Obama adviser says green shoots dead
Posted on 18 May 2009 with no comments from readers
Perhaps Martin Feldstein, a member of President Obama’s Economic Advisory Board was feeling a long way from home in Brazil last week when he spoke negatively but realistically about the economic outlook.
He said: ‘The evidence simply does not support the conclusion that the United States is on its way to a sustained recovery’, adding that the rebound in stock markets was ‘temporary’ because the bad news far outweighed the good.
Stimulus too small
Feldstein told his audience that ‘a one-time rise in GDP due to the stimulus package’ was being extrapolated across the rest of the year. And he said that the $300 billion being spent this year on the stimulus package would compensate for less than half the $750 billion in damage he estimated that the crisis had caused the US economy.
The package is ‘not strong enough, not targeted enough, to deal with these problems’, he noted. You have to admit expecting government spending to produce an instant and rapid recovery always looked a bit of a long shot. There are more dangers ahead.
The president’s top economic adviser warned that one-third of mortgaged US homes were now worth less than their loans, risking a wave of defaults and a downward price spiral. There was also a risk of a currency crisis because of the trade deficit and economic problems in Europe ‘equally bad if not worse than the US and Japan has been hit even harder’.
Readers from Europe or Japan might care to add that their own banking problems could make the US banking crisis just the tip of a global iceberg. In any event the US banking system is far bigger than the 19 banks that have been stress tested thus far.
Hope for 2010
Feldstein’s judgement was that recovery in 2010 was ‘just a hope’. It is hard to argue with this conclusion from a government insider and experienced Harvard economist, but it its far from the green shoots optimism of Washington over recent weeks.
GDP has crashed around the world, and fell by 6.1 per cent in the US in the first quarter. Trade volumes have slumped faster and by greater amounts than in 1930 and the Great Depression. US auto giant Chrysler is in bankruptcy and General Motors looks set to follow at the end of the month.
Only a bunch of Wall Street analysts talking up the market appear to have bucked the trend, duping investors into allowing some useful bank equity issues. However, as reality bites back the obvious conclusion is that the talk of green shoots has been nothing more than hot air, and a bear market rally. Reality will now intrude on this party.
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Those housing green shoots snuffed it today:
May 19 (Bloomberg) — Builders broke ground on the fewest homes on record in April as a plunge in work on condominiums and apartment buildings overwhelmed the second straight gain in starts on single-family properties.
The 13 percent decrease to an annual rate of 458,000 was led by a 46 percent decline in multifamily starts and followed a 525,000 pace the prior month, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 3.3 percent to a record low pace of 494,000.
Unfortunately, Mr. Feldstein is probably correct. For far too long many people in the West have lived well, not on earnings, but by increasing debt. Now, with the destruction of the shadow banking system, the debt must be paid. But it was allowed to grow to such an enormous size, that it will be nearly impossible to reduce. If I had to bet, I would expect a huge increase in inflation as a way to reduce the value of the debt. We could easily still see another Great Depression, especially when you consider that, unlike then, the era of limitless, cheap oil is gone forever. That will make a huge difference in any recovery, a critical factor that few have yet realized.
[...] Denninger writes: Congress looks likely to open up the Federal Reserve Act and change some of the operating procedures of the bank for the first time in its almost 100-year history. Many of the regulatory powers amassed by former Fed Chairman Alan Greenspan, a consummate bureaucratic in-fighter, could be stripped away. http://tiny.cc/zSKgb Senate Banking Committee Repub head Dick Shelby admitted, “There are serious, serious…unexamined questions regarding the Fed’s failure to fulfill its pre-existing regulatory responsibilities. With that in mind, I will view with great skepticism any move to give the Fed expanded authority.” Even Marty Feldstein said there were no green shoots last week! [...]