Friday, October 31, 2008

A Brutally Honest Must-Read


Time for the Darwinian Flush

‘The ultimate result of shielding man from the effects of folly is to people the world with fools.’
-Herbert Spencer
http://ftalphaville.ft.com/blog/2008/10/20/17216/time-for-the-darwinian-flush/


Thursday, October 30, 2008

F.U.C.T. (Face Up to the Cold Truth)


The field of economics, like medicine, has its own distinct schools of thought. Within these perspectives one need not search long to find references to 'wave' theories, which describe natural cycles of feast and famine as they relate to the world of commerce, and indeed, our lives in general. Although different cycle theories suggest disparate time frames and divergent parameters, these (and other) cycle-based theories complement -- rather than rip on -- one another. This is truly fascinating stuff, and not difficult to understand with a little patience.

Blog follower Astatula Map makes a compelling case that we are entering a new era defined by one of these cycles, specifically: the era of the "Kondratieff Winter." Once again, I yield the floor to my well-learned audience...

Kondratieff wave theory (see http://en.wikipedia.org/wiki/Kondratiev_wave for an adequate short explanation) posits a sort of economic "super cycle" lasting between 50 and 75 years. Some have tried to tag it with an exact number of years (e.g., 54), but I wouldn't get too hung up on exact timing. While some would dismiss the theory as being in the same class as biorhythms, astrology, or other superstitions, I believe it has a logical basis in psychology and the human life span (e.g., we become peculiarly vulnerable to repeating past mistakes when the generation that last committed them and learned from them dies off). The last Kondratieff Winter was in the 1930's, so it is to that era that we must look in order to help us see where we are headed now.
In both today's environment and in the Great Depression, the phenomenon was preceded by an enormous credit bubble that persisted for approximately 15 to 20 years until a "tipping point" was reached. At the dawn of the last depression, the tipping point was the stock market crash of 1929 (there is anecdotal evidence that suggests this stock market crash was due to the break-up in the Senate of the coalition that had been opposing the Smoot-Hawley tariff legislation). For us the tipping point was the "subprime mortgage crisis" of 2007, an event that was regarded as a notable problem at the time, but one that could be safely contained. It turned out that both events merely preceded the initial domino falls of their respective eras as each event led to a widening and accelerating credit collapse. In each case, when enough financial institutions had gotten in trouble, a collapse in monetary velocity (the rate at which money changes hands) ensued due to deleveraging, spiking risk premiums, and the resulting hoarding of money, both by individuals and institutions. This state persisted for several years in the 1930's. We can expect it to persist for several years from now as well, notwithstanding frantic efforts of governments to contain and counteract it. It should be emphasized again that in each case the tipping could not have happened without primary exhaustion of a decades-long secular trend of growing affinity for credit, risk, speculation, and basic greed. These conditions will take years to unwind, just as was the case in the 1930's. Due to the secular rather than cyclical nature of this counter-trend, the unwinding should be relentless and unstoppable, reinforced by multiple positive feedback loops along the way.

Take housing prices for instance. It has been widely reported in the news media that the price of houses must stabilize in order for us to see any improvement in our current economic condition. If one looks at housing price trends over the past century -- http://jluscher.googlepages.com/Housing_Boom.png/Housing_Boom-full.jpg -- one notices that home prices, in real terms, must fall by between 40% and 50% to return to 'normal' levels. The best case scenario is that after two years of home price declines, we may be close to half way there. The worst case scenario takes into the account the fact that the pendulum never stops in the middle. It is possible that before this is all concluded homes may be nearly universally despised as an investment vehicle, and home prices may end up at historically low levels in real terms. Deflation of the general price level could also magnify the nominal home price declines. Obviously this means that there is no end in sight to the foreclosures, hence no bounce in view for the toxic mortgage assets on the books. In fact, many apparently still "good" mortgage assets will become toxic soon. Few people will want to buy or build new homes in the current environment, and many of those who do will not be able to obtain financing. This means thousands of subdivisions stopped dead in their tracks, which in turn means thousands of strip malls and other retail outlets stopped dead in their tracks. This will torpedo the construction industry and the commercial real estate market. The nations regional banks that primarily specialize in commercial lending, as opposed to residential mortgage lending, will be affected next. All of this means soaring unemployment, which means more bankruptcies and foreclosures, more home price declines, etc.

Now as then, the government is impulsively flailing about trying to counteract the K-Winter. They may actually have stopped the K-Winter from beginning in 2002 - 2003 through Alan Greenspan's 1% interest rate policy and the start of the war in Iraq, but if in fact they delayed it they have only made it worse. The history of government actions meant to counteract a K-Winter fail to inspire us with confidence. In the last K-Winter, the government took two specific actions (the Smoot Hawley Tariff Act and a massive Federal income tax increase) that contributed significantly to the severity of the downturn. Current actions being taken are rife with potential for unintended harmful consequences. At the very best, they may lead merely to cancer rather than a car crash, as one observer has noted.

In addition to obvious economic woes, we could see vast national security problems as a result of the destabilizing effects of this crisis at home and around the world. Ominously, K-Winters identified in the past have often concluded with major wars.

When we do eventually come out on the other side of this, the massive amount of monetary printing currently taking place will probably lead to high inflation. It so happens that high inflation is one of the characteristics of the Kondratieff Spring. But for now, credit destruction is far outpacing monetary creation, and is likely to continue doing so for some time to come.

Just as the last boom sowed the seeds for its own destruction, so also the coming depression will sow seeds of renewal, if history is any guide. Many new businesses and product lines had their humble beginnings in the Great Depression. IBM is one example. Many people will by sheer necessity rediscover the virtues of saving and frugality. Many millions of families are already contemplating these and other changes in our lives, which could ultimately prepare the way for a resumption of healthy economic growth based on a sounder foundation of prudence and discretion (not forever, but at least for many years).
-Astatula Map


Any new cycle-holics may also reference:
the Kitchin inventory cycle (3–5 years) —after Joseph Kitchin,
the Juglar fixed investment cycle (7–11 years) —after Clement Juglar,
the Kuznets infrastructural investment cycle (15–25 years) —after Nobel Laureate Simon Kuznets,
the Forrester cycle (200 years) -after Jay Wright Forrester, and
the Toffler civilization cycle (1000-2000 years) -after Alvin Toffler.

