Wait And See

Here’s the economic strategy update.  Yesterday, Ben Bernanke apparently convinced the market that no major banks will need to be taken over due to lack of capital.  If he knows this, I’m not sure exactly why we need the stress tests.  But we now know the outcome of those tests.

At the same time, Chairman Bernanke has made (or reiterated) a clear call on the economic recovery.  Look at p.A2 in your morning WSJ; in the third panel of the chart, the heading tells you all: “Real GDP contracts… Bounces, then moderates.”

There is no sign of a potential lost decade here.  The central range of the forecast for 2010 is entirely above 2 percent, leaning towards 3 percent (Q4 on Q4).

So the banks have – by assumption – sufficient capital.  The stress test will be relative to this baseline; you can see that the “maximum stress” will be pretty mild and, very important, short-lived.

President Obama therefore can present and emphasize his (admirable) long-term goals, as he did last night.

I just have one question.  How exactly do we get growth over 2 percent in 2010 (and after)?  The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different).  There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year.  Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system.  Monetary policy sounded bold a month ago; now less so (again, if your central forecast is so rosy, why embark on risky or controversial further monetary expansion?)

The answer is: wait and see.  If we get a recovery, then we are fine.  If there is no recovery, we’ll deal with it at that time and we can bolder at that time. 

I remember hearing the exact same thing from the Paulson Treasury after the failure of Bear Stearns.

18 responses to “Wait And See

  1. I have to admit I’m suffering some cognitive dissonance after BB’s testimony yesterday. The economy is on the edge of systemic failure, but no action is needed right now. Banks still need government backstops, but their balance sheets are fine. Lots of confidence that we’ll have recovery in 2010, but no acknowledgment of past predictive mistakes.

    We are through the looking glass.

  2. The Federal Reserve still puts a lot of faith in the monetary stimulus. Having lowered the Fed Funds rate by more than 500 basis points, they expect the resulting demand to restore the economy to its long term path. They even occasionally mention the need to watch for when to remove this stimulus (which contradicts the FOMC statement that interest rates will be held low for a long time.)

    But what if the problem isn’t that banks don’t have enough capital? What if the issue is that borrowers don’t have enough income and collateral to support previous lending levels? In that case, equity infusions to the banks will be ineffective.

    How long and hard do you push on a string before you try something else?

  3. Two quotes. From Reuters:

    http://www.reuters.com/article/mnaNewsIndustryMaterialsAndUtilities/idUSN1248357020090112

    “Whether Citigroup will be better off accepting prices today or deferring sales remains to be seen,” Sonenshine said. “In both cases, AIG and Citi, we are looking at the slow but inevitable disaggregation of overextended financial services companies that have demonstrated an inability to manage risk.”

    The WaPo:

    http://www.washingtonpost.com/wp-dyn/content/article/2009/02/24/AR2009022403351.html

    “The government hopes to complete the tests in the next several weeks, officials said.

    Companies that need government money will be required to issue preferred shares that pay the government a regular dividend, basically the same terms on which the government has invested almost $200 billion in more than 400 banks since November. The key difference is that the preferred shares can be replaced with common shares.

    The change is critical because of the accounting rules that govern what kinds of money banks can count as capital. The basic rule is that capital is money a bank never needs to repay. The most basic form of capital is money raised by selling common shares.

    Many investors do not regard preferred shares as capital because the dividend on those shares rises sharply after five years, encouraging repayment.( NB- Don )

    The Treasury Department pushed banking regulators in November to declare that preferred shares counted as capital, but investors were not convinced.

    Some leading financial analysts and economists have doubts that the plan will work. They said that banks must be recapitalized on a massive scale, if necessary through a process in which the government would seize the most troubled companies, strip them of toxic assets and then return them to private hands.

    “I think the end game of this has to involve receivership for most of the largest financial institutions. Receivership and then reprivatizing them,” said Kenneth Rogoff, a Harvard economics professor. “You can’t guarantee that it’s going to work. But looking at the history of financial crises, there are very few examples of another successful exit strategy. And every month we wait to act adds to the depth and duration of the recession.”

    These tactics have proved useless so far. Investors will only jump in if subsidized, or they can get assets from these businesses at a deep discount. It’s hard to see how this works, even if the economy slowly gets better. It’s not clear that anybody really trusts these companies.

    As for the awful crime of hoping that the taxpayers get paid back, or Bernanke’s comment about the “Franchise Value”, they defy belief.

