Rates of Return
Sharon April 24th, 2009
Well, I admit, when I wrote my “All Better Now” post, even I was thinking that it might be a week or two before it became completely clear that we weren’t better. The bad news comes in fast, faster than your local apocalyptic prophetess of doom can even keep up with 
.
The worst news is not that GM is dead or that the government is definitely, absolutely not expecting Chrysler to go into bankruptcy(does everyone find that as reassuring as I do?), although that is very bad news indeed, especially for the midwest and for many, many aging pensioners. The worst news is that we finally have the beginnings of a tally of the rate of return on our investment. Oops, did I say return?
Here’s Ilargi over at The Automatic Earth (with a bit of help from Elizabeth Warren whose appointment to the government financial watchdog role, and whose blunt commentary are one of the few bright spots in this whole mess) on what we’ve gotten for our money:
“Six months ago, in October 2008, the IMF predicted that American financial institutions would have to write down $1.4 trillion in toxic loans and securities. Three months later, it increased the prediction to $2.2 trillion. We find ourselves another three months later today, and the number has risen to $2.7 trillion, or roughly two thirds of the $4.1 trillion the IMF claims will need to be written down globally. I don’t know about you, but I know a trendline when I see one: the chance that the IMF has this time gotten the numbers right, as in high enough, are zilch and nada.Of the “American” $2.7 trillion, about one third has been actually processed so far, which means US banks will need to write down another $1.8 trillion. Against that backdrop, we need to turn to Elizabeth Warren, who has estimated that $4 trillion has to date been injected into the US financial system. If we were to simplify the issue somewhat, we might say it has taken $4 trillion to write down $900 billion, and that’s without counting the remaining $8.8 trillion in loans that are floating out there somewhere in the economy.What we’ve seen the past few days are positive earnings reports form the main banks, which were so obviously founded on accounting tricks and other bells and whistle style decorating that Bank of America got rewarded with a 25% share value loss yesterday, basically for trying to fool the markets. Today is supposed to be Super Tuesday, the day that midsize and small banks come with their numbers. First off was Bank of New York Mellon, which reported first-quarter net income was down 51%. This should be fun.But it’s the larger picture emerging from all this that we should focus on. The $4 trillion the banks received so far under the guise of encouraging them to restart lending, the actual numbers for new loans are down 23%. Yet, here’s a New York Times headline today: “Credit Markets Still Sputtering, Geithner Says” You pump one third of the entire annual US GDP into them, they react by cutting lending 23%, and you call that “sputtering”? Let’s get a life, shall we, Tim?
In other words, it’s all been a complete failure….
Back to the larger picture: if commercial banks lend 23% less, despite all those trillions in incentives designed to make them lend more, the question arises: What is their core business, how do they make money? Right, by making loans available. So the less they lend, the less they are likely to recover or even survive. Catch 22,3,4. And how do you get out of that catch? By throwing in another $4 trillion? The first batch didn’t work, why would the second?”
Ok, so you invest 4 trillion to get 900 million of assets written off. Gee, anyone want to sign up for a mutual fund that gives that rate of return?
I think Ilargi has, with his characteristic bluntness, put his finger precisely on the problem. We have spent unimaginable amounts of money, and made unimaginable commitments to get us…a couple of little bumps in the stock market. If the Government had actually wanted to alleviate the crisis, they could have done so by disbursing the same money directly to consumers, or by using it to lend directly to them, it could have done so in a host of ways that would absolutely have been more successful than this one. I didn’t love the Bush disbursements, but let me stand up here and say that sending people cash is a heck of a lot wiser than flushing it down the toilet.
Meanwhile, in the real world, people’s lives are getting worse quite rapidly. Der Spiegel, in an excellent piece on the crisis’s effect on the poor and middle class, observes,
In New York City, soup kitchens must make do with sharply reduced budgets, even though demand for their services has quadrupled. According to the city government, free meals were provided to 1.3 million people in 2007. From October to November 2008, the number of New Yorkers living below the poverty line suddenly jumped to 3 million.
