Flying Pink Unicorns

2012-01-03T09:16:00.000-05:00

Two hot new investment ideas for 2012.

Happy new year blog followers! I know I don't post frequently anymore. Happily, I've been very busy working, as well as with life, so I don't have the free time I used to to put together detailed long blog posts on the issue of the day. But there are a few killer investment ideas that I just have to share. Want to make 50% or more on your money in the next 12-18 months? Read on. Needless to say, these ideas are, for the most part, very very risky. Not for the faint of heart. And nothing herein constitutes investment advice, of any kind, whatsoever. I mean it! If you are interested, you need to do your own research, and a lot of it.

I know this post is long, but I think it is well worth reading through, as it could make you a lot of money. By all means comment or email with any questions.

My investment ideas are based on my predictions that interest rates are highly likely to rise significantly in the coming year or two (and perhaps beyond) and that certain investment vehicles which buy Indian stocks on the Bombay Stock Exchange are reasonably likely to soar in the short run and VERY likely to rise in the long run. I have put my money where my mouth is on both of these ideas, and expect to do very well and hope to make a killing. If you have money which you can afford to invest in HIGHLY risky investments, you should join me..

I note that I have been consistently WRONG about my predictions about the US economy, consistently being way too optimistic. I do think we're about to break out somewhat, and grow about 3-3.5% in 2012, but it would be entirely sensible for you not to pay too too much attention to my prediction. Hey, what can I say, predicting the future is hard, especially when it hasn't happened yet. I also note that I am nowhere near expert in what I am discussing here. But the big picture I think I do understand, and I think that is enough to make a lot of money. With those caveats in mind, here are my 2 hot investment ideas for 2012.

1) Interest rates on long term US treasuries are highly likely to rise. Hoped for return 1year from today? 50-75%. 120% wouldn't surprise me much.

As many or most of you know, interest rates on long term US bonds tend to rise when investors are optimistic about the economy (for several reasons, especially including expected increases in inflation down the road) and tend to fall when investors are pessimistic (for the inverse reasons).

First, some brief background, experienced investors can skip. Long term interest have been very low for a few years now because of severe economic weakness as a result of the Great Recession, as well as a flight to quality and safety in turbulent times. When investors think the sky is falling, or might fall shortly, they often are eager to buy US Treasuries because these provide a safe haven. Accordingly, they bid up the prices of the Treasuries, and the yields move in the opposite direction of prices (google as to why if you like). The reverse happens when investors are more optimistic about the economy and less fearful about the world in general. The low yield of a US Treasury seems paltry compared to much more exciting and potentially lucrative investment ideas. At this time, investors are relatively eager to SELL US treasuries, driving the price down and the yield up. I note parenthetically that mortgage rates on houses are tied directly to the 10-year Treasury Bond-- they move in virtual lockstep with 10-year Treasury Bond rates. My predictions mean that if you are thinking of refinancing, hurry. Rates are VERY unlikely to go down significantly, and could well go up significantly. Quickly.

A year ago, in January 2011 the economy was in many ways quite similar to where it is now. Unemployment was a little higher, but there was optimism that stronger growth was right around the corner. Accordingly, the interest rate on the benchmark 10-year Treasury Bond rose from 2.54% on October 1, 2010 to 3.36% on January 3, 2011, a year ago. In contrast, the interest rate on this bond closed 2011 at 1.89%! Thus interest rates on the 10-year bond plummeted by 1.4 points last year, a very significant move. (I note that rates are already up to 1.95 in early trading today)

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011

There is nothing especially surprising about the interest rates from October 2010 and January 2011. However, the current interest rate, 1.89%, is very surprising indeed, and makes no sense based solely on the fundamentals of the economy. Why did interest rates drop so much in 2011, from a low level of 3.36% to a VERY low level of 1.89%? In a word, Europe. As the fundamentals in Europe deteriorated, and investors became more and more fearful of events in Europe, they fled the risks there (what market commentators call a flight to quality. (In fact, investors by and large fled risks everywhere, at least for a time). On July 1, 2011, before the worst of the Europe news began to hit the front page and dominate the business section (and before the huge market volatility of last Summer), the 10-year bond was at 3.22%, very close to the 3.36% where it started the year. On August 1, it was 2.77%, and by August 15th it was 2.29%! People became convinced the sky was falling, avoided almost anything risky like the plague, and ran to the safety and security of US treasuries. This trend continued right through to the end of the year.

I expect the 10-year bond interest rate to reverse course and head back towards about the 3.36% it was at at the start of 2011. I expect this for four reasons, the first three of which are by far more important than the 4th:

A) First, as noted, I predict that the economy will improve. Not an Obama Boom, perhaps, but an improvement. That should move interest rates up some. I note that I would make this investment even if I were certain the economy would be as in 2011 (but I would, admittedly, be less enthusiastic).

B) Second, I expect Europe to successfully muddle through, avoiding the worst (for example, an Italian default, which would be absolutely calamitous for Europe and very painful for the entire world). This is the key reason for my being so excited about this investment. If I knew for certain that Europe would (i) get significantly worse; and (ii) not improve noticeably by the end of the year, I would NOT make this investment at this time.

Why am I (somewhat) optimistic about Europe? Merkel in Germany is sensible. She's walking an incredibly difficult political tightrope, as if she is seen in Germany to be spending German money to bail out profligate countries on the Med, like Greece and Italy, she will end up voted out of office, if not on the business end of a pitchfork. In any event, she knows that whatever the consequences for her, she can't let the Euro area go to hell. And she won't. In addition, I really like what I've seen out of the new head of the European Central Bank, Mario Draghi. He has cut interest rates, and significantly increased liquidity for the European banks, which badly needed it. In other words, he's acting more and more like Time's 2009 Person of the Year, Ben Bernanke. Thank heavens! Sarkozy in France is also entirely sensible, and the new Italian government has already taken significant steps, as has the previous Spanish government. The European Central Bank is really the key, and Draghi is WAY better than his mediocre predecessor, Jean Claude Trichet (search my posts for my true feelings on that fellow).

Accordingly, I think it is highly likely Europe will avoid disaster. If you disagree with this prediction, you should almost certainly not make the investment I suggest.

Why is Europe so vital to American interest rates? Europe avoiding disaster will have a clear impact on the US 10-year Treasury, because as investors become more and more convinced that the sky is NOT in fact falling, they will want to take on more risk. A 1.89% return on paper issued by a profligate and politically dysfunctional US will look more and more ridiculous. So investors will want to sell, and drive the price up. This is exactly what I expect. I don't have any clue when in 2012 this should occur. Interest rates could well

C) Reversion to the mean: Interest rates have come down so far that I expect that in the absence of even more really bad news (for example, REALLY scary news out of Europe, a double-dip recession in the US, a localized shooting war between Iran and the US that temporarily drives oil to $180/barrel) interest rates should rise a decent bit from here even if I am wrong about the US recovery. If you told me that on 12/31/12 Europe will have muddled through without real disaster, and the US economy performed like it did in 2011, with unemployment about where it is now (8.6%) and no other especially bad news, I would GUESS that the long term rate would move up to about 2.5-2.8%, making me a tidy (but not unbelievable) return on my investment.

D) The US budget picture is gloomy in the medium and long run (as well as the short run) and our politics are dysfunctional enough that we may not fix it. That should, all else being equal, put upward pressure on long term interest rates, as investors expect that the temptation for the US to "inflate its way" out of the huge debt burden will become all but irresistible.

As stated above, reason D is far less important to me. Although potentially powerful in itself, the risks of the US becoming overly debt burdened is more of a long term play, and need not play out over the next few years (not to say it couldn't).

A key reason I LOVE this investment idea is my conviction that even if I'm wrong and Europe DOES blow up, I still think I will either lose a little or make a little. I just can't see the US going the way of Japan, with 1% interest rates for an extended period. We're too dynamic an economy for that. And we're not aging anything remotely like as fast as Japan. So I see this investment as heads I tie (or lose a little) and tails I win a LOT. That's a fantastically good deal, when you can find it.

How am I going about making this wager on interest rates falling? I am using an Exchange Traded Fund ("ETF") to make this market wager.

What the heck is an ETF? http://en.wikipedia.org/wiki/Exchange-traded_fund

The ETF I chose is ticker symbol TBT. It is an ETF designed to produce daily investment returns "before fees and expenses and interest income earned on cash and financial instruments, which correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index." *Sigh* I barely know that that means, but there is a strong, strong correlation between this index and the interest rate on the 10-year bond (which I am using as a proxy). So this ETF is NOT a pure bet on the movement of interest rates on the 10-year Treasury Bond, not by a longshot!

Indeed, the biggest risk to this investment, other than Europe or something else going calamitously wrong, is the ETF itself, and its a close second. There is no guarantee (to say the least!) that it will in fact perform as it is intended to. If rates go up significantly, it is VERY likely to go up as well, but not certain, and the amount is far from certain. I feel so strongly about interest rates going higher in the next 12-18 months that I am willing to take on this additional layer of risk.

For reference (and as you always hear, past performance is no guarantee of future performance (!), on January 3, 2011, exactly a year ago, this ETF closed at $37.51. I bought this on December 21, 2011 at 18.59. So if rates on the 10-year were to move back to where they were a year ago, and this ETF performed exactly the same on the way up as it did on the way down (HIGHLY unlikely) I would do a tiny bit better than doubling my money. In a year. In the real world, if interest rates do go back to 3.36% I estimate that I could expect a return of anything between 70 and 110%. That's a crude estimate, and could prove wrong.

As a cheaper (but even riskier) alternative, you could buy out of the money call options on TBT, and REALLY clean up if I'm right. Of course, you lose a lot, perhaps even 100%, if you're wrong.

2) India. Mutual Funds and Exchange Traded Funds which invest in India got absolutely clobbered last year. The ETF I have recently purchased (IFN) collapsed by 42.81% last year!!!!! That counts the payouts that were made (equivalent to dividends on a stock). A 42% loss!!! Why? Two main reasons: (i) India had its own serious problems (huge corruption scandals, a plummeting currency, the Rupee, and an economic slowdown); and (ii) Europe. As of July 2011, (when Europe began to completely dominate business and investment news) it was down "only" 13% or so for the year. The second half of 2012, however, was a complete wipeout.

To back up a bit, I think two of the very biggest macro trends of the next few decades are HIGHLY likely to be strong economic growth in India and China. China you all know about. India has also experienced rapid GDP growth in recent years, a far cry from its chronic economic under performance from its independence in 1947 through the reforms of then Finance Minister Singh in the early 1990s. This lousy economic performance was often called the License Raj, and the low growth rate (when India was dirt poor, and thus should have been growing far more rapidly) was derided as the Hindu rate of growth. No longer. In recent years, its economy has grown around 7.5%, and a tad higher in 2010. Not quite Chinese rates of growth, but still very strong. Enough to create tens upon tens of millions of new consumers, who are buying things like tvs, cell phones, refrigerators, etc. And cars. And a lot of other things.

Although investments in funds that invest in India are very risky, and highly likely to experience wild swings, a reasonably well run fund should do VERY well in the medium and long run, as India's economy continued to grow strongly. For all of its massive problems, India is a huge growth story. Invest a piece of your portfolio in it, for the long run. You'll thank me profusely 10, 20, 30 years from now.

In the short run, as stated above, India investments got absolutely clobbered by internal problems there and by Europe. I know zilch about India's progress towards solving its internal problems. I err on the side of pessimism knowing a little about the Indian government. However, investments in India were hammered by global fear arising out of Europe. Anything and everything risky scared people. There was and is great fear of risk,as discussed above. As this fades, there is no reason in the world for funds invested in India to do VERY well.

The investment vehicle that I have chosen is a Closed End Fund called "India Fund." Ticker symbol IFN. A closed-end fund is like the mutual funds you know about (commonly called open-ended funds) with the key exceptions that they trade like shares of stock, and do not generally issue more shares after an IPO. The simple version is that the managers raise money on the open market and invest in whatever it is they are going to invest in, in this case shares listed in India. The shares thus issues trade as any stock does, with supply and demand setting the price investors pay for shares in the fund.

The managers of the fund choose what shares (or other investment vehicles) the fund is to own. These change as the managers see fit. The market value of all of the shares (and other securities) owned by the fund, is called the Net Asset Value ("NAV") of the fund. It is the amount that the fund would presumably raise if it sold all of the securities it owned and liquidate and close up shop. The price you pay on the open market is NOT the NAV. It is a share price, just like the price of a share of GE or Exxon.

Accordingly, there are two key indices you have to pay attention to, the share price of the closed-end fund, and its NAV. It is possible for a closed-end fund to trade at a significant discount (or sometimes premium) to its NAV. That is, the total market value of the shares of the fund that you can buy or sell can be significantly less than the value of the shares it owns. Now and then this creates what I and many others believe is a monster buying opportunity. Such a monster buying opportunity currently exists for IFN, my closed end India Fund.

IFN had a closing share price of $35.33 on January 3, 2011, a year ago. I bought it at the very end of December at 18.82. In addition, I bought it at a large discount to its NAV, 12.8%. According to Morningstar, its 6 month avg. discount to NAV was 7.97% and its 3 year average discount was 3.46%, so it is currently trading at a significantly larger discount to NAV than it typically does! I don't know why this is the case. If I had to guess, and its only a guess, investing in India is VERY risky. As investors sought to avoid risk, this fund, and others like it, were shunned. In addition, India was a VERY unattractive place to invest last year.

The unusually large discount to NAV represents real value for me. Even if the value of the shares in the fund (the NAV) stays the same, if the fund merely reverts to its 6 month average discount to NAV of 8% (for simplicity), it would increase in price to $19.86, a tidy 5.5% return without any increase in the value of the shares it contains. Additionally, because the share price is beaten down so badly, it currently has a very attractive dividend yield of 6.3%. (Monies returned by a closed-end fund are not exactly like dividends of shares, but they are close enough for my purposes).

So there are 4 amazingly powerful reasons to buy IFN now:

1) The share price plummeted last year. If Europe doesn't self-destruct, the price should rebound, probably sharply.

2) It has a tidy yield of 6.3%, at its current share price. http://cef.morningstar.com/distribution?t=IFN&region=USA&culture=en-us Needless to say, there is absolutely no guarantee this will continue. On the upside, it could grow and grow significantly.

3) It is trading at a 12% discount to its NAV, as against a 6 month average of 8.06% and a 3 year average of 3.48%

4) India is a slam dunk long term growth opportunity.

For all of these reasons, as of the moment I think IFN is a MONSTER buying opportunity. I wouldn't be at all surprised if my $18.82/share investment is worth $50 or $60 in several years, and a huge dividend yield thrown in at no extra charge.

Or it could all go to heck and I could lose 20-50% on my investment. Balanced against the above rosy scenario is that the problems in India which caused a good chunk of last years 42% decline are very real; are not going away anytime soon, and could easily get much, much worse before they get better. And of course Europe could go kaboom. Finally, a sharp rise in oil prices would hit India. It imports about 3 million barrels of oil/day, or over a billion a year. If oil jumps $20/barrel, a very normal increase, that's $20 billion out of India's economy. That's slightly more than 1% of India's GDP. And the effect would be worse than that, just as it is here when gas prices increase. If oil jumped $80/barrel, India's economy would go to hell in a hand basket. As would ours. As would my portfolio.

Here are investment ideas that didn't quite make the cut.

I think gold is overpriced. Look at a chart of the price of gold, its a classic bubble. I bought GLL, an ETF designed to move twice the inverse of the price of gold. I've done well thus far, up about 10.7% in 6 months. GLL is at 19.81 now. I'll probably sell some or all of it at around 22.

For a few more sedate, safer investment ideas, try GE and oil companies. I really like the idea of a good dividend. GE is currently yielding 3.8%. Assuming they slowly increase their dividend, that # goes up (slowly) even if the share price remains constant. You're wildly unlikely to quickly triple your money, and pretty unlikely to rapidly double it, but I see GE, counting dividends, beating the market for years to come.

In closing, remember Warren Buffet's famous investment credo: Be fearful when others are greedy, be greedy when others are fearful. Right now, investors are quite fearful in much of the world. So be greedy!

2011-11-15T10:55:00.000-05:00

Romney will be the nominee.

I've been meaning to put up a post about how certain I am that Romney will be the nominee for a while, but life has interfered. I'll keep it short. Its done, over. Has been for a few months. Sure he's only polling around 30%, but he'll be the last man standing, just like McCain was in 2008. And as in 2008, the base will rally around him, this time out of blind hatred for Obama who, to many base Republicans, is pretty much a Kenyan Muslim socialist radical. One searches in vain to find any of these influences in his policies as president, but never mind.

Anyway, Romney is a done deal. The huge favorite for his VP choice is Marco Rubio, first term Senator from Florida. He's Cuban, so there's some hope (mostly vain imo) that he can help secure Hispanic votes. But he won't hurt with them either. He will sew up Florida, which leans away from Obama anyway, and that's not a minor detail. He's young, VERY attractive physically, gives a very good speech and will boost the ticket despite a few drawbacks.

I'll try and post in the coming few weeks about how I see the 2012 general election going. Cliff notes: Obama a clear but not overwhelming favorite. An economic lift (oft predicted by yours truly, still AWOL) would be a huge boost, obviously. As of now I see Obama winning the popular vote by about 3 or 4. That prediction could change based on economic data, and assumes an economy gathering strength into 2012. If we go into recession again before election day, however "minor" the recession (which I consider quite unlikely), Romney will win. But if we are adding 200k-250k jobs/month next year Obama will beat my 3-4 point prediction.

2011-09-07T11:15:00.000-04:00

Obama's big speech

Here's what's going to happen tomorrow, when Obama is going to give his jobs speech.

According to tentative leaks today, Obama will call for about $300 billion in "stimulus" spending, much or all of it to be paid for by cuts outlined soon. Many of these measures, particularly FAST (Fix America's Schools Today) make sense. And the dollar amount, if all of his proposals were enacted in full (snowball's chance in hell of that!) are enough to matter.

So I'm happy, right? Not at all. America has HUGE problems, and HUGE unmet infrastructure needs, as Paul Krugman and others have been saying for years. America has a HUGE problem with a lack of consumer demand. These two HUGE problems (coupled with other big problems I don't have time to post about right now) call for huge solutions. Big stimulus now, reduction of health care spending, and some trims in other spending years from now. But the current massive budget deficit we are running is not a problem. In fact, its a godsend. If the GOP had its way, we'd slide closer to a Great Depression.

Anyway, here's what I expect will happen after the speech. The markets will not react much because much of his program will not pass, and because any effect is priced in. The mainstream media will be very impressed with his "bold" plan. The GOP will deem some of it dead on arrival, but promise a careful consideration of the rest. And the Paul Krugman wing of the democratic party (the left, which is yearning for far bolder action) will be mostly disappointed. Krugman himself will probably spin it as a glass half full speech, but I expect much of the rest of the liberal blogosphere will be disappointed. Again. If anyone cares.

I'll post my reactions in the days after the speech.

2011-08-20T19:00:00.000-04:00

I know I haven't posted in ages, but this story is such a screaming outrage I had to post.

http://www.cnn.com/2011/US/08/20/tennessee.immigrant.woman/index.html?hpt=hp_t2

This really happened in the United States of America. The country I love. Her crimes were being here illegally and driving without a license. Perhaps they should be prosecuted. But the cruelty inflicted upon her is a screaming outrage. As is the dog's breakfast known as our insane immigration laws.

SMH.

2011-01-29T09:49:00.000-05:00

Mubarak will go.

Egyptian president Hosni Mubarak will go. Quite soon. I expect he won't last next week. I don't know what precisely will make him decide to give it up, but the most likely cause will be the army telling him his time is up. He'll get asylum somewhere, perhaps even the US, temporarily. Obama won't want to put him up permanently, but Reagan rescued baby doc from Haiti, and we would help Mubarak in his hour of need if it came to that.

Follow Gsquare86 on twitter. She's a (very pretty) blogger in Egypt. She's living it now. She can see how this movie ends.

The Egyptian people have HAD IT. And who can blame them? 30 years of autocratic rule, little economic growth, millions of unemployed, etc. The people have erupted. The army is a highly respected institution in Egypt, and they will certainly not go Tienanmen on the people. And that is what it would take. This protest is a revolution, it is real, it is not going away, and it will succeed, probably quite soon.

2010-10-31T09:15:00.002-04:00

I am predicting a bit more of a GOP blowout than some of the professionals, but my thoughts aren't out of the mainstream.

First, I note that if you want the best site for these sorts of election predictions, go on over to

http://fivethirtyeight.blogs.nytimes.com/

Nate Silver is, imo, the very best of the political talking heads, bringing cool rational analysis to the discussion.

But you're reading my blog, so here are my predictions:

I expect the GOP to pick up 60-65 house seats (!!!!!) and 8 Senate seats.

Here are the Senate seats the GOP will pick up:

Three are essentially certain: Indiana (was Evan Bayh), North Dakota (was Byron Dorgan) (Arkansas) (is Blanche Lincoln, she's toast).

Three are much more likely than not to go GOP

Wisconsin (currently Russ Feingold, well down in the polls), Pennsylvania (currently turncoat Arlen Spector, who lost his democratic primary-- Sestack is slightly down), Colorado (appointed Michael Bennett is down a little)

Two more states are VERY close, but I expect the GOP to take them both, making for an 8-seat pickup: Nevada (Harry Reid), Illinois: (Obama's old seat!). I note that in Nevada, Sharon Angle is such a weak candidate that None of the Above, which is really on the ballot in Nevada, may well pick up 3-5% of the vote and allow Reid to squeak back in.
California (Barabara Boxer v. Carly Fiorina), Connecticut (Richard I served in Vietnam Bloomenthal), Washington and West Virginia (where Obama is at about 30%!) I expect to stay Blue. In a truly historic GOP night, at least two of these would flip, but I don't see that. I note that the Washington state polls are basically tied, but I expect Patti Murray, the democrat, to win by at least 3 or 4 points. For a variety of wholly unimportant reasons, Washington State is very difficult to poll and the polls are typically skewed a few points in favor of the Republicans.

Finally, the GOP, as political followers know, gave up a nearly certain pickup in Delaware (which went for Obama by > 20 when it nominated Christine, I am not a witch, I'm you, O'Donnell rather than the eminently electable Mike Castle. Thanks guys!

2010-10-31T09:01:00.000-04:00

I know its been a while in posting. I've been very busy with other things in life. Yeah, ok, I've also been licking my wounds about having been WRONG about the Obama Boom. I still think we're about to enter a nice recovery, but (a) its very tardy; and (b) it likely will not be as vigorous as I expected. More on that in a post coming sometime soon. In the meantime, I'm back.

2010-04-30T10:00:00.000-04:00

Today's GDP Report shows clearly that the Obama Boom is underway.

This morning, the US Government announced its estimate that the economy (GDP) grew at a 3.2 annual rate in the first quarter of this year. http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm. This marks the third consecutive quarter of growth and the second consecutive quarter of strong growth. There is no longer any doubt at all that the Great Recession of 2007-2009 is well and truly over.

Let's walk through what this report means. At first glance, this is actually a weak report. Following the Great Recession, in which GDP declined by 2.4% in 2009, the most in any year since the 1940s, and in which unemployment skyrocketed by more than at any time since the Great Depression, one would expect a strong recovery. That's what happened in 1983-1984, following a sluggish start to that recovery. This is the economic boom which Reagan claimed was "morning in America" and led him to a 49 state reelection landslide in 1984.

3.2% growth in the first quarter of this year is not a strong recovery, by any stretch of the imagination. 3.2% would be fine if the unemployment rate were say 6%, but at 9.7% it is weak. However, when you look closely at the GDP report, it is clear that the Obama Boom has in fact begun.

First, and foremost, consumer spending, which makes up around 2/3 of the economy, and which has been hit very hard by the soaring unemployment rate, grew at a 3.6% annual rate in the first quarter, as compared with a 1.6% rate in the 4th quarter of 2009. This was true because consumers have a lot of pent up demand, for cars, certain electronics, and many other things for which purchases were put off in the last few years. It is most unlikely that the 3.6% growth rate in consumer spending will increase much until unemployment comes down substantially, which will take time, but I also think that it is unlikely that this growth will slow very much.

The housing sector was VERY weak in the first quarter, shrinking at a 10% annual rate! Paradoxically, the housing sector is the main reason that this report was in fact a strong report. Surprisingly, housing construction is only about 5% of GDP. http://www.nahb.org/generic.aspx?sectionID=784&genericContentID=66226

However, even at such a small share of GDP, a 10% decline in 5% of the economy means that housing dragged down economic growth by .5%. This is not the full story.

I agree with the general consensus that it is all but impossible for the economy to recover strongly while housing is in the tank. This is because when people buy a house they buy furniture, televisions, and all sorts of other things. The National Association of Home builders States that, "housing services have averaged between 12 and 13 [% of GDP.]" Thus housing overall is a very significant portion of the US economy.

So if housing is important, and it shrank so sharply in the first quarter of this year, why is that cause for optimism? Because what goes down must come up. Permits for new houses grew solidly in the first quarter. As one might expect, permits strongly correlate with future growth in housing construction. So I expect housing to very quickly move from a sector of the economy detracting from economic growth to a sector contributing, and perhaps by late this year contributing strongly.

In short, the seemingly weak 3.2% growth in the first quarter likely presages stronger growth going forward. Growth strong enough to produce the large number of new jobs that I have previously predicted. In fact, when the employment report comes out a week from today, it is likely to show that the economy created well more than 200,000 jobs in April. The Obama Boom has indeed begun!

One final note. State & local governments are tightening their budgets significantly, causing a drag on economic growth. This will continue for another year or thereabouts, as tax receipts will recover, but not quickly enough to close the huge budget holes in New York, California, New Jersey, Illinois, and other states. So this area of the economy will remain a drag for some time. However, later in this expansion, in 2011 or 2012, when other areas of growth may well slow, this area will again add to economic growth. That different sectors are in very different places cautions against a super strong recovery, like the one in 1983-84, but augurs well for a long expansion.

2010-04-30T09:26:00.000-04:00

Larry Kudlow agrees with me
http://www.realclearpolitics.com/articles/2010/04/10/a_v-shaped_boom_is_coming_105131.html

This means I have to carefully consider if I'm just wrong. Kudlow is a nearly mindless, knee jerk "conservative" who does hold some consistent and interesting views, but generally ignores any inconvenient history. This is, I think, one of his better pieces, but then I would say that, since he agrees with me!

Still, read this carefully. It isn't his usual garbage, for a wide variety of reasons. In particular, his focus on corporate profits is one I STRONGLY agree with. The main reason for my hyper optimism beginning late last Summer was my expectation of a BOOM in business investment. That Boom has probably begun. The consumer is even coming back to life, as was shown in this morning's GDP report showing 3.2% annualized growth in consumer spending in the first quarter of 2010.

By the way, Kudlow references that the 4th Quarter of 1992 was better than 1993 and blames the tax hikes of 1993 (which were widely expected from about September of 1992 on. Well ok (this has some truth). However, Kudlow conveniently leaves out the years of 1994-2000, when, after the Clinton tax hikes of 1993, the economy BOOMED!! Hey Larry, do tax hikes only hurt in year one and then help in the out years? To the extent one looked at the data from 1992-2000 and turned their brain off, that is what one would conclude. In reality, the Clinton tax hikes of 1993 HELPED the economy because they convinced the bond market that we were getting our arms around the budget deficit, and thus interest rates dropped for much of the Clinton presidency, helping spur a great economic boom.

In any event, someone not kindly disposed to Obama, at all, strongly agrees with my hyper economic optimism. Take that for what its worth.

2010-04-03T08:35:00.000-04:00

The Great American Job Machine stirs

The Bureau of Labor Statistics just announced that 162,000 jobs were created in March. For the first time since December 2007, the American economy created jobs (that is, more jobs were created than were destroyed). Its about time!

As my loyal readers are aware, I have been predicting, for months, a strong economic recovery, that would generate jobs, with the number rapidly increasing. In short, I have been predicting a much stronger recovery than nearly every economic prognosticator. I stand by that prediction. I am most certainly not claiming any sort of victory after one good report. Instead, we'll see in the coming months if the labor market really has recovered. After strong economic growth the last quarter of last year and the first quarter of this year, medium sized and large businesses are still very nervous about adding headcount. This can't last-- if demand for their products & services increase, new jobs will as well-- the laws of economics and common sense demand it. But businesses are bound and determined to wait as long as they possibly can, to ensure they can get the credit they need (in the case of small businesses) and to ensure that the pickup in demand is lasting (businesses of all sizes, but especially large businesses). Since I predict that investment by business is about to take off hugely, and that consumer spending, depressed since 2008 by job loss and fear of economic armageddon, is about to improve, demand for the goods/services of businesses in America should improve, and steady increases in jobs should follow.

Let's look more closely at today's reports. The report was expected to be skewed by a huge number of workers hired for the 2010 census. Even though those workers count as employed, and bring in a paycheck, their jobs are very temporary, and its appropriate to strip them out if you are trying to figure out the economy's underlying strength. There were 48,000 new census workers, far lower than expected. So there really were over 100,000 new jobs created, mostly temporary workers and in the health care industry. So the labor market is still quite weak, of course. Just a little bit less weak.

In addition, the government each month releases a second report which is used to report the unemployment rate that you hear in the news, currently 9.7%. That report also attempts to count how many jobs are created/lost in a given month, but the number of jobs in that report is considered less reliable than the number of jobs reported in the other survey, which is what the media is referring to when it reported that 162,000 jobs were created in March. Still, the second, less reliable report, concluded that 264,000 jobs were created in March. That marks the third month in a row the second survey has reported job gains, for a total of 1.1 million new jobs in 2010! That would be a strikingly good total if it were in fact true. Unfortunately, even I'm not that optimistic. As I said, the second report is considered less reliable. However, that second report is considered more reliable than the first, report, and in the fullness of time it may be that the labor market turns out to have been less awful in the last several months than we thought.

Anyway, returning to the jobs gained in March. The 162,000 number is a fantastic number compared to the small job losses which have occurred for the last 6 months and the monster job losses that occurred in the year before that. But in the context of 15 million unemployed, and many millions more unemployed, it is, of course, a pittance. America will need years of stronger job growth than we had last month in order to bring the economy anywhere near to the 4.5% or so unemployment rate that is as low as we can realistically get. That's how deep a hole we dug for ourselves in the years leading up to the collapse of Lehman Brothers and the Great Recession of 2008-2010.

But for now, we can all celebrate that the economy has begun creating jobs. It should create many, many, many more in the coming months.

2010-03-24T20:14:00.000-04:00

The political ramifications of health care reform passing

Here are the cliff notes. I think it will prove solidly beneficial to the democrats. If the economy behaves as I have predicted the effects will be felt by November, and the democrats will able to keep the losses under control. If the economy does not do as I've predicted, but instead is much weaker, who knows, but health care still helps.

Note that none of what I write below is at all dependent on the reforms becoming more popular between now and November, which may very well happen. I doubt very seriously they will become less popular, and if they become more popular, the bump for Obama could be more than I estimate below.

As a very politically savvy friend of mine recently posted, "We'll see in November. Like just about every mid-year election, the party in power will lose some seats. Even so, the Democrats will continue to hold both houses of the legislature and the White House. Hopefully us Democrats will continue to govern as we were elected to do and pass the agenda we were elected to pass."

I couldn't agree more.

For specifics. Obama's #s will likely go up around 2-4 points in the short run, a small but still significant move. Much or all of this will be among democrats or at least Obama voters, who were growing steadily more disillusioned. I predict, and on this I'm not at all certain, that this bump will remain in place in November. The democrats running congress will also get a bump, but their favorability numbers are SO low that it barely matters. But in terms of the November elections, the bump for Obama matters hugely, far, far more than a modest 2-4 point bump would indicate. Here's why.

