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.


19 Responses to “Rates of Return”

  1. vera says:

    Admittedly, this is a weird thought. But it keeps resurfacing as I follow these grotesque shenanigans. Are these people actually aiming to bring the system down? Could it be that somebody somewhere recognized that the system is completely unreformable, and ruining the earth, and that the only way to stop
    it is to bring it down? I mean, anti-civ people like Derrick Jensen ought to be applauding. Eh? After all, no clique of anarchist hackers could possibly do a better job!

    If a system keeps doing something long term, at what point do we stop crying “morons” and entertain the possibility that the results produced are actually results meant?

  2. Shamba says:

    I had an interesting experience at a Wells Fargo bank this morning. I don’t have an acct there but I’ve had a safe box there more years than I care to admit to but I haven’t been able to find the key since last year when i paid the bill for the box. I’ve looked everywhere and anyway, I just had to go to the bank and see what I could do about it. It turns out they have to have a locksmith come and drill out the old lock at my expense but it was worth it to me to have it done, I had to find out what exactly was in this box because I just wasn’t exactly sure anymore. (cost by the way was $125)

    The job was done this morning and the locksmith and the young woman, personal banker is her title, were pleasant and professional and very helpful. I found out what I needed to know and got the lock rekeyed and new keys. While I waited for the new keys, the young woman and I talked. I think she must have been in her mid-30s, nice looking and professional clothes. She’s going to Iowa, where she’s from in a few weeks to see her family and decide what to do about a new start there or somewhere else.

    She’s had a house foreclosure, personal bankruptcy and a truck repossesion in the past few months to a year. She also had a divorce not too long ago and she’s living with a boyfriend in a rented house (for a very cheap price, I thought). Boyfriend in construction hasn’t had work for months, he’s going to Iowa with her. she was able to get a new vehicle, she was suprised because her credit is shot but of course, car sellers want to sell rather badly these days. And the vehicle she bought was a Suburban. She may have a good reason to need a vehicle that big or not, I don’t know. What astonished me is that someone so young had gone through all of this in the past year or so! (She’s only been in banking for a year she said. Her background was in real estate.) She said everyone she knew was in the same circumstances. :(

    There it is for what it’s worth, I wished her luck in Iowa ( I don’t know if a farm plays in her future or not) and that she can truly find a new start.

    And I need to go check on how much brown rice I have these days … :)


  3. Bart Anderson says:

    Good question - why isn’t there a rational response?

    I think the reason is that we are a deeply irrational society (see the BBC documentary “Century of the Self” by Adam Curtis to see why). http://video.google.com/videoplay?docid=8953172273825999151

    In this case, we don’t have a rational response because of:

    1) The tremendous amount of power wielded by the banking/finance industry.

    2) Lack of a real Left which is able to critique capitalism and overcome the taboo on talk of nationalization or giving money to a broad section of the population (vs banks)

    Even the mild talk of partial or temporary nationalization by figures like Steiglitz and Krugman is ruled out of bounds.

    If we are not able to think clearly about economics, then we flounder about with fantastical ideas of plots, blaming particular people, etc.

    If the situation continues to deteriorate, then we will see the revival of ideas from the 30s, like socialism and fascism.

    Bart / EB

  4. Coy Ote says:

    Vera… “Are these people actually aiming to bring the system down? Could it be that somebody somewhere recognized that the system is completely unreformable…”

    I have entertained that thought from time to time. Along with this one… the system is just a giant evolved complicated entertwined mess that noone either in or out of the financial world knows what to do with.

    Ilargi is spending a lot of time lately kicking around “the three stooges” as he says, Geithner, Paulson, and Summers but honestly aren’t they (even if totally wrong) just doing what economists have been doing for decades now?!

    Dan W is convinced we’re going to war in Pakistan-and soon. And if you think about how we came out of the Great D via WW II perhaps he is right.

    Bottom line…. Who knows? !

  5. Henry Warwick says:

    OK, so I’m a guy, and I’m typical in some ways, where when there’s a problem, I’m not interested in sharing, I’m interested in a solution. After some consideration, this is my solution to the present crisis:

    1. Nationalise the banks, forthwith. They will no longer be “for profit” institutions. Since they don’t need fancy investment instrument designs, they don’t need hotdog CEOs etc. Therefore: they keep their jobs with a top salary of $300k p.a. They can’t make a living on that? Fine. Leave. In this model, they’re little more than managers anyway. We don’t need geniuses running banks, we just need people who are competent.

