Volatility

July 29, 2010

How A “Great Recession” Is Lied to an End (Zandi and Blinder)

 

Yesterday saw the release of a report, “the first of [its] kind”, purporting to gauge the “comprehensive…effects of the financial-market policies”, i.e. the Bailout including the Obama corporate stimulus, on the economy.
 
It’s really just a propaganda broadside, written by two hacks, the appropriately named Alan Blinder, and Moody’s own Mark Zandi. It goes without saying that we regard Moody’s with all the respect it deserves, and especially its much-vaunted (by Zandi in this paper) “Analytics Model”, which they used for the report, is supposed to inspire not laughter but awe. (It’s also encouraging to learn that their methodology is similar to that used by the administration and the CBO, and that the results obtained were similar. Now that’s good company.)
 
I won’t bother parsing their phony baloney numbers, since I’m instead going to focus on the ideology of the piece. But their basic claim is that without the government’s actions, “GDP in 2010 would be about 11.5% lower, employment would be less by some 8.5 million jobs, and the nation would now be experiencing deflation.” They believe most of this effect is from the Bailout proper, with some added effect from the stimulus.
 
This tabloid sure has a flashy title: “How the Great Recession Was Brought to an End”. So evidently “great recession” is their term for the GDP hiccup as the Bailout took over from the “normal”, “Great Moderation” version of neoliberal kleptocracy; kleptocracy 1.0. So at least when it comes from Obama hacks we can range that term alongside “jobless recovery”, since that’s the “recovery” being hailed in this piece, the alleged “end” of this “Great Recession.” The recovery is jobless, all right; everything the administration says and does is intended to normalize permanent unemployment at >9% (the bogus U3), closer to c. 20 % (U6). This report says (p.19) that while the NAIRU is currently decreed to be 5.5%, the real goal is to normalize at 9%. Thus this paper can cheerfully feature >9% unemployment through at least 2012 as part of the End of the Great Recession. Let the good times roll. (Meanwhile, if the Great Recession has really Ended, why is Obama leading this drumbeat for “austerity”? That sounds like a contradiction. Nowhere do Zandi and Blinder say anything like, “all this is predicated on gutting Social Security, the way “the markets” are allegedly demanding. But then, they omit a lot of things, as I’ll get to shortly.)
 
What are the basic premises of this tract? What reality does it deny?
 
Most of all, it denies the astronomical bloat of housing prices and all the toxic assets derived from these prices. Without the Bailout “the nation would now be experiencing deflation”? (p.1) The nation has to experience deflation. That’s a law of reality where your prices were blown up to become an $8 trillion bubble. But ZB (ZandiBlinder) says insolvent assets should be propped up. “The volume of transactions was small, but the TALF appears to have improved the pricing of these assets, thus reducing pressure on the system as a whole.” (p.11) (Until the next crash.)
 
Deflation must be the result as reality finally takes a hand. Exponential growth is unsustainable. So by ZB’s own contention the Bailout did nothing but temporarily stave off the inevitable, guaranteeing far worse destruction in the end, and having allowed untold trillions more in social wealth to have been destroyed by the banksters, and all for no purpose at all but to enable these criminals to continue looting. This is the Mission Accomplished ZB celebrates. Their basic method in deriving all these conclusions is founded in (and founders upon) a metric of the exponential debt machine.
 

Our basic approach was to treat the financial policies as ways to reduce credit spreads, particularly the three credit spreads that play key roles in the Moody’s Analytics model: The so-called TED spread between three-month Libor and three-month Treasury bills; the spread between fixed mortgage
rates and 10-year Treasury bonds; and the “junk bond” (below investment grade) spread over Treasury bonds. All three of these spreads rose alarmingly during the crisis, but came tumbling down once the financial medicine was applied. The key question for us was how much of the decline in credit spreads to attribute to the policies, and here we tried several different assumptions. All of this is discussed in Appendix B.
(p.4)

 
Throughout the piece they propagate the fraudulent theme and term “recovery”, resorting constantly to class war obfuscations like “the U.S. economy”. Whose “economy”? Of course, measures like “GDP” in themselves, aside from all their other problems, fraudulently aggregate the positions of diametrically opposed interests locked in a zero sum struggle. Look again to the term “jobless recovery”, really think about it, really draw in a breath to sense how redolent of crime this all is.
 
What did this study project as the cost of the next crash? The next, far worse crash which has been rendered inevitable by the Bailout, but could have been averted by letting the permanently insolvent system crash once and for all then rather than later? Well, the “study” left that out. Obviously this study has zero validity unless it projects this cost and factors it in.
 
How did they estimate the Bailout’s ongoing cost? Scores of millions more daily? Even if one believed their numbers for the TARP, the facilities, and so on, what about those toxic MBS stinking up the balance sheets of the Fed and the GSEs, both officially authorized to embezzle taxpayer money unto infinity in order to keep this toxic crap propped up for the sake of the banksters’ balance sheets, to accommodate their control fraud and personal “bonus” looting? Is any of that in there? It is not.
 
