The New Economy
The Monitor's Money editor, Laurent Belsie, blogs about the economic changes now under way in the U.S. and around the globe.
Sen. Jon Kyl (R) of Arizona grilled Geithner on his tax lapses – and his contention that the stimulus would be speedy. (Pablo Martinez Monsivais/AP)
Congress refocuses on economy, Geithner
After all the festivity and feel-good of Tuesday's inauguration, Congress got right back to work Wednesday with tough questions for Tim Geithner, the Treasury secretary-nominee.
His tax mistakes -- boneheaded though they were -- paled in comparison with the big worries about the economy. Even Democrats were tough on the nominee of the president they'd just lauded the day before.
Two of the senators' most pressing questions: How quickly would the stimulus be spent? How would banks be regulated after their disastrous entanglement with complex mortgage-backed securities?
"I am tired of these exotic instruments," said Sen. Maria Cantwell (D) of Washington. "There's nothing exotic about what's happened to our economy."
She pressed Mr. Geithner repeatedly about reining in banking excesses through regulation. He declined to give any specifics, saying President Obama would be presenting a plan to Congress in a few weeks.
Sen. Olympia Snowe (R) of Maine asked why the original bailout money was spent on injecting money into banks rather than buying up their troubled assets, as the Bush administration had originally proposed. "Clearly, it hasn't been [working] at this point. Do you think it's working?" she asked.
"I absolutely believe that actions taken [then] have made a very substantial impact in avoiding the risk of a much more damaging deleveraging of the financial system," Geithner said. He also promised to reform the program so that it would be more effective and transparent.
Will the Obama plan stimulate the economy speedily? asked a skeptical Jon Kyl (R) of Arizona, quoting Congressional Budget Office estimates that much of the money wouldn't be distributed for more than a year.
"We think we can do substantially better than the CBO suggests," Geithner responded. "We want to have strong force -- quickly."
The new administration's speed will be crucial, because the history of stimulus in the United States has been that it usually came too late, feeding inflation instead of fighting deflation.
Obama speech: Can hope trump deflation?
Hope floats – in the economy just as in Hollywood or sports.
It's often overlooked as a powerful lever for a foundering nation, maybe because it's so difficult to measure. Commentators often refer to investor optimism or consumer confidence – and these days both are in short supply – as key engines for the economy.
But it is hard for money men and women to figure out how to engender hope when the numbers are so gloomy.
That job falls, instead, to politicians – especially presidents, from Franklin Roosevelt to Barack Obama – who must rally people and create palpable hope for a better future.
Did President Obama accomplish that with Tuesday's inaugural speech? He ticked off America's wartime and economic challenges. He talked about the "sapping of confidence across our land, a nagging fear that America's decline is inevitable."
Then, in a startingly sober speech, he tried to rally his listeners: "Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America. They will be met. On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord."
The stock market wasn't impressed, with the Dow losing 332.13 points on Tuesday.
But key presidential phrases sometimes take time to emerge.
When Roosevelt delivered his first inauguration speech, journalists made little of what would become its most famous line: "Let me assert my firm belief that the only thing we have to fear is fear itself – nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." The phrase got stuck on inside pages (including by the Monitor, although it did rate a mention in an editorial).
But the administration knew it had a winner when Americans started writing in, mentioning the phrase.
And 1933 proved to be the bottom of the Great Depression from which America slowly began to emerge.
Was it hope that changed the equation? Hope was plentiful on Day One of the Obama administration, but as the new president himself said, there is work to be done:
"In the face of our common dangers, in this winter of our hardship ... let us brave once more the icy currents and endure what storms may come. Let it be said by our children's children, that when we were tested we refused to let this journey end, that we did not turn back nor did we falter. And with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations."
The Royal Bank of Scotland says its 2008 losses could reach $41.3 billion, the largest ever for a British corporation. (Matt Dunham/AP)
Banking crisis: new wave of trouble looks familiar
A new crisis is washing over the world's banking system. But this time, at least, the shape of the wave looks more familiar.
Last fall, banks and other financial institutions teetered on the brink because the housing bubble had popped. Now, they look shaky because of fears of a deep recession and the possibility of government takeovers. Banks have experience dealing with recessions.
The problems are global. Even before Bank of America and Citigroup announced huge losses on Friday, Ireland announced it was nationalizing one of its three big banks, and Germany's biggest bank, Deutsche Bank, said a logistics company partly owned by the German government would take a stake in it.
Bank shares plunge
On Monday, European bank stocks swooned as the Royal Bank of Scotland lost two-thirds of its value and the British government announced a second bank-rescue plan and said it was upping its ownership of RBS to 70 percent.
Now, the crisis is reverberating in the United States again. State Street Bank, a financial-services firm, announced Tuesday that its profits dropped 71 percent in the fourth quarter because it had to write down the value of some of its assets.