There is historically a strong correlation between the president's favorability numbers and the number of seats his party gains/loses in the midterms. Reagan in the high 30s in 1982. No Senate seats lost, but the GOP lost 27 House seats. Remember, democrats had the majority. Real shellacking. Clinton unpopular in November 1994. GOP wins huge, taking over both houses of Congress. 1998, Clinton popularish, economy booming, public upset about impeachment, democrats buck trend and gain seats. 2002, Bush wildly popular. GOP bucks historical trends, gains a few seats in the midterms. 2006 Bush quite unpopular, democrats win both houses. So in recent history, presidential popularity is very important in determining the outcome of midterm elections.

As of now Obama is around 45-47, not great, but not at the levels where you'd expect to see huge losses. But this number doesn't measure intensity-- it was ALL on the side of the GOP. That should change, and the change in intensity is the primary reason why health care reform is such a positive. Here's a breakdown of why I see the passage of health care reform as such a clear and significant positive for the democrats.

1) The democrats will benefit politically from passage of health care reform because it gives their voters some reason to go out and vote, rather than stay home.

This is the most significant reason, by far, that it helps Obama, totally dwarfing the rest of what I discuss.

If the midterm elections were held anytime before say last week, the democrats would have been wiped out, in an historic fashion, imho. I think they would have lost the House for certain, and likely the Senate too (despite holding a 9 seat advantage!) Why? Because the GOP voters are mad as hell, and they're going to turn out. Many independents are as well, and they're going to turn out. In contrast, the democratic voters, and independents aligned with democrats were disillusioned with the seemingly do nothing president/congress, and were inclined to stay home. That's how you end up with a GOP Senator from DEEP blue Massachusetts. Passage of health care reform (and the almost certain passage by the Senate of the House fixes) changes that somewhat. Now there is a distinct accomplishment that the democrats can use to get out their base. I actually think that decrease in the intensity gap would translate into fewer seats lost if the elections were held now. Possibly many fewer.

Thus if the democratic base is more motivated to go out and vote, the correlation between Obama's popularity and the outcome of the 2010 midterms should return to normal, or close. Thus if he's at the same 45-47 he's at now, for example, you'd predict significant losses, say 15-25 in the House and 3-6 in the Senate, but not historic losses, and the democrats would keep control of both houses.

2) The democrats will benefit politically because Obama is likely to be more popular.

With the linkage between presidential popularity and success in the midterms restored, at least in part, Obama's numbers become relevant again. I'm essentially 100% certain that the passage of health care reform (health insurance reform I should say, through gritted teeth) helps Obama. Not a lot, but a clear help. Here's why I know I'm right, and any contrary pundit is wrong.

A. The passage of health care won't hurt Obama much with Republicans-- he's already toast with them. After all, in the GOP base's wild fantasies, he wasn't born in America, isn't legitimate, might be muslim, and is a socialist! He's not one of us. How much less popular can you be? I suppose his numbers will tick down a point or 2 or 3, but 2 or 3 percent of say 25%, just isn't that much, less than one point overall. George W Bush has around a 75% favorability with the GOP base. Would you try and reason with such a group? If you have a crowd of people who think W was a good president-- well you can't really try and convince them of anything, they're just mentally out to lunch. You have to ignore them when governing, and hope the remaining 70-75% of the country sees things your way. That strategy worked nicely in 2008.

B. The passage of health care may help Obama with independents. It may not. I'm not sure, and don't have the time to puzzle it out. Its hard for me to see how it hurts with independents. After all, if he pushed for it so hard for so long he's a loser, as well as someone who wanted to (fill in the blank with your ridiculous parade of horrors). But since it passed, he's not such a loser, and of course none of the horribles this independent voter has heard about will have happened. Not a one. Instead, some will realize they've been lied to, on a grand scale. So why should this hypothetical independent voter like Obama any less? She hasn't been harmed. If I had to guess, I would guess his numbers tick up and stay up a few points among indys, but I'm not confident.

C. The passage of health care is 100% dead certain to help Obama with the democratic base, and not just a little. The democratic base is slightly larger than the shrunken GOP base, but less committed to the party. Before the bill passed, Obama was becoming seen as no accomplishment Obama, all talk and no action. Now there's some action. The health insurance reform polls fairly well among the democratic base. Sure a lot of us wanted a public option and much more, but we consider it a really good first step, as badly flawed as it is. Most democrats I know are happy about it. We sure as heck would have been pissed if he spent all this time and failed. The democratic base doesn't like a loser any more than anyone else.

So if health care only hurts a very little bit with GOP voters, helps significantly with democrats, and has an very mildly positive effect on independents, its effects are positive. Neutral if I'm wrong and it somehow hurts him among independents. To pick numbers out of the air, if it hurts him 2 points with GOP voters (25%), is neutral with independents (45%) and helps 8 points among democrats (30%) (yes, I think it could be that much), the harm with GOP voters would cost him about .5 points, and the help with democrats would benefit him by about 2.4 points, netting him 1.9 points of favorability rating. If you posit a 3 point bump among independent voters, which I think is reasonable, you'd add about 1.5 points, giving him about a 3.5 point bump. That sounds about right to me, and is what I think will happen. Predicting if that remains true until November is a fools errand. I will say that if it failed, the stench of a do nothing president and congress could have become very strong indeed and difficult to change in the public's mind.

D. Health insurance reform should also make passage of other key pieces of legislation, like financial services reform, more likely, by reaffirming that Barack and Nancy and Harry can get stuff done. This may also rebound to Obama's benefit, though I concede it may not.

Up to now the Republicans' game plan was to stop everything the Dems attempt. This is now much less likely to be successful, and if Obama and team donkey come to be seen as men and women of action, that could help.

2010-03-22T11:21:00.000-04:00

The market yawns at health care reform

Memo to my conservative/Republican friends that are bitterly opposed to the health care reform legislation that just passed.

The fate of health care reform was in serious doubt when the market closed Friday. As of 11:15 a.m. today, the first trading day after reform passed, the markets yawned. The Dow is up a tiny fraction, as is the NASDAQ. Virtually no movement at all on the dollar. If this really were a dramatic, government takeover of 1/6 of the nation's economy, with dire consequences for the budget and the economy, wouldn't the markets have reacted negatively? And if you want to say that the reaction is priced in already, well, then it must have been viewed POSITIVELY, because the Dow is up over the last several weeks, in the time that health care reform revived, and is WAY up since early in Obama's presidency.

Far more likely is that the market thinks that health care reform will not dramatically effect the economy in the short or long run. Which is probably correct, though I think there will be a LONG term positive effect. What we can be reasonably sure of is that the market does not see short or medium term sharply negative effects, or we'd see the Dow down 2 or 3 percent, at least.

2010-03-21T23:55:00.000-04:00

HEALTH CARE REFORM PASSED!

The epochal, hugely historic health care reform measure just passed the House! Today will, in time, be seen as one of the great legislative days in the history of the United States! I haven't been this thrilled with anything political in the United States, ever. Nothing in my lifetime (1970) is even close.

Teddy Roosevelt first proposed universal health care for all. FDR seriously considered including it in what became Social Security in 1935. Truman proposed it in the 1940s. Nixon proposed it in the 1970s. Nixon was a Republican, as was Teddy Roosevelt. Clinton, as we all know, proposed it and worked hard on it for a year. And while what emerges as law in the next week doesn't come especially close to truly universal coverage, it is a huge step forward. It is also a vital step towards a sane and rational health care system that doesn't cost twice as much per person as France or Germany.

Following a weekend of incredibly high drama, with every vote fought over tooth and nail, and with the outcome in doubt until early this afternoon, just moments ago, the House passed the Senate version of health care reform. This horribly flawed bill now goes to Obama, who will of course sign it, probably tomorrow. Passage of the health care reform legislation represents a huge victory for him, as he was, as I said in my post yesterday, all in on Health Care reform. The amount of effort, time, thought, arm twisting and sheer energy put into this bill by Obama, Nancy, Harry, and so many other very important people will surely be chronicled in best selling books to come, and maybe even a $100 million grossing documentary. There is a lengthy New York Times article on this point today, which I haven't yet read.

http://www.nytimes.com/2010/03/21/health/policy/21reconstruct.html

The Senate must now vote on the House fixes to the Senate bill, and will do so via use of reconciliation, which means that it cannot be filibustered, and is guaranteed an up or down vote. Harry Reid (Senate Majority Leader) and Dick Durbin (the # 2, and the guy responsible for counting the votes) have very confidently and quite credibly said they have the 50 votes to pass this series of fixes. If the Senate passes the same set of fixes as the House did earlier today, those fixes will go to Obama for his signature, which again should happen pretty quickly. The entire health care reform effort of the last year should (finally) be over in less than 5 days. A year and change of intense effort, following on talks over decades, stretching back to Teddy Roosevelt, albeit with long periods of inaction, has now, for the moment, ended. A great, great deal of work remains in the coming years, to be sure, but I suspect Congress is going to take a fairly long break from serious health care reform.

We have made huge strides down the long, arduous road towards universal health coverage (and a rational health care system). This is just a monster win for America, a truly great day for us all, even though a great many Americans can't see that yet.

There is no easy way to measure it, but this bill probably consumed more presidential effort than any since the great Civil Rights Act of 1964. And it passed. *whew*. Now, after the Senate presumably votes to approve the house-approved changes to the original Senate bill (I'm probably going to blogger hell after writing that last sentence) health care reform can get off the front pages and people can see that it doesn't do any of the terrible things that the the GOP says it does. And so will begin the democrats' and Obama's political rebound. More on that in a coming post.

2010-03-21T18:31:00.000-04:00

Health care will pass tonight

By all press accounts, the suspense is gone. Nancy has the votes, with several to spare. The vote on the rules by which debate will proceed, which is an excellent indicator of how the final vote will go, has just been concluded, and it has passed by 224-206, thus with 8 votes to spare. No republican votes.

This may well be the exact number that votes for the health care bill in two hours. I don't know for sure. In any event, the deed is done, and health care reform will certainly pass in just a few short hours. WOW.

2010-03-21T13:22:00.000-04:00

Dems appear to have the votes

The latest breaking news is that a deal has been reached with Bart Stupak and other pro-life lawmakers for them to vote for the bill. If true, that would almost certainly cinch the vote for Pelosi. It now appears upwards of 95% that the House will approve HC reform today! WOO HOOO!!!

2010-03-21T12:34:00.000-04:00

Glued to C-Span

I'm at work, earphones plugged into the computer, with C-Span on in the background. Maybe that's an indication that I need help. But I am SO into the upcoming health care vote. I'm pretty confident that if it passes, both the Senate bill and the fixes, that it will get somewhat more popular with the public in the coming months and years. There's just not much in it that hurts an ordinary voter. There just isn't. And when that sinks in, and when pre-existing conditions go the way of the dodo bird, it will likely become popular. IF it passes. And I'll be glued to C-Span. I'm almost sorry I agreed to go out tonight; I likely won't be able to watch live as the final vote is cast.

2010-03-21T10:41:00.000-04:00

Health care reform does not poll well-- so what?

I read a great article about why legislators should be very wary of taking actions based on public polls, particularly regarding complex issues. I wish I'd written some of this myself. I didn't-- and I don't think my commentary can improve upon it.

http://www.politicsdaily.com/2010/03/20/george-gallup-health-care-and-the-peril-of-legislating-by-polls/

2010-03-20T14:41:00.002-04:00

Obama's all in

First, in news that just broke moments ago, according to several key democratic members, the House will vote on the Senate bill tomorrow, and not use "Deem and pass." This is a good thing, in my view.

To use a fairly well known poker metaphor, as Andrew has, Obama has moved all of his chips into the middle of the table. He is going all the way with his hand, and he'll either win big or lose big, and very likely we'll know which of these tomorrow. Its better than 80-20 now that he'll win big. It is to his great and everlasting credit, win or lose, that he finally moved all in. It did take him long enough.

A bit of big-picture review. My friend Andrew, who is nearly always right about policy matters, has been bitterly critical of Obama on health care, and not without quite a bit of justification. For example, he was saying about June 2009 that Obama could not, under any circumstances, leave the writing of the Bill to Congress. He said, and I'm paraphrasing, that Harry Reid and Nancy Pelosi could not be trusted to organize a trip to McDonalds, let alone a hugely complex piece of vital legislation. Reid in particular has seemed weak, the various congress people each had their own agenda, etc. Instead, he was calling on Obama to get in the trenches, write the bill in essence, then allow cosmetic tweaking and try and jam it down Harry and Nancy's throats. I'm the PRESIDENT, Andrew basically wanted Obama to say. I disagreed at the time, saying that giving Congress a few more months of headroom was good politics and made good sense. I think in the fullness of time he was right and I was wrong. Obama WRITING the bill was never in the cards, but he needed to be MUCH more aggressive earlier on. To use poker terminology, Obama was playing a good game of LIMIT poker. In limit poker, your bet sizes are rigidly limited. You either bet the amount you are allowed, or you don't bet at all. You can't move your big stack of chips in the middle and force your opponent to either call or fold. In no limit poker, by contrast, you can (and occasionally do) move all of your chips into the middle.

Obama was making small demands, small shows of strength. In short, he was playing limit poker. Sure he wanted health care reform, of course, but he wasn't exactly setting any presidential effort records to get it. There were set piece speeches and events, but not a consistent, sustained effort.

Then in January, Scott Brown in Massachusetts became the 41st Republican vote in the Senate-- the Democrats could no longer defeat a Republican filibuster with only democratic votes. And no GOP members wanted to play along. Which was very disappointing, but it was clear by about March 2009 that the GOP was going to oppose Obama in lockstep on big things. When John McCain isn't with you on immigration reform, you know the party's gone nuts.

Anyway, after some brief talk of moving onto the economy and not focusing on health care, Harry, Nancy and Obama have been focusing non-stop on it, like a laser beam, for weeks. This in the face of an economy still deeply troubled and with polls showing the health care reform effort deeply unpopular. This is a truly astounding act of political courage by the democrats. Courage and democrats has not often been used in the same sentence in recent years (at least not without the modifier "lacking," or its equivalent) and for good reason. The democrats have by and large taken the easy way out, taking small shots at the GOP, but not frontally attacking their idiocy. In short, the democrats, like Obama, have been playing limit poker.

Well that all changed a few weeks back, beginning publically with the televised summit. In having the summit at all, Obama basically announced that he was moving all in. Enough of this limit crap, he in essence said, I'm playing no limit, and I'm playing for keeps. All in boys and girls. That drastic change in presidential attitude, on behalf of a pretty crappy bill, and in the face of stiff public opposition, tells me that Obama really believes that health care is MONSTER important, and is willing to take gigantic political risks in order to further the great moral and economic cause of serious health care reform. And he deserves great praise, in my view, for moving all in.

Tomorrow, in all likelihood, the final cards will be dealt and we'll see Obama achieve a huge, historic, glorious, hard-earned victory. But it will have been earned only because Obama finally moved all in.

2010-03-19T11:41:00.000-04:00

Health Care Reform will likely pass

If I had to guess, the dems will pass it with 3 or 4 votes to spare.

The fantastic CBO report, indicating that the health care reform bill will cut $138 billion off of the federal deficit in the next 10 years, and much more thereafter, probably sealed the fate of the bill in favor of passage. This projection by the CBO gives much needed political cover to moderate democrats in districts that voted for McCain (or barely for Obama) that they can run as "smaller government" types while voting for this health care reform effort.

From what the dem leaders are saying this morning, and from yesterday's hugely positive developments, (the CBO projection) it now appears 80-20, at least, that the dems will pass the huge, comprehensive (and rather awful) health care reform package, probably on Sunday. As my readers know, despite the bill's huge flaws, I consider this a monumental step forward in American history. Once this bill is fixed up in the coming years (and it may take quite a few years), this achievement will be fully on par with the creation of social security and Medicare in its impact on America.

There has been a TON of talk about the procedure involved in this latest leg of the health care reform battle. What is likely going to happen is that the House will pass the Senate bill, unaltered. This bill has some substantive problems, in addition to the smelly "bribes" needed to get votes 57-60 in order to pass a Republican filibuster. These include the infamous Nebraska giveaway, the Louisiana Purchase, a special deal for Florida, and more. Google these phrases for more info. After the House passes the Senate bill it goes to Obama, who signs it. It is then law. Next, the House and Senate will pass identical fixes to the bill, which will proceed through "reconciliation" a procedure in the Senate which precludes the use of a filibuster. The Democrats thus only need 50 votes (with Biden to break a tie, if needed) and not 60. This is not a challenge-- it was always getting ALL 60 members of the Senate to vote for a health reform bill that was the problem. 50 is easy. If that second bill, passed through reconciliation, gets a majority in both chambers IT goes to Obama for signature. Thus this round of health care reform would (mercifully) end, probably next week.

For Larry, what do I think of deem and pass? There has been talk, not yet silenced, that rather than the House simply vote on Health Care reform, they would vote on a rule for debate on the reconciliation package which would "deem" the Senate Health Care bill passed if the second reconciliation package passed. This way the members could "avoid" voting directly for the Senate bill. Its a sneaky act of political cowardice (the Senate bill itself is very unpopular in the House, and easy to vilify in campaign commercials.), and I don't much like it. Typical democrat way of doing things-- terrified of their pathetic, idea-less GOP opposition, who ran the country damn near into the ground when they were in power. A Trillion dollars blown in Iraq, Great Recession, torture, etc. And Nancy and Harry are afraid of these IDIOTS!

But do I, in the end, support Deem and Pass? Yes. If I was a yes vote in the House, and Nancy told me about this crazy procedure, I'd object. Strongly. But if she said, "look there are 5 wavering moderates that don't want to directly cast a vote for HC reform, but would rather use this crazy procedure," I'd be ok with it. Health care reform is much too important to worry about process. I will add that using this crazy procedure would almost certainly be a significant political NEGATIVE to those who go along with it. Think many tens of millions won't be spent on ads saying, "Congresswoman X voted for Obama's health care reform bill and then lied about it?" Of course they will. And the ads will be more than a little truthful.

The democrats contend that deem and pass has been used before, and it has, but never for the purpose of avoiding a clear recorded vote on an issue of signficance, let alone an issue of monumental, epochal, country changing significance. So I don't really like it at all. But its constitutional, and if they do it, it will stick.

In any event, in the end, who cares? Health care reform is BY FAR the biggest issue facing America. I mean BY FAR!! I actually don't think that can be seriously debated. Given that, and given that this (seriously flawed) effort represents a very significant first step towards getting rid of the health insurance companies and towards a rational health care system, all other concerns must yield.

DEAR US HOUSE:

PASS THE SENATE BILL, HOWEVER YOU WANT TO. NOW.

Flyingpinkunicorns

2010-03-18T12:01:00.000-04:00

Israel and settlements

For those that haven't heard, Israel was in the news last week for its insane, idiotic, and counterproductive settlement policies.

Here's the background. In Israel, Obama is seen as not really pro-Israel. He dared to make a big speech in Cairo, and for other reasons. Anyway, Hillary is really liked in Israel on her own merits and because Clinton was and is popular there. Joe Biden is popular in Israel to those in the know. Anyway, Biden was there last week, and met with Prime Minister Netanyahu. He told him that we weren't happy about proposed settlement expansion plans. While Biden was in Israel, Netanyahu's Interior Minister, a right-winger from the religious Shas party named Eli Yishai. What's a bit ironic is that Shas has never been focused on the settlements at all, unlike Likud, but more on that some other day.

The fact that this announcement took place while the US Vice President was in the country caused a stir. Israel apologized for the timing of the announcement, but not the substance of it. Admirable honesty. The only thing admirable about the whole Israeli settlement situation.

Here's my take on settlements. I HATE them. I think they are hugely counter to Israel's national security interests (and America's!), as well as being counter to Israel's economic interests. I think, to quote Thomas Friedman, that the settlement policy is "insane," and has been for many years.

The US has long allowed Israel to go its idiotic way on the settlement issue. Oh, we bleat about and complain, and pound our chest and tut tut, but except briefly under Bush 41, when we threatened to suspend loan guarantees to Israel, we just talk and do nothing about it. Which is what Obama is highly likely to do. Which is why Israel feels free to keep building settlements. AIPAC (the American Israel Public Affairs Committee), which is by far the largest and most organized Jewish pressure group, is mindlessly pro whatever an Israeli government does, especially a right-wing Israeli government. To AIPAC, its Israel right, wrong, or pro or contra US interests. AIPAC doesn't speak for mainstream American jews on settlements, which many American jews dislike or hate, but there it is.

In the US, there is no gain politically in OPPOSING Israeli settlements. This was true even before 9-11. Let's be honest: Who in America loves a Palestinian? An Arab? And AFTER 9-11? Oops.

So we give Israel around $3 billion a year in mostly military hardware, give it all sorts of diplomatic cover and get bitch slapped in return on the settlements. Year after year. If I were president, they'd be told that if they built so much as one more living room in occupied territories they'd be persona non gratta. We'd pull our ambassador, for good, cut as much aid as congress would let me, stop giving them cover in the UN, and I'd seriously consider selling high tech arms to Egypt and Saudi Arabia (not Iran, obviously). I'd show them that if you bitch slap the heavyweight champion, you just might get hurt badly. And hey, if I lost reelection? I'm sure I'd do fine on the lecture circuit, the boardroom circuit, etc. That's what a president with chutzpah would do. We're allies, these settlements are insane, and we bitterly oppose them. Build them at your peril.

In return for this admittedly very tough stance, I'd be willing to consider modifying my views somewhat on the final status settlement negotiations. I have, strongly supported Israeli military actions to defend itself, in particular the war against Hezbullah in 2006. I supported peace talks with the Palestinians when they made sense and opposed them when they did not. I am HARDLY mindlessly anti-Israel!!!! But on settlements, I am mindlessly anti-settlement, and thus in the minds of some, anti-Israel. The settlements are, by all accounts hugely economically costly, soldiers in huge numbers don't want to be sent to defend them, they cause great diplomatic grief to the US, impede a final settlement, and generally PISS ME OFF.

In a way, I admire what the Israelis do on settlements. They manage to do something hugely: (i) not in their ECONOMIC interests (protecting those settlements is hugely expensive, not to mention building them), (ii) pretty damn clearly not in their SECURITY interests; and (iii) which America, Israel's only real ally in the world, opposes (but does nothing about). After managing this trifecta, Israel then says, well, we did it, and we still love America. Israel's got cojones on the settlement issue. Short on brains, painfully short on long term planning, but long on cojones. And that, at least, is worth admiring.

As for Bibi (Israeli Prime Minister Benjamin Netanyahu), he's reasonably happy that the current Palestinian government has clamped down on the worst of the madness and sees Hamas as its blood enemy. And he'll probably be happy to dribble a few crumbs their way if they continue to "behave." But after the second intifada and the huge rift with Hamas, there's just no appetite in Israel for renewed grand talks. Even I oppose them, for heaven's sake!

I called in the late 90s on Arafat to unilaterally declare a Palestinian state. I think the idea still holds merit. Let Israel fight the existence of a newly declared state, born under fire, occupied by an enemy. The irony won't be lost on anyone in the region. It would put the US in a very bad spot, get the Arabs to verbally support it, and very possibly result in some positive (for the Ps) changes on the ground. I don't really see the downside. At worst, false hopes are raised and nothing changes, which is probably the most likely outcome. But a Palestinian state will happen someday, barring some catastrophic disaster, the question is when and what the terms will be. So starting sooner rather than later is no bad thing in my view, especially with a seemingly responsible coterie of P's in leadership positions in the West Bank.

So much of this could have been written 2 years ago, 5 years ago, or (with a few tense modifications and other tweaks) 15 years ago. We're frozen in time, because both sides are basically frozen in their positions. Israel proves daily what some deny-- that they are obsessed with settlements for their own sake-- greed-- simple greed (albeit badly misplaced), and faux security concerns (also misplaced). If the settlements weren't significant to the Israelis, they wouldn't keep building them! They tend to force moderate P leaders into the arms of the Islamic extremeists, exactly as Begin and others planned, so long ago. Sad, really.

2010-03-08T20:20:00.002-05:00

The March Jobs Report in early April will show at least 150,000 jobs gained

After a series of posts predicting job growth, and having apparently been slightly wrong on timing, I am making a specific, testable prediction for job growth for the current month. I'm predicting that there will be at least 150,000 jobs gained when the government releases the next report on the jobs market in early April. And I wouldn't be overly surprised if the number was over 250,000, a good number in general, and an absolute show stopping blockbuster compared to what has been going on.

I'm finally making a specific prediction because I finally think I know what's going on in the job market. Job growth has already resumed, but slowly. In fact, the other survey that the government conducts, usually considered less reliable, but still useful, shows 850,000 jobs GAINED in the last two months. This is an absolutely astounding number, given that the other survey shows slight job LOSS. I think the truth is somewhere in the middle, and closer to the weaker payroll survey. There's virtually no chance we have gained 425,000 jobs per month over the last two months (which would be a rocking strong total). The number of people filing first time claims for unemployment is MUCH too high for a job market boom. But still, these surveys, unless there are just huge problems with them, are telling us something, namely that there is some job growth out there. Which makes sense based on a few other things we think are going on.

February's numbers, depressed by the snow, showed some strength in wages, which implies a somewhat less weak labor market. Several sectors, including federal employment, temporary workers, and manufacturing, showed some strength. Construction was godawful, but that's probably weather related. In any event, construction layoffs have to slow radically in the coming months, or there wouldn't be any construction workers left!

As for March, the weather is currently quite good nationwide, there will be some census workers added (more in April), and there is one more month for banks to begin lending, which from what I have read hasn't started for small businesses yet (large businesses have had no problems getting money for a bunch of months). In short, this is the month where we finally get the positive job growth I've been predicting for months. You'll know as soon as you see the report whether I'm right.

There's little I like more than being right. But if I'm wrong, I'll post and let all of you know why, and what the report really said.

One other thing before I go. If my economic predictions are reasonably right, bonds are going to do VERY poorly over the next year, and stocks VERY well. If you own bonds, sell. Quickly. The Dow Jones index should get up over 12,000 fairly quickly, certainly by the middle of the Summer. 14k will soon follow. And I wouldn't be surprised if 16k or 17k followed soon thereafter. I think the market is pricing in a lasting recovery, but a weak one, that proceeds in fits and starts. In contrast, I am predicting a medium-strong and VERY consistent recovery. Predicting a consistent anything with the US economy is a surefire way to be dead wrong, but I think the amount of stimulus, both fiscal and monetary, is so historically unprecedented, that we will avoid a real slowdown for at least 2 years, and maybe 3. So the rest of 2010 will have somewhere between good and great growth, with good growth in both 2011 and 2012. The fed should begin raising interest rates in about September, very slowly and cautiously at first, and then beginning about March 2011 quite quickly, as the vigor of the recovery becomes clear. The best of the stock market growth should come between now and about June or July 2011. The next 15 months are going to be a historic bull market. For heaven's sake, BUY STOCKS! NOW.

2010-03-03T10:09:00.005-05:00

I was right about the coming United States economic recovery. Its here, its real, and its effects have already begun to be felt in the labor market. The current statistics are (slightly) wrong, will be very misleading for February, when the jobs report comes out this Friday, the 5th, but beginning with the VERY NEXT report, due out on April 2, the job growth I have long been predicting (and virtually promising) will be here. Give me 5 more weeks, and then you may judge

While my timing was very slightly off (I had predicted job growth would begin in November, later revised to "by February,") I was, I think, very right in my overall predictions. The economy will add jobs this month (when the figures are reported in early April). North of 125,000. This will herald a long period of time in which the economy is growing, steadily, but not in a boom (say 2.8-4%), and in which we are adding jobs at a rate of circa 200,000 per month. The national unemployment rate, currently 9.7%, will most likely stay between 9.4 and 9.8 % for the next 3-6 months and then begin a long, steady, inexorable drop until it is around 7.4% or so when Obama wins a 41 state reelection landslide in November 2012 running on a strongly recovering economy, which was facing a possible depression when he took office. (See my post of December 20, 2009).The real credit will go to the huge and very creative approach to stimulating the economy taken by Time's 2009 Person of the Year, Ben Bernanke, (likely destined to go own in history as the most successful Fed Chairman of them all for his deft handling of the great financial crisis of 2008-2009), the monster bailouts put through by Paulson (Bush's guy) and Geithner at Treasury, the much loathed TARP rescue of the huge banks (which I always strongly supported) and the stimulus package passed in February 2009, with virtually no Republican vote

Many books will be written about the period of bailout, from late 2008-early 2009, and how they saved the US economy. I think I have outlined these books in various posts, including this one.

Back to the economy.

There have been recent signs of economic weakness which were somewhat surprising. I don't deny this. Nevertheless, I have the courage of my convictions of the above predictions. I know I was a little early in predicting job growth last year, (so sue me!) but it is now here, and in the next several months it will be clear to all.

On Friday the government will report that a lot of jobs were lost in February, probably more than 150,000, a bad number in line with the number of job losses late last year, and not at all in line with my relatively rosy predictions repeated above. But this won't in fact be true. Instead, the awful snowstorms on the eastern seaboard and in the south will have skewed the numbers, particularly in the construction sector. A lot of people will have been furloughed as a result of the bad weather, and thus show up in the statistics as having lost their jobs. Now that March is here and the weather will VERY likely improve sharply, many of these workers will be rehired. When coupled with hiring in the service sector, the beleaguered manufacturing sector (!) and Census workers, the result will be a solid, steady job growth, beginning THIS MONTH, and accelerating in the coming months.

Here is an article neatly summarizing what his going on now-- which is in essence what I predicted months ago would happen in January/February.

http://money.cnn.com/2010/03/03/news/economy/job_cuts/index.htm

This article states that, "private sector employers cut 20,000 jobs in February, the fewest since February 2008, when employment first began to decline." In short, businesses have cut pretty much all the workers they are going to cut as a result of the economic downturn. Home builders realized long ago that they were in a depression (that sector). Large manufacturers have done their cutting and, amazingly, are now ADDING jobs. Ditto the service sector, which was hammered by a monster slowdown in demand for their services in late 2008. That demand is creeping up, slowly, but up, forcing service sector businesses to expand the hours their current employees are working, and to hire new ones, often on a temporary basis, while the business leaders wait and see how demand for their services go.

Another factor which will spur job growth this year is if the logjam breaks in DC over health care (and other issues). Now I don't know if bills will be passed and signed into law, but I do know that by the Summer bills will EITHER pass or be deemed dead until next year. This will provide increased certainty regarding costs of new employees, which will help decision makers decide to add workers. Its not a huge thing in my opinion, but it will register.

The upshot? My predictions were right, I am reaffirming them, and in early April, when the jobs report for March comes out, you'll all see that I was right.

I know I said I'd donate $100 to Sarah Palin if we didn't have a month of 75,000 job growth by February 2010. That will not come to pass in the official numbers, but I think they are wrong, and there is evidence in the unemployment survey to support my view. Look, I am paying off under the spirit of my promise, not the letter. If we still haven't gained significant jobs by April of this year, I'll pay off. Give me a few months to go through coming data and see if I may have in fact been right but for the February snowstorms. If not, I'll pay up.

2010-02-26T12:21:00.003-05:00

The most important issue facing the world.

I have come to believe that with the possible exception of global warming, the single greatest issue that the world's governments face is health care costs in the United States. I realize that sounds preposterous, but bear with me. I think I can make the case.

First some big picture background. Among the other startling changes in the world which have taken place since the end of World War II in 1945 is the absolutely unprecedented aging of the world. That is, the average age of a human being has shot up very dramatically in the entire rich world, to totally unprecedented levels. This is both because people are living much longer than ever before and, in a related phenomenon, the birth rate in the rich world has plummeted. This has, to say the least, been heavily commented on in recent years.

The average age of a human being has also gone up dramatically in most of the non-rich world, but this post focuses on the rich world (not least because I know a whole lot more about it).

