Simon Johnson has another excellent post up on his Baseline Scenario blog this weekend, entitled: "More On The Two-Track Economy -- From The WSJ And Others." It's a follow-up piece to something he posted about ten days ago: "The Two-Track Economy."
The day Johnson posted the first part of this series, I posted a diary in a review of it: "A Tale Of Two Economies."
I really don't know how much headline news it's going to take for some to accept certain facts, but the over-arching truth is--at least as far as our economy's concerned--the old rules no longer apply.
Stated another way, for 99% of America--those of us on Main Street--it's a "new normal," and it is UGLY; but, for the 1% that own Congress--the status quo on Wall Street--it's business as usual, a/k/a the "old normal."
Here's Johnson's latest:
More On The Two-Track Economy -- From The WSJ And Others
The Baseline Scenario
August 29th, 2009
The notion of a two-track economy seems to be taking hold. We kicked the concept around pretty well last week -- your 130 comments (as of this morning) helped clarify a great deal of what we know, don't know, and need to worry about. The two-track concept overlaps with, and builds on, long-standing issues of inequality in the U.S., but it's also different. Within existing income classes, some people find themselves in relatively good shape and others are completely hammered.
New dimensions of differentiation are also taking hold within occupations and within industries - the WSJ this morning has nice illustrations. The contours of this differentiation begin to shape our recovery or, if you prefer, who recovers and who does not - it's hard to say how this will play out in conventional aggregate statistics, but these are likely to become increasingly misleading.
So now it's all about whether you are a preferred client of Goldman Sachs or another big finance house.
This can lead to short-term growth - the speed of recovery in many emerging markets surprises many, from about 12 months after the crisis breaks. But it also leads to repeated crisis, to derailed growth, and to a loss of income, status, and prospects for most of society.
The truth is there's an extremely weak--even "fake"--recovery for Wall Street that's now underway, but Main Street is paying an inhuman price for this, both literally and figuratively.
Nowhere is this more self-evident than in a not-so-microcosmic bit of political kabuki currently playing out between the Federal Reserve and Bloomberg with regard to the basic concept that the public deserves to know--with just a modicum of detail--where roughly two trillion dollars in federal funds have gone.
I first wrote about this many months ago, on a few occasions. I covered the latest development in this case again, on Thursday, in: "Has The Government Decided We Can't Handle The Truth?"
Then, fellow blogger, Bink, kicked some serious status quo butt in, "The Secret That Will Destroy The World's Financial System," a couple of days ago.
Meanwhile, over the weekend, we heard that the Federal Reserve, in their outrageous response to the court, claimed they have no relevant documentation available to it that would enable it to respond to Bloomberg's FOIA request, in the first place! "Federal Reserve Finds No Documents at FRBNY Responsive to Bloomberg FOIA Request, Court Grants Emergency Stay Application."
Federal Reserve Finds No Documents at FRBNY Responsive to Bloomberg FOIA Request, Court Grants Emergency Stay Application
Submitted by Res ipsa loquitur on 08/29/2009 09:15 -0500
On August 28, 2009 the U.S. District Court of the Southern District of New York granted the Federal Reserve's Order to Show Cause and motion for a stay of the Court's recent Order compelling the Federal Reserve to produce "confidential" commercial and financial information concerning the financial institutions that have borrowed from credit facilities established by the Federal Reserve. The Federal Reserve's current position is that the immediate release of documents would moot any appeal, and cause irreversible damage to the institutions whose information is disclosed.
Oral argument took place on August 27, 2009. The Federal Reserve, as predicted, represented to the Court that an additional search of what the Federal Reserve considered "official files" at the FRBNY revealed no documents responsive to Bloomberg's FOIA requests. Bloomberg has reserved its right to dispute this issue pending the outcome of the appeal. The Federal Reserve and Bloomberg consented to seek an expedited appeals process, upon the Federal Reserve obtaining authorization to proceed with an appeal by the District Court's September 30, 2009 deadline.
Are we supposed to believe that two trillion dollars was distributed by our government via the NY Federal Reserve branch, then under Tim Geithner's management, where he had absolutely no paper trail available relating to those expenditures?
Given the sheer facts of this matter, taken within the most basic context that we now have our own government and the Federal Reserve telling us we can't be allowed to discover the truth about this--because the very existence of many of our largest financial insititutions would be at risk--kind of sums it all up for everyone in black and white.
In other words, we're being told that if we knew the truth as to what has occurred to date, even now, many of those top 19 entities on Wall Street that supposedly (mis)manage 75%-plus of this country's assets, would go under...today.
