff Kearns

Jan. 9 (Bloomberg) -- U.S. investors are looking ahead, and they like what they see( GOVERNMENT GUARANTEES ), say Barton Biggs and Robert Doll.

The 21 percent rally in the Standard & Poor’s 500 Index since Nov. 20 reflects speculation the worst of the recession is over( I AGREE ), according to Biggs, managing partner at hedge fund Traxis Partners LLC, and Doll, chief investment officer for BlackRock Inc. Equities will probably keep rising, they said yesterday on Bloomberg Television.

Airline shares may gain after crude oil fell 71 percent from its July record, said the New York-based Biggs. Stocks with the biggest price swings will climb as the recession ends, according to Doll. BlackRock is based in Plainsboro, New Jersey.

“Sometime around the middle of the year there’s going to be pretty conclusive evidence that the economy has stabilized( I AGREE ),” Biggs said. “That’s what the stock market is now looking forward and seeing, and that’s why I think that this rally carries further.”

The Standard & Poor’s 500 Index rallied after dropping to an 11-year low on Nov. 20. The benchmark plunged 38 percent in 2008, its worst yearly loss since 1937. Biggs was wrong in February 2008 he said the U.S. stock market is “at or very close to an important bottom( YIKES ).”

Biggs said airlines “make some sense” because they are cutting costs and getting a boost from lower fuel costs. The S&P 500 Airlines Index tumbled 29 percent in 2008, its fifth straight annual decline.

He also favors companies in less-developed countries. “The growth opportunities will be in emerging markets,” he said. “They are considerably cheaper then developed markets.”

Recession Nadir

Doll said the worst of the recession is probably over after more than $1 trillion of bank losses froze credit markets in 2008. U.S. gross domestic product may have contracted 4.35 percent in the last three months of 2008, according to the average estimate of economists surveyed by Bloomberg.

“The fourth quarter that just ended is likely to be the worst of the recession( I AGREE ),” said Doll. He said Nov. 20 probably was the bottom for the stock market.

Companies reliant on consumer spending to increase earnings led the advance in the S&P 500 since Nov. 20, rising 36 percent. Banks and commodity producers rallied 29 percent.

“Risky assets will outperform safe assets this year,” he said. “There are going to be horrible earnings but markets have a way of discounting that( I AGREE ).”

Biggs said that it’s too early to tell how the alleged fraud by Bernard Madoff will affect hedge funds and the fund-of- funds industry. Prosecutors say Madoff’s investment company may have cost clients as much as $50 billion through a “Ponzi scheme.” The impact will be seen in the first and second quarters of this year, Biggs said.

Hedge funds lost 18.3 percent in 2008, their worst year on record, according to Hedge Fund Research Inc.’s HFRI Fund Weighted Composite Index. The decline was the largest since the Chicago-based firm began tracking data in 1990."

I know we sound stupid.

"it indicates a modest decline of uncertainty since October 2008, suggesting that the worst may be behind us. "

I tend to agree with this post on Vox by Michelle Alexopoulos Jon Cohen:

"This column claims that uncertainty shocks affect on economic activity with remarkable swiftness, strength, and durability. Capturing expectations of average citizens in Main Street through the use of keywords in main newspapers, it indicates a modest decline of uncertainty since October 2008, suggesting that the worst may be behind us.( I AGREE )

It’s official. As everyone now knows, the US economy is in recession and has been since December 2007. If the contraction continues for another four months, which at this point seems inevitable, this downturn will match the two longest peak to trough slides in the Post-WWII period, the first from November 1973 to March 1975, the second from July 1981 to November 1982. Whether the current recession achieves the dubious distinction of matching unemployment rates of the earlier ones (9% in May 1975 and 10.2% in November 1982) remains to be seen, but the dramatic rise in unemployment announced on 5 December 2008 is worrisome. As for the stock market, the decline of the Dow Jones Industrial Average from its peak in July 2007 to its low point on 20 November 2008 actually exceeds by a few percentage points the 40% drop between October 1972 and October 1974. And, of course, the catastrophic fall in house prices continues unabated. In short, the economy is in serious trouble and it is likely to get worse before it gets better.( TRUE )

