Sez Yves:
Unfortunately, the reactions to Volcker’s speech say far more about politics and PR in the US than they do about what he actually said. Volcker’s comments were delivered in a moderate, occasionally perplexed tone. He was often candid and descriptive, far from “blistering.” And despite the Wall Street Journal headline, “Volcker Spares No One in Broad Critique,” in fact he left many targets untouched (bank pay, accounting chicanery, “free market” ideology, cognitive capture of regulators and the revolving door between regulatory positions and lucrative private sector roles, predatory behavior by financial firms). In fact, Volcker was a defender of traditional commercial banks, noting that they have special role via acting as depositaries and payment services, and complaining of how money market funds were encroaching on their turf and providing similar functions without having the same degree of oversight and capital requirements. He also spent a fair bit of his talk extolling the Fed as the logical party to serve as the lead financial regulator, while somehow missing that the central bank did a horrific job in the runup to the crisis and is chock full of monetary economists who have no interest in financial firms’ inner workings.
Indeed, Volcker actually said (and I am not making this up), that the mess in the economy was NOT the result of the financial crisis. His formulation is rather astonishing. He depicts the financial crisis as the result of real economy imbalances, as opposed to the build up of speculative excesses in a grossly undercaptialized, tightly coupled financial system (starts at 9:30).
But in saying that I don’t mean to blame the crisis on the regulators or even on the market. I mean, this crisis got so serious, it’s so difficult to get out of this recession because of disequilibrium in the real economy. You know the story…when the bubble in housing burst, then the financial system came under great pressure, you don’t blame it for originating the crisis, in fact, under pressure, it broke.
Huh? The idea that the real economy distortions produced the crisis. as opposed to deregulation led to excessive leverage in financial firms and were the primary cause of distortions in the real economy, is barmy. Contrast Volcker’s take with that of Meryvn King, Governor of the Bank of England in a 2009 speech:
Two years ago Scotland was home to two of the largest and most respected international banks. Both are now largely state-owned. Sir Walter Scott would have been mortified by these events. Writing in 1826, under the pseudonym of Malachi Malagrowther, he observed that:
“Not only did the Banks dispersed throughout Scotland afford the means of bringing the country to an unexpected and almost marvellous degree of prosperity, but in no considerable instance, save one [the Ayr Bank], have their own over-speculating undertakings been the means of interrupting that prosperity”.
Banking has not been good for the wealth of the Scottish – and, it should be said, almost any other – nation recently. Over the past year, almost six million jobs have been lost in the United States, over 2 ½ million in the euro area, and over half a million in the United Kingdom. Our national debt is rising rapidly, not least as the consequence of support to the banking system. We shall all be paying for the impact of this crisis on the public finances for a generation.
To put none too fine a point on it, King is the top central banker an a country where financial services constitutes a bigger proportion of GDP than the US, yet he does not hesitate to place blame for the crisis where it belongs, on the banks (and he is willing to eat crow for regulatory lapses). Volcker, by contrast, offers a critique which is hardly controversial, yet gives the industry a pass.
The reason Volcker’s speech was greeted with overdone enthusiasm is that Americans are fed such a steady diet of propaganda by the officialdom that anything that bears some resemblance to observable reality is bracing by mere virtue of contrast.
California Employment Hooks Downward Once Again
Last month I suggested that the little hook downward in California employment, reported for July, was a troubling sign. Today, fresh data was released from the State of California, and the downward move has continued. Whereas employment levels had just managed to hang on above the 16 million person level in July–in August they slipped back below, to 15.968 million. | see: California Employment in Millions 2000-2010.
Let’s consider the context here. Lower interest rates and several trillion in monetary and fiscal stimulus over three years has produced, at best, a small but brief cessation of job losses in California, the largest state in the union. As my work here at Gregor.us has also shown, over the past year and a half,
California is one of a handful of states that is extremely sensitive to the price of oil. 75 dollar oil is too high for California’s economy, which is massively leveraged to a road and highway transport system that was built out on 12 dollar oil.
Meanwhile, a severe debt-deflation remains underway in California as asset values in all real estate continue to fall from highs that will never be seen again–not in real terms, anyway. The headwall to any improvement in job creation largely comes from these two factors. And, helps us make sense of the following fact: in August of 2000 the total number of employed persons in California stood at 15.994 million. And in August 2010? Answer: 15.968 million.
