Get ready for the “Great Immoderation”

By J Saft
May 8, 2009

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own —

The recession will soon be dead, laid to rest alongside the idea of the “Great Moderation”, a set of hopeful assumptions that underpins expectations about economic growth and asset valuations.

This, when investors, bankers and executives ultimately realise it will cause them to pull in their horns, take less risks and be less willing to pay high prices for assets.

Economists, observing that since the 1980s recessions have been mild and short and expansions long and robust, developed the theory that better economic management, namely cutting rates in the aftermath of bubbles, globalisation and, get this, improvements in financial markets, had led to a sort of best-of-all-possible-worlds “Great Moderation”, in which economic volatility fell and with it the risk premia required for holding financial assets.

This little theory has, needless to say, come somewhat unstuck during the current downturn which has been great but far from moderate.

This raises the uncomfortable possibility that the last 25 years of good times were just a bit of luck, or even worse, an artificially engineered consumption binge with central banks and governments playing a role similar to what Chicago tavern keepers used to do — opening up early so last night’s patrons can have a quick nip to take the edge off on the way into work.

It’s a debate which is far from academic and its outcome will influence much more than the actions of central bankers and regulators.

While financial market volatility has been a feature during the past decades, the idea, or at least the feeling, of the Great Moderation has seeped into the culture, influencing the behaviour of actors across the economy.

A corporate manager is going to be more likely to leverage up and go for the big hit if he feels as if most recessions are mild and short, in the same way that a consumer will buy a boat on credit or an investment property for the same reasons. If the weather never gets that cold why waste money on insulation?

What if these people now decide that the universe is a less friendly place and that they ought to, heaven help us all, save a considerable amount against the day?

This is really about volatility, which, because it can tend to ruin you, is expensive. Most investment or economic management strategies have at their heart attempts to limit or cushion volatility. And so, if we really can expect more volatility in the economy we can expect it to find expression in a lower ceiling for economic growth, leverage and asset prices.

Of course, the current debacle may be just one data point rather than a trend, a view financial markets seem to have adopted. That is more or less the argument of Larry Summers and the U.S. administration, who are betting that this is the kind of thing that happens only very rarely.

This is a version of the 100-year storm argument beloved of company managers trying to explain why their results are so poor; the implication is you could not have been expected to plan for a freak storm and once it is past it is back to the good times.

This thinking lies behind the strategy of making financial conditions so easy that people are tempted to borrow and invest. It just might work, and we just might have a sharp and long recovery which generates enough revenue to pay off the public debts we are now racking up.

But two other possibilities, both speculative, spring to mind.

One is that deleveraging proves to be not just an event but a state of mind. As in Japan, people may simply decide that they’ve had enough risk, thank you very much, leading to a weak recovery, a relapse and then a quandary about how best to pay off the bills we’ve recently run up.

The other is that the current mix of policy, deep cuts in interest rates, deficit spending and quantitative easing, the effects of which are little understood, ends up breeding volatility of its own, probably in inflation.

The cost of that volatility will be an unpleasant surprise to the investors now bidding up the prices of shares and managers now preparing to invest for expansion, and one that might lead them to at last act more conservatively.

Add to arguments for a new “Great Immoderation”  that emerging markets will almost certainly be more of a driver of global economic growth under most of the reasonable scenarios in the coming decade. Emerging markets historically are more volatile and if as they grow to be a bigger piece of the pie are likely to make overall growth more volatile.

None of this takes away from the essentially good news that the recession looks to be ending soon, but higher economic volatility will hang heavy over the recovery and the cycle to come.

— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.–


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Nice article as always Jim. I can’t see a replay of the Japanese scenario you describe, but the inflationary genie methinks is set to escape from the bottle. It therefore makes sense for mortgage holders to try to pay down debt as quickly as possible. If not, they could end becoming part of the next wave of foreclosures as interest rates go back up in the next decade.

Posted by William Kemble-Diaz | Report as abusive

Well James, I am glad that this is simply a ‘recession’ and that it appears to be coming to an end. It is nice to know that the bank stress tests were such a success despite the fact that the test was ‘rigged’ from the start. Read Dr Martin Weiss on this. It is also interesting that banks are so strong that they do not have to mark derivatives etc mark to market but can value them at what they like. I wonder why the market value is not correct? Oh it is a simple thing called insolvency.

Well I am off to fantasy island now James to pump this market and spend my money. No doubt I will meet you there James, along with the CNBC crew and a whole pile of other economists etc. Great days are coming-NOT!

Posted by D Rumsfeld | Report as abusive

A system in which the government guarantees assets and eliminates regulation is similar to leaving your keys in the BMW with the windows down and your wallet full of credit cards on the dash. The logic escapes me.

