Economics

I still cannot believe this: FOXNews.com – Rep. Boehner: White House Using Rush Limbaugh as Distraction – Neil Cavuto | Your World

At the end of this story GOP House Minority Leader John Boehner suggests that Congress institutes a spending freeze. That’s right a freeze

That’s plain lunacy.

A freeze would devastate the economy. It would be a policy error of historic proportions. It is so far from being remotely sensible that I thought no one could dream of it let alone go on TV and advocate it. For stupidity it is … well one for the ages.

Either Boehner realizes he has absolutely no responsibility and therefore can say whatever comes into his head no matter how ludicrous. Or he is simply so stupid that I have no words to describe it.

No textbook. No fringe theorist. Nobody with a shred of economic knowledge thinks a freeze is anything but a disaster. Stopping the one source of consumption right now would condemn the economy to a catastrophic plunge that would make the Depression look like a halcyon era of growth.

What does he think?

Anything?

Here we are fighting to reignite sagging demand and he wants to snuff out the few embers we have.

What an idiot.

I sincerely hope that the Republicans go through whatever soul searching they need to quickly. A healthy democracy needs a healthy opposition. One with solid alternative ideas aimed at helping.

Right now the GOP resembles Napoleon’s retreat from Moscow. Useless, diminishing, incapable, and leaderless. If Boehner’s comments are representative of their idea of policy let’s hope they don’t see power for a few decades.

That’s not just clueless. It’s not even horrendous. It’s apocalyptically and bizarrely awful.

Ugh.

Just for fun on a late Friday afternoon, here are some share prices to ponder:

Citi: $1.01; market capitalization of $5.64 billion
Wells Fargo: $8.61; Market cap. of $36.49 billion
Bank of America: $3.17; market cap. of $20.1 billion
JP Morgan Chase: $15.93; market cap of $59.86 billion

Ford; $1.70; market cap. of $3.95 billion
GM: $1.48; market cap. of $885.23 million

Microsoft: $15.31; market cap. of $135.85 billion

And the purpose of this is?

Merely to point out the derisory level that Citi’s stock has now reached. With a market capitalization of a paltry $5.64 billion it has total assets of about $2.1 trillion. That’s an absurd valuation relative to the bank’s size. Clearly the market is not anticipating a recovery any time soon!

Plus the combined market capitalization of the big four banks is less than that of Microsoft, yet they control total assets equivalent to around half of the entire country’s GDP. That is a precarious by any standard.

Finally: even it its current parlous ‘zombie’ state Citi has a greater market capitalization than GM and Ford combined. And GM’s price is after a late day recovery that meant it crept back above the dreaded $1:00 mark! Even so GM’s stock is now worth what it was in 1933. So much for 75 years of assiduous management of shareholder value.

Comparing one iconic near bankrupt company with another is probably another is perhaps ghoulish, but it gives us an idea of the devastation in the core of the economy. Step back and imagine the world of business without such household names as GM, Citibank and Merrill Lynch. These are not trivial companies yet by the time we emerge from this recession none of them may be in business, at least not the way we are used to them. Add in such famous financial names as Lehman, Bear Stearns, Wachovia, or AIG and the list of major brand names to be swept away in this downturn is staggering.

The age of dinosaurs was ended by a meteorite impact of epic proportions. The two asset bubbles of the past twenty years have had the same effect on our big companies. Were they simply too big and ponderous to survive? The dinosaurs died out because they couldn’t adapt quickly enough to a drastic climate change. But at least they weren’t responsible for the catastrophe that sealed their fate. They just had bad luck. The cohort of dead and dying companies littering our economic landscape fell foul due to their own actions, or inactions. Their demise is a testimony to the hubris of corporate America, not to the sudden impact of some unforeseeable event. They did this to themselves. Tough. But what a spectacular implosion. A buck buys you Citi or GM stock. Wow!

Something to think about as we limp into another weekend.

The employment figures released this morning were awful. Here’s the press release from the Bureau of Labor Statistics: Employment Situation Summary

Since the recession began at the end of 2007 the economy has now shed about 4.4 million jobs. There seems to be no end yet to the worsening employment outlook. The number everyone follows closely is that for non-farm employment, farming being so erratic and now a quite small percentage of all workers, which fell by 651,000 in January after having fallen by a similar amount in December. The number of unemployed people has risen from 9.35 million in the third quarter last year to 12.467 million in January, while the figure of those who say they have dropped out of the workforce has also risen by about 1 million.

Overall there is nothing in this report that we can look on with any optimism. An 8.1% unemployment rate is still below the peak of the 1981/82 recession, but that provides no solace since both the downturn and then the recovery back then were fairly sharp. This time through, the economy seems to be following a more prolonged and inexorable downturn and the prospect is for a very slow recovery. The last expansion – since the mild 2001 recession – was the worst for job growth ever. So the platform we built, from which we are now falling, was weak to begin with. That weakness will prevent rapid growth when we finally turn the corner on this downturn because the imbalances we need to overcome are manifold rather than focused on just one area.

This lack of comparability is worth mentioning:

Some analysts are making comparisons between the current and the 1981/82 recessions in order to claim we are all over-reacting to this one and that the fiscal stimulus was unnecessary. This argument is particularly attractive to any right of center politician who objects to government spending. They look at the two unemployment numbers and conclude that 1981/82 was worse, yet the fiscal stimulus back then was minimal. The recovery for that recession was largely engineered by aggressive monetary policy via the reduction of interest rates.

