Alice in Wonderland economics

Via Mike Shedlock we learn of another example of the craziness of today’s financial world. The Nevada Federal Credit Union is paying its customers to withdraw their money. Yes, their message is: Please take your business elsewhere, we don’t want it. Why? Because it is costing them to hold money. They cannot find any worthwhile loan opportunities (it is Nevada, after all) and they can't engage in the high risk investing/gambling that the big boys on Wall Street can. They are paying more in required deposit insurance (.4%) than they can earn with short term Treasuries (.25%).

Here is a simple example of how artificial is the Fed’s current policy of holding interest rates at nearly zero--in other words, more smoke and mirrors. Economists and financial bloggers like Shedlock have been saying for a couple years now that most government interventions to right our economic ship are counterproductive. Their goal is to restart the country’s economic engine but do nothing to fix its problems. When your car needs a tune-up, if not an overhaul, pouring additives in the tank may get you a few more blocks or miles, but you’re still going to end up on the side of the road with the hood up.

No "easy" button

Quote of the day:

Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no “easy” button.

From "Between Dire and Disastrous" by John Mauldin on Barry Ritholtz's The Big Picture. The letter is somewhat long but a clear and succinct description of the Greek economic conundrum and its consequences for the whole developed world. In brief: no country is very far from being the next Greece.

You also go into the vineyard (Sunday Reflections for February 14, 2010)

He went out and found others standing around; and he said to them, “Why are you standing here idle all day?” They said to him, “Because no one has hired us.”' He said to them, “You also go into the vineyard.” (Matthew 20)

I’m old enough to have lived through a few recessions. I’m also old enough to have parents who lived through the Great Depression. The current economic downturn is being viewed as somewhere in between these categories, hence its designation as the “Great Recession.”

The cover story of the current issue of The Atlantic is a disturbing report on the long-term effects of this recession’s worst consequence: our persistently high unemployment. The article summarizes the extensive body of research on the experience of unemployment. This includes unemployment’s consequences years after the experience, for individuals, communities and society.

We all recognize the emotional stress of being out of work. Research shows, however, that it is probably more devastating than we imagine.

Andrew Oswald, an economist at the University of Warwick, in the U.K., and a pioneer in the field of happiness studies, says no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. It is the worst thing that can happen, he says, equivalent to the death of a spouse, and “a kind of bereavement” in its own right. Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald says; most of it appears to be the result of a tarnished identity and a loss of self-worth. Unemployment leaves psychological scars that remain even after work is found again, and, because the happiness of husbands and the happiness of wives are usually closely related, the misery spreads throughout the home.

Persons unemployed early in their adult lives are more prone to heavy drinking and depression years later. The lifetime earnings levels of young people who enter the work force during times of recession are permanently reduced compared to those who begin working in economically healthy time. And the significantly higher unemployment rate of men versus women is disruptive to both families and communities.

The weight of this recession has fallen most heavily upon men, who’ve suffered roughly three-quarters of the 8 million job losses since the beginning of 2008. Male-dominated industries (construction, finance, manufacturing) have been particularly hard-hit, while sectors that disproportionately employ women (education, health care) have held up relatively well…. At the time of this writing, it looks possible that within the next few months, for the first time in U.S. history, women will hold a majority of the country’s jobs.

Higher unemployment rates for men contribute significantly to violence, crime and drug abuse. Neighborhoods and communities that had seen real progress in these areas are now watching this progress reversed. Domestic violence rates are increasing. Out-of-wedlock births are increasing while marriage rates are declining.

Compounding the effects of this recession is that for most people it is exacerbating downward economic trends underway for at least a decade.

In a Pew survey in the spring of 2008, more than half of all respondents said that over the past five years, they either hadn’t moved forward in life or had actually fallen backward, the most downbeat assessment that either Pew or Gallup has ever recorded…. Median household income in 2008 was the lowest since 1997, adjusting for inflation.

The article’s author concludes that, while still mostly unseen at this point, the length and severity of this recession is causing serious disruption to personal lives and communities across the country. These consequences will be broad and deep.

We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come. We have a civic—and indeed a moral—responsibility to do everything in our power to stop it now, before it gets even worse.

There is wide acceptance that this recession is “different.” We are not just experiencing a hiccup in the business cycle but a serious breakdown in our economic engine. The recovery will likely be long, slow and uneven. Many communities and industries simply will not come back to their previous conditions.

This Great Recession is also raising questions about some of our economic realities and assumptions. The devastated construction and finance industries grew—with government collusion—to compensate for stagnating incomes and the loss of previously well-paying manufacturing jobs. Rather than face these problems directly, there is yet strong temptation to re-inflate these essentially nonproductive “bubbles.” In another case of economic denial and fantasy, government at all levels have been running ever-increasing deficits and accumulating enormous unfunded employee benefit obligations. None of this is going to be fixed quickly or easily.