Power is intoxicating. Arlen Spector switched parties in hopes of attaining one more nomination for the Senate seat he currently holds. “If you can’t beat’em, join’em”. I’m sure he has convinced himself and others in Pennsylvania he is indispensable. Like so many other long serving Congressmen, where was his voice when Congress repealed Depression era regulation in the 1980s and 1990s? Where was his voice and others when Congress voted to break the Treasury in order to prosecute the war on terror?

Big government and big business wield big power. To be exact, vast sums of cash. Consequently these institutions attract beguiling sociopaths and megalomaniacs seeking to fulfill their delusions. President Eisenhower’s warning of the “Military (Congressional) Industrial Complex” should be heeded and acted upon with great urgency.

The founding “Fathers” however flawed, believed in and set forth the principles of limited government and the hope for a nation with a multitude of small business entities. I suspect that their experiences with the Bank of England, Parliament and the Crowns financial supporters were not much different than our experiences with big banking, the FED, Treasury and Congress today.

Posted by Anubis | Report as abusive

Regardless of how we rationalize market valuations, the net impact to the average unskilled investor remains the same. When you need the money, the markets might be either up or down, fluctuating 10 to 15 years of growth depending on the security. So no matter how we portray or model the dynamics, within our lifetime it will be difficult to change how the average unskilled investor regards the market.

Now as we move or are pushed into new industries – like windfarming – people also expose themselves to potential new liabilities. So having a large portfolio when a person is a high school teacher or auto worker is much less dangerous than having a lot of money on the side and being an entrepreneur. Investors are also getting older and drawing from their savings. Plus we have a whole generation of people who after reflecting on the experiences of their parents just do not think of money the way we do. They have less of it – much going towards debts.

So fundamentally there is a problem with ability to pay or bid up the markets at least in the longterm. Companies should probably focus on obtaining capital from debt securities. However even here there have been some problems. Even secured creditors get screwed – by the Federal government of all people. I suggest the anxiety, frustration and anger will linger around for 30 to 40 years. That’s called a grudge.

Posted by Don | Report as abusive

If you’re a common working citizen, then what kind of situation would you rather be living in? Would you rather be part of a system that keeps you edgy at best or scared out of your wits at worst? Do you want to be part of an economic system that keeps you awake at night wondering if you will loose your home, your job, and end up living in poverty?

Or would you rather replace that system with an economic system that ensures you will keep your home or be able to buy the home of your choice without fear of loosing your income and living in poverty? Some people will say that the choice is not as simple as that. I’m telling you that it is.

When the opposition says it’s not that simple they’re talking about the “how”. “How will we do it? It’s impossible. People will never agree to it.” etc…
When I say it’s simple, I’m talking about making the choice to move in that direction. And we can start by automating the US Treasury and the Federal Reserve. Consider the fact that they are insulated from the other branches of government. This is for the purpose of avoiding conflicts of interest. This way neither government nor wall street is supposed to be able to interfere with the operations of these two bodies.

However, since only people that come from government or wall street are “qualified” to run these agencies, the decisions made by them will naturally favor wall street or government. The reason, humans always work in their own interests first. It’s just how we are. Sometimes this is done out of greed. Sometimes it’s done because when all you know is one thing, then you tend to see problems only in terms of how they relate to what you’re best at. Hence Hank Paulson took actions that favored wall street over main street. But Paulson is not alone by any stretch of the imagination. They all do it.

By automating those two agencies and turning them into an independently functioning system we can remove the human desire to maintain control. By making the replacement system so that it prioritizes all human participants to be of equal value, our wealth, which we already know is fake, and with which we still pretend to “buy” stuff would be distributed amongst the population equally.

This way you still have the money to buy the things you want and need, and not have to go to a job that you hate. Instead, you could have your own business. You could find a job in an organization who’s goals are In line with your own. You could choose to spend your life developing your greatest gifts and talents, and then teaching others to do the same. The possibilities are limited only by your choices.

The opposition will not and cannot offer any objections that speak the the human concerns of the current “crisis”, in other than monetary terms. In other words not a single supporter of the current economic system can speak to easing your suffering in any meaningful way, where money isn’t the most important part.

We keep begging for jobs. Because nothing is better than slaving your day away for wholesale pay, so that you can turn around and pay retail for all the stuff you help make (insert sarcasm here). Don’t think that’s the case? Why do you think we need a law that mandates a minimum wage? Because if we didn’t, corporate America would only pay you as much as you were willing to work for. And if that means you live below the poverty level, oh well.