Tuesday, October 28, 2008

For the Good of Most Excellent Questions

A simple string of words preceded a landslide in November of 1980; they may, in fact, have caused it. Just as history has a quite peculiar way of repeating itself, so too can the weight of words long since spoken once again possess, propel and deliver the invisible, yet palpable impact of change.

Ladies and Gentlemen, the fortieth President of the United States, the late Ronald Wilson Reagan...

Monday, October 27, 2008

From the Audience... Again

I received a most thoughtful reaction to Sunday's topic of China's People's Daily report, and I am compelled to yield the floor to follower Palladin's thoughts on the matter. To be sure, Palladin's comments are couched from the perspective of one who has insight and experience outside the reach of any hack passer-by. Ladies and gentlemen, please attend...


Is it actually possible that the call from China's People's Daily to "banish the U. S. dollar" might find favor with the international finance community? Certainly, the proposal should come as no surprise. In fact, the only surprise -- and it really does just befuddle me to no end -- is that anyone could be surprised by it. Several OPEC members, to include those who do not love us very much, such as Iran and Venezuela, and some that at least pretend to like us a little better, such as Saudi Arabia and Kuwait, have been suggesting for a year that the price of a barrel of oil -- now traded in U. S. Dollars, which is why several Arab Middle Eastern countries continue to peg their currencies to the dollar even though it is in decline -- should be marketed in Euros or some other currency, such as the Chinese Wong, instead. The dollar's value is propped up by its connection to oil; in other words, we may not be on the gold standard, but we certainly are on the oil standard.

I repeatedly am disappointed in educated, supposedly intelligent people -- mostly Republicans in my encounters, oddly enough -- who, when asked if they are at all concerned about the extent of our debt to nations like China and the vulnerabilities that may result, simply chant the mantra "if I owe you a dollar, I am at a dis-advantage to you, but if I owe you a million dollars, you are at disadvantage to me." That may be true for individuals, although I cannot think of any examples where this may be true. To make my case, if a person defaults on a $1M mortgage on a house, the bank may try to work out a deal with the borrower, but in the end, if no payments are forthcoming, that bank eventually will foreclose.

The dynamics of relationships between nations is quite different from that between individuals. As much as we want to believe the world simply is driven by market forces, the truth is there also are ideological factors at work as well. We may think the Communists and Islamic Fundamentalists simply are nuts for believing what they do -- and, maybe they are. But, that doesn't mean they are not true believers in their absurdities. I can see where a country like China might want to lead a coalition of nations in a campaign to bring down its only competitor, the United States because, as costly as it might be up front, there really is the opportunity for long term gain. And, we also have to consider what we would prefer not to believe: the Chinese honestly may believe the U. S. has become a force for inter-national financial chaos in this world, and for the good of world order and stability, it (the U. S.) must be unseated from its place of dominance regardless of the immediate cost.

The self-satisfied who take comfort in the belief that China, OPEC, etc., would not dare do harm to the U. S. economy because they hold too many dollars, and therefore, they too would suffer need to consider that we have entered a time when no one can evaluate with any accuracy the value of the dollar. Given that level of uncertainty, there really may be no advantage to holding on to those dollars, even if dumping them causes immediate pain. In fact, it might be wise to get rid of them quickly before they become more worthless than the paper on which they are printed.

If China, even unilaterally, does act on the suggestion of the People's Daily, we really will find ourselves impoverished. For one thing, where will we then turn to borrow the $700B we will need to finance the Paulson Plan, or any other aspect of the U. S. Government as well -- to include national defense and the wars in Iraq and Afghanistan? And, that only will be the first installment in a lengthy string of cascading ills.

Paladin

Sunday, October 26, 2008

Natural Financial Selection: In Darwin We Trust?


"The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations and rely only on their own currencies."

If the People's Daily story sparks momentum that influences international leadership to remove the dollar peg from commodities like oil, the time to bail out of all U.S. dollar-investments might be immediately. Right or wrong, if the rest of the world perceives this mess as America's fault, then it is America's fault... if only for a day; that's the power of perception. Consider it a demonstration of the importance of confidence (or lack thereof) in today's violently shaky economic reality. Never mind the wealth that the rest of the world accumulated from buying into the 'relative strength' of dollar assets; few ask questions about where the money's coming from while they're getting rich. No one forced China to peg their currency to the dollar when money was flowing like wine. Everyone benefited then. But their question today is, "what have you done for me lately?"

We humans are a fickle bunch.

So the official newspaper of China's ruling Communist Party accuses the U.S. of plundering the whole world's wealth. Is China's goal to incite a global reaction? Worse, if global reaction becomes call to action, then we could be witnessing the 21st century's shot heard around the world. If all dollar pegs are removed, China would take an almost incalculably huge loss if their stake in hard currency, US Treasuries, Bonds, et cetera, collapses--not to mention losing their biggest export customer, the United States, if Americans' purchasing power evaporated. To suggest such an action tells me they must see such incredibly hard times on their relatively prosperous booming economic horizon such that cutting their losses now would benefit them in the long run.

These events could well play out as the economic version of natural selection. If so, then the U.S. is no longer at the top of the financial food chain. As the global economic contraction metes out its unexpectedly savage punishment, which of our newly dominant predators -- yesterday's allies -- will feast first on the entrails of capitalism?

LET THE FREAKOUT COMMENCE!

U.S. has plundered world wealth with dollar: China paper
BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.
http://www.reuters.com/article/forexNews/idUSTRE49N1XX20081024


Hat tip to Cumbersome for the Calvin and Hobbes art.

Saturday, October 25, 2008

The Genie Has Left the Bottle. But Is It Useless to Resist?


Know what's going to destabilize the financial system?
GOVERNMENT ASSIMILATION OF TOXIC DEBT THAT INHIBITS THE MARKET'S ABILITY TO CORRECT ITSELF

Bailout expanding to insurers
Treasury to take stakes in firms as distress spreads beyond banks
Insurers, including The Hartford, Prudential and MetLife, have pushed the Bush administration to include them in the plan. Many firms have taken losses from mortgage-related securities and other investments and are struggling to replenish their coffers.
http://www.msnbc.msn.com/id/27368452/

