This graph from Calculated Risk is getting uglier and uglier:
In the words of the Oracle:
Billionaire investor Warren Buffett said on CNBC that the economy “has fallen off a cliff” and that Obama’s team is sending some mixed signals about its approach, hurting confidence.
“The message has to be very, very clear as to what government will be doing,” said Buffett, an informal adviser to the White House. “And I think we’ve had – and it’s the nature of the political process somewhat – but we’ve had muddled messages and the American public does not know. They feel they don’t know what’s going on, and their reaction then is to absolutely pull back.”
I suppose the good news is that compared to all the examples provided in that chart, we are probably at the halfway point. Who knows, though, really? Is it wrong to view this as the “correction” (and that may not be the right term) for both bubbles? And what will the basic economic structure look like when it is all over? Will we end the “too big to fail” practice? Are the days of global ginormous financial institutions over? Has anyone heard anything about a new regulatory structure, or is it just too early to worry about fire safety while the house is still burning down?
I sort of have the feeling that there just isn’t much that can be done to stop the current disaster, and while it is important to try to make this as painless as we possibly can, what is probably much more important is how we rebuild.
The Grand Panjandrum
(via NY Times)
The opening paragraph:
There is no doubt you will see new regulations. I am a little surprised they almost immediately didn’t reinstitute Glass-Stegle (sp?) but it may take some time to figure out how they will handle derivatives and other stuff like that. It is not line we have had an opposition party the last 30 years thinking about and holding hearings on possible regulations, so there really is nothing "in the can" like the Dems have for health care.
Billy K (D-TX)
Totally true. The problem is, we’re about to let the rebuilding be done by those that caused this disaster.
What is most important right now is that we all learn how to use clear 2 liter bottles to decontaminate potable water, search for grubs and edible roots, and gather up as much necessary vitamin supplements as to assist us with better night vision so as to avoid large urban predators.
OT, but Obama is walking and chewing gum again at the Dept. of Education! ZOMG! Don’t tell David Brooks!
In addition to today’s news that man bites dog, and the sun rises in the East, there’s word from the Republicans that they are sure to oppose everything and anything Obama proposes no matter what its promise or projected assistance to be, no matter when, where, or how he proposes it.
So Obama’s got that going for him. Or not.
If we let enough banks fail, the market will clean itself out and we’ll be fine.
Yes. Exactly. I don’t know how we should do that, but it’s pretty clear that what we’ve had for the last ten or fifty years did not work. Sure, it worked for the time it was working, but in the long run is it good to have massive bubbles develop and then pop and tons of people get hurt and lose their homes, etc.? Probably not so much.
I don’t know how we can avoid bubbles – they’ve been going on since the days of the Roman Empire – but maybe there’s some way to make it all work better. Will the guys in charge now be able to sort it out? Not holding my breath.
If you view the sinking of the Titanic as the "correction" that got ocean liners to carry more lifeboats, then, yeah.
How will those who are already railing against mortgage bailouts, and those railing against the s-word feel about having their tax dollars spent on the seemingly inevitable soup kitchens and shelters for homeless families? Will they, at long last, reveal that they have no decency? I will hate to see more Americans reduced to needing such aid but the hundreds of thousands who needed it when we were riding high certainly didn’t seem to be much of a concern. The cynic in me says that as long as none of the chattering class winds up in those breadlines the blame will go to Obama and to the needy.
I don’t think we can say we are halfway there, or anything really. That, to me, is the underlying cause of lack of confidence, not the government’s inability to articulate a clear path to recovery.
The chart only shows some of the major market events (it totally leaves out the 89′ Black Monday correction, for instance). The real issue is that each and every ‘correction’ follows its own unique path, and indeed ‘past performance is no indicator of future results.’
However, even given that, taking into account the widely diverse areas of the economy across a very broad swath of industries that are all currently in distress, plus the global nature of this financial event, I cannot bring myself to believe that there will be a significant recovery starting until at least 2 -3 years from now, and maybe as many as 5, again just for the recovery to start.
Small nit: CR actually links that from a guy named Doug Short, who runs a financial planning site at dshort.com.
