Economic and Financial News - Nov 28, 2008 - World War 2 was a relative bargain

Economic and Financial News Nov 28, 2008

The following items have come to my attention the past few days, and, dear reader, I deem them worthy of your attention and perusal, and just generally good stuff for your edification and amusement.

The Washington Post notes that Americans' Food Stamp Use Nears All-Time High of over 30 million.

Compared to Wall Street bailout, World War Two was a relative bargain

Barry Ritholtz notes that with the Citi bailout, the total cost of saving Wall Street from itself now exceeds $4.6165 trillion dollars. Since people simply cannot comprehend this staggering sum, Ritholtz passed on inflation adjusted numbers crunched by Jim Bianco of Bianco Research to show that the Wall Street bailout is now the largest outlay in American history.

In fact, Ritholtz notes, the amount poured down the rathole of Wall Street exceeds the combined amounts spent on NASA, the Vietnam War, the Korean War, the Marshall Plan, the New Deal, the Louisiana Purchase, and a few more as well.

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion
TOTAL: $3.92 trillion
data courtesy of Bianco Research

That is $686 billion less than the cost of the credit crisis thus far.
The only single American event in history that even comes close to matching the cost of the credit crisis is World War II: Original Cost: $288 billion, Inflation Adjusted Cost: $3.6 trillion

The $4.6165 trillion dollars committed so far is about a trillion dollars ($979 billion dollars) greater than the entire cost of World War II borne by the United States: $3.6 trillion, adjusted for inflation (original cost was $288 billion).

Go figure: WWII was a relative bargain.

I estimate that by the time we get through 2010, the final bill may scale up to as much as $10 trillion dollars...

How the Real World Works

Since many Americans have so little idea of the origin of many of the items they take for granted every day, I will pass along any information I find that explains the nuts and bolts of how the real economy works. This evening, I bestow the “When they forgot the nuts and bolts, everyone got screwed” award to DailyKos diarist StrandedWind, who gives us the horrifying details of how propane shortages in the Dakotas are leading to an inability to dry grain to proper moisture levels for storage, which is leading to an unusually large amount of grain not being harvested, which will lead to excessive retention of snow in farm fields during the winter, which will lead to a shorter planting system next year, which will lead to The Famine Of 2009.

Btw, my chain of causation is a very shortened and excessively simplified summary of what StrandedWind describes. He will give you some idea of the complexity of our modern world; you will never consider a simple breakfast corn flake simple again.

Motor City Meltdown

Former AFL-CIO economist Thomas Palley is a very rare creature – one of the handful of professional economists who actually foresaw the financial crises a few years ago.

Now Palley is warning that a failure to rescue American auto makers will not only collapse the real economy, but will ignite a firestorm of financial market after-effects that will make a repeat of the First Great Depression all but guaranteed. Palley argues that “sacrificing the Big Three automakers will accomplish nothing” (except fulfilling conservative ideological preference for laissez faire) “while risking a tragic economic depression.”

The financial crisis that began in 2007 has been persistently marked by muddled thinking and haphazard policymaking. Now, the United States Treasury is headed for a mistake of historic and catastrophic proportions by refusing to bail out America’s Big Three automakers.
Make no mistake, if Detroit’s Big Three go bankrupt, the perfect storm really will have arrived with a collapse in both the real economy and the financial sector. This threat means that the financial bailout funds authorized by Congress can legitimately be used to support the automakers. Treasury’s refusal to do so is a monumental blunder that risks a general meltdown, the consequences of which will extend far beyond America’s shores.

Moreover, the automakers are essential for closing the trade deficit, and their demise could bring another surge in imports. The automakers are also the backbone of American manufacturing, driving advances in manufacturing technology that will be needed if America is to be a world leader in the coming “green” transportation revolution. Additionally, the Big Three are vital to national security, supplying important military transportation assets. Lastly, bankruptcy will impose massive costs on the government’s Pension Benefit Guaranty Corporation (PBGC), potentially undermining its financial stability.

All of this is true. But missing from this array of arguments is the damage a bankruptcy of the Big Three would do to financial markets. In one fell swoop, the hard-won gains in stabilizing the financial system could be blown away.

But the greatest damage may come from the credit default swaps (CDS) market that brought down AIG. Huge bets have undoubtedly been placed on the bonds of GM, Ford, Chrysler, and GMAC, and bankruptcy will be a CDS triggering event requiring repayment of these bonds. Moreover, a Big Three bankruptcy will bankrupt other companies, risking a cascade of financial damage as their bonds and equities fall in value and further CDS events are triggered. This is the nightmare outcome that risks replicating the Crash of 1929.

