Buttermilk & Molasses

Are You Freaking Kidding Me, Mr. Chairman?

We're in the midst of the largest recession in almost a century, barely faced down the unraveling of the global economic system and watched a $8 billion housing bubble settle down around the heads of 16 million unemployed Americans, and the friggin' chairman of BB&T Corp. has the gall to blame all of it on the government?

Here's BB&T's John Allison at yesterday's Virginia Chamber of Commerce conference:

"All were misled about housing," he said. Residential real estate was overbuilt by $8 billion, and prices rose on average 30 percent more than the market could bear.

"Without Fannie and Freddie, we wouldn't have had the housing bubble," he said. "Only government can make a mistake of this magnitude possible."

Way to take accountability -- for anything. It's good to see people washing their hands and pointing their fingers, especially after they benefited so directly from the mistakes and warnings they blindly ignored.

The real irony? Earlier in his talk, Allison talked about "a lack of personal responsibility."

Maybe John Allison could issue a loan for a slice of humble pie.

The Great Unraveling: Krugman's Economic History Lesson

Leave it to Paul Krugman to cover 300 years of economic history as part of a NYTimes Magazine piece. His thesis? Modern economists -- you know, the ones who called the end of economic theory a few years ago? (A few years after the historians who cheered "the end of history" were mocked by current affairs.) -- need to hit rewind, accept that life is messy and that there are no neat solutions to human interactions, and that bubbles happen.

It's a great bit of history and analysis, and well worth the time of anyone trying to get their head around the fact that the smartest guys in the room were, well, not so smart after all.

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: “There is always an easy solution to every human problem — neat, plausible and wrong.”

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won’t be neat; but we can hope that it will have the virtue of being at least partly right.

The Great Unraveling: Cheerful News from My Favorite Prognasticator

Sometimes John Robb makes so much sense he makes me want to get off the grid as fast as possible. His latest contrarian post argues very succinctly that economic recovery is not around the corner; things are too fragile.

The driver of this fragility is that 75% of a typical American families budget (not counting education costs of kids) is dedicated to fixed expenses.  This means that the loss a small as 10% in a family's income would be sufficient to force failure.  Combine this fragility with increasing income volatility and even the slightest shock will set off a wave of extreme frugality and mushrooming financial failure at the household level.  In the past, we were able to hide this fragility through increased debt/bubbles.  That's over.   We've already taken on as much debt (375% of GDP right now, and still climbing) as we can acquire and the banks are hoarding the bulk of federal cash infusions to paper over their insolvency (almost all of the toxic assets from last fall's debacle are still in place, and more are en route from commercial real-estate).

Robb's diagnosis? Retail sales will not recover in the near future, which will continue a spiral that will drive down home prices and drive up unemployment -- which will drive down retail sales even more, and so on.

From where I sit, Robb's leading argument makes sense. We recently sat down to look at our own family budget to discover that essentially 80% of what we spend is fixed -- and not easily discarded. When I was growing up, trimming around the edges of our lower middle income family budget could create sizable savings in expenses; not anymore.

I'm not sure how I feel about his following argument -- the one that maps out the impact of this loss of budget flexibility. The potential fallout is pretty huge, but I'm also aware that there is a huge amount of wealth (imaginary and otherwise) being pushed around the board just out of our sight. Presumably, to keep the world economy from going to the dogs Robb sees howling at the door.

The Great Unraveling: 30 Months. 5.5 Million Jobs. A Graphical Look.

Slate and the Washington Post teamed up to dump 77MB worth of county-by-county employment data from the Bureau of Labor Statistics into a graphical, time-lapse look at job loss across the United States between January 2007 and this summer. The maps show two things -- both pretty astounding.

First, that job losses started gaining traction long before most of us were paying attention -- especially in more industrial corners of the country. That's what the first map (above) shows with its blue job gains bubbles surrounded by small, pink job loss clusters.

The second thing the maps show is that our country is now one gigantic red blog of job loss activity. See the second map (below) and wince.

The obvious question: If it took 30 months to turn all that blue into red, how long will it take to repaint that map again?

The recession may be slowing, but we've got a long slog ahead of us.

The Great Unraveling: Bless Paul Krugman, Keeping Us Honest

If Paul Krugman didn't receive the Nobel Prize for Economics last year for what he knows about economics, he ought to get one for explaining politics. Today, Krugman inked a spirited defense of Big Government's half-assed rescue of the economy -- defense in the sense that a recession is an awful lot better than a second Great Depression, which is where he (and others) suggest we were headed last winter.

The key point in Krugman's NYTimes piece is that an active government is what kept the economy from spinning completely out-of-control, and that short-term revisionists on the Right and the Left should stop their carping. (I mostly like the fact that he put the sentence "Ronald Reagan was wrong" in print.)