It’s worth a skim if you want all the financial badness in one conveniently apocalyptic place.
Yeah… I’m really getting the feeling that if this is a forest fire, it’s time to start wetting down the not-yet-burning houses and just hope that the ash fertilizes the ground for the future.
God, is it going to be hot for awhile, though.
How can any one country stop too big to fail? This requires global action, and that requires the UN.
Of course we can’t "stop" the disaster, that’s been clear for a while. But it makes a difference if it goes on for a few years, versus say a decade, like the one Japan experienced. Richard Cohen compares are experience to theirs.
More importantly, maybe it’s too much to hope for, but I wish we could learn from this that it’s a hell of a lot better to anticipate possible trouble than to wait for the disaster and try to dig our way out. I’m thinking here of global warming, and our long term relation with the planet and it’s resources. The stakes there make the one’s were dealing with now look like a few peanuts.
Halfway? I doubt it.
We are well and truly fucked.
Yes, as long as we don’t forget the tax cuts, and also have a moratorium on government spending.
Last but not least, let’s get that wall along the Mexican border finished.
John, you neglected to link to a few other pithy pieces of that interview. While Buffet reitereated his support for President Obama and still thinks he’s the right guy for the job, he’s got a problem with his priorities and compared the situation to Roosevelt’s response to the Japanese attack on Pearl Harbor.
Shorter Buffet: Quit throwing all the other stuff you want to do (health care, energy, education) at us right now, because fixing the economic meltdown right now is the most urgent challange we face. If this doesn’t get fixed first, the rest won’t matter.
Church Lady: "Shorter Buffet: Quit throwing all the other stuff you want to do (health care, energy, education) at us right now, because fixing the economic meltdown right now is the most urgent challange we face."
Which is of course bullshit and just another in an apparently infinite series of excuses NOT to fix healthcare or education at all. The money is done gone, and if we wait until the pre-arranged/plotted/planned economic catastrophe is "solved" then there won’t BE any money for rebuilding America.
Plus, Obama isn’t actually doing each thing himself. And he isn’t "throwing" anything at us. And Warren Buffet is a King Tick wealth-mongering hack who can’t be trusted. So go say a prayer for greater insight, Church Lady, because the Right truly did destroy our world … again, also.
Rebutted many places, but I’ll paraphrase what Obama has said:
Health care, energy, education and all the rest are part of the economy. Pretending they’re not is just putting on a bandaid and leaving a bigger mess down the road.
@Church Lady: Buffet’s point makes sense on a basic level, but it misses the mark. Comparing a broad, complex, and gradually unfolding situation like the current economic/financial one to an extremely acute and specific situation such as a military attack leads to all sorts of false equivalencies. It makes far more sense to compare the current situation to the true cognate of the Depression and how Roosevelt addressed that. And he did in fact address it in a very broad manner, encompassing arts, science, infrastructure, engineering, etc.
To say that, by addressing issues and problems that aren’t solely financial in nature, Obama is falling short in his duties is both shortsighted and mistaken. As Roosevelt did in fact show, a broad approach to solving a broad problem is effective because it accurately diagnoses the nature of the problem. Additionally, it makes no sense whatsoever for the other, non-financial/economic personnel in Obama’s administration to sit idly by as Obama and his financial team focus exclusively on the economy. The whole idea behind a cabinet structure is that the responsibility for carrying out the varied and myriad policies of an executive administration is delegated to people who specialize in the areas in which those policies are focused. Obama outlines his initiatives to his cabinet members and announces them to the public, and it’s up to the various departments to do the rest. If he were to make the mistake of micromanaging the way any of these initiatives are carried out, that of course would be a different story. I have yet to see evidence of micromanagerial tendencies on his part, though.
The main point I’m trying to make is this: To see the current situation as Obama throwing too much at us is bass-ackwards. What Obama is doing is identifying individual issues and throwing the (considerable) talent resources he has on hand at them. If it all seems overwhelming to us observers, then, frankly, that’s our problem, not his.