Nick Bloom, in a recent Vox column, uses links he has identified in his academic research between uncertainty shocks as measured by changes in expected volatility of the S&P 100 – the so-called investor fear index – and GDP growth to predict the length and depth of the current downturn. He predicts, on the basis of a dramatic jump in expected volatility caused by the credit crunch, a GDP decline of 3 percentage points in 2009 with recovery starting at the very end of year, assuming favourable government policies and a drop in volatility. Fear and uncertainty with all its associated collateral damage – postponed investment, limited structural change, and delayed consumption – indeed would seem to stalk the land.( I BELIEVE THAT THE FEAR AND AVERSION TO RISK IS THE MAIN CAUSE OF OUR CURRENT SITUATION )

From Wall Street to Main Street

Bloom’s argument depends heavily on the reliability of the expected volatility index( I BELIEVE THAT IT IS GOING DOWN ) as an indicator of uncertainty. Although his research results are compelling, it is still reasonable to wonder if his results are sensitive to his uncertainty measure. Or, to put it another way, are the forces that shape expectations among the Wall Street crowd the same as those that affect the folks on Main Street? In short, would the use of a more broad-based indicator of uncertainty alter the observed link between uncertainty shocks, output, and productivity? This is the question we are addressing in our current research. In brief, here’s what our preliminary results tell us.

Uncertain times, uncertain measures

We base our index of economic uncertainty on the number of articles that appear in the New York Times which use the terms uncertain and/or uncertainty and economic and/or economy( I'VE NO IDEA HOW RELIABLE THIS IS ). The beauty of the measure is that it is consistent over a very long time span (the New York Times searchable data base extends back into the nineteenth century), it is transparent and unfiltered (as they say, all the news that’s fit to print), and it approximates what the average Main Street resident knew about current events. In Figure 1, we present our monthly uncertainty index (adjusted for the days of each month) with NBER business cycle reference dates in the background, to show it adheres closely to business cycle dates. Moreover, as Figure 2 illustrates, the timing of the uncertainty shocks identified by Bloom’s uncertainty index (based on S&P volatility) and ours are quite similar.

Our statistical results suggest that uncertainty shocks act on economic activity with remarkable swiftness (the shock has an almost immediate negative impact on growth and productivity), strength (they explain over 25% of the variance of output and productivity within two years), and durability (the effects linger for a number of quarters). Moreover, the current uncertainty shock - that effectively dates from the Bear Stearns bailout( THIS INTERESTS ME ) - is the largest of the twentieth century, greater even than that associated with the October 1929 stock market crash.

The dreaded D-word

Of course, the obvious question is what does all of this mean for Main Street and its inhabitants? Many are now prepared to put the current crisis in the same league as the dreaded Great Depression. They point out that in both periods there were significant bank failures, sharp declines in equity and housing prices, and a severe credit crunch. However, the current policy responses have been vastly different, in large part because Federal Reserve Chairman Bernanke, an expert on the Great Depression, has used his deep knowledge of that event to avoid the errors of the past. Unlike in the 1930s, the monetary authorities have moved swiftly to increase liquidity, push down interest rates, and bolster the stability of the financial system. As it happens, our regression results suggest that these policy responses make a big difference. That is, when we introduce interest rates (the policy variable) into our regressions, we find that the economic contraction is likely to be closer to the 1%( I TEND TO AGREE ) predicted by the OECD than to the 3% predicted by Bloom.¹

Could the worst be over soon?

