Yikes!

As much as I hate to admit it, occasionally I'm wrong. Very occasionally, I'm extremely wrong.

As gasoline prices drop below $3 a gallon, commodity prices in general crash, and the CPI comes in unchanged, I have to consider the possibility that my fears regarding inflation (and the concomitant stagflation I've ranted about) well may be unfounded. On the other hand, all of us might be in better shape if I'd been right.

Gasoline prices fell because the price of oil is down, due, we're told, to a steep drop in demand. And how much of a drop in demand does it take to bring about a 50% drop in the price of a barrel of light, sweet crude? Since oil is valued in dollars, the calculation is easy -- 50% -- and we know it can't be just from people cutting back the mileage they put on their SUVs.

(Yes, I know -- gasoline prices have fallen by about a third, not by a half. So where has that extra money gone? Give it a little thought. It will come to you.)

Since we haven't exactly gone green in the past few weeks, demand for oil ought to be a pretty good indicator of the world's level of economic activity -- which leads one to surmise that the global economic slowdown might be a good deal worse than we've been told. Also, consider that if the CPI has dropped again the next time the figure comes out, we'll have entered the realm of deflation. Bye bye recession, hello depression.

Apparently, a new stimulus package is in the works. I sincerely hope there are no "checks in the mail" to individuals this time, given how little multiplier effect there was last time. Previously, I called for aid to the states, tied to infrastructure spending, to get the construction trades back to work. Now, I say, just give the money to the states -- no strings attached. A lot of it easily can be spent on infrastructure -- not even by creating new projects, but just by continuing existing projects. Did you ever notice how the roads always seem to get repaired in the months just before an election? Keep fixing those roads, governor! Build us some new schools, and repair some bridges! Even if all the contracts are assigned by patronage, and half the federal aid is used to pay relatively unproductive bureaucrats, people who otherwise might be unemployed will be working instead.

Of course, nobody actually has a clue what's really going on in the economy. Bernanke really seem to be playing it by ear, and Paulson changes direction as often as John McCain. Movement in the stock markets, as you've noticed, is totally erratic. Marketplace should forget about playing "We're in the Money" or "Stormy Weather" when it reports the Dow and the NASDAQ, and just play Willie Nelson's "Crazy" every time.

Way back in my youth, there was a frequently quoted fortune cookie that went something like this:

"May you live in interesting times."
-- ancient Chinese curse

Well, whatever. Life sure is interesting these days -- but I can't help but hope that out of this painful mess may arise a kinder, happier, post-capitalist world.

The next economic stimulus package

As I predicted way back on Groundhog Day, that stimulus package that was supposed to rescue us from economic stagnation turned out to have been a bust. The reason, clearly, is that it was more a product of political considerations than economic considerations. Giving away "free" money always is popular with the public, but it wasn't especially helpful.

To the extent that the cash was used to pay down consumer debt, it may have delayed some write-downs by the banks -- but given the state of American indebtedness, most of those who used their "Bush Bucks"* to pay credit card bills probably were in just as much trouble when the next month's batch of statements arrived.

It seems likely that most of the remaining rebate money was spent on gasoline. The part of the oil company profits that didn't go overseas went to the usual fat cats, and wasn't spread through the economy to any significant extent. The multiplier effect of the rebates, it follows, was insignificant.

Now Democrats are talking about another stimulus package. Mind you, just before a national election is really a very bad time to discuss an economic stimulus because there's no possibility that politics won't play a big role in what takes shape -- but there are a few level heads in the relevant Congressional Committees, so perhaps there are a few rays of hope for a genuinely helpful package this time.

The hardest part will be enacting a package without rebates. A new round of rebate checks will be no more helpful than the last round -- but the temptation to woo voters with dollars may be too strong to resist. If the presidential candidates get on the rebate bus, there's absolutely no hope of putting the money to better use.

To be worthwhile, stimulus spending must be targeted. A good start would be direct financial assistance to state and local governments. State and local governments are major employers, and many state constitutions mandate balanced budgets. When sales tax revenues fall -- and they have fallen fast because of the current recession -- government employees are laid off.

Not all aid to the states should wind up in their general funds, though. Some should be specifically targeted towards infrastructure improvements. Workers in the construction trades were particularly hard hit by the collapse of the housing market, and infrastructure projects could put many of them back to work.

Yes, politically connected contractors, as always, would get the lion's share of the contracts -- but I don't care if certain brothers-in-law profit so long as they are paying worker salaries. In my ideal world, contractors being paid with federal funds would be required to hire union workers, but that's probably way too much to hope for, even if the Democrats win big in November. There still are entirely too many "New Democrats" out there.

