Have no mercy, Junk'em all

Eliot Spitzer in Slate magazine is close to suggesting a serious rethink on the massive US bailouts of giant financial institutions. He asks -

“The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector”.

The great irony is that our new place in the global economy is a direct consequence of our grand victory over the past 60 years. We have, indeed, converted virtually the entire world into one integrated capitalist economy, and we must now bear the brunt of serious and vigorous competition. In the immediate aftermath of World War II, the United States was essentially the only nation with financial capital, intellectual capital, skilled labor, a growing middle class generating consumer demand, and a rule of law permitting safe investment. Now we are one of many nations with these critical advantages.

But even more important, from a structural perspective, our dependence on entities of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts. In that case, vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive. It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.”

It’s a refreshingly different take from most arguments that favor a bailout just because America needs its lenders that are too big to fail, no matter how imprudent they were. Here is Spitzer calling a spade exactly that. Have no mercy, junk’em all…

Grouping recession

Can recession be grouped as good and bad? It appears so. Prof.Ray Barrell of the National Institute for Economic and Social Research, a London-based think tank, has two pieces of bad news. The first is that this is the wrong sort of recession: Because it was precipitated by a banking crisis, consumption may well fall much more dramatically. That's plausible: Consumers who want to smooth consumption can't borrow to do so. It is also what has happened during the 14 banking crises, in various high-income countries, that Barrell and his colleagues have studied.

The second piece of bad news relates to the first. Because consumers were already borrowing heavily in the good times, both credit constraints and a long-overdue realism are likely to bite all the more deeply. That, too, is a tendency Barrell finds in the data.

Of course, as the lucky sellers of herbal Viagra are alleged to be discovering, when consumer spending falls, some products do well and others do very badly. Nervous retailers looking for cues might wish to pick up research from the 1990s in an article by economists Martin Browning and Thomas Crossley called "Shocks, Stocks, and Socks." They find that when people are unemployed, they save money in a logical way by not buying "small durables" such as socks and, indeed, clothes in general. In the short term, people get by and save about 15 percent of their household budget. When they find a new job, they replace the tired old socks.

Bad news for Gold Toe, good news for sellers of needles and thread.
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