AIG Tapped $90.3 Billion From Government Credit Line
Oct. 24 (Bloomberg) -- American International Group
Inc.
has used $90.3 billion of a U.S. government credit line since it was bailed out last month, an amount exceeding the size of the original loan meant to save the insurer.
http://bloomberg.com/apps/news?pid=20601208&sid=aNYcIjrc7.g4&refer=finance
Paulson Takes Stake in Regional Banks
Oct. 24 (Bloomberg) --"The Treasury began purchasing stakes in a number of regional U.S. banks, as the government stepped up its efforts to halt the freeze of credit to businesses and households."
http://bloomberg.com/apps/news?pid=20601208&sid=aXGtkUB_OG0U&refer=finance
No curbs on Wall Street pay despite meltdown
AP, Friday, October 24, 2008
NEW YORK - Despite the Wall Street meltdown, the nation’s biggest banks are preparing to pay their workers as much as last year or more, including bonuses tied to personal and company performance.
“Taxpayers have lost their life savings, and now they are being asked to bail out corporations,” New York Attorney General Andrew Cuomo said of the AP findings. “It’s adding insult to injury to continue to pay outsized bonuses and exorbitant compensation.”
http://www.msnbc.msn.com/id/27367042/

Addicts keep using to avoid the consequences of using--a druggie debt trap. Their hearts and minds -- wracked from years of self-centered, selfish, and ego-centric behavior -- know no other way to exist. They are self-inflicted victims of the ultimate insanity, clinging desperately to the false hope that they can continue the same self-destructive behavior... but somehow achieve different results. It is pure fantasy, and a deadly one. For most, there are only three outcomes: jail, institutions, or death. For the blessed few, there can be recovery, but only if the addict is willing to admit the problem exists and make a conscious decision to change.

America stands at the crossroads of the addict. Americans are addicted to credit, cheap food, and easy living; somehow, somewhere along the way to nirvana we were certain these things would bring us, these things we cherished most became our heroin.

But the dealers got arrested and the whole world is going crazy. Global markets are rising and falling hundreds of points in the space of a few minutes, all non-food commodities are in deflation, people everywhere are losing their minds with worry; everyone in general, is sweating and shaking (even the Saudis). These are the initial withdrawal pangs that precede delirium-tremens: the DT's. Our leadership is stuck in a tragic loop of throwing more and more money at problems that more and more debt will never solve. EVER. The money pit we created has no bottom. Paulson, Bernanke and Co. are savagely beating the Treasury printing presses bloody to increase the flow of currency as if the presses were horses, trying to gain a few furlongs on the problem... to no avail. They could print money until the printing of it uses up all the paper in the world and it will not change the stark reality that America is BROKE. We finally leveraged our financial system to death; the day of Wreckoning (sic) when this truth will emerge is at hand.

Things could get ugly from here.


America is not the Lone Ranger in this debacle; the entire world is invited. In the unlikely event that prices do not move from today’s closing levels, here is how September-October will rank on the list of worst two-month periods for U.S. stock indices (thanks to Bill Norris's 10/24/2008 New York Times article United Panic for the numbers):

Dow Jones Industrials (1920 to 2008)
1. April-May 1932, down 39%
2. March-April 1932, down 31%
3. October-November 1929, down 30%
4. October-November 1987, down 29%
5. August-September 1931, down 29%
6. September-October 1929, down 28%
7. September-October 2008, down 27%
8. November-December 1931, down 26%
9. April-May 1931, down 25%
10. September-October 1987, down 25%

Standard & Poor’s 500 (1928-2008)
1. April-May 1932, down 39%
2. September-October 2008, down 32%
3. March-April 1932, down 30%
4. August-September 1931, down 29%
5. October-November 1987, down 28%
6. September-October 1931, down 25%
7. May-June 1932, down 24%
8. April-May 1940, down 24%
9. September-October 1929, down 24%
10. September-October 1987, down 24%

Nasdaq composite (1971-2008)
1. September-October 2008, down 34%
2. February-March 2001, down 34%
3. October-November 1987, down 31%
4. October-November 2000, down 29%
5. September-October 1987, down 29%
6. November-December 2000, down 27%
7. August-September 2001, down 26%
8. April-May 2000, down 26%
9. August-September 1990, down 21%
10. July-August 1998, down 21%

The mega-rich are still mega-rich; the upper-crust, the middle class, and the poor became much poorer in the last 60 days. Together we stand at a critical and fleeting point--the point where we can either face our problems and recover financial integrity, or say 'screw it' and continue down the same path that brought us to this marvelous point. One thing is certain... if we keep doing what we're doing, we'll keep getting what we're getting.

Whichever we choose, the moment of truth is at hand. One day, if we're lucky, our progeny will say to themselves... of us, their ancestors... "We stood at the turning point..." I hope the tale they tell will have a happy ending. I hope they are not disappointed by everything we are doing and about to do to try to assuage the angry, ravenous beast of ruin confronting us.

Thursday, October 23, 2008

FLASH: Employment Now a Luxury, Not a Right


As if one tsunami wasn't enough, America now has another one to deal with. We still have no idea how to fix the Big Credit Kahuna that's smashing down on us, and now we have to deal with big wave number two.

Say hello to the unemployment tsunami.

I think we can finally brand Reagan-esque Voodoo Economics a failure. Most of the money the well-to-do received in the form of tax cuts, investment incentives and the like did not "trickle down" to the middle and lower classes as predicted. Let's face it, people; all that money just stuck to the rich folks like it always has, like it always will. Money just clings to rich people, maybe because rich people cling so well to money.

Anyway, since trickle-down voodoo failed, I propose that we try some 'trickle-up' voodoo... and we had better start by putting people to work. Fortunately for us, there just happens to be an excellent place they can start. America's infrastructure is crumbling; the vast numbers of unemployed can become employed by beginning the incredibly necessary work of un-crumbling our roads, bridges, dams... whatever needs fixing. They should start immediately. Hopefully, the leadership that would be required to pull this off will soon emerge into the American Presidential landscape. I only hope it will be soon enough. Inauguration might not be until January, but the new President should begin his job on November fifth. I don't think we have all that much time to fix our problems before our problems will become unfixable.


Job Losses Accelerate, Signaling Deeper Distress
By Neil Irwin and Michael
S. Rosenwal
Washington Post Staff Writers
Thursday, October 23, 2008

Employers are moving to aggressively cut jobs and reduce costs in the face of the nation's economic crisis, preparing for what many fear will be a long and painful recession.

The labor market has been weak all year, with a slow drip of workers losing their jobs each month. But the deterioration of the job market is now emerging as a driver of economic distress, according to a wide range of data and anecdotal reports from corporate America.

In September, there were more mass layoffs -- instances in which employers slashed 50or more jobs at one time -- than in any month since September 2001, the Labor Department said yesterday. And nearly half a million Americans have filed new claims for un-employment benefits in each of the past four weeks, the highest rate of such claims since just after the terrorist attacks seven years ago. Anecdotal reports suggest that the hemorrhaging in the job market has only begun.

