Yes, Kossacks, there's reason for economic optimism. Setting aside the shocking present of rising unemployment, foreclosures, and national deficit, there may be reasons to feel hopeful about the future.
Fed Chairman Bernanke in his 60 Minutes interview this month and in his semiannual report to the Senate Banking Committee last month, predicted that "there is a reasonable prospect" the recession will end this year. He's not alone. The National Association for Business Economics (NABE)
professional industry forecasters expect the recession to continue through mid 2009, but then see economic activity picking up again in the latter half of the year.
Wells Fargo economists in their annual forecast agree that "the deepest and longest recession since the 1930s will end in the second half of 2009."
Perhaps we Main Street dwellers should attend and follow President Obama's lead in being hopeful and optimistic. There are reasons to be.
To ripen your mood, I refer you to rweba's diary from yesterday, Geithner's plans may be already working.
Now, before I get going, I acknowledge I'm a big fan of unapologetic liberal economist Paul Krugman, and I acknowledge that he's NOT a big fan of Obama's recovery policies and plans. But he's not a fan of the Obama program -- it seems to me -- primarily because he sees it as Hank Paulson's. A man Krugman despises.
Further, I acknowledge that Krugman is an expert, and I'm not. But, in spite of that, I have a "take" on the prospects for America's economic recovery. As a blogger, I'm entitled!
Let us rip.
The economic abyss we're in is a complicated mess, but (and despite Dr. Krugman's Cassandra-like wailing -- it is NOT only about the financial sector). There are other components to consider.
Senior economist Scott Anderson predicted that housing will lead the way back. "One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out." Today the Commerce Department announced that US housing starts unexpectedly rebounded in February, surging 22.2% from January in the biggest percentage rise since January 1990. And the US Labor Department published good news, too, publicizing that US producer prices rose by less than expected in February, increasing by 0.1% last month, compared with a 0.8% gain in January.
There's the manufacturing sector, which few seem to take notice of other than in terms of GM, Ford, and Chrysler. But around the world, it fell off the edge of a cliff. Manufacturing nearly came to a virtual halt as factories cut back and even stopped making goods. Consequently, inventories of products for sale have declined. And that's good news because those inventories have declined at a faster rate than the economic downturn made us believe they would.
In turn setting the stage for manufacturing to stabilize later this year, providing some relief for a global economy that is contracting for the first time in six decades. "The drop in inventories is good news," says Ethan Harris, co-head of U.S. economic research at Barclays Capital in New York and a former economist at the Federal Reserve Bank of New York. "Just as unusually low valuations set the stock market up for recoveries, unusually low inventories set up the economy for recovery."
Inventories bottom at the end of recessions. Admittedly, we don't know precisely how deep the actual bottom will be and inventory decline can't tell us that. But one thing is different in this era from any similar experience in the past because
just-in-time inventory management and closer interaction between firms at different stages of the supply chain mean companies’ stocks are in better synch with the economy
than ever before, giving us a better alignment between manufacturing activity, inventory levels, and economic health.
JPMorgan Chase’s Hensley says that
consumer demand has firmed up in recent months, which "would set the stage for a stabilization in manufacturing and the economy towards mid-year."
Some companies already are seeing flickers of reviving demand. FedEx Corp. last week predicted companies would start replenishing depleted inventories later this year, helping keep the economy from shrinking further. The Memphis, Tennessee-based package-shipping company is a bellwether for the U.S. economy because it delivers everything from documents to manufactured goods such as clothing and auto parts.
Nissan has announced it will begin to increase production of new autos next month. Toyota, the world's largest automaker has indicated it will do so in May, when it introduces new models.
Norbert Ore, chairman of the Tempe, Arizona-based Institute for Supply Management’s manufacturing business survey: "It’s time to start to think the supply chain is getting control of inventories."
It is hard for us humans to see the dawn is coming when the clock says it's 4AM. But the roosters know.
Turning (and continuing animal metaphors) to the gorilla in the room -- financials -- today Secretary Geithner will unveil an approach designed to release
$100 billion of bailout money to spur investment funds to purchase -- and banks to unload -- the illiquid securities and loans that have caused credit to dry up. The Treasury, Federal Reserve and the Federal Deposit Insurance Corp. will all play a role alongside private investors in aiming to buy between $500 billion and $1 trillion of troubled assets.
"By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Geithner said in an op-ed piece published in today’s Wall Street Journal. "The ability to sell assets to this fund will make it easier for banks to raise private capital."
Like manufacturing closing down has depleted inventories and will spur growth in the face of dawning demand, a similar process has occurred in the financial industry. Credit has closed down and money has been pulled out of stocks or lending deals in favor of refuge in US Treasuries. But Geithner's announcement of a big infusion of dollars to purchase toxic assets is designed to drive investor's capital out of treasuries (whose yields plummeted last week on the announcement of things to come) and into stocks. . .into risk. . .into lending.