Not last Fall. Not "earlier in the year." But, right now.
So, given this reality--trillions of taxpayer dollars later--how can anyone talk about a "recovery?"
Major banks (think: Citigroup and Bank of America) and other financial institutions (think: AIG) are still extremely insolvent.
This all makes sense...just as long as we keep lying to others--and to ourselves--that our reality some are calling a recovery is anything but that.
IT'S BLUE SMOKE AND MIRRORS FOR THE WALL STREET CASINO
For just a moment, let's revisit the "rigged game...."
Stock Market Insanity
What else can one call it when the stock of five completely bankrupt (to the tune of at least a couple of trillion bucks, and that's being nice about it) entities accounts for 30% of the overall activity in the marketplace? (See: "Five Financial Stocks Dominating Market Volume.")
Five Financial Stocks Dominating Market Volume
Submitted by Tyler Durden on 08/22/2009 12:37 -0500
Since the beginning of July, the most prominent feature of the market has been the divergence in volume between financials and "all other" stocks. While overall stock market volume has been flat if not down over the past two months, and a continuation of a long-term downward trend since the March ramp up, the volume in financial stocks has staged an unprecedented pick up.
...five primary names have been responsible for the bulk of the volume in not just financials but across the entire market. The five stocks are Citi, AIG, CIT, Fannie Mae and Freddie Mac.
A summation of the individual volumes since March reveals an unprecedented dominance of the total market volume represented by just these five stocks, hitting nearly 2 billion shares on Friday, August 21.
Then there's this, over the past 48 hours, from Jesse's Cafe Le Americain (h-t to Naked Capitalism): "US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers"
US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers
Jesse's Cafe Le Americain
August 29, 2009
"... There are some obvious bubbles already formed in certain insolvent financial stocks like AIG, with disinformation rampant in the Wall Street demimonde...
...Wall Street insiders and their enablers pig out on public money while the nation suffers. This is not change, this is business as usual."
Insider Selling in August Soars to 30.6 Times Insider Buying, Highest Level Since TrimTabs Began Tracking in 2004.
NYSE Short Interest Plunges 10.3%, While Margin Debt Spikes 5.9%
SAUSALITO, Calif., Aug. 28 PRNewswire -- TrimTabs Investment Research reported that selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.
"The best-informed market participants are sending a clear signal that the party on Wall Street is going to end soon," said Charles Biderman, CEO of TrimTabs.
TrimTabs' data on insider transactions is based on daily filings of Form 4, which corporate officers, directors, and major holders are required to file with the Securities and Exchange Commission.
In a research note, TrimTabs explained that insider activity is not the only sign the rally is about to end. The TrimTabs Demand Index, which tracks 18 fund flow and sentiment indicators, has turned very bearish for the first time since March.
"When corporate insiders are bailing, the shorts are covering and investors are borrowing to buy, it generally pays to be a seller rather than a buyer of stock," said Biderman.
TrimTabs also reports that the actions of U.S. public companies have been bearish. In the past four months, companies have been net sellers of a record $105.2 billion in shares.
"Investors who think the U.S. economy is recovering are going to get a big shock this fall," said Biderman. "Companies and corporate insiders are signaling that the economy is in much worse shape than conventional wisdom believes."
TrimTabs Investment Research is the only independent research service that publishes detailed daily coverage of U.S. stock market liquidity--including mutual fund flows and exchange-traded fund flows--as well as weekly withheld income and employment tax collections...
...For more information, please visit www.TrimTabs.com.
And, of course, we can't forget this ongoing matter, now can we?
High Frequency Trading
Then there's the high frequency trading issue, which is now to the point where even U.S. senators are dropping all pretense of any fairness existing in the marketplace. This from Delaware Senator Ted Kaufman (Vice President Biden's handpicked replacement): "Kaufman on HFT: The Bottom Line Is Liquidity Vs Fairness."
Kaufman on HFT: The Bottom Line Is Liquidity Vs Fairness
Submitted by Tyler Durden on 08/28/2009 15:37 -0500
(DIARIST'S NOTE: "Tyler Durden" actually represents approximately 40 staffers at Zero Hedge.)
Liz Claman: Let me ask you, when the review comes in, what will you be looking for, because she may find that so far, the markets are relatively fair and we have a level playing field.
