Globalization

More on Our Overleveraged World

Niall Ferguson in the Huffington Post today

The harsh reality that is being repressed is this: the Western world is
suffering a crisis of excessive indebtedness. Many governments are too
highly leveraged, as are many corporations. More importantly,
households are groaning under unprecedented debt burdens. Average
household sector debt has reached 141 per cent of disposable income in
the United States and 177 per cent in the United Kingdom. Worst of all
are the banks. Some of the best-known names in American and European
finance have balance sheets forty, sixty or even a hundred times the
size of their capital. Average U.S. investment bank leverage was above
25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to
1. British bank balance sheets are equal to a staggering 440 per cent
of gross domestic product. 

I discussed whether families facing so much debt should spend or save in this post from last night.

Steele, the GOP and Confronting the Southern Strategy

Michael Steele had a lot to overcome. One of his opponents, the sitting GOP Chair from South Carolina, had just resigned from an all white country club and admitted that he became a Republican in reaction to his personal experience with desegregation. Another opponent, Chip Saltsman, sent out a wildly racist CD to RNC Members which included the now infamous Magic Negro and Star Spanglish Banner songs. Saltsman was so battered by his out-of-touch comments that he withdrew from the race before the balloting began. But Katon Dawson, the SC Chair, went all the way to the final ballot before losing to Steele.

What a stark choice this was for the Republicans: an avowed disciple of the Southern Strategy era of racial politics vs. an African-American candidate from that awfully liberal, pretty far north state of Maryland. That Steele won, defeating Saltsman and Dawson, is a hopeful sign that the GOP has begun to confront its shameful exploitation of race as a national political strategy over the past 44 years. But the road back to power for the Party Mr. Steele has chosen to lead is a hard one. As I recently wrote:

Their recent success as a national Party was built on an approach towards race that spoke to a different racial reality in America, an American one where could get away with magic negro songs, and much much worse of course. But that America - a white/black, majority/minority America - is now an historic relic, and is in the process of being replaced by an America that has 3 times as many minorities as it did just 44 years ago, and is on track to be majority minority by 2042 (for more on this historic demographic transformation see here). But for many in the GOP, including ones who might become their Chairman, they know no other politics than this Southern Strategy era politics, a politics that has been rejected once and for all by the American people of today's America.

It is important that the leaders of the GOP have begun to confront its shameful racial past. But their problem has no simple or easy fix. It will require a complete refashioning of their politics around a very different set of 21st century demographics and a much more tolerant understanding of race in America - and a complete and utter repudiation of much of their domestic agenda for the past half century. Which is major reason why I think their road back is such a long one - many of their leaders came to power by becoming expert in this kind of politics; it is the core play in their playbook; it is the foundation of their domestic agenda; and they know little else. Their old Southern Strategy dogs aren't going to learn new tricks - for the GOP they will have to slowly, over time, replace their anachronistic leaders with ones schooled in the modern governing challenges, modern media and technology and modern demography of our day. The process of watching this generational replacement take place will be one of the most interesting political stories of the next 10-20 years, and of course has become all the more necessary in the age of Obama.

Recall that one of Mr. Steele's predecessors as RNC Chairman, Senator Mel Martinez of Florida, resigned in 2007 after less than a year on the job because of the lingering intolerance of the Party of Saltsman, Tancredo, Limbaugh and Dawson. So these tensions in the GOP - and the nation - will continue to play out for some time as old attitudes and people give way to new racial attitudes and a new America.

Just yesterday, Mr. Steele showed how hard this adjustment would be for the GOP. As Huffington Post's Sam Stein reported, Steele was asked on Fox News whether the GOP's position on immigration had alienated the Latino vote for a generation. His answer? No, of course. Hispanics really agree with our position calling for continued exploitation and demonization of Hispanics, but we just didn't message it very well. Score one for the nativists.

So, all in all, Mr. Steele's election is a hopeful sign for the GOP and the nation. His Party not only chose a new path in electing him their new Chair, they rejected candidates who would have sent a very bad signal about the values of the GOP in this new age of Obama. But as we saw with the irresponsible House stimulus vote last week, old ways die hard, and the choice of Steele alone does not a new Party make.

Obama's Weekly Focuses on the Economy, Stimulus

The text: 

As the holiday season comes to end, we are thankful for family and
friends and all the blessings that make life worth living. But as we
mark the beginning of a new year, we also know that America faces great
and growing challenges—challenges that threaten our nation’s economy
and our dreams for the future.  Nearly two million Americans have lost
their jobs this past year—and millions more are working harder in jobs
that pay less and come with fewer benefits.  For too many families,
this new year brings new unease and uncertainty as bills pile up, debts
continue to mount and parents worry that their children won’t have the
same opportunities they had.