In the rich world, which I am crudely defining as the US, Canada, Japan, all of Western Europe (even Greece), and a select few other countries which share rich world characteristics, specifically Taiwan, Hong Kong, Singapore, South Korea and Israel (these last two are two of the post-World War II world's most inspiring, unbelievable success stories-- I really should write a post about that someday). At the end of the Korean war South Korea was among the poorest countries on earth-- that was 1952. In 2009, South Korea has a per capita GDP very close to that of Italy! Its per capita GDP is about 59% that of the United States, and about 84% that of France, a staggering figure given the complete abject poverty it faced in 1952, the existence of a nutty, implacably hostile regime bordering it, etc. In raw #s, the United States' per capita GDP is about $46,000, and South Korea's is about $28,000.

www.wikipedia.org/wiki/list_of_countries_by_GDP_(PPP)_per_capita.

The entire rich world as I've defined it has one particular hugely significant demographic fact: the population is aging quite rapidly. In a select few countries, notably Japan and Italy, the number of people is actually falling for the first time since 1946, as more deaths are recorded than births. There are a series of reasons for this monster demographic shift which have been the subject of many hundreds of books. In the US, this trend is very much in place. However, our average age is increasing less rapidly than in any other medium sized or larger rich country because we have higher immigration than most and a higher birth rate than most. Nevertheless, this trend is very much in place here in the US.

One other "minor" note on demographics before I move on. China is not yet rich, though if you visited the big cities you could be forgiven for thinking otherwise. But due to the infamous one-child policy, and mass industrialization in the last 30 years, China's demographics have moved hugely towards those of the rich world.

Put simply, as I recall it, and I have not researched this point, the entire US will have the age profile Florida does now in circa 30 years. Imagine that for a second-- a US the same age as Florida. WOW! Also in around 30 years, China will have the same average age as the US does now. In the lifetime of a single person, China's demographics will have swung from those of a dirt-poor country to those of a rich country! In any event, the demographic changes since 1945 have been utterly astounding, truly amazing!

And old news. Ok, flyingpinkunicorns, shut up about demographics and get to the point! As people get older their health care costs rise. This is something less than a revelation.

As you've heard a lot in the last year unless you've lived on the moon, health care costs in the US are very VERY VERY high, per person. In fact, these costs are almost exactly TWICE the costs of France, per person. (Very slightly more, based on the latest figures). France is a large wealthy country with a health care system that works quite well thank you very much. I'm not picking some small, obscure, quirky country that isn't remotely similar to the US. France is also not an outlier- Japan spends less per person, Germany about the same. Now the US is richer than France, so perhaps somewhat higher costs per person might make sense. We're also world beating world leaders in the most expensive forms of health care, which might also justifiably drive per person costs up somewhat. However, we have about 310 million people and France has about 65 million, so perhaps maybe we should have some better economies of scale. Anyway, we spend slightly more than twice per person what France does on health care each year, and the gap between France and the US grows inexorably each and every year. This difference is just HUGE. We spend something like a TRILLION DOLLARS more every year on health care as a nation than we would if we spent what France did per person. A trillion, for those not used to these sorts of numbers is a million million!!! That's every year. Our entire GDP is about $13 trillion. So 1 out of every 13 dollars worth of value that Americans produce each year is spent on additional spending on health care spending above and beyond what we'd spend if we spent like France. Our health outcomes are worse than France, but that's beyond the scope of this post.

Worse, as I said, the gap between what we and France (and every other rich country) spends per person grows every year, and not by a little. In just 10 years, by my back of the envelope calculations, we'll spend about 1.8 TRILLION DOLLARS more per year as a country than we would if we spent what France does per person. This is insane, and unsustainable.

I think its actually crystal clear that with the possible exception of global warming, health care costs in the US are the biggest issue our government faces. Health care is everything, in my not-humble opinion! But the most significant issue in the entire world????

Yes, the entire world. As I said above, every rich country (and most emphatically China too!) has the same demographics, with slight differences in timing (large differences in the case of China). So every rich country is facing the same explosion in health care costs that we do. Its as predictable as the sun rising in the east tomorrow.

This next point may seem quaint, even silly, but I believe it to be quite real. The rich world looks to the US as an example! Now in recent years our politics have become quite silly, and thus no one is really looking at us except as a model of how NOT to do things. But since every rich country faces precisely the same problem in one fashion or another, a significant US effort to tackle health care costs would be watched very closely in Berlin, Tokyo, London, Seoul, etc. And yes, Paris too. Conversely, if after all the effort the last year, we fail to tackle the issue, that failure will be noted in those same capitals. After all, their politicians, elected all, (Beijing a huge and notable exception) face the same electoral pressures that ours do. If the super-rich huge US can't tackle its HUGE increases in health care spending, how can we in modest little Rome (or wherever) hope to take it on? I don't want to overstate this, but a successful US effort will redound positively in various world capitals, while an abject failure will redound negatively.

And make no mistake about it, health care costs are huge, huge issues in nearly every (really every) rich country. Follow any election anywhere in the rich world if you don't believe me. One reason the Tories are about to take back power in the UK is that the UK public believes they can now be trusted with the much loved, (and in some cases much loathed) and much abused National Health Service ("NHS"). (In order to give you an idea of how popular the NHS is in the UK, a politician running to abolish the National Health Service in the UK would have about as much success as one running in the US on a platform of abolishing Social Security and Medicare-- not much at all!). Canada's Medicare system (the identical name is a coincidence) is a huge political issue. It has had huge problems in recent years, many of which have been worked on and partially solved. Ditto the NHS in the UK. As Western Europe ages (faster than the US), managing the graceful decline of the welfare state just as more people need it is highly likely to be one of the defining issues in elections there for decades. It is difficult to overstate the critical importance of health care costs and delivery to the future of that portion of humanity that lives in the rich world.

Everyone who studies these things knows that the rich country with the most out of control health care costs is, by far, the US. Because of the huge problems in our health care system, the huge effort by Obama and the democrats to take it on over the last year, and the still out sized size and importance of the US, the outcome of our health care battle will be felt and heard around the rich world for years, perhaps decades. That's why I consider health care the most important issue facing the world, as well as the defining issue of our time in the United States.

Damn it, Congress, PASS THE SENATE BILL. Now. Then fix it as best you can during reconciliation. Then, after we lose seats in 2010, improve it in 2011. Then, after Obama rides my long-predicted economic expansion to a 40 odd state reelection landslide in 2012, improve it some more. Then improve it some more. This is a generational project. It took generations of bad policy to get in the hole we're in, now start the process of digging us out!

2010-01-20T12:33:00.002-05:00

What does the MA Senate race mean?

As most or all of you know, unknown Republican Scott Brown beat the sitting Attorney General of Mass by 4 in a Senate special election. This race was primarily a referendum on Obama and the huge effort to reform health care. The results are crystal clear. In DEEP blue Mass, which Obama won by 26 (!), a basic political nobody from the GOP won and took Ted Kennedy's seat, which he'd held since 1484.

Don't believe anyone who tells you to the contrary, this election, coupled with the New Jersey governor's race in 2009 (blue state incumbent governor kicked out) and the New York mayor's race (highly popular incumbent BARELY squeaks to reelection) tells you the voters are as pissed at those in power now than probably at any time since 1932. Seriously. Right now, the dems have the power, and the voters are FURIOUS. As I recently said, if the McCain/Obama election were rerun right away, McCain would win solidly, possibly in a landslide. And Obama himself isn't unpopular. The voters are in a blind rage!

Phase I of the Obama presidency (Solid win, mandate to do big things, some willingness to do big things) is now over. The democrats are highly likely to run around like terrified rats on a sinking ship, scurrying to do what they think they must to save their own skins. The actual interests of the US of A will of course come in a distant second. This bodes ill for health care reform, immigration reform, energy reform. Of course, a do nothing congress is child's play to run against. America has all these big problems, you folks had all the power for two years, and you did diddly squat. Don't need Karl Rove to run THAT campaign!

The BIG question is what happens to Health Care reform. The democrats, as Andrew un-boldly predicted, are publicly swearing off hardball options, like ramming a bill through fast before the new Mass Senator is seated, or having the House vote on the Senate bill without a single change (It could then be signed by Obama). The chance of no health care bill has now gone up exponentially. That would very likely lead to an electoral wipeout in 2010, with the GOP taking back the house and coming very close in the Senate (dems currently hold 59 seats, counting Lieberman and Sanders, two independents) with the GOP holding 41.

If my very sunny predictions about the economy turn out to be wrong, the dems could face an electoral wipeout of epic proportions, particularly if they don't pass the unpopular health care bill. So why pass it? Because running against it in the abstract, as the GOP has, is MUCH easier than running against it as a law. Are you opposed to insurance companies NOT being able to discriminate based on pre-existing conditions? Try selling THAT to voters. Against greatly increasing coverage? Easier sell, but easy counter-sell. Want to give insurance companies MORE power? Good luck selling that. Selling this law, however much I despise the current bill, is HUGELY easier than selling it as a bill.

More to the point, the bill, however hugely flawed it certainly is, is a gigantic step in the right direction, overall. It turns the insurance companies partially into public utilities, a key step on the way to phasing them out, which is critical for the prosperity of America in the long run. It helps millions of people, almost immediately, by restricting health insurance company practices. It takes a big step (though not a huge one) towards universal coverage. It raises revenue, which we desparately need to do. The federal government BOTH spends too much AND taxes too little. Sorry GOP folks, but 2+2 =4, not 7.3, no matter how much you wish it too. If you support the continued existence of Medicare, Medicaid (in some form), social security, national defense, and don't wish to default on our debt, taxes must rise. Its really that simple. And the HC bill DOES raise some money. Of course it spends it as well, but the spending may end up shifting some spending within the health care system from the private sector to the government, resulting societal savings in HC overall, which I hugely support. So its worth fighting for, and, politically speaking, worth dying for, as horrendous and awfully flawed as it is.

Now we're in phase II of the Obama presidency. He's at about 50%, large, fairly compliant majority in the House, speaker totally on his side. Senate Leader is going to lose his seat in 2010, so he's not nearly as on Obama's side, but he STILL HAS 59 SENATORS. Can they get anything done? If not, they're not worth fighting for, except insofar as the GOP WOULD get things done, bad things, which would harm the republic, put us deeper in the fiscal hole, and make the US a far less fair and just country. The actions of the Senate in the next 2 weeks will tell us a giant amount about the next 10 months, before the 2010 elections.

And since full campaign mode will begin about early Summer, I am hugely pesimistic about big things getting done that are tough. So basically, with HC on the 5 yard line, first and goal, we just took a false start penalty and a sack. Is Obama going to play it safe, and try and kick a field goal (most likely result) (get a much smaller, watered down even further bill through in reconciliation) or is he going to try and force it into a very small space and let his receiver go make a play (call on the public to FORCE the Senate to vote-- but Harry would have to declare war and cooperate-- which he wouldn't).

Make no mistake, my readers. The democratic agenda is toast. Not because we only have 59 Senators, but because as a party, especially including our president, we are unwilling to take the big risks that bring big rewards.

I wanted Gore to run. When that didn't happen I was for Hillary. I hardly had a kind word to say about Obama. A year in, I can't say I've regretted the decision to support Hillary over Obama, even once, for even one second.

Woe is us.

2010-01-18T16:33:00.002-05:00

Oops. The new polls are MONSTER favorable to Brown, the Republican in Mass. I retract my earlier prediction. I don't have the foggiest idea what's going to happen in Ma. tomorrow. Not a clue.

2009-12-21T20:29:00.002-05:00

Obama is about to become more popular. Then less

Since I've been throwing around predictions as freely as Joe Lieberman has been throwing around positions on health care legislation, here's one more. Obama's popularity ratings in recent polls has been around 48-49%. I predict he gets about a 5 point bump if health care reform passes both houses and he signs it into law. This will last about 15 minutes, then Obama's popularity will resume its downward slide, into the mid 40s, or perhaps even the low 40s. From there I'm not sure yet. I have him in the low to mid 40s in say mid-February, the next move in his popularity will depend on: (1) the strength of my predicted Obama Boom; and (2) how much credit Obama gets for the coming recovery in the job market. I'm not sure about how much credit he'll get for that, I'll have to think about it.

2009-12-20T15:12:00.001-05:00

Projected unemployment rates going forward.

I decided to predict job growth and thus unemployment rates going forward as the Obama Boom gains steam. The results were incredibly disappointing.

June 2010: 9.5%

December 2010: 8.7%

June 2011: 8.2%

December 2011: 7.7%

June 2012: 7.2%

December 2012: 7.1%

In other words, assuming I am right about the predicted Obama Boom, assuming it is of decent strength, and assuming it lasts uninterrupted until at least December 2012, three years, the unemployment rate in December 2012 will be around 7.1%. Although hugely better than the current 10%, 7.1% isn't exactly what we would call a Boom. That's how deep of a hole we are in as a result of 8 years of failed Bush policies, coupled with 8 years of total abdication of oversight responsibilities by Congress, including the last 2 years in which democrats had control of both houses of Congress. Nice work people.

My predictions on the general course of the economy since January 2009 have been good. Let's see if I can continue my recent economic forecasting, and put it to some good use. I am, of course, on record predicting an Obama Boom, starting about now, with job growth beginning before February. In this post, I decided to make some assumptions about the number of jobs created going forward and to crunch some numbers and thereby project the unemployment rate

In this post, I predict what the US unemployment rate is at various points in the future. The unemployment rate is of course a percentage, or a fraction, with the numerator being the number of unemployed people in the country and the denominator being the total work force (employed persons & unemployed persons who wish to work). The denominator does NOT count people not looking for work. So to take a simple example, if 10 people want work, and of the 10 9 are working and 1 is not, the unemployment rate is 10%. Thus in order to predict the unemployment rate, I must predict 2 things; (1) the number of net jobs created per month; and (2) the growth in the labor force. Predicting job growth is very hard, to say the least. Predicting labor force growth is quite easy in normal economic times. Coming out of a recession is the one time it is hard, and coming out of a deep recession it is especially hard.

The number of unemployed people are reduced each month by the number of net new jobs minus the growth in the labor force. That is, growth in the labor force tends to increase the unemployment rate, all other things (namely net job growth) being equal. For the mathematically inclined, number of people currently unemployed - (net new jobs created in December 2009 - growth in labor force in December 2009) = the number of people unemployed at the next report, in January 2010. To find the reported unemployment rate in January 2010, you take that new number of unemployed and divide it by the total labor force in January 2010.

That's how it works. I'm sure there's a simpler way to explain it to all of you, but I can't figure out how in a text format. I'm confident that if someone buys me a drink I can explain it better f2f.

As of December 1, 2009, according to the Bureau of Labor Statistics (the most commonly accepted and most comprehensive source), there are 15.375 million unemployed people, and the Labor Force is 153.9 million. Hence the 10% unemployment rate widely reported in the media. Note that these figures come from the current population survey.

http://www.bls.gov/

According to that survey, there are 138.5 million people working. 15.38 million unemployed + 138.5 million people working = 153.8 million for the total labor force. 15.38 million unemployed divided by 153.8 million total labor force = 10% unemployment. The total labor force does not perfectly equal the number of employed + the number of unemployed (as it should) due to rounding and other minor issues. Nevertheless, these are the numbers used by the bureau of labor statistics and reported on by the press.

According to the other major government employment survey, which attempts to accurately count the number of jobs, there are, as of December 1, 2009, 131 million non farm jobs, almost exactly. When you hear in the news that the economy created/destroyed X number of jobs in a given month, or year, that number is from this second survey. In the past, the number of jobs according to the second payroll survey has increased far faster than the number of jobs in the population survey. Thus the reported unemployment falls noticeably more slowly than the actual improvement which takes place in the job market. This is highly likely to happen in the coming Obama Boom. In any event, don't worry too much about this relatively minor statistical issue. If you read the rest of this post and the media reports in the coming months you'll understand my predictions (and, more importantly, what's going on in the labor market) just fine.

In general, when our economy is weak, growth in the labor force slows or even stops, as many people despair of finding a job, stop looking for work, and thus are no longer counted as part of the labor force (discouraged workers). As the economy recovers, the number of people in the labor force increases faster than usual, as formerly discouraged workers begin to look for work again. This will have a very significant impact on the size of the labor force as the economy recovers in 2010 and 2011. Alan Greenspan estimated recently that the Labor force under normal circumstances grows about 100,000 per month. This figure is consistent with what I have read elsewhere, and I accept it. The labor force did not increase at all in 2008 and 2009 due to the weak economy. Given that the labor force did not increase at all in 2008 or 2009, it thus has 2.4 million fewer workers than it would have if the economy had remained reasonably strong. (24 months (I'm assuming no growth for December 2009) multiplied by 100,000 per month). This is a huge, huge number! As many of these people happily trickle back into the labor force, the reported unemployment rate will drop far more slowly than it otherwise would as strong job growth resumes in 2010 (see my predictions, below). In short, this very unnatural pause in the growth of the labor force means that absent truly spectacular job growth, the reported unemployment rate will stay quite high for years to come.

I am, for simplicity, estimating 1/3 of this 2.4 million people are added back into the labor force each of the next 3 years. That's highly unlikely to happen so precisely, of course. Instead, more will reenter the labor force as time goes on and the economy improves, thus convincing people they can find work. However (a) I can't really make even an educated guess how it would break out; and (b) doing so would mean a lot of extra work for little extra gain in the accuracy of my predictions.

Accordingly, I assume for purposes of this post that the Labor force increases by 2 million per year for each of the next 3 years. This figure covers both the 1.2 million people that would normally be added to the labor force each year, plus the 800,000 per year for each of the next 3 years that are going to return to the labor force due to the stronger economy, as discussed above.

Two million people per year results in an average increase in the labor force of 166,666/month, for the next 3 years. This means that going forward if the economy gains 166,666 jobs in a given month the unemployment rate will stay the same (assuming no statistical fluctuations). If the economy gains 200,000 jobs per month for the entire year of 2010 (a halfway decent total, if a weak number at the start of an expansion), unemployment drops by only 400,000 people, a pathetic, godawful number for an entire YEAR early in a recovery. The unemployment rate would only drop by .4%, from 10% currently to 9.6%!!! Fortunately, I predict that job creation is going to be significantly stronger than 200,000 per month.

Note that I further assume that for the month of December 2009, there is no growth in the labor force and zero net jobs created. This assumption is merely for convenience.

Predicting how many jobs will be added per month, is of course very difficult. I could end up being way, way off. In addition, I predict a fairly smooth path to recovery. This is in fact unlikely to happen. Month to month, or even quarter-to-quarter, events are highly likely to unfold quite differently from how I predict. But over 6 month or year-long periods, my predictions may fairly be judged, as longer periods of time smooth out random fluctuations in both the economy and the federal statistics.

Here are my predictions, for all the world to see, and marvel at down the road:

January-June 2010: 275,000 jobs created per month.

Unemployment rate projection for June 2010: 9.5% (with 154.877 million people in the Labor Force and 14.73 million people still unemployed!) Since I don't expect as many people to rejoin the labor force earlier in the Obama Boom as I do later on, my REAL prediction for unemployment for June 2010 is 9.4%.

I note that this is an exceptionally daring prediction, FAR more optimistic than nearly every private forecaster. My reasons for being so optimistic about this time period are:

1) More of the federal stimulus money will be being spent;

2) Businesses cut far more jobs in 2009 that was justified by the drop in output/orders. I call these "panic job cuts." These will, I predict, begin to be quickly reversed, as corporate America already realizes that the risk of a second Great Depression has been more or less eliminated and will soon realize that the Obama Boom has begun.

3) Rock bottom interest rates have had even longer to work their way through the economy;

4) A boatload of temporary workers, more than 500,000, will be hired for the census, mostly during this time period;

5) I think that the jobs survey is currently underestimating the number of jobs being created, thus my 250,000 per month estimate is less of an increase over what is currently going on that is apparent;

6) I expect the serious problem of banks being unwilling to loan money to the small business sector, probably the number 1 headwind the economy faces, to begin to be solved towards the end of this 6 month period

7) I expect mortgage and car loans to get slightly easier (less hard) to get during this time period;

July-December 2010: 355,000 jobs created per month (!)

Unemployment rate projection for December 2010: 8.7% (with 155.877 million people in the Labor Force and 13.6 million still unemployed!)

Now the job machine has really turned on. This is also a daring prediction. Basically, I'm predicting a very strong recovery in 2010, with GDP growth probably above 4% and very possibly above 5%. This is of course in line with my other various posts predicting an Obama Boom, but is WAY WAY off of the consensus economic forecast of the people with the ultra fancy degrees and years of experience. Well, pardon my immodesty, but barring some huge external event, like a new big war, or oil going back over $150 a barrel and staying there, I'm RIGHT and the fancy PHDs that make good money trying to predict the economy are WRONG. What makes this fun, of course, is that time will answer this question. At the end of 2010, I'll either be right, plenty close enough to declare victory or, if the economy is much weaker than I expect, just dead wrong. And it'll be clear to all that read my blog and all those I talk to.

January -June 2011: 300,000 jobs created per month.

Unemployment rate prediction for June 2011: 8.2% (with 156.877 million people in the Labor force and 12.8 million people still unemployed.

I expect at least a mild slowdown from the previous 6 months because temporary census workers will be laid off starting late in 2010, the stimulus' effect will have largely been felt. On the other hand, by this time it will be crystal clear to all that the recovery is very real, and business investment and consumer spending could both propel upwards rather quickly.

I should add that trying to predict minor fluctuations a year out is, well, impossible. Predicting the macro trend of the economy is incredibly difficult, predicting minor changes within that trend is well-nigh impossible.

July-December 2011 255,000 jobs created per month.

Unemployment rate prediction for December 2011: 7.7% (with 157.877 million people in the Labor force and 12.27 million people still unemployed.

I expect monetary policy to tighten (interest rates increasing and the fed rapidly slowing the growth of the money supply and ending various extraordinary programs) beginning in about July 2010 and picking up speed through the end of 2010. The strong effects of these changes should begin to be felt in the July - December 2011 time frame.

January-June 2012 295,000 jobs created per month. The economy rebounds from a slight slowdown the previous 6 months, just in time to ensure Obama's reelection.

Unemployment rate prediction for June 2012: 7.2% (with 158.877 million people in the Labor force and 11.5 million people still unemployed.

This number is crucially important to Obama's reelection chances. If I'm way too optimistic here, and the actual unemployment number is over say 8.5%, he's in trouble. Over 9% he's toast. If, however, I'm right, and the unemployment rate is fairly close to 7.2%, and has been dropping for a long term, I think he'll win by more than 10 points.

July-December 2012 200,000 jobs created per month

Unemployment rate prediction for December 2012: 7.1% (with 159.877 million people in the Labor force and 11.3 million people still unemployed.

The economic hole we are in is SO DEEP that even after 3 years of pretty damn good growth in the number of jobs in America, the unemployment rate will still be 7.1%, a figure well above the average for the any decade since the 1930s. This is really not good.

Its of course possible that I'm not being optimistic enough. However, even a REALLY strong Obama Boom would still only bring the unemployment rate in December 2012 down to around 6%, still not full employment.

A final word of caution: Needless to say, my predictions after say June 2010 are merely guesses. But I have to make them in order to even take a stab at projecting/predicting the national unemployment rate in the future. And you wonder why economic forecasts are so very unreliable? The actual results are unlikely to be this smooth. But if I'm pretty close on each of these I will have done a spectacular job at predicting the recovery of the shattered job market. Conversely, if I'm way off, well I'll join the crowd.

2009-12-16T14:29:00.001-05:00

Time listens to me

Time has named Ben Bernanke person of the year, just as I advocated. Glad someone out there is doing as flyingpinkunicorns suggests. Now if only congress and the president would listen to me, we'd all be much better off!

2009-12-15T12:27:00.003-05:00

Ben Bernanke should be Time's person of the year

I call on Time to make Ben Bernanke the 2009 person of the year. Its not even close. Sorry Barack. More so than even Geithner, he has led a hugely aggressive, hugely creative and hugely successful effort to save the US and world economies from a second Great Depression, a fate which looked altogether too likely when 2009 began. This famous scholar of the Great Depression was and is bound and determined not to let another depression happen on his watch, and he has succeeded beyond almost everyones expectations, though not mine. As 2010 begins, the economy has, at a minimum, even if I'm WRONG on all of my predictions, clearly avoided a Great Depression, where unemployment rises well above 15%, perhaps even 20%, and mass bread lines form. And with a different less aggressive and determined Federal Reserve Chairman, that could have been our fate.

And, of course, as my loyal readers know, I believe that the economy is poised to begin a spectacular multi-year boom, which I have labelled the Obama Boom (because that is how the public will perceive it) although it really should be called the Bernanke boom. And with private debt considerably lower than before the Great Recession began in 2008, we are beginning 2010 on a sounder footing for a sustainable recovery than at any time in a great many years, probably since before the Vietnam buildup in 1966! Bernanke is in no small part the one man to thank for this wonderful scenario, and that's why he's my runaway choice for person of the year. In fact, if I were to pick person of the decade he would be a serious contender, and probably my pick, (Bin Ladin? W?) despite being only a minor player on the world stage until he succeeded Greenspan in 2006. Here's to W's one positive lasting legacy! When you sip champagne at 12:00 a.m. on 1/1/10, spare a thought for Ben the Great!

2009-12-12T10:53:00.005-05:00

I'm going to donate $100 to Sarah Palin if I'm wrong.

EDIT 12-14-09: I have decided that the terms of my promise were too lenient-- I will donate $100 to good old Sarah unless the economy creates at least 75,000 jobs in at least one of December, January 2010 or February 2010. The only caveat is that this wager may not be settled until the final revisions for these months come in, in the middle of 2010. I actually think that we may be well over 100,000/month by February, and I may win this little wager very easily.

The job market is going exactly as I predicted. If the economy doesn't add jobs in a month before March 2010 (that is, in at least one of December 2009, January 2010 or February 2010), I will donate $100 to Sarah Palin's PAC (absent, god forbid, some huge calamity that interrupts the normal ebb and flow of the economy).

http://www.sarahpac.com/

As I DESPISE Sarah Palin passionately, this will HURT! But I need to demonstrate to all of you how sure I am that not only is the recession well and truly over, but that we will have a strong recovery, that will have job growth and that that will happen beginning VERY soon! I recently predicted that the economy would begin gaining jobs in about February 2010. Looks like I wasn't optimistic enough!

Oh, and if there's only one positive month, and its just BARELY positive, that will be a cheap win, and I'll STILL donate the $100!

All of the political discourse these days is about how Obama's poll ratings are falling (they are), health care reform is mildly unpopular (it is), and the job market, though less bad, is still absolutely awful (it is). This last point, as I've been telling you for months, is about to change. Too bad it won't be in time to help Obama pull the mediocre health care reform effort over the finish line.

Its amazing that the conventional wisdom is so slow to adjust to events that are reasonably clear. The conventional wisdom is still that the job market may get worse through at least the first half of 2010 and in any event won't improve much. Well, either I'm right and the conventional wisdom is wrong, or Sarah Palin's getting $100 from yours truly.

Recent economic reports have been strong. Consumer confidence (according to the University of Michigan survey, highly regarded in this area) rose to 79.1, from 68.8. In March 2008, as the recession had just begun and Lehman Bros was still worth billions, it was 84.2. Consumer confidence is at a number which indicates a soft economy, but NOT one in recession. Consumer confidence, and perceptions, are catching up to reality. The recession is of course well and truly over and GDP is expanding quickly.

I don't have the time right now to do the research to compile an estimate of 4th quarter GDP (the 4th quarter does end on December 31), but the growth will be strong, at least 3%, and don't be shocked if its up over 4%. Inventories at businesses are up, which is usually BAD for growth, but right now indicates rapidly increasing business confidence (rapidly increasing from the sub-basement that is).

The early news on holiday sales is reasonably good. In fact, retail sales jumped 1.3% in November, a stunningly good number, if it were free from sizable distortions. It isn't, but its still a solid number, indicating strong growth in the overall economy, and of a piece with the improved consumer confidence numbers.

Between improving consumer confidence, downright decent retail sales, the fallen dollar (which has already helped exports), and fairly good import/export reports, businesses are rapidly becoming convinced that they need to stop shedding employees, and need to consider starting to add employees.

Stay tuned. In an upcoming post I'll make some predictions about how many jobs will be created on average every 6 months, and working from that will make an educated prediction on the unemployment rate over the next few years.

2009-12-07T11:13:00.003-05:00

Obama will dedicate leftover monies from the bailout to deficit reduction and job creation

As you may have heard, the Treasury Department has announced that it now expects to recover a lot more of the money it lent out to banks and other financial institutions in the various bailouts than was previously announced. In fact, as of this moment, the Treasury expect to MAKE A SMALL PROFIT from the money lent to the banks.

www.nytimes.com/2009/12/07/business/07/tarp.htmp?_r=18&hp

In short, the bank bailouts worked, and worked spectacularly well, at saving the banking system, as I have been saying. Bernanke/Geithner/Paulson are, at least as of now, heroes for their post September 2008 actions. (Their role pre September 2008 is, happily, beyond the scope of this post).

There is a large amount of money currently available to the Treasury Department for additional bailouts. I don't know how much, as this amount hasn't been released, but it is likely over $100 billion, possibly way over. The huge majority of this money is very unlikely to be needed for additional bailouts. I therefore predict that Obama and Congress will soon agree to dedicate around half of this "found money" to deficit reduction, in order to sound concerned about the deficit/high levels of spending, and around half to a new stimulus package, labelled a job creation program. Its a political win-win, and reasonable economically. This new job creation package will likely focus on construction spending. This could happen quickly, perhaps even as soon as Obama's speech on the economy tomorrow night.

Folks, the bailouts worked, the economy is recovering, the economy is on the verge of creating new jobs, and a new road/highway/bridge/tunnel building program is about to begin (which program is perfectly reasonable, given the decrepit state of our nation's infrastructure). My predicted Obama Boom will be clear to all in a few short months. If you have money you're thinking about investing, for heaven's sake, MOVE. Stocks and houses will both be more expensive in a few months than they are now, stocks much more so. Buy now, before the market realizes that the Obama Boom has begun!

2009-12-03T10:50:00.005-05:00

The job market has already improved

The news on the labor market, and thus the overall economic recovery, is even better than I thought. The job market is only slightly ahead of where I expected it to be on its road to recovery, and is significantly further along than nearly anyone expected. I remain extremely optimistic about the coming Obama Boom, far FAR more optimistic than nearly every economic forecaster and talking head.

Here are two articles about the November employment report, released yesterday.

http://money.cnn.com/2009/12/04/news/economy/jobs_november/index.htm

http://www.nytimes.com/2009/12/05/business/economy/05jobs.html?_r=1&hpw

In November, the economy lost 11,000 jobs. (I note that this number is seasonally adjusted. This means that, for example, the economy ALWAYS gains a lot of jobs in November as retailers gear up for the Christmas shopping season. The 11,000 number is derived after the seasonal effect of increased November hiring is stripped out). Given that there are 130 million jobs in the US, 11,000 is a tiny, number, statistically. Basically, there was no net job loss in November. We always speak of NET job gain or job loss, because many tens of thousands of jobs are gained and lost in every month; jobs are created in the deepest of recessions, and lost in the strongest of booms. That churning always takes place. What matters from the perspective of the entire economy is the net of those numbers. And in November, the net was about zero, and the closest it has been to zero since late 2007.

The media focused on the unemployment rate dropping by 2 tenths of a percent. While this was surprising indeed, in my opinion the important number is the number of net new jobs, not the unemployment rate, which is, in my view, a more flawed statistic, for a variety of reasons that I'll explain by e-mail if someone asks.

Since the labor force grows by 130,000 per month, or thereabouts (immigration, more people turning 18-23 than are retiring) the economy needs to gain about that many jobs each month just for the unemployment rate to stay even. So if the economy loses 11,000 jobs and the unemployment rate drops, you have a statistical anomaly. The statistics are flawed enough that this sort of anomaly is well within the normal range of statistical background noise.

Back to the actual employment report. As the New York Times article above put it, the jobs report is the strongest since the recession began in late 2007. Since 11,000 jobs were LOST, least bad since late 2007 is a better way of putting it.