More recently, city soup kitchens have been literally overrun by their clientele. The Church of the Holy Apostles in Manhattan currently distributes 1,250 meals a day, but even that is not enough, says Joel Berg, director of the New York City Coalition Against Hunger. “Many people leave without having received a meal.”
Ilargi goes on to observe that the IMF is wildly understating the losses that American banks will have to absorb. Amd since the states are already struggling to keep functioning, and stripping benefits from the poor, rapidly undermining the social safety net from school kids, the elderly and the disabled and a host of others who can ill afford the losses. The Federal Government, losing revenue left and right, must sell more Treasuries than ever to keep afloat - even as other nations begin to pull back. Who will buy them? And who will pay the rapidly increasing debts?
All of our assumptions - every single one of our national and collective responses to this crisis has been built upon an overarching assumption - that things *will* get better and soon. Now I don’t swear this is not true - however, as I’ve pointed out before, the last two deep and major financial crises in the US essentially lasted a decade or more - both the Great Depression and the “two recessions with inflation and no real recovery in the middle” of the 1970s and early 80s lasted a full decade. Every plan we have made assumes that will not happen to us - but not because we have good evidence it won’t, but because we don’t want it to. Well, not wanting it is insufficient.
Of course, you could easily (and correctly) make the case this is typical. That is, our climate change policy has always assumed that we wouldn’t wait too long, we had plenty of time and that the optimistic and politically acceptable targets would reign. Our energy policy has always assumed that the optimistic targets for depletion and renewable energies would reign. Most of us live our lives on the assumption that optimistic assumptions about progress and wealth will be accurate. Thus, we do not have any sort of backup strategy, even of the most common sense sort.
In fact, we reject pessimistic outcomes in our basic assumptions - look at the constant crowing that US unemployment is nothing like the Depression’s 25% rate. Well, ummm…duh - that figure comes from 1933, four years after the stock market crash. If you figure our stock market crashed back this fall, in September, let us compare (we all know about Shadowstats, right, and that the US official figures are umm…tweaked). In 1930, within a year of the crash, the official unemployment figure was umm…. 8.7 percent.
What, seven months after our stock market crash, is the unemployment figure? Hmmm… the tweaked national figure for March was 9%. That is, we’re doing a little worse than in the Depression for the parallel point in the crisis. Does this mean we’ll end up with 25% unemployment? I have no idea, and I don’t claim to - but I do know that comparing irrelevant statistics out of context doesn’t really do much but screw with people’s understanding of events - which is probably the point.
Nouriel Roubini’s latest forecast does predict an eventual, slow, sluggish recovery - assuming, of course, that nothing else bad happens. That definitely sounds like what we want to bet on, right?
My analysis of the data suggests that the global economic contraction is still in full swing with a very severe, deep and protracted U-shaped recession. Last year’s economic consensus forecast of a V-shaped short and shallow recession has vanished. While the rate of economic contraction is slowing compared to the free fall rates of the fourth quarter of 2008 and the first quarter of 2009, we are still a long way away from the economic bottom and from a sustained recovery of growth. In particular, in Europe and Japan there is little evidence of a positive second derivative of economic activity.However, by the end of the first quarter of 2009, there were some signs that the pace of contraction had slowed in many economies, especially in the U.S. and China, where policy responses have been more significant and leading indicators in the manufacturing sector may have bottomed before they did in Europe and Japan. However, major economies, including all of the G7, will continue to contract throughout 2009, albeit at a slower pace than at the beginning of the year. Moreover, the global recovery might be sluggish at best in 2010 given the overhang of the credit losses of financial institutions, the lingering credit crunch, the need for retrenchment by overstretched and over-indebted households in current-account-deficit countries, and a slow resumption of demand prompted by extensive government stimulus.
It is simply common sense to have a rational backup plan for an extended economic crisis without an easy recovery, or a series of ever-deeper recessions that cover a decade or more - period. And it is also common sense not to put all your eggs in one basket. We’re gearing up for a bigger crash than we needed to have. And that’s something, coming from me. There are going to be a lot of broken eggs.
Sharon