However we got here, the problems we face today are not Democratic
problems or Republican problems. The dreams of putting a child through
college, or staying in your home, or retiring with dignity and security
know no boundaries of party or ideology.

These are America’s problems, and we must come together as Americans
to meet them with the urgency this moment demands.  Economists from
across the political spectrum agree that if we don’t act swiftly and
boldly, we could see a much deeper economic downturn that could lead to
double digit unemployment and the American Dream slipping further and
further out of reach.

That’s why we need an American Recovery and Reinvestment Plan that
not only creates jobs in the short-term but spurs economic growth and
competitiveness in the long-term.  And this plan must be designed in a
new way—we can’t just fall into the old Washington habit of throwing
money at the problem.  We must make strategic investments that will
serve as a down payment on our long-term economic future. We must
demand vigorous oversight and strict accountability for achieving
results. And we must restore fiscal responsibility and make the tough
choices so that as the economy recovers, the deficit starts to come
down. That is how we will achieve the number one goal of my plan—which
is to create three million new jobs, more than eighty percent of them
in the private sector.

To put people back to work today and reduce our dependence on
foreign oil tomorrow, we will double renewable energy production and
renovate public buildings to make them more energy efficient.  To build
a 21st century economy, we must engage contractors across the nation to
create jobs rebuilding our crumbling roads, bridges, and schools.  To
save not only jobs, but money and lives, we will update and computerize
our health care system to cut red tape, prevent medical mistakes, and
help reduce health care costs by billions of dollars each year. To make
America, and our children, a success in this new global economy, we
will build 21st century classrooms, labs, and libraries. And to put
more money into the pockets of hardworking families, we will provide
direct tax relief to 95 percent of American workers.

I look forward to meeting next week in Washington with leaders from
both parties to discuss this plan.  I am optimistic that if we come
together to seek solutions that advance not the interests of any party,
or the agenda of any one group, but the aspirations of all Americans,
then we will meet the challenges of our time just as previous
generations have met the challenges of theirs.

There is no reason we can’t do this.  We are a people of boundless
industry and ingenuity.  We are innovators and entrepreneurs and have
the most dedicated and productive workers in the world.  And we have
always triumphed in moments of trial by drawing on that great American
spirit—that perseverance, determination and unyielding commitment to
opportunity on which our nation was founded.  And in this new year, let
us resolve to do so once again. Thank you.

See the video here.

For more on NDN's recent work on the economy and stimulus click here, and for our recommendation on including a national effort to give all American workers computer training visit here.

FT: "US stocks suffer worst year since Great Depression"

George W. Bush's remarkable record as President - a drop in median income, rising rates of poverty and the uninsured, the loss of a major American city, perhaps the worst foreign policy mistake in US history, a lazy response to the Al Qaeda threat which left the door open to 9/11, extraordinary levels of public corruption, warrentless spying on American citizens and knowing and willful violation of the Geneva Conventions, insufficient action taken on global warming and the coming retirement of the baby boom, and an election victory decided by a 5-4 partisan Supreme Court decision - earned this extraordinary new distinction today:

"US stocks suffer worst year since Great Depression" 

No matter how Iraq turns out it sure seems likely that history will judge W. to be the worst President in America's long and storied history. 

Krugman on Backstopping the States

For months President-Elect Obama has been arguing for including aid to the states in the next stimulus.  Paul Krugman does an excellent job today explaining why it is so important to do so.

Levels of Global Trade Decline

From the Washington Post today:

Sharply lower consumer spending in the United States and other high-income countries is stalling global trade, causing a surprise downturn in exports from China that is dramatically slowing its economy and rippling through other countries that rely on international commerce.

With recessions hitting the United States, Europe and Japan at the same time, China yesterday said its November exports took their biggest dive in seven years. Weak holiday spending is taking a particularly hard toll on toymakers: Two-thirds of China's small-toy exporters closed in the first nine months of 2008, according to government statistics. At the same time, tight credit and falling global demand are setting off the first decline in world trade in a quarter century, touching off a wave of job losses in rich and poor countries alike.

The drop in trade is both sharper and faster than many analysts had predicted only weeks ago, with freight lines that were sailing full this summer now slashing prices by as much as 90 percent as cargo traffic plummets and unsold goods pile up at ports from Baltimore to Shanghai. The World Bank this week said global trade is set to fall by 2.1 percent in 2009, marking the first decline since 1982. The drop is contributing to a more dire outlook for the world economy, which the World Bank said is close to falling into a global recession.

The slowdown illustrates how globalization, which fed rapid growth during times of plenty, can quickly turn against nations during times of bust. Depressed car sales in the United States, for instance, are spreading through the global supply chain, eliminating jobs for contract auto workers in Japan and laborers in South Africa who mine the metals used in car parts.