Opposition to the bailout is bringing back to the surface the worst of the conservative economic thought that got America and the world into this mess in the first place. The opposition of the Federal Reserve and Treasury to hands-on intervention meant that they were slow to understand that merely ring-fencing the commercial banks could not save the financial system. Now, they are failing to understand the financial significance of the Big Three.

Conservative animus toward trade unions is also once again on display. But it is union weakness that has caused wages to stagnate and forced America to rely on debt and asset price inflation as the engines of growth.

Though I strongly supported Obama in the election, I have been very strident is criticizing our new President’s selections for his economic policy team.

Don’t you think it’s very interesting indeed that the financial markets and those closely allied with financial elites are praising Obama’s selections? So, whether you like it or not, I think some of the most important articles right now are from people who have a clear track record of opposing financial elites and who are now warning that Obama is making a potentially fatal mistake in the economic advisers he has selected.

Here’s economist Michael Hudson on Obama’s economics team
The Neo-Yeltsin Administration? The Obama Letdown

Obama’s ties with the Yeltsin administration are as direct as could be. He has appointed as his economic advisors the same anti-labor, pro-financial team that brought the kleptocrats to power in Russia in the mid-1990s. His advisor Robert Rubin has managed to put his protégés in key Obama administration posts: Larry Summers, who as head of the World Bank forced privatization at give-away prices to kleptocrats; Geithner of the New York Fed; and a monetarist economist from Berkeley, as right-wing a university as Chicago. These are the protective guard-dogs of America’s vested interests.


Traditionally, business booms culminate in a wave of bankruptcies that wipe out bad debts – and the savings that have been invested on the “asset” side of the balance sheet. This year has changed all that. The bad debts are being kept on the books – but transferred from the banks to the federal government, mainly the Federal Reserve and Treasury. The bank bailouts have aimed not so much to protect the banks themselves, but to enable them to pay off on the bad bets they made vis-à-vis the nation’s hedge funds and other institutional investors in the derivatives market.
To participate in a hedge fund, one needs to prove that one can afford to lose their money and not be much the worse off for it in terms of actual living conditions. So the $306 billion in federal guarantees of the junk mortgage packages sold by Citibank, and the $135 billion bailout of the insurance contracts written by A.I.G. to protect swap contracts from loss, could have been avoided without much impact on the “real” economy.

Hudson points out that state and local governments are too financially weakened to undertake the large infrastructure program being discussed, but Wall Street will be happy to fund a $700 billion infrastructure program, because WS has already figured out how to make a killing from the program: “rent-of-location – that is, vast windfall gains for well-located real estate.”

The gains from providing better transport infrastructure typically are so large that transportation investment could be self-financing by taxing these property gains – recapturing the added rental value in the form of property windfall taxes. London’s tube extension to Canary Wharf, for example, cost the city £8 billion – but increased real estate values along the route by some £13 billion.

Hudson then issues a very important warning:

The fact that state and local budgets are too burdened to afford infrastructure spending themselves will lead to it being privatized from the outset.

Obama's one-trick wizards
”Spengler” on Asia Times Online has a brutal summary of Obama’s economic team. Noting that when Reagan took office in 1980, the U.S. stock market was far below its historical average, Spengler argues that most American financiers that appear to have been successful since then, did nothing more than ride the return to the historical norm, about the same as a flea rides a dog.

Failed financiers run the Obama transition team. It used to be that the heads of great industrial companies got the top Cabinet posts. Now it is the one-trick wizards. After George W Bush fired former Treasury Secretary Paul O'Neill, who had run Alcoa, the last survivor of the species was Vice President Dick Cheney, the former CEO of Halliburton. Obama's bevy of talent comes from finance. American industrialists have become figures of ridicule, like the pathetic chief executive of General Motors, Rick Wagoner, begging for a government loan.

Without leverage, the clever folk around Barack Obama are fleas without a dog. None of them invented anything, introduced an important new product, opened a new market, or did anything that reached into the lives of ordinary people. They wore expensive cufflinks, read balance sheets, exercised regularly, sat on philanthropic boards, and assumed that their flea's ride on the Reagan dog would last forever.


Of course, nothing excludes the possibility that Obama's team will come up with something constructive. But there is no reason to expect a drastic change from the crisis response of the same sort of people (starting with Treasury Secretary Paulson) in the Bush administration. They will bail out incompetent, failing firms and drop money from helicopters and call it a stimulus package. And it will turn out no better than it did for the humiliated Republicans.

