A Minsky Moment!

Brad DeLong: "This is indeed a significant liquidity event..."

The always cheerful Nouriel Roubini explains all: "the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply increased the probability that the US economy will experience a hard landing. We are indeed at a 'Minsky Moment' and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic- will not work; it will only pospone and exacerbate the eventual and unavoidable insolvencies."

Economist's View: Joseph Stiglitz: Greenspan, Bush Errors Finally Come Home to Roost

A political storm is a theatrical with a moral lesson about policy errors.

Joseph Stiglitz (via Mark Thoma):

"The story goes back to the recession of 2001. With the support of US Federal Reserve Chairman Alan Greenspan, US President George W. Bush pushed through a tax cut designed to benefit the richest Americans but not to lift the economy out of the recession that followed the collapse of the Internet bubble."

"Given that mistake, the Fed had little choice if it was to fulfill its mandate to maintain growth and employment: it had to lower interest rates. ... But, given that overinvestment in the 1990s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment.

"The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds. And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness.

"In fact, even this did not stimulate the economy enough. To get more people to borrow more money, credit standards were lowered, fueling growth in so-called "subprime" mortgages. Moreover, new products were invented ... making it easier for individuals to take bigger mortgages. ...

"Alan Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages. But did Greenspan really expect interest rates to remain permanently at one percent - a negative real interest rate? Did he not think about what would happen to poor Americans with variable-rate mortgages if interest rates rose, as they almost surely would? ...

"Fortunately, most Americans did not follow Greenspan's advice to switch to variable-rate mortgages. Even as short-term interest rates began to rise, the day of reckoning was postponed... [But the] housing price bubble eventually broke, and, with prices declining, some have discovered that their mortgages are larger than the value of their house.

"Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so.

"Just as the collapse of the real estate bubble was predictable, so are its consequences... By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge.

"The housing bubble induced Americans to live beyond their means - net savings has been negative for the past couple of years. With this engine of growth turned off, it is hard to see how the American economy will not suffer from a slowdown.

"There is an old adage about how people's mistakes continue to live long after they are gone. That is certainly true of Greenspan.

"In Bush's case, we are beginning to bear the consequences even before he has departed."

The economic downturn will intensify the political storm building around Bush, and he will well deserve it, because it is all of his own making. But, what of those, who made Bush?

Progress in Iraq

Phil Carter takes note: "When states fail, there is rarely a single incident you can point to as the moment of collapse. However, in Iraq, we may now be witnessing the slow-motion disintegration of the Iraqi state"

Wyle E. Coyote just looked down

One element of a "perfect" political storm is an economic down-turn. Although economic anxiety has been an element of the national discomfort with Bush, the economy has been humming along nicely for some time. That may be changing.

As Mark Kleiman, from whom I steal my headline, puts it, "To those of who have been wondering when the insanity of the Bush Administration's fiscal management was going to catch up with us, the answer may well be: just about now."

The first sign of big trouble was the Bear Stearns hedge funds zeroing out, on July 18.

On Friday, American Home Mortgage closed its doors.

Bloomberg.com columnist Mark Gilbert, after toting up signs of credit instability worldwide, notes: "At least 70 U.S. mortgage companies have shut, gone bust or sold themselves since the start of last year, according to Bloomberg data. As Dennis Gartman, economist and editor of the Suffolk, Virginia-based Gartman Letter, is fond of saying in his research reports, there's never only one cockroach."

Media Spectacle

Sunday, Michael O'Hanlon and Kenneth Pollack, mindless cheerleaders for the Iraq War since day zero, published an op-ed in the New York Times, cheerleading for the Iraq War. In it, they described themselves as a critics of the Bush Administration's Iraq policy, the better to highlight their "good news".

Monday, the right-wing, corporate News Media catapulted the propaganda, and the blogosphere divided.

Glenn Greenwald, at Salon summarized:

I spent yesterday and today reading through virtually all of the writings and interviews of these two Brookings geniuses over the past four years concerning Iraq. There is no coherence or consistency to anything they say. It shifts constantly. They say whatever they need to say at the moment to justify the war for which they bear responsibility. It is exactly like reading through the writings of Bill Kristol, Tom Friedman and every other individual who flamboyantly supported this disaster and -- motivated solely by salvaging their own reputations -- are desperate to find some method to argue that they were right.

Even though I write frequently about how broken and corrupt our establishment media is, witnessing these two war lovers -- supporters of the invasion, advocates of the Surge, comrades of Fred Kagan -- mindlessly depicted all day yesterday by media mouthpieces as the opposite of what they are was really quite startling. After all, there is a record as long as it is clear demonstrating what they really are.

But in order to maximize the potency of their propagandistic Op-Ed, they proclaimed themselves to be "analysts who have harshly criticized the Bush administration's miserable handling of Iraq" and -- just like that -- Americans hear all day about the magical and dramatic conversion of these deeply skeptical war opponents who were forced by the Grand Success they witnessed first-hand in Iraq, as much as they hate to do it, to admit oh-so-reluctantly that the Surge really is working! Well, if even these Howard-Dean-like War Opponents say it, it must be true. That was the leading "news" story all day yesterday.

