bank run blog

Speaking to members of Congress today, Federal Reserve Board Chairman Ben S. Bernanke delivered a message of cautious optimism about the US economy, saying that modest growth may be possible later this year. The Associated Press reports :

“Federal Reserve Chairman Ben Bernanke told Congress Tuesday the economy should start growing again later this year, his most optimistic assessment of the country’s financial health since the recession struck with force last year.”

Bernanke sees reasons for renewed hope that the economy may be on the rebound :

“’We continue to expect economic activity to bottom out, then to turn up later this year,’ he told lawmakers. ‘We expect that the recovery will only gradually gain momentum.’

Recent data suggest the recession may be loosening its grip on the country, Bernanke said.

‘The pace of contraction may be slowing,’ he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.”

If the tenor of Bernanke’s economic prognosis sounds familiar, it’s only because you’re paying attention. Here’s what the Fed chairman told an audience of distinguished academics and policymakers at the International Monetary Conference in Barcelona in June, 2008 :

“We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009.”

Today’s guardedly upbeat remarks were made in Congressional testimony before the Joint Economic Committee. Bernanke told the same committee in March, 2007 :

“Growth in consumer spending should continue to support the economic expansion in coming quarters. In addition, fiscal policy at both the federal and the state and local levels should impart a small stimulus to economic activity this year.”

Bernanke’s forecast for 2007 concluded :

“Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters. As the inventory of unsold new homes is worked off, the drag from residential investment should wane. Consumer spending appears solid, and business investment seems likely to post moderate gains.”

Keenly sensing a “cooling” of the US housing market in 2006, USA Today reported that Bernanke was expecting a “soft landing” :

“The housing market, after flying high for five years, has lost altitude but appears headed for a safe landing, Federal Reserve Chairman Ben Bernanke said Thursday.

‘It seems pretty clear now that the U.S. housing market is cooling,’ Bernanke said in a question-and-answer session following a speech he delivered on banking in Chicago.

He noted that home sales and construction are slowing.

‘Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,’ Bernanke said.”

A former professor of economics at Princeton, with degrees from Harvard and MIT, it is certain that Bernanke is one of the best and brightest of his generation. The question is, at what?

Associated Press : Bernanke: Economy should grow again later in 2009

Federal Reserve Board : Remarks by Chairman Ben S. Bernanke at the International Monetary Conference, Barcelona, Spain (via satellite), June 3, 2008

Federal Reserve Board : Prepared Testimony of Chairman Ben S. Bernanke Before the Joint Economic Committee, U.S. Congress, March 28, 2007

USA Today : Bernanke: Housing market is headed for a soft landing (May 18, 2006)

Six years after shocking and awing those who hate our freedoms, it is left to the Obama team of trivials to attempt to clean up the shameful mess in Iraq by prolonging it. The war did not destroy the already rotted US economy, but it will certainly reduce the chances of a meaningful recovery during the Obama, Jindal, Jenna Bush or Bristol Palin administrations.

The apologies and reparations demanded by decency and international law may be too much to hope for, but it must be amazing for foreigners to watch America grapple with the ignominious anniversary through a series of narcissistic thought pieces. The Associated Press offers a brief summary of the catastrophic fiasco, employing, apparently without irony, the phrase “America’s costly mission” :

“Six years after the U.S. invaded Iraq, the end of America’s costly mission is in sight, but the future of this tortured country is much less clear.

With violence down sharply, most Iraqis feel more secure than at nearly any time since the war began March 20, 2003 — March 19 in the United States.

But violence still continues at levels that most other countries would find alarming. Last week, suicide bombers killed a total of 60 people in two separate attacks in the Baghdad area, and an American soldier was fatally injured Monday on a combat mission in the capital.

Fighting still rages in Mosul and other areas of the mostly Sunni north. Competition for power and resources among rival religious and ethnic groups is gearing up, even as the U.S. military’s role winds down.

Both the Sunni and Shiite communities face internal power struggles that are likely to intensify ahead of national elections late this year. Sunni-Shiite slaughter has abated, but genuine reconciliation remains elusive.”