  4. Hi,

    I read a similar opinion about Indian economy by Mr. Chidambaram. I am not sure if you are following Indian economy separately. Here is the link:

    http://economictimes.indiatimes.com/News/Economy/Indicators/Indias-economic-upturn-to-begin-October-Chidambaram/articleshow/4184442.cms

    As you can see, the headline of the news and the content both seem to based on sentiments rather than any data. However, given that this comes from the subject expert such as Chidambaram there must be some credibility there. What do you think?

    regards,

    Jagmohan

  5. Hi,

    I have one question. With this context of debate on whether the economy will turn around in 6 months or 2 years or more years, my question is:

    What will be ideal scenario after this downturn is over? What parameters to look for and whats the forecast about those parameters irrespective of the time it will take for the recovery?

    Any comments?

    regards,

    Jagmohan

  6. The franchise value of these banks is about equivalent to the franchise value of the Republican Party. In any event, if the government doesn’t even have the capacity to conduct meaningful stress tests, then how do they have the capacity to take these outfits into receivership? These transnational companies are so gigantic, can they no longer be supervised by our national government? Shouldn’t we simply begin dismantling them using anti-trust law? I think the reason the Obama Administration is flinching from being decisive (just like the previous administration) is because these gigantic dinosaurs have our nation by the tail.

  7. If the current strategy fails, Ben still has that hog leg in his holster – if I understand others’ comments correctly he has not used any of the Fed’s ability to buy T Bills yet, and could do so at any time it was necessary.

    Are these guys purposely trying to thread that needle? (Walking the line between treating this as a severe but normal contraction, in which recovery will restore the value of many of the banks’ assets and pull them back from the brink, as with much of the rest of the economy, and taking ultimate measures to replace a money supply that is vanishing due to failure of the derivatives backed money supply created by the shadow banking system)

    If so, I have a feeling it is not the decision of unaided financial economists – the only personality in the system holding that kind of tolerance for ambiguity and risk taking is Barack Obama. Which runs counter to my perception that the financial guys are running Obama, and leaves me thinking Obama may be running them instead.

    If so, then should the current strategy fail, I expect the President will have no problem pulling the trigger on (StatsGuy will be pleased) massive Fed purchases of US debt in the form of Treasuries.

  8. @Jim

    I would be pleased, yes, although I have a new theory as to what Bernanke may be up to (other than confusing everyone and promising to act while desperately hoping he won’t have to act).

    From my recent comment on the Becker-Posner blog:

    The fear on the part of Bernanke is probably that visible inflation would drive up interest rates on the massive US debt, which is funded largely through short-term notes (this is an historically new development, and incredibly short sighted). This could increase interest-as-%-of-GDP to well over 2% to 3%, and would be crippling.

    My best guess is that Bernanke is trying to walk a tightrope – keep interest rates low but keep the money supply expanding to stimulate the economy, and “grow” out of the debt. I cannot see how this will work over the next 5-10 years. The only thing that has permitted it to work so far has been the world-wide panic and continuing devaluation of other assets (or, more accurately, the FEAR that those assets would continue to devalue). Soon enough, those assets will bottom to such a degree that it will become riskier to hold T-bills than hold stocks or commodities (or whatever).

    However, this plan would be consistent with Clinton’s plea to the Chinese to keep buying our debt.

    However, after causing untold damage to the world economy, the panic will shift the other way as investors flee T-bills. This will _force_ Bernanke to float the T-bill auctions, which will reinforce those fears.

    In other words, because Bernanke has waited so long to act, we’re now in a situation where a public purchase of T-bills could trigger a flight, in which case interest rates would rise on short term US debt rollovers and new issues (of which there will be plenty). To prevent US debt servicing costs from soaring, Bernanke has to continue to issue new debt at below-market interest rates even as interest rates rise.

    So now I’m hoping for one of two things:

    China wises up, realizes that it’s going to get screwed, and spends down its 2 trillion in US dollar reserves as fast as it can (before those reserves get cut in half by inflation).

    OR – and this would indeed be the best option –

    The G20 miraculously agrees to global simultaneous quantitative easing on April 2 (which seems about as far away now as January 20th seemed when we were still in November). The markets see that the world can indeed act in unison, and break us out of this snap. Investors flee to other assets – stocks go back up, commodities go back up, housing probably just stops declining, the gold-bugs have a field day. This both reflates the economy and stops debt-driven bankruptcy.

