Stiglitz and 'Fear Index' See Trouble; Recovery v. Crazies

Five-year Vix Fear Chart - Now up near 50

Substantial changes to the banking system forcing banks to make loans to small business could be the answer to stagnation. But this is unlikely to make it through the current GOP Congress, says a depressed Joseph Stiglitz

Today, the world looks to see if 2011 will offer a repeat of the nightmare of 2008, following plummeting stocks yesterday, capping a bad 10 days.

Adding to fear about Europe, [Europe Considers Ban on Short Selling], is the emergence of a potent political force, the American Tea Party, that is literally cheering for an economic melt-down as the GOP in a somewhat more muted fashion attempts to talk the economy down for political ends.

But talk down not just into another recession that runs in a somewhat predictable cycle, but rather the more awful condition of an unpredictable financial collapse, a global economic crisis.

So, the general public will get a crash education in the VIX fear index.

VIX fear index

Fear breeds fear; Crazy breeds the unknown.

The VIX index measures fear and resulting volatility of investors, offering an educated guess on the next 30-day period of the CBOE Futures Exchange (CFE) and S and P 500 Index.

Market psychology and pathology impact ultimately the performance of one's 401-K, and the VIX functions as a red flag and early warning.

The higher the VIX, the more the volatility and fear.

The VIX is at trading at $41.76 (down from the opening; -1.23(-2.86%))  at 10:22 this morning, and the Dow is up 185 points at 10:22 A.M.

On October 24, 2008, the nightmare of 2008, the VIX reached a day-high record of 89.53.

An investment manager told the Financial Times that the last few days' trajectory of the VIX occurs only "during systematically important shock events such as the 2008 financial crash, Bear Stearns bankruptcy, 2010 flash crash, and the 2007 credit market meltdown."

Joseph Stiglitz spoke with Jeff Macke at TechTicker yesterday, and the Nobel Prize-winning economist looks an appropriate representative of the economy that a major American political party is desperate to oppress: Stiglitz looked like a Zombie. Check out the video.
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Professor Joseph Stiglitz

From Jeff Macke at TechTicker:

Professor Joseph Stiglitz has won two Nobel Prizes, taught at the finest schools in the world, and is one of the most highly regarded economic minds in the world. Perhaps it is exactly this intellectual firepower causing his "very depressed state of mind" when he considers the state of the American economy.

The professor joined me and my Daily Ticker colleague Aaron Task, simultaneously honoring us with his presence, bumming us out with his forecast, and giving us hope for a solution; even though his best-case scenario is the United States flat-lining like the Japanese "Lost Generation." How could he not be glum these days?

For starters, we can't get out if we don't know how we got into this mess. Stiglitz says the matter started at the top. "The problem was the economic downturn, the crisis, was much worse than the Obama Administration wanted to own up to." And in his view the stimulus was too small, too brief, had too many tax cuts, and too few drivers of economic growth. I would've pointed out that the Administration was passionate about the sorry state of affairs to the extent the President could blame his predecessor, but that would seem argumentative.

Fiscal policy didn't cure our economic woes, so Aaron and I inquired about the role of Ben Bernanke and his merry crew, which was meeting at the time of our conversation. Can the Fed help break the economic slump?

An emphatic "no," responded the normally loquacious Stiglitz. Failed monetary policy of the past was one of the causes of our current problems and stimulus from the Fed has done what it can. Short-term rates are de minimis and real interest rates are negative, a stance which isn't going to change until at least 2013.

Big corporations are awash with cash, notes the Noble Laureate, but small companies, the real drivers of employment, can't get loans. Substantial changes to the banking system which would force banks to make loans by in effect, penalizing them for keeping cash on the books, could be the answer. But this is unlikely to make it through the current Congress.

The subsequent statement from the Fed represents an effort to do exactly that at the monetary level. Real interest rates are even more negative than they were yesterday morning. Holding cash comes with a cost. Will this lead banks to get cash off their books by lending it to the small businesses that need it? That's up to the elected officials. The Fed has done what it can, their "hands are tied," as our esteemed guest said.