But there are even more fundamental questions being asked. Why are so many communities in near-permanent states of depression? Why are economic inequalities growing? Why are we unable to have economic prosperity that doesn’t endanger the ecological health of the planet? Why are so many businesses focused on quarterly profits rather than long-term growth and development? Why can we not provide affordable health care to all our citizens? Why are there such enormous disparities in education? Why is our political process paralyzed when it comes to dealing with these problems?

The last question may be the most telling. The answer to it is that dramatic changes in our culture and indeed the world have resulted in new challenges for which there are no easy answers or consensus. Globalization is improving the standard of living for millions of previously impoverished people. At the same time, however, it is lowering that standard for millions of previously well-off people, as well as replicating much of the social chaos and ecological damage previously experienced in the developed world.

But the real challenge is even more fundamental. Technological innovation is creating such high levels of efficiency that in many areas of the economy, human labor is nearly superfluous. Bluntly, we are running out of things for people to do. This may be more recognized in Great Britain where what we call being “laid-off,” they call being “made redundant.” Yet surely it is now an accepted human right that no one can be considered “redundant.”

The challenge for us as a society is to reimagine what constitutes valuable work. There is no end to useful things people could be doing. For those things to constitute gainful employment, however, the benefits of economic efficiency have to be redistributed. Rather than making a relatively few investors fabulously wealthy, rather than constantly building and shrinking enormous corporate and government bureaucracies, rather than building ever-more houses and shopping malls, rather than manufacturing and marketing evermore pointless toys and gadgets—perhaps we need to be asking some really basic questions: What makes us happy? What makes for a good society? What do we want our world to look like?

For the truth is (but which we are too startled to realize) the human race is on the verge of making those questions, about which ancient people only dreamed, ones we can actually answer and do something about. In other words, as a species we are rapidly entering a whole new world which is asking of us a very different question than we faced before: Now that we don’t have to work to stay alive, what do we want to do that make us happy? Our problem, as so often happens, is that having finally gotten what we dreamed of for so long, we aren’t sure now what to do with it. Somehow, though, I think that’s a good problem to have and in solving will make us better people.

But what if they're wrong?

Right now the markets are doing their best yo-yo imitation again, this time in response to the PIIGS debt crisis (PIIGS=Portugal, Ireland, Italy, Greece, and Spain. Eastern Europe and the Baltic states also have some serious financial problems. Many don’t think the UK is in all that great shape, either. And then, of course, there’s Dubai. Oh, and did I mention Turkey?) The immediate concern is Greece, which is running an enormous deficit and may soon be unable to finance its debt in the bond markets, thus risking a default. Greece’s economy is relatively small but everyone’s fear these days is of contagion, a chain reaction. One default will cause interest rates to spike for all the other unhealthy countries, risking their defaults. Pretty soon a third of the EU is insolvent, overly exposed banks are tottering, and it’s fall 2008 all over again.

US markets are way up today (though still bouncing around quite a bit) on the news that the EU has agreed to “help out” Greece. Is this a bailout? Details will be worked out in coming days, the new EU economic affairs commissioner says. And the devil will certainly be in the details. German tax payers are not excited about paying for Greece’s fiscal irresponsibility—but the Greeks aren’t either, apparently. The government has only just begun reigning in spending and already there are strikes with many more promised to come. And if Greece is bailed out, who else will be coming to Strasbourg (EU headquarters) hat-in-hand?

By why should we care about Greece, or the PIIGS, or even Europe? Near the end of his life, Otto von Bismarck is reported to have said that the next Great War would begin over “some damn fool thing in the Balkans.” In 1914, of course, that is exactly what happened. Today’s economic interconnectedness is not unlike the diplomatic alliances which quickly pulled most of the world into war. The lack of real understanding of the consequences of those connections is also similar. What would happen if Greece defaulted on its debt (or Portugal or Spain or Dubai)? No one really knows, and for that reason no one wants to try it and find out.

The United States remains the world’s single largest economy but it has obviously been rocked on its heels. There is some awareness by the average worker/voter that these global imbalances are playing a role in our domestic economic problems. For a generation now we have known that our dependence on foreign oil is a problem. For nearly as long we have watched with alarm the movement of manufacturing overseas to countries with much lower labor costs. With the economic reversals of the current recession, real wages and living standards have been flat for the past decade. Some would argue they are actually in decline.

On the positive side China and India, the two previously impoverished and largest nations on earth, are booming. Of course, the resulting prosperity is being very unevenly distributed, and they are both experiencing all the other complications of modern industrial economies, including urban congestion, pollution, crime, rampant political corruption, and social disruptions of all kinds. Brazil, Vietnam and other Third World countries are having similar experiences. And they all view with suspicion the developed First World’s sudden concern with global warming and greenhouse gases—which the developing countries are all now producing in abundance.