How did they calculate the fiscal reverberations of the even more intensified anti-democratic stranglehold of the banks and even more obscene wealth inequality, both of these direct (and intended) effects of the Bailout? There are no class war costs factored in at all. It’s just like the idiots who parsed the health racket bailout with an electron microscope trying to find the alleged way it was marginally better than the status quo. I didn’t see any of them factoring in the monstrous costs of further entrenching the insurance and drug rackets, or the costs of forcing the people to buy worthless protection at extortionate prices, the same way any Mafia gang would enforce.
 
With those preceding questions I was still talking about quantifiable money costs. I suppose it could go without saying that the whole thing is a repulsive exercise in sociopathic wonkery and technocracy. Not a word about morality, justice, freedom. Not a word about how the worst robbers in history are getting off scot free (so far), get to keep the trillions they stole, and are being allowed to continue committing the same crimes which already destroyed the economy, stealing billions more in the exact same way. Justice has been spit upon. Morality has been raped. By their own testimony here Zandi and Blinder are committed to our permanent enslavement under the tyranny of these finance terrorists. As if, even if any of the numbers in here were true, that could be meaningful compared to the cost of our servitude in perpetuity.
 
Here’s just a few quotes on the theme, and I’ll have some more going forward:
 
“Without capital injections from the federal government, the financial system might very well have collapsed.” (p.12)
 
“The financial system is still not functioning properly…but it is stable. Evidence of normalization in the financial system is evident in the sharp narrowing of credit spreads.” (p.12)
 
So our jobless recovery takes place under the auspices of a system which “isn’t functioning properly”, but which at least is “stable” from the point of view of the criminals. Which is of course all that matters. That’s what is to be “normalized”. (I came into this piece intending to refer to how Obama was seeking to “normalize” permanent unemployment above 9%. I wasn’t surprised to see ZB using that word as well.)
 
“TARP has also been useful in mitigating systemic risks posed by the mountain of toxic assets owned by financial institutions. Because institutions are uncertain of these assets’ value and thus of their own capital adequacy, they have been less willing and able to provide credit.” (p.12)
 
“Institutions are uncertain of these assets’ value” means they’ve been uncertain how far the government will go to prop up worthless paper at exorbinant prices.
 

While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective. If policymakers had not reacted as aggressively or as quickly as they did, the financial system might still be unsettled, the economy might still be shrinking, and the costs to U.S. taxpayers would have been vastly greater.
(p.2)

 
Why? What would it have cost to achieve our liberation from financialization? ZB don’t say, but they do lay out their four allowable scenarios (and therefore the four they supposedly tested).
 

To quantify the economic impacts of the fiscal stimulus and the financial-market policies such as the TARP and the Fed’s quantitative
easing, we simulated the Moody’s Analytics’ model of the U.S. economy under four scenarios:

1. a baseline that includes all the policies actually pursued

2. a counterfactual scenario with the fiscal stimulus but without the financial policies

3. a counterfactual with the financial policies but without fiscal stimulus

4. a scenario that excludes all the policy responses.

The differences between Scenario 1 and Scenario 4 provide the answers we seek about the impacts of the panoply of anti-recession policies. Scenarios 2 and 3 enable us to decompose the overall impact into the components stemming from the fiscal stimulus and financial initiatives. All simulations begin in the first quarter of 2008 with the start of the Great Recession, and end in the fourth quarter of 2012. (p.4)

 
So it’s three corporatist policy responses plus doing nothing. Not modeled: Letting Wall Street perish while the government mustered its resources for a Main Street triage. Or they could have tried a truly Keynesian/New Deal, a direct stimulus and job creation program with no Bailout or corporatist stimulus. Those are just two examples of alternatives which ZB declare in principle to be unpolicies. That’s because they’re corporatist ideologues.
 

While all of these questions deserve careful consideration, it is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situation in far graver condition. We conclude that Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”

While the TARP has not been a universal success, it has been instrumental in stabilizing the financial system and ending the recession. The Capital Purchase Program gave many financial institutions a lifeline when there was no other. Without the CPP’s equity infusions, the entire system might have come to a grinding halt. TARP also helped shore up asset prices, and protected the system by backstopping Fed and Treasury efforts to keep large financial institutions functioning.(p.7)

 
It’s also fitting that they began their simulations in Q1 2008, since the ideology of the piece is that we can and should return to the status quo ante, say 2005.
 
“Broadly speaking, the government set out to accomplish two goals: to stabilize the sickly financial system and to mitigate the burgeoning recession, ultimately restarting economic growth.” (p.2)
 
Actually that’s three goals. ZB regards restarting growth as more of a magical process than a goal, no doubt. That’s the way it is with believing in something according to fundamentalist faith. But exponential growth cannot be sustained, and in fact the real economy hasn’t grown in over a decade. All so-called growth has been just the same old financial tricks. As for the two proclaimed goals, mitigating the recession is meaningless in itself, if there’s no plan for a better world to be the result; and “stabilizing” (there’s that Orwellian word again) the rackets is a positive evil.
 
