Wednesday, October 22, 2008

Accounting Losses Represent the Past...Layoffs Represent the Future

Accounting losses report on what has been done and the consequences of those actions. The announced layoffs, in the thousands, give us an indication of what is in store for us in the future. The announced layoffs mean that retail sales will continue to be soft…goodbye Christmas volume, hello special sales even before Thanksgiving…industrial production will continue to decline…will all cars in America be produced by foreign companies…and continued declines in housing prices and increases in foreclosures…the American dream is on hold. So the wealth of Americans will continue to decline which will mean…more layoffs.

Not only is Ben Bernanke speaking gloom and doom…Hank Paulson is also now on record for a long and difficult period of economic retrenchment. The amazing thing to me is how Paulson seems to carry out what ever seems to be on Bernanke’s mind.

Remember there was a time when Paulson was letting Lehman Brothers go, implying that the rescues were over. And, then Bernanke had a meltdown…called Paulson…who arranged a meeting with congressional leaders…a meeting in which Bernanke is reported to have scared the daylights out of all present. Since then, Paulson…the free-market Paulson…has been bailing out everyone he can…while Bernanke is flooding the world with billions and billions of dollars. We should have Carl Sagan reciting these numbers to the world!

The bottom line…the Bush administration will be remembered…not exactly fondly…for a long time. The team that wanted to get out-of-town before the roof fell in didn’t make it. January 20, 2009, now, seems such a long time away.

Most of the responses we are seeing to the financial and economic crisis seem to postpone real action so that the in-coming administration will have to make the hard decisions as to what the new world of finance and economics is going to look like. And, this seems to be across the board…Iraq, Guantanamo, education, justice, health, and so on and so on. The President has all but disappeared!

According to the Wall Street Journal the only person lobbying for a position in the new (Obama) administration is Ben Bernanke. Yesterday the Journal argued that Bernanke all but submitted his resume to the Democrats by coming out in favor of the new stimulus plan being offered by the Democrats in Congress which has been supported by Obama. (See “Bernanke Endorses Obama”, Everyone else wants out.

So, we are going to have a sustained period of economic stagnation or decline. Layoffs are going to increase for a while rather than decline. How bad the economic conditions are going to get is still anyone’s guess, but the extent of the financial dislocation certainly carries with it an ominous black cloud. And little is being done about it. It is the future we have yet to see.

The financial guys have thrown about everything they have at the problem because they do not want to be accused of not providing enough “stuff” to keep the financial markets going. Now, we move to the real economy…output, employment, and dislocation! This is raising the cries for a fiscal response.

Here is where the other side of the frivolous and undisciplined behavior of the Bush administration comes home to haunt all of us. Since it has been in office, the monetary authorities kept interest rates exceedingly low while at the same time ignoring the housing bubble. When things seemed to get a little tough, the Fed drastically lowered its target interest rate. In effect, it shot off almost all of its ammunition. Not having much else it could do, the Federal Reserve flooded the world with liquidity. The monetary authority expended its resources before the battle really began and has little more it can do except direct intervention in institutions…not markets…with newly printed money.

In terms of fiscal policy the irresponsibility of this administration was also present. The problem now is how to add additional stimulus upon an already mammoth budget deficit. No one really knows whether or not a new stimulus program will do anything toward reducing the severity of the economic decline. Again, it is a case that the ammunition was basically used up before it was really needed.

This is where the lack of discipline kills you. When you really need something, you find that what you need is not there and this leaves you with little you can do going forward. The “free market” tools that could have been used to speed about a recovery have been frittered away in easy living. Now, the only recourse is greater direct government intervention into the economy in an effort to prevent the worst.

One final note: one of the implicit assumptions connected with the free market model is that there is a moral structure in the society which underlies behavior and allows the free market to be free. This moral structure leads to people acting responsibly with respect to commitments and relationships.

What we have seen in the last seven and one-half years is an administration that has underwritten fiscal prodigality and monetary laxity, behavior that has been emulated throughout the economy. In effect, the administration has undermined the moral fabric of economic prudence. Now the administration is washing its hands of its waywardness and scurrying for the door. It is someone else’s problem.

And the layoffs will grow.

I believe that a lot of the uncertainty is over. The future is not going to be pleasant. The question is…how unpleasant will it get? Not only does the economy need to be rebuilt but the moral fiber of the markets need to be reconstituted.

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