Companies that announced plans this week to cut jobs include Internet company Yahoo (1,500 positions), pharmaceutical company Merck (7,200), National City bank (4,000) and Comcast, the cable company (300). The weakening employment outlook is part of the reason that investors have become more fearful of a deep, prolonged recession -- fears that led to yet another miserable day on Wall Street yesterday, with the Dow Jones industrial average down 514 points, or 5.7 percent.

"The customers I've spoken to are all living under a sense of fear," said Paul Villella, chief executive of HireStrategy, a Reston company that matches employers and workers. "They have very limited visibility into the future and have a great degree of uncertainty, so they just want to sit steady and be conservative in hiring."

Villella and others who work with employers said that for many companies, the pullback in hiring is not a direct result of tightening credit. Rather, firms simply don't know whether their own customers will be affected by the financial crisis; as a result, they want to hold their breath and delay hiring decisions until they have a better sense of the future.

The nation has shed jobs every month this year, but at a slower overall pace than in past economic downturns. The slide accelerated in late summer, with declines similar to those in past recessions. Last month, employers shed 159,000 jobs, the most this year and more than the average number of monthly job losses in the terrible labor markets of 2001 and 2002.

More obscure indicators monitored by economists at the Federal Reserve and in the private sector also show an inflection point in late summer. For example, employers had 214,000 fewer job openings in August than in July, according to a Labor Department report. Over the past year, the number of openings dropped by a more modest average of 74,000 per month.

Indeed, many companies are imposing hiring freezes. Such moves don't often get the kind of headlines that layoffs do, but because they shrink the number of places people can turn to for jobs, they still hurt the economy. VMware, a Palo Alto, Calif., software company, is one firm that has curbed hiring. Earlier this week, after reporting third-quarter earnings that beat Wall Street's expectations, VMware told analysts on a conference call that despite a 32 percent jump in revenue, a "hiring pause" had been imposed for all jobs except critical ones.

"We are just being conservative," VMware spokeswoman Mary Ann Gallo said yesterday.

The nation's unemployment rate was 6.1 percent last month, not astronomical by historical standards. But the rate was up from 5 percent in April, and many forecasters now expect it to hit 7 percent or more by the end of this downturn. The construction and manufacturing sectors have been losing jobs for more than a year. But lately, job losses have begun or accelerated in a wide range of other fields. Retailers, stung by less consumer spending, cut 87,000 jobs in the three months ended in September. Employment services shed 100,000 positions in that span, reflecting the fact that companies are slashing temporary jobs. The leisure and hospitality industry cut 51,000 jobs, as people had less money to stay in hotels and eat in restaurants.

In the greater Los Angeles area, Manpower, one of the nation's largest temp agencies, has noticed a steady increase in job seekers since early September. Paul Holley, a spokesman for the company, said there are more applicants for fewer openings and better-qualified candidates seeking work.

What's particularly noteworthy, Holley said, is what's happening in Phoenix. Job applications have held steady, but since September more applicants have had backgrounds in general labor and warehouse distribution. That's unusual because warehouse and logistics jobs usually hold steady in the fall to support retailing for holiday shopping.

Randstad USA, another large temp agency, reports that job ap-plications are up in the Tucson area and that the firm is even getting inquires from people who still have jobs.

"In general, a lot of people seem to be insecure about their current jobs even if they are still employed," said Emily Cline, Randstad's area vice president for Tucson.

As reports of layoffs continue to pile up around the country, executives at Randstad said they have noticed a shift in psychology among job seekers.

"Employees are much more willing to work extra hours and to take on additional duties to enhance job security and improve their employability," said Eric Buntin, managing director for marketing and operations at Randstad. "In a changing market, they know that's a valuable resource."

They are also willing to make less money, even as the cost of living goes up. Cline said some call center jobs that were paying $9 an hour in the Tucson area last year are now paying $8.50. "Their option becomes to take the job or not have the job," she said.

With workers losing their leverage to negotiate raises, there could be greater downward pressure on wages, which in turn could drive down overall economic growth. Workers are already having a hard time getting raises; inflation-adjusted pay for non-managerial workers fell 1.9 percent in the year ended in September, according to the Labor Department.

Staff writer Michael A. Fletcher in Cleveland contributed to this report.

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/22/AR2008102203709.html?wpisrc=newsletter



The Bad News About Your Job
Why the unemployment rate is artificially low.
Daniel Gross
NEWSWEEK

It's hard to overstate the poor numbers coming out of Wall Street in recent months. But could it be that we're overstating the gravity of the situation? As job losses have mounted and consumer confidence has plunged, policymakers, news organizations, econo-pundits, and even some of my NEWSWEEK and Slate colleagues have noted that the unemployment rate, which rose to 6.1 percent in September, seems to be at a nonrecessionary, noncatastrophic, low level. The un-employment rate is still below where it was in 2003; and between
September 1982 and May 1983, the last very deep recession, it topped 10 percent. (Go here for a chart and historical data).

But maybe the employment data are much worse than they seem. In the past year, the two key measures of employment-the unemployment rate and the payroll jobs figure-have been poor but not awful. The unemployment rate has risen from 4.5 percent a year ago to 6.1 percent. And in the first nine months, 760,000 payroll jobs were
lost. This is unwelcome but not catastrophic. So why do things feel so bad? It's not because, as Phil Gramm suggested, we're a nation of whiners. And it's not a matter of columnists and spin doctors shading the numbers to make things look worse.

Rather, these two figures are undermeasuring the weakness in the labor market. By some measures, in fact, the job situation is worse than it has been at any time since 1994.

Here's why. Back in the 1990s, the Bureau of Labor Statistics recognized that in a changing economy, in which outsourcing, self-employment, and contracting were becoming more commonplace, the traditional methods of measuring unemployment and job growth might not accurately portray the economic situation. And it knew its methodology had some quirks-the unemployment rate doesn't account for people who have given up looking for jobs, or who have taken themselves out of the work force. So since 1994, the BLS has been compiling alternative measures of labor underutilization. There are many different varieties of labor underutilization. There are marginally attached workers: "persons who currently are neither working nor looking for work but indicate that they want and areavailable for a job and have looked for work sometime in the recent past."

There are discouraged workers, a subset of the marginally attached crowd, who have "given a job-market related reason for not looking currently for a job."