In spite of the very real threats to the US (and world) economy, a little perspective is in order. First, we have survived sharp jumps in uncertainty in the past – July 1971, January 1991, September 2001 (see Figures 1) – and will do so again( TRUE ). In this respect, it is also worth noting that the pattern displayed by our uncertainty index for the current crisis resembles more the sharp, short-lived ups and downs of the 1970s and early 2000s than it does the long drawn out rise and sluggish fall of the Depression years. This would seem to suggest that the current crisis, despite its gravity, does not mark the end of the world as we know it( I AGREE ). Second, in keeping with the old adage that it is often darkest just before the dawn, the numbers in Table 1 indicate that the light of a new day may just be visible on the horizon. Our uncertainty index, in this case based on data from six major US newspapers, shows a sharp run-up in uncertainty through October 2008 and a modest decline since. Two months do not make a trend but the drop is definitely encouraging( IT IS ). Although the negative economic consequences of the severe shock are likely to dog the economy for some time, we would guess that the worst is, indeed, behind us. Or, to employ Bloom’s horror film metaphor, the credit crisis has us (with good reason) perched on the edge of our seats, white-knuckled and wide-eyed. But, it is well to remember that the heroine while a little worse for wear, usually lives to welcome the dawn of a new day.

Newspaper	Average daily number of articles with keywords ("uncertainty” or “uncertain” & “economic” or “economy”)					Average week-day circulation
	2007	2008a	Selected months			30 Sept. 2008
			October	November	Decembera
New York Times	1.09	2.33	4.13	3.87	3.11	1,000,665
LA Times	0.65	1.07	2.00	1.27	1.44	739,147
USA Today	0.23	0.47	0.68	0.60	0.75	2,293,310
Wall Street Journal	1.98	3.38	5.29	3.43	2.56	2,011,999
Washington Post	0.76	1.58	3.48	1.90	2.22	622,714
Chicago Tribune	0.56	1.07	1.32	1.60	1.67	516,032
Circulation-weighted average	0.95	1.75	2.88	2.10	1.85	na

a. Values reported for 2008 are through 9 December 2008.

References

Alexopoulos, M. and Cohen, J. 2008. Uncertain Times, Uncertain Measures. Manuscript. University of Toronto, 2008.
Bloom, N. 2007. The impact of uncertainty shocks. National Bureau of Economic Research, Working Paper W13385. Issued in September 2007.
Bloom, N. 2008. The credit crunch may cause another great depression. VoxEU, 8 October 2008.
Bloom, N. 2009 will be the Nightmare on Main Street. VoxEU, 18 November 2008.
OECD. 2008. Economic Projections for the US, Japan & Euro area. Press Conference 11 November 2008.

---

1. Our predictions are made from standard Vector Autogression (VAR) forecasts. While our bivariate analysis suggests a decline of approximately 3%, the addition of interest rates into the system cut the forecasted decrease to 1%."

My own opinion comports with this. As the level and breadth of the government guarantees are absorbed, and the government reacts with various incentives against the fear and aversion to risk, and as the Bush Administration departs, it's possible that uncertainty and fear will start declining in earnest. I'm leaving it at this just in case this opinion turns out to be idiotic.

"All were looking for gains this year, and their targets at the start of the year are far above where the S&P 500 is currently trading."

This isn't fair, really, but if you're going to pretend that you can predict the future better than anyone else, it shouldn't be unexpected. I guess when you're wrong, as I told John Gapper, it's better to be gloriously wrong. From Bespoke:

"Bloomberg recently surveyed market strategists for their 2009 S&P 500 price targets, and collectively, they're looking for a gain of 21.8% from the index's current price level. As shown below, UBS is the most bullish of the group with a year-end 2009 price target of 1,300 (a 47.2% gain). UBS was the most bullish last year as well with a 2008 price target of 1,700. Goldman and Strategas are the second most bullish this year with price targets of 1,100. Credit Suisse has a target of 1,050 (for mid-year '09), Citi and HSBC are at 1,000, and Merrill Lynch is at 975. Merrill is the least bullish strategist of those surveyed, but they're still looking for a gain of 10.4% from current levels.

For those looking for direction from these strategists, their 2008 projections should be noted. All were looking for gains this year, and their targets at the start of the year are far above where the S&P 500 is currently trading.

Interested in more in-depth market analysis from Bespoke? Subscribe to Bespoke Premium and start receiving our closely followed reports today.

"We will see what 2009 will bring, but my characterization of 2008 is largely based on data."