There were, however, significant positive indicators in last month's employment report. First, the number of jobs lost in September and October were both revised down, by a total of 159,000. In and of itself this is good news. The fact that both revisions were in the same direction is even more significant.

Second, the average work week increased from a record low of 33 hours in October to 33.2. This is highly significant, because in many cases businesses can work their existing employees harder before hiring new people. That number, still extremely low, is at least on the rise. In addition, increased hours means, in many cases, increased income, which means increased consumer spending. One month's increase in the average hourly work week is not very significant, but if this becomes a trend, it becomes highly significant, both because employers will be forced to hire more employees, and because of the aforementioned increase in consumer spending.

Third, the number of temporary workers increased by 52,000, the most in five years. In many cases, businesses hire temporary workers when they first need additional labor, and later, as conditions for their business continue to improve, they add permanent workers. The number of temporary workers is the proverbial canary in the mine-- temporary workers are, almost by definition, the first to be fired in a downturn and the first to be hired in an upturn. The 52,000 number is itself somewhat significant, but the trend, if it continues, is hugely significant.

In summary, this was a significantly less bad report than any in the last 24 months, and it gave tantalizing hints of possibly GOOD employment reports to come, starting soon. It is encouraging for my predictions of a very strong economic recovery.

What does this report mean going forward?

The first rule of interpreting government statistics (after being skeptical in general) is that one month does not a trend make. That must be kept in mind. It wouldn't surprise me overmuch if December and January's reports were less positive/more negative. You need at least 2 months, and preferably more, before you can begin drawing conclusions.

However, the other news I have seen recently gives me no reason to believe that the underlying labor market has become significantly less bad, and will continue to improve in the next few months and beyond. I have had absolutely no reason to question my great optimism about the vigor of the coming Obama Boom.

First, Challenger has reported that the number of job cuts slowed in November to the lowest rate in two years.

http://money.cnn.com/2009/12/02/news/economy/job_cuts/index.htm

This is consistent both with the November employment report (released two days later) and with what I have expected to see and am now seeing. Businesses have cut so very many workers that they are about done cutting headcount, unless demand (the overall economy) takes a sharp turn for the worse. Businesses, in my opinion, have already cut enough workers given the current demand for the goods & services. As that demand picks up, the number of new jobs created (not net new jobs, just new jobs) should increase sharply from the current low levels. This, of course, leads to the creation of net new jobs in the event that the numbers increase above job cuts.

Second, new filings for unemployment claims have also fallen recently, though to still fairly high levels. This number (correlating strongly with the number of jobs destroyed due to falling demand) dovetails with the above-mentioned Challenger report. Simply put, businesses are firing a lot fewer people, since they have already laid off so many due to the decline in demand. As soon as businesses realize that they need significantly more workers, which I still predict will occur this Winter, probably in February, the number of net new jobs should turn (and stay) positive. This will not be a jobless recovery. To borrow a phrase, net new jobs, and lots of them, are right around the corner.

2009-11-21T09:56:00.002-05:00

Friedman and Kristoff get it

In a column published in the NY Times on November 7 of this year

http://www.nytimes.com/2009/11/08/opinion/08friedman.html

Thomas Friedman basically gave up on the prospects of peace between Israel and the Palestinians in the short term, and came out against any further US involvement in trying to restart negotiations between the parties. I (sadly) agree strongly with this column, the thesis of which is that the US should stop bothering to try and broker a peace agreement that neither side wants! If they decide they want it, they know where to find us. As he put it, borrowing a line from the State Department, the Israelis want negotiations without a deal (so they can be seen and see themselves as trying for peace while always expanding their precious settlements which, given the dramatic downturn in violence from the Palestinians, is Israel's primary short term goal these days), while the Palestinians want a deal without negotiations. Oh sure, the Palestinians want a peace treaty, but even those that will negotiate with Israel, such as Abbas, don't want to actually give up anything, such as a never-will-exist right to return to Israel proper, or a total giveback of all lands captured in 1967. (I favor such an Israeli giveback, except for the old City of Jerusalem, as in Israel's selfish interests, but never mind...) And why won't Abbas and his ilk negotiate about now? Because even so-called moderates in their midst might well put a bullet in their heads. Oh, and Hamas runs the West Bank, and their official position is that Israel has no right to exist, and of course no formal negotiations. Lovely. Even if Israel WANTED a workable peace deal, which in my opinion it basically doesn't, it has literally no one to negotiate with!

So neither side really wants to talk turkey. I said a while back that I'm opposed to Israel resuming peace talks because Abbas has no base and can't deliver anyone. While that was and remains true, Frideman's argument is vastly better than mine. No more negotiations because neither side really wants to reach an agreement. So taking Friedman's insights and formulation into account, my plan is: (1) leave both sides mostly to their devices; (2) prevent the Israelis from further self-destructive settlement expansion; (3) let the Gazans stew in their rocket launching juices; (4) ignore the West Bank; and (5) be done with the whole damn thing. Friedman's right, if they want to talk, they know where to find us. I wish I could support peace negotiations, but right now I don't, for the reasons so very well stated in Friedman's column. Excellent job, Tommy!

As for Kristoff, in his column in the Times Thursday November 19th,

http://www.nytimes.com/2009/11/19/opinion/19kristof.html

he said that the GOP health care naysayers of today are saying many of the same things, sometimes literally the same things, that (mostly) GOP opponents of the creation of Social Security in 1935 and Medicare in 1965, said. Back in the day, the naysayers said Medicare would ruin health care, it was a step to socialized medicine, the government would get between you and your doctor. Nonsense. In 1964, way too many elderly in America HAD NO REGULAR DOCTOR because they couldn't afford it. After 1965, they could. Medicare was the reason. Sure, its mighty expensive, and has to be radically altered or it will, literally ruin the country, but America without Medicare is literally unthinkable. Elderly people having to chase down free/reduced cost care. Monster unmet health needs. Gigantic numbers of elderly dying for want of readily available care. Appalling. Kind of like what happens to thousands of uninsured annually today, you understand, but radically worse, because the elderly need health care far more than younger folk, and are in a worse position to find information, reduced cost or free care, etc. In short, it would be a nightmare for the nation and a living hell for way too many of the elderly. As for the politics, if the GOP ever put to a vote a full repeal of Medicare it would probably be the end of them as a party, literally. I could imagine the democrats winning a 50 state landslide by 25 points, and holding 80-85 seats in the Senate and a similar proportion in the House after the GOP tried it. Medicare is wildly popular among the elderly, for all of its flaws, and both parties know it. It is also popular among the non elderly population.

As for social security, the "end of the progress of a great country," was the quote from one speaker. That's right, ensuring that no elderly person in America lives in truly abject poverty will finish us off as a great nation! Think we're richer and better off than in 1935? Or 1945? By a wide, wide, wide margin, in every measure. Longer life expectancy, lower infant mortality, better health, more/better cars, vastly more/better consumer goods, and far more. Social Security was down a path to the dreaded "socialism." Without getting into silly labels, would it be better if millions upon millions of elderly were in dire poverty? I think NOT.

Now both programs have huge downsides, cost and otherwise, don't get me wrong. But their upsides are absolutely massive; in my humble opinion, they radically changed the country for the better!

Kristoff is 100% right! The democrats should bring up these long-ago objections from GOP naysayers, demonstrate that they proved wildly off the mark, remind the public that the GOP (and some democrats, to be sure) have been against the great progress represented by the two huge social entitlements, medicare and social security, and the same arguments that are wrong then are wrong now in today's health care debate. Bravo, Mr. Kristoff! I couldn't have said it better myself!

2009-11-07T21:32:00.002-05:00

Jobs created by Presidency.

While I was listening to the un-illuminating debate about health care on the house floor, I decided to show you all just how bad George Bush's economic record was.

In the 4 years of Jimmy Carter's presidency, the economy gained 10.5 million jobs. That's actually a huge number, but I'm not surprised. This is when women were entering the labor force in huge numbers, and we were a lot younger as a nation than we are today, so more workers were entering the workforce every year. Its not nearly as impressive as it sounds, but not godawful either.

In Reagan's 8 years, the economy created 16 million jobs. What's interesting is that only 5 million and change were created in his first 4 years, as a result of the bad recession of the early 1980s, whereas 11 million were created in the last 4 years in the 1980s boom.

George Bush senior took over when the economy was strong, so his 1-term presidency should not have created many jobs. And it didn't, only 2.6 million in the 4 years. Not as bad as it sounds, but not good.

During Clinton's 8 years the economy created a whopping 22.5 million!!! Now the economy was weak but recovering when Clinton took over, so his first term should have had a bunch of new jobs created. And, with a larger labor force, you would expect a larger number of jobs to be created than in past presidencies. Still, this is a HUGE, HUGE number.

During Bush 43's 8 year disaster of a presidency, the economy created 2 million jobs!!!! Yes, 2 million net jobs in 8 years!!! Now the 2001 recession wasn't his fault AT ALL, and he took over right at the end of a boom, so the fact that literally zero jobs were created in his first term is somewhat forgivable. But only 1.8 million in his second term? Beyond pathetic!!!

Review of 8-year presidencies:

Reagan: 16 million.

Clinton: 22.5 million.

Bush 43: 2 million.

16, 22.5, 2. Yes, there are mitigating factors, but not ANYWHERE near enough to account for this huge, HUGE difference in economic outcomes. Amazing. Hey, who out there still likes Bush?

2009-11-07T21:03:00.004-05:00

Have my economic projections changed?

I was recently asked whether, given the still awful employment reports coming out every month, whether I'd care to revise my economic projections. The answer is basically no. I was precisely correct regarding when the recession would end and the growth in the economy in the last quarter, but I was perhaps too optimistic in terms of the recovery of the job market. Job losses have slowed dramatically. The economy lost 645,000 jobs/month from November 2008-April 2009, 357,000 from May-July 2009, and 188,000/month from August-October. So the job market is clearly deteriorating at a much slower rate than late last year and early this year.

http://www.bls.gov/news.release/empsit.nr0.htm

But less bad being the new good isn't really very good. I actually thought the job market would be closer to zero jobs lost by now. That less unhappy day is probably still a few months away. But it won't be long before we're gaining jobs, and after a few sluggish months of job growth I still think that by the middle of next year job growth will be quite strong.

So nothing has changed my prediction for a strong economic recovery, which will be clearly felt by the middle of next year. I may have been off on timing, but everything else stands.

A window into my thinking can be seen by the striking Third Quarter 2009 Productivity Report, released Thursday.

http://www.bls.gov/news.release/prod2.nr0.htm

The money sentence is, "Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009." This is the best quarterly result since the third quarter of 2003, and is a huge number. Since that third quarter of 2003, the next highest number was the 6.9% of the 2nd quarter of 2009, and the next highest 5.5 percent in the third quarter of 2007 (just before the recession began). No quarter since 1999 has been over 10%, so 9.5% is a big number. Output increased 4% (not bad at all, but not quite a boom), and hours worked DECREASED 5%. Business cannot keep that up for long at all. Fewer hours worked and more production. Very soon, if more production is desired by business, more worker hours will be needed. This will first be accomplished by asking current workers to work longer hours. There is, sadly, plenty of scope for this, which is why I may have been too optimistic about how fast the labor market would recover. However, you can only produce so many more widgets (or cars, or refrigerators, or legal briefs) with your current staff before you have to hire more people. That point will be reached soon, probably during the Winter or very early Spring. From there, I expect demand to be so robust, as a result of government stimulus, very low interest rates, a lot of money sloshing around, and pent up demand for consumer goods, including, incredibly, cars, that businesses will have to hire a lot of workers, quickly, and continue doing so for a long long time.

2009-11-07T19:21:00.003-05:00

Health Care reform passed the House. 220-215, only 2 votes to spare! Nancy must have done yeoman's work arm twisting "moderate" dems. One Republican voted for it, which is one more than I expected. Although the House did pass it, the margin was SO narrow that it gives a lot of cover to wavering moderate dems in the Senate.

Just a short time ago, the House passed one of the 2 or 3 most important pieces of legislation in the last 50 years. Yet another step in the never-ending journey towards a just and more sensible country was passed. The Senate is taking its sweet time, and then there will be a conference committee, and the House passage was a nearly foregone conclusion for months, but it is still one of the most dramatic bills ever to pass the House. This is a truly historic day, a key step on the road to a more sane health care system. That less-than ringing endorsement STILL means that this is a Monster Important Bill. Health care is THAT important.

This post is going to be on the rambling side, because I have a few different threads going through my head, and don't want to do two separate posts, so please bear with me. Health care is crucial and I have some interesting things to say, I think, so bear with me.

In general, I'm of two minds on health care reform. The health care reform I REALLY prefer is frightfully simple. The House bill is 2,000 pages long. My health care bill is literally a paragraph: "All Americans shall have the right, and be required, to purchase access to Medicare at prices to be set by a Panel of 5 members appointed by the President and Confirmed by the Senate. This Committee, called the Medicare Committee, shall have the power to promulgate rules and regulations it deems appropriate, with Congress having the right to veto said regulations within 30 days of their promulgation; otherwise they have the force of law."

That's it. Basically, Medicare access for all. The idea is for private insurance to whither on the vine and end up with a single payer system. But Obama and many others deemed that FAR too radical, and they are surely correct. The democrats just wouldn't go for it.

So we end up with reform designed to make the current system work less dysfunctionally, less badly, rather than, as I much prefer, ripping it up, stomping all over it, burning it to a crisp and forcefully throwing it in a landfill, to die a well-deserved death.

But if you're going to make the health care system work less badly, the House Bill seems to me to be a very good start. I haven't followed the health care debate closely, for some reason, but this bill does restrict the more odious health insurance company practices. We appear to be stuck with the private system, but it will be less awful. The success or failure of this great reform effort, assuming it passes, will be in whether health care costs stop soaring far beyond inflation, and instead go up at around the rate of inflation. That change may not sound like much, but over a 10-20 year period, its HUGELY HUGELY important. We spend circa 2.2 TRILLION dollars a year on health care. Call it 2 trillion for simplicity. A difference of 5% in the rate of growth of health care spending is $100 BILLION a year in growth in spending avoided. That's well over a trillion ANNUALLY in avoided growth in health care costs in 10 years time, and far more than double that in 20 years time. I know I sound a bit hysterical when I say this, but slowing the growth in health care costs is, literally, crucial for the survival of this nation. Without exaggerating one iota. Every other problem America faces absolutely pales in comparison to the inexorable growth in health care costs, and the hugely dysfunctional health care system. And even though the lack of insurance by 50 million people is HUGELY significant, costing by most estimates more than 30,000 lives per year (that's nearly a 9-11 EVERY MONTH) self inflicted by our insane health care system, even that enormous problem pales in comparison to the ridiculous costs in our system. If we spent per person what France (a rich complex economy and a healthy country) spends each year, we would spend about $800 BILLION less each and every year on health care. $800 billion!!! That amount of money just dwarfs everything else in our national discussion. That's the total cost of the Iraq war-- EVERY YEAR, above and beyond what France spends, if only we spent what France spends per person! This is, beyond a shadow of a doubt, the most significant domestic issue facing America. Its fiscally critical, its the civil rights issue of our times, its so very important!

Civil Rights? Huh? Has Flyingpinkunicorns flown into a brick wall and suffered a concussion? Not at all. I think that health care should be a right, like the right to equal justice, the right to a free to the student public education through high school, the right to freedom of speech. If we don't provide AS A RIGHT health care to every single American (and not merely access to an emergency room) I think we should e-mail Gordon Brown, the PM of Britain, CC the Queen, and tell them we screwed up in 1776 and we want back into the British Empire! I really do-- I don't think we are a worthy nation right now because health care is not a right. It should be. That's a civil rights issue if ever I saw one; we discriminate on health care access based on ability to pay. If anyone proposed instituting charges for public schools such that poor parents couldn't afford to send their kids to school, in an attempt to secure a better life, there's be million person marches and riots! If we had previously enshrined health care as a right, and tried to take it away, the same would result. We should move towards making access to health care a right. Now you don't have a right to the very best private schools, and I'm actually 100% ok with having more expensive and less expensive plans. But access to a basic "Ford" plan should be, must be, a right. The democratic health care reform bills do NOT do this, but they do move several steps in that direction, which is why I support the effort on civil rights grounds.

I watched a lot of the house speeches today. They were not illuminating. There are a great many things I could say about the STUPID things the Republican members said, but I want to focus on just one. The GOP fancies itself the party of freedom. And at least 5-7 members mentioned the loss of FREEDOM in the House bill. You know, those who would sacrifice liberty for security deserve neither, blah blah blah. That's one of many sayings that if you think about it for a nanosecond you'll realize just how silly it is. Now government can EASILY go too far, and restrict liberty without increasing security correspondingly. See airport security. But having regulations decreases freedom? Want the freedom to drive without the restriction of traffic lights? Let the market decide? How about preventing insurance companies from discriminating based on pre-existing conditions. This decreases freedom for insurance companies, but as for individuals, not so much. Oh, the horror of government bureaucrats getting between you and your doctor. What do you think the private insurance sector does, every hour of every day in every state? This is just silly. Think most seniors think they've lost freedom by being on Medicare? Go ask them, Medicare is hugely popular. Veterans care, despite some problems, also works fairly well. The idea that millions of uninsured, myself included, who will soon enjoy vastly cheaper access to the health care system somehow are losing freedom is, of course, insane. Even those who have insurance will, if this bill works, pay less/their employers will pay less in coming years. Not much of a loss of freedom! The only persons losing "freedom" are health insurance companies, which have had far too much freedom and have done a huge degree of harm with it.

Anyway, there are some anti "freedom" provisions, to be sure. But overall, I'm with FDR who spoke of freedom from want and freedom from fear. Its easy to take that way too far, but this legislation doesn't even come close. By and large, this bill rationalizes to an extent a partially irrational health care system. It puts sensible regulations on insurance companies, protects individuals from arbitrary practices, and so on.

Now don't mistake for a second what I've said to indicate that I buy what the democrats are saying. What the democrats are saying is in many cases nearly as silly as what the GOP says, which is impressively silly indeed! Here's my favorite: several female legislators said that they rise to support this bill because it prohibits insurance companies from charging women more than men. Now let's assume that they insurance companies do so not out of animus, but because women's health care costs more. I don't know this to be the case, but I'm assuming it, as its overwhelmingly likely to be true.

So why on earth shouldn't insurance companies be allowed to charge more to those who cost more to service? GEICO charges more for bad drivers than good drivers, because paying out claims for bad drivers cost more. This makes all the sense in the world. Now if government thinks for social policy reasons that women shouldn't be charged more for health care (a somewhat reasonable position) then it should be government that pays for this preference somehow, either for a credit to the private sector or, better yet, by being the insurer (I support a single-payer system, strongly, for all of its flaws). But why on earth should this preference be imposed on the private sector? Similarly, why should an insurance company be forced to cover a pre-existing condition, presumably without being allowed to charge an appropriate rate? If someone has diabetes or the like, and is likely to cost a lot, and is getting new insurance, why should the insurance company be forced to insure at less than a market rate? This forces a private, for profit business to subsidize someone it does not have a business relationship with. That's INSANE! INSANE! It really is. Should American Airlines pay if I get cancer next week? No? Then why should a new insurance company? Because its in the insurance business? But I thought the private sector should be allowed (in the bounds of other laws) to act as it pleases. You are taking away what the private sector can do usefully; set prices. Using the private sector in this way is crazy; you get all of the downsides of the private sector (incentives to deny care, huge marketing costs, incentives to delay payment, etc) with few or none of the upsides (a market based pricing mechanism). The design of the democrats' health care reform is so far from optimal it isn't even funny. Of course, its still far, far better than our crazy, insane health care system, but it sure as heck isn't the way I would design it.

If you want to see a democrat saying what I'd like to say about the GOP and health care, look up on c-span.org the speech by George Miller on Saturday night the 7th at 8:40 p.m. eastern. HOO BOY! Tell em what you really think George! And he's 100% right. The GOP has no answers for the huge problems in our health care system. Zippo. Well, they have a few good ideas. We do need to reform the medical malpractice system. Its not nearly as big a deal as you've heard, but it is a problem, a meaningful one, and it should be addressed. The government should be the primary watchdog over bad doctors, either state or federal. But that doesn't really happen overmuch now; so the tort system takes on this role. And it does so hugely inefficiently. So reform is needed.

And the GOP is going on and on and on about allowing insurance companies to sell across state lines. Now this creates huge new marketing costs, so I'm not wild about it. Still, if we're stuck with this insane system, we may as well have the competition that selling across state lines will bring. Would you prefer that only 2 or 3 car companies be allowed to sell in your state? I didn't think so.

But these "ideas" do literally nothing to deal with the uninsured, and little to nothing to deal with runaway health care costs. The GOP is out of ideas. Completely out. If you're in any way surprised by this, you haven't been reading my blog! Or paying close attention. Well, that's what we have bloggers for!

2009-11-07T19:20:00.001-05:00

Obama won the Nobel Peace Prize. Huh? I'm a bit tardy, but better late than never.

This announcement had me scratching my head from the instant I heard about it.

According to the Nobel web page, "Since World War II, the Peace Prize has principally been awarded to honour efforts in four main areas: arms control and disarmament, peace negotiation, democracy and human rights, and work aimed at creating a better organized and more peaceful world."

http://nobelpeaceprize.org/en_GB/about_peaceprize/history/

Well, although it does say "efforts" rather than "results," what special efforts has Obama made? Talks with North Korea and Iran? Whoopee. A return to American engagement after the Cowboy diplomacy of the Bush years, particularly the first term? Worthy of a pat on the back, but a Nobel Peace Prize?

At least for me, one should have tangible ACHIEVEMENTS in areas involving peace and human rights before receiving probably the most prestigious award in the world. Starting the peace process between the Israelis and Palestinians in the early 1990s DID qualify in my view, even though it didn't work out. At least there was a tangible accomplishment, substantive talks where there were none before with a clear possible path towards the resolution of one of the world's more intractable conflicts. But talks with Iran having just begun, following years of talks with the Europeans? Worthy of note, perhaps, but a Nobel? In short, whatever ones views of Obama, he has only been in office 9 months, and on the international front has nothing tangible whatsoever to show for it. Now that's not a damning indictment or anything, but we're talking about the NOBEL PEACE PRIZE here.

Oh, and while we're on the subject of PEACE, he's only very slowly winding down our 100,000 troop commitment in Iraq. What are we accomplishing there for regional, or even local peace? Don't know. And he's considering a troop buildup in Afghanistan, which will more likely than not lead to years of inconclusive war, civilian casualties, and all without Afghanistan being a viable nation state under a stable government at the end of this process. Now perhaps this can be defended, but we're talking about a NOBEL PEACE PRIZE here.

Look, I've predicted that the economy will boom, health care reform will pass and Obama will wind down our wars. Despite a VERY VERY slow start, I'm still at least lukewarm on him, if not a little better. But this award was just silly.

What really happened is that the elites of Europe were just horrified by Team Bush, and are so thrilled to have them replaced by a team that actually wants to talk to Europe and values its opinion, that they threw a wholly undeserved Nobel at him. Its their award to cheapen, I suppose, and they have indeed cheapened it, and not just a little. Nice going peoples.

2009-11-07T19:20:00.000-05:00

The Obama boom has begun, Part II, the Politics

As I said in a post a few weeks back, the Obama boom has begun. The economy will do spectacularly well over the next several years, far better than nearly everyone is predicting. In addition to the significant economic ramifications, as discussed in the companion post, the coming boom will have big political ramifications.

As of this moment, the democratic part of the US electorate is dissillusioned with Obama. Nothing seems to have changed, and all we hear is TALK about health care, not action. Well, this too shall pass. It is overwhelmingly likely that a bill will be signed into law, and no one will care down the road that it took ridiculously long; instead, the voters will ask; what's in it for me.

Similarly, people are frustrated and pissed that the economy still sucks. If my Obama Boom does come to pass, and I'm even surer than before that it will, all will be forgiven. Unemployment was still over 7% when Reagan won 49 states in 1984, he won such a roaring landslide because everyone could see that things were getting much better. The same will be happening before 2012, and Obama will be similarly headed to a rocking reelection landslide.

Obama will likely win a 40-45 state reelection landslide. If my predictions about the economy are right, and nothing else ala war or watergate goes disastrously wrong, Obama will win reelection by 15 points.

Second, the boom will come in time to avert what could otherwise be bad losses for the democrats in the 2010 midterm elections, and instead leave the dems with only modest losses.

Third, and much more important than the short term political ramifications, the coming Boom will likely serve to remind Americans that government can and often does things right. The reaction to the disastrous meltdown of 2008 was spectacularly effective, and, I predict, the reaction to the coming Boom, with the fed slowly raising interest rates and taking money out of the economy, money it created in order to stimulate the economy and prevent a depression, will be almost as successful. I predict that the number of Americans who think government can actually do a lot of good, and get a lot right, will soar, from the very low numbers of today to numbers more in line with historical norms. I realize that this prediction is out there, even wacko. But when you try and predict the future sometimes there ARE sharp breaks with the present. Of course when you're wrong you look super foolish. I'm not saying that faith in the government will truly soar, but it will rise. And since the GOP is the party of government can't do anything right, it will be electorally disasterous for them. Not only will Obama win big, but he'll have big coattails. The dems could gain 15-25 house seats and 5-8 Senate seats in 2012 if what I forsee comes to pass.

Put another way, the above will make GOP attacks on government fall on far less receptive ears than they have since the late 1970s, which will have the extremely positive side effect of forcing the GOP to come up with a new message. Say, the government spends too much, and doesn't do what it does well. THAT's the message that the GOP used to send, and its a vital message! They've gotten away from that, to "Government isn't the solution, government is the problem," Reagan's famous line. Well, mostly not. If you're old, young, sick, or in any other way not fully able to take care of your needs as well as a healthy middle class adult, government IS the solution. Oh, and even if you are middle class, prosperous and well, you need government to regulate the financial markets, the health care system, and so on. Ask Lehman. Ask millions of foreclosed homeowners. Yes, Middle America, I'm talking to you! Not to mention getting the basics right. Americans understand that Bush ran two wars badly, failed during Katrina (with plenty of Louisiana (democratic party) failure thrown in, left the economy teetering on the edge of depression, and allowed America's problems to fester. Even people who don't follow politics overmuch get that. Ask President McCain.

Now, if after a few years of Obama the economy is booming, health care is being partially reshaped, the war in Iraq is winding down and the war in Afghanistan is being won, all of which I predict, faith in him, the democrats, and the federal government in general, will go way up! This will have profound ramifications, some of which I have outlined, some of which I can't even begin to guess. But this is the near term political future. Democrats up, Republicans down further, and, after a weak showing in 2010, democrats should be able to make gains all around in 2012 on the coattails of Obama's landslide reelection.

2009-10-08T12:15:00.002-04:00

The Obama boom has begun; Part I: the economic ramifications.

This is a 2-part post. This post is Part I, in which I will discuss the ECONOMIC ramifications of the coming Obama boom. The coming boom is a monster, and thus the ramifications are highly significant! Even just my basic predictions have huge, HUGE ramifications. The Dow will, conservatively, I think be at about 17,000 in 2012, up almost 45% from where it is now. Even the highly likely economic ramifications from my predictions make this post well worth reading. In Part II, the companion post, I'll discuss the likely POLITICAL ramifications. If I'm even close to being right the political ramifications have the potential to be sweeping, reshaping American politics for a generation, as the depression did, in a coalition favoring the democrats in a very big way. Unfortunately, at least in the short run, this won't have much practical effect. As the health care debate has shown all too clearly, Obama is a compromiser, unwilling to go to the mat for most anything, and the barons in Congress are a heck of a lot more concerned about their pet projects then about solving America's problems.

In my post on July 9, I predicted a strong recovery. The shape of that recovery is becoming crystal clear to me, and it will blow your mind. Yes, it will be V shaped, for those who have followed discussion about the shape of the recovery in terms of a letter of the alphabet. Like the letter V, the economy went down sharply, and its going to go up sharply. In fact, it has already not merely hit bottom, but began growing fairly strongly. The initial estimate for 3rd quarter (July-September) GDP comes out at the end of October, and I'm looking for a number north of 3%, and possibly around 4. The 4th quarter will be over 2.5% as well. Not yet a boom, but definitely growth. 2010 will be the BIG year, the year the economy really takes off.

Jobs are what everyone is (rightly) worrying about. Job loss will stop quickly, before the end of the year. Job growth will start out slow and then, as I discuss later, shoot up very suddenly and very very sharply, in the early to middle part of next year.

I'm not prone to excessive optimism, I'm really not. But the American economy is about to roar back to life, haul Europe's along with it, and shock the world. Put on your party hats, peoples, the good times are about to ROLL!

In my July 9th post I explained a bit about why I think economic growth will be so strong over the next few years. Let's try some hard number predictions (guesses, really).

A) The short term:

For the second half of this year, which has begun, growth will be fairly strong. I'm thinking 3% or so for the 3rd quarter, and about the same, to perhaps as high as 4% for the final quarter. This Christmas will be a strong holiday season, with sales up more than 10% from last year's poor levels. Even though these are strong predictions, they aren't the stuff of legend, given the economic free fall of late 2008/early 2009. In fact, jobs will most likely continue to be shed, and unemployment will tick up to 10.3% give or take a few tenths. But 10.3% should be the high water mark for unemployment for this cycle. From there the unemployment rate will decrease, very slowly (if at all) for a few months, then pretty rapidly for a long time thereafter.

In short, the $64,000 question is the job market. When will the economy begin creating jobs, and lowering the monster 9.8% unemployment rate? The very short term news on this front is awful. The average number of hours each working American works each week is the lowest on record. This means that as company order books begin to increase (this has already begun) companies can easily work current employees a little harder before even thinking of hiring new employees. And companies will be VERY cautious in hiring new people.

To explain what will happen next, a brief look back is required. Between September 2008 (Lehman) and about March 2009, businesses in America were in full out panic mode! The financial system teetered on the edge of collapse, a collapse which would very likely have resulted in unemployment over 15% nationally, bread lines reminiscent of the 1930s, and all sorts of other awful outcomes. In this environment, with sales of things like refrigerators, tvs, CARS, and other consumer durables falling faster (by far in some cases) than at any time since 1945, business understandably lost its nerve, panicked, and laid off, en masse, millions of workers. What's weird about the Great Recession of 2008-2009 (I like the name Great Recession, it really captures the moment -- I didn't make it up) was that FAR more jobs were shed than should have been based on the GDP numbers, as I said earlier. Given the sharp decline in GDP, unemployment should be around 8.3-8.5% now. Instead, its 9.8. A 1% + difference in unemployment is a big deal, its about 1.5 million job. So we're basically short about 1.5 million jobs from where we "should" be based only on the GDP decline. In broad brush, those 1.5 million jobs are "panic" jobs. Jobs that were destroyed not because they couldn't be supported by the companies that had them, but because companies were hugely fearful. Now this was perfectly rational, don't misunderstand my point. But now that the financial crisis is over (yes, its OVER), American business has fewer workers than it needs RIGHT NOW by at least 1.5 million. As GDP picks up, that shortage is going to grow, fast. Real fast. So does this mean businesses are a few months from a hiring boom that will will take the job market in 3 big steps from godawful to weak to mediocre to good? Nope. Businesses will project the recent past into the near future (perhaps the most common human mistake-- if on my epitaph it is said that I cautioned against making the mistake of projecting the recent past into the near future, I will have accomplished something, as it is one of my two basic motifs in life) and businesses will be very cautious in expanding payroll, particularly with the crushing costs of health care added onto the cost of hiring most workers. Thank you GOP and weak-kneed democrats. More on health care coming to a post near you.

In any event, sometime late this year or early next year, probably in January or February 2010, a funny thing is going to happen to American business, in a fairly short time frame, circa 2 weeks. Businesses from the redwood forest, to the gulf stream waters, from California (yes, even California) to the New York islands, are going to be caught short. Their order books, down so sharply, will begin to revive. Nothing too dramatic, but instead of having orders for 100 units as we projected, we've got orders for 108. Now we can get out 108 with current payroll, but its a strain. And our customers are telling us they might want 115 over the next period. Wow, we need to hire new workers! Well, let's DO IT. This will happen, literally in a few weeks, all over the country. And so begins robust job growth.