There are people who work part-time because they can't find-or their employer can't provide-full-time work. There are people who have left the work force entirely. Neither the unemployment rate nor the payroll jobs figure captures the plight of many of these folks.

And the alternative labor underutilization measures show a lot of stress. The data on people not in the work force show the number of people not looking for work because they're discouraged about finding jobs has risen from 276,000 in September 2007 to 467,000 in September 2008-up 70 percent. The percentage of people unemployed for more than 15 weeks stood at 2.3 percent in September 2008, up from 1.6percent in September 2007, a rise of nearly 45 percent. But the most troublesome is the U6. The U6 is sort of the summa of job angst, a shorthand tally for the aggregate of job-related frustration. (Moneybox covered some of this terrain back in 2004 .) To compile the U6, the BLS takes the number of unemployed, plus all marginally attached workers, plus all of those employed part-time for economic reasons, and then calculates that total as a percentage of the sum of the entire civilian labor force plus marginally attached workers.

The U6 in September rose to 11 percent, its highest level since the data series started in 1994 and significantly higher than it was in the last recession, in 2001. The ratio between the U6 and the official un-employment rate has remained relatively steady over the last several years. But that means that as the unemployment rate has risen, so too has the portion of the population suffering from other types of work deficits. Three years ago, when the unemployment rate was 5.1 percent, an additional 3.9 percent of the labor force fell into one of those other underutilized categories. Last month, with the un-employment rate at 6.1 percent, an additional 4.9 percent of the labor force was underutilized. (See charts comparing the unemployment rate and the U6 rate.) Add it up, and more than 10 percent of American workers are essentially not contributing full-time to their families' well-being and to that of the economy at large. The unemployment rate may still be historically low, but the underutilization is historically high.

http://www.newsweek.com/id/165219


If you haven't had enough of this mind numbingly bleak recession and jobs drivel, walk yourself over to Mish Shedlock's Lemonade Stand, where he will pour more citrusy-sweet nectar of glee for your amusement. Here's a blurb, a not-too-pretty picture (notice hellashus spike... spike B-A-D...), and a link:

...unlike 2001-2003, the bulk of those financial and auto sector job cuts are never coming back. Lehman and Bear Stearns are both out of business, and now that brokers are under direct Fed regulation leverage will be reduced to 10-1 from a current 30-1 or even 50-1. The Auto sector is about to undergo more consolidation and those jobs too will be gone forever when it happens. I expect the reported unemployment numbers to rise to 7.5% to 8% in 2009 and keep rising into 2010. If so, expect credit card losses, foreclosures, bankruptcies, and corporate bond yields to rise. Expect retail sales, corporate profits, and government bond yields to drop.In regards to government bond yields: Yes, I know all about the massive amount of printing taking place. People send me a chart of it every day. Here it is...


http://globaleconomicanalysis.blogspot.com/2008/10/jobs-losses-mount-as-recession-deepens.html

Grill, Baby, Grill!


Ahhite, yo, it's gettin' bad, dog. The brothers is shoppin' dey grills. Fo real.
-Tyrone the Barber

I'm not being racist or cute; that's what the man said.

Tyrone's barber shop is usually a place of much levity and talk of families, jobs, kids and whatnot. Today, however, the mood was more serious -- quite somber, actually.

Tyrone told me that some of his closest friends are really starting to feel squeezed. There is good reason for this; every single segment of our economy is shrinking drastically. Brothers and sisters are losing their jobs due to layoffs as demand for almost everything falls record-fast to record-low levels. Many of his friends have made a huge sacrifice within the last month or two that would have been inconceivable a short while ago: among these sacrifices, they have started converting their grills to cash. Words cannot describe how huge this is for them. To some this may sound trivial, but only to those who have no idea whatsoever what Tyrone's world is like. Minimize it at your peril, because although this does not concern you today, it will damn sight concern you tomorrow or the day after, metaphorically speaking with regard to time frame.

Keep in mind that most of these folks didn't qualify for traditional loans when money was flowing like wine, so they are forced to seek credit outside what you and I consider traditional channels. There is a whole nasty sub prime universe that preys on people of this ilk: pawn shops, payday loans, cash-for-titles stores and the like. The latter charge up to $300 percent interest, which should be illegal, but since the victims are willing it's OK for some reason. That world is transparent to the majority anyway; we see right through them such that they might as well not exist for us.

Some are pawning their grills hoping a bridge loan will tide them over, others are selling their grills outright for the value of the metal and bling. This adjustment is a very powerful statement; one that cannot be properly conveyed outside of the African American community. Grills are very personal items to them, they represent the individual's identity and personality in ways that I cannot imagine. It's a signal to me to kick preparations up a notch; the consequences of an economy reduced to rubble and rags is becoming astonishingly visible at deeper levels more quickly than I had thought possible... and I believed I was being pessimistic.

If the shit does hit the fan, you should know that the people who are on the bottom rung of the economic ladder are used to surviving in harsh conditions. I am not singling out any color here; poverty knows no boundaries and can jump almost anyone; soon many more will fall. Survivors at this level of existence are street-wise and savvy to the ways of the asphalt jungle of which we know virtually nothing. They are used to providing for themselves and their families in unusual and creative ways. They feed their families, no matter what.

NO MATTER WHAT.

We're worried about paying our cable bill. Should we quit Cinemax and TMC and just keep HBO and Starz? Their minds are otherwise occupied, and there are a lot of them, so treat them with civility. Already there are tent cities all over the USA; mainstream media reporting on them or the people who built them is incredibly rare. The people who got there first are probably still there, because once a person gets that far down on their luck, they then dwell in the world of predators... predators who prey on the unfortunate. It behooves the predators to keep the poor in poverty, since that is the only way the predators continue to profit from the less fortunate. It is wrong. It is evil. We allow this to continue because we fail to stop it so we, too, are evil. Once a person becomes part of that world, it is astonishingly difficult to escape. So their numbers will only grow; the predators will continue to feed.

If you and I woke up tomorrow morning and could not get cash out of the bank or at the ATM, our heads would first explode with confusion, then explode again with panic. Our day would be shot to complete hell and the loss would be unfathomable as the sickening reality that our lives had changed forever slowly begins to sink in. But to the homeless and the people who live in the woods and the rest of the Culture of the Invisible, it would just be... Friday. Friday, right?

Yes. Friday.

How's your Plan-B coming? At least get something that would be handy in keeping the sun, rain, and/or snow off of you. Just in case.