So many people are adversely effected by this situation, and it has the potential, if not handled and responded to correctly, to spiral downward into a very deep and lasting problem, so that I do call it a crisis. But, in general, I see things as Casey Mulligan does, although not for the same reasons:

"Professor Black claims that “Rome is burning,” which I take to mean that we are in the midst of an economic disaster, and claims that I ignore it because of a theoretical bias.

2008 has been a disaster for Wall Street. A couple of years of steeply rising oil prices has been bad for the automobile industry, and a disaster for the makers of gas guzzlers — namely, GM, Chrysler, and Ford. However, I admit — proclaim — that I do not see 2008 as an economic disaster for the average American. We will see what 2009 will bring, but my characterization of 2008 is largely based on data. ( THIS NEEDS TO BE INTERPRETED, BUT, IN MY CASE, I'LL ADMIT TO A BIAS, I THINK IT'S A FAIRLY CLEAR PICTURE )

First let’s look at the employment data through November. Employment is down about 2 million, which undoubtably creates stress for a couple of million families. But is that a disaster? Robert Hall and Susan Woodward have a chart comparing the employment dynamics today to the 1982 recession, and find that, in percentage terms, employment declined more rapidly in 1982.

By 1982 Q1, productivity had fallen 3 of 4 quarters for a cumulative decline of 2.3 percent. Through 2008 Q3, productivity had risen six consecutive quarters, with an increase of 2.1 percent over the past four. It is very likely that the U.S. will have the most real GDP per capita in its history in 2008, despite the fact that the entire year will be spent in recession (by the employment definition). [1]

Even the more gloomy forecasts for the next year do not portend disaster. At quarterly rates, GDP growth, Goldman Sachs says, will fall 5/4 percent, 3/4 percent, and 1/4 percent from 2008Q3-Q4, 2008Q4-2009Q1, and 2009Q2. That’s a cumulative decline of 2.3 percent 2008Q3 - 2009Q2, or $200 billion, or about $700 per person. Is that a disaster?

Note

[1] Through Q3, 2008 GDP was $8,771 billion (seasonally adjusted by the BEA). 2008 population (July) was 303,824,640, so 2008 produced $28,870 per person already through Q3. That means only $9,338 per capita ($2,837 billion in aggregate) needs to be produced in Q4 to break the 2007 record. In other words, if Q4 is within 3 percent of Q3, we break the record. Even the most pessimistic forecasters admit that Q4 real GDP will be greater than that."

For some people $700 is a disaster, but that should be handled by the money we spend on helping people out during this recession. I'm with Mulligan because I see the economy as being in much better shape than in the past to deal with a crisis such as this ( I don't separate the economy from the general existential situation of the time ), and, I know this isn't everyone's view, I see this as a downward version of our upward bubble. The debt is troubling, but not insurmountable.

I predicate my position on a fairly effective government response to this crisis, and that's my bottom line for optimism. Since I believe that Implicit and Explicit Government Guarantees were being counted on, and counted on to be effective, then the crisis will abate when those guarantees are seen to be guaranteed, and there's a feeling that the government is competent. Don't expect any big changes until President Obama is sworn in.

"What it shows is that next year, 2009, there will be a massive bulge in the value of bonds issued by European companies that have to be repaid."

Robert Peston on BBC with an interesting post to begin the day:

"The transformation of the years of easy credit into a financial nightmare for many big companies is illustrated by the Bank of England in its Quarterly Bulletin, which was published overnight.

This transition from credit feast to credit famine is depicted in a chart of the maturity profile of outstanding European corporate debt (stay awake, this matters to you).

What it shows is that next year, 2009, there will be a massive bulge in the value of bonds issued by European companies that have to be repaid.

Or, to put it another way, about $1000bn of "old world" companies' borrowings in the form of tradable debt has to be paid back during the next 12 months - with something like $800bn of this owed by financial companies and $200bn by non-financial companies.

That would be a colossal sum to pay off at the best of times, and is equal to about five times what's been repaid in 2008.

It is a disturbingly huge amount, at a time when even the bluest-of-blue-chip companies are finding it difficult and expensive to raise money by selling new corporate bonds.