The real issue, however, is much bigger than Greece, or the PIIGS, or even the EU, for that matter. We are all in a global economy now and no one really knows what that means. We are learning as we go along, and that’s not a particularly comforting realization. We know there are major global economic imbalances and that they are major problems. Two disturbing things about that reality are 1) the economic and political experts have no idea how to right those imbalances and 2) those imbalances are getting worse. This is not a good thing.

*    *    *

The official story of both the previous Bush and current Obama administrations is that, through their daring and aggressive actions, the country was pulled bank from the brink of economic catastrophe. Now we must simply wait for the admittedly painfully slow recovery, and then our economic ship will be righted and sail along happily once again. They may be right. There are also reasons to worry that they are partially, or even very, wrong.

What’s of concern now is not just disagreement on the cause of this “Great Recession” but even what really happened in 2008. A helpful explanation I read recently is that government officials see the events of 2008 as essentially a “panic,” an economic psychological event. What’s necessary then is to restore confidence, calm the markets, and get everyone to start investing, hiring, and spending as before.

There is another unofficial view, however, that the situation is more serious—perhaps much more serious. For those who espouse this position, 2008 was not simply a panic but a real economic crisis, exposing significant problems which need to be dealt with now if we are to avoid similar or worse crises in the future.

One way to summarize the crisis viewpoint is that the economy is being seriously distorted by attempts to patch over the consequences of the global economic imbalances. This is what is causing the “bubbles,” the artificial markets of recent years that have inflated and then disastrously blown up, e.g. the housing bubble most recently and the tech bubble before that. Bubbles give the illusion of growth and prosperity for awhile, and then they pop. In the aftermath, the economy as a whole has moved little, if at all, but with significant resulting chaos and disruption. The housing excesses (in both quantity and quality) in the 2000s were just as economically pointless and unproductive as the tulip bulbs of 17th century Holland.

The concern is that the 2008 TARP bailouts and 2009 deficit-financed stimulus have (again) swept our economic problems under the rug. The current run-up in the stock market is at least a mini-bubble, the result of the government pumping billions of dollars into the economy with nowhere for it to go. While everyone acknowledges too many houses were built at too high prices, we are again hoping for prices to rise and home construction to rebound. Consumer wages and assets have fallen yet we are again hoping they will start borrowing and spending. We just need to get the economic juggler juggling again (paying no attention to those marbles rolling around the floor) and everything will be fine.

The causes of the 2008 economic convulsion will be analyzed for years to come—which is not particularly comforting to realize. To this day there is no consensus among economists or historians on either the cause of the Great Depression eighty years ago, or on what finally pulled the world out of it. The conventional answer to the latter, a world war, is also hardly reassuring (but that, too, is disputed).

What was catastrophically unique about the housing bubble was that it was fueled by an enormous growth of credit. Most of that debt has been transferred to the federal deficit or is still hidden on the books of the TBTF banks via fantasy asset valuations. The story is much the same across Europe, especially in the PIIGS and the UK. The strategy seems to be to play an international high-stakes shell game: keep shuffling the bazillions of dollars of global debt around so no one will notice. In the meantime, wait for tax revenues and asset prices to rebound and—poof!—the debt will disappear.

Needless to say, there is a lot of doubt this scheme is going to work. Or the strong suspicion is that it will only work by the creation of yet another bubble, with the same disastrous results. This strategy is derisively described as “kicking the can down the road.” Of course there is the very real possibility that the can will be run over and flattened before it gets to its “destination,” as Greece’s problems are rudely reminding everyone.

Since this scheme requires the rebuilding of “confidence,” Western leaders are unanimously insisting that the corner has been turned and recovery is underway, however slowly. None will publicly express doubt that the juggler can keep all his balls in the air. Joining them in this phalanx of optimism are, of course, the world’s bankers and financiers (including, very likely, your own investment advisor). Their survival depends on them being right.

But what if they’re wrong? Given they’re huge miss in not anticipating the most recent economic meltdown, that has to be recognized as at least a possibility. And there is ample reason to suspect it is much more than just a possibility. What’s scary, though, is that it’s not at all clear what the alternative strategy should be.

Most of those who say we are in the midst of a serious economic crisis believe we need to stop playing financial games and swallow the necessarily painful medicine. But then what? Big banks are allowed to fail, inept businesses go bankrupt, prices fall even further, government shrinks, wages fall, unemployment rises—and then where are we? The assumption is, that like a diving plane, the economy will eventually resuming flying at a new, though lower level. But what if the economic pilots can’t pull the nose up in time?