Thanks be to Brad for the killer photo. To find out why this is funny, visit: http://www.youtube.com/watch?v=mNLuq0lW50k

Wednesday, October 22, 2008

Zaving Kapitalism Eez Kool, Butt Than Whool Zave Uz Kapitalists?

I've always counted on two basic life lessons involving the allegory of ducks. The 'duck test' is a humorous term for a form of inductive reasoning. Although cliche', it is also a fully functioning smell-test. It can be explained this way: "If a bird looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck." There is also a lesser known but no less basic duck truism, stating that ducks, by design and default, make more ducks.

While the former may still hold water, the latter is now dead as Fred.

Some American ducks are busy making a type of platypus-like rodent-style fish travesty that has never been even remotely connected with any modern vision of the U.S. financial system. The U.S. government is now the biggest U.S. banker. The government is telling us that they had to nationalize banks in order to save capitalism. Really, that is what they are saying, they had to take ownership stakes in the largest banks in order to save capitalism. Anybody read George Orwell lately?

The making of a different duck...



Give everyone money and the value of all money is diminished. What will the next 'stimulus' look like? And while all eyes are on the Dow, there are other indicators we should be watching also, especially the loss of vast numbers of jobs in virtually every sector... starting now. This will be, without a doubt, an equal opportunity recession (note that 'anchor' Nichole Lapin is CNN's answer to Sarah Palin, only dumber, but I'm sure she's very nice)...



We should all remain optimistic that things will not stay bad forever. A great deal of data suggests that maintaining a positive attitude helps lower blood pressure, increase serenity, and enhance general well-being. That said, we should all hope for the best... and prepare for the worst...

Tuesday, October 21, 2008

What IS the Recommended Daily Allowance of Moral Fiber?

The $55 trillion (TRILLION!) credit derivatives market faces its first reckoning day today as $360 billion worth of contracts on now-defaulted Lehman Brothers derivatives are due to be settled. Here's another example of a juicy piece of genuine news that was not reported in the mainstream media since the 10 October default-swap auction put swap payouts at 90 cents on the dollar (very generous of us taxpayers). So thanks to Telegraph.co.uk, we have the following:

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3224615/Markets-hold-breath-as-360bn-Lehman-swaps-unwind.html

These derivatives were, of course, very risky to begin with, so companies sold 'swaps' as a kind of 'hedge' in case the 'instruments' ever became 'worthless.' Naturally I type this, quite literally, tongue-in-cheek. Sellers wanted buyers to think they had stop-loss-like protection, but the sellers couldn't call it that. So they chose an appropriately useless and irrelevant moniker: swaps. If they had sold 'insurance,' then the product would have been subject to regulation and oversight under all sorts of inconvenient laws which require, among other things, that a percentage of insurance monies collected be put up for safe keeping in the event that payouts were necessary to satisfy future claims. But the amount they needed to keep on hand for swaps was $0.00. Hell, they could have used the name 'Skuzzlebutts' or 'Giant Indians' instead of swaps if they felt like it. The concept would have been no less morally, ethically, or financially bankrupt.

So here we are again with another lesson in moral fiber and the consequences of not having any. The derivatives bombed, the buyers wanted the swaps they bought as a safety net to kick-in, but there was just one small problem. There was no money to pay claims. No money anywhere. Buyers paid for protection and there wasn't any. Zilch.

The American taxpayers effectively own the company that must now pony-up. Today is that day. The day of the first 'small' wave of Lehman Derivative credit swap payouts. Monday's nice 400 point gain on the Dow will probably be erased (and then some) if I'm right; any market behaving rationally would rightly dive to the floor. But rationality is the exact opposite of what we're seeing now... the market's signals are all messed up. Paulson and Bernanke's interference amounts to rescuing those who have done wrong and ignoring those who made the right choices. The market does not grok such nonsense; the market's mentality is like the HAL 9000 computer in Arthur C. Clarke's novel and movie 2001: A Space Odyssey; lie to it, and it becomes confused and neurotic. This manifests in exotic and irrational reactions to previously straightforward scenarios. Then, regardless of whether you're an investor or an astronaut, the end result is FUBAR!

Anna Schwartz co-authored "A Monetary History of the United States" with Milton Friedman in 1964. Her body is frail but her mind is immaculate. She believes that Paulson and Bernanke's actions are prolonging the crisis because of those mixed signals formerly noted. She believes nothing is too big to fail because the quicker it fails the more quickly the market can deal with it, and begin to mend itself.
It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.
"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.
-Anna Swartz as interviewed by Brian Carney, WSJ, 10/18/08

http://online.wsj.com/article/SB122428279231046053.html?mod=special_page_campaign2008_mostpop

Some analysts believe today's swap redemption will be a non-event, that the auction took care of any worries. Heck, the government's paying for it, so who cares?? If there's nothing to worry about then maybe we'll have another pass-the-champagne feast like yesterday's +413-point romp on the happy little tire swing. If not, well, then we won't. But in addition to today's Lehman derivatives settlements, a whole slew of corporate earnings reports are due out this week, so if these don't get us then it's likely that the new Era of Frugality, or the big wave of hedge fund sales that loom large on the horizon, or the rising tide of Alt-A and A-rated mortgage paper defaults, or the Big Kahuna... the inevitable credit card Day of Wreckoning (sic), (which Bank of America's Ken Lewis refers to as "a damn disaster") will.

God said He'd never flood the world again, but said nothing about the financial markets. The market is no more than a big idea anyway. Lest we forget, the whole concept of value and worth are products of our imagination that do not even exist in three-dimensional space -- just like Skuzzlebutts and Giant Indians. So no need to get excited if your 401k lost $200,000 in the last six weeks; the money was never really there to begin with. Let that thought dance on your prefrontal cortex a while. Regardless...

Happy Lehman Derivative Swap Payout Day, America! You earned it!

Monday, October 20, 2008

Job Opportunity and Gratitude Enhancement


When I saw this photo, about a dozen jokes and metaphors tragically died trying to get out of my mouth at the same time. Most were crushed; they could not have lived through the experience. Only the strong survived.

WANTED: Pachyderm Detailer. Must really, really, really love elephants. Apply within.

The big boy might be a metaphor for the Fed and you and I are the guy who's GOIN' IN. Or the 'Detailer' could represent what it feels like to wake up as Hank Paulson every morning, having to bow down to those whose power he failed to grab in Hank's original comedic bailout draft that demanded complete lack of oversight, legal review, or interference from anyone at anytime... now or ever.