Think Enron. Think MCI Worldcom. Think AIG. Think they really care about your future or the future of your kids? Think again. If they had your interests at heart would they have bled this economy dry the way they have? And then stick us with the bill?

Automate the money system. Make the system HUMAN CENTERED. Prioritize all humans as EQUAL. Let’s finally start turning this nation into a country where all are indeed created equal.
Let’s finally truly become a nation of free citizens.

Posted by Benny Acosta | Report as abusive

Japan’s lost decades was about supporting ‘zombie’ banks. Today is different, this is global with massive imbalances in jobs and trade; an overly enabled elite class whose self-interest served to expand their wealth rather than create sustainable economic conditions to create sustainable expansion and wealth within nations; therefore globally. Rather than the quality of life being raised in developing nations (only a small percentage were) those of free nations are reduced and will continue to contract. Western governments are supporting ‘too big to fail’ financial institutions due to counter-party ‘risk’. These aren’t zombie banks, these are vampire banks/businesses.

The macroeconomic view is cooked because of that self-interest (myopic) vs the macro view. Private incentives blinded it to public good/service macro-view and enabling those sustainable processes. The philosophic/academic view of self-regulation and self-healing markets is now moot. This is because the markets were never really free-markets and can never be really free markets. It was horrifically naive and overly/academic. Now, the core issues are taxpayer rights, human rights and constitutional rights.

Don is right, there is a long-standing grudge being created now. Current contraction in credit markets is a perfect example of how self-preservation will take hold and be expanded on. Revolving credit and other individual credit contracted last quarter revealing how society changes as threats are thrown at them. The lessons from the second removed previous generation in what wealth is versus the ‘digital/paper’ wealth today is still germane. Ownership largely discouraged by monetary policy and wild-wild west with one sheriff and no deputies in a city of millions.

Incentives count, the incentives currently are to discount and cheapen us to a lowest common denominator of our value/worth based on spending and our ability to spend. As inflationary pressures mounted particularly in critical service sectors, credit become the only way for most to fund ordinary lives. The incentives in government(s) is to support those who richly rewarded them; the lawyers making laws for lawyers and those with ever increasing global resources to influence those laws to feed their self-interest.

Posted by NS | Report as abusive

Interesting comment by Anubis regarding big government and big business attract beguiling sociopaths and megalomaniacs seeking to fulfill their delusions. As well, President Eisenhower’s warning of the “Military (Congressional) Industrial Complex” should be heeded and acted upon with great urgency.

Hard to argue against those statements. While our manufacturing sector (which produces real goods and real wages) has collapsed from 80% of GDP to 15% of GDP in the last 60 years, government spending now matches manufacturing in GDP contribution. Government does not create wealth, but is a black hole of bureaucratic expense that reallocates wealth. Similarly the failed banks are eerily similar to the failed S&Ls not that long ago, which also did not create wealth but merely reallocated it, and finally collapsed.

Ultimately therefore we have these big government and financial businesses managed by (re: Anubis) beguiling sociopaths and megalomaniacs who contribute nothing to the economy while the cornerstone of REAL wealth, manufacturing, has evaporated. If the current trends continue unchecked, one can argue that the economic cycles will get more volatile in the long run, and our economy progressively deteriorate until we have collapse.

Posted by IM Alright | Report as abusive

People just need to remember one thing. We have been on a debt binge the last 30-40 years, ESPECIALLY so the last 10 years. Consumers and companies need to pay off their debt (‘luckily’ a LOT of it are being written off) AND then save so that we (instead of the Chinese) can finance our governments debt.

Posted by blackbean | Report as abusive

I remember back in the days when Nixon was proclaiming, “I am not a crook!” which of course he was. Now 90% of the elite, “too big to fail” CEOs and their politician friends are saying the same thing. And of course they are all crooks. They have stooped to every level of corruption in order to justify the most outrageous accumulation of undeserved wealth in history and continue to do so as ordinary citizens “bail them out”. Until we face up to this corruption, economic and societal collapse does not go away. I think the commentator who called it “vampire” capitalism stumbled onto the soundbite of our times. Until we use the legal system to drive a stake into the heart of this trend, society will continue to be sucked dry.

Posted by Jonathan Cole | Report as abusive

Little theories have a way of coming unstuck, I’ll give you that.

The uncomfortable possibility exists that the bulk of our Economy, one of grotesque war machinery, grand theft and pathetic excuses – America’s three biggest contributions to global culture in recent decades – is coming fatally unstuck, addicted as it appears to one little theory, that theory being ”with friends in high places, we can get away with this, so let’s keep doing it”. No crack addiction could be more lamentably misguided than this.