If there was anything good about the 2008 Farm Bill, it was the improvement in the Food Stamps program (now to be known as the Supplemental Nutrition Assistance Program for the sake of a snappy acronym), but rising food prices make even more improvement necessary. I also was pleased by the expansion of unemployment insurance benefits. Both programs pump money into the economy at the bottom, where it is certain to be spent, and have the greatest multiplier effect.

In the long run, though, no economic stimulus will be especially effective if it drives the federal government deeper into debt, further depressing the value of the dollar. To the greatest extent possible, federal stimulus spending should be paid for with cuts in other areas. I can think of two places to cut, right off the bat: oil subsidies, and agricultural subsidies. Big oil and big agribusiness have been making out like bandits (an apt comparison) while the rest of America has been suffering.

I'd also suggest changes in the Alternative Minimum Tax: index it for inflation, so that Congress need not go through it's annual ritual of raising the floor amount; and make what essentially is a flat tax progressive, so that the super- and super-duper-rich pay more than the current 28%. Of course, the AMT could be eliminated entirely if Congress had the guts to undo some Reaganomics and create a couple of higher tax brackets for both individual and corporate income taxes.

In brief, I think the people who got us into our current mess should pay to get us out of it.

*(Note: I heard the expression "Bush Bucks" from my daughter. I don't know how widespread its use might be.)

Farmer's market

As our mothers used to remind us when we didn't finish our dinners, people are starving in (fill in country of your mother's choice.) The odds are excellent, whichever country she used as an example, that people are indeed starving there. The price of food is up significantly worldwide, and the very poor can't afford to buy it.

The reasons cited to explain high food prices include increased demand, higher costs of production because of the spike in oil prices, a drought in Australia, diversion of food crops to the production of ethanol, speculative movement of capital from erratic stock and bond markets to commodities, and more. Farmers in both the United States and Europe are earning record profits from sales -- and raking in more cash from government subsidies.

Why, you may ask, should we subsidize agribusiness when it's making record profits? You can't argue that farmers need subsidies, either to stave off bankruptcy or to encourage production.

But wait, cries the farm lobby. If you cut off our subsidies, food prices will go even higher!

On the surface, that seems like a reasonable argument. Look a little deeper, though, and you can find the holes. Farm subsidies by wealthy nations long have undercut agriculture in the developing world. When it costs less to buy cheap, subsidized imports than to grow food at home, local farmers can't compete. The only agriculture that survives is the production of cash crops like coffee, cacao, and coca. Then when imported food becomes prohibitively expensive -- as it is now -- there are no local farmers left to fill in the slack.

In the United States, even programs to provide food for famine victims in other countries have been little more than another agricultural subsidy. The food we provide to other countries, by law, must be grown in the United States and shipped only via United States shipping lines. By the time it finally arrives in, say, Africa, many of those who needed it are beyond help. At the moment, there are proposals to allow "as much as" one-third of U.S. food aid to be purchased in the area where it is needed, but the farm lobby is fighting even that.

There's no reason to think the situation will improve if Barack Obama becomes president. Obama, a loyal soldier in the service of agribusiness, fought hard to preserve the high tariff on imported ethanol when the Bush administration proposed eliminating it. (Would the Bush administration have made the proposal if there had been any real chance of passage? It's impossible to say, but I suspect the answer is no.)

To Barack Obama from an old white guy

A little while ago, I posted the video you can watch above to YouTube, as a response to a video from the Obama campaign which you can watch here. If you don't find my video in the "video responses" section, it means the Obama campaign didn't "accept" it -- that is, decided they'd rather not have it associated with their video.

If you didn't have the patience to listen to me go on for close to ten minutes, here's the gist of it -- I tell Obama that what I really want him to do is undo the Reagan Revolution. I tell him he should significantly raise taxation of the very rich, re-regulate a lot of what's been deregulated over the past quarter-century, and run a government that's actively pro-union. Beyond that, I want him to put government workers back on the payroll to do most of the work that's been contracted out, and I assert that the Iraq War was started specifically so the private sector could loot the Treasury.

Yes, it's one of my usual diatribes, and if it actually appears on YouTube as a response to Obama's video, I'll be flabbergasted -- but there's at least a chance that somebody in the Obama campaign will have looked at it.

The truth is that I don't expect Obama could accomplish what I think needs accomplishment even if he wanted to. The biggest problem I see with an Obama presidency has nothing to do with Obama. Rather, it has to do with the fractious nature of the Democratic Party. Will Democrats in Congress unite behind Obama if he wins? I'm guessing they'll give him all the stunning support they gave, say, Jimmy Carter. Thanks in part to Clinton pulling the party to the right, there are quite a few powerful Democrats who are quite conservative -- and the fact that Congress becomes more and more of a millionaire's club with each election cycle won't much help either.