Hark back to the post- ‘Dot- Com’ recession period noted by Paul Krugman and others at the time as a ‘jobless recovery’. Declining relative employment along with declining small business prospects has been a characteristic of the Anglo- American business model since 2001. The following remarks are from ‘The State Of Working America 2004/2005 (Mishel, Bernstein and Allegretto):
In contrast, since 2000, unemployment has been high (relative to the precedingperiod of full employment) and not responsive to the productivity growth thathas occurred. In fact, the unemployment rate of 5.6% in mid-2004 stood at precisely
the same level as that of November 2001, when the recovery began. Thegreat American job machine was uniquely dormant for almost two years into thisrecovery, with consistent job creation finally occurring in the fall of 2003. Sincethen, the U.S. economy has added 1.5 million jobs, yet it remains 1.2 million jobs
below the last business cycle’s peak employment level in March 2001. The UnitedStates has been tracking employment statistics since 1939, and never in historyhas it taken this long to regain the jobs lost over a downturn.This persistent labor market slack and its negative effect on wages andincomes is a central theme of this book and is explored throughout the chaptersthat follow …
What would be a cause of market slack? The conventional answer is the taxation ‘effect’ of finance on the productive economy. What about energy prices? Here are your oil prices since 1998 courtesy of the US Energy Information Agency:
You can see the steady increase in price from the low in 1998 of $12 per barrel to the $99 average price for the year in 2008: this represents an 800% increase in cost. That cost came out of everyone’s pocket since all of us ‘use’ (waste) petroleum.
There is an assumption that any increase in the final price of any good or service affected by input costs will simply ‘stick’. If gasoline rises to $4 a gallon in the US the drivers will pay the price and any (small) effects will be absorbed into the economy as a whole. There might be ‘inflation’ (where wages eventually ‘catch up’ to the price increase) but there would be little long- term cost to output.
In an energy context an asset bubble ‘hedge’ would inflate asset values faster than any increase in the input costs of the assets themselves. The bubble would reduce the amount of slack in the productive economy. Artificially creating demand in the real estate industry would – and did – reduce unemployment.
Both the assumption and the bubble together have tended to make the effect of higher input prices invisible; the economy cannot ‘render’ costs that are not paid; nor account for payments that are never made! What is rendered instead is the failures of the businesses whose payment stream falters, jobs which are lost as a consequence. Jobs are not lost when the worker(s) are fired but when the business that employed them loses customers. The payments that are not made represent profits not gained by the businesses.
Without profits there are no businesses.
Instead of looking at business and the ‘tax- like effect’ of higher energy costs (in addition to the tax- like effects on business of the finance hedge created to offset higher energy costs) the establishment continually focuses on the pump- price of gasoline. Business customers may indeed be able to afford the gas but cannot afford to buy the new cars and trucks, the new stores and shops, the new capital goods or new hires. It has been the steady breakdown in these business categories that has been accumulating, that had reached a critical level of imbalance prior to 2007, when the finance ‘hedge’ against higher energy costs finally came undone. Indeed, finance bears a lion’s share of the blame for the current breakdown but credit (get it?) must be given to finance for keeping the economy afloat during much of the post- 1998 period.
Just as the ‘off- shoring of labor’ hedge is currently keeping the US economy afloat now! We decry the loss of jobs but the energy- overpriced US economy cannot afford US workers at anything like US wages and benefits.
Consider why the finance mega- structure was created in the first place. Greed is good, but … why abandon (energy- saturated) real production in favor of asset price inflation if real production is … really productive? The country sent its productive industries and skill base overseas to Mexico and China. Along with the asset price bubbles, outsourcing expensive labor is another hedge against higher energy costs. Our country wrapped the only form of real production that could not be exported – the construction of millions of redundant houses all over the landscape – around a financing asset bubble. How can the entirety not be considered an ‘imbalance’ in the light of energy constraints?
Here’s Floyd Norris of the NY Times:
Recessions and Recoveries Are Not All the Same
By FLOYD NORRIS
In the old days — before 1990 — American recessions tended to be fairly sharp. But the recoveries, when they came, were also rapid. Laid-off workers were recalled and consumers who had deferred purchases out of fear they might lose their jobs were willing again to buy cars and homes.
Click here for a gigantic version of this chart that opens in a new window!
The newer version of recessions — in 1990-91 and 2001 — provided shallower downturns. But the aftermath was also slow and painful. They came to be known as jobless recoveries.
The National Bureau of Economic Research determined this week that the recession that began in December 2007 ended in June 2009. That made it the longest downturn since World War II, and data had already shown it was the deepest in terms of decline in gross domestic product. And now that we know the recovery is more than a year old, it appears that this cycle is combining the worst of both worlds: deep fall followed by slow recovery. There are many reasons for that, and some exceptions to the pattern. Manufacturing appears to be recovering faster than it did after the two recent recessions. But construction, which had boomed to a greater extent than ever earlier in this decade, remains more depressed than usual.
Failure of the housing bubble was inevitable. Houses dressed up as ‘investments that can only go up in value’ were waste enablers: more destinations alongside more highways flooded with automobiles all mindlessly dancing that Dance of Death that is our increasingly energy- stranded ‘civilization’.
What’s next? Accountability for finance is an obvious answer but this must take place alongside an acknowledgment of the imbalances as well. Perhaps Mr. Volcker was not concerned with energy inputs – these seem far away from the problems of banking, credit and currencies – but re-balancing away from waste is not an option any more. We conserve or else our nation perishes …