As a species, U.S. corporate managers and their less scrupulous overseas brethren continue to celebrate the burial of at least a generation’s worth of gross malfeasance. Instead of facing inquest, they dip deeper into the public wealth domain where, with ever-waterier excuses, they plunder whatever yet remains there to be plundered. Hoping to retire before being held to account appears to be their idea of risk management.

Their track record speaks for itself. These wheezing individuals are not to be revered, not venerated, their agenda neither to be cited nor emulated, except perhaps by random little theorists and fabricators of trite excuses – who are one and the same thing.

Thus to Big Theory: In a world with adherence to economic science and ethics, the underwhelming majority of corporate managers might expect nothing short of mass public prosecution with multiple life sentences doing hard time.

Big Theories do not tolerate half measures, but demand rigorous elimination of grand malfeasance. Big Theories dispense promptly with all those who attempt to staunch big problems with little excuses.

No Big Theory terms the present situation an Economy In Recession when it is more like an indigent, plague-infested vermin colony whose margin has been called for the umpteenth time.

Without mincing words, Big Theories then take measures accordingly.

Anything short of this degree of diligence would be, as you inadvertently remark, a data point – albeit one in need of more serious illumination than your column has provided.

Posted by The Bell | Report as abusive

The persons posting comments to Saft’s piece appear not to have read what Saft wrote. First, we must pay heed to the critical concept of a “great moderation.” This is an essential part of understanding current macroeconomic phenomena. Saft makes some excellent points here and argues from a few different perspectives. Interesting that those posting comments are incapable of understanding objectivity.

Posted by Dune Runner | Report as abusive

How about this market theory…The HONOR AND INTEGRITY market theory. Under this theory the market expeditiously financially rewards those who conduct themselves with honor and integrity and financially punishes those who do not.

The ability of contemporary market participants to retrieve the pain, suffering, personnal and professional loss experienced from the financial collapses of past generations originating from these past generations lack of honor and integrity has unfortunately dulled. Euphoric and depressive phases of market participants is known as the ‘ohhh sheeit’ collective wail and we are still in the ‘ohhh sheeit’ phase.

Everyone reading this knows of the lack of integrity that continues to exist within our private and public sector leaders. The following example should suffice as since the Fed straddles (metaphorically speaking) both the public and private sectors. This doozy extracted from the comments in 2008 made by the 82 year old former Fed Chairman “For those of us who have looked to the self-interest of lending institutions to protect shareholder equity, myself included, I am in a state of shock and disbelief”. Shock and disbelief from a man who served on President Fords economic council, ran his own prominent economic consulting firm and sat on the board of directors for ALCOA, ADP, ABC, GF, JP MORGAN, MGTC, MOBIL.

Well shucks Jimmy, I may be just a plain old country boy but I know the pathological makeup of our public and private leaders who continue to be motivated by self enrichment. I have no doubt that they will crawl over the rest of us for the last chair when the fat lady exhales her final breath.

human nature well trained by the s it is from our collective ability to retrieve historyical records of systemic fraud leading to systemic market dilusion leading to collapse, has taught us that market participants

Posted by csodak | Report as abusive

By reading the title I first thought ‘has he lost his marbels? Recession over, huh?’
Then reading on, you actually made sense, however the title doesn’t really describe your piece.
As they are saying, operation successful, patient dead. This exactly what we have here, recession over, economic system dead. I am not so sure about the former – but I am dead certain about the latter.
There is still too much debt in the system and there are still no prospects for jobs let alone higher earnings.
The banks have pumped up their interest rates and are sucking the life out of the consumer – the little that was left after they took the taxpayer’s money. Recession over? Yeah, sure for those who are affluent enough to never have really felt it in the first place.

Posted by Robynne | Report as abusive

The key to working on problems is to have stability. We have built an unstable, rickity system, that relies on government to keep priming the pump just to get a little water flowing. The goal to solving our financial problems is to establish stability in the banking industry, in the manufacturing industry, and in the retail industry. Credit has to be available, but people have to be retrained to use it wisely. There are many things in life to enjoy, rather than a garage full of cars that have payments due, a house where we owe more than what it could sell for, and stocks that go up and down like yo yos. We have been through 16 years of instability with a crash at the end. Now What?

Posted by f belz | Report as abusive

A surprising approach from Mr Saft. His approach puts emphasis on the perceptions of investors. Yes, they’re very important, but this emphasis can lead to the simplified neo-Keynesian position: just get people to be positive enough and the future will be positive. “Only believe”.

Trouble with this is debt. Believe all you want, the government, households and major institutions are still emeshed in debt – the debt has to be serviced and maybe even paid down a little. I may believe I can walk through that wall but that doesn’t change the fact that I can’t.