So what saved us from a full replay of the Great Depression? The answer, almost surely, lies in the very different role played by government.

Probably the most important aspect of the government’s role in this crisis isn’t what it has done, but what it hasn’t done: unlike the private sector, the federal government hasn’t slashed spending as its income has fallen. (State and local governments are a different story.) Tax receipts are way down, but Social Security checks are still going out; Medicare is still covering hospital bills; federal employees, from judges to park rangers to soldiers, are still being paid.

All of this has helped support the economy in its time of need, in a way that didn’t happen back in 1930, when federal spending was a much smaller percentage of G.D.P. And yes, this means that budget deficits — which are a bad thing in normal times — are actually a good thing right now.

In addition to having this “automatic” stabilizing effect, the government has stepped in to rescue the financial sector. You can argue (and I would) that the bailouts of financial firms could and should have been handled better, that taxpayers have paid too much and received too little. Yet it’s possible to be dissatisfied, even angry, about the way the financial bailouts have worked while acknowledging that without these bailouts things would have been much worse.

The point is that this time, unlike in the 1930s, the government didn’t take a hands-off attitude while much of the banking system collapsed. And that’s another reason we’re not living through Great Depression II.

Eat. Drink. Play. Sleep. Locally, Not Globally.

Two efforts are beginning to gain traction in the shopping corridors of Richmond, both focused on encouraging Richmonders to spend their cash with local merchants. Karri Peifer at Richmond.com wrote about The 3/50 Project last week and the locally driven Think/Shop/Buy/Local campaign this week.

Last week, Peifer wrote:

The 3/50 Project is a grassroots movement only a few months old dedicated to "saving the Brick & Mortars our nation is built on."

The concept is pretty simple. It asks shoppers across the country to pick three independently owned businesses they would miss if they disappeared and to try and spend $50 a month shopping there (collectively).

If half the population of Richmond and its surrounding counties committed to spending $50 a month in locally-owned businesses, it would generate $25 million in revenue, the majority of which would stay right here in town.

I mentioned earlier this week that my 3/50 choices were all coffee shops with two local grocery stores tossed in as consolation prizes.

Peifer follows on this week with a look at the Retail Merchants Association campaign.

The Great Unraveling: It Ain't Over 'Til It's Different

Economists over the past year have talked in the visual language of the alphabet -- is the current recession a "V" (fast decline, fast resurgence) or a "U" (fast decline, flat creep, quick rebound) or a "W" (down, then up, then down, then up)? More pessimistic observers talk Canadian -- the recession as a hockey stick, which is to say an extended flat market with a moderate bump at the end.

Robert Reich thinks we're in an "X" market:

My prediction, then? Not a V, not a U. But an X. This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin.

If Reich is right, we're in for a few long years of uncertainty, fits and starts, and questionable reinvention as government and corporations continue to try to apply various adaptations of old solutions to what increasingly is becoming a different model.

The Great Unraveling: Economics as the New Cold War?

I couldn't turn away from global strategist John Robb's latest piece for World Politics Review when he kicked it off with my favorite diplomat, George Kennan. (And don't tell me normal people don't have "favorite diplomats".) Robb offers a send-up to Kennan that uses Kennan's ephemeral 1947 telegram that essentially shaped a half-century of U.S. foreign policy as a filter through which to examine the 21st century.

The new enemy? Global economics.

In a nutshell, Robb argues that our new global economic system is overconnected and "dynamically unstable"; that nation-states are becoming irrelevant; and that new emerging groups will prove to be more agile and disruptive than we can imagine. It's a glum assessment, and Robb argues that we've hit the point of no return:

It's unlikely that we will see any reversal in the spread of the global supernetwork. To the contrary, it will continue to expand, complexify, and intensify. As a result, the nation-state as an organizational system will continue to weaken, shocks and disruptions will occur more often, and super-empowered oppositional groups/networks will organically proliferate. In sum, the only policy solution that could possibly work is one that attempts to limit the spread of chaos at the lowest possible cost.

Bleak, no? His solutions are not as depressing, but they seem unlikely to rise to the surface absent some additional economic and structural pain.

The Great Unraveling: Misread, and Possibly Still Misreading

It would not have been as disconcerting to hear Vice President Joe Biden acknowledge that the Obama administration "misread how bad the economy was" if he had used the present tense. Biden's candor on ABC's "This Week" is likely to find itself walked back by various administration representatives in the coming days, but I think the comment is a telling indication that the White House's fiscal guys still see this recession as a catastrophe averted, rather than one still in the process of developing.