    However, I do not think either of these things is likely, primarily due to a combination of political interests and 30 years of Milton Friedmanomics.

    Honestly, the dice were cast in early January – everyone expected quantitative easing, which would have triggered a forward-looking jump in stocks and asset prices and would have stabilized consumer confidence.

    Instead, Bernanke (in the infinite wisdom of his well-insulated quasi-agency position) probably started thinking the economy was pulling out of it. Or, in the words of Herbert Hoover – that the problem had ended 60 days earlier. Indeed, his own internal projections called the max unemployment rate at under 8% and expected a recovery in late 2009. What a rosy scenario that would have been!

    Bernanke – the famed scholar of the Great Depression -fell into the same trap as Japan in the 1990s and Roosevelt in the late 30s – failing to act early enough and with enough decisiveness.

    Oh, and as to more evidence that we’re drowning in debt (which is increasing in value), the insurance companies who all carry annuity obligations (and expected to pay for them with investments in stocks and bonds) are sinking as their formidable capital cushions get crushed. Prudential – yes, the Rock – just got downgraded by Fitch and cannot tap the Fed’s commercial paper note liquidity program.

    Oops. Wanna bet other insurers are in line?

    As I said, the banks are no longer the primary threat – and our continued obsession with “getting the banks lending” is distracting us from the real issues. (Okay, Krugman may get it, but no one else.) The govt. will continue to pour assets into the big banks and finance companies, because they are sooooo essential to a free market economy, while everyone else is allowed to drown in debt.

    Honestly, I am starting to side with the free market extremists – let them all declare bankruptcy and the whole thing burn. While I prefer a smart government over the whole system imploding, it’s amazing how much damage can be inflicted by witless incompetence.

  9. @Stefan

    The stress tests are an officious formality to justify dumping more money into our useless banks. That much was made clear by Obama’s speech.

    Similar to Obama’s appointing of a Presidential Commission on the economy. I laughed when I heard this. Commissions take months if not years to issue reports. Months!

    Historically, Presidential commissions are a technique that the President uses to claim he’s “doing something” without actually having to do anything, or to lay the blaim for a decision at someone else’s feet. (“The commission concluded that…”)

  10. I’m new to this blog and not an economist by any stretch of the imagination, so forgive any naivete here. But I would love some insights on Geithner’s take on nationalization. Geithner just gave an interview with PBS NewsHour — nationalizing irresponsible banks is apparently not in his deck: http://news.yahoo.com/s/nm/us_financial_geithner.

    I know Simon Johnson said on Bill Moyers that he was for intense FDIC intervention. By comparison, Geithner’s plan seems well short of that. It doesn’t even sound bold. It sounds wimpy and incredibly slow. According to NY Times, banks will have 6 months to get private capital (isn’t 6 months way too long to wait?). If they don’t, we’re just going to give them more money with common stock.

    How does this work? If they can’t get private capital and need extreme amounts of taxpayer dollars, don’t we just end up owning them anyway?

    If you ask me, this is a big gamble to put all of Obama’s agenda at stake for Geithner’s incremental plan. And, he gives no compelling reasons as to why nationalizing the banks wouldn’t be the better strategy.

    Am I missing something?

  11. AIG considers break-up in bid to stay afloat

    By Francesco Guerrera in New York and Sundeep Tucker in Hong Kong

    Published: February 25 2009 23:42 | Last updated: February 25 2009 23:42

    AIG and the US authorities are in advanced discussions over a radical restructuring that would split the stricken insurer into at least three government-controlled divisions in an attempt to keep it afloat, according to people close to the situation.

    The restructuring, described by one insider as a “controlled break-up”, could lead to the end of AIG’s 90-year history as a stand-alone global insurance conglomerate. It also could provide a template for carving up other troubled financial groups – such as Citigroup – should they be brought under government control, the people involved say.

    http://www.ft.com/cms/s/0/fe997b42-0380-11de-b405-000077b07658.html

    Maybe the “stress testing” is really a cover for working out the breakup details. It’s what I would be aiming at doing all along :-)

  12. Well now I am more confused then ever, which is not easy given how confused I was before. There is a very high probability (certainty) that some of the large banks, (and AIG) are insolvent and so, one assumes, need to be restructured or closed, otherwise they continue as “zombie” banks requiring more government support. This needs to end so the resources they are absorbing can be put to productive use. The only ways to do that are 1- Chapter 11 restructuring or 2- nationalization and “re-privatization”, which both basically mean the same thing since 1 cannot be done without the government anyway. Why are we avoiding the difficult decisions?