This is where the comparison breaks down completely. The 1981/82 recession was artificial in that the Federal Reserve Board pushed rates up in order to slow the economy down. The reason was that it wanted to dampen inflation which was running in double digits at the time. As the recession bit and inflation expectations fell away the Fed then cut rates quickly so the economy could return to growth, only with the inflation problem removed. The success of monetary policy in 1982 has been used ever since as an argument against using fiscal policy. The problem now is that interest rates are already near zero. The Fed can’t slash them to get growth going. With monetary policy thus rendered ineffective, all we have is fiscal policy.

The irony, of course, is that the same people who want us to rely on monetary policy are the same ones who advocated low interest rates even in the face of the last two asset price bubbles. Had they supported running rates up in 2002/2006 the economy would have slowed back then and maybe even slipped into a mild recession, but at least the Fed would have had room to maneuver with monetary policy.

So: I think the employment picture will worsen throughout the year, although much of the severe damage due to ‘belt tightening’ in business will be over by the end of March. Beyond then the bad news will tend to come from business failures and bankruptcies rather than cutbacks in healthy companies. So as the summer comes on we will likely see a pattern of headline grabbing ‘chunky’ lay-offs rather than the systemic widespread losses that have fed the numbers over the past two quarters.

Look for a 10% + unemployment rate by year end, and no real improvement until mid 2010.

We should all pause and note the astonishing price of Citi’s stock. Today it fell below $1.00 for the first time. Its highest point was $57.00 back on December 18 2006. That’s quite some fall. This collapse in value represents all sorts of problems, not least of which is the NY Stock Exchange rule that all stocks listed on the NYSE must have a value of more than $1.00. That rule has been temporarily suspended for Citi because of the ‘extraordinary’ circumstances. Normally a company’s managers would have only thirty days to present a plan to the NYSE explaining how they propose restoring their stock price to a more acceptable level. Right now I imagine Citi’s managers have no idea how to do that: no one wants to buy stock in what is, by all sensible reckoning, a dead bank. If you think I am exaggerating then go check the interest rate on Citi’s junior subordinated debt: 26%. That’s quite a risk premium considering the risk free rate on such things as government bonds is practically zero. The market clearly doesn’t think Citi is long for this world. Since when does a 26% risk premium indicate a healthy organization? That ‘misunderstanding’ the market has, according to Geithner, concerning Citi’s true worth is evidently quite large.

Meanwhile back in Tim Geithner’s parallel universe: the government already took a big slice of ownership last week. We taxpayers are now the proud owners of about 36% of the bank, which according to today’s price is pretty much a worthless investment. Today’s drop in stock price means that the ploy of converting the government holding from preferred stock into equity in order to reassure the markets as to Citi’s capital ratios obviously was a dud. But then only Geithner and his advisors thought it might work.

More interestingly the Treasury announced, while converting their preferred stock into common equity, that Vikram Pandit, the current CEO, would stay on in his job. I find that odd. Since when did a 36% ownership stake give someone the right to dictate who stays or leaves the executive floor? Seems like the Treasury is acting like a majority owner. But we mustn’t admit that, so let’s pretend not to notice.

With the stock below $1.00 I wonder how long this pretense of independence can be maintained. The charade is getting less convincing by the day.

And so another day drifts by without any word from Geithner and crew as to why the refuse to countenance nationalization. The absurdity of one of our major financial institutions running the risk of being kicked off the NYSE because its stock has now reached junk status apparently doesn’t phase the Treasury Department at all.

This is borderline farce.

How many times do I have to say? Nationalize now!

Do I love this?

Last week I wrote that I thought that GM’s auditors would be faced with a quandary: they are obligated to tell the company’s shareholders whether the company is a ‘going concern’. Auditors hate being in this position because the mere suggestion of doubt is often enough to tilt the company over the edge and into bankruptcy court. An ambiguous audit report can be the trigger for creditors to start to pull out their money, or attempt to renegotiate loan terms. Given GM’s losses and the speed with which it is burning through cash, I wrote that it was becoming inevitable that its auditors would have to issue the dreaded warning.

Well now. A week later, here’s today’s New York Times reporting that this is exactly what is going on. The shareholders have been told that there is considerable doubt about the company’s ‘ability to continue as a going concern’: Auditors Raise Doubts about G.M.’s Viability

Wow. All those boring years as an auditor taught me something.

Anyway please permit me to bask in my entirely unjustified self-satisfaction.

But not for long. The bankruptcy of GM will send a cascade of job losses and factory closings through communities that are already in dire straits. While I cannot feel sorry for the company itself, badly managed and poorly served by all its stakeholders including short sighted unions, I sympathize deeply with the families and the towns whose lives will be hugely affected by any restructuring.

It is within the context of the impending economic disaster for those regular people that the news of GM’s CEO having his pay cut to a mere $5.5 million in 2008 provides us with a graphic example of why Obama’s budget is so important. Something has to ameliorate the insult to working folks. Rick Wagoner just earned $5.5 million for destroying GM, and some people find it inappropriate to increase funding to unemployment insurance, or to extend health care coverage to poor kids.

That’s a statement about our priorities.

They were wrong for too long.

And I hate being right about GM precisely because of the harm its failure will do to thousands of ordinary people.

So. Perhaps I don’t love this after all.