The other oddity in the article is the reliance on “emerging markets”. Two problems there: First, China is getting increasingly tough with the U.S. and clearly intends not to provide an easy ride for the U.S. Second, many merging markets have had capital sucked out of them by the U.S.’s funding needs. So, the U.S. zombies get fed at the cost of higher growth possibilities in emerging markets. That may change as risk perceptions change but in that case the U.S. will suffer increasing costs to roll over her debt.

Posted by Simon Smelt | Report as abusive

I am one of those that is increasingly nervous about re-investing in the market. For the longest time I was willing to “ride it out” as my 401k plummeted. But in early march I took all those naysayers to heart that were predicting we were nowhere near the bottom, everything was still dire, and there was no reason to think there would be a quick recovery. So, I got out. Now it looks more and more like I got out near the bottom, and all I can do is lock in great losses if we don’t see a major pullback! So now I sit and watch the market rise and I can hardly find a negative pundit anywhere in the crowd. Where are all those I listened to in March? Do I reinvest, lock in losses and then suddenly see it drop again? Holy cow! I can’t afford that, but every day I don’t risk it the market just keeps climbing. The problem is there seems to be no alternative investments to grow my 401K. Capital preservation doesn’t yield squat. So, it appears to be risk or go broke. No sir, I don’t like it, not one bit, and at this point I haven’t a clue what to do. Thanks to all those naysayer “experts” in March – for nothing!

Posted by Forester1 | Report as abusive

The other is that the current mix of policy, deep cuts in interest rates, deficit spending and quantitative easing, the effects of which are little understood, ends up breeding volatility of its own, probably in inflation.

The cost of that volatility will be an unpleasant surprise to the investors now bidding up the prices of shares and managers now preparing to invest for expansion, and one that might lead them to at last act more conservatively.

“Add to arguments for a new “Great Immoderation” that emerging markets will almost certainly be more of a driver of global economic growth under most of the reasonable scenarios in the coming decade. Emerging markets historically are more volatile and if as they grow to be a bigger piece of the pie are likely to make overall growth more volatile.

None of this takes away from the essentially good news that the recession looks to be ending soon, but higher economic volatility will hang heavy over the recovery and the cycle to come.”
Mr. Shaft: I hope you will provide a more detailed reasoning behind this statement. China and other nations have implemented direct stimulus into their economies to create more domestic demand; however, trade remains their most vital source of expansion and revenues.

It is ironic that the commodities markets prior to the 1999 CFMA served to DECREASE volatility and smooth out pricing in market which can be volatile due to environmental/political factors. Clearly, this is exceptionally flawed legislation if one follows commodity markets since its passage. Last year extremely instructive not only in the energy markets but also other commodities including grains which challenged emerging markets, produced starvation in vulnerable countries, strife and political stresses in others.

Without reform internationally in key markets to every economy-like commodities, international cooperation in creating standards of production, basic human rights in developing nation workforces/trade which meets former international standards/laws on those key issues, those disparities will challenge governments to overcome the current crises towards a sustainable recovery in the opinion of this humble reader.

Sincerely, I and others are seeking the information which provide evidence of sustainable recovery and how developing nations will become global leaders or larger participants economically in the coming decade as the spending power of the USA and other countries contract.

Posted by NS | Report as abusive

Money is the medium of exchange for needed resources, in this place. And if it were left in its proper place, our government and the systems which operate subject to our law, would yield positive results that far exceed what we’ve thus been able to accomplish. And that’s saying something.

Anyone can say what they want, but when you look at things in from a broader perspective you get the idea that money is not your friend. This economic system does not have your interests at heart. This system actually requires that many of you live at or below the poverty line so that it can function.

Make no mistake. Under the current financial system, our government does not protect us. And corporate America does not respect, or value us as the sovereign individual human beings we are. The current corporate culture has conspired with government to require heavy emphasis on mathematics, engineering, and the sciences in our national educational system. And that’s wonderful. But our government also plays down the national endowment for the arts. It downplays and barely supports liberal arts/humanities.

The reason is simple, technically focused institutions of learning churn out better workers. This brings the financial support of the corporate sector. But the humanities and the arts produce thinkers. Such subjects are reserved for “Ivy league” institutions. The idea being that if you’re poor, you should have an education that teaches you to be a better, more skilled employee. But if you’re wealthy you get to learn how to think so that you can utilize the skills of the workers to further your own goals.

If, as a working class American, you realize that the game is rigged in favor of the house, do you really want the economy “fixed”? Corporate America and government want you to believe that it’s a choice between living from paycheck to paycheck like it is now, or riots in the streets, violence and chaos everywhere.