Déjà vu
It's not as if financial institutions haven't done this before.
For example: As concerns rose about its own viability last week, RBS pointed out that all of Britain's domestic banks are now technically solvent, using the guidelines that force banks to value assets at current market levels (even if they're extremely low).
Banks sometimes are technically insolvent in bad economic times. Typically, they have time to adjust until the value of their assets goes back up. This time, with greater transparency and quicker write-downs, that's a luxury markets might not allow.
Crowds gathered along the Reflection Pool on the National Mall waiting for an inaugural celebration Sunday. (Carolyn Kaster/AP)
Inauguration: a giant leap for blacks?
Martin Luther King Jr. got it right when he dreamed of a day when people "will not be judged by the color of their skin but by the content of their character."
Better than two-thirds of African-Americans say Dr. King's vision of race relations has been fulfilled, according to a new CNN-Opinion Research Corp. poll. That majority – 69 percent – was double the percentage of blacks who agreed with that statement last March (and was higher, incidentally, than the 46 percent of whites surveyed in the new poll).
Much of that optimism springs from Tuesday's inauguration of America's first black president.
But how far, really, have African-Americans come economically? It's a mixed picture.
Progress is apparent
The black middle class is more visible. More than a quarter of black workers are in management, professional, or related occupations. The Census Bureau counts 49,730 black physicians and surgeons, 70,620 postsecondary teachers, 49,050 lawyers, and 57,720 chief executives.
Nearly 38 percent of black 18- and 19-year-olds were enrolled in college in 2006, up from 18.1 percent in 1967.
The percentage of black families in poverty has fallen from 33.9 percent in 1967 to 22 percent in 2007.
Big gaps remain
But black households earn less than other races or Hispanics. Median income was $33,916 in 2007, less than what Hispanic households earned ($38,679) and more than a third below the $54,920 that non-Hispanic white households took home. As individuals, blacks make up 12.6 percent of the population but 27.0 percent of the people whose incomes are less than half poverty pay.
So has the United States paid back, as King put it in his "I have a Dream" speech, its "promissory note" that "black men as well as white men, would be guaranteed the 'unalienable Rights' of 'Life, Liberty and the pursuit of Happiness' "?
Not yet, although an Obama presidency represents a big symbolic step.
Great recession? Mini-depression? What to call this crisis.
On Tuesday, newly inaugurated President Obama will seek to reassure an America caught in the grips of ... what?
"Economic downturn." "Great turmoil." "A crisis unlike any we have seen in our lifetime."
Those terms, which Mr. Obama has employed in recent days, are presidential waffle words.
The wrong word
Maybe he's smart not to come up with a catch phrase. The president who most famously tried to do that was Herbert Hoover, or so the story goes. Barely a month after the crash of 1929, apparently not wanting to scare people with the term "panic," he tried a different one in his State of the Union address:
"This hesitation [in business investment] unchecked could in itself intensify into a depression with widespread unemployment and suffering."
It proved more prophetic than politically wise. By the end of his administration, people had started capitalizing the "D." By the late 1930s, it was joined with "Great" and tagged Hoover with economic failure.
A recovery, anybody?
Obama, in fact, has moved the other direction. Using focus-group research, aides have urged members of Congress to use "recovery" instead of "recession," Bloomberg News reported earlier this month.
If politicians are shy about venturing a new term, economists and commentators are not. These run the gamut from alarmist – "The Next Great Depression" (Glenn Beck of CNN) and "Inflationary Depression" (Peter Schiff of Euro Pacific Capital) – to plain vanilla:
"The economy is a depression," writes Peter Morici, economist at the University of Maryland.
One of the challenges of the name game is that it requires projecting the future. Today's downturn would have to get a lot worse to equal the Great Depression.
Citigroup announced it is splitting off its banking unit from $301 billion in troubled assets. (AP/File)
A modern bank run on Citigroup and Bank of America
So this is what a 21st century bank run looks like.
Depositors stay calm, shareholders panic. The government steps in with taxpayer money and guarantees. A few months later, banks' share prices plunge again, the government injects more capital, and so on.
No wonder people are angry. It's one thing to save, say, a Citigroup whose bad decisions helped create the mess to begin with. It's quite another when those rescues don't work.
That's why Friday's $8.3 billion quarterly loss and breakup of Citigroup into two entities and the $1.8 billion quarterly loss and latest government infusion of $20 billion into Bank of America are increasing pressure for decisive and fundamental reform of the financial system.
"The most important issue [for the US economy] is the financial system. You don't install new lighting until you've fixed the wiring, and the economy's wiring is the financial system," write David Backus, Matthew Richardson, and Nouriel Roubini of New York University in a New York Post op-ed.