It might have worked if Hank had serviced the right asses, which I find at once terribly funny and terribly frightening.

What's not funny at all is how rapidly the number of jobs is shrinking, not just domestically, but globally. Virtually all sectors are affected. Work is becoming a luxury, so if you value a paycheck you might want to try to keep it, at least for the time being. If you're thinking about finding a job, now would be the time to get out there and get one. Today's news is not too bad considering what I believe tomorrow's headlines will look like.

I expect this beautiful picture will get a frame and a place of honor on my desk. Hopefully it will serve as a reminder during moments I find myself wanting to quit my job for whatever inane reason is floating in my brain at any particular moment. This way, even if I am having the worst day of my entire life, I will be able to point to that photo and, if nothing else, I can be grateful I am NOT THAT GUY. It's a strategy I predict will work one hundred percent of the time.

Until next time, pant pant, snarl snarl
-TEB, comforting the afflicted and afflicting the comforted since 1962

Sunday, October 19, 2008

From the Audience

Today I received comments from reader Paladin regarding the following Newsweek article. Paladin's remarks were too good and too relevant to keep to myself, so here they are, for your edification.

To preface, Newsweek gives military and political reasons for Iran's apparent toning down of bravado and activity lately, but Paladin offers another, far more serious and far-reaching conclusion: at its heart, Iran's capacity to influence the rest of the world is significantly diminished when oil is cheap. Conservation efforts of late, largely forced by record gas prices, have decreased domestic oil demand which caused the recent dramatic drop in crude prices. The message is crystal clear: influence exerted upon US interests from middle eastern countries and oil producers who would do us harm would be greatly minimized if the United States can maintain petroleum demand at low levels. Warfare on Iran's purse, not on a battlefield, is the most intriguing idea I've heard in some time. This is important at depth, and Paladin's insight into the real Iran that goes uncovered by mainstream media injects much more than my simple overview; please read on.

Why Iran is Cooling Off
by Mark Hosenball
NEWSWEEK
From the magazine issue dated Oct 27, 2008

For reasons that remain unclear to the Bush administration and its allies, the level of violence attributable to Iranian-backed insurgents in both Iraq and Afghanistan is falling. Pentagon press secretary Geoff Morrell says the trend dates back to an Iraqi-government assault last spring on militants in the Basra region of southern Iraq. After the crackdown, Iranian-supported insurgents (known to U.S. officials as "special groups") fled into Iran, where they have since been cooling their heels.

Still, according to one U.S. counterterrorism official, who asked for anonymity when discussing sensitive information, some reports suggest that Iraqi militants are still actively being trained inside Iran for attacks on U.S. forces.

Meanwhile, in Afghanistan, intelligence reports last year indicated that Iran was also supplying terrorist-style arms to anti-American militants there. But the latest intelligence indicates that the level of bombing technology used by the Taliban in recent IED attacks is far less sophisticated than the devices used by Shia militants in Iraq—evidence that Iran is exercising restraint in its dealings with Afghan insurgents.

The question is, why? Another U.S. official, who also requested anonymity, said that Iran may be turning down the heat on American forces in the region in anticipation of a Barack Obama victory in the presidential election. According to this theory, Iran's theocrats fear an Obama presidency would greatly improve American esteem among European governments; the Iranians believe these leaders indulge Tehran now chiefly because of their disdain for President Bush.

A drop in Iranian-instigated paramilitary attacks does not mean that Tehran has ceased making mischief in the region. Recently, Morrell says, Iranian operatives have been actively pressing Iraqi politicians to oppose U.S. efforts to reach a new "Status of Forces Agreement" with the Iraqi government regarding the continued presence there of American troops. He said Iranian efforts have included trying to orchestrate anti-U.S. demonstrations in Shia neighborhoods and funding attempts to bribe Iraqi politicians.

http://www.newsweek.com/id/164510

Paladin's comments:
I am taking the liberty of submitting comments (on the Newsweek article-TEB) about a topic I consider to be of particular importance to the U. S.: our relationship with Iran.

I’ll begin by offering the caution that there is a certain vanity in believing that nations like Iran pursue courses of action solely with the reaction of the U. S. in mind. That is why I always disparaged the post 9/11 question "What did we do to make them hate us so?," since it was blind to the possibility that "they" could hate us on their own initiative, and without any inspiration from us.

But, as for Iran, it is likely that the ruling clergy of the country -- the real power, when they chose to exercise it -- being protective of their perquisites, are concerned that Iran, should it continue to act as a pariah nation, will be isolated by world more willing to cooperate with the U. S. once the latter no longer is led by a President who is so radioactive. The declining price of oil also causes pain for Iran. That country needs oil to be at $90.00 / barrel or above to continue to fund the entitlements that the President has promised the people in order to buy their loyalty, and as badly off as the U. S. may be economically (and as bad as our national debt), Iran is hard pressed to borrow the money it would need to cover its deficit spending.

Finally, the main body of Islamic extremists in the world are “Salafists,” or militant Sunnis, many of whom hate the Shi'a (the dominant sect in Iran) as much as, if not more so, than either the U. S. or Israel. Iran cannot feel comfortable living in the middle of an Islamic world dominated by such types.

So, conditions are bad in Iran. The President arguably is overplaying his hand, but usually is saved by his card-playing opponent, Mr. Bush, who plays even worse. The only question that may be remaining is whether the Iranian President really does have Messianic pretensions, and if so, will he do something absolutely insane in the hope of bringing about the Armageddon some religious fanatics believe is needed to encourage the redemptive return of the Hidden Imam? Fortunately, there have been some recent signs that he may not be that nuts after all, and even if he is, the clergy, not willing to risk the luxurious lifestyles they have created for themselves since the 1979 revolution, are likely to keep him under some control.

Wall Street Wages and Bonuses Eat 10% of Total Bailout Handout


I offer mainly comments through imagery today, dear readers; digesting this article from UK's Guardian made me feel far too angry to lurch into a regret-filled and sordid soliloquy. Kindly read the quotation below, then follow the link to the entire story. A might be a good idea to grab the Tums first...

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week the Morgan Stanley $10.7bn pay-pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.