The impact on China, one of the rare lights in an otherwise gloomy global economy, is particularly troubling. Beijing announced yesterday that its November exports dropped 2.2 percent after a 19.2 percent surge in October. Imports took an even steeper drop, falling 17.9 percent. Analysts now say growth there is slowing to its lowest level since 1990, curbing Chinese demand.

Update: I reflected on what all this might mean for how the Obama Administration thinks about handling the global economic portfolio in this recent post.

$1 Trillion Deficit Projected Next Year

At this point there is almost nothing that Bush touched that he didn't break:

Congressional leaders and both presidential candidates are proposing billions of dollars in tax breaks and other measures to stoke economic growth, a surge in spending that could send the federal deficit soaring toward $1 trillion this year, creating the deepest well of red ink since the end of World War II.

The government already has embarked on an unprecedented spending spree to halt the implosion of the U.S. financial system and is borrowing money at levels that some economists fear could undermine the nation's economic security for years to come. Congress could consider additional spending as soon as next month, potentially digging the nation's hole even deeper.

"We're going to make Ronald Reagan look like a piker in terms of deficit creation, I think," said Rudolph Penner, a senior fellow at the Urban Institute who served as director of the Congressional Budget Office during the Reagan administration.

The numbers are adding up fast. Since President Bush signed an economic stimulus package in February, authorizing billions of dollars in rebates for American taxpayers, the government has pledged as much as $1.5 trillion to prop up the teetering economy. It has approved new mortgages for struggling homeowners, salvage operations for faltering financial institutions and a historic $700 billion bailout plan to pump money into banks paralyzed by the financial crisis.

The Treasury Department so far has borrowed nearly $500 billion from pension plans, foreign governments and other investors to replenish the coffers of the Federal Reserve. Since the end of August, the national debt has jumped from $9.6 trillion to $10.3 trillion, with borrowing for the bank bailout yet to come.

Meanwhile, the budget deficit -- the annual difference between government spending and tax collections -- has risen rapidly. It jumped from $162 billion last year to $455 billion in the fiscal year that ended in September, largely because of the cost of the stimulus package, as well as slowing tax revenues and rising expenses in Iraq and Afghanistan.

The budget picture looking forward is even bleaker. While the deficit is projected to be about $550 billion for the fiscal year that began Oct. 1, budget analysts have yet to figure in the effects of a recession, which could easily tack on another $100 billion. They also have not included the first $250 billion being spent on the bailout plan, which the White House budget office said this week must be added, even though much if not all of the money is eventually expected to be returned to the Treasury.

And with options for a second round of stimulus spending starting at $52 billion -- the size of the package proposed earlier this week by Republican presidential candidate John McCain -- it's not hard to imagine the deficit rising to $1 trillion. That would approach 7 percent of the economy, a yawning budget hole not seen since 1946.

Some economists say that prospect should dampen talk of further spending. Others say it's better to spend the money now in an effort to protect jobs and smooth over the harshest effects of a recession than to lose the money later through sharply lower tax collections and higher unemployment payments. Economists advising House Democrats are urging a spending package of as much as $300 billion, arguing that the economy could shrink by about that much over the next year.

Read the rest of the story from the Washington Post here.

Awesome Headline

As of 445pm today, the website of the New York Times led with this headline:

Stocks Plunge 8% on Economic Gloom

Pearlstein on Wall Street's Responsibility

Steven Pearlstein has a wonderful close to his column today:

In putting several trillion dollars in government funds on the line, the country has now done just about everything that Wall Street could have asked to address the financial crisis. The question now, as John Kennedy might have put it, is what Wall Street is ready to do for its country. So far, the answer is not much.

After getting their closed-door briefing yesterday from Paulson on the government's latest initiatives, Wall Street's finest literally ran from the Treasury to their waiting limousines, bypassing a media scrum eager to convey any scrap of wisdom or insight.

Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.

After yesterday's "historic" meeting, we are told by industry apologists that we are supposed to be grateful to nine leading banks for having "volunteered" to accept additional capital from the Treasury, along with a government guarantee for newly issued bank debt, even if it means having to accept a dilution of existing shares and a few harmless restrictions on their operations.

Pardon me if I'm less than blown over by this munificent offer, but it hardly seems commensurate either with the severity of the current crisis or the depth of the banks' culpability in fomenting it.

If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed.

There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush. Wall Street, by contrast, has served up a nothing sandwich, a lack of leadership that's been stunning.

 

Krugman Praises Brown, Questions Bush and Paulson

On the day it was announced that he had won the Nobel Prize for Economics, Paul Krugman joins NDN in singing the praise of Gordon Brown and in asking the question the public, the media and Congress must be asking - why did this White House get it so wrong?

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson - after arguably wasting several precious weeks - has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don't know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It's hard to avoid the sense that Mr. Paulson's initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson's fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn't making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.

 

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