The Down Turn

An interesting article about what caused the economic down turn

From Cato:
The U.S. Didn’t Cause the World Recession
Posted by Alan Reynolds

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.” Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular. “Already,” he says, “this illness has spread to the global economy.”

Already? Industrial production in Japan began collapsing in November 2007, two months ahead of the U.S., and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong. By no coincidence, that was when the price of oil rose as high as $145 a barrel. Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption. Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude , “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):
U.S.
-0.2%
France
-1.0
Germany
-1.6
Britain
-1.8
Italy
-2.6
Japan
-4.6


Does it make sense to blame the largest declines in GDP on one country with the smallest decline? If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter). If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP. But falling exports subtracted 2.84 percentage points from fourth quarter GDP. Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

GM

From Hit and Run on the GM, Chrylser Bailout:

GM, Chrysler to Gov't: Give Us More Money Now. Or More Money Later. But Definitely Give Us More Money.
Posted on February 18, 2009, 8:30am Nick Gillespie
There's a reason why GM and Chrysler announced their long-awaited, much-anticipated restructuring plans (the homework requirement for taking taxpayer loot last year): The plans pretty much model the Saturday Night Live sketch in which automakers explain to Congress that they will need more federal dollars even or especially if there's an uptick in the car business.
From the Detroit Free Press:
General Motors Corp. and Chrysler LLC summoned the prospect Tuesday of their collapse unless they get $7 billion in federal aid within six weeks—part of a dramatic plea for a total of up to $39 billion to survive the worst economic crisis in the history of Detroit's signature industry.
Yet the automakers warned that any new money from the federal government would be much cheaper than the staggering cost of bankruptcies and forced liquidation of the two companies. By their estimates, bankruptcies would cost a combined $124 billion in federal loans and up to 3 million lost jobs.
Saints preserve us, I've seen junkies with better raps than that one. Among the options outlined by Chrysler is a merger between it and GM, thus producing the fugliest business baby since Kmart and Sears hooked up.

Rampant Consumerism, The Cure/Disease

I got this from Coyote blog.

I had a blog topic talked about in the video (towards the end): The Republic Of Yellowstone

“Because there is no disaster that immediate, decisive, wrong action cannot make worse”

Now Is Not The Time For Profit, Its Time To Spend

Matt Welch at Hit and Run writes about the bailout of the banks. He has a good summation paragraph on how it's going down:

As President Obama said,

There will be time for them to make profits, and there will be time for
them to get bonuses--now is not that time.

It will likely never be that time, as long as the government is in the
business of running private commerce. Banks will be forced to write 4 percent
mortgages. Automakers will be forced to build magical green cars that spew out 3
million jobs from their exhaust pipes. Airlines will be forced to Buy American,
governors will be forced to spend their budget-filling bounty on unionized
teachers, and newspapers will be forced to run Rahm Emanuel columns. Local
commercial decisions will be made in Washington, based on politics, instead of
by business-owners, based on consumers. As a direct result, the once-autonomous
firms, despite all that fancy money, will get less and less competitive, spend
more and more of their time trying to please Washington instead of their
customers, and will continue coming back for more as long as the well doesn't
run dry. Even if some of the details are off, the general results are as
preditable as a Beltway school closing early on a snow day. Nationalizations
have happened time and time again over recorded history, and their rate of
success is not ambiguous.

I think Nationalization is the crux of the matter. People tend to loose trust in democracy when they realize that what gets them into office (power) can also replace them. Honestly I don't think 90% of the politicians in Washington even realize that what they are doing right now is very close to what was done in the great depression, and will probably ultimately lead to the down fall of our country as we know it. I firmly believe that we are heading for a Soviet Union like crash.

4% mortgage, must be time to buy. Except wait, what happened when low interest rates go back up and the people that overextended themselves getting into the perfect house can't make the new higher interest rate payment? We would all be better off, instead of a 1-2 trillion stimulus to be spent on making sure UAW still gets paid $75/hour, if the government paid off everybodys mortgage.

The Ants Go Marching

At the Cato Blog, there is a good post on the new bail out (since the first 700 billion didn't get the job done). It's mostly about all the lobbyists lining up to get a piece of the pie.

The Stimulus Lobbying Frenzy
Posted by David Boaz

Every company and industry wanted to be sure that it would be eligible for some of the money, and members of Congress worked to slip their constituents and campaign donors into the bill’s 451 pages. By the time it passed, it included special provisions for Puerto Rican rum producers, auto race tracks, and corporations operating in American Samoa (such as Starkist, which is headquartered in House Speaker Nancy Pelosi’s district). It required that insurance companies pay for mental health benefits and granted tax benefits for victims of the 1989 Exxon Valdez oil spill and makers of children’s wooden arrows….

No sooner was the article published than more examples fill the media: “A Republican [in Ohio] called it a once-in-a-lifetime opportunity.” “Cities, towns ready to vie for stimulus funds.” “Road Builders Compete for Slice of Stimulus.” “West Michigan’s stimulus wish list.” “A State with a Wish List for Stimulus Spending.” “Steel industry lobbyists seem to have persuaded the House to insert a “Buy American” provision in the stimulus bill it passed last week.” “JetBlue Goes to Washington to Discuss Economic Stimulus Plan.”

When you lay out a picnic, you get ants. And this is the biggest picnic in the history of pork-filled picnicking.

The reason government bail-outs (in the form of spending) doesn't work is because the more the gov spends the more people save (and thereby don't spend). I believe that spending is what gets out of a recession, but only when the people spend, and that wont happen until the government stops digging us into an insurmountable hole.