Separate dross from gold
At a minimum, this means separating the banks from their so-called toxic mortgage-related assets. That's what is now slated to happen with Citi's breakup: One entity, called Citicorp, will handle commercial, retail, and investment banking; the other, Citi Holdings, will hold everthying else, including an estimated $301 billion in risky assets. Much of these assets are to be sold off or worked through.
The split essentially returns the banking entity of Citigroup to what it was in 1998, when it led the charge to repeal the Depression-era Glass-Steagall Act. For six decades, the act kept banks from speculating in risky investments - the kind of investments that last year humbled Citigroup and sunk Lehman Brothers and other big-name financial institutions.
Dragged down by Merrill Lynch
Bank of America's problems also loom large because it agreed to buy Merrill Lynch, an aggressive player in those risky mortgage-related securities, which itself lost $15.3 billion last quarter. (Those results are separate from Bank of America's, because it didn't take over until Jan. 1.)
The stocks of both Citibank and Bank of America have lost about 80 percent of their value since the end of September.
These problems are also dragging down shares of other banks, even those that are far more healthy. That is why the calls for quick and decisive action are becoming more urgent. Perhaps that means a government entitiy that takes over those bad loans a la savings and loans crisis or, in the extreme, a partial or full nationalization of banks.
"If we've learned anything from the last Citi bailout, it's that small interventions don't work," writes economy blogger Felix Salmon of Portfolio.com , who urges nationalization. "What's needed now is a complete revamp of both banks' capital structures, and a brand-new owner."
House releases first look at Obama stimulus
House Democrats have given America a first draft of what economic stimulus will look like under President Obama.
The American Recovery and Reinvestment Bill of 2009, released Thursday, includes a bit of everything – from clean-energy subsidies to school modernization to highway spending. These are long-term investments that could change the shape of the United States, much as Depression-era work programs modernized America for the 20th century.
Short-term emphasis
But by far the largest part of the sprawling package is aimed at short-term stimulus. A third of the $825 billion bill – some $275 billion – would go to tax cuts for the middle-class that President-elect Obama campaigned on during the election. as well as tax cuts to businesses to encourage job-creation.
The next biggest piece is an $87 billion temporary increase in what the government reimburses states for their Medicaid programs. Another $79 billion would also go to the states to prevent cutbacks by local schools and public university.
In all, these short-term efforts – including the tax cut – represent roughly $600 billion of the total bill. The rest is dedicated to longer-term efforts, such as doubling renewable-energy production ($32 billion), highway construction ($30 billion), and school construction ($20 billion).
President-elect's input
The House plan was worked out with cooperation with Obama, but it still must go through the House and be reconciled with any Senate plan. House Speaker Nancy Pelosi called it a "first step" and said it would reach the president's desk in a month.
House minority leader John Boehner called the plan "disappointing" because it didn't offer even more money in the form of tax cuts.
The House Ways and Means Committee, which released a summary of the bill Thursday, highlighted the fact that it contained no earmarks.
Geithner tax problems a chink in Obama's armor
The tax peccadillos of Tim Geithner may not sink his bid to become the next Treasury secretary, but they have tarnished a bit the aura of President-elect Obama's incoming team.
Mr. Geithner failed to pay Social Security self-employment taxes when he worked for the International Monetary Fund. He paid up for two years when his 2003 and 2004 returns were audited by the Internal Revenue Service (IRS) in 2006. But he didn't pay the same taxes for 2001 and 2002 until late last year when he was being considered for the Treasury post.
In all, he paid $42,702 in back taxes and interest, according to documents released Tuesday by the Senate committee charged with vetting Geithner. The documents also revealed more minor tax adjustments. Part of Geithner's responsibility as Treasury secretary would be the IRS.
Immigration glitch
The documents also showed that one of his household employees continued to work for the family for three months after her proof of legal work status had expired.
Democrats said the revelations wouldn't prove a major hurdle to confirmation.
"A few little hiccups," said Senate majority leader Harry Reid (D) of Nevada, who dismissed the charges.
"I am disappointed," said Sen. Max Baucus, chairman of the committee vetting Geithner, in a statement . "But I am satisfied that Mr. Geithner has taken the steps necessary to fix these problems."
On the Republican side, Sen. Orrin Hatch of Utah also said he did not have a problem with Geithner.
A respected expert
Geithner is well-regarded for his work at the New York Fed and as a key figure in helping Obama's powerhouse economic team to make swift moves to dampen the fires of recession. But the revelations represent a chink in the armor of an Obama team that has performed well up to now.
Obama nominees, including Secretary of State nominee Sen. Hillary Rodham Clinton Tuesday, have sailed through their Senate hearings. When Commerce nominee Bill Richardson was tied to a corruption investigation, he swiftly withdrew. The team has worked closely with the Bush administration to request the second chunk of bailout money from Congress.