More or less every chief executive and finance director I know is agonising about how to obtain debt finance - and is having very unsatisfactory conversations with banks.

Here's the Bank of England's characteristically euphemistic account of the implications: "a large volume of corporate debt matures towards the end of 2008 and over 2009, which presents significant refinancing risks for firms".

What's likely to happen is that Europe's biggest and strongest companies will vacuum up whatever meagre credit is available from malfunctioning wholesale markets and banks.

And that, in turn, means that weaker businesses, those most desperate for credit, are going to find that conventional sources of credit are simply not available to them.

Their desperate plight - their almost complete inability to raise vital finance - is shown by another Bank of England chart. It plots the market price of European leveraged loans - banker-speak for the debt of companies with big borrowings - which has collapsed to 65 cents in the dollar on average.

To translate: companies with large debts are only expected to pay back two thirds of what they owe, which doesn't make them a sound banking proposition in our harsh new world of tighter-than-tight credit.

So lots and lots of companies won't be able to raise the finance that would keep the bailiffs away, unless taxpayers step in as the lender of last resort.

Taxpayers have already done that to the tune of £600bn and rising for British banks (see my note "How much will taxpayers finance economy?"). And, as I've been pointing out for some time, we are being asked to provide life support to a swathe of the real economy, from steel makers to car manufacturers.

The Government will succumb and will lend taxpayers' money to non-financial companies.

In a way, there's no choice, because we'll be hobbled for years as an economy if our few remaining manufacturers and exporters are wiped out.

But many will urge that companies which borrowed recklessly in the good years - often to generate unsustainable growth in profits that triggered bonus payments or to finance excessive special dividends - should not be bailed out.

Though in punishing imprudence we would be foolish to punish ourselves.

The trick for government, therefore, would be to rescue fundamentally viable businesses, while somehow leaving feckless management to swing in the wind."

Peston is someone who has been getting this right. The Government is going to have to essentially Guarantee large portions of the economy. In this sense, John Quiggan is correct, in that Government Intervention in the economy is going to grow larger and more intrusive in the next few years. Paradoxically, the Hybrid Plans like TARP assure this fact. The Dual Nature invites Government into a partnership from which neither party easily extricates itself.

This problem of Coroporate Debt is why I have been calling for Tax Relief for Coroporations. We can focus on Investment, or simply try and free up more cash for these businesses. If we don't do that, the government will have to, as Peston says, intervene to save Viable Companies. There is no way out of this messy situation that doesn't involve government incentives or intervention. I would rather give incentives to businesses to handle this debt problem on their own than have the government essentially micromanage winners and losers.

I give you then "Peston's Promise":

"And, as I've been pointing out for some time, we are being asked to provide life support to a swathe of the real economy, from steel makers to car manufacturers.

The Government will succumb and will lend taxpayers' money to non-financial companies.

In a way, there's no choice, because we'll be hobbled for years as an economy if our few remaining manufacturers and exporters are wiped out."

"So let’s talk about stimulus math, as I see it."

Paul Krugman thinks large about the stimulus in the NY Times:

"So what kinds of numbers are we talking about? GDP next year will be about $15 trillion, so 1% of GDP is $150 billion. The natural rate of unemployment is, say, 5% — maybe lower. Given Okun’s law, every excess point of unemployment above 5 means a 2% output gap.

Right now, we’re at 6.5% unemployment and a 3% output gap – but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion."

Here's my comment:

If we’re going to end up spending this amount we might as well do it now.

However, are you including things like UI in your figures? What’s the mix?

I mean, surely on what and where you spend the money is as relevant as the total number? Or are you simply assuming that the money goes out and that’s it? Is this organic or mechanical?

— Posted by Don the libertarian Democrat

Here's Alan Blinder's number:

"Next up, after reforming the bailout plan, is the Economic Recovery Act of 2009. Given the likely severity of the economic slide, a large dose of fiscal stimulus — amounting to perhaps 2 percent of G.D.P., or roughly $280 billion — is needed either in the lame-duck Congressional session this month or soon after Inauguration Day. "

"Ms. Meeker terrified the audience with the prospects of the coming recession"

When I read about the first part of this presentation, I nearly cried. Then it improved, via the NY Times:

"Nobody can show more in less time than Mary Meeker, the technology and Internet analyst at Morgan Stanley.