Beginning early next year, Bernanke and the fed will see that my predicted Boom is really here, and begin draining money out of the system, and raising interest rates, in short undoing the huge stimulus efforts undertaken in recent years.

I predict that job growth is on the verge of turning positive, and that for September-December job loss will be very small, less than 100k/month on average, and that by February there will be net new jobs. Even manufacturing employment, which has been just decimated, is going to increase. In the most recent national report on manufacturing, for August, the purchasing managers' index registered 52.9, indicating slight growth in the manufacturing sector overall. This is the first month of growth in 18 months, and surprised me somewhat. Its not a strong report per se, but for manufacturing of late it is strong indeed.

http://www.ism.ws/ismreport/mfgrob.cfm

This report implies, based on past correlation, that the economy is already growing at an ok clip, 2-3%. Given that the recession has just ended, this isn't bad. Given that businesses inventories are way down, there is thus an immediate need for more manufactured items. Now of course some of this will come from overseas, but a fair bit will come from the good old US of A. So the manufacturing recovery has already begun! This will alas come as news to Ohio, Michigan, etc, which have been so hard hit in recent years, but if order books are growing employment will grow too. In the short term at least.

Since inventories are low, and there is pent up consumer demand for cars (some of which was satisfied by cash for clunkers) electronics, and other items, economic growth should be fairly strong in the coming months, as it usually is after a recession. Recovery from the last 2 recessions (2001-03, 1991-2) was painfully slow. Most commentators are predicting a similarly slow recovery this time, in particular because of the huge problems in the financial sector. These predictions are reasonable and understandable. And dead wrong!

These predictions by others ignore the huge actions by the fed, treasury, and the congress, as outlined in my July 9th post, which I take so very seriously. In short, there is a totally unprecedented amount of stimulus in the pipeline, and now that the financial system isn't a total mess, that stimulus will work its magic.

To conclude predictions for the near term:

2nd half 2009: 3.5%.

1st half 2010: 5% (that's not as shocking as it sounds after such a steep recession).

2nd half 2010: 3.5%

Not bad at all, I'd say!

B) The next few years:

As I've said, starting late this year or early next year the economy will take off like a rocket, and one of the great booms in American history will begin. Figure on better than 4% growth for 2010 and at least 3% for 2011.

Because the economy is so weak now, and has been for a while, it can grow for quite some time without increasing the types of inflationary pressures that come from a strong economy, namely a wage-price cycle where emboldened workers demand and receive higher and higher salaries and other forms of compensation, and then spend that money chasing a relative shortage of goods and services.

Will inflation kick up and become a serious problem, as many suggest? No. Why? Because I have nearly unlimited faith in Bernanke's ability to manage the money supply and other factors within the control of the fed. The recovery will be faltering at first, and Bernanke will be cautious in undoing the massive amount of stimulus that he has injected. But the GDP growth that I have predicted is so strong that he will by the middle of next year begin fairly aggressively raising interest rates, selling back treasury bonds that the fed has bought, thereby reducing the money supply, and slowly begin eliminating the other extraordinary stimulus measures which took place in 2008 and early 2009. This will have the desired effect of clamping down on inflationary pressures caused by very very easy money, and, I predict, cause the dollar to soar. These two things in conjunction will be enough to prevent inflation from increasing more than modestly.

Once the markets become convinced that I am correct, and that a strong noninflationary recovery/boom is underway, the markets will take off like a rocket! My advice on buying stocks? If it isn't nailed down, buy it. If it is nailed down, get the nail off the damn stock and then buy it! The conditions I outline are ideal for a long sustained stock market boom (which will, by 2012, be creating its own problems, but more on that in a few months). My 17,000 prediction on the Dow Jones by 2012 could prove conservative.

C) The ramifications:

Much has been written about how American consumer behavior has really changed this time. And it has, for a while. There is MUCH less conspicuous consumption. Frugality is in. Had the hard times lingered, this change may have lingered. But since a boom, and prosperity is really right around the corner this time, old habits will reassert themselves. Debt will again be in. Even a housing boom wouldn't surprise me, but that's several years away at least.

The federal budget deficit will close much more rapidly than the CBO or congress is predicting. It won't be balanced anytime soon, that's just not in the cards, but it will shrink and shrink dramatically. In fact, if reelected, it wouldn't surprise me that much if Obama duplicates Clinton's feat of the federal budget balance moving in the correct direction for 8 years in a row! In any event, the Boom will be strong enough to fundamentally rewrite the budget picture for the next several years, but not anything like strong enough to solve the long term budgetary problems, of course. These require a significant cut in the rate of growth of Medicare, AND significant tax increases, as well as modest cuts elsewhere in the federal budget.

2009-08-26T06:00:00.005-04:00

Today is the most important day in the health care reform effort, and likely one of the most important days of Obama's Presidency. Here's why.

As you have all likely heard, Ted Kennedy died last night after a battle with brain cancer. As you also likely know, Ted Kennedy had always considered national health care reform and universal coverage as a crucial battle to be won in order to make America a better place, and the next logical step in the great liberal reform efforts from Teddy Roosevelt, to Social Security, to the civil rights laws, medicare and medicaid, in the 1960s.

We're going to learn an awful lot about Obama's presidency today, and unfortunately I don't think we're going to like it.

If LBJ were president right now, he would shamelessly exploit Teddy's death in order to pass health care reform in his name. His speech would go something like this: "America lost a Senate legend today when Ted Kennedy passed away. I got to know him over the last few years, and grew to really appreciate what a giant he was. He will be missed, and I hereby declare today a day of national mourning in his honor. Health care reform was his life's work. He said on many occasions that he hoped to live long enough to see America pass a real national health care system, one which would cover everybody. So we would have an America in which people could no longer go bankrupt because they got sick, or have their health insurance taken away. I demand that Congress act quickly after its recess to pass comprehensive health care reform legislation that would make Ted Kennedy proud. And I assure each and every member of congress that he is watching from on high, and will take careful note of what goes on in this debate.

Health care reform was Ted Kennedy's life's work, his great goal. I call on Congress to pass, without delay, a health care reform bill, entitled the 'Ted Kennedy Health Reform Act of 2009.' I have been discussing for months now the details which must be in that bill. The ball is now in Congress' court. Teddy is watching. Thank you and goodnight."

Something like that. Despite the fact that its the end of August, and despite the fact that Obama has been talking ENDLESSLY about health care, he should take 5-10 minutes of prime time tv tonight, and make a speech along these lines. Then, Kennedy's name should be repeatedly and shamelessly mentioned in the press, in order to pass the act. His family won't mind, I strongly assume, and no one could DARE accuse him of taking advantage, because the media won't allow it; as they know that he would have been the first to approve of his name being exploited for THIS cause. LBJ would do it. FDR would do it. Lincoln might well. Nixon certainly would. But its not in Obama's nature to so shamelessly use a man's death for the cause. So he won't. He'll issue kind words, and mention health care reform, but not in the very direct and clear way I outline. And it will be a missed opportunity, perhaps even a missed golden opportunity, to reclaim the debate.

Oh, one other thing. We're going to learn whether Obama or Rahm Emanuel is running the White House. Rahm Emanuel, as I understand him, would exploit the death of his own mother in order to accomplish a relatively minor goal. He CERTAINLY would endorse a strong program along the lines I mention, and, I humbly submit, doesn't need flyingpinkunicorns to suggest it to him. So in addition to learning how much Obama is willing to exploit Kennedy's death, we're going to learn a lot, I think, about Emanuel's power to shape the agenda. The next 24-48 hours are going to be both crucial and fascinating for those paying close attention. So pay close attention.

2009-07-09T12:09:00.004-04:00

The economy will recover strongly in 2010. Nearly every economist on record is predicting a very slow recovery. Nearly every economist is wrong.

First, its not at all unusual for the huge majority of economists to be fundamentally wrong on the course of the national economy. Very few predicted the vigor of the recovery starting in 1994, following a very slow start to the recovery after the recession of 1991. Very very few predicted a steep recession following the bursting of the housing bubble in 2007-2008. And now, most economists, seeing the truly dreadful economic numbers that are coming out this year, are predicting a very slow recover, if any at all. A lot of ordinary people are wondering if the economy will ever recover strongly.

It will. Betting against America has been a losing bet for 400 years. It continues to be, particularly since we have reasonably competent leadership in the White House.

Anyway, all of the economists and ordinary people I have alluded to above are making the same fundamental mistake. They are projecting the recent past into the near future! It is my belief that this error is very common among people of all stripes, is deep in human nature, and in fact is one of the key obstacles people face regarding trying to get an idea of what will happen in the future.

Housing prices went up recently? They will continue to do so. The stock market? Ditto.

It takes vision (and guts, and insight) to predict a radical break from the recent past. After all, the recent past often DOES indicate the course of the near future. But sometimes it doesn't, and recognizing those times is crucial if you're going to be worth a crap as an analyst of any sort.

Let's see if I'm worth a crap as an analyst of the economy about now.

The reason I am predicting a strong recovery is simple; there are so many huge efforts in place to stimulate the economy. These are, in order of importance:

First, and most importantly, Hank Paulson and Tim Geithner have apparently stabilized the banking system. When's the last time you heard truly awful news about a major bank/financial institution? Been a while, hasn't it. We've progressed through a stimulus package, health care reform, Iranian elections, Michael Jackson, and so on. Its easy to forget that from September to early February the financial system was at various times teetering on the edge of the abyss. With the help of (eventually) good leadership from Paulson, under Bush, and (reasonably) good leadership under Geithner, the banking system has apparently stabilized. This was absolutely necessary for economic recovery to take root. If I am reading the treasury department website correctly, and I think I am, a total of slightly over $70 billion dollars has been repaid to the treasury, from various banks, out of $203 billion the government put in.

http://www.financialstability.gov/docs/transaction-reports/transactions-report_070609.pdf

Given where we were just a few months ago, that's an incredibly good sign for the health of the banking system.

Second, the Federal Reserve has created an absolute boatload of money. M2 is the aggregate total of all physical currency, amount in demand accounts, savings accounts and a few other areas. This is the measure that the fed currently uses to determine the broad money supply. Between September 2008 and July 2009, the fed (wisely in my opinion) increased M2 from
$7.65 trillion to $8.3 trillion, a nearly 10% increase. This 10% increase is a fairly large increase historically, and is highly likely to stimulate the economy in the short run. In so doing, the fed dramatically increased the amount of reserves held by banks. This change allows banks to make more loans. This process has begun, but not yet in a big way.

Third, interest rates have been cut by the fed, to the floor. This hasn't really mattered yet, due to the banking/credit market crisis, but as these areas continue to return to normalcy (I predict) interest rates will regain their potency to stimulate the economy, as businesses and individuals will again want to borrow to grow/expand their business, buy cars and houses (more on that later in this post) etc. With banks increasingly able and willing to lend (there has been progress already in this area, and I predict much more in the next 6 months) the low cost of capital will stimulate, as it always has.

Fourth, the Obama stimulus. It has been criticized (correctly) for being slow to really get moving. Much of the actual government spending will occur between this October and next October. This fact will turn out to be a blessing in disguise, as the spending will likely have far more knock-on effects than it would have earlier this year, because the banking system will be healthier. In any event, the stimulus will add somewhere around 1.5 points to GDP growth for the next fiscal year (beginning October 1st).

Fifth, businesses have already cut so very many workers. This, perversely, should indicate that the rate of job loss should slow, very very soon. It already has slowed, but only from frightfully high levels, to high levels. This should progress, in turn, to fairly high levels, little job loss, and then a little job gain. The sectors that have been hardest high (finance, construction, especially residential housing construction and manufacturing) have had absolutely savage, depression-like job cuts. I admit to not knowing the details at all on this point, but it seems to me that further serious job cuts in these areas are highly unlikely. Many of the weak businesses in these areas have gone out of business, the survivors have already cut to the bone. Businesses have cut jobs in many cases even faster and further than the demand for their goods/services have fallen. When demand stabilizes (which may have happened already, and in any event should happen quite soon), businesses will quickly stop cutting jobs, and then tentatively start adding a few. This process tends to build on itself in normal recoveries.

Sixth, there is beginning to be pent-up consumer demand. The sales of cars in particular dropped so steeply in 2008-2009, that the average age of vehicles in America has soared to the point where in the past car sales really picked up. This may take a little while this time around because of the credit crunch and particular worries about GM and Chrysler, but with the government bailouts in place, I predict these worries will soon be overcome. 2010 should represent a big percentage increase in car sales off of the truly godawful levels of 2009. This will boost the economy.

The same is true to a lesser extent for other consumer goods. Demand fell so far so fast, that it will likely rise soon.

With housing, I doubt this is the case. Housing prices still probably have further to fall, and I can't see a housing recovery of any kind until at least 2011. In past recoveries housing has usually led the economy out of recession, as lower interest rates entice buyers. That is most unlikely to happen this time, which is why the recession has gone on for so long (18 months and counting assuming it is not quite over yet).

However, the other elements of recovery that I have outlined should be so vigorous that a very weak housing market is overcome, and a reasonably strong economic recovery should take root sometime late this year or early next year. The naysayers, who are predicting a double dip recession, with unemployment eventually reaching north of 12%, are wrong.

Having said all this, job losses should continue for several more months, and unemployment will top 10% for certain. Its possible that everything I predict in this post could come to pass except for job growth, and that unemployment could still rise through next Spring, topping out at around 11.5%. I doubt it, but its possible. That would merely set the stage for a delayed, and thus stronger recovery, as the job market catches up to the other underlying forces in the economy.

I know I seem ridiculously optimistic to many of you, but what I am doing is not simply projecting the recent past into the near future, but instead trying to understand the forces that will shape the near future. And what I see is an array of forces constituting wind at the back of the economy, and only housing as a strong headwind. There are many, many more tailwinds than headwinds.

By all means, judge me favorably or harshly over the next year, depending on what happens. But this is, in broad outline, how I see the economy.

2009-07-09T10:44:00.006-04:00

Panic, despair, health care

These words now go together.

The effort to reform health care is in real trouble. Here's one recent article among many.

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/08/AR2009070804184.html?hpid%3Dtopnews&sub=AR

The dems are badly floundering because of intra-party disagreement (not surprising) coupled with the entirely expected nearly uniform GOP opposition. Anyone who thought the GOP would participate in actually trying to solve a crucial national problem must have spent the last 8 years on Neptune. Well, prescription drugs for seniors. Anyway, we KNEW the GOP wouldn't work with President Obama on health care. After all, can't give the democrat a victory! Although there is a lot of talking by Chuck Grassley, the ranking Republican on the crucial Senate Finance Committee, he has few GOP followers. As Jon Kyl, the # 2 Republican in the Senate recently said, Grassley has no authority to represent Republicans.

http://www.latimes.com/news/nationworld/nation/la-na-baucus-grassley9-2009jul09,0,5713295.story?page=2

So the democrats have put in a HUGE effort to be bipartisan in the Senate, only to be predictably disappointed. Sure, the dems may pick off 3 or 4 Republican Senators, at most, but that's it. And more likely they'll get only 1 or 2. And that's worth fundamentally watering down health care reform?

In any event, the Obama administration realizes that their signature issue, health care, is in big trouble. To its credit, the administration has awakened, big time. The early strategy was to give congress their head, let them work out the trade-offs with minimal supervision/input, and weigh in where necessary. After all, the Congressional committee chair people are really feeling their power these days because of the huge democratic majorities, and a top-down approach from the White House might really have not worked any better than it did for Hillary in 1994. Alas, that particular plan has run into the iceberg of democratic disunity, and, like the Titanic, the leave-it-to-Congress ship is taking on water fast. Oops.

The administration has now realized that the democrats in Congress can't agree amongst themselves and, as Andrew put it, are like petulant children, requiring careful adult supervision. Well fortunately, adults, from Obama to Emanuel and on down, run the White House. The adults are now in the game, and are pushing, pulling, arm twisting, begging, threatening, cajoling, convincing, negotiating and other adjectives I can't think of at the moment, with congress, mainly the Senate. All is negotiable, but the noises coming out of the White House recently have been hugely encouraging; more willingness to negotiate over how to pay for it (I couldn't possibly care any less), while less negotiation on a public option (I couldn't possibly care any more). All to the good, as far as it goes.

The (really) bad news is that with the clock ticking towards Obama's (meaningless) August deadline, the Senate isn't close to agreeing on the big issues. The Senate HELP Committee (Health, Education, Labor and Pensions, Kennedy, Chairman), put out a reform bill tentatively scored at $600 Billion over 10 years. Chump change, in other words, given that we will spend more than $40 Trillion over that stretch. If Kennedy put it out, I'm for it (on Health Care). If we can't pass this reasonable bill, the sky has fallen. Obama will be shown to be totally impotent. Like the Emperor in the Wizard of Oz.

To be defeated by Max Baucus and the other compromisers when you hold 60 seats (57 or so is the real number-- there are a few dems that really aren't, but Snowe and one or two Repubs are listening) is just sad.

Based on what I know now, and I have been following of late, I'd say that its no better than 50-50 that a serious reform bill is signed into law. The House will do what its told, and Nancy will pass a strong bill with a PUBLIC OPTION (insert steroids here), but the Senate???? And even if the Senate does pass a real bill, that conference committee will be one whale of a monster-fight. Will Nancy and Steny Hoyer in the House just cave to the Senate, after being told we can't get to 50 in the Senate without doing it the Senate's way? I predict yes, they will. If they didn't, the thing could die. I don't think red state dems like Nelson of Nebraska, the two dems from Arkansas (Pryor and Blanche Lincoln), Landrieu of Louisiana, etc. are afraid of bucking Obama. They think it will HELP them politically in their states, and they're almost certainly correct. Since they're not running for president, what do they care if health care reform whithers on the vine?

I advocate the democrats in the Senate writing a reasonable bill, compromising within the party, ignoring the GOP, and going from there. I truly hate to try and do such a massive reform effort in a partisan fashion, its far from optimal. But alas the GOP just isn't willing to deal on any terms except their own, and they're not willing to really try and dig in and help solve America's huge problems. So we'll have to do it without them, and let the chips fall where they may.

I urge everyone to contact their house member and Senators on this. www.house.gov, and www.senate.gov. Finding links to send your rep/Senator a message on-line is a piece of cake on the main web sites. This issue is so huge that its worth the few minutes to send your comment.

2009-06-22T14:59:00.005-04:00

Iran:

Here's my take on what's going on in the Islamic Republic.

As I see it, what you and the world are witnessing is a game of multidimensional chess, with various forces pulling this way and that. Fundamentally, there are four forces operating within Iran:

1) The clerical supporters of the regime. Led by, of course, Ayatollah Khameni. These are fairly radical to very radical folks that truly believe in the religious destiny of the regime, and the odd (to western ears) tenants of Shia Islam. These folks are willing to countenance a totalitarian state if need be to preserve a regime they largely believe in. There is also some genuine popular support for the Islamic nature of the regime, albeit less than a few weeks ago....

2) The military/paramilitary supporters of the regime. Their most public face is President Ahmadinejad who won the Presidency (fair and square, by Iranian rules and standards, which include required approval from the regime to run for president!) four years ago, and has been declared the "winner" amidst such controversy recently.

#s 1 and 2 are in a pretty strong coalition. Should this coalition break down, a revolution is quite likely.

3) Clerical opponents of the regime. It is of course simplistic to simply label them opponents, but right now, at a time of maximum uncertainty, these people are calling the recent election fraudulent. Since Khameni has repeatedly said otherwise, and threw down the gauntlet in a defiant fist-banging, and somewhat threatening speech on Friday, it is fair to call these clerics opponents. The most visible person representing this faction, by far, is former president Rafsanjani. He is currently the Chairman of the Assembly of Experts, a fairly important behind-the scenes body which, among other things, elects the Supreme Leader. There are several Grand Ayatollahs that also fit within this description, many of whom have far superior religious credentials to Khameni.

The most interesting aspect of the the current Iranian crisis (and a crisis it is!) is that there is such a public split amongst clerical elements within the regime. Previous disagreements, with a few odd exceptions, have been papered over, and in the past, such as 1999, when there were visible splits within the regime, the Supreme Leader put his foot down, and everyone basically jumped back in line. This time, not so much.

Another key thing to keep in mind as the Iran situation unfolds. Rafsanjani was once a crucial supporter of Supreme Leader Khameni, and was the key person involved in elevating him to that status when former Ayatollah Khomeni died in 1989. He has been rumored, however, to have turned somewhat on his former protege, and acted within the Iranian government to maneuver against Kahmeni. Rafsanjani was once considered a moderate, and compared to Kahmeni and Ahmadinejad he really is. He does NOT believe in the overthrow of the regime or (god-forbid from his perspective) western democracy. He does, however, think the regime has led the country into a ditch . He apparently opposes the harsher clerical controls over people's daily lives, and has been a critic of the economic decisions made by recent governments, especially that of Ahmadinejad. His focus is on economics.

4) Pro Civil society (and in some cases far less anti-western than the regime, or even pro-Western democracy in rare cases). This group is represented by former President Khatami and to a lesser extent, of course, "defeated" presidential candidate Mir-Hossein Mousavi and many of the masses in the streets. Mousavi was perhaps better described really as an internal critic of the regime than some anti-regime outsider. However, he has recently stated that he is willing to "be a martyr," which paints him more as a regime opponent.

In order to run for president, you must be approved by the Guardian Council, a body appointed by the Supreme Leader of and 6 jurisits. These are crucial pillars of the regime, and not about to let a real rabble rouser run for the somewhat important job of president. I say somewhat important, because ultimate power rests with the Supreme Leader.

My take is that a lot of the public is unsure about whether they truly support a full overthrow of the regime. Many would probably blanch at the violence and uncertainty this would entail. They are united, however, in their loathing of the manner in which Ahmadinejad and his ilk have run the Iranian economy into the ground. Remember when oil prices were sky high? You'd think Iran, with the 3rd largest amount of proven oil reserves (Saudi Arabia, Canada, Iran, Iraq) would have had a rip roaring economy. Not so much! Instead, Ahmadinejad's blatant misrule has left the Iranian economy in a sad state. Kahmeni has obviously lost some influence in the eyes of the Iranian people.

In addition, Ahmadinejad is blamed by people in this group for foreign policy misadventures. Not that these people like Israel, by a damn long shot. Many are, however, neutral to slightly favorable about the US. But what they DO think is that Ahmadinejad has brought a world of negative attention onto Iran with his various diatribes, and that this has done no good and some harm to these people's day-to-day lives.

Predicting what will happen next is a fool's errand. But make no mistake; the regime is clearly threatened, and could fall, with Kahmeni likely winding up in exile in Iraq. More likely, unfortunately, is a Tianenmen like crackdown, where Kahmeni calls out the army for real, kills a few hundred or more, and makes crystal clear that its all over, time to pack up and go home. I fear this outcome greatly.

2009-06-03T17:25:00.004-04:00

I was recently asked to comment on an op ed piece by David Brooks. Here's the piece:

http://www.nytimes.com/2009/06/02/opinion/02brooks.html?_r=1&ref=opinion

For those who don't know, Brooks is a conservative that sometimes uses his brain, making him a rare bird indeed on the conservative side. He's really a moderate conservative, a northeastern "conservative" of the kind that dominated the GOP once upon a time, when it was by and large to the left of the democrats. He became fairly critical of Bush towards the end of the second term, disillusioned with what happened when the GOP ruled the roost.

Anyway, here are my thoughts.

Brooks' piece is thought provoking, but I think he's wrong in a few key respects.

First, let's start where he's RIGHT. GM's biggest problem, at the end of the day, has been that its corporate culture could not accurately allow reality to seep into the key decision makers' in-box. Roger & Me was 1989 for heaven's sake. GM's been mismanaged for Olympiads!

Second, and much more worryingly, Brooks is surely right that, "the Obama plan won't revolutionize GM's corporate culture." However, the realistic risk of oblivion might. And that's where Brooks is wrong. He says there won't be any more outside investors. Baloney. Banks/investment funds will be CLAMORING to invest in GM (owned by Obama and thus unlikely to go truly bust as Brooks himself argues) if they show any signs of life. Perhaps even if they don't. Brooks is making the always fatal error of projecting the recent past into the near future. Credit markets will be loosened, money will look for a home, and if GM climbs out of intensive care, money will find it.

Brooks is importantly right that Obama's plan DOES entrench the ancien regime, which is terrible. The internal resistance in the administration to actually get in the car business and RUN IT for a few years is monumental. Look, I don't like the idea of a government running a car company much either. Put the factories in the district of powerful chairman, kowtow to the unions, block imports, ease rules, etc. But GMs management has been SO bad for SO long that its really hard for me to believe that Uncle Sam could do too much worse. Where I do think Brooks is somewhat wrong is that it "would be politically suicidal for the Democrats, or whoever is in power, to pull the plug on the company -- now or ever." He's not WRONG here, for sure, but he forgets a somewhat likely scenario. GM shrinks, does not boost market share, shrinks further, eats up more money, shrinks further, etc. GM may not so much die as fade away, at least in North America. In fact, that's probably the most likely scenario. Now this is godawful because it WOULD mean that dems throw good money after bad (and rightly get roasted by the Southern/Western dominated GOP for doing so) but it would over a period of say 12 years mean the end of the company, at least its North American Operations. It is true that GM will have to beat to Obama's drummer. Given that its focus for decades has been on anything but innovation and building small cars that people want, as opposed to big trucks that warm the planet and drive up the price of oil, changing its focus to pleasing its new masters in Washington will be much less harmful than Brooks thinks it will. Its easy to be reflexively against government owning the commanding heights. It isn't totally wrongheaded. But GM is a bit of a special case b/c its management has been SO bad for SO LONG. To conclude, Brooks piece, although worthwhile, is, in main part, at war with itself.

1) GM's corporate culture is totally dysfunctional (totally true);

2) GM will now have to please new masters (totally true, and more than just Obama-- Congress too);

3) Therefore, things will get worse and more good money will be thrown in after bad (I submit false-- GM was so bad that pleasing DC should be an IMPROVEMENT.

Lastly, Brooks throws in a FASCINATING analogy to the Iraq war, without bringing himself to quite say that that's what he's analogizing to: "The end result is that G.M. will not become more like successful car companies. It will become less like them. The federal merger will not accelerate the company’s viability. It will impede it. We’ve seen this before, albeit in different context: An overconfident government throws itself into a dysfunctional culture it doesn’t really understand. The result is quagmire. The costs escalate. There is no exit strategy."

There are two possible exit strategies if things go wrong at GM:

First, bite the political bullet and let it go bust. Who knows, Obama might grow a set and do just that if the company just implodes. But let's stipulate that he/his successors won't.

Two, stand idly by as GM vainly struggles to right itself, and slowly fades away. Expensive, surely, to the extent any more money is put it. But the public is fed up with the bailouts, big time, and there may not be repeated bits at the apple. In any event, this would impose the market discipline that Brooks and the GOP so love, as oblivion nears. Then pleasing Obama/Congress would take a back seat to survival. After all, if DC isn't coughing up any more money, why kill yourself to please them. This exit strategy would be the "do nothing and watch them fade away" strategy. This is the strategy I predict Obama will take.

2009-05-28T17:59:00.005-04:00

The recession will end in July, give or take a month or two.

Yup, I have finally figured it out, and this prediction will not likely be retracted.

On December 12, 2008, I posted that the recession would end on June 17th, meaning really June of this year.

http://flyingpinkunicorns.blogspot.com/2008/12/june-17-th-2009.html

My thinking was that as of June the recession would have been going on longer than any since World War II, and that a fair bit of the bloodletting had already took place.

Alas, on February 8, I retracted that prediction, fearing the banks were in truly horrible shape, and that it would take months, at a bare minimum, to even begin to clean them up.

http://flyingpinkunicorns.blogspot.com/2009/02/i-was-wrong.html

I guess I lost my nerve.

A few weeks back, the administration released the results of the so-called stress tests, indicating what would happen to the banks if unemployment went over 10% (a stressful situation for banks' balance sheets). The results indicated that the banks were in MUCH better shape than we had thought. Sure there were a few, notably Bank of America, which needed more capital. It was decided that 10 large banks needed a total of $75 billion more in capital, with Bank of America needing $33.9 billion.

In the few days following the results of the stress tests, several banks raised billions in capital, which would have been impossible late last year due to the fear in the financial markets about the banks. This was a loud (but largely unnoticed) vote of confidence in the banking system.

Anyway, the recent unemployment numbers have been godawful. The number of first time claims for unemployment, dropped by 13,000 last week, but were still at 623,000, a terrible number. That's the sort of number you'd expect when the economy was deep in recession. However, unemployment is what is referred to as a lagging indicator. That is, when business first starts getting better, you force your current employees to do a little more. Only when it keeps getting better do you finally take the plunge and hire new people. So even after the economy begins growing, everyone, including me, expects that unemployment will get worse. We will certainly see 10% before 2009 is over, and could conceivably see 11% early next year. But the worst is very very likely over. Barring a huge new shock in the banking system, the less bad news we've been hearing about the credit markets, coupled with more federal stimulus money, rock-bottom interest rates and the small Obama tax cuts will cause the economy to begin growing very soon. Almost certainly during the Fall, and probably during the Summer. Do hold the champagne. The mere fact of growth of GDP, in and of itself, doesn't mean too much for the great majority of people (though it does help the federal budget). But this time it may mean a little bit. I'm a big believer that people and businesses don't react to numbers that much, they react to conditions on the ground. But hearing a positive GDP number will almost certainly give business and consumer confidence a boost. And such a number is very possible for the quarter which runs from July- September of this year.

If I had to predict, (guess, really), I'd guess that the recovery is for real, but not vigorous until early to mid 2010. Figure that unemployment will begin to fall by about May 2010, and fall sharply at that. Given that by May 2010 it will be about 10.5% I suspect, it can fall very fast without worrying anyone that the economy will overheat and cause inflation. In about April-May 2010 the fed can begin draining the economy of the extra money it created in 2008 and 2009, and begin raising interest rates. The day I can advocate for that in my blog will be a good day indeed, for all of us.

2009-05-28T17:41:00.002-04:00

As you all likely know, congress is seriously considering major health care reforms. In 1993-94, the Clinton administration created a body headed by then first lady Hillary to draft up a complex plan. The administration drafted it, and intended to stick as much of it as possible down the democratic congress' throat. The democrats gagged, and, in the face of the terrifying couple of Harry and Louise (google ads, Harry and Louise, health care) passed nothing at all. The GOP took control of both houses of congress in 1994, denied there was a serious health care problem that needed fixing, and the rest is history. Painful, expensive, life shattering history for millions of Americans who lack health insurance, or who find that when they need it most their insurance company slow pays their doctor, denies claims, denies authorizations for tests, demands pre-notification before an emergency room admission (presumably you should have known you would be rear-ended) and so on along the litany of things wrong with our health care system. Oh yeah, we spend nearly 50% more PER PERSON than any other country in the world (with the tiny exception of Switzerland, who we spend more than anyway) and we get outcomes that are slightly worse than our peer countries (Canada, France, the UK, Germany, Japan). I always thought conservatives believed in cost-benefit analysis. Well, our system costs more and generates slightly worse outcomes. Sounds like it needs fixing....

Anyway, the point of this post is to jolt you, my readers, into DOING SOMETHING. The burning issue of health care reform in the last few weeks is whether the Obama administration will compromise on what is known as a public option. Liberal and lefty democrats favor a single payer system, like Canada or France, whereby the government is the primary (or only) purchaser of health care. This is socialized medicine, which the right has made a dirty word, on a par with communist, terrorist, or gay married person. A bogeyman. Anyway, the democrats are, sadly, NOT proposing any such option, which would, among many other things, put the health insurance industry out of business. Instead, the mantra these days is that if you like your private insurance (and many Americans justifiably do) you can keep it, largely unaltered. But, if you don't like it, or you don't have private insurance, a PUBLIC OPTION allows you to buy into some form of government run or regulated option, such as Medicare.