You keep saying this and I think it misses the point. Of course we can’t avert the coming recession. That’s a given; the time to do that if it was ever possible was a long while back. The big question now is where will we be in 2020? An in adequate response now could stretch the pain into the next decade.
I agree, but for different reasons. Warren Buffet always talks his book. In other words, he’s always talking up his portfolio. The only reason Buffet had anything to say by going on CNBC for an "exclusive" interview, was because of the beating he was taking. I’m not completely positive, but this has got to be one of, if not the worst, beatings that his company has taken in such a short period of time.
One of the ways investors gague fear in the market is the "VIX", which is an indication of volatility. The higher the VIX, the more fear, and vice versa. Back in October/November when the markets were imploding, it was around 89 at the peak. The markets rebounded a bit. The VIX is near 45 today. Not even close to capitulation. The market won’t even sniff a bottom until that fear is realized again.
You can’t use historical graphs to predict future events. And keep in mind that the economy is foundering even though there are many post-Depresssion regulatory mechanisms in place.
Meanwhile, there are more and more signs that this is a global financial meltdown. I’m surprised that there is not more of an effort at a co-ordinated international response.
More importantly, maybe it’s too much to hope for, but I wish we could learn from this that it’s a hell of a lot better to anticipate possible trouble than to wait for the disaster and try to dig our way out.
Greenspan’s official stated policy was to do nothing while bubbles formed, but to take action to clean up the mess afterward. The man must have been smoking something illegal to think he could clean up 600 trillion in CDS’s with a world GDP of 80 trillion to do with it. What a maroon.
The one, single key new law we need is: no one is allowed to get too big enough to fail. No one. Period. If we get that one lousy thing out of this, things will be better in future fubars.
Last but not least, let’s get that wall along the Mexican border finished.
Yes, we absolutely need to keep our citizens from fleeing.
@Olliander, Obama has to throw money at something that has a chance of paying out later. Universal health care pays out for small-medium sized business, alternative energy pays out when when oil shoots back up again at the end of the recession. It should be thrown at planting trees like last time?
All the forests around where I grew up in Mich were CCC planted, so I’ve certainly enjoyed their cool shade if not their slightly overly-orderly beauty… but it seems a limited vision on what we are capable of as a people.
We should have instituted uni health care twenty years ago, but we didn’t have the political will for it. We should have upgraded the nation’s sorry arse electrical grid when Y2k revealed how untenable as it was, but a few rich new-ruralists whined too loudly about high-tension wires, so we didn’t. We have a tiny window here where political will against desperately needed upgrades has been swept aside. I say use it.
@Ash Can: I think the point Buffet was trying to make is that until a plan is put into place to stabilize the financial markets, they will continue to fall in search of a bottom. As the fall continues, it will draw more and more different sectors of the economy into the pit, making the bottom harder and harder to find. If a plan to reassure the markets and stop the fall, thus finding a bottom, doesn’t happen before everything else gets taken down with it, there won’t be any money for the government institue any shiney new programs, much less continue funding for the ones already on the books. Buffet is prioritizing.
@Church Lady: I think you have a good point. I happen to disagree with the point, however.
The stock market has been disassociated with the economy for quite some time. Typical P/E ratios of today would be seen as reasons to flee stocks as recently as 15 years ago. Yes, the market swings on emotion, not reason, but that’s an even better reason to avoid supporting it till fundamentals – that is, OTHER economic issues – are stabilized.
There is, in my opinion, far too much belief that "what’s good for wall street is good for America" in the eyes of the pundits – much as the only opinions that matter are those in DC. Buffett’s comments reinforce this opinion, and I’m willing to see it tested.
Except that nothing short of, "Hey, we’ll give each of you guys $10 million apiece" is going to reassure the markets.
It’s just barely beginning to dawn on Wall Street that all of these "assets" they’ve been trading are, in fact, worthless. If you sell a $300,000 mortgage 20 times so it’s "worth" $1,000,000 on paper, that doesn’t change the fact that you really only have $300,000 and the rest of the money tacked onto it is imaginary.
Oh, and what Kirk said, too. The traders on Wall Street have been gambling with other people’s money for years now, and now everyone is discovering that what they were really doing was drawing credit from the casino and didn’t have any actual assets to cover their bets.