    2. By nationalising the banks the USgov repudiates the bank debt. Life continues on, the Chinese still own huge amounts of American Paper, and they will get paid. Over Time. Like everyone else. Because this is money eating debt, it has no velocity in the economy and will not result in inflation. Allowing for low interest rates to boot.

    3. And the money? Next step: disband the Federal Reserve. The USgov will be responsible for its money supply.

    4. Nationalise Health Care. Face facts: This whole nonsense about “your health care decisions should be between you and your doctor” is total freaking bullcrap. You know who makes your health care decisions? The insurance company. I would absorb the health care industry directly (on the one end) and I would get really pretty damn stiff with Americans on the other end. But a lot of that will fall out naturally.

    5. Gas will be USD$5 gallon. If gas is cheaper than that due to over production or demand destruction, then the remainder goes directly into alternative energy systems. No ifs and or buts. If it is over $5, then it rises to what ever price that is.

    6. Car makers will do chap 11, and restructure under strict supervision. The focus will be: the development of hybrid trucking to last 10 years to be replaced by electric vehicles and electric trains. The largest private vehicle will be the equivalent of a minivan. Gas will be rationed, viz WW2. The auto industry will focus on making superlightweight electric vehicles. Electric Bicycles (viz Stokemonkey or Crystalite systems) will be subsidised and encouraged, as well as enclosed electric tadpole trikes.

    7. The USA will abandon Empire. The Pentagon will cut its budget by 50% a year until it is the size of the Chinese rate of spending. American Troops will be brought home, decomissioned, and retrained for the powerdown.

    #7 is actually #1, but the banks need attention.

    The above should result in a vastly improved economy.

    Jeavons is correct if prices are stable or supply meets demand, on demand. When that ceases to happen, conservation is the only path to economic growth: if demand falls below production consistently year over year, then conservation will result in “economic growth”. Such a curve is not sustainble due to granularities in energy requirements - i.e., you can only drive down the energy curve so far before people die of starvation. These inelasticities can be seen as “granularities”: things that don’t divide.

    But we are FAR from there (yet) and once we get a new energy / economic regime into common practice, then substitution can come to the fore and the machines can run, albeit fewer of them, and on a tiny fraction of the energy they once used - it will never get to granularity.

    What I described above can happen and work. I would expect countries with more centralised govts (China, Russia, etc.) would do the above by decree. Nations filled with citizens may also find the political will to co-operate and bring the system down to reality. (Denmark, EU, etc.) but nations composed of TAXPAYERS, are screwed, as they have replaced their social contract with an economic one: they buy gov’t services as consumers. And consumers want one thing: SOMETHING FOR NOTHING. Hence, countries with taxpayer mentalities will fail.

    That’s my opinion and I’m stickin’ to it… for now…

  6. Brad K. says:

    Vera, Coy Ote, I don’t think these people believe that anything has changed.

    The Clintons grew up around organized crime in Arkansas, Obama comes from Chicago (The governor, the vacant senate seat - does anyone really believe Obama wasn’t playing with the Chicago “boys” before he got elected - or since?). They have no conception of anything beyond working the system for immediate gratification, for servicing their ambition, or for general personal aggrandizement.

    They don’t believe anything can fail - their focus is on what they can get out of what can be made available.

    Ah! The word I was looking for was “corrupt”. Situational ethics comes to mind, too.

    “Don’t attribute to evil, what can be explained by sheer ignorance.” It can be a simpler way to live.

  7. Greg B. says:

    You wrote:
    “…with a very severe, deep and protracted U-shaped recession. Last year’s economic consensus forecast of a V-shaped short and shallow…”

    Trying to define such big drawn out events with simple shapes like U or V often causes people to get into financial booby traps. It leads people to believe that a turn is THE turn. That the latest bottom is THE bottom, or current top is THE top.

    The shape is better explained as a distorted W, or even better as a V made with lightning bolts. Like this: \
    \ /
    \ /\/
    \/\ /
    …and we are only in the first little bear market rally (seconf line down) Bbut in a month or two you will start seeing news reports about how the “Bull Market” is back and ready to shoot for the sky. That’s the booby trap that many will invest into and unfortunaly lose in.

  8. Stephen B. says:

    Well, I for one think I was growing a bit complacent as things “bottomed out” in the past few weeks. No, I didn’t actually think we had reached any kind of bottom, but did actually, for a moment perhaps, in the back of my head, think the free fall had been arrested in some kind of way. But just when you think you’ve read enough stuff on the Internet to sufficiently numb the brain, you come across something big.