  13. There is a better bailout proposal that would solve most of the problems we face. It utilizes the concept that if everyone is employed in making life better for all, that we shall all succeed. This plan could have been adopted about 19 years ago but it was not. It has some very unique aspects.

    Here we provide only a brief summary; details are available.

    The United States announces to the United Nations and to the World that it will provide the U.N. with “credit chits” for less developed nations in amount 150 billion dollars per year. The other developed nations of the world are also invited to contribute in total 150 billion dollars in “credit chits” to the U.N. So far no actual money leaves any nation. This offer is made regardless of cooperation from other developed nations, but with cooperation it means 300 billion per year, very roughly 10 times what is provided now, a great deal of which we know is wasted.

    The U.N. makes these credit chits available to democratic nations of the developing world and to those nations which are verifiably evolving toward democratic rule by non-discriminatory consensus; everyone participates. The chits are made available to developing nations on the basis of solicited application of: development proposals from them, verifiable need, and guarantees against misuse or corruption.

    These chits from the U.N. may only be utilized for social and economic development, six specific self-sufficiency goals: 1) food production, 2) housing, 3) health care, 4) economic means, 5) civilian security, and 6) education and training to support items 1-5. All chits must be used for peacetime goods and services.

    The U.N. will not grant chits to nations where war is likely or where violations of rights: gender, religious, human, or ethnic, are active or likely. Repressive and military governments and martial law governments will not qualify for participation in this program, nor will any nation, regardless of its size, which is not fully participating and cooperating in the worldwide elimination of: armaments of war, nuclear weapons, terrorism, and illicit drugs.

    We emphasize that chits will only go to democracies or nations evolving toward democracy because historical evidence indicates that true democracies do not wage war against each other; true democracies do not even prepare for war with one another.

    The development proposals submitted to the U.N. by developing nations are carefully evaluated, in terms of the proposed societal, cultural, economic, and environmental impact, and protection against abuse and corruption. Is the nation verifiably moving toward true but self-defined and equitable nondiscriminatory constitutional democracy? Does the proposal truly represent the desires of a great majority of the people? Will minority rights be protected? What proof, what evidence, what tests support the proposal? The U.N. may wish to reject certain proposals or return the proposals for corrective improvement.

    When a proposal is accepted and to be funded, the U.N. awards the amount in “Developed World credit chits” for peacetime goods and services. The chits must make their way back to their origin nation within two years of issue, and may pass through several nations; all must be on the approved list of democratic nations which abide by the U.N. Charter and all Covenants.

    Example: Tanzania, satisfying the requirement of an adequate democracy, wishes to further expand its agriculture and tourism by improved water supplies, farm machinery, construction of tourist villages on the Mwambani Bay coast and near Ruvu Bay, and small hospital clinics in some remote areas. It has found that all the materials and consultants for this development can be obtained at a good price from India, Taiwan, and Finland. Tanzania exchanges its credit chits for those goods and services from those nations. It uses chits originally from Finland, but India and Taiwan have chosen chits which originated in the U.S. and Canada. So far no money has gone anywhere. The Finnish industries that supplied the goods and services take the chits they received and exchange them in the Finnish Government treasury for cash, to pay their workers and replenish their supply of raw materials. No money left Finland. India and Taiwan exchange their chits with industries in the U.S. and Canada who in turn exchange the chits at their government treasuries to pay their workers and continue their industry’s growth. (India ordered 25 Cray computers. Taiwan bought very sophisticated medical equipment. Some chits were to go to Israel but it has not yet met the specified conditions for participation; they hope to soon.) (One of the next projects: India and Bangladesh will cooperatively work on flood control projects to control the Ganges, Brahmaputra, and Megha rivers, supplying adequate water for the fertile delta but also channeling excess water into some of the arid regions of India.) Everyone is working. No money has left any nation.

    Developing nations which abide by the U.N. Charter and all Covenants, and which receive credit chits, can expect constant on-site verification and audit by U.N. inspectors, comptrollers, and visitors who will have the responsibility to see that the credit chits are used exactly as originally proposed.

    Preference in the allocation of development credit chits will be given to those nations: 1) which are able to demonstrate a continuing reduction or lack of “war armament,” 2) which are part of a multination cooperative regional development, and 3) which have instituted U.N. recommended educational programs designed to lead their nations through the 21st Century, rather than indoctrinating for the furtherance of international disputes and terrors.