If you think of Wall Street as a giant casino — which is what it is — it all makes a lot more sense as to why they refuse to face reality. They’re convinced that all they need to do is get one more good roll of the dice or spin of the wheel and they’ll be able to cover their losses.
Wile E. Quixote
So the markets are up today, in part supposedly because of the coming reinstatement of the "uptick" rule. I looked this up on Wikipedia and found the following:
How does the uptick rule work? If I short a stock, say Bear Stearns (to use Jon Stewart’s excellent example from last night). I borrow shares of the stock when it is at 69 dollars a share and sell them. Then I have a certain amount of time to return the shares I borrowed, hopefully by purchasing them at a lower price than I sold it at. So if I had shorted Bear Stearns at $69 and bought the shares back at $2 I’d make $67 per share I shorted. Right? How would having the uptick rule in place affect this?
@Church Lady: This is still a tail-wagging-the-dog scenario. Kirk Spencer @28 puts it much more cogently when he says that the financial markets will stabilize once the economic issues underlying them stabilize.
Financial markets don’t respond to plans, they respond to confidence. If a company is confident in its growth prospects (and its corporate finance associates agree), it will be willing to issue commercial paper. If investors share this confidence, they’ll be willing to purchase that paper. If broader indicators are trending positive — if unemployment is stabilizing, inflation is moderating, corporate earnings are firming — then stock and commodity indexes will start going up as well.
The financial markets may be a great way for businesses to raise capital to fuel growth (once those businesses meet certain criteria) and for investors to grow wealth, and they may be an good indicator overall economic conditions, but they are only an indicator, and hardly the only one. The markets are more dependent on the overall health of the economy than vice versa.
This is why I have no problem with Obama’s prioritization. Once employment levels off, people are working and bringing home paychecks and resuming normal lives, and businesses are seeing quarterly numbers go from red to black, the markets will follow suit. Obama is focusing on the fundamentals of the economy. I don’t blame Warren Buffet for feeling uneasy, but I think Obama really is focusing on the actual root of the problem.
@Wile E. Quixote:
It wouldn’t, if this is all there is to your scenario. If a company reports godawful earnings numbers without warning, loses a huge chunk of business, or has its corporate boardroom raided by the feds live on the network news, that stock’s gonna tank, period. What the uptick rule did, basically, was to stave off panic. Short selling is, essentially, placing a bet that the stock in question will decline in value. Without the uptick rule in place as a dam of sorts, avalanches can occur in individual stock prices when a trickle of short selling becomes a cascade becomes Niagara Falls, as more and more investors say to themselves, "Geez, a lot of people are looking for this stock to tank; they must know something I don’t." Add this to the fact that trading activity moves very quickly and turns on snap decisions, and you have the potential for individual stocks to get pounded straight into the ground by unchecked spates of short selling.
Nobody knows right now. Will this be a recession, or a depression? Will it be U shaped or L shaped? Will we get 10 years of miserable stagflation like the "lost decade" that hit Japan from 1989-1999? Will we get hyperinflation, like Germany in the 1920s? How bad will unemployment get — 20%? 25%? 35%? 45%?
In a fairly famous article, Bill Gross (world’s biggest bond investor, the PIMCO guy) calculated that back in 2002, at the full blast of the bubble, fair value for the Dow was 5000. What’s the fair value of Dow today, now that the baltic dry index has collapsed by 96% (i.e., world trade has just about dried up)? 3000? 2000? If we go by the low point of the DJI in the Great Depression, that equates to around 1200 in today’s market, correcting for inflation.