ZB rewrites TARP history:
 

The Troubled Asset Relief Program (TARP) was established on October 3, 2008 in response
to the mounting financial panic. As originally conceived, the $700 billion fund was to buy “troubled assets” from struggling financial institutions in order to re-establish their financial viability. But because of the rapid unraveling of the financial system, the funds were used for direct equity infusions into these institutions instead and ultimately for a variety of other purposes.
(p.11)

 
As I recall, it wouldn’t have been sufficient to buy the toxic crap at the prices the banksters were demanding, so Plan B was accounting “forbearance” (i.e. abetting fraud) while “injecting capital”, i.e. shoveling loot.
 

But with the banks deteriorating rapidly and asset purchases extremely complex [I like that euphemism for bankster intransigence], the TARP was quickly shifted to injecting capital directly into major financial institutions. Initially, this meant buying senior preferred stock and warrants in the nine largest American banks, a tactic subsequently extended to other banks…..

The largest use of the TARP funds has been to recapitalize the banking system via the Capital Purchase Program. At its conception, the CPP was expected to amount to $250 billion. Instead, its peak in early 2009 was actually about $205 billion, and as financial conditions have improved, many of the nation’s largest banks have repaid the funds. There is only $67 billion outstanding in the CPP. Banks also paid an appropriately high price for their TARP funds in the forms of restrictions on dividends and executive compensation, and additional regulatory oversight. These costs made banks want to repay TARP as quickly as possible. Since nearly all CPP funds are expected to be repaid eventually with interest, with additional
proceeds from warrant sales, the CPP almost certainly will earn a meaningful profit for taxpayers.
(p.11)

 
I like the touch about the “appropriately high price.” But this can’t hide how grotesqueries like BofA and Citi were allowed to pay back the TARP in order to resume bonus looting, all of it enabled by government-sanctioned accounting fraud. It’s all a propaganda exercise, just like the bogus stress tests.
 
ZB joins in, proclaiming the stress tests valid:
 

The Treasury and Federal Reserve ordered the 19 largest bank holding companies to conduct comprehensive stress tests in the spring of 2009, to determine if they had sufficient capital to withstand further adverse circumstances—and to raise more capital if necessary. Once the results were made public, the stress tests and subsequent capital raising restored confidence in the banking system.
(p.2)

 
They move on to flat out lies about the TARP and the housing market.
 

The housing bubble and bust were the proximate causes of the financial crisis, setting off a vicious
cycle of falling house prices and surging foreclosures. Policymakers appear to have broken this cycle with an array of efforts, including the Fed’s actions to bring down mortgage rates, an increase in conforming loan limits, a dramatic expansion of FHA lending, a series of tax credits for homebuyers, and the use of TARP funds to mitigate foreclosures. While the housing market remains troubled, its steepest declines are in the past…..

In fact, TARP has been a substantial success, helping to restore stability to the financial system and to end the freefall in housing and auto markets. Its ultimate cost to taxpayers will be a small fraction of the headline
$700 billion figure: A number below $100 billion seems more likely to us, with the bank bailout component probably turning a profit.(p.2)

 
Even if that turned out to be technically true, we of course can’t legitimately separate the TARP from the Bailout in general. (Or say TARP = Bailout.) But we’re very familiar with the Big Lie of doing so.
 
As for the bubble-headed dogma about permanently reflating the bubble (“This time housing prices will go up forever!”, ZB are evidently screaming), I think we know how ridiculous that is. But they’re sure trying hard. Indeed, they even bring in Phil Gramm for a cameo:
 

Three rounds of tax credits for home purchasers were also instrumental in stemming the housing crash. The credit that expired in November was particularly helpful in breaking the deflationary psychology that was gripping the market. (p.16)

 
So they ape Gramm’s “nation of whiners” having a “mental recession”.
 
Finally, to reiterate that unemployment normalization figure: “Unemployment is still close to 10% at the end of 2010, but closer to 9% by the end of 2011.” (p.4)
 
This will have been two years since the official End of the “great recession”. Zandi and Blinder don’t venture further, but we’ve heard plenty from the administration to the effect that Obama considers this figure permanent. That’s what they’re willing to say politically. We can only imagine what the real desired number is, as the destruction of what few real jobs remain in Bailout America continues at full fury.
 
Meanwhile the hacks will do what they can to make it all look normal, and like a “recovery”. All we the peasants have to do as we free fall into impoverishment and indenture is retain faith in magic words like “recovery” and “growth”.
 
This “study” by Zandi and Blinder will try to do its part whitewashing the Bailout’s infinite crimes. And as they say, “we welcome other efforts to estimate these effects.” No doubt there will be such efforts.
 
If only an effort like the one I wrote today could get the same dissemination.

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