Ted Kaufman: I am absolutely convinced that when you look at it, and when you talk to enough people you know, people know it's not. My job is to suggest concerns that I have in my oversight capacity as a U.S. senator, and send them over to Mary Schapiro. Now it's up to Mary and the other commissioners to come back with a proposal and I will deal with it when it comes back.
Yes, our Senators are now telling us the market is rigged. How much more proof do we need? (See my other diaries over the past eight weeks for more on this.)
"But...but...but...we're told that the stock market's stellar performance is a key leading economic indicator. And, our leading economic indicators are all pointing to a recovery?"
Of course, we could venture off a bit into tinfoil hat land, but I'm keeping it real here...and this is as real as it gets!
Speaking of reality...contrary to the wisdom of others, this is not a conventional recession.
Folks, do not be lulled into inaction!
The International Monetary Fund (IMF) and the Bank of International Settlements (BIS) are telling us: this is not a conventional recession.
THIS IS NOT A CONVENTIONAL RECESSION!
Our quarter-century penance is just starting
By Ambrose Evans-Pritchard
Published: 10:00PM BST 29 Aug 2009
Never in modern times has there been such a flat contradiction between the euphoria of markets and the stern warnings of officialdom at central banks and financial watchdogs.
Corporate credit has seen the steepest rally in almost a hundred years, according to Morgan Stanley. Hedge funds are reviving the final bubble play of early 2007, writing put options on long-dated "volatility" contracts to wring out extra profit.
It is as if the Great Contraction - as the Bank of England now calls it - was just a random shock, as if we should naturally expect "V-shaped" resurgence to take us back to where we were. Yet that is what precisely we are being told will not and cannot happen.
"The current financial crisis is unlike any others," says the Bank for International Settlements. Lasting damage has been done. The "cumulative output loss" is likely to reach 20pc of GDP in the major economies.
The message is the same at the International Monetary Fund. "The world is not in a run of the mill recession. The crisis has left deep scars. In advanced countries, the financial systems are partly dysfunctional," said Olivier Blanchard, the Fund's chief economist.
Mr Blanchard said an IMF study of post-War banking crises led to an unpleasant finding. "Output does not go back to its old trend path, but remains permanently below it..."
So, we're told that everything's morphing into two economies...one for the haves...and another for the have-nots.
For the have-nots, it's...
A NEW NORMAL (Which is anything but normal, IMHO.)
Our future will be:
unacceptably high unemployment for many years,
the virtual death of the American consumer, at least as we've known consumption for the past few decades,
approximately one out of every seven people on Main Street in full-blown poverty and on food stamps by 2010,
to a great extent caused by the hoarding of cash--that's OUR cash, by the way--by the folks on Wall Street...and...
For the haves, it's...
THE OLD NORMAL (Which is business as usual.)
with even more obscene salaries, and more rewards for totally myopic decision-making devoid of any social responsibility,
because with the knowledge that our government is encouraging their bad behavior, rather than doing something about it, it's like giving carte blanche to the wolves in the henhouse,
with just more unacceptable behavior,
and encouragement--up to and including virtually deification--for the folks that got us into this mess in the first place...
So, against so many formidable obstacles, what's the solution?
Paul Krugman begins to address that at the end of his latest column in today's NY Times; but there are no easy answers: "Missing Richard Nixon."
Missing Richard Nixon
NY Times Op-Ed
August 31st, 2009
...We tend to think of the way things are now, with a huge army of lobbyists permanently camped in the corridors of power, with corporations prepared to unleash misleading ads and organize fake grass-roots protests against any legislation that threatens their bottom line, as the way it always was. But our corporate-cash-dominated system is a relatively recent creation, dating mainly from the late 1970s.
And now that this system exists, reform of any kind has become extremely difficult. That's especially true for health care, where growing spending has made the vested interests far more powerful than they were in Nixon's day. The health insurance industry, in particular, saw its premiums go from 1.5 percent of G.D.P. in 1970 to 5.5 percent in 2007, so that a once minor player has become a political behemoth, one that is currently spending $1.4 million a day lobbying Congress.
Every desperately needed reform I can think of, from controlling greenhouse gases to restoring fiscal balance, will have to run the same gantlet of lobbying and lies.
I'm not saying that reformers should give up. They do, however, have to realize what they're up against. There was a lot of talk last year about how Barack Obama would be a "transformational" president -- but true transformation, it turns out, requires a lot more than electing one telegenic leader. Actually turning this country around is going to take years of siege warfare against deeply entrenched interests, defending a deeply dysfunctional political system.
Bold type is diarist's emphasis