Reuters covers much of the same territory, describing the fragile, violent situation without reference to the fact that it was illegally imposed on Iraqis by Americans through what is recognized around the world as a criminal invasion and occupation :

“The announced end to the U.S.-led occupation overshadows everything in today’s Iraq, where a government beset by rivalries struggles to put a stop to violence that has killed tens of thousands and displaced 4.7 million people since 2003 and to piece together an economy and society shattered by war.

Washington’s plan to withdraw all troops by 2012 focuses attention on whether Iraq can prevent violence from flaring anew and whether it can defuse explosive feuds over oil and power.

Hazim al-Nuaimi, a political analyst in Baghdad, said the six years after the toppling of Saddam Hussein’s had been traumatic for Iraq’s economy, its political conflicts and the security of its people.

’The only thing that has changed is that now there’s a light at the end of the tunnel. But it seems six years is not enough to be able to reach that light,’ he said.”

As for the costs, beyond the inestimable damage to America’s reputation, very few ever believed the rosy scenarios floated by Cheney, Rumsfeld and Wolfowitz. The enormous true costs of the war have long been clear to public policy experts and were discussed by veteran economist Joseph Stiglitz and Harvard lecturer Linda Blimes in this excerpt from their book The Trillion Dollar War, published more than a year ago year in the Times :

“The Bush Administration was wrong about the benefits of the war and it was wrong about the costs of the war. The president and his advisers expected a quick, inexpensive conflict. Instead, we have a war that is costing more than anyone could have imagined.

The cost of direct US military operations – not even including long-term costs such as taking care of wounded veterans – already exceeds the cost of the 12-year war in Vietnam and is more than double the cost of the Korean War.

And, even in the best case scenario, these costs are projected to be almost ten times the cost of the first Gulf War, almost a third more than the cost of the Vietnam War, and twice that of the First World War. The only war in our history which cost more was the Second World War, when 16.3 million U.S. troops fought in a campaign lasting four years, at a total cost (in 2007 dollars, after adjusting for inflation) of about $5 trillion (that’s $5 million million, or £2.5 million million). With virtually the entire armed forces committed to fighting the Germans and Japanese, the cost per troop (in today’s dollars) was less than $100,000 in 2007 dollars. By contrast, the Iraq war is costing upward of $400,000 per troop.”

Associated Press : Iraq better but future shaky

Reuters : Iraq traumatised and divided six years on

Times : The three trillion dollar war

As the US hosts the emergency G20 meeting in Washington this weekend, in an attempt to agree on parameters for an international solution to the crisis in the financial sector, President Bush has summoned all of his oratorical skills in a stirring defense of the “principles” that have resulted in his inauguration as the Herbert Hoover of the 21st Century. The International Herald Tribune reports :

“President George W. Bush has called on world leaders not to abandon free market capitalism, insisting that it was not responsible for the international financial crisis.

On the eve of hosting the Group of 20 leaders in Washington, Mr. Bush acknowledged there should be some reforms to correct the problems that led to the economic downturn.

However, in a speech delivered in the heart of Wall Street in New York, he said such changes should be modest and should not lead to over-regulation or threaten easier global trade.

While he acknowledged that critics were ‘equating the free enterprise system with greed, exploitation and failure’, the financial crisis was not a failure of the free market and government intervention was ‘not a cure-all’.”

There is a palpable sense of desperation to the US approach to financial market reform, as top government officials strain to avoid upsetting their patrons on Wall Street. The comic timidity of Paulson, Bernanke, and Bush in even identifying the source of the collapse is apparent to the rest of the world. From the Daily Telegraph :

“Governments have already thrown hundreds of billions of dollars into the markets in a bid to thaw frozen credit markets, calm jittery traders and prevent the global economy from spiraling into a recession.

While some leaders have called for undertaking big reforms to the financial architecture, the Bush administration so far has been more cautious. There have been questions about whether differences could be bridged to achieve tangible progress.

While Bush warned in his speech that the crisis would not be solved overnight and there would be more ‘difficult days ahead,’ he said that this weekend leaders would set principles for adjusting their own financial systems and discuss actions they can take to implement them.”