Another possibility, it seems, has to be at least considered: namely, that there is no answer. Is it possible that our long-running, free market capitalist system has finally run its course? It may not just be irony that within less than a generation of the demise of communism, its rival system, capitalism finds itself on the ropes. Perhaps the longer view of history will be that something fundamental about industrial society came unraveled at the turn of the millennium.

This doesn’t mean we are necessarily on the verge of some economic cataclysm or dystopian future. It could be the world is on the verge of something new and different—and better. Wrenching global economic disparities and ecological deterioration certainly argue that a better system could well be awaiting discovery. Getting there, however, as history and present events indicate, will likely involve significant trauma and upheaval. In any case, it may well be time to stop patching the old wineskin and instead start looking for a new one.

Update: Baseline Scenario has a comprehensive summary of its revised global economic forecast, which corresponds to many of the issues I address above. Its final point: 22) We are steadily becoming more vulnerable to economic disaster on an epic scale.

Seven Worrisome Things

As part of its slow death spiral, the Washington Post dumped one of its more able reporters, Dan Froomkin. Fortunately he landed at place which can use his talents even better, The Huffington Post, where he is now Washington Bureau Chief. Last week he wrote this piece which succinctly summarizes the continuing and serious economic dangers still lurking. The theme of so many economists today is that this is not an ordinary recession. Rather, it is the culmination of years of economic deterioration and denial, compounded by financial malfeasance and incompetence.

“7 Things About the Economy Everyone Should Be Worried About” is just what it says—and “everyone” should include our elected officials in Washington. Economic stagnation, or worse, is now a reality for the majority of American households. The reasons are not yet clear but globalization and our dependence on foreign oil are certainly major factors. The missed element in this, however, is that not everyone is sharing in our economic flat-lining. The rich and very rich have managed to continue to prosper and Washington policies have played a direct role in enabling them to do so.

This, for me (and for many others), has been the biggest disappointment with President Obama. He doesn’t get it and, despite his rhetoric, is enacting policies guaranteed to continue this inequality. His failure to aggressively rein in the big banks is one example. His nonsensical concern with the deficit in the midst of the country’s worst recession since the Depression is another. Surrounded as he is by advisors who are almost all products of Wall Street, this isn’t really a surprise. Perhaps the surprise is that we didn’t see it coming.

Read Froomkin’s article and learn about these “7 Things:”

No. 1: The middle class may never be the same again
No. 2: The recovery could take a really long time
No. 3: The recovery could only be temporary
No. 4: Then what? This time, we don't have the tools to get out of a recession
No. 5: The ‘very serious' people in Washington are still obsessed about the deficit
No. 6: Whatever is making the stock market go up could go away
No. 7: The hugely irresponsible financial sector remains unchastened

Why economics?

Some of you may wonder why I post on economics since most of the time I focus on religion and theology (I know my Lutheran news and gossip posts get a lot more hits than my economic ones ever do). While it has always been an interest of mine, last year’s financial crisis convinced me not only of the enormous impact economics has on everyone but also of its vital moral dimension.

The implosion of the banking system showed that something had gone seriously wrong with our economic system. That the multi-billion dollar taxpayer bailout was followed by billions in Wall Street bonuses proved something was seriously morally askew, as well.

I have been trying to follow all this as closely and carefully as my time allows. Internet bloggers not only provide a lot of helpful information and analysis but also lead to other authorities, books and articles. Needless to say, this is a HUGE subject with often violently contrasting viewpoints. One thing I have learned, however, is that most of the “experts” relied on by the mainstream media (MSM) are themselves part of the flawed system. Thus, for example, the economic talking heads on news shows who are financial advisers (as many are) will always be essentially optimistic about the economy. Otherwise people will have no incentive to give them their money to invest.

After sorting through the experts and finding those that seem sincere and honest (especially about their limitations), the message I have gotten loud and clear is that our financial problems are far from resolved. The bailouts in the fall of 2008 stopped the immediate crisis from turning into a financial meltdown. The serious economic problems which created this crisis are still almost entirely unresolved, however, and could easily erupt again.

I have become convinced that this is ultimately a spiritual crisis. The economic questions we are facing are not just technical but are fundamentally questions about values and life. This life is now so much more complex than our ancestors could have imagined, and more complex than most of us are aware. Our ignorance of both micro- and macro-economics leads us to feel overwhelmed and victimized, forced to rely on experts we know nothing about. Yet if we cannot come to a consensus about what constitutes essential economic health for ourselves and our communities, then the future of our democracy is seriously in danger.

So, you can expect more economics posts from me. I hope you’ll read them, read the articles they link to, and start your own economic education program. Economics is not money, numbers and statistics. As its Greek origin suggests, oikonomia is the management of our households, personal and collective. Right now, economic mismanagement is threatening the livelihood and future of every one of us.