By the way, I tried to make the video more visually interesting than just my talking head by adding a bunch of stills and animations, some of which are moderately amusing. If you haven't watched it yet, please give it a try.

Dammit!

(Yes, another "dammit" post.)

I guess when everybody's expecting a cut in the federal funds rate, it just has to be cut. The expectations were for a cut between half-a-percent and one percent, so the Fed split the difference. Me, I'm with Fed governors Fisher and Plosser (Dallas and Philly, respectively), who favored a smaller cut. The two were characterized by the Times as "hawkish" on inflation.

Hawkish? I'm not hawkish. I'm scared.

The discount rate also was dropped by three-quarters, which is a good thing because the Fed may be the only place left for American banks to acquire capital. Low interest rates are sure to mean low interest by foreign lenders, especially when the dollars that get paid back will be worth so much less than the dollars invested. If I were the Sheik of Araby with a vault full of petrobucks, I guess dollars might be all I had to lend, though -- making the U.S. the only game in town. On the other hand, at the next meeting of OPEC, the notion of valuing a barrel of crude in euros rather than dollars might seem like a pretty good idea.

How bad is it, Ben?

Only that bad? Well, last year, I suppose, the biggest worry was confidence. If you'd told people we were up Shit's Creek and probably would have to paddle out with our tongues, who knows what might have happened to the economy? Hell, people might have thought all those sub-prime mortgage derivitives collapsing were a real problem, and then how could we have -- uh -- paddled our way out?

Okay, I get it. Fine. But just how bad is it?


Oh! A little worse than you told us, huh? Well, those write-downs by Citi sure had the markets nervous, but cutting the federal funds rate and encouraging even those banks having "no problems" to borrow money from the discount window really should have done the trick -- don't you think?

Except it didn't do the trick. Nobody much wanted to be seen bellying up to that discount window, and the federal funds rate doesn't make a damned bit of difference in a liquidity crisis. Okay, it does encourage certain idiot speculators to bid up stock prices, but that's just short-term action. A day or two later, the idiots are losers -- except for those who found even bigger idiots to buy on the bump. (Granted, some bargain hunters who are willing to hang onto their purchases for a few years might do quite nicely down the road. There's some really good value out there if you can separate the grain from the chaff.)

Okay, but I'm waiting for you to tell me -- how bad is it?


Hmm... You know, come to think of it, maybe it wasn't such a good idea to repeal Glass-Steagall after all. It just might have softened -- or even prevented -- the sub-prime mortgage mess. What was Bill Clinton thinking when he signed it? He was a Democrat, wasn't he? (Oops, I forgot! New Democrats are not all that similar to us Old Democrats -- those of us who still think FDR had a few damned good ideas!)

Well, Ben, it's not your fault. You're just out there trying to clean up the mess Greenspan left behind, and I honestly think you're doing pretty well, considering what a hell of a mess it is. I think it's great that you've dusted off the New Deal playbook -- and I don't mind at all that you made it possible for JPMorgan-Chase to pick up Bear-Stearnes at a flea-market price. If there's a "moral hazard" in your action, I don't see it. Those who invested in that nest of vipers were justly screwed, and those who led the company to its demise will plummet along with the value of their stock options.

The opening of a discount window for investment banks leaves me feeling a little queasy, but I guess it had to be done. Sunday's surprise quarter-of-a-percent cut in the discount rate, if we're lucky, might mean no further cut in the federal funds rate tomorrow -- no matter how pitifully Wall Street whines. If the idea is to get banks to use the discount window, keeping the discount rate lower than the federal funds rate seems like the best way to do it. Anyway, the dollar has fallen as low as it ought to go. If the dollar's current devaluation isn't enough to correct our imbalance of trade, the value of the dollar isn't the problem. The people of this country shouldn't have to see the value of their incomes and their savings evaporate so that a few speculators can turn a quick profit.

Maybe I'm deluding myself, but I think that you might be exactly the right person to be Chairman of the Fed in these difficult times. You know your history, you're willing to risk trying some new approaches to our problems, and you've arrived at a point where you can be impervious to political pressure if that's what you want. I think that's what you want -- that, and a strong shot at minimizing the pain of the god-awful mess we're in.

A good ninety-eight percent of America is economically illiterate, and a substantial majority of the remaining two percent is ideologically blinded. I think you must understand that there won't be a hell of a lot of support for doing the right thing, but that doesn't wipe out your obligation to do it.

So do it.

And tell me , how bad is it -- really -- and how bad will it get?



Yeah, I was afraid of that.