Continuing with the theme of Obama’s disappointing picks
Kevin Drum demolishes a study of the effect of taxes on GDP done last year by Berkeley economics professor Christina Romer — who has just been appointed by Barack Obama as head of the CEA — and her husband. Particularly troubling is that the Romers argue for the basic conservative position that higher taxes are associated with lower GDP. Drum writes:

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Last week, Larry Beinhart explained why The real-world effects of tax policy are counterintuitive. . . High marginal tax rates correlate with economic growth.

I used to run a small business -- a commercial film production company.

Every time we took a dollar out as personal income, it instantly turned into 50 cents [because 50 cents was paid in taxes. If the tax rate were 70 percent, the dollar taken out would have instantly turned into 30 cents. If the tax rate were 35 percent, the dollar taken out would have instantly turned into 65 cents.]

If we didn't really need the money, that was an incentive to keep it in the company and to find ways to spend it that took it out of the taxable profit column but increased the value of the company.

High taxes create an incentive to reinvest profits into long-term growth.

With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest.

Corporate Tax Rates by Country
Continuing with the tax theme, here’s a graph you should bookmark for the next time a conservative tells you that the U.S. has the highest corporate tax rates in the world. Citizens for Tax Justice compared taxes collected as a percent of Gross Domestic Product. Note that the United States is third from bottom.

Study Shows China as World Technology Leader

Technology indicators show China ahead of the U.S. in technological standing

Atlanta (January 24, 2008) —A new study of worldwide technological competitiveness suggests China may soon rival the United States as the principal driver of the world’s economy – a position the U.S. has held since the end of World War II. If that happens, it will mark the first time in nearly a century that two nations have competed for leadership as equals.

The study’s indicators predict that China will soon pass the United States in the critical ability to develop basic science and technology, turn those developments into products and services – and then market them to the world. Though China is often seen as just a low-cost producer of manufactured goods, the new "High Tech Indicators" study done by researchers at the Georgia Institute of Technology clearly shows that the Asian powerhouse has much bigger aspirations.

AIG Plans to Pay Retention Bonuses to Executives

CPA notes that AIG bailout looks like old-fashioned bankruptcy fraud committed by organized crime mobs in the Roaring 20s.

Banks looking to head off strict regulation of credit swaps

Chris Cook’s Equity Unitisation
Former European futures market regulator Chris Cook explains why the financial crises means the world has passed “peak credit” as well as “peak oil” and explains a new form of equity-based financing.

Gentrifying Gitmo
“Cassandra” of reverses her previous position in favor of closing Gitmo. Instead, “Cassandra” suggests Gentrifying Gitmo to get the place ready for former denizens of lower Manhattan.

Wrong-wing nut case of the day
Tom Delay has a blog. Yesterday, I looked at Delay’s proposals for reviving the Republican Party (not very realistic nor very interesting). But, whoooa, get a load of this comment by one “Chad.” And note that none of the other 28 comments saw fit to call out Chad.

Chad writes: Tuesday, November, 25, 2008 7:56 PM

The Totalist Agenda?

What if it is an Islamo Nazi conspiracy and you see super germanic negro men and women who had black american fathers and white mothers who got married to American troops stationed in Germany and Obama is going to push extream liberal leave his Jewish friends hanging then in the preplaned economic and social chaos eliminate leaders who would resist the totalist authoritarian system that ends American freedom as we know it.

So if he Obama doesn't go to Church cause he is Jealous he has no excuse. He could build a side door in a church with a bullet proof section closed off for him or invite a minister and singers every week to worship in the white house. After the greek pillars and adoring crowds will he pose for any christmas shots bearing gifts bowing to Baby Jesus? People have a need to either worship or be worshiped. Has he fallen into the pit fall of the Nero?

But he don't do it, we need God to bless America or we are through.

I think about all I can add is the obvious observation: Yeah, those people really are crazy; thank God they're apparently not the brightest bulbs in the parking lot.



Welcome to EP Tony!

Great piece. It is just unbelievable and the GDP contraction is no comparison to the contractions going on in the past which they didn't even come close to spending what they are now.

What I find amazing is how passive America is on this phenomenal spending. $8.5 trillion, > 60% of this years entire economy.

I also like the references to some of the best blog pieces of the week you are reviewing.


sorry I've been gone so long. We moved from the outer Virginia suburbs of DC to North Carolina a few months ago (no, I do not like it here).