In the first session of the Web 2.0 conference in San Francisco, Ms. Meeker terrified the audience with the prospects of the coming recession, then offered a vision of ultimate redemption. (You can see her slides here.)"

Here's my comment:

“Nobody can show more in less time than Mary Meeker, the technology and Internet analyst at Morgan Stanley.

In the first session of the Web 2.0 conference in San Francisco, Ms. Meeker terrified the audience with the prospects of the coming recession, then offered a vision of ultimate redemption.”

Here's my comment:

Well, when I read that story, I didn’t see it doing a lot to drum up business for Morgan Stanley. It made me take a xanax, and think of putting cash under my mattress. And I’m optimistic about the economy.

— Don the libertarian Democrat

"The government’s mixed signals about rescuing financial institutions may have added to market turmoil in recent months"

Interesting post on the WSJ :

"The government’s mixed signals about rescuing financial institutions may have added to market turmoil in recent months, a Federal Reserve policy maker said Monday.

In remarks to a conference in Israel, Federal Reserve Bank of Richmond President Jeffrey Lacker said the “disparate” government responses to potential failures at major firms created uncertainty and “may have made it difficult for market participants to forecast whether and in what form official support would be forthcoming for a given counterparty.”

“Shifts in expectations regarding official intervention may have added volatility to financial asset markets that were already roiled by an increasingly uncertain growth outlook,” Mr. Lacker said at a conference at Hebrew University of Jerusalem, according to his prepared text released by the Richmond Fed...

Many investors and Wall Street executives have sharply criticized the U.S. response — spearheaded by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke — for sending mixed signals during the crisis about which firms might get taxpayer support to prevent their failure. The Fed stepped forward with $30 billion in March to prevent the bankruptcy of Bear Stearns Cos. and facilitate its sale to J.P. Morgan Chase & Co. Six months later in September, however, it declined to offer support to prevent the failure of Lehman Brothers Holdings Inc. Fed officials believe Lehman’s circumstances wouldn’t have allowed for a similar rescue.

The rescue of insurer American International Group Inc. just after Lehman’s failure added to criticism. Now, after Congress passed a $700 billion financial-sector bailout last month, banks are lining up to receive capital infusions from the Treasury."

Here's my comment:

” for sending mixed signals during the crisis about which firms might get taxpayer support to prevent their failure.”

This is the truth. Investors were counting on government intervention in this crisis. Any signal that this might not be forthcoming was seen as a looming disaster.

The government should have acted immediately and decisively, since it had given implicit and explicit guarantees that it would intervene in a crisis. The failure was also one of not having clear policies and guidelines of what would trigger intervention. Consequently, all moral hazard arguments have been fruitless.

In future, we need clear guidelines of government intervention, and moral hazard needs to be clear

Comment by Don the libertarian Democrat - November 3, 2008 at 10:06 am

Lacker does give a positive view of sorts:

“We have to give serious consideration to the idea that this episode of credit and financial market turmoil is part of the economy’s natural response to the sharp decline in the underlying fundamentals in housing finance,” Mr. Lacker said. “My sense is that the deterioration of economic conditions is playing a more prominent role in the tightening of credit terms right now than the direct effects of financial market turbulence.”

But Mr. Lacker said an economic recovery sometime in 2009 is a “reasonable expectation” because the Fed’s interest-rate target has come down to 1%; the major shocks that dampened economic activity — such as high energy prices — are subsiding; and the drag from the housing sector “seems likely to lessen in the next year.”

Call me a cock-eyed optimist, but I agree that we're moving past the crisis stage into the recession stage, and that is actually progress. Also, maybe it's the influence of Casey Mulligan, but I believe that things will begin to improve faster than many think possible.

The long term problems will still be there, but we will have an opportunity to right this ship.