Imho, a public option is CRUCIAL if health care reform is to really deliver any significant benefits to America. In fact, I would state that the issue of the public option is by far the most significant issue facing the congress and president these days. The economy will soon recover (more on that in a post coming soon), the shape of energy reform is becoming clear, but we could choose to omit a public option for health care and simply let a big opportunity to reform a part of our economy which badly needs reform, and allow millions of uninsured Americans to stay uninsured.

Howard Dean has created a web site that asks everyone to sign a petition supporting a public option for health care. I have signed this petition and I urge all of you to do the same.

http://standwithdrdean.com/

2009-05-07T18:05:00.006-04:00

My thoughts on Afghanistan/Pakistan

I begin with the assumption that the Taliban would get KILLED in a free and fair country-wide election. That is, although they have real pockets of support among the Pashtuns on the border, they are not a genuinely popular movement, as Mao's communists were, and so many successful revolutionaries were. They were wildly unpopular, by all accounts, the first time around.

I'm no Afghan expert, but I'm told they don't have a ton of support. Remember, Al Queda in Iraq looked like they had real Sunni support, until the Sunni leaders turned on their asses and asked the infidels, ie. US, to help kill them, b/c they horribly overplayed their hand. The Taliban was a foreign import, rather than a genuine Afghan movement. They were really installed by Pakistan's intelligence service (the ISI) as a way to stabalize and have a tad of control over their northern neighbor. Control didn't quite happen, but a modicum of stability (vis-a-vis Pakistan) did. Prior to the installation of the Taliban, various factions vying for control over Afghanistan took their battles, literally, to the streets of Pakistan. They set off car bombs and did other damage. The Pakistani army and intelligence services (and people) were NOT amused.

The Taliban are not natural leaders of Afghanistan in any way, shape or form, and are not viewed that way by basically any non-Pashtuns, and not really by many Pashtuns either as I understand it. They were accepted by many, especially in the beginning, because they brought an end to the chaos and fighting. Once the Afghan people got a taste of the Taliban, they were ready to throw them out.

Why do we care whether Hamid Karzi or the Taliban control Afghanistan? Afghanistan is one of the very poorest countries on earth. Even though it is nearly 100% Muslim, your average Muslim in another country doesn't begin to care about it (as they might Iraq, Egypt, and other countries of significance). Their only exports are poppy seeds and instability. They have no oil. On the other hand, they are strategically located, and are vital to the future of Pakistan. So they do matter.

As we all know, Bin Ladin had completely free reign in Afghanistan prior to 9-11. The Taliban ran things day to day, but Bin Ladin did as he pleased. So its perfectly fair to say that the Taliban attacked us. But would they dare do it again if they somehow regained power? Probably not. The best reason to be willing to spend lives and oodles of money to defeat the Taliban lies in Pakistan. Although Pakistan is poor as well, it has circa 180 million people, nearly all Muslim, most of a modern army, and many dozen nuclear weapons. Bin Ladin followers taking over Pakistan (as many have dreamt of for years) would be a HUGE disaster for American national security. In my view, a seriously first order problem. Andrew thinks that even in this godawful eventuality, we could rely on MAD (mutually assured destruction) to prevent them from getting too uppity. I don't. Religious nutjobs are just not nearly as predictable as the Soviets were. Besides, I'm not willing to bet New York on it. I'm highly confident that India feels the same way. Sure, Pakistan is their enemy. But the Pakistani regime mostly plays within defined bounds. (The terror attacks last year in Mumbai (formerly Bombay), which killed 173 people and were huge front page news worldwide were a glaring exception, but India knows perfectly well that Pakistan didn't orchestrate the attacks. Whether Al Queda (or the Taliban) would similarly confront India within a known parameter of permissible activity is another matter entirely. That's a question which India would greatly prefer not to have to answer.

I've made a leap that I should explain. There are several areas of Pakistan, near the Afghan border, which are in virtual open revolt against the Pakistan government. These are sometimes referred to as the Tribal areas, which is only one part of Pakistan that is in near revolt. It is in these border areas (including but not limited to the Swat Valley) where Bin Ladin and the rest of the remaining Al Queda leadership are thought to be hiding, and it is from these areas where the Taliban is launching their attacks across the border into Afghanistan. The Pakistani government is none too pleased at these developments. Although a cease fire was controversially signed between Pakistan and some of the rebel elements back in February, the Pakistani army has moved in in force in recent days.

http://www.nytimes.com/2009/05/08/world/asia/08pstan.html?ref=asia

Pakistan fears that the Taliban types, with the aid of Al Queda types, could be a grave threat to their (always weak) government. So they're pushing back hard in certain areas.

So what does Pakistan think of the Taliban war in Afghanistan? What with the rebellion going on near the border and all, and the army and the intelligence services being the only institutions in Pakistan worth a NYC subway ride, I doubt seriously they're going to see it in their long term interests for the Taliban to WIN in Afghanistan. For them to EXIST, maybe. Keeps the US interested, keeps our billions flowing into Pakistan, keeps us from following our foreign policy where it wants to go, which is a wholehearted embrace of India, for trade reasons, as a counterweight to China, and a counterweight to possible Islamic radicalism coming from Pakistan or Sri Lanka. (Was that the longest sentence you ever read?)

That's where gravity is (strongly) pulling the US foreign policy. Fear of Bin Ladinists controlling Pakistan's nukes are pulling in the other direction. Both the army and the ISI realize this, and are playing a bit of a dangerous double game, but they don't see it in their interests to order the army to turn border areas into rubble. They've, however, gone from playing patty cake with the rebels to playing a bit rough, and from the US perspective, that will just about do. I think the Pakistan/Afghan problem is approaching a sort of equilibrium. Pakistan sees the rearming of the Taliban and the chaos following in Afghanistan and sees a more than mini rebellion by very similar types in the north of Pakistan, with the aid of Al Queda. They've looked in the crystal ball and just cringed. So the army under MUSHARRAF preferred to play patty cake, while the army under weak civilian leadership is starting to crack heads. These people aren't Saddam's sycophant idiots. They have more than 1/2 a clue, the army does. And while they may not crack down hard enough to WIN (by which I mean crush the rebellion utterly) they will, I humbly predict, crack down hard enough not to lose (in Pakistan). Which is really more than enough from their perspective. India can tolerate this, the US can tolerate this, and at the very very VERY end of the day it may be that even the TALIBAN can tolerate this. Leverage from the US on the Afghan side of the border can badly squeeze an already somewhat squeezed Taliban until they slowly whither away into dust. That, in broad outline, is my Plan. I think it has a high chance of "success" and a low chance of bad failure (Al Queda types controlling swaths of Pakistan or, god forbid, the Pakistani military and with it its nuclear arsenal). It is for this reason that I support the escalation of the effort in Afghanistan-- not so much because its worth that much American money and blood to see who rules Afghanistan, but because it is worth lots of American treasure to ensure that the rebel types, aided and assisted by (and part and parcel of) the Taliban (and aided by Al Queda) don't rule Pakistan.

2009-04-04T06:37:00.000-04:00

I hate Tom Daschle.

You will recall that he was the administration's original nominee to fill the post of Secretary of Health and Human Services. He was to be charged with shepherding health care reform through Congress.

He has made serious health care reform harder by his failure to pay his taxes and lying about it and by taking money from the health care industry. His self-centered narrow-minded actions have the potential to really hurt America by making health care reform much harder.

I was really happy when he was announced, after getting over it not being Hillary tasked to run the health care reform effort. He was Senate Majority Leader, so he knows the Senate and Senators well. He wrote a book about health care reform, his views were sensible and he seemed serious about it all. In short, a wildly excellent pick.

This all went to hell in a hand basket several weeks ago. As you probably know, Daschle realized several months ago that he owed back taxes as a result of not having declared that he received a car and driver. He knew for certain he owed the taxes in the middle of 2008, but he didn't pay the taxes until months later. Daschle's not real rich, but he's made good money since he left the Senate. Assuming he had the cash to scrape together, and he surely did, his not paying his taxes immediately would be disappointing if he were merely a private citizen. Once he realized he was being considered for a cabinet position, he should, of course, have paid the taxes THAT DAY.

Worse than all of the tax follies is his taking money from the health care industry. This made Obama's defending him all the harder. Thanks, Tom. Thanks heaps.

2009-02-08T23:12:00.002-05:00

I was wrong.

In my December 5, 2008 post, I predicted the recession will end in June. I was wrong. It won't end quite that quickly. I didn't realize that the banks were as horribly terribly badly off as they are. Don't get me wrong, I obviously knew that big banks were in huge trouble. I just didn't realize that it would be this bad.

Later this week there will be an anticlimactic announcement on how the Obama Treasury Department will spend the $350 billion remaining from the big Congressionally passed $700 billion bailout for the financial industry. I say anticlimactic because $350 billion is fairly small in comparison to the amount of money which will in the end likely be necessary to pump into the banks and other financial institutions going forward, taking no notice of the huge amount of money which has already been pumped in.

So with the banks still in terrible shape, and likely months away from being cleaned up, I simply have no idea when the recession will end. I'll let you know when I know.

2009-02-03T20:27:00.000-05:00

The Stimulus package: Flawed but well worth doing

As it passed the House, its badly flawed. Still worth doing if push came to shove, but it could be seriously improved. The Senate is in the process of improving it, fortunately.

As you all likely know, the House recently approved the $820 billion + stimulus package. Sadly, it did so without a single Republican vote. The Senate vote is expected to be somewhat more bipartisan, but clearly, this is a democratic affair.

The house vote was 244-188. All but 11 democrats voted for it.

Here are some of the highlights of the package as passed by the house:

$145 billion goes to Obama's signature "Making Work Pay" tax cut, which he campaigned on. Individuals receive up to $500 and families up to $1,000 through a cut in payroll taxes, by reducing social security withholding. This will be around $15/week for most American workers.

This sort of tax cut is not very stimulative, to say the least. Most economists say that people will spend around 30-40% of it, and save the rest. Now savings is generally a good and wonderful thing, but not in the very short term. Right now consumer spending is hugely depressed, and we need to do everything imaginable, and much not imaginable to increase it over the next 2 years. And a tax cut which will be saved is not very stimulative at all. The lower down the economic ladder a tax cut is, the more of it will be spent.

Unemployment checks will have an extra $25/week in them, and people will be eligible for unemployment for a longer period of time. This sort of spending is highly stimulative. Most people on unemployment are spending 100% of their checks, and will quickly spend the additional money.

$37 billion for high tech items, like expanding broadband access and converting medical records to electronic form. This spending is in fact somewhat stimulative, in that people will have to be hired and companies paid money to do the work.

$40 billion to allow people on unemployment to qualify for Medicaid. This entitlement is regardless of income and assets. This spending is less stimulative than other spending. It may improve people's health, and I support the idea in general, but let's not pretend its the kind of spending that multiplies itself, like building a bridge. If you build a bridge, you have to hire construction workers, who buy more boots and tvs and what have you. And the company, very possibly struggling, will make more profits/less losses, which gives the owners of the company more money. Cement has to be sold. Stores near the construction site make more.

$150 billion in additional spending on Universities, schools and child care centers. Not the most stimulative spending I can envision!! May be a good idea, may not, but the GOP is right that the primary purpose of this spending is not short term economic stimulus.

$87 billion to states to increase the federal contribution for Medicaid. This is a reasonably good idea, because it will save states from crippling layoffs, which will make the downturn worse. On the other hand, it rewards the states for highly imprudent budgeting. Given that all states (except one, I believe it is Vermont) have state constitutional provisions requiring a balanced budget, the states have been wildly imprudent in their budgeting process and rainy day funds. I hate the fact that there will be Republican governors who can say, "see, I balanced the state budget without raising taxes, and I'll do the same thing in Washington" when it will have been federal money that allowed the balanced budgets. The country desperately needs to be taught the lesson that there is no such thing as a free lunch. To balance a budget you must raise taxes, cut spending, or some combination of the two. Magic, will and GOP principles will not do it.

$79 billion for a state fiscal stabilization fund, disbursing half the money in late 2009, and half in late 2010. Most of that money would apparently be spent next year.

$30 billion in highway construction funds, and "tens of billions more" for other transportation projects, water projects, park renovation, military construction, local housing and more. This is the spending I most favor, as this is the most stimulative kind of spending, with what economists call the biggest multiplier effect. And, as an added big bonus, America's infrastructure is woefully inadequate, and surely most of this infrastructure really needs to be built anyway.

$63 billion on additional money for food stamps and on increased and extended unemployment benefits.

The initial proposal by Obama had godawful business tax cuts, designed not to stimulate the economy a jot, but to win GOP support. Fortunately those seem to have gone by the wayside. Sad to say, but in order to win GOP support these days, you need badly designed tax cuts which don't much stimulate the economy, and aren't good for the Republic. Needless to say, the GOP is out to lunch.

Speaking for the Republican party, Jim Demint, Senator from South Carolina said the following on a Sunday morning talk show:

1) We all support the need to do something. But "the way to move our economy forward and to protect jobs is to infuse more money so that consumers have more to spend and businesses have more to invest. . . ." Two ways to do this: (a) Government spending through 'political manipulation.' The other way is tax cuts. "That is the American way."

So government spending is un-American. Typical GOP horsecrap.

The Senator continued, "This plan is a spending plan, not a stimulus plan . . . its wasteful and a lot of the spending will be permanent." We have to decide if we want to be a "free market economy or government controlled economy.

"This is a government managed economy which doesn't work."

Um, Jim, it was the REGULATION which didn't work. If you want to blame (GOP) government, fine. But to imply that too heavy a regulatory burden is what has us in the state we are in is truly rich.

HEY JIM: The point is that right now people are terrified of losing their job, health care, etc. They are (wisely) saving rather than spending. They saved the great majority of the last tax cut, in 2008. Economists believe they will save most of any 2009 tax cut. Spending is much more effective in stimulating a moribund economy. Much more. The Good Senator's statement is a simple regurgitation of ideology, rather than one involving a shred of thought.

Barney Frank, key Congressman from Massachusetts, Chairman of the House Financial Services Committee gave off the democratic talking points. He also, as is his wont, went far beyond these talking points, explaining in some detail why he was saying what he was saying. He may not be an intellectual GIANT, but he's a smart serious guy that clearly wants the right thing for his district and the country.

Anyway, this isn't the very best stimulus package I could imagine. Not by a long long shot. Too much of its spending is too slow in coming, and there isn't anywhere near enough spending. Still, it looks like the Senate will add spending, including especially infrastructure spending. Roads, bridges, etc. Incredibly, some GOP Senators have called for increased tax cuts on the lowest paid and middle class workers, which tax cuts would in many cases be spent. I'm as surprised as you are.

In summary, pay attention to to what the Senate does. The final bill will probably look a lot more like what passes the Senate than what passed the House.

The House went a little hog wild throwing spending in that wasn't real stimulative. Understandable, but not ideal.

2009-01-20T20:04:00.004-05:00

PRESIDENT Obama

We have a new Commander in Chief. Bush is really gone. Goodbye, thanks for nothing, don't let the door hit you on the way out, and good riddance. Bush played gracious for weeks, I'm sure even he got tired of it. And now he's gone.

I find it a bit funny that Obama flubbed his lines in the actual swearing in. It looked like either he was terrified (understandable) or he hadn't rehearsed with John Roberts. Obama's not a real spontaneous kind of guy, so I'm assuming he was just scared. Fine.

Anyway, I did watch a fair bit of the day's ceremonies. Not really my cup of tea, a big old parade and all. Watching Bush fly away in the helicopter was just about as satisfying really as watching Obama take the oath of office.

Now the hard part begins. Israel-Gaza, big stimulus package, enormous money needed to save the banking system again (more on that in a post coming up), an economy deep in recession, a health care system hugely in need of root and branch reform, Afghanistan heading south, a broken immigration system. Bush left the country far, far worse than he found it, and Obama has the most full in-box since WW II, by a lot. But you all know this already.

Today is ceremony day. And it was quite a show! And we swore in the 44th President.

OH-BA-MA!! OH-BA-MA!! OH-BA-MA!

2009-01-15T03:16:00.009-05:00

I was right and the ECB was wrong.

I was right. Again. This time it had to do with the interest rates set by the European Central Bank (ECB). Again, the ECB sets interest rates for all of the countries which use the Euro as their currency, much as the Federal Reserve sets interest rates.

In my post of June 6, 2008, I mocked the leaked news that the ECB was to raise interest rates soon.

http://flyingpinkunicorns.blogspot.com/2008/06/i-hate-european-central-bank.html

The announcement caused the dollar, then moving downward, to really tank (It has since rebounded strongly against the Euro as investors flee to the "safe" US in these godawful scary times). In addition, the move was wholly unnecessary, as I argued at the time. I argued that the ECB would harm to the dollar vs. Euro exchange rate and that inflation in the Euro zone was not a problem.

Well, shortly thereafter, as we all know, the world financial system, led by the US, went to hell in a hand basket, dragging the real economy down with it. And, to its credit, the ECB lowered rates by half a point in October, another half a point in November, and 3/4 of a point in December. It lowered rates by an additional half a point today. In short, although it has moved radically slower than the federal reserve to get interest rates down, it immediately stopped increasing rates.

Now I'm not going to sit here and tell you I predicted that the financial crisis (or the real economy) were going to get anywhere remotely near as bad as they did. I didn't. I'm not going to argue that the ECB's blunder in signalling higher interest rates and then following through with them made any real difference. Because in the end it didn't.

But I will sit here and tell you that I argued, (for months) in this blog and in private e-mails with Andrew, that inflation was not a problem here or in Europe, and worrying about it was absolutely silly. And I was right, right, right!! So yes, I was doing a better job running Europe's interest rate policy than the board charged with doing it. Which, given that Jean Claude Trichet is its head, isn't real surprising. Trichet had rocks in his head; still does. European interest rates in Euro-land aren't being lowered anywhere near fast enough. European inflation will drop darn near as fast as here. While Europe's economy isn't anywhere near as bad as ours (yet) it is almost as dependent on oil and thus will benefit hugely as we will from oil's dizzying price declines. And while Europe's economy doesn't adjust as fast as ours (one of the great strengths of the United States) it does adjust. European inflation has already dropped sharply, down to 1.6 % year on year vs. 2.1% in November and 4% in July (shortly after I wrote the above post arguing that there would not be an inflation problem in Europe)!

I was right and the ECB was wrong.

2009-01-06T16:53:00.005-05:00

New York Times Muddleheaded thinking

I can't begin to think of a better example of why the world is so muddle-headed on Israel than this NYT editorial about Gaza. Read the NYT piece before you read the rest of this post. Andrew, this means you too.

http://www.nytimes.com/2009/01/06/opinion/06tue1.html?_r=1&ref=opinion

*Time passes while loyal readers swamp the New York Times Website.**

Spot the muddle headed "thinking?"

Israel, aided by the United States, Europe and moderate Arab states, must try to end this conflict as soon as possible and in a way that increases the chances for negotiating a broad regional peace.

That means ensuring at a minimum that Hamas — a proxy of Iran — is not seen as gaining from the war, that the rocket fire is halted permanently and that the terrorist group can no longer restock its arsenal with more deadly weapons via hundreds of tunnels dug under the Egypt-Gaza border.

Ok, let me see if I have this straight. The primary goal must be to "end this conflict as soon as possible." In short, a shriek to stop the killing! Well, I don't think that should be Israel's sole goal to be sure (otherwise why start fighting in the first place) but at least I understand this point.

But in the very next paragraph, without a hint of irony, the Times insists that the rocket fire (from Hamas) be halted permanently, and, to boot, that it cannot get more weapons through the Egypt border.

In short the New York Times agrees with the stated war aims of both Israel (END THE ROCKET THREAT FROM HAMAS) and Hamas STOP THE KILLING OF THE PALESTINIAN PEOPLE). If supporting the war aims of two diametrically opposed parties strikes you as a bit odd and hypocritical, that's because it is.

How this magic solution of an end to the conflict "as soon as possible" is to be married with the goal of ending the Hamas rocket threat the Times neglects to inform us. Unless "as soon as possible" really means "as soon as Hamas is utterly destroyed. That I would support. But the tone of the New York Times piece means that it really means that the military operation end quickly. Which makes no sense; the New York Times knows perfectly well that if Israel ends the operation soon Hamas will rearm and the rocket threat will remain. Either you support the Israeli effort to reduce/eliminate the Hamas rocket threat, or at least show that rockets into Israel have consequences, or you don't. In this instance, you simply can't have it both ways.

In conclusion, as so many do regarding Israel, the New York Times wills the ends but not the means. Given that the Times is such an important paper and cares a lot about Israel, this lame effort to describe the Gaza situation is particularly pathetic.

2009-01-05T03:28:00.006-05:00

I am disappointed with the news today regarding Obama's stimulus plan.

http://www.nytimes.com/2009/01/05/us/politics/05spend.html?th&emc=th

First, the leaks indicate that the economic package is to cost between $675 and $775 billion. Although clearly substantial enough to do a lot of good, this is less than I would like, and have advocated. The US GDP is about $14 trillion. Assuming this money is spent evenly over only 2 years (which is not accurate, but I'm simplifying) that means that assuming a $700 billion package, that would be $350 billion each year, or 2.5% of GDP. Now that's not nothing to be damn sure, but with the economy shrinking at about a 5% rate, it isn't quite enough to ensure a return to growth. However, coupled with the enormous amount of stimulus already in the pipeline, as I discussed in my December 5, 2008 post, this package may well be sufficient to lift the economy out of recession. If it packs enough stimulative punch. Which brings me to my real problem with the leaks about the package.

According to the above-mentioned New York Times article, Obama plans for his stimulus package to include "about $300 billion in tax cuts for workers and businesses."

The current plan is to devote about 40% of the cost of the stimulus plan to tax cuts, "including his centerpiece campaign promise to provide credits up to $500 for most workers, costing roughly $150 billion."

I suppose given that it was an often repeated campaign pledge, and will not go to the wealthy, I really can't squawk too badly about this $150 billion.

However, the remainder of the tax cuts I am really not happy about, especially in the context of a somewhat smaller package than I would have liked.

First, why am I not jazzed about tax cuts as part of the stimulus package? Well, consumers are tapped out and heavily in debt, and will tend to save this money or pay down debt. I could live with this amount of tax cuts as part of a larger overall package, but the leaked plan leaves "only" approximately $400 billion in spending over two years, or $200 billion per year. This represents only approximately 1.5% of GDP for each of those two years, not nearly enough spending to have the impact I was looking for.

Second, the tax cuts other than the aforementioned tax credits for each worker earning less than $200,000 per year will likely be particularly ineffective.

The first major business tax credit I am unhappy about is one which, "[t]o encourage businesses to expand their work forces and operations, Mr. Obama wants a tax credit for each job created. During the campaign, he proposed $3,000 for each job." This is just silly. Most of the jobs thus created would have been created anyway. This is a wasteful business tax giveaway, and lousy policy to boot, as any marginal jobs created which would not have been create otherwise are, by definition, marginal (barely needed if at all), thus economically inefficient, and relatively less like to survive as jobs over a period of years.

The second tax credit referenced is not yet specific. The Times article stated, "Advisers said [Obama] was now also trying to figure out a way to give incentives to businesses to resist cutting jobs, as so many have been doing."

Tax incentives for businesses not to cut jobs is probably even worse than incentives to create jobs! Businesses need to cut back their workforces in order to maintain a sustainable size going forward. This is a hugely painful process, trust me, I know from painful personal experience, but is entirely necessary. Thankfully, this tax incentives probably won't make too much difference-- if a company needs to lay of 500 people, it really needs to lay them off, and a few tens of thousands of dollars won't make much difference.

Still, it would have been much better for the government to dole out money which would be spent, driving business and consumer demand. Then some of these businesses would in fact need the marginal worker created by the tax incentives to create jobs, and (although in fewer cases) the businesses set on cutting jobs would no longer need to do so.

Finally, and I suppose this doesn't at all surprise me, "The economic plan will also include other tax breaks intended to stir capital investment." It is my opinion that many of these tax breaks merely encourage investment which would have occurred anyway, and thus are primarily a giveaway to businesses. However, the money involved in these tax breaks is unlikely to be particularly huge, so the relative harm is somewhat limited.

I had been hugely optimistic based about the economic stimulus package based upon on what I heard from Team Obama. I am not prone to bouts of wild optimism! But the details which are now emerging about the stimulus package are disappointing. It will still be big and still be very much worth doing, but it won't have anywhere near the impact it could have.

I have no way of knowing, but I suspect that the large amount of tax cuts is done so as to secure moderate democratic and republican support, that is for political reasons not policy reasons. Sadly, any attempt to attract even moderate Republicans generally means making policy worse. But in the scheme of things, increasing the chances of passage, coupled with the huge momentum boost that would create towards the rest of Obama's agenda probably make $100 billion of wasteful tax cuts well worth it. And if the package were $100 billion larger I'd pipe down. But in a $700 billion or so package, $100 billion of almost entirely non-stimulative tax cuts, and $150 billion in only partially stimulative tax cuts constitutes a gigantic wasted opportunity. Still, when I first read the Times article I was hugely disappointed. The more I think about it, the more I am merely disappointed.

2009-01-05T03:01:00.007-05:00

Paul Krugman's wrong.

http://www.nytimes.com/2009/01/05/opinion/05krugman.html?_r=1&ref=opinion

I largely disagree with his statement of current economic conditions, as is clear from my recent blog posts.

First, he says, "The fact is that recent economic numbers have been terrifying not just in the United States but around the world. . . . Let's not mince words: This looks an awful lot like the beginning of a second Great Depression."

No Dr. Krugman, it doesn't. Not as of yet, anyway. I am focusing exclusively here on the US and not the world economy, as Krugman does in his opinion piece. If you look closely at the US economic numbers in recent months you will find an economy clearly suffering just about its worst stretch in decades, but, contrary to what Krugman said, you will find highly similar numbers from the 1981-82 recession and the almost equally severe 1974-75 recession.

Specifically, if you look at the economic numbers which have been released (and not credit or financial market conditions, which do look uncomfortably like the beginning of a second Great Depression) you would be pretty much forced to agree that while the US economy is doing quite badly, it is well within post World War II norms for a steep recession, as opposed to a second Great Depression (which I will loosely define as at least several years of both massive unemployment, and economic output well below what the economy is capable of).

There are many economic statistics I could use to make my case. I will pick two, Christmas season retail sales figures for 2008 (because they are both recent and comprehensive) and the recent November employment report (which I chose because it was particularly awful, and was very widely (and correctly) reported as having been particularly awful. I believe other statistics would support my case equally well.

Item 1: Christmas season retail sales:

As you have likely heard, the retail sales figures over the holiday season were awful. But if you look closely, they appear to be standard recession level figures rather than something worse. I think.

According to MasterCard, a statistic that nearly everyone uses, "total retail sales, excluding automobiles, fell over the year-earlier period by 5.5% in November and 8% in December through Christmas Eve."

http://online.wsj.com/article/SB123025036865134309.html?mod=rss_whats_news_us

Now those headline numbers are godawful, and support Krugman's case more than they do mine. However, look more closely.

"When gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales."

Does a decline of 2.5%, or 4%, sound like a second Great Depression to you? I think not, although I haven't done the research to be sure. There is no doubt the numbers were awful, but not historically awful. And that should be the standard if you are saying, as Krugman did, that, "recent economic numbers have been terrifying," and that the numbers look like the beginning of a second Great Depression.

I note that simply excluding autos altogether may give a misleadingly positive picture. I am 100% sure that if you included autos the numbers would be significantly worse. But auto sales were artificially high for years and are now artificially low. While clearly relevant in determining whether we are headed for a second Great Depression, I wouldn't put too too much stock in autos as a leading indicator about now. I think using retail sales excluding autos and gasoline is in fact the appropriate measure.

In summary, the various quotes I read when googling this matter were similar to the one in this article, "This will go down as one of the worst holiday sales seasons on record." No doubt it will. But I read, "worst in many years," "probably the worst since 1970" and the like. I did not read, "Much worse than anything we've ever seen," "worse than anyone's worst nightmares" or anything like that. In short, bad but not historically awful.

Item 2: Employment numbers:

December's numbers come out this Friday, and everyone is expecting a whopping job loss, somewhere north of 500,000 jobs, possibly as many as 650,000; a huge monthly loss to be sure. But let's look at November's numbers.

According to the New York Times, the 533,000 jobs lost in November were the most since December 1974. "Not since December 1974, toward the end of a severe recession, have so many jobs disappeared in a single month — and the current recession, far from ending, appears to be just gathering steam."

http://www.nytimes.com/2008/12/06/business/economy/06jobs.html

The Times piece then argues that whereas the 1974 numbers came at the end of a severe recession, this recession is just gathering steam. I point this out, but don't address it, because I don't know for sure if this recession is just gathering steam, and neither do you. I do note a crucial point that the New York Times and most other media outlets miss when throwing history around:

The number of jobs lost in December 1974 was a massively higher percentage of the overall labor force than the 533,000 lost in November 2008.

As the Heritage Foundation put it, "In percentage terms, the number of establishment jobs declined by 0.4 percent. In comparison, the December 1974 job losses of 602,000 were twice that number—a 0.8 percent decline from the previous month. The size of the decline in percentages is the same as the peak job losses in the 1981-82 recession but twice that as compared to peak job losses in the 1990-91 and 2001 recessions."

http://www.heritage.org/research/economy/wm2157.cfm

In short, looking solely at November's employment report, and ignoring all other economic indicators, one would conclude that we are in a bad recession, but nothing more. Well, I don't doubt for a second that we are in a bad recession. Hell, the stock market has crashed, unemployment is zooming upward and huge famous companies have failed or been rescued as they were about to fall into the abyss. That's not the question. The question instead is whether this is anything more systemically severe than a bad recession. And the clear answer, based on the data currently available, is no.

In fact, given the fact that the credit markets are easily at their worst since WWII, that the other financial markets have suffered the biggest losses since WWII, the shattering loss of confidence by consumers, financial institutions, and non financial businesses, the fact that as of now we have only seen really bad numbers, as opposed to historically terrible numbers, strongly supports my argument, and not Krugman's, in my opinion..

Two more points before I shut up:

First, I think Krugman's piece was meant as much for advocacy as to describe current conditions. He concludes the piece, "So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?" I certainly have no problems with this advocacy! Even I would agree that the risk of a Great Depression II is the highest since 1945, probably by a significant amount. I don't think that can actually be seriously debated! So a huge stimulus package, which I have advocated for weeks (see my companion post on my big disappointment with the details Obama has released recently about his plans for the upcoming stimulus package) is a fine idea, and I'm glad Krugman is lending his Nobel prize name to the effort again.

Second, everything I have said here is backward looking. That is, I have concluded that the risk of a second Great Depression is minimal based upon the data already released (and the huge government response, which I have discussed in earlier posts). Should data over the next 3-4 months come be substantially worse than the date released in recent months, I could be forced to revise my view. However, even if this occurs, it would likely point to a steeper recession than I and others expect (which I freely concede is possible) rather than a years-long slump, where recovery doesn't occur for years, and then is massively too weak to get the country back to near full employment. I still believe that in order for a bad recession to turn into a second Great Depression, government policy response must be inapt, inadequate, or both. And given that Obama takes office shortly, future policy is likely to be neither. And federal reserve policy under Bernanke is quite certain to be neither.

I agree with the conclusions reached by Ben Bernanke and others: bad federal reserve and fiscal policy caused the slump of the late 1920s to turn into the Great Depression. Despite huge problems with the Treasury Department's response, the federal government has made an absolutely massive response this time around, and it is precisely this response which I think will both prevent this recession from spiraling into a truly terrible state, where unemployment say reached 15%, and also will prevent a many-years long slump that would constitute a second Great Depression.

2009-01-02T05:52:00.002-05:00

2009 Legislative Predictions:

18 days till inauguration. Get excited. Get really excited!

