one very wobbly leg?

Remember President Obama’s 3-legged economic recovery stool: 1) Wall Street: fix the financial system with Geithner’s new “TARP II” plan, 2) Main Street: fix the economy with the $787B “American Recovery & Reinvestment Act” stimulus, 3) Kitchen Table: clean up the toxic politics.  And remember that this is the world’s first truly global crisis.  Everything is tightly interconnected with everything else around the globe.

Leg #1 is looking pretty shaky — and not just here in the US.  Even after the $ billions of direct money and the $ trillions of central bank support, our biggest banks are in deep trouble.

In London, the Guardian is reporting that the UK’s biggest bank is in deep trouble.

In Washington, the Washington Post is reporting that the US’s biggest bank is in deep trouble.

And from Princeton, Nobel Prize winning economist and columnist Paul Krugman is saying we’re all in deep trouble:

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized - and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis.

If Krugman is alarmed, I’m alarmed.  And you?

the $ deciders

There’s not much support for the Geitner line that we don’t need to “take a majority position” — takeover, nationalize — several banks, maybe many banks.

Here’s a good survey in the Huffington Post of the range of opinion on the other side of the question.  This may turn out to be a major turning point for the Obama administration AND for the recession’s path in the US.

Revisit the banking item two below — the Brits are taking the opposite tack.

shock absorbers?

I’ve worried here before about the potential for political instability and violence to accompany this recession.  It is a bit more complicated than cause and effect.  Here in the US — and to some extent in the world — the warm glow of the Obama election and his calm, firm demeanor on TV likely is a buffer for now.

He’s exerting a strong international presence with Secretary Hillary and the small busload of special envoys already zipping around the perennial trouble spots.

More, even very poor societies have a considerable capacity for civility under stress.  But at some point the civil fabric rips — or rather, the civil fabric is ripped by some wannabe ‘leader’ trying to exploit the pain for political gain.  The chaotic violence which follows can be exceedingly difficult to stamp out — yet another signal that we could be in for a long, long period of poverty and trouble.

Here’s TomDispatch with more on what’s happening right now.  Excerpt:

The global economic meltdown has already caused bank failures, bankruptcies, plant closings, and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.

As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants, and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a “lost decade,” the result could be a global landscape filled with economically-fueled upheavals.

What do you think? Could we see political unrest here in Washington State?

now the Royal Bank of EveryBrit

The Obama financial team is tiptoeing around our big bank problems. From earlier reports, Wells Fargo, Citi, and Bank of America were all three ‘underwater’ — just like a distressed homeowner they owe more than they own.  How many more are in the same hole?  Apparently the ‘nationalization’ bugaboo has been keeping Obama from acting directly.

Not so in the UK. After some tiptoeing Brown is acting.  Here’s the Telegraph’s remarkable report : RBS — the Royal Bank of Scotland –  is being taken over and split into a good bank and a bad bank.  They plan to take 5 years to work out the return to RBS standing on its own.  Plus: Lloyds is transferring £200 B into the government’s toxic assets pocket — that’s more than $300B!  And who made the announcement: Northern Rock — the bank which failed earlier and is now a government institution.

We’re not far behind.

Update from London — note the big offload of workers:

The UK’s Royal Bank of Scotland has posted a net loss of $34.4bn for 2008 - the biggest ever loss in British corporate history.

Announcing the news on Thursday the bank unveiled a massive restructuring program that it said would included hiving off many of its international businesses.

The bank also confirmed that it will offload so-called toxic assets into a government insurance program.

Recent media reports have said the bank is preparing to announce it is cutting up to 20,000 jobs.

RBS has already been part-nationalised under government bailout packages worth almost $30bn.

The huge loss contrasts with the $10.5bn profit the bank made in 2007.

Update update: How bad is it? Here’s the London Telegraph’s report — 95% means the bank was/is almost worthless!

Royal Bank of Scotland has suffered the biggest loss in British corporate history - more than £24bn - and admitted today the taxpayer could end up owning 95% of the bank if its losses continue to mount.

The troubled bank needs to sell up to £19.5bn new B shares to the taxpayer in order to insure £300bn of its most troublesome assets. As a result, the taxpayer’s voting rights over the bank would increase to 75% from almost 70% now. But Stephen Hester, the new chief executive, said the government’s “economic interest” could rise to 95% “depending on how things work out”.

projected impact of the new spending

Will the recovery money make a difference?  Our first yardstick is unemployment.

Here’s Moody’s estimate of the effect we might hope from the stimulus money.

Of note, unemployment keeps growing through the end of this year!  So the 3.5 million or so jobs the Obama team is hoping to create will not fill a deepening hole. But it does turn the corner.

