Cross-posted from Slobber and Spittle for comment and correction as needed.
So says an op-ed in last Sunday’s Washington Post:
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.
Note the term "free market economists". These are the sorts of folks who were telling us a few months ago that everything would right itself in the end, if only we trusted the magic of the markets. Guess what, there was no magic there. As Richard Sale wrote the other day:
The middle class is anxious, the rich are defensive, the poor are humiliated angry and suspicious. The national outlook is grim and the bulk of Americans are having to endure a period of contraction and anxious fear. But leaving out the anguish of the human toll of this vast economic failure, one of the most dismaying feature[s] of the current discussion of our plight in the media is the ineradicable staleness of its terms – it is as though the crisis of the 1930s had not happened.
Today in the Allentown, Pennsylvania Morning Call, there is an article about job hunting in the Lehigh Valley:
Nationwide, employers cut nearly 600,000 jobs in January alone, the most since 1974.
In the Lehigh Valley as well, 2008 has been one of the worst years in decades for the local job market. The number of local residents out of work was the most since at least 1990. In 2008, the region’s employers cut 4,700 jobs, the most in at least 18 years.
"It’s getting very hard," [Lehigh CareerSight overseer Nancy] Dischinat said. "Even employers that are holding their own — that usually at this time would be hiring — just aren’t."
The labor market is unlikely to recover soon. Hiring usually is among the last components of the economy to recover after a recession.
Approximately 250,000 people live in that area. To lose 4,700 jobs is a considerable setback. In the Puget Sound region of Washington, which has roughly 1.5 million people, the outlooks is much the same. Both Boeing and Microsoft have announced layoffs of at least 5,000 workers in the last month. The only good news I can find is that, according to Caspio, an online database that tracks layoff announcements, there were no new ones this week. The Los Angeles Times has a story today about a lawyer who has been looking for work for a year. The story notes that there have been significant layoffs of lawyers across the country. Lawyers are usually "recession proof".
Even to an idiot savant economist, it’s clear we haven’t hit bottom yet.
The WaPo article was written by Matthew Richardson and Nouriel Roubini, two professors from New York University. They go on to write that the banks are in so much trouble right now is that there is just too much unsecured, and presently unpayable, debt out there:
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion — including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans — is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.
Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.
But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks’ assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.
The irresponsibility required to create so much bad debt is breathtaking. According to the CIA World Factbook entry for the United States, our total gross domestic product was about $14.5 trillion last year. The sums Richardson and Roubini are talking about come to more than half of that. Needless to say, the banks and other financial institutions deserve much of the blame. They’re not the only ones, however. As I’ve written before, some of the blame goes to Congress and previous presidential administrations for allowing the industry to go unmonitored for so long. But then, we Americans are the ones who, as a group, continued to borrow even when we shouldn’t, and we are also the ones who didn’t pay enough attention to what our government was doing. In the end, the responsibility is ours.
We were also the ones who allowed our manufacturing and services industries to be shipped overseas. Rather than fix the environmental problems with the semiconductor and steel industries, we let them be shipped elsewhere. The employment that created the highest-paying jobs for us working stiffs were shipped to countries that didn’t bother to enforce employment laws, and took a dim view of labor unions. Now we know the answer to a question that’s been on my mind for some time: How can an economy cast off its ability to make things, and instead live on ever-cleverer "financial instruments" and "intellectual property" to sustain itself?
The answer is now clear: It can’t.
My entirely uninformed opinion is that what we’re going to see is our perceived economy and wealth shrinking to something close to its true size. That process in itself won’t be pretty, but we can make it a less painful one. The question is whether Americans will take their attention away from chicks in bikinis, celebrity gossip, and other meaningless tripe long enough to make those decisions.
I don’t know enough to say whether nationalizing banks is the best approach to this situation or not. Some would observe that there are at least a few banks that are effectively nationalized already. All I know is that I’m by no means opposed to it, as long as it’s a temporary measure, and is followed with a more diverse and well-regulated financial industry when it’s returned to private hands. The banks became too concentrated, and thus too big to fail. That’s one clear lesson from all of this. We can talk about letting those banks fail, but the cost of that seems potentially much greater than the cost of propping them up or absorbing them into the government.
What I am sure of is that the idea of treating much of this debt as somehow "toxic", as though someone drove a single-hulled tanker of it into the banks and sank it, is wrong both rhetorically and in practice. Whatever can be salvaged must be, either at the same price over a longer payment period, or at a diminished price. President Obama is talking about some sort of mortgage relief for consumers, and this would be a big part of resolving that issue.
But we must never forget that these "toxic" assets were created by our often deliberate lack of foresight, not an accident of nature.
For quite some time now, it’s been fashionable to bash the inefficiency and clumsiness of government institutions. Speaking as someone who has had an up-close look at how the government operates, I can tell you that much of it is well deserved. But what should be abundantly clear from all this is that saying that businesses are more efficient is disingenuous at best. As Patrick Lang observes:
Roubini and Naseem Taleb (the Black Swan man) were on CNBC last week impatiently explaining to the money honeys and intellectually challenged staff pomposities that the financial system is so broken that it will not reconstruct itself and that the reason the financial system is broken is the unfortunate truth that it is largely populated by even greater (and often equally challenged) pomposities as the staffs of the 24/7 business news channels. The news pomposities are those men of wisdom who bleat the numbers of the day and hope for a rise in the markets.
The big beggar banks are driven by people for whom greed and arrogance are the hallmarks of likely success in the "bidness." Roubini says it simply – "Nationalize the big banks now, or nationalize them later under worse conditions."
Greed and stupidity at many levels, and among many different groups of people, contributed to this problem. While it’s sad that this is so, very few of us have cause for complaint. This is why paying attention is so important. This is why being involved is so important. It’s also sad that the ones who were paying the least attention will be among the ones complaining the most about whatever solutions are attempted.
I wonder how much the Swedes complained …