Some predictions on the legislative front with a sprinkling of foreign policy thrown in.

Congress and Obama have an unbelievably full in-box as Obama awaits inauguration on January 20th. Doesn't it seem like he's already president? Hasn't the nightmare ended yet?

1) A massive stimulus package will be enacted before the end of February. This prediction isn't really tough. Its been all over the news. I predict that the total amount of all stimulus packages (there may be more than one) will be less than $800 billion. While that is a staggeringly large number, I will likely be a little disappointed in the final number, as I would prefer an even bigger number, both to ensure that the recession isn't needlessly deep, and because I think a large percentage of the money is likely to be reasonably well spent. Go ahead, laugh. That's a reasonable response to the bit about well spent. But a lot of it will.

2) Health care reform. The big enchilada. I don't know when health care reform will pass, but I predict it will. It will be some form of messy compromise, designed to peel of 10 Republican votes in the Senate and 30 in the House. It will allow anyone who wants to to buy into either Medicare (my choice) the Federal Employees' health plan (better than nothing) or perhaps both. It will reform the way insurance companies work. It will forbid discrimination based on pre-existing conditions. It will not, however, require insurance companies to insure patients. And it most certainly will not be a radical reform, like single payer, unfortunately. It will be a messy compromise.

3) Immigration: I predict that no significant action will be taken on immigration in 2009. Perhaps 2010.

4) Energy: I predict that the amount of new spending on alternative fuels and regulations on emissions will be surprisingly high. Cap and Trade, Carbon swaps, fuel cells, batteries, solar panels. You will be hearing a lot about these in 2009. I don't know enough to make a truly detailed prediction, but as between more energy reform and less, I predict more. The shock of $4 a gallon gasoline was profound, and will be useful to Obama when he tries to sell serious energy reform.

5) Iraq: Iraq will worsen slightly, at times, but not enough to throw the planned slow motion withdrawal off track. We will in fact begin withdrawing meaningful numbers later in 2009.

6) Afghanistan: We will, as has been stated, add more troops into Afghanistan.

7) Trade: The sounds of silence. New trade deals are off the table in 2009. Obama needs all the help he can get for his legislative agenda, and pissing off organized labor will have to wait until 2010, or beyond.

2009-01-02T05:26:00.004-05:00

Some predictions for 2009

Since my 2008 election predictions were a monster success, I figured I'd take a stab at some 2009 economic and other predictions. I'll come back at the mid-year mark, and in very early 2010 and see how I did. Be gentle, some of these are sure to be embarrassingly wrong.

1. The economy:

As I explained in my earlier post, I expect the economic recovery to begin in about June, 2009. I do not expect it to be vigorous at first, although the economy may show surprising vigor by the very end of this year. Or it could go yet to hell in a hand basket if the credit markets truly seize up again. I'm guessing that the worst will be over by March and growth will resume by June. By the end of the year it will be real, although whether the job market will be improving I'm not sure.

2. The stock market:

The Dow Jones is currently at 8,776.39. I expect it to move up 25% from here, closing the year at around 11,408, give or take 500. I know that sounds like a huge move, but it all it would really do is undo a portion of the losses of the crash-year of 2008. The Dow Jones closed 2007 at 13,364.16. So I'm only predicting it gets partway back. Historically, the markets move prior to changes in the real economy. Since I'm predicting an economic recovery starting in June and picking up steam towards the end of the year, I therefore predict a solid market move starting circa March. I can't tell what month-- that would just be making stuff up as opposed to an educated guess/prediction.

The conditions for a huge year in the market are practically perfect. Ridiculously low interest rates and an economy that has been in recession for a year, and which recession has greatly increased in severity in recent months. That may sound funny, but the market bottom should precede the economic bottom, and that is coming soon. If the credit markets improve, as I predict, and credit begins flowing, this will light a fire under the markets.

The Dow Jones isn't the whole market obviously, but as a market overview prediction it will do nicely.

3. Interest rates: The Fed Funds Rate:

As of now, the Federal Funds rate is set at a target of between 0 and 1/4th of 1 %. Effectively zero. I predict it will move up to 1% by the end of the year, with all of that move coming after August, and possibly even in November/December.

The fed has lowered interest rates truly to the floor. They will want to begin gently easing as soon as they are confident that the credit markets have largely or entirely returned to normal, and the economy is recovering. That should be by the end of next year. They may, in an abundance of caution, leave rates at zero several months into 2010, which would make this prediction wrong, but then they may not. Obviously a lot will depend on the overall economy, and whether inflation is sharply negative, as it may be early in 2009. If inflation numbers come in negative month after month, the fed will be seriously spooked, and will leave interest rates at zero regardless of what happens in the real economy. The fed simply does not want to risk a bad deflation!

4) Interest Rates: The 10 year bond:

These days, the benchmark interest rate set by the credit markets is the 10-year bond. This is currently at 2.24 % after taking a bath late last week. Still, 2.24% is just about the lowest in 40 years. I predict that at the end of 2009, the 10-year bond will be at 4.5%. This is of course a huge move! There are two main reasons for my prediction:

First, I think the rate is somewhat artificially low (or, put another way, the price of the bond is artificially high) as a result of a flight to quality. Investors are terrified of investing in most anything; stocks, bonds, etc, for fear of mass bankruptcies. Uncle Sam is safe (at least from bankruptcy), so investors have rushed to accept historically low yields so as to park their money safely and at least earn something.

Second, Since I predict a fragile economic recovery, that would imply that the markets would no longer fear a big deflation, and I think that deflation fears have really brought down the rates on the 10-year bond, big time. Think about it-- if inflation is negative 2% (deflation), a 2% return is actually 4% after inflation, which isn't bad at all. However, if inflation is 1%, to maintain that same 4% post-inflation yield, interest rates would have to move up to 5%.

5) Oil:

As I write this early in the morning on January 2nd, oil is at $41.65 a barrel. I predict that oil closes 2009 at $52 a barrel. The futures markets are predicting a bigger move up than that. OPEC has moved fairly aggressively to attempt to cut production. They will surely make further attempts. Whether they succeed, I have no idea. Congress is likely to pass major legislation requiring massive increases in fuel economy in future years, and investing huge amounts of money in alternative energy. Given that the US uses 25% of the world's oil, this will register in the markets. But the big oil-market story of 2009 will be that economic Armageddon is avoided. Once the oil markets realize that this is the case, oil should move up quite a bit. My prediction here is actually fairly conservative.

2008-12-29T04:09:00.007-05:00

Thinking about Gaza.

This post is about what I think Israel's goals should be for this offensive against Gaza: What should Israel be trying to accomplish. The short answer is the removal of the Hamas government, the destruction of Hamas as an organization, and a very significant reduction in the amount of capability of people inside Gaza to hit Israel with rockets or in any other fashion.

As all of you already know, Israel is 3-days into a significant series of air strikes against Gaza, that have already apparently killed approximately 300 people and wrought some destruction.

As I write this, the New York Times lead story on-line is headlined, "Israeli troops mass along border; Arab anger rises." Well, Arab anger always rises when Israel defends itself. If rockets are launched against Israel, not so much. If Saddam launches Scuds against Israel without Israel having done anything to Iraq, that is cheered in the Arab world (and was in fact cheered at the time both by Palestinians in the West Bank and Gaza and, disgracefully, by well more than a few Israeli Arabs (who are citizens of Israel)).

With that sidelight out of the way, where should Israel go from here?

An article that my friend Andrew sent me,

http://www.tnr.com/politics/story.html?id=b80c860d-dca8-4d79-9cc4-05d91b6d4721

got me to thinking: What should Israel's goals be as it prosecutes this significant offensive against Gaza?

My short answer is that Israel should continue its military occupation in Gaza until each of the following conditions are met: (1) the eviction of the Hamas regime in Gaza, and its replacement by Fatah (the Party founded by Yasser Arafat, currently headed by Mahmoud Abbas, that is in power in the West Bank), (2) that Fatah be required to act to stamp out Hamas and its imitators once and for all on pain of its being replaced by leaders of Israel's choosing, (3) the capture or killing of Hamas' leaders; (4) leaving behind any military and security infrastructure needed to ensure that the rocket threat poses by Hamas does not reemerge; and (5) the permanent occupation of a narrow strip along the Egyptian border, to prevent the smuggling of weapons, including but not limited to rockets, into Gaza. No civilian settlers for heaven's sake! If I could be convinced that this is simply unworkable, that the Israeli soldiers there would simply be easy prey for Hamas or other groups, and you can't just leave them sitting there for decades, I would be open to alternative security arrangements that would reasonably ensure that the flow of weaponry into Gaza turns into a mere trickle.

These are, make no mistake, ambitious goals. They will require Israeli blood, many Palestinian civilian deaths, entangle Israel in Gaza politics, reliance on an unreliable Fatah "ally," and will only reduce and not eliminate the threat. But it is the best series of goals that I believe is achievable for Israel at any reasonable cost. There are problems, including one serious problem, with the goals I have set forth, as I will discuss below,.

Is Israel going to go anywhere near this far? I doubt it, but there is room for debate. Any attempt to predict Israeli behavior has to begin with the Lebanon War of 2006. Then, you will recall, Israel engaged in a weeks' long series of air-strikes designed in part, as I remember one Israeli saying, to show that "the bossman has gone crazy." Well, designed in part to reestablish Israeli deterrence. Israel had more or less accepted small military actions against it for quite some time and had had enough. Anyway, at the time Prime Minister Olmert talked very tough, saying that the goals were to "destroy" Hezzbullah, or to destroy it as a military threat. Andrew and I were thrilled to hear about Israel seeming to act decisively to defend itself for the first time in many years, and we were thrilled. Alas, Israel then declared peace with precisely none of its objectives satisfied, with Hezzbullah having fired well more than 10,000 rockets into Israel and having emerged victorious in the eyes of everyone in the region.

This shadow, in some ways similar to how Americans look at Vietnam, looms over the current operation in Gaza. Once again, we have air strikes against a well armed ragtag military group that fires rockets into Israel. When I say well armed, they are, for a group of militants, as opposed to a modern army. Make no mistake, the Israelis have a small but very real modern military and could, if it wished, crush Hamas, and leave total devastation in its wake, and suffer relatively few casualties while doing so. This would require a level of death and destruction that Israel is simply unwilling to consider. I don't want to leave the impression that by saying "well armed" that means they are in any way shape or form comparable to Israel.

Some in Israel have talked about resuming deterrence. Let the Palestinians and others in the region fear Israel, and then they will stop attacking it. This is most unlikely to work. Whatever the flaws of the Palestinians may be they, and their leaders, are tough and determined. Despite facing down a modern military, with aircraft, precision guided bombs, tanks and satellites, they fire rockets into their massively superior opponent and talk openly of its destruction. Hardships are simply blamed on Israel, or the US. Hamas is particularly tough, courageous and determined. The idea that a massive show of force, capture of some of its leaders, destruction of buildings and infrastructure and killing of a few hundred civilians is going to change the behavior of those that run Hamas is ludicrous. Time and again, Palestinian leaders have shown their basic inability to be deterred by that level of force which Israel is willing to dish out. Would they be deterred in the future by the kind of much more significant operation that I outline? Israel's never tried it, so I don't know for sure, but my best guess is no, they would not. I am in no way relying on deterrence.

In the meantime, the Bush administration has talked about Hamas being at fault (fine) and calling on it to "renew the ceasefire." I don't want a ceasefire with Hamas, while it (a) fails to recognize Israel; (b) Remains committed to the destruction of Israel; and (c) arms towards doing harm to Israel, including but not limited to acquiring rockets with a longer range into Israel, and, of course, using those rockets. I might support allowing Hamas to stay in power if it:

1) Agrees to a coalition with Fatah and to turn over all military assets;
2) Recognizes Israel; and
3) Publicly and irrevocably commits to working towards a 2-state solution.

I do not believe that Hamas can possibly accept these terms, it is meant as a poison pill they can't possibly accept. In reality I do not support any sort of resumption of a truce with Hamas. They represent an intolerable threat to Israel, which could grow in time into a mortal threat. Israel's citizens having to live under the constant threat of rocket attack is simply unacceptable. Hamas could possibly ensure a few months of quiet (possibly) but the resumption of the threat of living under rocket attack would then resume at Hamas' leisure. This is intolerable.

What are the main problems with the set of goals I have outlined? The biggest problem by far is the assumption that Fatah can somehow be forced to stamp out any future threat posed by Palestinian militants. Since the beginning of the peace process of the 1990s, a constant source of tension between Israel and Fatah has been the attempts (or lack thereof) by Fatah to disarm Palestinian militants/prevent their emergence in the first place. Arafat at times actually did crack down on the militants (in part because they were a threat to his power, wealth and life), but mostly let them alone because (a) he wasn't always strong enough to crush them; and (b) they served his ends in a negotiation with Israel; they represented the leverage he had-- suicide bombers and other attacks on Israel.

What if Fatah "promises" to stamp out the remnants of Hamas, and not to let it reemerge. Then, time goes by, and, mysteriously, new militant groups form, new groups are lobbing rockets at Israel, and Fatah says, "gee, we're sorry. Where did they come from?" This is, to say the least, a likely series of events. I have not fully worked out how Israel would deal with this eventuality, in part because there just isn't a good answer. Or at least I haven't worked one out. Caroline Glick, of the Jerusalem Post, constantly reinforces the point that Fatah cannot be trusted. She has not set forth an answer of how to deal with this problem either. The Palestinians represent an enormously difficult series of security problems for Israel to deal with. But short of simply killing them all, which Israel has not and should not consider (we did not carpet bomb Fallujah during the worst of the Iraqi Sunni insurgency, even though that would have killed hundreds or thousands of militants and arguably saved many American and Iraqi lives), Israel has to make a series of choices vis-a-vis the Palestinians. And rocket attacks, or even the fear of them, is to me on the side of unacceptable. Israel should pay any price, bear any burden, inflict any harm necessary to avoid the risk of rocket attacks.

2008-12-29T02:45:00.000-05:00

The fall of the Japanese markets

The Nikkei 225 Index, Japan's defining stock market index, very much analogous to the Dow Jones Industrial Average that you see every day in the news, closed today at 8,747, up a tiny fraction. By coincidence, the Nikkei is extremely close in raw numbers to the Dow Jones, which closed on Friday at 8,515.

Why on earth am I telling you this? Because on December 29, 1989, the Nikkei closed at its all time closing high of high of 38,916!! Thus 19 years after the Japanese market hit its all time high, it is down 77.5% from its high!

http://en.wikipedia.org/wiki/Nikkei_225

http://finance.yahoo.com/echarts?s=%5En225

Its incredible how far the Japanese market has fallen from its peak. It fell throughout much of the 1990s, and has been cut in half again in this decade.

I was 19 in 1989, when the Nikkei closed at its high, and I well remember all the talk about how the Japanese model was superior, how the Japanese would own America (Japanese individuals and companies went on a hugely publicized shopping spree in the US, buying movie studios, theme parks, buildings and businesses. Most of these were sold in the 1990s at absolutely titanic losses).

This history of Japan bears remembering whenever anyone wants to assume anything about our future.

2008-12-25T20:37:00.002-05:00

Elie Wiesel Foundation Loses Everything to Madoff

http://www.newsmax.com/insidecover/wiesel_losses_madoff/2008/12/24/165157.html?s=al&promo_code=7656-1

The Elie Wiesel Foundation For Humanity lost "substantially all" of its modest $15.2 million assets to the Bernie Madoff pyramid scheme. I know I'm supposed to be very angry at Madoff (and I am, furious-- he obviously should never be a free man again, and he makes me hope/wish there is a hell) and very sympathetic to the charity and those that it helps that now may have to do without (and I am), but I'm also pretty ticked at the imbecile(s) who put all of their money into one person's hands. Why on earth would you do that? Now look, its a small charity, so I don't expect them to spread their money to 8 different people. And there's only so much due diligence that a small charity can do. But 3 different people? So if one's a crook you have 2/3 of your money?

Am I being too harsh here? This isn't the United Way losing billions, or anything remotely like that. Still, didn't your momma teach you never to put all your eggs into one basket?

2008-12-23T13:13:00.005-05:00

Clinton: 22.5 million jobs created; Bush 3.7 million.

Under 8 years of Clinton: 22.5 million!

Under 8 years of Bush: 3.7 million!

Under Bush BEFORE the recession began 4.6 million.

This doesn't count December and January, which will subtract at least 500,000 from the already paltry Bush totals.

There are many caveats, to be sure. After the very strong job creation record under Clinton even a successful Bush presidency would have created many fewer. But not nearly this many fewer.

Folks, we all know failure when we see it. But sometimes in life numbers have the power to just boggle the mind. Sometimes numbers crystallize things for you.

2008-12-22T20:48:00.003-05:00

I wanted to share a statement made in a recent column by Caroline Glick, in the Jerusalem Post.

She is a right-winger, dead set against a Palestinian state or any giveback of land by Israel in the West Bank (she was also against the Gaza pullout) because she is of the opinion that the Palestinians would simply use any new land or especially a new state as a launching point from which to increase their capacity to attack Israel and kill Israelis. She sometimes is a bit, well, frothing at the mouth about these things, and, I think, has not fully thought through where Israel's settlement policy has taken it.

She also called on the Olmert government to resign before the Lebanon War was even over, and was as furious at Olmert's conduct of the war as I was (which is very furious indeed).

Anyway, she recently summed up why I am against a resumption of peace talks with the Palestinians far better than I have or could. In a just world, the following words would be remembered for the ages as a perfect summary of our times:

"But Fatah (the main Palestinian governing party, once headed by Arafat, now headed by Abbas) is a dead horse. Even if it were to sign a peace deal with Israel - and really meant to keep it - the deal would be a dead letter because the Palestinian people themselves want neither peace with Israel nor Fatah."

http://www.jpost.com/servlet/Satellite?cid=1228728255154&pagename=JPost%2FJPArticle%2FShowFull

She is lock down right. It pains me to write this, because I want to believe in what's best in people. And many Palestinians DO want some form of peace. But not the people with the guns, and not a huge majority of the people, who could try and shout down the people with the guns (at least in some parts of the world). And I've hated Israeli occupation and settlement policies for 25 years. But not only are serious talks with Abbas profoundly unwise for precisely the reasons stated by Caroline Glick, but its difficult for me to see how that changes in coming years.

My friends (to borrow a phrase from a defeated presidential candidate) the middle east is much more likely to end up in conflagration in the next 5-10 years than a global peace settlement. Israel has to line up for its share of the blame, but the Palestinians have painted themselves into such a corner at this point that even if Israel wanted to adopt my policies (give back all the damn land, pull out all the settlers and be done with it), the Palestinians wouldn't be in any position to accept it and become tolerable neighbors.

Its a very sad situation for all concerned, and likely to grow sadder and sadder as Iran arms.

2008-12-22T18:13:00.008-05:00

This post is designed to explain precisely why an absolutely titanic government stimulus package is necessary, and where the economy should and will go in the next 5 years. I don't mean to be predicting, I mean to explain instead. Predicting is more fun (especially when I'm successful, as with the elections) but in the end far less useful).

I. Definition of GDP

First some background. The GDP, or gross domestic product, is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.

http://www.investorwords.com/2153/GDP.html

http://en.wikipedia.org/wiki/Gross_domestic_product

Knowing what makes up GDP is really important if you want to understand how to get it growing again, so take a minute to really understand the component parts.

1. Consumer spending (sometimes called consumption)- you buy it and use it-- food, a tv, sneakers, whatever.

2. Investment: Education. Housing. Railways. Ports. Something that is not consumed, but is instead used for future production of goods and services. Obviously there can be gray area. A computer is both.

Importantly, both non-residential investment (such as factories) and residential investment (new houses) combine to make up Investment. Residential housing is a key part of investment. This has dropped off the cliff, as you might imagine. Off the cliff.

3. Government spending. As I understand it, if the government buys it it comes under this category, period.

4. Exports - Imports. The value goods exported, minus the value of imports. I will not discuss trade at all in this post, because it is very difficult to control and predict.

II. Consumer Spending is in the Tank, and Likely to Remain There For a While

Now let's see where these categories of spending are these days. Consumer spending has plummeted. You may not be able to see that quite now as you finish up your Christmas shopping, but it has. Retailers are going bust, the car companies are obviously in a world of hurt, and US domestic sales of automobiles have dropped further than at any time since World War II. Big discounts are available on electronics, clothes, etc. Basically, consumers are afraid for their jobs/homes, or have lost them. When you're really concerned about losing your job, the Plasma screen TV or new dress can wait.

This is most most unlikely to reverse itself anytime soon. American consumers are famous shoppers. After 9-11 retail sales REALLY plummeted, as people were both riveted to the tvs and nervous. But a few weeks later it rebounded sharply. Bush literally urged us to go shopping. Small, small man.

Anyway, there are two excellent reasons to think that consumer spending won't rebound sharply anytime soon, which I boldly predict it will not.

First, Americans understand that the economy is truly awful. Most of the readers of this blog are highly educated people born and raised in the northeast. I am very confident that people like us badly underestimate the shock that people not like us feel when a Lehman Bros. goes under, or a Citigroup needs dozens of billions in cash and hundreds of billions in loan guarantees to stay afloat, and, especially, when GM is driven to the wall, and needs money by the end of the year to avoid bankruptcy. These things, by themselves, could be enough to badly depress or shut down economic growth. Couple that with the fact that the local Target closed, local businesses are cutting back and your boss tells you that the company needs to save money, and presto, you have a recession mindset. Multiply that by the entire nation, and you have probably the worst recession since 1945. The absolutely frantic government response has in some ways exacerbated this problem. The frequent statements by Bernanke and Paulson earlier this year that the crisis was contained proved most ill-founded. To their credit, they're not saying that anymore. But people that watch the news remember. It seeps in. Of course, the response is still necessary, as I've said in posts before.

Second and more important, is where are people going to get the $$ to spend? From 2002-2007, a key source of money that people used to shop was from appreciating home values (and stock portfolio values). As people were wealthier on paper they spent more and, importantly, borrowed more and saved much less. Home equity loans and credit card receivables went up sharply, and people spent like drunken sailors (as did the government).

Well, the stock market has crashed and the housing market has tanked, so these temporary boosts to wealth will be out of action for a while. Incomes aren't rising fast (obviously). So ladies and gentlemen, its really simple. With incomes down, and insecurity and debt up, those with jobs are saving more and spending less. Those without jobs or having lost their house are spending way less. Presto-- consumer spending is down.

And even though it may not go down radically from here, it is really hard to see a sharp rebound. The stock market could go up quickly, who knows, but the housing market really can't. There's just too many houses on foreclosure and unsold inventory for housing to rebound much until at a bare minimum mid to late 2009, and probably not until at least Spring 2010 at a guess.

Having said all this, I refer back to my post on Friday, December 05, where I pointed out that there is already a lot of "stimulus" in the pipeline, including lower oil prices, lower interest rates which are causing a lot of refinancing, and all of the money that the fed and the treasury has been throwing around. So there's more uncertainty than usual right about now, because there are such extreme headwinds and tailwinds at the same time.

Referring back to the beginning of this post then, GDP is consumer spending + investment + government spending (I'm leaving exports - exports out of this post, because it is very difficult for the government or anyone else to control exports). If consumer spending is unlikely to rebound strongly (to say the least) anytime soon, and investment is as well (residential housing is a big part of investment) you simply have to have government spending grow, or there is no way the economy will in the near future. Government spending (deficit spending) is the only game in town.

III. The Attempt to Stimulate Consumer Spending in 2008 Largely Failed, and its Failure was Both Predictable and Predicted

Earlier in 2008, the rebate checks were mailed out. This is an attempt to increase consumer spending by increasing the deficit and simply putting more money in people's pockets. It worked to an extent, but only so much, both because it was much too small to have a serious impact and, more importantly, because scared consumers tended to save the money and not spend it. All of this was predicted by many mainstream economists.

Savings is good too, for a myriad of reasons, but these reasons are mostly long term. In the short term, spending is far, far better than saving.

IV. The Federal Government Can, Should, and Will Increase Government Spending to Stimulate the Economy

Don't let anyone tell you, as some conservatives are, that government cannot stimulate the economy by running larger deficits and spending the money on bridges, roads, ports, health care, etc. It most certainly can. This is Keynesian economics 101, and is not controversial among serious economists. Now the government can't increase the size of the economy this way over the long term but in the short term it absolutely can, should and will. Team Obama has leaked this week that the economy is in much worse shape than they thought, and have not acted to quash speculation that the upcoming stimulus package will be bigger than anyone thought a few weeks ago, north of $700 billion over two years, with a trillion dollars over the 2 years being considered not out of the question. This is such a good idea that I am at a loss for words. It could be the difference between unemployment topping out at say 8.5-9%, or at 11-13%. It could mean the difference between a decent job and homelessness for millions of Americans. Its a hugely good idea as I've said in several posts before and will in several posts in the future.

V. Where will the Economy Go From Here?

Now its prediction time. Where will the economy go from here. Or, put another way, where will growth come from when the economy does recover?

Now that I think of it, this belonged in my last post, when I predicted that the recovery will begin on June 19, 2009. LOL.

At the very end of the day, the only way the standard of living of a nation grows is through productivity. That is, you can grow GDP by putting more people to work (for example, granting women and minorities the right to compete on equal terms for jobs, which is good economics as well as morally right), running a budget deficit, or doing myriad other things, but these things by and large do not, in the long run, increase per capita GDP. The only thing that does that is productivity. Basically, allowing Labor to work more efficiently, or allowing the interaction of labor and capital to work more efficiently.

How to increase productivity in the long run has been the subject of entire books and is beyond what I can contribute. To increase GDP, which I'll happily settle for, you need increases in (exports - imports), consumer spending (which is 2/3 of the economy, and I've discussed at length), investment or government spending. Increasing government spending is an excellent short term solution, and a poor long term solution, as taxes need to be raised to pay for this spending, and that will short circuit consumer spending. The key, in my opinion, is investment. We've had about enough residential housing for now, and that's a huge part of investment. So increased investment isn't easy!

So one wonders where growth will come from in the medium run. It would appear that after 2010 more growth than usual will have to come from investment than usual, and less from government spending (which will have skyrocketed from an already high base). People and businesses need money to invest, and that money, by definition, is either borrowed or comes from savings.

It is a central tenant in economics that government borrowing plus private investment = private savings plus foreign investment. So private investment and private savings are closely related. If you're going to build a railroad, or bridge, or new factory, or the like, the money for the investment must come from somewhere. That somewhere is generally either savings or borrowed, either from the government (to build a school) or abroad (A new Toyota factory funded by the parent company perhaps). So to increase investment you (as a practical matter) need to increase savings. Which can often decrease consumer spending-- private citizens savings = their income minus their consumption, minus THEIR investment. Anyway, raising savings (which in the US have been abysmal for years) has been a big issue in the US for years and the savings rate has only declined. So raising investment is going to be tricky.

It may well be that government spending will have to be elevated longer than I had thought. If I'm right, and consumer spending is slow to recover, the only things left are trade, government spending and investment. Can't raise investment without (a) raising savings; or (b) going into more debt. And one thing I'm certain the United States has about now is too much debt. Too much credit card debt, too much mortgage debt, too much government debt (at the moment). So I'm not for a strategy that relies upon increasing debt.

I am arguing for a government investment program that is real, and sustained, even after the stimulus package I have long advocated has run its course. By investment program I mean spending which can benefit economic growth later on, like schools, mass transit and other infrastructure, and possibly alternative sources of energy. Health care is also an excellent place to begin this investment. It is sorely needed (50 million or so people are uninsured, and that number is sure to rise in the steep recession we are in), government can do it (Medicare works), and it can be continued long after the recession is over. Whether it raises long term economic growth, however, is trickier. It might, but not as clearly as a much needed rail link.

Other areas for long term increases in government spending that are useful for the economy need to be considered. And taxes will need to be increased to pay for this spending (obviously diminishing any stimulative effect!) But as of now, and my mind isn't fixed on this, I don't see any other way forward. For the last 25 years, growth in the economy has been fueled primarily by increases in debt. The national debt has absolutely skyrocketed, mortgage debt has soared, consumer debt has soared, business debt has increased somewhat. A strategy for growth that allows for growth alongside a decrease in debt is now needed. And that will likely require more investment, by both the private sector and state and local governments.

2008-12-15T16:33:00.005-05:00

I endorse Likud in the Israeli elections which will occur in February 2009.

I have to start by saying that as of now I am against any serious long-term negotiations with the Palestinians over the borders of a Palestinian state or any other long term issue. I take this position because the Palestinians are so badly split, between Hamas, which does not recognize Israel at all, runs Gaza, and has quite a bit of support, and Fatah (once Arafat's movement) which is "led" by Abbas, "runs" the West Bank, and has almost no real support among the Palestinian people as I understand it.

I never ever thought I'd live to endorse Likud in an election. They have always stood, and still stand for everything I hate about Israeli foreign policy. Likud was founded by a merger of several Israeli right wing parties, and was effectively run by Menachem Begin who for me is the most hated figure in Israeli political history. Begin was the mastermind of Israel's crazy settlement policies, by which Israeli citizens were dropped, hither and fro, into lands captured by Israel in the 1967 war. Begin conceived these policies in order to ensure that Israel could never give the West Bank back to the Palestinians (or anyone else). That was the stated position behind the creation of the settlements, at the time. That so many American Jews mindlessly repeat, "the settlements are necessary for security" is simply not thinking things through. Begin did, and that's where his views led first Likud, and later Israel, though he had tons of help in growing the numbers of settlers.

I have hated the Israeli settlement policies since I was 13. So how on earth can I endorse my hated political enemy? Well, Israeli politics is a mess.

The ruling Kadima party of Olmert (a party originally led by Ariel Sharon, which broke away from the right-wing Likud party) has, imho, done a terrible job for Israel's security. I just can't forgive these bozos for the 2006 Lebanon war fiasco. You'll recall that: (a) Israel essentially declared war on Hezbullah in Lebanon; (b) announced a series of (perfectly reasonable and appropriate) goals for the war; and (c) declared peace with literally none of these goals accomplished.

Olmert, the Prime Minister throughout this fiasco, clung to his job like grim death. He has been investigated for corruption for quite a while, and in September Israeli police recommended that criminal charges be brought against him.

He did not run for the leadership of the Kadima party, and that position was won by Tzipi Livni, Israel's hapless Foreign Minister. Livni reminds me a lot of Condi Rice. Theoretically capable, but mindlessly followed brainless leaders through brain-dead foreign policies for years and years. At least Condi had the good sense not to run for President to continue these brain dead policies. I wouldn't vote for Condi for dog catcher, and I think more of her than I do of Livni. Livni is a sad, sad woman who views Israel not as it is, or rather not as one might see it, but as she wishes it were. Not unlike Condi and Iraq, or Israel-Palestine, or many other foreign policy matters. Livni, from what I know of her, has no business running a community bank, let alone a country. She has repeatedly defended the Lebanon war fiasco, and has advocated final status talks with the Palestinians, which makes no sense given that Hamas, which denies Israel's right to exist, controls the West Bank. Either of these policy positions are so bad, so stupid, so counter to Israel's vital national security interests, that they disqualify her from serious office. But holding both of these positions is heroically incompetent and idiotic. She must go.

As if one needed another reason to despise Kadima, there is always that controversial prisoner trade made earlier this year. I ripped Olmert & Co. a new one in my post of July 16, 2008. I have nothing to add to that post, so I refer you to it for details on the awful exchange of a live murderer and other goodies for the bodies of two Israeli soldiers killed in Hezzbullah captivity.

So supporting Kadima is out, if I can find an even vaguely reasonable alternative (no Andrew, the "tooth fairy" won't do). I note that I supported Sharon for Prime Minister when he ran, so despondent and disgusted was I by the behavior of the Palestinians, and so little was I interested in a resumption of peace talks just then. I was reasonably happy with Sharon's leadership (more words I never dreamt I'd think, let alone write), and was comfortable with supporting his protoge, Olmert. Well, I was ignorant. I'm knowledgeable about American national politics. Israeli not so much, except in very broad outline.