As I noted earlier, the Bureau of Labor Statistics has been fiddling with the counting rules.  If today’s unemployment numbers were converted to the 1930’s framework, we might be up in the 12% zone — not too far below Great Depression numbers in the late ’30s when the depression was still raging.

Time to reset the assumptions. Until now, I’ve been suggesting that we assume an “L-shaped” recession which bottomed out late this year and started a slow recovery over 3-4 years.

That looks too optimistic by half.  The bottom may still be next winter — i.e., a year from now (!) we should feel that the crash has stopped and that we’re quivering at the bottom.

But it looks now that we’d better assume we’re in for a very slow, very long recovery of “more than 5-6 years according to Fed officials cited in this Washington Post report.

What does that mean for us in practical terms besides a knot in the stomach?  Time to rethink: what’s ahead? What does being forehanded mean now? This is going to be so bad for so long that we’d better get clear quickly about how we’re going to navigate or we could indeed be in for something as long and destructive as the Great Depression.

I think it important to keep reminding ourselves just how serious this is.

Here’s the WaPost today:

Swift, Steep Downturn Crosses Globe
Markets Are Hammered as Hope Fades for Quick Recovery

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, February 18, 2009; A01

NEW YORK, Feb. 17 — Markets around the world plunged Tuesday as evidence mounted that the global economic crisis is worsening.

Japan is suffering its worst downturn in 35 years. The British economy is facing its sharpest decline in almost 30 years. Germany is slumping at its worst pace in nearly 20 years. Meanwhile, the job market in the United States, at the epicenter of the global downturn, is the worst in decades. And emerging economies are contracting at a pace few had predicted just months ago. Even China, whose economy still is growing at a 6.8 percent annual pace, is grappling with vast numbers of the unemployed, raising fears of unrest.

The sharpness of the global slowdown has alarmed economists, who see no obvious engine for recovery.

Read the rest of this entry »

Nouriel Roubini, guru of the day

Nouriel Roubini, one of the more fore-sighted economists, is saying out out loud what President Obama and Treasury Secretary Geithner have been thinking about: “nationalizing some  very big banks.”  Why?  Because it appears that some of the big names — Wells Fargo, Citi, etc. — are insolvent!  Yes, some of the very folks that told Paulson last fall that they didn’t need his $25B or so swallowed that and are now confessing they are underwater.

We can credit — maybe, all is still murky — Obama & Geithner for starting their ’stress testing’ of the banks — i.e., looking at the books.

Here’s the London Independent story.  Roubini is also pressing the Brits  and the Germans.  This banking problem is not just and American story.

The sums are huge — up in the $trillions — and it is not clear just how much our ‘owning’ some banks is going to touch our taxpaying pocketbooks.

Jon Talton

Seattle Times economics writer-columnist Jon Talton offers an astute observation in his column.

Here’s his point: what worked for job creation in the past is not necessarily the right receipe now.  This time, in this midst of this massive rearrangment of our our economic landscape, we must innovate.  The end of his column:

… the stars that aligned for Seattle in the past may be tougher to conjure after this disruption.

In such times, established players like Seattle benefit from going in with a fully stocked pantry of economic assets, so to speak. Yet economic history shows those are the very ones who risk losing their standing, perhaps forever, in a historic paradigm shift (e.g., Buffalo, N.Y., and Dayton, Ohio).

I don’t claim to have all the answers. But this is a conversation we urgently need.

Some elements are obvious: get the most from the Feds for infrastructure, research and technology. These will enhance productivity, create and sustain good jobs and help maintain Seattle as a talent magnet.

Maintaining strong universities, cultural amenities and improving the environment again, essential for creative class talent, will be difficult given state finances. But we ignore them at our peril.

Retaining advanced businesses and the region’s culture of entrepreneurship is a murkier, but still vital, discussion. Private capital is pulling back everywhere.

How can we limit the damage? Are taxes and regulation too onerous? If so, how is that balanced against a high-quality economy that is partly a result of smart regulation and an adequate tax base? We’ll need to learn new ways to grow the pie - even just keep it - as global losses continue and global competition and change accelerate. Standing still is not an option.

This sounds heartlessly esoteric if you’ve been given a pink slip or are dreading one. But it is the heart of the matter for the region and state’s leaders.

GDP shortfall -- to date & projections

Just how serious is our recession?

This very interesting chart shows just how far below its potential our US economy is projected to perform.

And note how much that projection has notched downward in the last month.

This is a log scale, not GDP in dollars.  In that gap is our ‘missing’ business activity.  Even this seems optimistic. The WSJ’s panel of economists are projecting that we’ll bottom out by mid-year.  Other economists are now saying we could be stuck down here for years — a “long, long, long, long time” in Paul Krugman’s words.

Go here to the Econbrowser blog to get the details on the chart.