    There was this piece http://www.energybulletin.net/node/48731 posted over on Bart’s EB a few days ago by Michael Lardelli reminding us once again how energy is simply everything to the world economy. Towards the end, it had this graph: http://www.onlineopinion.com.au/images/article-images/Lardelli_09_04_23_6.jpg of EROEI of the various world energy sources and how said EROEI is about to fall off a cliff. Now, this wasn’t exactly news to me and I doubt it’s news to most here, but somehow I guess I needed a dope-slap-reminder on the subject and that article provided it all too well.

    Keep at your community and personal preparations folks because it’s all gonna get UGLY. There’s just no doubt about it.


  9. Greg B. says:

    Darn, the formating in my message above messed up the picture I made with the slashes :(

    Anybody know how to make and post something like this and defeat the default formatting?

  10. Stephen B. says:

    Well, reading the Der Spiegel piece http://www.spiegel.de/international/world/0,1518,620754,00.html Sharon referenced, of course it already IS very ugly, depending on one’s personal situation, not to take away anything from what others have already suffered.

  11. Kate says:

    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.

    Sharon, I am so glad to hear someone else saying this too. While it’s not a popular view at present, in real terms this is so true. Allow me to explain,

    When I received last year’s stimulus, I was able to pay down some outstanding household debt. Sadly, so far, those funds were the last extra (meaning non-necessary to actual existence) dollars I have seen since. And my situation is by means unique.

    Many other folks I know used their Bush funds, not to go shopping for big screen televisions or vacations but to get medical/dental care and prescription drugs. Most felt at the time this might be their last opportunity for a while and most have been correct. For an increasing number of adults, the choice of taking care of their health is being edged out by other more pressing demands such as food, shelter and energy.

    I personally find it ironic that the financial crisis is blamed (in large part) on the massive over-indebtedness by the consumer. Yet, all talk of solutions focus exclusively on encouraging further borrowing. In fact, the consumers ability to pay this debt gets squeezed tighter each passing day.

    If the problem the banks really face is the specter of massive consumer default, then why (oh why) is not the entire machinery focusing on making sure the consumer can pay down the debt (instead of actively working against this)? Would not this seem to be the best way for ensuring everybody wins? Consumers pay off existing debt, *voila* no loan default crisis. Once no longer over-extended, they will within a couple years be ready to resume major purchases to replace aging merchandise, etc.

    If the problem the banks really face is that the golden goose cannot lay eggs at ever-increasing speeds, it’s certainly no excuse for choking it to death.

  12. jerah says:

    Swine flu! I’ve been waiting and waiting to hear a news story on bird flu being transmittable human to human, since that would pretty much mean a pandemic, and silly me, it’s not bird flu this time. It’s swine flu, just like in 1918.


    Heading out to stock the larder (if I can call my apartment’s closet a “larder”).

  13. Mark N says:

    Pandemics…just one of many possible scenarios where we are not attempting to feed 9 billion people.

    Here’s to being fit, healthy, and having a strong immune system…possibly the best rate of return of all.

  14. Pangolin says:

    I think the human race is getting it’s occasional lesson in the folly of fiat currency. Our monetary system distorts the distribution of labor, goods and services and far too great a percentage of the worlds resources have spent the last few years chasing phantom dreams.

    Now that the bubble has popped the people who gained power organizing the dream hunts are reluctant to direct the world to do anything else. They are going to print cash and throw it on the banking bonfire they have created until the populace demands they do something different en masse.

    The ‘free market’ hasn’t created jobs in years; government action has. The free market runs mergers, fires half the staff and spends the savings gambling on derivitives. We are nowhere near capitulation of the political and financial elites to new realities. Everyone is pretending things will go on as normal.

    With any luck this swine flu scare will just be a scare. If it truly is a pandemic we’re truly deep in the manure pile with a pickle fork.

  15. Jerry says:

    I too agree with the fact that bailing out banks and GM along with AIG is pure folly. It hasn’t dawned on Obama that trying to sustain the unsustainable will not work. We really need to localize food production and rebuild our railways so that we can function in an energy starved world.

    The average person doesn’t have a clue what is in store for him or her when oil is going to either rationed by the Feds or by price. I am definitely cutting more wood for the upcoming winter and planting more potatoes with my brother. This summer’s project is to build a root cellar.

    Henry, I agree with your point of view especially health care and nationalizing the big banks. I say let the banksters all rot and bring all CEO pay back down to earth. I can’t believe they make so much money when banks are writing off so many bad loans.

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