    When the chits arrive back in the nation of origin they do not go to the national treasury. They go to the nation’s suppliers of peacetime goods and services, thence cashed in at the treasury, thus enhancing productivity and employment in the original nation of chit origin. Everyone works.

    Each Developed Nation annually deposits “credit chits” with the U.N.; the money actually remains in the Developed Nation’s treasury, until payout is due to the nation’s industries. There will be great advantages to all nations who make payments into this program, and considerable disadvantages to those who can, but do not. The more chits deposited, the greater economic value accrues to the depositor; it should be obvious.

    Each less developed nation will keep a trained national militia suitably equipped for national and international disasters, and for maintaining civil order in times of need, but not for the burden of war. With the war burden gone in the less developed world, great changes could be obtainable in twenty years rather than 200. The developing nations in this program will be protected from outside interference by developed nations, acting when necessary as “police”. There will be penalties for those who interfere with this peaceful progress.

    Of the current 192 U.N. nations, perhaps 42 of them will be depositing credit chits with the U.N. and thus for 150 nations, it means that there is likely deposited in the U.N. some US$300 billion, each year for their use. If one nation does not make use of it, some other nation will. All they need to do is . . .

    Each developing nation should insist on themselves creating “added value” to their natural resources (with due consideration to the societal and environmental impact) by processing these resources at home, rather than simply shipping only raw and crude materials abroad: phosphates, copper, chromium, aluminum, diamonds, uranium, oil, minerals, etc. By this means considerably greater “wealth” is created in each developing nation, and will allow them much greater economic power for importation of necessary goods from abroad, e.g., exports from developed nations. Chits will be available for this type of development. Each democracy-oriented developing nation shall decide for itself what ultimate relationship with outside nations and agents best fits its needs. They will ask, “Truly, who have been our friends? Who can we trust? Who do we respect?”

    By this new policy the destiny of the Less Developed World shall be molded by their own hands, free from exploitation by outsiders. It becomes their responsibility. Can the leaders of nations of the less developed world work together to make the 21st century *their* century? They should consider the especially appropriate example of Japan in the period 1945 to 1970, a mountainous nation, poor in natural resources, socially and physically destroyed by war but in many ways recovered in 25 years. Their greatest resource is their people, something that their old military government failed to understand and protect. After 1945 a democratic non-militaristic Japan accomplished a great deal with help from its democratic friends.

    To further assure and advance self-determination, development, and confidence for the people of all nations it is necessary to establish government and private international exchange programs involving 10,000 to 50,000 people per year – students, teachers, workers, farmers, artists, government officials, scientists, athletes and upper-bracket bureaucrats – for the purpose of finding creative new approaches to cooperation and development for mutual and world benefit.

    The “Sister Cities Program” should be greatly expanded to include more of the less developed nations. Does Timbuktu (in Mali) have a sister city in the Developed World? Does your town have a sister city in the less developed world? Important question: Why not? Shall we soon be able to have sister cities in North Korea? How about P’ungsan in the DPRK (North Korea)?

    Former U.N. Secretary-General Kofi Annan was right on target with what Time magazine labeled “Kofi Doctrine,” urging world intervention to stop massive human rights violations, but the doctrine falls far short without the complete and essential ameliorative steps proposed here.

    Each year this program will see returned to the nonmilitary economies of the developed nations, in total, some US$ 300 billion! Hence, this proposed program should greatly reduce unemployment in any nation participating.

    With nations in full peacetime production and with greatly lessened threats of war, national debts should become payable. What effect would a thriving well-managed economy have on social and economic problems in any nation, in the U.S, in Pakistan, in Iraq, Iceland, etc.? Would it make them more solvable?

    An exchange can be made: With self-sufficiency and self-defined but true democracy in the developing world and the virtual elimination there of poverty, illiteracy, malnutrition, disease, neocolonialism, rights deprivation, indebtedness, exploitation, and slavery; the entire world could have full economic recovery, elimination of the possibility for international nuclear catastrophe, and the practical elimination of war. In a world at peace the refugee problem is solved. The killing stops and world problems can be solved. The basic tool is proper incentives, not sanctions and deadly threats; justified benefits, not penalties; advantages for all. Consider, compare, what the 3,500,000,000 people of the developing world do not have, and who is capable of supplying it! There are abundant opportunities for all!