Think about it. Why is this a crisis really? It’s a crisis, because the people who are in so much debt, do not want to relinquish their control over your future. If big companies and big government control the money, then they can make you jump through as many hoops as they want. All the while holding out the promise of “relief”. And what is the root of this control? It’s money of course.

If you don’t earn enough money, you don’t deserve to live like a human being. You should be allowed to wallow in the streets. It serves you right for being poor. It doesn’t matter if you’re sick. It doesn’t matter if your mind is damaged. It doesn’t matter how well you’ve served your country or your fellow human being. What matters is the money in your pocket. And if you don’t have enough then to hell with you and good riddance.

But that’s only if you’re a worker. Because if you are one of the privileged few who own most of what the rest of us work with, then you’re not about to give any of that up. From the point of the wealthy, this is a crisis specifically because the working class will suffer. Corporate execs, still have their comfortable homes. They will eat well tonight and every night for the foreseeable future. They won’t suffer. Because once conditions get bad enough for you, you’ll work for much less than you did before. And it’s not their fault. It’s the economy. Never mind that our money is fake.Do we want this? I certainly don’t.

Posted by Benny Acosta | Report as abusive

Theoretically a company turns to the equity markets to raise capital for growth. If the seller said, “I want you to buy shares in this company although it will not grow at all,” theoretically such a company would be worthless. With the GM for instance, my understanding is that for years the company lost money for each car sold. For me such a company has no value.

However, it would be fair to say, these days a company can raise capital in order to redirect its operations or perhaps upgrade facilities. So in a mature economy for established companies this might be an area of considerable growth. But in reality it is often easier and cheaper to build from scratch rather than rebuild and restructure. Don’t take my word for it but consider billions of years of trial and error. Mature trees don’t become saplings. They just rot and die. The little seedlings are what grow. So I question the idea of restructuring giants like a car company.

At the same time, perhaps small companies who are not dependent on such huge economies of scale can adapt. My theory makes no sense at all but also comes from nature. Where there is limitless energy, there is unlimited growth potential. So if we could focus on giving people cheap energy and developing systems that use much less, that would give us our best chance of lasting development.

Posted by Don | Report as abusive

Interesting that a previous comment mentioned GM.

The automotive analogy is apt here, because what consumers are buying from GM are not world-class transportation solutions but rather, financial obligations – to pay, regardless of the amount or lack of satisfaction with the alleged product. GM is not alone in this shell game, but their example is sadly not untypical.

GM workers, always the butt of management denunciation, have been duped into thinking that they may see any of the money they invested in pension funds which meantime have already been cavalierly liquidated by corporate management, in hopes that bankruptcy may be declared before they have to account for what they have done.

GM investors, poor sods, have for years been duped into thinking that theirs may have been a viable stock choice, whereas in fact all they’ve been sold is a bill of goods, with nothing tangible to back it up. Beyond that, they have no say in the matter other than voting with their dollars and selling GM at a loss, if only that the point be made that GM is very far from being run the way any company should be.

GM management, on the other hand, never works harder than when they are in the process of deciding how many hundreds of millions of dollars in bonuses to award themselves for doing absolutely nothing of any value for anybody but themselves and possibly whomever is on their silent payroll at legislature level.

It would be completely improper to view the recovery of GM and any other such corporations as a good, much less necessary thing.

Posted by The Bell | Report as abusive

Much of the wealth created over the last few decades, actually much longer, has just been due to speculation. We have been under the impression that we could regulate the speculation to a suffciient degree that we could gain it’s benefits, additional economic activity, while only having to deal with the cost of minor downturns. Except the leveraging went deeper and deeper with each cycle.

Imagine that someone gives you $1000.00 and tells you to make money off of it. Now if you were to invest it and make $100.00 in a year you would, by most standards, have made a decent return. But by entrepreneurial standards you would have done terribly, someone buying junk at garage sales and selling it online could probably beat that return over a year. The problem is, though, that if everyone takes that view then the market becomes saturated with vendors and no one can make money. Really the same is true of the stock market, there aren’t enough viable growth oriented investments to warrant the amount of capital which is thrown at the stock market. The point becomes not rewarding good business ventures as much as it does simply gambling. So all you are doing is working a game of asset inflation. There is simply too much capital available. We have become addicted to a shadow economy based on gambling.

The Fed is supposedly worried about controlling inflation, if so it needs to not just worry about the CPI but inflation of asset values as well.

Posted by ERhoades | Report as abusive

Circa 2009 widget sell price = $100
Circa 2009 widget SG&A = $60
Circa 2009 widget net income = $40

Quatitative easing and massive stimulus packages drive
inflation and interest rate ramp up by 2010-11.