Noam on Madison and the World

Wisconsin is still Ground Zero

By Noam Chomsky in TomGram

The democracy uprising in the Arab world has been a spectacular display of courage, dedication, and commitment by popular forces -- coinciding, fortuitously, with a remarkable uprising of tens of thousands in support of working people and democracy in Madison, Wisconsin, and other U.S. cities. If the trajectories of revolt in Cairo and Madison intersected, however, they were headed in opposite directions: in Cairo toward gaining elementary rights denied by the dictatorship, in Madison towards defending rights that had been won in long and hard struggles and are now under severe attack.

Each is a microcosm of tendencies in global society, following varied courses. There are sure to be far-reaching consequences of what is taking place both in the decaying industrial heartland of the richest and most powerful country in human history, and in what President Dwight Eisenhower called "the most strategically important area in the world" -- "a stupendous source of strategic power" and "probably the richest economic prize in the world in the field of foreign investment," in the words of the State Department in the 1940s, a prize that the U.S. intended to keep for itself and its allies in the unfolding New World Order of that day. ...

Those with a sense of irony may recall that Benjamin Franklin, one of the leading figures of the Enlightenment, warned that the newly liberated colonies should be wary of allowing Germans to immigrate, because they were too swarthy; Swedes as well. Into the twentieth century, ludicrous myths of Anglo-Saxon purity were common in the U.S., including among presidents and other leading figures. Racism in the literary culture has been a rank obscenity; far worse in practice, needless to say. It is much easier to eradicate polio than this horrifying plague, which regularly becomes more virulent in times of economic distress.

I do not want to end without mentioning another externality that is dismissed in market systems: the fate of the species. Systemic risk in the financial system can be remedied by the taxpayer, but no one will come to the rescue if the environment is destroyed. That it must be destroyed is close to an institutional imperative. Business leaders who are conducting propaganda campaigns to convince the population that anthropogenic global warming is a liberal hoax understand full well how grave is the threat, but they must maximize short-term profit and market share. If they don't, someone else will.

This vicious cycle could well turn out to be lethal. To see how grave the danger is, simply have a look at the new Congress in the U.S., propelled into power by business funding and propaganda. Almost all are climate deniers. They have already begun to cut funding for measures that might mitigate environmental catastrophe. Worse, some are true believers; for example, the new head of a subcommittee on the environment who explained that global warming cannot be a problem because God promised Noah that there will not be another flood.

If such things were happening in some small and remote country, we might laugh. Not when they are happening in the richest and most powerful country in the world. And before we laugh, we might also bear in mind that the current economic crisis is traceable in no small measure to the fanatic faith in such dogmas as the efficient market hypothesis, and in general to what Nobel laureate Joseph Stiglitz, 15 years ago, called the "religion" that markets know best -- which prevented the central bank and the economics profession from taking notice of an $8 trillion housing bubble that had no basis at all in economic fundamentals, and that devastated the economy when it burst.

All of this, and much more, can proceed as long as the Muashar doctrine prevails. As long as the general population is passive, apathetic, diverted to consumerism or hatred of the vulnerable, then the powerful can do as they please, and those who survive will be left to contemplate the outcome.

- Noam Chomsky is Institute Professor emeritus in the MIT Department of Linguistics and Philosophy. He is the author of numerous best-selling political works. His latest books are a new edition of Power and Terror, The Essential Chomsky (edited by Anthony Arnove), a collection of his writings on politics and on language from the 1950s to the present, Gaza in Crisis, with Ilan Pappé, and Hopes and Prospects, also available as an audiobook. This piece is adapted from a talk given in Amsterdam in March.

Stiglitz, Johnson, Krugman Sound Alarm

Three economists who during the Bush-Cheney years became political-economic pundits of sorts are sounding the macro-economic alarm.

As President Obama turns the political focus onto “jobs, jobs, jobs,” Joseph Stiglitz, Simon Johnson and Paul Krugman warn of a "enormous catastrophe" (Johnson), and real-economy circumstances about which economists are "almost universally pessimistic (Nobel Laureate Stiglitz)."

One understands the political imperative of not placing all bets [political-economic initiatives] on a single swing when mainstream Republicans will happily court more catastrophe if they can garner a political advantage out of the rubble, but Obama needs to swing for the fences and follow the advice of another economist, Nobel Laureate Krugman, who warns that "2010 [may] be a year that began in false economic hope and ended in grief."

Stiglitz Is Coming to Town

Update: A reader recommends a March piece by Paul Krugman in which he blasts the bank bailout plan. "But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls 'a lot of bells and whistles to finesse the fact that the government will wind up paying well above market ... .'"