Still, the tax mistakes set the wrong tone for an administration that says it stands for transparency and fiscal rectitude after an era of anything goes on Wall Street.
Federal Reserve Chairman Ben Bernanke said Tuesday that a stimulus isn't enough for a lasting recovery. (Matt Dunham/AP)
Bernanke wades into economic policy muddle
The 20th century theories for battling recessions are looking a little tattered for today's economic storm, which is why the solutions now being proposed look ideologically messy.
Lifeline? Grab a bunch! economists and policymakers are saying. One alone won't work.
That theme emerged again Tuesday when Fed Chairman Ben Bernanke addressed the London School of Economics.
"The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity," Mr. Bernanke in his most direct support yet of President-elect Obama's stimulus package. "In my view, however, fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."
Stimulus, stimulus everywhere
Practically every country is contemplating a stimulus package, a direct legacy of John Maynard Keynes, the British economist who made deficit-spending cool back in the 1930s. In case you haven't noticed, Keynes is making a comeback.
For half a century, his theories provided the justification for governments to spend millions and billions of dollars when hard times hit. It was cheaper to go into debt and speed the recovery, the theory went, than to endure the economic and tax consequences of a longer downturn.
But if the theory worked, how come the stimulus-driven New Deal didn't? Most economists agree World War II pulled the US out of the Depression. Was the theory wrong or the stimulus too small?
Interest rates matter more
Enter the other big theorist of the 20th century – economist Milton Friedman, who argued that it wasn't a lack of stimulus that made the Depression so bad but the Federal Reserve's tight rein on the money supply. As a young economist, Mr. Bernanke expanded on that theory. Economist (now Obama adviser) Christina Romer also studied the Depression and other downturns and agreed that money supply, not stimulus, was the engine of recovery.
But that theory now looks suspect, too. Bernanke has spent the past 16 months cutting interest rates – they're now effectively zero – without much effect. The economy continues to deteriorate.
This has led to a vigorous debate over what to do. Many economists, even conservative ones, are now calling for a Keynesian stimulus, at least as a temporary measure to jump-start the economy.
But Bernanke is looking beyond that. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," he told the London School of Economics.
With no more direct leverage on interest rates (they're at zero), the Fed is pumping more money into the economy by making huge loans to financial firms and buying up their debt. The US Treasury is buying up portions of companies considered crucial to the functioning of the financial system.
Where to go from here?
But this lack of clear direction leaves Americans dangling at the end of economic theories with no clear relief from the gathering storm.
That's not necessarily a bad thing. Flexible, ad hoc measures may be the right solutions in these times, if they can generate confidence and trust. Meanwhile, we probably need a new theory to explain why the old ones didn't work.
Auto show blues? Consumer electronics offer ray of hope.
For four days in Las Vegas, the economic gloom lifted a little as the world's electronics companies introduced the latest gadgets for 2009.
The Consumer Electronics Show, which ended Sunday, showed off wireless battery chargers, a better Windows operating system, and Internet-ready TVs that blur the line between broadcast and broadband. Clearly, the world's inventors have not closed up shop because of plunging stock markets or the latest reading on economic output.
The mood at CES was reportedly somber: 10 percent fewer exhibitors and thousands fewer attendees. Still, the outlook was brighter – and perhaps more important as a barometer of the US consumer – than, say, the Detroit Auto Show, which was gearing up Sunday just as the CES was winding down.
Autos – so 20th century
Let's face it: Cars haven't been cutting-edge for decades. Cool, maybe. They could be high-tech again if they switch to new fuels. But what piques water-cooler interest these days is more likely to be a smart phone than a Smart car, a DTV (especially those half-inch-thick digital sets that debuted last week) rather than an SUV.
More important, while sales of cars are falling, US sales of digital TVs are setting records. This year, they'll jump 6 percent, forecasts the Consumer Electronics Association. Sales of high-definition sets – the most expensive DTVs – will climb 11 percent.
"We're seeing more and more that TVs are not a luxury item anymore, they're a necessity," says Megan Pollock, the association's senior manager for high-definition televisions.
Forecasts trimmed but still positive
No one will confuse the economic punch of a $1,500 DTV purchase with that of a $30,000 auto sale, especially since most TVs are made overseas. Also, the DTV forecast is down from previous ones. With fewer people buying digital televisions than expected, the federal program that subsidizes the cheaper alternative – a converter box for analog TVs – has been overwhelmed with requests ahead of next month's switchover to digital broadcasting.
Nevertheless, digital TV sales are headed up, which says something in this current environment.
In the 1930s, when cars were cutting-edge, sales plunged by half within a year of the 1929 stock market crash and four-fifths by 1932. This year, auto sales are expected to drop 14 percent.
It's a sign that, faced with what could become the worst downturn since the Depression, Americans have tightened their purse strings. But they haven't pulled them shut.
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