Anyway, Olmert took Israel out for a spin, and in my view he dinged up the car really good. I suppose he didn't wreck it, but he ran it into a tree, blew out 2 or 3 tires, did thousands of dollars of damage in body work, destroyed the clutch, and never bothered to change the oil, damaging the engine mildly. So I'm not giving the car back to him! Livni was his passenger, and is convincingly promising to drive and care for the car in precisely the same way he did, negotiating with the Palestinians when Hamas runs Gaza and Abbas has very very little power and no influence. So I am certainly not lending her the car! I wouldn't give her a picture of the car.

Normally I would look to Labor. Labor is the mainstream party of the Israeli left, and a natural home for people like me who want to make a final peace deal with the Palestinians and Israel's other neighbors, and is willing to give up land/settlements to do it.

And I would consider Labor if I heard sensible things from Ehud Barak, its leader. Barak, you'll recall, was Labor's leader when the talks which got hot and heavy between Clinton and Yassar Arafat were ongoing. He pulled Israeli troops out of southern Lebanon, a move which I strongly supported. Alas, Barak promised that Olmert's troubles would not derail talks with the Palestinians. Talks which he wants a second chance as Prime Minister to see through. Well, that's fine Ehud, really, but who are you going to talk to? Abbas? He has about as much sway over the Palestinian people as the Bum who slept at 57th street and Lexington avenue last night. He couldn't make a deal stick among Fatah supporters! Let alone his blood enemy, Hamas. If the talks don't include Hamas, I don't support them. And since Hamas doesn't recognize Israel, that becomes rather difficult. I would much rather Israel talk to Hamas now, without preconditions, than engage in serious, endgame negotiations with Fatah. Better to talk to people who you know hate your very existance but could possibly make a deal stick if they struck one than to people who have resigned themselves to your existance, but could not make a deal stick. (I think Israel should adopt my plans for a final proposal and simply unilaterally implement them, but that's for another post another day).

In addition, the Israeli left has apparently splintered into various sub-parties. I have not troubled myself to learn about this.

So I look to Likud. Its head, Netanyahu, (Bibi) is a too-slick used car salesman type. He's obviously competent, however, which is more than I can say for Livni. And he's against negotiations with the Palestinians at this time, which is more than I can say for Barak and Labor.

So unless and until I hear reasonable things from Barak, I am, very reluctantly, with nose pinched firmly shut, supporting Likud in the upcoming Israeli elections.

Choices like these make a choice between McCain and Obama seem like a wellspring of fantastic options.

2008-12-15T14:47:00.003-05:00

Federal Reserve to cut rates this week

The Fed is meeting this week to set short term interest rates. They will cut interest rates by half of a point, to .5%, from 1%. I support this cut.

Several months ago, I worried about the fed running out of room to cut rates, that is running out of bullets. Given that the economy is in a very deep recession (see my previous post) financial markets are still very deeply troubled (I have heard that the markets are pricing in a huge record number of defaults by investment grade companies, and an absurd 75% default rate in junk bonds (even a depression lasting 3 years probably wouldn't result in that bad of a default rate)) I'm not worried about holding ammunition in reserve anymore.

A better argument against a big interest rate cut now is that it won't do any good now, while credit markets are frozen, but might do some good in the future, when credit markets have again reopened. And there is merit in this argument. But a better argument is that low, or even zero short term interest rates, allow banks to cheaply build up their balance sheet by borrowing at short term rates, from other banks, and lending out money risk free to Uncle Sam. Even though long term rates are also very low, they are not zero, or 1%. Instead, the 10-year treasury bond is at 2.52 as of now. Borrowing short and lending long is what banks do in general, and allowing them to profit sharply from doing so is good policy right about now.

There is open talk of the fed simply cutting short term rates to zero (literally free money). My guess is they'll only cut to .50 %, but the difference is really only one in degree.

2008-12-15T14:36:00.002-05:00

Blagojevich tries to sell an appointment to the Senate

As you have all likely heard, Illinois Governor Rod Blagojevich, already publicly under federal investigation, was arrested and charged with trying to personally profit from his right to appoint the successor to Barack Obama as Senator from Illinois.

Given that he and everyone else knew he was being investigated, that he would say what he is alleged to have said on phone calls he absolutely knew may have been tapped, is just insane. It shows how disconnected from common sense people can become. I hope they throw the book at him.

Still, an argument can be made that this is no big deal. As Andrew said, is this sort of corruption really godawful? If he and Rahm Emanuel had agreed that in exchange for his nominating who Obama wanted to fill the seat the Obama administration would push for 25 new schools and hospitals in Illinois, that would be perfectly legal. Normal, ordinary political horsetrading. But if the Governor seeks a $500,000 a year job for himself, its bribery. I note that $500,000 a year is a whole lot less, to say the least, than 25 new schools and hospitals would cost! Yet the one is normal politics and the other is the worst form of bribery, suitcases of cash in essence. Is one really that much morally worse than the other? More harmful to the Republic? A serious argument could be made, but I don't feel like making it now.

2008-12-15T14:14:00.003-05:00

Cholera in Zimbabwe

Hundreds of people have died in the recent (entirely preventable) outbreak of cholera in Zimbabwe.

http://en.wikipedia.org/wiki/2008_Zimbabwean_cholera_outbreak

Cholera is spread by a bacteria through eating contaminated food or water. Due to the unstable political situation, Zimbabwe's previously tolerable (for a poor country) supply of safe water has gone downhill. The outbreak has now spread to towns in Botswana, Mozambique, South Africa and Zambia. Proving yet again that a badly unstable neighbor on your doorstep is just not a hot idea.

The Zimbabwe government has taken turns denying the outbreak and blaming it on a "calculated, racist, terrorist attack on Zimbabwe by the unrepentant former colonial power (the UK), which has enlisted support from its American and Western allies so that they can invade the country."

Yeah, that's it. Gordon Brown, PM Britain, has infected the Zimbabwe water supply with Cholera to make it easier for the UK to invade and re-subjugate the people of Zimbabwe. This is typical of the government there. Absolutely typical.

Mugabe has to rank as one of the most disappointing leaders in the last 50 years. He spent 11 years in prison for advocating for a free Zimbabwe as a colony it was known as Rhodesia and had white minority rule similar in very broad outline to the apartheid government in South Africa. After his release from prison he joined a rebel movement which ended in universal suffrage, and left him a hero in the eyes of many, and not just locally.

He took power in 1980. For many years he was widely regarded around the world as a fine leader by African standards. Infant mortality and young child mortality plummeted, immunization increased radically, child malnutrition fell, literacy boomed, the economy soared, education improved. In short, he appeared to be doing many of the right things for precisely the right reasons. There were certainly blips in this good story. He was intolerant of dissent and would kill to enforce that. He is violently anti-homosexual, and has used the courts to enforce that from time to time. Still, taking his record as a whole he was one of the best, if not the best of the revolutionary leaders. (I think of Mandela as a prisoner of conscience, not a revolutionary leader).

Then, starting in the mid 1990s, Mugabe moved, step-by-step, into the monster he is today. I remember I met an African woman, Nigerian I believe, at a law conference in the late 1990s. At a break I got talking to her and the topic turned to Mugabe. I was railing against his latest outrages (nothing compared to what was coming in this decade) and I remember she ended the conversation by walking away from me saying in an exasperated and angry voice, "Mugabe's not a monster." Well, she was basically correct when she said it, but in time I got much the better of the argument.

In recent years he has resorted to mass violence and mass use of food as a weapon, to maintain his iron grip on the country. As a result, Zimbabwe, once a clear post-colonial success, has gone to hell in a handbasket. It has suffered a mass inflation, gigantic food shortages, many thousands of arrests and government sponsored murders, and many other markers of a badly failed state. Mugabe apparently lost his bid for reelection, but ignored the results and imprisoned, on and off, the leaders of the opposition. He is now in the process (unsurprisingly) of shredding a power sharing agreement.

What a bitter disappointment from a man who obviously once cared deeply about the people of his country. Maybe in the fullness of time we'll learn that he has Syphilis, which has been rumored for years. That certainly wouldn't excuse any of his military and other supporters and sycophants.

What a parting gift to the world it would be for Bush to take him out before he turns over power. Mugabe IS a monster, and needs to be killed. He's in his 80s, but probably has 10 years left in him to misrule Zimbabwe and infect it and its neighbors. He must go.

2008-12-05T16:54:00.010-05:00

June 17th, 2009.

Everyone wants to know when the economy will turn around. The answer is June 17th. Ok, obviously I can't be nearly that precise, but I expect that sometime next Summer the recession will end and growth will resume. As compared to the conventional wisdom, I am actually being quite optimistic.

Previous recessions since WWII lasted 8, 8, 16, 6, 16, 11, 10, 8, 10, 11, and 8 months (measured from the time of the peak of the economic cycle through the trough, the top through the bottom).
This works out to an average of 10.1 months per recession. That is, the average recession since World War II lasted for 10.1 months.

According to the pertinent body, the Business Cycle Dating Committee of the National Bureau of Economic Research, this recession began in December 2007. The main reason for this determination is that the economy lost jobs each month this year (even before the financial crisis really got going). So if this recession lasts for an average amount of time, it would be over by now, or would end any day now.

This recession, however, is clearly destined to be much worse than an average recession. There's just no doubt about that. So in considering how long it will last, I'm simply throwing out the shallow recessions and considering only the severe recessions.

The two most severe recessions since World War II, working backwards, were the 16 month recession that ended November 1982 (SKY HIGH interest rates, Rust Belt, Reagan deeply unpopular), and the 16 month recession from November 1973 to March 1975 (Inflation, high oil prices, Watergate, just not a real good time to be us).

The shorter recessions, like the one from March 2001 through November 2001, encompassing and exacerbated by 9-11 and the one following Saddam's invasion of Kuwait in 1990, were relatively shallow. I think its a metaphysical certainty that this one will be vastly worse than the most recent two shallow recessions, because of the various aspects of the financial crisis, and the huge credit crunch which has resulted.

So this is a severe recession (I hope, the alternative is much more likely to be a second great depression than a shallow recession). Since the last two bad recessions lasted 16 months, it seems reasonable to begin my analysis by assuming that this one will last about 16 months, give or take. There are, as always, things which make this time different. More on that below.

Based on the determination by the powers that be, mentioned above, that the current recession began in January 2008, if this recession is like the last two severe recessions, this recession could well end sometime around or shortly after May of this year, which would be 16 months after the recession began.

That's the (relatively) good news.

The bad news is that this scenario is in many ways much too optimistic. Although the economy was in recession earlier in 2008, it was just barely so. Job losses were fairly small until about September of this year. Major business restructuring did not begin until about September. The tax rebates helped mitigate the recession earlier on, thus delaying the onset of business job slashing. So the adjustments that are usually made even fairly early on in a recession were not made.

But fear not. In November, the economy lost the huge number of 533,000 jobs, following a loss of 403,000 in September and 320,000 in October. Now that's job loss. Everyone expects a loss of 500,000 to 600,000 jobs in December. (These numbers are seasonally adjusted, meaning that you consider what has happened in Decembers past, which usually have an increase in jobs for the holiday season).

In any event, if you assume 500,000 jobs lost in December, that would make 1.7 million from October through December, a huge number, and likely a reasonable percentage of the total number of jobs which will end up being lost in this recession.

It took a while, but everyone has finally realized that we are in a deep recession. This much is a very good thing, as it enables businesses like auto companies, Investment Banks, and others in trouble to realize that they are and begin necessary downsizing. We are, I hope, a decent chunk of the way through that process. But more remains, not least the possibility of a chaotic Chapter 11 bankruptcy filing for GM and Chrysler, which would be so significant as to possibly throw off my timetable. We will see in the coming days and weeks if the Bush Treasury department intervenes to save them pending the new congress and administration. My guess is that they will, but you never know.

Of course I have already gone too long in this post without mentioning the credit crunch. Recessions often come complete with banking/financial crises. The S&L problems began in the early 1980s recession, and lingered almost into the early 90s recession, which had banking troubles all its own. The Great Depression, obviously, had hugely severe banking troubles. And this time around, banks are just not doing much lending about now. This is real bad, and will prevent economic recovery until banks begin lending more normally.

Business and credit conditions are probably both worse now than at any time since World War II. That's really bad and really, really scary. And it does portend a significantly longer recession than average. When you couple that with the fact that this recession started off very mildly, and only became severe about September 15th, when Lehman collapsed, you would conclude that the economy will contract all of next year. (Which it might).

There is, however, a significant upside in all of this gloom and doom. that is the completely unprecedented effort by the Federal Government to mitigate the effects of the recession. Fiscal stimulus has been incredibly lame thus far, with the rebate checks being most of it. But on the monetary policy side, the federal reserve has been extremely aggressive, cutting interest rates far and fast, injecting huge amounts of money into the financial system, buying commercial paper from businesses (essentially loaning many billions of dollars to private business), creating a Term Asset-Backed Securities Loan facility to support the issuance of asset-backed securities collateralized by student loans, auto loans and credit card loans, and much more.

Similarly, the Treasury Department has been hyperactive, as everyone knows, with the huge $700 billion appropriated for financial rescues and myriad other uses. Paulson has spent darn near $350 billion of that money and has asked Congress for permission to begin tapping the remaining $350 billion. GM and Chrysler may be the next beneficiaries of Treasury Department largess.

Although the Treasury's actions aren't classic economic stimulus per se, they will have much the same effect eventually, as they represent pumping huge amounts of government money into the financial system which will, I predict, enable a thaw in the credit freeze beginning relatively soon.

In essence, the economy is in a tug of war between the worst conditions since World War II on the one hand and by far the most vigorous government response on the other.

There is actually additional stimulus to the economy already in place. This includes: (1) the huge drop in oil prices, from a high of $150 or so to the current $45 or so. That's significant if the oil price roughly holds going forward. I would be very surprised if oil shot back up past say $70 or so in the next year, very surprised. (If I had to predict I would predict it stays fairly close to where it is now) So if oil holds nearish to the $45 level, that would amount to an approximately $300 billion per year tax cut as against the much more expensive oil earlier this year; (2) the new money which will be put in homeowners' pockets as a result of the coming refinancing boom. Interest rates have plummeted on mortgages. Even given the housing market's moribund state, and the credit crunch, many homeowners will successfully refinance.

Finally, and most significantly, Team Obama has been talking an awful lot about a very substantial fiscal stimulus which he has said he wants on his desk within the first week that he takes office! The new Congress is sworn in and starts work on January 6th. Given that Obama has a decent chunk of his team in place already, it is likely that this will be the new congress' first significant item, and conceivably Obama could have the new piece of legislation waiting for him on his desk following his inauguration speech.

There has been much speculation on the size of the upcoming stimulus package, which will be crucial in determining how much power it has to shorten/end the recession and, more importantly, to strengthen what could easily be a lackluster recovery. Obama has said that he intends the "single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s." These are encouraging words indeed with regard to the size of the upcoming stimulus package (which, I note, I have called for for many, many months!)

Speculation has been that this package would be $500-$600 billion for two years, an amount I would have considered too large 9 months ago, but I now consider somewhat too small. Still, assuming they close the deal at $500 billion over two years, that would definitely help. The GDP is now about $14.5 trillion. $250 billion per year is just under 2% of GDP. Not enough to turn an economy shrinking at 5% per year (as it is right now) into growth, but enough to give a good shove in the right direction.

Also remember that it will take time to get the spending going. The spending probably won't be at full force for about 9 months. So at the beginning of 2009 it will have little impact, but at the end of 2009 its impact will probably be more than 2% of GDP, and in 2010 will almost certainly be. So this stimulus package will really do some good by the middle-end of next year.

We have a bad housing bubble, which is another complicating factor. Traditionally, housing is a key factor in leading the country out of a recession, because lower interest rates make housing more affordable. That obviously won't work this time, not anytime soon, because there is a huge oversupply of housing relative to the demand which exists absent a belief that housing prices can only go up. So even with current mortgage rates near 45 year lows I don't expect housing to rebound anytime soon.

In conclusion, the current terrible conditions coupled with the extreme mildness of the recession in the first 6-8 months, the credit crunch, and the housing market's truly parlous state call for a long deep recession. The huge amount of governmental corrective action already taken, coupled with the Obama stimulus to come, call for a shorter, but still deep recession. I predict that these forces roughly cancel each other out, and we have a deep recession, but that it ends more quickly than the experts predict, sometime about June 2009.

Taking a truly wild guess, I'd guess that 4th quarter GDP declines about 5.5%, First quarter 2009, ending March 31, 2009, declines about 3%, 2nd quarter 2009, ending June 30, 2009, declines about 3%, and 3rd quarter 2009, ending September 30, 2009, grows about 2%.

Sadly, if the recession is as short as I predict, I do think the recovery will be tepid, rather than the strong rebounds the economy used to have long ago, when factory workers were rehired when orders increased. This time around, companies will be very slow to take on new workers. Wall Street will not be growing anytime soon. Manufacturing could continue to shed workers, it wouldn't surprise me. So I predict a slow and halting recovery, which will feel much like a recession to many workers. Which is why I think the planned Obama Stimulus is significantly too small. A much larger stimulus would take out insurance against a flaccid recovery.

2008-12-05T11:39:00.002-05:00

Blockbuster (un)employment report

As you have probably all heard, the government released a blockbuster "jobs" report today, announcing that 533,000 jobs were lost in November, 1.3 million have been lost in the last 3 months, following revisions which made really bad figures worse. The 3-month total was the third-highest three-month job loss total since WWII.

The real surprise to me is that job losses aren't at an all time record. We recently learned that a recession began in December 2007. Given that we've been in recession for almost a year and the financial crisis which heavily intensified beginning in September, I'm surprised these aren't the worst months of job loss on record. Perhaps those months are soon coming.

" According to a report by outsourcing agency Challenger, Gray & Christmas, planned job cut announcements by U.S. employers soared to 181,671 last month, the second-highest total on record."

http://money.cnn.com/2008/12/05/news/economy/jobs_november/index.htm?postversion=2008120510

So what have we here? Nearly historic 3 months of job losses, many more certainly coming. Unemployment rate is at 6.7%, but that will surely climb significantly.

As bad as these numbers are, they could (and perhaps will become) significantly worse. In a coming post I'll write about when I think the recession will end. Sooner than you think, probably around July/August of 2009.

2008-12-03T04:21:00.002-05:00

GM gets serious

Well, I ripped Ford a new one in my earlier post, and I don't apologize. Ford should have gone further than it judged necessary, just to make crystal clear to wavering lawmakers that it was serious. GM IS serious, and apparently will run out of money by the end of the year if it doesn't receive a big infusion, quickly. GM, in contrast to Ford, which came to Congress with nothing, promised deep cuts, the elimination of divisions, namely Saturn (ouch, a good small car), Saab, Hummer (what, no political tin ear?) and Pontiac. GM said it would cut more than 20% of its remaining jobs, shut nine factories, seek to renegotiate the terms of its $66 billion in debt and push to reopen talks with the UAW to cut its labor costs.

http://www.nytimes.com/2008/12/03/business/03auto.html?_r=1&th&emc=th

Now that's more like it!!

2008-12-02T14:47:00.002-05:00

Ford has nothing. Zip. Nada.

Today, December 2, was the deadline for the automakers formerly known as the big 3 (the Desperate 3?) to develop a bailout proposal.

http://news.yahoo.com/s/nm/20081120/bs_nm/us_autos_bailout

Well, today's the big day. According to the New York Times, Ford, "wanted access to $9 billion in loans but that it could survive and become profitable in three years without the money unless the current recession 'is longer and deeper than we now anticipate.'

http://www.nytimes.com/2008/12/03/business/03auto.html?_r=1&hp

And what turnaround plan did Ford announce in exchange for its request for $9 billion in loans? The current CEO would be willing to work for $1 a year and they will sell their corporate jets. Additional specific cost cutting measures included promises of . . . promises of . . . crickets. Nothing at all.

I'm flabbergasted. And totally appalled.

First, that Ford wants the money but thinks it can survive without it is rich. If it wants an additional $9 billion in loans, it is nervous, and rightfully so. Even if it might survive without these loans, GM is in a much more precarious position, and as Ford admitted, a GM failure could cripple Ford as well if suppliers went under. Specifically, in the Times article, Ford stated, "It is in our own self-interest, as well as the nation’s, to seek support for the industry at a time of great peril to this important manufacturing sector of our economy.”

So whether it "needs" the $9 billion in loans or not (and I'm sure it does), Ford wants money for the industry. Big money.

And its turnaround "plan" that it puts forth in exchange? The 2 items mentioned, sell the corporate jets and the CEO gets no money, are so unbelievably bare it isn't funny! First, the CEO needs to go, as does the rest of top management. But forgetting that for a moment, CEO pay $1, fine. Sell jets, fine. That should have consumed, literally, the first 30 seconds of the first meeting on the subject. After that, well, talk to the unions, eliminate brands, ask Congress for legislative relief so dealerships can be cut, cut production of gas guzzlers, ask for specified funds for hybrid or electric cars, additional tax rebates for high MPG cars and electric/hybrid cars. You know, a PLAN to actually return Ford to a profitable status, where it could pay the money back to the government, hopefully with a profit on the equity stake Ford proposed the government take in exchange for the highly risky loans.

None of that was proposed by Ford. None of it at all. Even though it would be an empty threat, if I were Harry and/or Nancy, I'd publicly threaten to hold them in contempt of Congress if they didn't come up with a real plan. I'd graciously extend the deadline to Sunday evening.

Here's what Ford did say, from the above-mentioned article:

Ford said that, as a result of its turnaround plan, it believes its core North American auto operations will be break-even or profitable in 2011 on a pre-tax basis. The company had previously set a goal of returning those operations to profitability next year but dropped that target in May without giving a new one.

Ford also said it expects industry-wide sales of 12.5 million vehicles in 2009, 14.5 million vehicles in 2010 and 15.5 million vehicles in 2011. By way of comparison, U.S. auto sales averaged close to 17 million a year from 1998 through 2006.

The company made commitments to speed up the introduction of hybrid and electric vehicles, and added that it believes the consumer shift away from light trucks towards more fuel efficient vehicles is permanent.

And Ford pledged to reverse the decades-long trend of losing money on the production of small cars in the United States. The company said it would increase the production of smaller vehicles such as the Ford Focus to more than 1 million a year and reduce the complexity of the car's parts in order to reduce costs.

So let's see. Ford's turnaround "plan" is that the American market will recover partway back to the good old days of 1998-2006, it will speed up the introduction of hybrid and electric vehicles and lose less money on small cars. It will make small cars better and cheaper. Well that's reassuring. And a clear, specific bold plan.

Or not. The market recovery is a wish. It may very well come true, but a wish or a hope is not a plan. Speeding up electric/hybrid vehicles? Fine. Would like details, but fine, that actually does bear a passing resemblance to something that would be in a plan. And making small cars better? Forgive me, but the American auto makers have failed spectacularly here for 2 generations, literally. I wouldn't bet $9 on it, let alone $9 billion. That just barely qualifies as a wish, and certainly does not qualify as part of a plan.

This is the arrogance/denial these people are living in. I sure as heck hope GM does better.

2008-11-29T17:30:00.002-05:00

The latest federal efforts to restart our financial system

Another day, another record breaking, unprecedented, potentially insanely expensive, federal rescue.

Earlier in the week, while we were all making travel plans for Thanksgiving, the federal government announced that it was purportedly pumping up to $800 billion into credit markets, with the goal of making it easier and cheaper to get a mortgage, as well as student loans, small business loans, and, incredibly, credit card loans.

The closer I look at this seemingly breathtaking program, the less I see.

The government isn't getting into the lending business. Instead, the federal reserve "plans to purchase in coming months up to $600 billion of debt issued or backed by Fannie Mae, Freddie Mac and other mortgage finance businesses. The idea is that with this debt off of the balance sheet of these financial entities, they could more readily make mortgage loans.

I'm not opposed to this happening in a vacuum per se, but I think its hugely overblown. Are there really masses of people with reasonably good credit itching to buy a home but unable to because they can't get a mortgage? I'm willing to be persuaded, but based on what I know (which is very little) I find that really hard to believe. Perhaps the reason that home prices have plummeted is, um, because they rose so far so fast and people aren't rushing out to buy houses about now? Or because a lot of people that might have bought a house in 2008 bought it in 2006? Or because with a deep recession upon us people are waiting to make such big purchases?

By purchasing these securities, the government is hoping to lower mortgage rates as paid by would-be homeowners. That's a fine goal generally, but one thing our economy does not need about now is any incentives for additional housing stock. We already have a pretty significant overbuilding of residential real estate. Politicians are obsessed with helping homeowners, because homeowners vote, but in terms of our nation's problems, sadly, helping people buy new homes, or stay in the ones they have is actually pretty low on the list. That sounds creul, and it is, but if more houses by far were bought and sold and built that fundamental demand would require, as is 100% certainly the case, why encourage a return to the merry-go-round? Traditionally, recovery begins with a housing market revival. Happened in 2002-03, 1992-94, 1984-5, etc. That's not going to happen this time, at least I hope not. If the recovery of 2009-10 is housing led, god help us all. I say that becuase it would represent the building of another bubble rather than an expansion on solid footing.

As I have said before, Paul Krugman has said, and now Obama and many democrats, government spending, primarily on infrastructure, should lead us out of the recession. Then private investment and perhaps international trade can follow. Housing should still be a drag on the economy for at least another year and a half, and when it recovers it is highly unlikely to be a robust housing recovery.

Back to the debt securities the government is set to buy. Now this debt was implicitly backed by the government anyway. Everyone assumed it. So if the federal reserve can put it explicitly on the federal balance sheet without losing the ability to spend huge amounts of additional money if that proves necessary (and it will) that's fine by me. But for the reasons I have outlined above, this just will not be a panacea of any sort whatsoever. Where it may do some good is because mortgage rates have been dramatically lowered (they have in the last week) a new refinancing boom is underway. This will put cash in people's pockets, some of which will be saved (which is a good thing in and of itself!) and some spent, which is, right this instant, an even better thing.

The other part of the new announced program from this past week is that "the Fed will provide up to $200 billion in financing to investors buying securities tied to student loans, car loans, credit-card debt and small-business loans." (emphasis added) This part of the package I approve of, for the most part, although lending money to investors to buy these securities, as opposed to the government buying them itself, seems like a needless step. Now the government is a lender, rather than an asset purchaser. Someone explain to me why this is radically better?

Anyway, this country probably needs more student loans and small-business loans. Car loans are trickier. Car sales were quite high until recently, but have fallen off the cliff, to their lowest levels since the early 1990s. This profound shock, coupled with the myriad other problems they already had, have, as you all know, driven the big 3 to the wall (no pun intended). So a case can be made for subsidizing car loans about now. A case could be made against it, but again, I'm comfortable. The government won't lose anything like $200 billion buying these securities. Even assuming rising defaults, which seem certain, the fed will be able to recover some-most of the money it is spending, perhaps even make a profit.

Financing the purchase of securities linked to credit card receivables is a whole other matter. I'm ignorant right now, and willing to be persuaded, but at first blush that seems just nuts. Does America need more credit card lending, or does it need less? Isn't that a drug we need to wean ourselves off of? Cold turkey if necessary?

Next, I note that, "The central bank is taking several steps to avoid [certain risks]. The Treasury has agreed to absorb the first $20 billion of losses on the new $200 billion lending program for car loans, student loans, and other consumer credit." The central bank is to lend money to investors via various banks. Investors can then use the money to buy AAA rated securities tied to consumer debt.

http://online.wsj.com/article/SB122761978389056335.html?mod=todays_us_page_one

So even though it isn't purchasing the securities for its own account, the government is guaranteeing the first $20 billion of losses (the losses most likely to occur!) I wonder what interest rate the federal reserve will receive on the loans it makes to investors. This seems like a crazy, unnecessary step. What value are these investors adding, exactly, above and beyond the purchase of the securities, which the fed could do all by itself?

Finally, it is highly noteworthy that the federal reserve is paying for these new announced facilities by simply increasing the money supply! Actually printing more $20 bills is so 1980s. Now the fed will simply issue electronic credits. But the effect is absolutely identical to running the printing presses and simply printing hundreds of billions of additional dollars. It is a sign of the times that this critical fact is barely remarked upon by the press. I note that I am not too concerned about it right now. The big risk to printing more money, obviously, is inflation. And higher inflation is a real risk down the road, and we'll need to be mindful of it. But right now, not so much. A mass deflation is a bigger and vastly scarier risk. So let it be said that I approve of printing additional money as the means to pay for all this, but even I'm seriously concerned about the precedent, and about the direct harm which could come. Team Obama is going to have a hell of a job on its hands for a long long time. Even if, happy happy joy joy, the economy recovers towards the end of next year and recovers strongly, there is still going to be a massive financial mess to clean up. Bush 43 has left a terrible pile of steaming brown stuff in his wake.

2008-11-24T19:09:00.004-05:00

More Euphoria over comments by democrats.

Various democrats have tossed around gigantic amounts as the amount of money to be in Obama's stimulus package.

At a press conference today, Obama praised Summers as one of the great economic minds of our times. Even his harshest detractors will concede that.

A few months back, Summers called for a big stimulus package. Specifically, in September he testified before the House Budget Committee in favor of a second fiscal stimulus. This was before the worst of the economic/financial crisis. In October, he wrote in the Financial Times, "In the current circumstances, the case for fiscal stimulus -- policy actions that increase short-term deficits -- is stronger than at any time in my professional lifetime."

In his House testimony, he advocated infrastructure spending, aid to state and local governments, assistance with affording heating in the winter, investments in energy and renewable energy and aid to lower income families, like increased food stamps and unemployment insurance extensions.

And recently, at a conference, Summers cited a report by Goldman Sachs that suggested that the stimulus should be in the range of $500 to $700 billion, a range that I favor.

The only bad news is that in the past Summers has advocated much smaller dollar amounts than I would like, much much smaller. Since the economy and financial system is very much worse off than when he was advocating smaller amounts, I am highly confident he will quickly adapt to the new reality and be an advocate of a large stimulus.

Summers will apparently be the main architect of Obama's plan. I'm in heaven.

In another sign of panic appropriately spreading to democrats, Chuck Schumer, New York's senior Senator, said on ABC's Sunday morning talk show, said that he thinks the stimulus package has to be big, "has to be between $500 and $700 billion, and that's because our economy is in serious, serious trouble."

Wow, he gets it. Schumer's never impressed me, but these are just the numbers we should be talking about. Particularly since a smaller compromise number may in the end be necessary, we should sure as hell start big. And $500- $700 billion is big. Really big. Big enough to actually help, especially given that it will take a long time to spend that kind of money, as a fair bit of it will be for construction projects that simply cannot begin instantly.

My friends, recovery may not be right around the corner, but we can begin to glimpse its outline. Ben Bernanke, at my urging, dropped rates far and fast. I disapproved of his recent interest rate cuts on the grounds that he should keep some ammunition lying around rather than make all the cuts he can, but given the market instability, it appears that he was right and I was wrong. I would now, were I voting member, vote for an additional quarter point cut, and would thus retroactively endorse the earlier cuts.

In any event, massive monetary stimulus (as yet wholly unfelt because the financial system is all gummed up), massive assistance to the financial system (already being felt, but the job is nowhere near done) and, if all goes well, massive fiscal stimulus. The only thing that would prevent a serious recovery beginning between late Spring-Summer 2009 and Winter 2009 would be if the financial system goes from awful to god-awful. Heaven knows that's possible!!!! But if it doesn't, I'm confident we can begin a recovery. The shape it will take I know not, because it cannot be consumer driven, as many past recoveries were, is unlikely to be housing driven, as the recovery of 2003-2007 was, and the government will have to retrench after 2010. But the odds of a depression, higher than at any time since 1945 in recent weeks, are dropping fast. The appointment to the Treasury, and Summers advising Obama, materially lower those odds.