We do have a few hard data points. Global markets lost 50 trillion (with a T) dollars worth of assets last year. Export-driven economies have fallen off a cliff, and the evidence appears to indicate that export shock will continue to hammer the global economy for the foreseeable future. Looks like a lot of the workers we’re shedding right now, and many of the industries that are downsizing, aren’t coming back — they’re just going away. Retail sales? Probably going to be replaced by online purchases. Realtors? Forget that job description, we’ve got 15 million empty houses, the housing glut will take another 30 years to wind down at current population growth rates. Financial services? Think grameen banks, that job description is probably dead. Software engineers? Think open source peer production — linux. Those jobs are going away, the stuff is becoming free. Journalist? That one is already dead, stick a fork in it, newspapers will be gone within 10 years, replaced by online (whatever). Blockbuster movies? Think YouTube, people aren’t going to be willing to piss away ten bucks on a crappy superhero spandex schlock flick playing in a multiplex, not when there’s better stuff online done for free using Blender and Flash. Iron Sky, anyone?
We face a future of ever-higher oil prices, leading to ever-increasing costs to ship goods around the world. This has already put globalization on hold, and may eventually kill globalized trade as a going concern when manufactured goods simply cost too much to ship all the way around the circumference of the earth. There is some oil price at which that will happen: if not $147 per barrel, then $500 per barrel, or $1000 per barrel or $5000 per barrel. At some point, global shipping will become uneconomic.
A lot of smart sensible people are now starting to think that just as the collapse of the Soviet Union in 1991 proved communism was ultimately unworkable, maybe the meltdown of the global economic in 2008 proves that free market capitalism is ultimately unworkable. We tend to forget that a lot of the working parts of our society exist entirely outside the "market economy" memesphere: churches, public libraries, public schools, government-funded basic science research, university tenure and scholarship, marriage, family, arts and music grants, open source software development, credit unions, co-ops, NGOs like Doctors Without Borders. The idea that market capitalism offers a viable model for more than about 25% of our society just doesn’t pass the straight-face test.
Most of all, market capitalism proves unworkable when you have to keep the global growing and growing and growing until you fish the seas barren and pollute the land into a toxic moonscape and fill the sky with greenhouse gasses until the earth turns into Venus. Bruce Sterling summed up this suspicion that market capitalism has proven itself unworkable in his speech at Webstock 09:
After a while you have to wonder if it’s worth it — the money model, I mean. Is finance worth the cost of being involved with the finance? The web smashed stocks. Global banking blew up all over the planet all at once… Not a single country anywhere with a viable economic policy under globalization. Is there a message here?
Are there some non-financial structures that are less predatory and unstable than this radically out-of-kilter invisible hand? The invisible hand is gonna strangle us! Everybody’s got a hand out — how about offering people some visible hands?
Not every Internet address was a dotcom. In fact, dotcoms showed up pretty late in the day, and they were not exactly welcome. There were dot-orgs, dot edus, dot nets, dot govs, and dot localities.
Once upon a time there were lots of social enterprises that lived outside the market; social movements, political parties, mutual aid societies, philanthropies. Churches, criminal organizations — you’re bound to see plenty of both of those in a transition… Labor unions… not little ones, but big ones like Solidarity in Poland; dissident organizations, not hobby activists, big dissent, like Charter 77 in Czechoslovakia.
Armies, national guards. Rescue operations. Global non-governmental organizations. Davos Forums, Bilderberg guys.
Retired people. The old people can’t hold down jobs in the market. Man, there’s a lot of ’em. Billions. What are our old people supposed to do with themselves? Websurf, I’m thinking. They’re wise, they’re knowledgeable, they’re generous by nature; the 21st century is destined to be an old people’s century. Even the Chinese, Mexicans, Brazilians will be old. Can’t the web make some use of them, all that wisdom and talent, outside the market?
Market failures have blown holes in civil society. The Greenhouse Effect is a market failure. The American health system is a market failure — and most other people’s health systems don’t make much commercial sense. Education is a loss leader and the university thing is a mess.
Income disparities are insane. The banker aristocracy is in hysterical depression. Housing is in wreckage; the market has given us white-collar homeless and a million empty buildings.
The energy market is completely freakish. If you have no fossil fuels, you shiver in the dark. If you do have them, your economy is completely unstable, your government is corrupted and people kill you for oil.
The human trafficking situation is crazy. In globalization people just evaporate over borders. They emigrate illegally and grab whatever cash they can find. If you don’t export you go broke from trade imbalances. If you do export, you go broke because your trading partners can’t pay you…