Circa 2011 widget sell price = $140
Circa 2009 widget SG&A = $80
Circa 2009 widget net income = $60

Debt-ridden companies could get killed, and those with manageable debt levels could thrive in an inflationary climate!

Posted by Mitch | Report as abusive

Funny to see that the economy is now so called observing some green apples falling from the sky, make sure they do not hit you on the way down on the head. The economy as you state is now shortly ending its’ recession, funny to say, that the recent back to back quarters for US GDP tolled a negative number bearing greater than 12%, yes, the green apples are falling, just like consumers are spending mad for luxury items, not necessities like WalMart sells, cars and homes sales are improving, if you define the decline rate of sales are decreasing as no longer a problem, hey so be it, same goes for the unemployment numbers. The most funniest thing is now banks, which led in the revival of this Spring Rally since early March 2009 are now issuing new capital stock to raise their liquidity levels as the US Government’s TARP line of credit nears its’ max, no wonder the rally was important that the US Government had marketed and pushed with daily speeches and Prime Time interviews, wow I do feel free money is falling from the sky, and the smart money is still injecting cash on the sidelines now at this overbought market levels. Hoping to see that the S&P 500 by year end goes to 2000 and the rally continues for another 39 more weeks for the sake of the current government and financial institutions, as the recession is at the end as everyone is hinting on, or maybe this is just my false hope and wishful thinking, as it took approx. 8 years for the housing bubble to burst with anyone including a pets which possibly would be able to get a mortgage or line of credit approved by banks. Any how let us see what the government markets to emotionally adjust the general public’s state of false confidence and banks to colude in resolving their greed from the past, luckily changing accounting rules legally was a great help in making these banks seem they are just perfect now within a period of a few months.

Posted by r. korban | Report as abusive

There are many ways to tell a story. The one story that keeps getting glossed over is not about recessions and business cycles or even governmental intervention. It’s about corporate power. The financial lobbyists are overwhelming the government. They love when we blame the fed or republicans or spending so long as they control the power. They are the powers that be, the wizards behind the curtain (of OZ). We are only chasing shadows until corporate power get reined in. Until then it all just for show while the people clean up after the greed.

Posted by Ron Berry | Report as abusive

It sounds like the bears are grumbling when instead they need to fatten up (get out of the market) before winter so they will have enough to survive. The bulls had to do the same. It is over and time to face it, instead of so much news about the bolonga. Two months ago the constituents returned to the stores if you were watching the parking lots. The sense has changed. Bears, mark my words, fatten up and hibernate!

Posted by DN | Report as abusive

This economy is broken. Humans have become nothing but cattle. We are raised on a steady diet of obedience and faith in government. We are fed consumerist ideas and told that there in lies the key to happiness. How happy do YOU feel?

If you believe the economy is getting better that’s great. What does that mean for you? Does it mean that if you’re lucky, you’ll be able to go back to working for less than what it costs to pay your bills? Does it mean you can breath easy until the next disaster.

Ever notice how junkies go crazy when they don’t have their drug of choice? But once they get their fix they feel better for a while. Ever notice how when you don’t have enough money, you get edgy, tense, or sometimes even suicidal? And yet when that money comes in you feel so much better.

We are sick. And we have allowed ourselves to be enslaved by the dollar. We are economic junkies. If you work for a living, is this what you want? If not, you would do well to speak up before your opportunity vanishes.

When the world economy gets bad enough, tensions will brew and war will ensue. Then the “back bone of the American economy” will be come the American bullet catcher.

Posted by Benny Acosta | Report as abusive

Game Over ?

They have until October.

Politics always trumps Free Markets and it’s all calculated!

If this fiasco hasn’t turned-around by then, the O-Team will send in “The Cleaner” and the Election Cycle will rein.

– End of ’09, bargaing and hope will be lost and heads will roll (i.e., L.S. and T.G. are out and the nation is a step closer to socialism)
– 2010 will bring depression and will end with acceptance
– 2011 re-election campaign kicks in with promises of “Road to Recovery”
– 2012 Capital gets the backseat with Labor is in the drivers seat. O-Team is re-elected with majorites in both Houses.

The fate of capitalism as we know it, will forever have changed!


Posted by Peter | Report as abusive

The average American citizen has one major concern,getting back to normal.The working class have suffered enormous lost due to corporate greed and as many have lost everything some are willing to gamble more.Thomas Jefferson warned that if government got in bed with banking institutions it would be the American people as a whole that would suffer.Does this Country and its Constitution have any hope of surviving such a blind lust for money?I recall a story of a crucified man watching as soldiers gambled for his clothes.How far is Wall Street willing to go ?