As an independent business owner, there is nothing I'd rather see than an economy on the mend, but that's not the reality I see stretching ahead over the next few years. The private sector is still trying to untangle itself from the ropes -- and we're just starting to see state governments and the nonprofit industry grapple with serious revenue shortfalls. And with another $40 to $70 trillion remaining to bleed out of the current global system (compare that to the $14 trillion GDP of the United States, and wince), we've still got a ways to go -- and few signs that the policymakers are inclined to act.

Here's a micro story: I've now spent eight weeks with two groups of unemployed workers in the Richmond area, focusing on helping almost 100 people regain their footing in this economy. These groups skew older, white and more educated -- people at the peak of their earning power, who now find themselves nearing retirement with 401k plans slashed (or cashed to pay the bills) and almost no easy opportunities. This snapshot mirrors what I'm hearing from other markets around the country, and my sense is that come 2011 these displaced workers are going to find themselves making $20-40k less than they were making in 2007. If they're working at all.

Nassim Taleb, who has drawn attention for his book Black Swan and for his anticipation of this global economic unravelling, said last week that we're "in the middle of the crash".

Taleb, who came to prominence for his early warnings about the dangerous practices at financial institutions, instead directed the discussion toward the big picture, voicing his concerns about the direction of the economy and public policy. "The system is very fragile. You may have green shoots or whatever you call them . . . but you're still in a world which is breaking, and that world should break. Nature breaks anything that's too big," he explained. As finance became increasingly reliant on exotic products and high leverage ratios, complexity grew far beyond what regulators could understand or should have allowed.

As a result, there is excessive leverage in too many parts of the world; Taleb estimates that $40 trillion to $70 trillion globally needs to be deleveraged. The United States annual GDP is approximately $14 trillion. Until the financing problem is solved, it's going to be difficult to resume normal, healthy growth. "We're in the middle of the crash, so if I was going to forecast something, I know it's going to get worse, not better . . . You're going to have much less leverage in the system."

But Taleb is not convinced the process is fully underway. Rather than working off debts, he says the government is looking to inflate asset prices through stimulus plans.

Taleb's concerns echo those of John Robb, a global analyst whose doom-and-gloom scenarios toy with my own penchant for hyper-realism. Today, Robb pointed me in the direction of Ambrose Evans-Pritchard's latest demoralizing piece in the Telegraph:

The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is now 18.2pc, counting the old-fashioned way. The reason why this does not "feel" like the 1930s is that we tend to compress the chronology of the Depression. It takes time for people to deplete their savings and sink into destitution. Perhaps our greater cushion of wealth today will prevent another Grapes of Wrath, but 20m US homeowners are already in negative equity (zillow.com data). Evictions are running at a terrifying pace.

Some 342,000 homes were foreclosed in April, pushing a small army of children into a network of charity shelters. This compares to 273,000 homes lost in the entire year of 1932...

...What is so disturbing is that governments have not even begun the spending squeeze that must come to stop their countries spiralling into a debt compound trap.

French president Nicolas Sarkozy, with a good nose for popular moods, says: "We must overhaul everything. We cannot have a system of rentiers and social dumping under globalisation. Either we have justice or we will have violence. It is a chimera to think that this crisis is just a footnote and that we can carry on as before."

Evans-Pritchard concludes:

We are moving into Phase II of the Great Unwinding. It may be time to put away our texts of Keynes, Friedman, and Fisher, so useful for Phase 1, and start studying what happened to society when global unemployment went haywire in 1932.

The Great Unraveling: A Change in Investment

John Robb is best known for his work on a little something known as 4GW, or fourth generation warfare, in which the lines are blurred between civilians and combatants, between conflict and economy, between politics and terror. In recent months, Robb has been exploring the global economic crisis with a perspective that we're not likely to be making a comeback from the meltdown.

He's started to flesh out some of his theories on how local resiliency can help individuals and communities maintain some equilibrium in the white water. Today, Robb argues that the new frugality -- American consumers become savers, for a variety of reasons -- means that economic growth will be flat even as commodity prices spike. As a result, the financial markets (including your once-coveted 401k) will be the worst place to put money.

Robb suggests that people and communities put their money into local (read: more easily controllable), productive assets -- like electricity generation and food production.

The judo move to pull this off is the creation of community -- county, town, neighborhood, etc. -- funds/mechanisms that enable individuals to move a portion of their tattered/depleted tax protected savings in IRAs/401ks into accounts that build/own/operate local solar energy production and food production.  At the entry level, the capacity required is only aimed at one customer: the investor.   With the long lead time and preferential treatment of tax deferred retirement savings, this mechanism has the ability to offset the extremely long payoff cycles of local solar/food investments and thereby turn cost centers into savings vehicles.