Prophets of Doom … or Realists? (Update)
When the New York Times and the Wall Street Journal start singing the same tune, you gotta believe we’re in big trouble.
Here’s Paul Krugman in today’s Times:
Four years ago, an academic economist named Ben Bernanke co-authored a technical paper that could have been titled “Things the Federal Reserve Might Try if It’s Desperate” — although that may not have been obvious from its actual title, “Monetary Policy Alternatives at the Zero Bound: An Empirical Investigation.”
Today, the Fed is indeed desperate, and Mr. Bernanke, as its chairman, is putting some of the paper’s suggestions into effect. Unfortunately, however, the Bernanke Fed’s actions — even though they’re unprecedented in their scope — probably won’t be enough to halt the economy’s downward spiral.
And if I’m right about that, there’s another implication: the ugly economics of the financial crisis will soon create some ugly politics, too.
And David Roche, writing in today’s Journal, chimes in:
It is a very logical progression. Peloton, Carlyle, Focus — hedge funds and other non-deposit-taking financial institutions (NDFIs) are now being hit by the credit crunch, which had so far been mainly confined to mortgage lenders and the banks.
The Federal Reserve has reacted. Its Term Securities Lending Facility aims to encourage investment banks and prime brokers to lend to NDFIs and so relieve those parts of the credit market it cannot reach with its rate cuts and loans to banks.
The Fed understands the structure of the liquidity pyramid (from central bank money at the bottom, through bank lending, to the even bigger securitized debt markets, up to the huge derivatives sectors at the top). So far its liquidity injections have got no further than the banks. Now it hopes to reach higher. Unfortunately, it won’t work.
However, Roche holds out a spark of hope — with a big “IF attached:”
We estimate that nonfinancial corporate debt ultimately will have to shrink by 11%-12%. This will generate a decline of five percentage points of real U.S. GDP growth and push the U.S. into recession. Europe’s real GDP growth will contract by two percentage points.
Globally, total credit losses of $1.4 trillion will cause a contraction in world GDP of 2.5 percentage points, or half the current rate of global growth. So the global economy will become a gray, dull world of semi-recession and sticky inflation that will last a long time. Without major policy blunders, however, it won’t be a 1930s-style depression.
As if on cue, the latest ( at least as of 1:25 p.m.) from the Times:
Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.
If this symphony sounds a little too jarring, you can always catch “John Adams” on HBO — though wasn’t he always trying to land a few euros to help Uncle Sam’s war effort?
Further gloom in today’s Boston Globe:
The United States has already slipped into a deep recession that could be the most serious since World War II, said Martin Feldstein, president of the Cambridge group that is considered the official word on economic cycles.
“The situation is bad, it’s getting worse, and the risks are that the situation could be very bad,” Feldstein said in a speech yesterday at a financial industry conference in Boca Raton, Fla.
But, thankfully, there is one take charge guy out there who’s not buying the prophets of gloom and doom. Gail Collins in the New York Times reports on the President’s speech yesterday to the Economic Club of New York:
Bush finally got around to announcing that he was going to “talk about what we’re for. We’re obviously for sending out over $150 billion into the marketplace in the form of checks that will be reaching the mailboxes by the second week of May.
“We’re for that,” he added.
Once the markets had that really, really clear, Bush felt free to go on to the other things he was for, which very much resembled that laundry list for Katrina (“400 trucks containing 5.4 million Meals Ready to Eat — or M.R.E.’s … 3.4 million pounds of ice …”) This time the rundown included a six-month-old F.H.A. refinancing program, and an industry group called Hope Now that offers advice to people with mortgage problems.
And then, finally, the nub of the housing crisis: “Problem we have is, a lot of folks aren’t responding to over a million letters sent out to offer them assistance and mortgage counseling,” the president of the United States told the world.
But wait — more positive news! The secretary of Housing and Urban Development is proposing that lenders supply an easy-to-read summary with mortgage agreements. “You know, these mortgages can be pretty frightening to people. I mean, there’s a lot of tiny print,” the president said.
Really, if he can’t fix the economy, the least he could do is rehearse the speech.