According to the Associated Press, “difficult days” do not necessarily require downmarket dining :

“The White House dinner Friday night for foreign leaders working to resolve the global economic crisis featured traditionally gourmet selections for such an august gathering. There was no risk of a menu meltdown to go along with the subject of the meeting — austere markets, lost jobs and homeowners with mortgages they can’t afford.

The White House said the menu included fruitwood-smoked quail with quince gastrique; quinoa risotto; thyme-roasted rack of lamb; tomato, fennel and eggplant fondue; a salad course of endive, baked brie and walnuts; and a pear torte to cap the meal.

Among the wines: bottles of Shafer Cabernet “Hillside Select” 2003 — about $300 per bottle — for the main course and the much cheaper Landmark Chardonnay “Damaris Reserve” 2006 for about $40 per bottle with the appetizer course. The Chandon Etoile Rose sparkling wine that accompanied dessert runs around $30 a bottle.”

International Herald Tribune : Bush defends free market system ahead of G20

Daily Telegraph : Bush: Financial crisis ‘not a failure of the free market’

Associated Press : No menu meltdown at financial meltdown summit

The first major overhaul of the bailout package passed just ten days ago is already complete, and the details have been shared with top banking executives. According to the Associated Press :

“The Bush administration plans to spend an initial $250 billion of the $700 billion bailout buying stock in private banks, greatly expanding protections for the U.S. financial system out of deep concern for the faltering economy, industry and government officials said Monday night. President Bush planned to announce the details Tuesday morning.

Agreement on the plan came after a remarkable Treasury Department meeting between top government economic officials and executives of the nation’s largest banks to revamp the most costly financial rescue in the nation’s history.”

The long article contains some interesting information. The assistance will apparently be limited at first to just nine banks :

“The administration will use $250 billion of the bailout program recently passed by Congress to buy into U.S. banks, the officials said. The government initially will purchase stock of nine large banks, but the program is expected to be expanded to many others. Among the initial banks participating will be all of the country’s largest institutions, including Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co, Bank of America Corp. and Morgan Stanley, said one official, who added that administration briefers did not provide any amounts that would be received by individual banks.

The administration expects to spend the $250 billion buying bank stock before the end of this year, this official said. Bush will certify on Tuesday that another $100 billion is needed from the $700 billion rescue program. That would leave the final $350 billion to be spent.

In addition to the stock purchases, the Federal Deposit Insurance Corp. will temporarily provide insurance for loans between banks, charging the banks a premium for doing so.”

Associated Press : Bush to announce expanded bank bailout details

New York Times : U.S. Investing $250 Billion in Banks

Bloomberg : U.S. Plans $250 Billion in Bank Equity, Person Says

The catastrophic events of last week have the Bush team huddled around the drawing board, and analysts wondering if they ever even had a game plan. From the New York Times :

“As international leaders gathered here on Saturday to grapple with the global financial crisis, the Bush administration embarked on an overhaul of its own strategy for rescuing the foundering financial system.

Two weeks after persuading Congress to let it spend $700 billion to buy distressed securities tied to mortgages, the Bush administration has put that idea aside in favor of a new approach that would have the government inject capital directly into the nation’s banks — in effect, partially nationalizing the industry.

As recently as Sept. 23, senior officials had publicly derided proposals by Democrats to have the government take ownership stakes in banks.

The Treasury Department’s surprising turnaround on the issue of buying stock in banks, which has now become its primary focus, has raised questions about whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance.”

full story

Not one to shy away from potentially divisive unilateral action, Bush uncharacteristically urged international cooperation on propping up the failing US banking system. The BBC reports :

“At the White House, Mr Bush pledged the G7 most industrialised nations would take robust action together.

On Friday, G7 finance ministers agreed to take moves to free the flow of credit, back efforts by banks to raise money and revive the mortgage market.

Announcing no new policies, Mr Bush said: ‘We must ensure the actions of one country do not contradict or undermine the actions of another.

‘In an interconnected world, no nation will gain by driving down the fortunes of another. We are in this together. We will come through it together.’”

full story