    The careful reader may have noticed that all the credit chits and the money they represent need never pass through the World Bank, or any bank, or the International Monetary Fund. Also noticeable is the fact that implementing this proposal could have considerable effect on military spending and on the opportunities for world peace.

    Morrison and Tsipis, in their book, REASON ENOUGH TO HOPE, explore some of the problems facing the world should the impoverished billions of people be brought online to also benefit as we have from “the good life.” Food and energy needs, and overpopulation are likely to present many difficulties. Food requirements and overpopulation are linked. However, in any nation of fixed area which has made development advances in the last century without going to war, I think you will find that though population has increased, family size has decreased. I might be wrong in this conjecture but I think not. In the Japan of 100 years ago large families would not be uncommon especially in rural areas, families with four to eight and more children. It seems hardly conceivable in today’s Japan where now the ideal family will have two children, one girl and one boy. If food, education, health care, and economic opportunity are available, parents in a democratic society should rather quickly learn that a family of four will probably do better all around in contrast to a family of ten. Consider China also, with its desires for one-child families.

    Which do you prefer: $80 billion spent to support U.S.-Japan military activities in Japan, Okinawa, and elsewhere in Asia, in anticipation of conflict which may never occur, and more billions for the U.S. Space Command to achieve ‘full spectrum dominance’ and superiority in space weapons; or $80 billion to eliminate the threats of wars in Asia while simultaneously enhancing the lives of destitute, distressed, and sometimes oppressed people, bringing them much better life opportunities and international understanding, and steering $80 billion into peacetime production and services from the Developed world, and fruitful cooperation with the people and wisdom of Asia?

    This proposal is also probably the only approach, for decades or centuries to come, by which people of the less-developed world, in peace, can become their own masters, can create the sensible path to their own destinies as so many other nations have. This is not a threat to the Developed World. Peace with justice, and international cooperation, is preferable to war, anytime.

    When regions and nations are at peace, they advance. It is not by mere coincidence that the nation of Japan, after its near total destruction in 1945, has in the past 62 years made astounding advances in all aspects of human activity without killing anyone in a war.

    Should there be any doubts in the minds of people of the earth as to the desires of the United States for world peace with justice and fairness for all nations, proposal of this plan by the United States government to the United Nations would put such doubts to rest. It would renew the faith of many Americans that their own government was not imperialistic.

    How altruistic and honest about peace are nations willing to be? For 200 years there has not been a war between truly democratic nations.

    “The laughter of fools has always been the reward of any man who comes up with a new thought.”
    –Stephen Lister

  14. “…consumer and business confidence is weak everywhere…”

    Consumer confidence is largely a construction of media and, with this administration, politicians. If politicians emote and the media report, day aftr day, nothing but doom and misery, then polling showing low public confidence is simply a verification of the efficacy of that message. It has been shown over and over that, when specifically questioned, people will report that their personal situation isn’t too bad, but they know others are having problems. Polling for the most part is simply a quality check by the media to see if their agenda is successful.

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  17. Worthwhile to note – another reason why the last three months have been critical:

    “large organizations are all planning to trim costs for the next financial year”

    Something economists don’t take into account in their cute little models (in addition to things like insolvency, expectations, collateral, risk perception, etc.) is budgeting cycles.

    The US federal government plans its budget well ahead – even if a budget gets passed, it takes several months to implement. The same is true with corporations and other organizations (like universities, non-profits, etc.).

    Budgets have been set over the past 5-6 months that will not be unset. They are currently being set now. This is one of the reasons it can be so difficult to change a trend once that trend has been set in place.

    At some point, in order to allow policymakers to move forward, we are going to have to come to the realization that modern economists know very little about the economy, and that (in fact) by the time they learn something about it, the truth has often changed.

    For example, the speed at which this whole thing happened and spread globally has been truly unprecedented. Even in the Great Depression, by March we were seeing a bounceback (that later vaporized). This time, with a constant stream of indicators every week (typically 2 or 3 major status-checks being released on labor, industrial demand, inventories, trade, foreign economic numbers, etc) we have constant reminders of how bad it is. Moving against this headwind requires HUGE strength. Obama’s great weakness is that he likes complex programs that are efficient and well designed. Team Obama prefers to attack a problem with a thousand small hammers instead of one big hammer.

    We have yet to see whether this approach works (it technically hasn’t failed yet). However, everyone thinks it will fail, and therefore it likely will.

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