Posted by wheedle | Report as abusive

it’s interseting to learn that the banks of US was only 78 billion dollars short of business as usual. why didn’t the US government give them the money earlier so we wouldn’t have to go through a GFC?

Posted by Ding | Report as abusive

RB, A vastly different element to the economic calamity of today, vs those of even the recent past and that of the ’30s is information and sophistication of the worker bees, economic participants required to keep the global wheels turning. The occlusion of markets, shadow banking and delusional culture of the giant international corporations is stripped bare and why confidence will not be returned. Tier 1 Capital is cooked you say-why is no one really surprised is the better question.

Broadly leaders of government(s) culpable and complicit in enabling it. These wealthy and powerful hold no national interests but are steadfast in a dogmatic extremism which supply excessive rewards at the cost of others which rose exponentially over the last 15 years.

Rather than systemic risk management, it is/was a systemic free-for-all and broke essential lynch-pins in keeping the mechanisms of base economics working. Modeling, philosophies and banal incentives disconnected from reality for so long, the hazards remained unseen. Trade deficits alone at stunning levels a gigantic red-flag which was ignored by those who believed their obtuse and manipulative means could replace it. Narcissism and giant egos were supported rather than given margins of law or consequences in self-perpetuating dysfunctional systems.

Globalization of corporate giants, finance giants over-reached until a category 5 economic hurricane of “counter-party” risk was created coupled with a global tsunami of leverage and debt.

The tragedies are however real and in particular include the less enabled individuals coping with and shacked by this ruse of an economic system of opportunity. The lack of choices of the hoards of involuntary, undereducated, passive ‘investors’ in the market-solutions for funding educations, retirement, health care,housing, lives etc. also led down a primrose path of faddish schemes of money making. It has nothing to do with value, growth, production, innovation or even trade as it has revealed itself to be nothing more than a facade with false promises and false returns of snake oil salesmen.

There is an opportunity for a return to more fundamental, less volatile and more secure economic paradigm, I am dubious that construct will arise without the foundation of this barn built with toothpicks falling down first. Inflation is required for the current system to survive.

Deflation risk gone as new homes are being demolished? There’s one way to decrease the inventory. I want to know why this still isn’t a risk. I suspect I know why-supplies of everything will be reduced until demand outstrips it and therefore-inflation will produce that necessary capital that needs to be raised. Problem is, it will be among those basics everyone needs to survive as larger and larger populations of individuals necessarily must return to basic needs versus idealized/manufactored wants.

Posted by NS | Report as abusive

I think a lot of the recent press releases lately about the economy bottoming out are premature, and to some extent even conspiratorial on the part of government officials, the real estate industry, and the press. Maybe I’m being too negative, but it’s just my sense of things right now. A lot of people in this country have a hard time being truthful anymore. I live in an American town with a population of about 60,000 people. In the past two months I have seen more and more homes come up for sale with fewer and fewer sales. Our next door neighbors on a quiet street just moved out of a nice neighborhood leaving their house empty. They were not able to sell it. They bought it four years ago, and they will probably take a loss on it.

Posted by Juan Way | Report as abusive

The worst of the Swine Flu seems to be past, polar bears are doing just fine, marijuana will be soon be legalized (hooray!), prayer is an act performed by people in need of a divine daddy figure, and the Great Recession is on the ropes and will soon be history. How grateful am I? Words fail me. Maybe it’s time to put in that sun room (gotta borrow for that, I’m afraid) , take a Caribbean cruise (credit card at the ready) and buy that Swiss watch I’ve always wanted (don’t I deserve it after all this travail?)

It’s back to our old ways! I’m so happy. Really. All this saving, paying off debt, eating in, worrying about retirement is such a drag. Hey, I’ll never make it to the top of the capitalist Ponzi pyramid, so I may as well live it up. I’ve got no kids, so the banks will have no one to come after when I’m gone.

Life is good. Morning in America.

Posted by Robert Foster | Report as abusive

Juan, your story of the neighbor who lost their home after some years is the story of millions of people. In 1933, the worst year of the Great Depression, 275,000 properties were foreclosed. In the past year approximately the same number of homes have been foreclosed upon every month. Our population today is not even three times as great.

The next real estate collapse will be commercial properties. Warehouses and factories recently completed or under construction are either empty or construction suspended. Consumer spending habits have inexorably been altered rendering many of these massive facillities unnecessary in the forseeable future.

These facts have not escaped the Administration or Congress in Washington. As so many other commentators have stated in these blogs, the American taxpayer is left in the dark as to the realities of our predicament. Informed consent is essential for government to work effectively. It would appear the outrage of Congress over deception and fraud in the business world is nothing more than calculated deflection.

Posted by Anubis | Report as abusive