I caught several carefully measured reactions at various magazine websites. George Packer, author of the Assassins Gate, and a recovering supporter of the war himself, wrote a note at the New Yorker, which basically invited people to consider whether O'Hanlon and Pollack, in their visit to Iraq, had been brainwashed by a carefully orchestrated dog-and-pony show, but concluded with this cya boilerplate paragraph:

O’Hanlon and Pollack have long been critics of the war. They are serious analysts and have nothing to gain by supporting the strategy of an Administration that they say has “lost essentially all credibility.” I don’t doubt that they believe what they saw and heard and wrote, and I’m certain that some of the gains they describe are real. I would like to know more about what they didn’t see and hear. At the heart of arguments over the war there has always been the question of what’s happening “on the ground.” It’s never been harder to find out than it is now, and in my experience, no news is generally bad news. Over the past four years, Iraq has humbled a lot of people. What’s missing from the Op-Ed is a necessary humility.

Matthew Yglesias, young and naive over at the Atlantic Monthly, initially snarked with abandon:

Meanwhile, it's worth noting the incentives that O'Hanlon and Pollack face. If they bow to reality and say the US should move rapidly to start cutting our losses in Iraq, then they're people who advocated in favor of a disastrous policy and this'll be bad for their careers. If, by contrast, they say the surge is looking good, and then work together with Bush administration officials and The Weekly Standard to construct a stab in the back narrative about Iraq, then they can hope to salvage their professional reputations at the expense of liberals.

(of course, haha, that's to imply that the policy analysis put forward by Brookings Institution foreign policy program people might be influenced by crass careerism rather than Very Serious Expertise but that's absurd, right, after all Very Serious People are above such things)

But, later in the day, Matthew was spanked by Jon Chait at The New Republic and Ross Douthat at his own Atlantic Monthly, and had to show humility. What did Jon Chait have to say?

Jon said:

It's hard for me to evaluate whether their argument is correct, but the on-the-ground evidence they present from their recent trip to Iraq deserves to be treated seriously.

In other words, Jon can't be troubled to be the least bit critical, but he knows that these Brookings guys are serious.

UPDATE: Greg Sargent at Horse's Mouth documents how the Associated Press has transmuted this one op-ed into a general narrative of critics seeing military progress in Iraq. And, how Anthony Cordesman's pessimistic, but very cautiously worded report on the same trip as O'Hanlon and Pollack, has been reported by the Washington Post as optimistic.

Economic cross-currents

A political storm is moral theatre, a nation coming to terms with error -- not a simple policy error, but moral error, a betrayal of core national values, a challenge to the constitution, a falling short in national solidarity -- which the body politic attempts to correct in a restructuring of political elites and power.

Powerful political storms almost always have an economic component, as background if not as a central element. Economic pain motivates some large part of the body politic to pay attention.

A remarkable aspect of the Bush Presidency has been the absence of serious economic pain. That all the gains of economic growth have gone exclusively to corporate profits and to the very wealthy has been a critical part of the context of dissatisfaction. That Bush policies have increased gas prices (and, not incidentally, energy company profits) has not gone unnoticed.

But, low unemployment has kept the intensity of economic dissatisfaction bounded, even while unhappiness about Iraq and Katrina and corruption have simmered.

A truly "perfect" storm will have a nasty economic component. See those dark economic clouds on the horizon?

Economist.com: "The greenback has never been further out of favour on currency markets. The Federal Reserve tracks the dollar's value against a weighted basket of seven currencies that are commonly traded beyond their respective borders. This index, regarded as a good gauge of financial-market sentiment about the dollar, has fallen to an all-time low"

Financial crisis just one 'Bear-like' event away: "A global financial shock is just one 'Bear-like' event away, economist Mark Zandi warned Thursday, giving it a one-in-five chance. In the current 'high level of angst' following the collapse of two Bear Stearns funds, the uncertainty caused by another hedge-fund failure could cause investors to freeze, he said. Zandi, chief economist for Moody's Economy.com, said he expects significant declines in home sales and prices in coming months to further erode mortgage credit quality. About half of the structured securities owned by hedge funds are in the riskiest tranches of complicated derivatives based on the subprime mortgages that are going sour quickly, he said. If there is a global financial crisis, he said he expected the Federal Reserve would ease, but questioned how effective it would be in restoring confidence in the U.S. financial system."

"Rough ride for U.S. stocks; selloff resumes"

Krugman had an excellent column on the origins of the present crisis is housing, oil and credit. And,he draws the political connection:

"what’s really striking is ... the current angst ... over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices. . . "

Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices. . .

I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.

Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

I was angry once, proudly shrill even. But that time is over

Liberty Calling:

"It is the summer of our discontent, because we want an end to the decade of stupid, and yet, we keep waking up in stupid's America. . .

"Some people wait, and hope that the summer of our discontent will start the fall of the House of Bush. But if not you, who? If not now, when? If not by your hand, how? If not in the place where you live, where? If not for what we have seen and know, what?

"Tomorrow is another day. It can be the first day of you doing something, the next day of you doing something. Just don't let it be the last day of doing anything, or the next day of not doing anything, or the first day of not doing anything any more. And if what you have been doing hasn't been working, then maybe it is time to try something else. I was angry once, proudly shrill even. But that time is over, because it really is time to explain to the people, who don't approve of Bush, but don't yet want him gone, that he's never read anything not written on a baseball bat.

Which end of that bat are you going to be on?"