Geithner's plan, which he will detail today, will have three major parts:
. . .1) a public-private partnership to back private investors' purchases of bad assets. The $700 billion bailout fund would provide the backing. The government would match private investors dollar for dollar and share any profits equally.
- expanding a recent Fed program that provides loan for investors to buy securities backed by consumer debt. It's an effort to make it easier for people to get auto, student and credit card loans. The Term Asset-Backed Securities Loan Facility (TALF) program is getting up to $100 billion from the bailout fund; that money then is being leveraged to support up to $1 trillion in Fed loans. Under Geithner's plan for the toxic assets, part of that $1 trillion would now go to support purchases of banks' troubled assets.
- using the FDIC, which guarantees bank deposits, to purchase toxic assets. Officials said the agency would create special investment partnerships and then lend them money to buy up troubled assets.
The major thrust of these policies will be to encourage (if not force) the private sector to establish the value of toxic assets by making safe havens (Treasuries) so unattractive (near 0% yields) that money leaves "the nest" in search of a new home (stocks, mortgage paper, consumer credit, business loans) where the returns on investment will be higher.
And bad tasting as the AIG bonuses are to us Main Street dwellers, Wall Street insiders tell us that paying $165M in bonuses may have saved us taxpayers $1.6T.
The crippled financial services firm had written into its $1.6 trillion book of derivatives a clause that would have put most every one of its mortgage-backed securities and CDS in technical default if the company reneged on making any payout greater than $25 million, according a white paper AIG filed with Washington on March 13.
The $165 million bonus package qualified as such a payout, according to the seven-page white paper, which was reviewed by The Post.
"AIG Financial Product's derivatives portfolio stands at about $1.6 trillion and remains a significant risk," AIG wrote in the document, which was sent to Treasury Secretary Tim Geithner.
"Failure to pay the required retention payments [bonuses] therefore could have very significant business ramifications," it said.
The document went on to lay out: "A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million."
(snip)
In addition, during the two days of Congressional testimony by Ed Liddy, AIG's chief executive, there was no mention of this trigger by any participants just mea culpas on having to pay them.
Liddy's actions appear to back up the scenario, since he testified that he was repulsed by the bonuses, but paid them and asked the execs to return the money. That action prevented a default.
The AIG white paper seems to lay out specific reasons for the payments being made facing likely defaults on the $1.6 trillion of insurance it wrote.
CDS are quasi insurance products written to cover any shortfall realized in the high returns promised by the MBS purchased by investors.
If the NYSE is any indicator, the past 10 trading days have indicated that investors are willing to take on more risk, as Geithner's plan is intended. Another good sign is that crude oil prices have risen. From record highs mid-last year of $147/bbl, prices fell in November 2008 below the "magic" $50/bbl and hovered in the $30-low $40 the first quarter of '09, but have stabilized around $50/bbl once again. Thirdly, the decline in steel prices slowed considerably in February 2009, seemingly fulfilling an economic prediction made last December that after plummeting more than 50% at the end of 2008, they could recover in March of 2009. This may be the case, as we see from reports in China, which hint that the bottom, if not acquired, is near.
Yes, we're in a bucket that has dropped down a well. During the descent and free fall it has become blacker and blacker. By now, we're all wondering if Obama and Geithner are going to be able to grab the spinning handle and wind us back up to the top, or if we're going to splash down, spill out, and drown at some unfathomable bottom.
Looking at some of the technical indicators beyond economic theory, it appears that someone has been able to grab the handle and is putting a brake on its spin. As we all know, it's a hell of a lot easier to drop a bucket down a well than it is to wind it back up again. Don't expect an economic recovery to happen faster than the collapse did. Entropy say that's impossible. Don't expect to return to the economic boom years where values went higher and higher and investment values rose and rose. Expect a slow and gradual recovery to a more stable but healthier economy to be visible to Main Street, like the dawn, toward the end of this year. Be prepared for a bumpy, diving and dipping 2009 with continued unhappy job losses, business failures, and bank closures. Steel yourselves, grow some spine. Turn away from the Ultimate Doom Sayers and absorb the improving economic indicators. See the light.
We elected a president to lead us out of the doldrums; let's support that president by going forward with him and join in making the recovery a reality by the next elections in 2010. What could be sweeter than being a Democratic candidate for office then? All you'll have to run on is, "I endorse and support President Obama's policies on economic recovery, which have proven to be the right ones, unlike the Republican leader, Rush Limbaugh, who wants those policies to fail." That Democratic candidate will be on the winning side. Hands down.
And so will we all.