Next Tuesday's (May 19) Joint Economic Committee (JEC) hearing will hear testimony by Nobel Laureate economist Joseph Stiglitz.

Stiglitz is widely admired for his book (co-authored with Linda J. Bilmes), The Three Trillion Dollar War: The True Cost of the Iraq Conflict, putting a price tag on the obscene Bush-Cheney-Rice lie that continues to kill to this day.

That's the thing about Nobel Laureates. They often feel free and obliged to tell the hard, unvarnished truth.

To give you an idea of what Stiglitz will say on the economy, consider his commentary in The Spring of the Zombies, excerpted below after this political aside.
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No one envies the Obama administration's task to revitalize after 20 years of neo-liberal/neo-conservative globalization, offshoring of jobs, and facilitation of financial speculators.

But Obama's resort to Bushian secrecy on matters ranging from the bank bailout plan to photos of American torture victims does not inspire confidence, much less reassurance that our president is on the same team as we.

An unprecedented number of Americans (myself included) worked to get Obama into the White House; and America still suffers from eight years of a genuinely hostile force in the White House.

We expect better from Obama. In so many words: You don't lie to a man who just got out of the can.

We are either in this together or we are not

Obama's refusal to provide the pubic with details on the mysterious creation of Zombie banks and the censorship of the black art of American torture makes everyone wonder about the nature of the man in charge.

The audacity of opacity is not the message that any administration should be sending to American citizens especially now. It's a tremendous mistake.
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From Stiglitz:

(E)xamine the fundamentals: in America, real estate prices continue to fall, millions of homes are underwater, with the value of mortgages exceeding the market price, and unemployment is increasing, with hundreds of thousands reaching the end of their 39 weeks of unemployment insurance. States are being forced to lay off workers as tax revenues plummet.

The banking system has just been tested to see if it is adequately capitalized – a ‘stress’ test that involved no stress – and some couldn’t pass muster. But, rather than welcoming the opportunity to recapitalize, perhaps with government help, the banks seem to prefer a Japanese-style response: we will muddle through.

‘Zombie’ banks – dead but still walking among the living – are, in Ed Kane’s immortal words, ‘gambling on resurrection.’ Repeating the Savings & Loan debacle of the 1980’s, the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). Worse still, they are being allowed to borrow cheaply from the United States Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions. ...

In earlier crises, as in East Asia a decade ago, recovery was quick, because the affected countries could export their way to renewed prosperity. But this is a synchronous global downturn. America and Europe can’t export their way out of their doldrums.

Fixing the financial system is necessary, but not sufficient, for recovery. America’s strategy for fixing its financial system is costly and unfair, for it is rewarding the people who caused the economic mess. But there is an alternative that essentially means playing by the rules of a normal market economy: a debt-for-equity swap.

With such a swap, confidence could be restored to the banking system, and lending could be reignited with little or no cost to the taxpayer. It’s neither particularly complicated nor novel. Bondholders obviously don’t like it – they would rather get a gift from the government. But there are far better uses of the public’s money, including another round of stimulus.

Every downturn comes to an end. The question is how long and deep this downturn will be. In spite of some spring sprouts, we should prepare for another dark winter: it’s time for Plan B in bank restructuring and another dose of Keynesian medicine.

Joseph E. Stiglitz, Professor of Economics at Columbia University, chairs a Commission of Experts, appointed by the President of the UN General Assembly, on reforms of the international monetary and financial system. A new global reserve currency system is discussed in his 2006 book, Making Globalization Work.

Obama Critics to Appear at Joint Economic Committee

Update: See Too Much To Handle? Why I expect Obama's poll numbers to plummet soon at TNR by John Judis.

Via Robert Kuttner:

'Part of the Way with LBJ'
- Students for a Democratic Society button, circa 1964

The Joint Economic Committee (JEC) hearing next Tuesday (May 19) will feature testimony from leading critics that one hopes will highlight the 'absurdity of the Summers/Geithner approach (to the financial crisis) and help animate skepticism in the media, the public, and eventually the President.'

Nobel Laureate Joseph Stiglitz; former IMF chief economist Simon Johnson, whose recent piece in the Atlantic Monthly compared the US to third-world kleptocracies, and Thomas Hoenig, the most outspokenly critical of the regional Federal Reserve Bank presidents (are scheduled to appear before the committee).

