Sunday, May 23, 2010

Is the sky falling?

After the operation, Mrs. Weiner was told by her doctor that the operation was a success but that the recovery period would be long and challenging. “You will be improving, but there will be set-backs. There will be times when your temperature rises, you will experience pain that comes and goes, and your strength will oscillate. There will be some days when you will have to stay in bed.” The first day back at home her temp went to 101 and she panicked. Doctor, what’s wrong? Please help me!
What are we to assume about Mrs. Weiner? Does she have a bad memory? Does she not trust her doctor? Or does she simply have little experience with this kind of recovery and isn’t so sure that 101 degree temperature is something to ignore?
This little scenario seems appropriate for our current situation with global stock markets. Didn’t we all hear that this would be a rough recovery? Didn’t we know that the road to economic health would be long and with times of regression? Was the latest batch of bad news really enough to cause such panic in global stock markets? Are things about to get much worse? I don’t think so, but there is much we need to attend to as a nation before these apparently disproportionate attacks subside.
Think about all the tidbits of news you have heard about the economy in the last few months. No, the news did not make us want to light firecrackers or pop champagne corks – but it has provided some reason for confidence. Inflation seems well under control, employment may be firming, earnings have been decent and sales have been growing. Compared to a year ago – clearly the news from Main Street has been quite cheery.
So what’s all the fuss about in the markets? Much print has been devoted to our friends in Europe. Some relevant news relates to Asia. But it is hard to believe that this could have caused such chaos in financial markets. Asia is growing so rapidly that we are worrying that they may need abrupt pullbacks in China, India and a few other places. Too much strength hardly seems a reason for the value of wealth to decline as much as it has. Mudslinging in Europe also seems unlikely to cause the financial earth to move. It really isn’t news that Germany plays to its own drummer. The script has been the same for at least 50 years. Some event calls for more control in Brussels and it takes a lot of time and sausage on the wall before the members of the EU (now 27) give up a little more of their independence.
I know I make light of the current challenges – but I find it very hard to believe that the euro or the EU is going to disappear anytime in the near future. Would Spain really have done better this year if they were not in the EU? Sure, the peseta would have depreciated -- but my guess is that it would have dropped like a rock – not something anyone in Spain would have enjoyed. They know they are much better borrowing the credibility of the union than off on their own with one more tool of macro policy! The last time I looked, countries are lining up to be part of the euro – not asking to leave it.
So what’s the rub? Why are stock markets crashing down around our ears? I think it has something to do with the fact that most of us don’t trust our economic doctors. They tell us they fixed things but all this is pretty new to most of us. If you have some financial wealth you want to protect it. When times are good you want the money generating nice big returns. But the second you think that things are going to worsen you sell and put the money in safer places. We have our collective ear to the ground for the slightest hints of a rumble of trouble.
Will this ever change? I think so, but it will take a while. First, we know this will be a long recovery. Until employment is rising in a sustained way, we are going to be skeptical about Main Street. I am optimistic that we are not so far from that point. Second, we are still watching various governments work on financial market fixes – legislation that changes the way that Washington or Paris or Brussels interacts with the world’s banks and financial institutions. We don’t want these companies to cause another financial crisis – but we also don’t want them so hamstrung that they can’t do their jobs. This regulation is slow coming. It will take some time before the public trusts that it will be done right.
Finally – while Greece and a few countries have bitten into fiscal reform – the rest of us have done very little to stave off a future attack from what are now colorfully called bond vigilantes. It is real to worry about the fiscal health of the US. Recently a couple of good economists – Alan Blinder and Martin Feldstein – independently wrote articles ( ; )suggesting that it is not too hard for Congress to show good faith with respect to fiscal problems. They argue for tax and spending changes that could be announced today but which would begin to bite in the near future. Such legislation, however, would take compromise by both political parties – something which appears impossible today. Until the fiscal imbalance is dealt with, I suspect Mrs. Weiner would be crazy not to call her doctor as frequently as her symptoms arise. She will be nervous for quite a while and so will we.


  1. Hi Larry,

    I have to disagree with the basic thrust of your post. At best I would say signals about the economy, both at home and abroad, have been mixed. Some would claim that it is not so much that inflation is under control, rather that we are dangerously close to deflation. Commodities like metals and oil have been declining. For oil in particular this is strange since we are entering the summer driving season; something I can't ever recall happening.

    China's lack of transparency in economic terms is as troubling as ever. India has been having a real estate bust perhaps as significant as the one in the US. Spain and Portugal have suffered even more.

    But my biggest gripe is about your last claim that the US (and perhaps by implication the world) will bite the bullet on spending money we do not have. For my lifetime the US has been spending, and promising to spend, way more than we have. Not to let previous pols off the hook, but the current administration does seem to make peeps like Bush pikers. Greece has been burning cars in the streets and unions say they will strike next week. Spain, Ireland, and the other weak sisters in the EU can't possibly repay their debts. Germany complains the recent bailout only kicked the can down the street. It seems to many the debts will have to be written off since they can not be paid back.

    Once there are defaults of this magnitude it seems unlikely to me that Western nations will be able to put promised social programs on the credit card. Not to mention they will no longer be buying as much from China and India.

    Maybe if congress had passed a budget I might share you bright outlook. But I don't see a budget before the election, and my guess is there will be lots of new faces in congress; but no majority to enact tax and spending changes.

    It looks like more of the same to me. As Maggie Thatcher said "the problem with socialism is that sooner or later you run out of other people's money to spend". This is what happened to Greece. The weak sisters in the EU look to be next. The US can not prop up EU countries running out of other people's money; not only for political reasons at home, but also because we are running out of money to spend here at home. China may be unwilling or unable to keep lending us money as well.

    Sorry about the long rant, but I am more worried about the cause than the symptoms. And it looks to me like the cause is spending more money than we have.

  2. Mike, I never meant to say or imply that the US or anyone else would "bite the bullet on spending money." What I tried to do is explain what I meant by my last sentence where I say that we will be nervous for quite some time. Negative stock market outcomes like last weeks will NOT end until government does something about financial reform and government budget deficits. It is a conditional statement. I never implied that government's would do the right thing. Thus my conclusion -- bad stock market days will continue.

  3. Here's one hooray for the "bond vigilantes"! May they continue to strike fear into governments worldwide. Why is everyone so worried about a default in Greece? I know it would be a blow to the gut for most of them (and perhaps a death blow to some of the weaker ones).

    But why is it the end of the world if holders of Greek debt were only to get 30 cents or so back for every Euro they hold in Greek bonds? They bought the freakin' things from Greece!!!! Either they did not do their due diligence OR they knew all along that Eurozone and the ECB would not allow a euro member to default!

    I'd say the latter is the more likely scenario. Let Greece default and let the bond holders take it in the 'nads for once instead of the taxpayers (and small investors in the U.S.)!

  4. Too clarify the last 2 sentences in my first paragraph: "them" are big German and French banks.

  5. Hi John,

    The problem with a Greek default is not that the EU banks would take a bath. Rather that credit default swaps were issued to cover the bank losses. Those credit default swaps were issued by AIG which is a wholly owned subsidiary of obama and the US tax payers. So the banks would get their loans repaid from taxes from US tax payers. How is that "too big to fail" thing working out for you?

    Just as an aside, more good news; the DOW just dropped below 10k.