I do not begrudge any working person wages, including those still punching a clock at SHAMECO on Wall Street. It's got to suck to have to work there now, knowing (as they do) that no other business wants to hire anybody coming from financial houses or the mortgage companies. Wait... don't forget the only reason any of these ex-rainmakers have a job at all is thanks to John and Janet Taxpayer; these firms would be ruined in scandal if not for the trillion dollar federal handout. But how can any employers pay discretionary bonuses above and beyond salary when firms' losses for the year add up in the billions of dollars? Somehow, the words 'discretionary' and 'entitled' must have taken on other meanings of which I was not previously aware. As we chug from this virtually unpalatable keg of gin and ether, keep in mind that these huge bonuses were paid out in 2007 as well, even as firms like Merrill and Lehman were declaring billions in write-downs.

Dammit, America, we are being torn a new one. We teach our elected officials how to treat us, their constituents. I think if there was ever a time to get old-school on our representatives it's now. Right now. My father and my father's father would never have put up with the way we're being treated... what about yours? Fellow Americans, it is up to US to declare that the new school is in session. No one will do this for us. Make a decision to make your thoughts and feeling heard. Start here; use the comments section on this blog post. State your case. Let it out. Rip on me if you want to. Participate in things that concern you. Start today. Maybe America needs a King and a Queen, whom we can deify and can do no wrong, so we can start holding our elected officials accountable for their actions.

I'll leave you with one more thought for today... why do you suppose Americans have to discover facts like these courtesy of media outlets from outside the United States??

Saturday, October 18, 2008

The New Vampire Reality--Just in Time for Halloween


I was most amused by the first piece of web news that caught my eye this morning. The headline?

“Retailers worried rocky economy could ruin Halloween.”

If retailers don’t like the spending they’re seeing for Halloween, then brother, they are really going to hate the way Christmas shoppers behave this year.

I have little doubt that the fourth quarter of 2008 will bring genuine financial pain to a broad range of businesses -- global and domestic -- at a level unmatched in four-fifths of our population’s living memory. You’d think that anyone paying even distant attention to the economic gloom of late might have surmised that the reality of uber-consumption, at least for a while, has changed.

Times are already bad for many folks, especially the millions who were financially stressed coming into this. These poor bastards are now and have always been minimized and marginalized, so we mainstream-types just see right through them; they are invisible to us. Within only a matter of months, however, we will substituting the words ‘many folks’ with the words ‘most folks.’ That means you and I could well become invisible to the fewer and fewer ‘Haves’ as jobs and payrolls shrink, consumers cut their spending to the bone, tight credit contracts durable goods production and sales channels, and fewer bags of processed orange-sugar ghosts and diethyl-moopgloop-hedromine goblins get tossed into America’s shopping carts pre-Halloween.

Living rooms and kitchen tables across America are on fire with talk of a long winter looming large on the near-term economic horizon. Already I see a lot fewer plastic pumpkins and giant scary store-bought monsters with glowing eyes sucking on my neighbors’ electric bills. It’s a rural area, and what’s popping up on porches in my world are arrangements of corn husks and colorful gourds (no doubt locally grown), and little skeletons the kids made out of whatever paper and crayons were kicking around the house. That’s how many Americans are getting ready for Halloween this year. The ones who spend $200 on candy, trash and trinkets may soon wish they had put that money in the butter and egg jar, instead.

I love the idea of taking a break from commercialism to celebrate holidays more simply; I just wish the idea had come from within ourselves rather than forced upon us courtesy of painful new economic realities. Who knows, maybe that’s the only way change happens these days.


Friday, October 17, 2008

Hey, Brother, Can You Spare Ten Years?

Whatever their squabbling in Washington this week, one thing upon which Democrats and Republicans were able to agree was the apparent novelty of the country's current financial woes. "We have an unprecedented crisis," said House Minority Leader John Boehner, in a phrase frequently invoked by other congressional leaders. Crisis? Yes. Unprecedented? No way.

No. Not so. Uh-uh. Untrue. EL WRONG-O.

This crisis, in fact, does have a precedent that looks remarkably like the financial running amok that struck Japan 20 years ago, when a stock market nightmare exposed years of speculative lending -- mostly dependent on real estate -- and led to a dramatic economic collapse. In response, Japan's government launched a strategy that actually made the problem worse; the 'cure' morphed to economic plague, which became ten years of stagnation known as Japan's "lost decade. The bad news is that... today... at this moment... the United States is making some of the exact same mistakes.

Japanese banks in the 1980's loaned wildly, gambling on rising real estate prices, and PRESTO... a bubble was born. At one point, the value of land in Japan was reportedly greater on paper than the value of all the land in the rest of the world. But in December 1989 the gamble failed; the stock market fled south and investors realized how many bad loans the banks had made, many of them with Japan's overvalued land as collateral. Most Japanese banks became afraid to lend any more money, and capital dried up. Just like that.

Does any of this sound remotely familiar? Anyone? Anyone?

Bueller?

At first, Japan's leaders propped up the value of financial assets, convinced that the banks -- intertwined as they were with Japanese corporations -- were too important to fail. This protected Japan's ailing banks, allowing them to continue lending when they should have been cutting back. The government also started plowing money into the public sector to keep the economy alive.

More stimulus checks, anyone? Is anyone getting this?

The additional spending was largely directed toward public works projects, shoring up a weak financial system, and subsidies to the weakest of Japan's businesses, which, in retrospect, ought to have been allowed to fail. While the direct stimulus of government works projects and subsidies to weak businesses kept the economy from falling back into negative growth for a time, the weakness resumed once the direct stimulative effects of the spending packages wore off.

-American Enterprise Institute economist John Makin

Indeed, the stimulus just served as a smoke screen. Banks, never forced to acknowledge their mistakes, appeared healthier than they were, and companies that should have gone bankrupt stayed open. Initially, the strategy did produce a minor boost in growth, but the economy never regained its momentum. Worse, Japan became addicted to the idea of recovery without pain. So for ten years, one Japanese prime minister after the next did what they could to keep the economy afloat through multi-billion dollar infusions... yet banks never gained enough confidence to lend aggressively, weak companies barely stayed alive, and uncertainty kept consumers out of the stores.

By 2000, Japan had piled up debt worth more than 150 percent of its gross domestic product, and average citizens were no better off--more than $10 trillion in wealth and savings destroyed since the early '90s.

As in Japan, the US bailout will do nothing to encourage financial institutions to change the business models that got them in trouble in the first place. Instead of accepting that poorly run financial firms must be allowed to fail, Washington decided that many financial institutions, such as American International Group (AIG), are too large to go under--or, as the Fed put it, "in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility."

The real Decider, history itself, respectfully disagrees.

http://www.youtube.com/watch?v=DlVQWbWTlco