The JEC is a "bicameral Congressional Committee composed of ten members from ... the Senate and the House of Representatives. ... Its main purpose is to make a continuing study of matters relating to the US economy."

Suffice it to say that Obama does not deserve and has not earned the benefit of the doubt on foreign policy, the financial crisis, civil rights for gays, transparency, well anything.

Econ Wm Black: Treasury plan is 'greatest boondoggle in history'

Reading finance analysts Blodget-Black-Krugman-Stiglitz-Shiller-Johnson-Roubini-DeLong, an Obama supporter is left with the feeling: Jesus, I hope these guys are wrong about what Treasury Secretary Timothy Geithner is doing.

One of the problems is Geithner's Public-Private Investment Program (PPIP).

From TechTicker:

While much of the focus is on the stress tests and banks' efforts to raise cash, the real story is Geithner's Public-Private Investment Program (PPIP), says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

The PPIP is the 'greatest boondoggle in the history of the world,' says Black, a former bank regulator who was counsel to the Federal Home Loan Bank Board during the S&L crisis. As occurred during the S&L era, Black says the PPIP will allow banks to exchange 'trash for cash' and turn 'real losses into faulty gains.'

If the goal of Tim Geithner and other regulators was 'to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished,' Black says.

Among the masses and a growing number of economists is the distinct sentiment that what Obama and Geithner are doing is in a word: Wrong.

And boondoggling. Isn't that what the Republican geniuses who got us into this mess do?

What does that mean? That banks make a lot of money and the rules of the game have always favored capital?

We know that, that's kind of why many people get into finance: To make money. If this seems unfair, change the rules and start gearing American capitalism towards the middle class. Like soon.

One thing certain is that Obama needs to rebut these economists who are scaring the hell of a growing number of his supporters who just don't feel sufficiently conversant to understand or much less defend what is going on in the financial temples. And looking to the Recovery Accountability and Transparency Board doesn't seem all that revealing.

And by anecdote, some dudes sure seem confident that the DOW is going back down to 6,500 in the foreseeable future.

How bad is it? Tell me right away.

The Nation's Meltdown 101

From the Nation Magazine:

As the world faces economic collapse and citizens struggle to figure out where to go from here, The Nation has assembled this special section as an online guide to the crisis, drawing largely from Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover (Nation Books) by Katrina vanden Heuvel and the editors of The Nation.

Aggregating highlights from Nation events and providing an overview of the crisis, this page will feature videos from public forums; relevant podcasts; and a curated selection of The Nation's most illuminating articles about the financial meltdown.

Check out the Nation's Meltdown 101.

'Unbridled capitalism doesn't work'

Joseph Stiglitz, Roubini, Krugman: All agree that we have not even hit bottom yet.

From Der Spiegel, by way of Salon:

Joseph Stiglitz: "It's going to be bad, very bad. We're experiencing the worst downturn since the Great Depression, and we haven't reached the bottom yet. I'm very pessimistic. Governments are indeed reacting better today than during the global economic crisis. They're lowering interest rates and boosting the economy with economic stimulus plans. This is the right direction, but it's not enough."

Obama Needs to Nationalize

Update II: Krugman - "Nationalization is actually as American as apple pie."

Update: Time Magazine - "According to Reuters, there are over 8,300 FDIC-insured banks in America. Last August, dour economist Nouriel Roubini told Barron's that 1,400 banks in the U.S. would eventually fail."

The Obama administration can pivot fast, but there is no doubt that Wall Street and policymakers (some of whom are being earnest) want more specificity on how Obama will manage the bank bailout plan.

As part of the American Recovery and Reinvestment Plan, Obama needs to move decisively on the bank bailout with lots of a details, clear timeliness and delineated scope in a manner that would make project management professionals proud.

Treasury Secretary Timothy Geithner didn't provide any of that yesterday.

As David Mizner at Daily Kos notes, one suggestion that is growing among our top economists is: Nationalize the banks we now subsidize. See Krugman, Stiglitz, Roubini, Taleb, Baker Agree: Nationalize.

The voters don't care about free market ideology (such as it is) and what the pundits will say to nationalization: They want decisive action now as bleeding jobs turn the futures of Americans bleak.

As Krugman writes this morning, "And the argument that our culture won’t stand for nationalization — well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out. Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie."