Monday, March 9, 2009

My suggestion for the White House economic recovery web site: blog and Twitter

The White House has an "okay" web site for the stimulus package,, but it needs a blog and they need to exploit Twitter. I sent them the following suggestion:

The web site needs a blog and Twitter feeds to provide us with more timely information.

See the NY Fed site for Twitter examples:


-- Jack Krupansky

They do have a blog on the main White House web site, so it is not an unnatural request.

Somehow, I find it amusing that the New York Federal Reserve Bank is on Twitter!

In any case, I at least gave them some useful feedback. Have you??

-- Jack Krupansky

My suggestion for the White House economic recovery web site

It is all well and good that the White House has a web site for the stimulus package,, but I did not find it immediately helpful in terms of how much money is actually flowing into the U.S. economy. I sent them the following suggestion:

What is missing and really needed is a classic thermometer that shows the amount of stimulus funding that has actually been disbursed or spent by each agency and is actually out there in the economy.

There should be a daily log listing the agency, specific program, and amounts for daily disbursements and expenditures into the economy above the agency/program baseline budget that is directly attributable to the ARRA stimulus spending.


-- Jack Krupansky

It will be interesting to see if they actually can tell when each dollar of ARRA money is disbursed or spent.

In any case, I at least gave them some useful feedback.

-- Jack Krupansky

Is the nation at the brink of a depression?

What a great name for someone alleging that we are on the "brink of a depression": Specter. According to an Associated Press article entitled "Specter says nation on 'brink of a depression'":

The nation is on the "brink of a depression," but there's a "reasonable chance" that the $787 billion economic stimulus package will help ease the situation, Sen. Arlen Specter said Monday.

Specter, R-Pa., said the nation's economic situation is more dire than the public has been told, but did not elaborate.

"Our economic problems are enormously serious - more serious than is publicly disclosed. And I think we're on the brink of a depression," he told reporters at the state Capitol.


"Had there been no stimulus, I think we'd have gone right off the edge," he said. "I think we're pretty close to the edge anyway, to be very brutally blunt about it."

This is the same Arlen Specter who concocted the infamous Single-Bullet Theory of the JFK assassination and here he is concocting a conspiracy theory about the U.S. government allegedly withholding information about the economy. Yeah, right.

In truth, there is no "edge" or single trigger event for a depression. A true depression is a very long, very slow downward slide. Sure, people worry about whether our current slide might have that lasting potential, but there is no evidence of that yet -- even if the dear senator might have fearmongered himself into believing so.

It may not feel like the government actions are having much of an effect, but that is because the Federal Reserve, Treasury, et al are still busy putting all of the elements into place and it will take more than just a few months to see fruit borne of those efforts.

My theory is simply that we need to finish burning off the excess "growth" of the past several years which was fueled by super-cheap credit and exotic financial instruments. That might mean a net hit of 5% to 10% to GDP, employment, income, and spending, but this is not a long-term depressionary process. Sure, such a "structural contraction" is much worse than a garden-variety inventory-based recession, but we already have enough structural supports in place to effectively preclude a true depression.

If we are at a brink, it is a brink of starting to see the positive impact of the stimulus and the Federal Reserve efforts to restart non-bank lending (what was called the "shadow banking system.")

The simple reality is that politicians love to peddle one of two things: sunny-day fantasies or deep, dark gloom. The latter gets a lot of traction these days regardless of what reality might be.

-- Jack Krupansky

Has the economy really fallen off a cliff?

Colorful metaphors are great fun, but never terribly enlightening. Warren Buffet is an endless source of colorful metaphors, the latest of which is his allusion that the U.S. economy has "fallen off a cliff." He uttered this odd characterization in an interview on CNBC [but... but... but... I thought their credibility had "fallen off a cliff" after Jon Stewart's "takendown"!!! Have they rehabilitated themselves already?!?!] that is summarized in a Reuters article by Jonathan Stempel entitled "Buffett says economy fell off cliff, fears inflation."

Now, to be fair, maybe Mr. Buffett considers any recession to be a "cliff." Sure, any contraction of economic activity is not to be desired, but the simple fact is that the "fall" to date of the U.S. economy has been only a "few" percent, which is hardly a cliff.

Now, the stock market can be legitimating characterized as having "fallen off a cliff", but there has been no comparable decline in the overall real economy, whether you look at GDP, employment, income, or spending.

To be clear, yes, the U.S. is experienced a severe "structural contraction", that may leave the U.S. economy 5% to 10% smaller over the next year or two, but that hardly constitutes a "cliff."

A fall from a cliff is not something that you survive. The U.S. economy is surely going to survive.

Mr. Buffett enjoys being colorful, something that CNBC is well-positioned to promote, but not for any socially useful purpose.

-- Jack Krupansky

Wednesday, March 4, 2009

Zombies and nationalization, what's it all about?

With all of the non-stop, mega-volume talk about "zombie banks" and how nationalization of banks is the only way to go, one has to wonder whether President Obama and his team are really as bone-headed stupid as their critics suggest. So, what is really going on?

Put simply, it is all about sour grapes and lobbying.

First, let's acknowledge that there is always more than one way to skin a cat, and that includes dealling with so-called zombie banks. So, maybe critics half a half a point in that their proposals could work. The problem is that these critics refuse to accept what I just said, namely that there are in fact multiple possible paths that lead out of the current financial swamp. Alas, pride, ego, and ideology prevent the critics from admitting any such thing.

Second, the whole concept of a bank being a so-called "zombie" is predicated on all of their "risky" credit assets effectively being worth zero or at least something very far from 100 cents on the dollar. The real problem is that we will not know the true value of many of these assets until the economy is back to normal growth mode. Until then, hard-core freemarketeers will insist that all "risky" assets are effectively worth zero. Their ideology and possibly even personal trading positions prevent them from allowing that a significant fraction of these risky assets will be worth something much closer to 100 cents on the dollar a few years from now. In short, one man's "zombie" is simply another doctor's hospital patient. Never confuse the present with the future. The future has to be worth something to any sane person, but those who drone on and on about zombies can admit no such thing.

Third, many of these critics are probably just shilling for pals who have bearish trading positions that are bets on the decline or failure of the various financial institutions. Even if they do not have a direct position, they may pal around with traders and speculators who do and essentially be their mouthpieces.

And then there is the media. They love a juicy story. Negativity sells. They are out to make money, not enlighten you.

The real bottom line is that many of the critics are much more interested in lobbying for their pet plans than allowing that the administration economic team might succeed.

Treasury and the Federal Reserve may not yet have all of their ducks lined up yet, but they are actually doing an outstanding job and much more likely to succeed than their critics will ever be willing to admit, even after the fact.

Yeah, our major banks sure have made a lot of mistakes over the past five years, but it would be far better to allow the administration economic team to continue their efforts, which includes course adjustements as reality evolves, than to try to bend to every self-serving criticsim and proposition that critics lob at them.

Personally, I do not see any of the big banks as likely to fail or in need of true nationalization. All of them are in fact lending, but not to the excess we saw during the housing boom. I see no merit in referring to them as zombies. Yes, more bailout money will clearly be needed (a trillion, maybe two?), but their trajectory is getting better as each day, week, and month goes by.

The good news is that the evil old Wall Street which was the primary driver of the excesses of recent years is rapidly vanishing.

In short, no sane American need lose even a moment of sleep at night worrying about "zombies" and "nationalization".

-- Jack Krupansky

Tuesday, March 3, 2009

What are we doing in Afghanistan?

I am no fan of New York Times Op-Ed columnist Bob Herbert, but in his column entitled "Wars, Endless Wars" he does raise troubling questions concerning just what exactly the U.S. is doing in Afghanistan. As he puts it:

The U.S. economy is in free fall, the banking system is in a state of complete collapse and Americans all across the country are downsizing their standards of living. The nation as we've known it is fading before our very eyes, but we're still pouring billions of dollars into wars in Afghanistan and Iraq with missions we are still unable to define.

Bob expresses his concerns, but does not really try to dig deeply to identify the root problems other than a sense that there is simply no clear strategy.

Is it really all about Iran, keeping them boxed in and under pressure to abandon their support for terrorism (Hamas and Hezbollah) and their "nuclear ambitions"? Maybe, but not quite since there are also troubles in Pakistan.

Is it really all about religious extremists? If so, major military operations are probably not likely to ever reach a point we could call success.

Is it maybe at heart a war on Islam? Could be, but nobody will admit that in public.

Is it driven by yet another crackpot worldview and policy initiative of the shadowy so-called Pro-Israel Lobby? Once again, it could be, but nobody will admit that in public.

Whatever it is, we do not appear to have a robust exit strategy identified and in place and underway.

Are we fighting "terrorists" or shadows or even illusions? Maybe all three.

-- Jack Krupansky

Wednesday, February 25, 2009

Paul Volcker argues for splitting commercial and investment banks

In a recent speech, Paul Volcker, former Federal Reserve Chairman and current economic adviser to President Barack Obama, argues that we need to separate traditional commercial banking from investment banking in order to get a more stable banking system:

I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions -- or at least that's the way the market is going -- whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.

This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.

What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them – it's the service part of the financial system.

And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world.

So you have this bifurcated -- in a sense -- financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries. I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies.

These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically – they would never admit this – given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre – why do we need it, they thought. Obviously that hasn't worked out very well.

This leaves open the question of whether commercial banks could offer retail brokerage services. I think they could. In today's model, retail brokerage has traditionally been a "sales" function for investments banks, but that is no longer working out very well for most consumers.

They key thing is that banks would once again be true banks, with a focus on absolute protection of the value of cash.

-- Jack Krupansky

Here is what President Obama needs to do...

There is only one thing that President Obama needs to do:

  1. Continue to ignore all of the "back-seat driving" advice he is getting from so many pundits, commentators, alleged experts, journalists, and even his supposed supporters.

He is incredibly smart in his own right and has direct access to the infamous "best and brightest", many either working right in the White House or a mere phone call away. He has no shortage of resources for assembling all of the relevant facts and driving towards effective solutions to the challenges before us. End of story!!!

There are two core camps of critics of the President:

  1. "The Opposition" - plenty of sour grapes there. This is to be expected -- and ignored. They lost, but they want their losing ideas to live on. President Obama is doing a great job of continuing to humor them.
  2. Progressive supporters who can never accept the concept of compromise. They need to just sit down and shut up. President Obama will compromise on progressive ideals only to the extent that it is necessary to effectively govern. The Progressives need to accept that.

President Obama can, has been, should, and will continue to "dialog" with both camps as he continues to forge compromises that address the challenges before us.

In other words, President Obama needs only to continue to follow his own nose and gut instinct, critics be damned. Or, in today's vernacular, "Let them blog."

-- Jack Krupansky

Tracking the ongoing media mania over alleged parallels to The Great Depression

I am endeavoring to track the current media mania of attempting to draw parallels between the current economic situation and The Great Depression. I am doing this by using Google News to count the total number of "news" references to the phrase "The Great Depression" in the previous 24 hours.

  • 1/10/2009: 411 hits
  • 1/30/2009: 319 hits
  • 2/6/2009: 308 hits
  • 2/25/2009: 389 hits

-- Jack Krupansky

Tuesday, February 24, 2009

Is it all about trust or about honor?

The financial crisis is causing people to reflect on trust, but I think the core issue is honor. Honor has to be in place before trust can be established, otherwise the trust is simply empty and truly meaningless. For quite some time I have thought of Wall Street (and even most banks) as "Thieves Without Honor." Without a core of intense honor, any firm is just one giant Ponzi scheme, one ethical error away from disaster. Wall Street wants to take a CDO approach to "managing" trust -- with bad assumptions about the maximum default rate on their synthesized approach to "honor". We need a return to hard-core, true honor not the synthetic, artificial contrived appearances that Wall Street and banks in general have made their stock in trade.

In the old days, lots of marble, polished brass, fine-tailored suits, and an impressive-looking vault were all we needed to "trust" a bank. No more. Sadly, Wall Street and most banks still believe in a lot of that crap, albeit with a "fresh modern" veneer of a lot of slimy marketing as icing on their cake, but all of that needs to go.

The really tough thing is that trust is based on appearances for so many people. How do we go about emphasizing, measuring, auditing, and rewarding honor as "Job #1"?

-- Jack Krupansky

Financial models, variables, parameters, assumptions, "Garbage In, Garbage Out"

It is so easy to blame so much of the current financial crisis on complex "financial weapons of mass destruction", but it is not necessarily so simple. I have read descriptions about how CDOs (Collateralized Debt Obligations) are supposed to work. The actual ideas are not that bad. Clearly the models for these instruments ultimately failed, but as far as I can tell the basic models are in fact reasonable.

Like all models, there are plenty of variables and parameters. If you do not get the variables and parameters right, then of course the models will fail.

Any wizened old computer programmer can tell you a simple truth about even the most perfect computer software: GIGO - Garbage In, Garbage Out. In fact, it does not matter if you get 99.9% of the variables and parameters absolutely right, even one bad key parameter can spoil the entire model.

In the case of CDOs, a key parameter is the maximum default rate, how many people can fail to pay their mortgage payments before the model begins to fail. If the default rate is below some threshold, the models work extremely well and almost everybody makes lots of money. But, if the default rate is above some threshold, the models, as they say, "blow up" and either nobody makes any money (a CDO of absolute junk subprimes) or many people get wiped out and some indeterminate number are still magically protected by the models. But unless you can accurately predict how many will be protected, the safe assumption is that none will be protected. Unfortunately, we need to know the expected default rate in the future for a given pool of securities, and that is the one most important thing we do not know at this stage, unless the government steps in with a guarantee.

The crisis appears to have occurred because the assumptions about the near future and resulting parameter values were simply wrong, really wrong. Sure, the modelers may claim that they did not "know" that junk mortgages were being sold and that the housing boom was actually a bubble, but models are supposed to incorporate all of the variables and parameters of the real world, not some idealized world.

During the housing boom, modelers set their parameters on the assumption that the future would resemble the past. No gung-ho modeling group anxious to share in the corporate bonus pool was going to set their parameters based on the near future resembling The Great Depression (or worse.)

Wouldn't it be a hoot if it was all that simple, great models, but just a few "bad" parameter values?!?!

-- Jack Krupansky

The financial crisis and the Nuremberg Excuse

There is no shortage of finger-pointing as to the causes of the current financial crisis. I was somewhat stunned to read the following anecdote by former Federal Reserve Chairman Paul Volcker in a recent speech:

One of the saddest days of my life was when my grandson -- and he's a particularly brilliant grandson -- went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."

What else is there to say?

-- Jack Krupansky

Monday, February 23, 2009

Thomas Friedman: The government should give money to venture capital funds

I am no fan of Thomas Friedman, but I do agree with most of what he says in his latest Op-Ed in The New York Times entitled "Start Up the Risk-Takers" in which is proposes a fairly simple model for government investment to create new jobs:

Call up the top 20 venture capital firms in America, which are short of cash today because their partners -- university endowments and pension funds -- are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors' upside and keep 80 percent for themselves.

Sounds like a plan. But, it is not quite so simple. True, professional venture capital firms operate in a relatively narrow range of financing and stage of development. The typical paradigm for a venture capital-funded venture is "early stage", were only a relatively modest level of capital is needed (rarely more than $20 million), and where only a modest number of jobs are generated. Sure, some venture capital firms offer "later stage" funding, but that is still for the relatively early life of a new venture when growth is high but revenue and jobs are still relatively modest. The Googles and Microsofts and Intels of the world did not require large-scale capital in their venture capital stages. So-called expansion capital on a large scale typically comes not from professional capital firms, but either organically funded from revenue and profits from dramatic early success of a Google or Microsoft or Intel, or from debt offerings on Wall Street or other non-venture capital sources. That is the stage when a high volume of jobs are created.

Professional VC firms do offer growth stage funding ($10 to $50 million), but that is still only the stage where a venture might be hiring no more than a few hundred people, not the major growth stage where thousands of jobs are being created and hundreds of millions of capital investment are being made.

Sure, I agree with Friedman -- and have already myself suggested -- that the government should temporarily step in to fund professional venture capital firms that are having difficulty raising capital from their traditional sources such as large banks, insurance companies, pension funds, and large endowment funds (all of whom are themselves struggling financially), but this is money to fuel a future wave of job creation, say three to ten years from now, and won't create millions of new jobs in the next two to three years.

There are also SBIR, SBA, and other government funding programs that can be boosted directly by the government. Government guarantees for bank loans and debt offerings for young, innovative ventures could also be a big help for growing innovative companies far beyond the early stages where venture capital is most successful at boosting promising companies and weeding out the good ideas that simple do not work in the real world.

Yes, by all means the government should ramp up venture capital investment, but that will not obviate the need for stimulating and supported significant chunks of the "old economy" for many years to come.

Besides, the last thing we need is yet another new "bubble", let alone a slew of them.

We want new ventures that are robust and durable, not flash-in-the-pan, "gold rush" style "opportunities."

Energy innovation is worthy of investment, as is filling the gap for funding of venture capital firms, but let us be careful to avoid turning this into another "dot-com boom", because we all know how that movie ended.

The good news is that it might cost only $20 billion (as Friedman suggests) to give the venture capital industry the shot in the arm that it does in fact need.

Personally, I am not completely convinced that any or many of the top VC firms could actually put $1 billion to use with their current investment paradigms and I would not want to destroy the current paradigm that works so well. To be clear, over-investment does not result in comparably greater success. Maybe $250 million average (per year) for the top 20 firms and $50 million average for the rest of the top 100 firms would be more than sufficient for the level of investment that these firms could manage successfully at this point. That works out to about $9 billion a year. Okay, double it to make sure that good businesses do not have trouble getting funded. That gets us to $18 billion, close to Friedman's number. My own original number was $2 to $3 billion a month or $24 to $48 billion per year. My model was simply that in times of financial crisis, better to err way over the top. At this point, I would prefer to hear the VC sector tell us what they feel that they need. Offer them $50 billion a year and sit back and watch the spectacle of them saying "Please give us less money."

Maybe the key thing is for the government to be able to assure VC firms that there will be "government supported" funding (e.g., debt securities) available for VC-funded companies that have advanced beyond the VC-supported stages to the point where they do need tens or even hundreds of millions to expand to the degree where individual firms are creating many hundreds or thousands of jobs. This might help to encourage VC firms to fund new ventures that will eventually require large-scale capital after they advance beyond the stages where traditional VC firms add the most value.

Finally, Friedman did not even mention so-called "angel" investing, where individual investors are funding innovative new ventures at a smaller scale than normally appeals to professional venture capital firms. Give these people more generous tax incentives, matching funds, and possibly some degree of government guarantees, or maybe outright tax credits, and you could see a dramatic blooming of innovative firms.

In any case, I do have to give Friedman credit for raising awareness of this critical issue to the national level. A single small paragraph in my own blog simply wasn't good enough to even get the ball rolling:

Provide government funding to venture capital firms which are experiencing extreme difficulty raising funds from traditional sources (big banks, pension funds, and insurance companies) due to the credit crunch and skrinkage of the economy, on the order of $2 to $3 billion per month.

-- Jack Krupansky

Tuesday, February 17, 2009

Death to the Hummer!!

As GM struggles to restructure to survive, it seems abundantly clear to me that the Hummer has to go. Sure, if they find a buyer they should sell the Hummer business. If they are unable to line up a buyer and the business is unprofitable, the solution is clear: they must kill off the Hummer business. Simply shut it down, kill the Hummer.

Besides, the Hummer is the epitome of excess of a world that no longer exists. Big, expensive, guzzles fossil fuel, favored by overpaid managers and executives -- including those of Wall Street.

At heart, the Hummer is a distraction to GM management. Rather than expending time, energy, and resources figuring out how to save the Hummer, GM management should focus all of that time, energy, and resources on the Volt and other paths that at least have a hope for the future.

The Hummer must go. GM should kill it while they have the chance.

What about Saab? Simply spin it off to local Swedish management for $1, let it file for bankruptcy, and let the Swedish government decide if there is anything worth saving there. If anybody actually wants to buy it for more than $1, great, sell it ASAP. Either way, get this dog off of the plate of GM management as well.

The only thing GM management should be focused on is the path to the future.

-- Jack Krupansky

Friday, February 13, 2009

Simple solution to the mortgage crisis

All manner of "fixes" have been proposed and will continue to be proposed to "fix" the housing/mortgage crisis, but none have so fare managed to gain traction. I have a simple proposal which I call the Mortgage Resolution Corporation (MRC), a government-sponsored entity (yeah, I know...), whose primary function is simply to make mortgage payments whenever the consumer fails to do so.

The bank or other mortgage servicing entity would simply electronically "debit" an account for the consumer at the MRC for the principal and interest.

In exchange, the MRC incrementally assumes a partial ownership of the mortgaged property, ahead of the consumer, and possibly ahead of the bank or mortgage servicer for the amount of principle paid down.

The MRC would maintain a debit account for the amount of mortgage payments paid so that if and when the underlying property is sold, the consumer would receive a capital gain only to the extent that they have paid down their MRC debit account. This would provide an incentive for consumers to eventually catch up on their payments and not get too much of a free ride.

The MRC would be like the old toxic waste dump "Superfund" program in that its first job is to keep payments flowing and keep people in their houses, but to also attempt to recoup costs whenever legally possible.

Initially, the U.S. government would fund the MRC, but after it has been in operation for a few years, it would be expected that the private sector would buy into the MRC and supply private capital to run the program with explicit government backing of the mortgages.

This plan would:

  1. Eliminate foreclosures.
  2. Keep mortgage payments flowing to banks, servicers, and investors.
  3. Keep people in their houses even when they lose employment or have expensive health problems.
  4. Earn the taxpayers a healthy return over a 5-10 year period as the housing market eventually bounces back.
  5. Earn homeowners a profit to the extent they maintain the property for 5-10 years and eventually catch up on all mortgage payments.

Do you have a better idea??

-- Jack Krupansky

Thursday, February 12, 2009

Stimulus II

Now that the stimulus bill is virtually a done deal, it is time to start thinking about what the next phase of stimulus should look like. The current stimulus package will have some positive effect on the ecnomy, but there is still a lot more painful restructuring of businesses needed that will leave millions more people out on the street in the coming months. Another 700,000 workers filed for unemployment insurance in the past week alone. The number of ex-workers on unemployment insurance is approaching 6 million. And there is no end in sight. Sure, there will be some firms that will begin rehiring over the next couple of months as some of the stimulus kicks in, but many firms will still be faced with declining revenues over those same months.

The current stimulus package is a decent stopgap measure, but it is still only a partial solution. Even if it creates several million jobs over the next two years, there will continue to be millions of people with no significant income and many millions of those who still have jobs who become more frugal, further savaging consumer spending.

By June, a lot of the reality of the current stimulus and ongoing restructuring of the economy will be somewhat more obvious, so that July might be an excellent timeframe for considering Phase II of stimulus.

My current thinking is that a "Stimulus II" package should include:

  1. Direct stimulus to consumers, on the order of $50 to $100 billion per month "until further notice". Sure, some people will save much of this, but that will help to shore up consumer balance sheets, which is a necessary component of getting the economy on a sounder footing. Besides, there are so many millions of people out of work for whom "saving" is not an option. This spending would phase out as real consumer income gradually and eventually improves.
  2. Increased government business investment spending on the order of $50 to $100 billion per month to spur demand for the goods and services of businesses. Businesses need to see higher demand and actual revenues before they start hiring in earnest. The simple reality is that we need a somewhat bigger government component in the economy to protect people from serious economic episodes such as this one. There is plenty of room for expansion of government services - paid for by the government, but provided by the private sector.
  3. Provide government funding to venture capital firms which are experiencing extreme difficulty raising funds from traditional sources (big banks, pension funds, and insurance companies) due to the credit crunch and skrinkage of the economy, on the order of $2 to $3 billion per month.

That would be a start. I am sure that even more is needed. But, maybe not a lot more. Basically, we need to keep stimulating until unemployment is low again, and then gradually withdraw stimulus as the private sector picks up the slack.

The key is that unless there is sustained stimulus, we risk facing a "1937" problem, where the U.S. actually began recovering from 1934 to 1937, but then ran out of steam and declined again and languished until another form of stimulus appeared (World War II.)

-- Jack Krupansky

Monday, February 9, 2009

Senate stimulus bill ready for final vote tomorrow

The Senate version of the stimulus bill cleared its main hurdle a few minutes ago with 61 senators voting for the compromise deal amendment. This means that the Senate can hold the final vote on its bill tomorrow. Then the House and Senate bills move on to a conference committee where the real horsetrading begins. Once the conference committee issues its final "report" for the bill, the House and Senate each hold one final vote to approve the final conference bill that will be sent to President Obama for his signature.

It is unclear at this time what House items might be added back or what Senate items might be removed. That will be a matter for the House and Senate leaders to negotiate, not to mention the three Republican senators whose votes are needed to pass the final bill in the Senate.

The bill remains a cross between an over-decorated Christmas tree and an over-stuffed sausage, but that is about how it started out in the House anyway. The final trimming and stuffing will not occur until Wednesday and Thurdsday when the House and Senate bills are reconciled by the conference committee.

-- Jack Krupansky

John Taylor: How Government Created the Financial Crisis

Monetary policy expert John Taylor has an excellent opinion piece in The Wall Street Journal entitled "How Government Created the Financial Crisis- Research shows the failure to rescue Lehman did not trigger the fall panic" that succinctly argues that it was a string of monetary policy errors and misguided interventions on the part of the Federal Reserve and Treasury that created and prolonged the financial crisis. Technically, he is absolutely correct, but unfortunately monetary policy has more than a little domestic politics guiding it that precludes a strict and correct monetary policy. Could we have done better? Yes, but we could have done a lot worse as well.

-- Jack Krupansky

Sunday, February 8, 2009

Is bipartisan politics DOA in Obama's "new" Washington?

Barack Obama was chosen by Americans to be their next president based on an apparently sincere desire to bring "change" to Washington. He claimed that he was going to eliminate the "same old games." He claimed that he would reach across the aisle in a truly bipartisan spirit. He claimed to be devoutly anti-lobbyist. I do believe that he is sincere in these commitments, but some of them will simply take time and never should have been considered as "Day One" slam-dunks.

The case in front of us is the fiscal stimulus bill currently soldiering down the partisan political gauntlet known as Congress. As traditional Washington legislation goes, this bill is actually doing quite well, but as a centerpiece of the "new politics" bipartisan spirit that Candidate Obama seemed to be espousing, it is essentially DOA (dead on arrival.) Its one success is that it does not have any true "earmarks", but it is chock full of pet hobbyhorses of innumerous subgroups of congressional factions of every stripe and flavor.

One other semi-success is that the original "plan" from the White House economic team did have one bipartisan twist, namely a significant dose of tax cuts and breaks that were clearly designed to appeal to Republicans. That was a wise choice, but President Obama is essentially credited with no points for that wisdom since liberal Democrats hate it and Republicans were denied the right to a "pride of authorship" participation in the drafting of the plan.

The net result is that just about everybody hates the bill for some reason or another. Maybe that is why it will pass: each faction knows that no other faction got what it really wanted. There is an old saying that the only truly successful and lasting settlement is one in which each party to the negotiation gives up something very dear to them.

That is essentially the proposition before us: Do we "blame" President Obama for this ugly duckling of a bill, or do we praise him for setting idealism and ideology aside and being so pragmatic as our Community-Organizer-in-Chief?

Us centrists and pragmatists will praise him, but the idealists (progressives) and ideologues (conservative Republicans) will vilify him.

Essentially this comes down to an all-out battle (war?) between those who believe that compromise (bipartisanship) is a force of good and those for whom it represents pure evil.

This is not the end of bipartisanship, but it will be a long war as the right wing conservatives seek to protect their dwindling legacy and the left wing progressives seek to recover that which they believe was stolen from them and otherwise denigrated in past years (vengeance?).

-- Jack Krupansky

Saturday, February 7, 2009

Compromise amendment for stimulus bill still not quite ready, but coming soon

Senate Majority Leader Harry Reid just explained that staff has been drafting the 800-page compromise amendment non-stop since the 5 PM deal yesterday and it is expected to be ready to be formally submitted within a few minutes. There would be a procedural vote late Monday afternoon and then the big Senate vote on the entire bill could occur on Tuesday.

-- Jack Krupansky

Tuesday, January 6, 2009

What concessions will Barack Obama make to the Republicans to get a timely stimulus bill passed by a wide margin?

Although there has been talk of the big stimulus bill being delayed until the middle of February, I think this is simply the "same old games of Washington" mentality trying to take root again, and premised on the Democrats proposing an unacceptable bill that passes the House and then fails in the Senate and then gets renegotiated to be what it should have been in the first place. But, in meetings on Monday, Barack apparently indicated that he wanted a bill sooner than what people were talking about. There was also talk that he is determined to get 80 votes in the Senate. That makes a lot of sense to me, but suggests that major concessions will be needed. The ultimate question is what concessions Barack Obama will be willing to make to the Republicans in the Senate in order to assure that the bill gets passed, gets passed with a fairly wide margin of moderate Republicans, does not get blocked by angry right-wing Republicans, and gets passed ASAP, within a few days of the innauguration.

The precise list of concessions is not as important as the question of process. Barack is a strong enough community organizer to be able to deeply comprehend the extent to which he will need to make moderate Republicans relatively comfortable with any stimulus plan, as well as to assure that no right-wing Republicans feel offended enough to block the bill with parliamentary maneuvers. I am 100% confident that Barack knows this "game" well and will play it well, despite opposition to compromise that will come from his Progressive supporters.

I look forward to Barack signing a solid stimulus bill before the first of February.

-- Jack Krupansky

Saturday, January 3, 2009

Does Pelosi get the message about working with the Republicans?

In his weekly address, Barack Obama talks in vague terms that "the problems we face today are not Democratic problems or Republican problems... These are America's problems, and we must come together as Americans to meet them with the urgency this moment demands." and that "we need an American Recovery and Reinvestment Plan." I am sure that Barack fully understands that he needs more than a couple of Republicans onboard if he wants a plan that is as grandiose as he envisions and as quickly as he correctly deems it necessary, but I have seen no evidence that Pelosi and her fellow Democratic hench-persons in both houses of Congress are in fact ready if not enthusiastic about accommodating the alternative views of a moderate number of moderate Republicans. From news reports, it does sound as if Barack's stimulus (or "recovery and reinvestment") team has been instructed to incorporate items from an earlier House stimulus bill, but that is surely a recipe for arriving at a standoff with most Republicans in the Senate. I suspect that Barack knows that this will be the result in the very near term (this week) and that he has "calculated" that he needs to allow that result to show that he is nominally on the side of the Progressive wing of the Democratic party. Once that standoff is reached, Barack can then turn to Pelosi, et al and wait for them to finally admit that they will have to make some concessions in order to get their bill passed. Barack will not have to say anything. The Democrats already know that concessions are needed, but they need to play to The Progressives and pretend that the Democrats "control" Congress. This is the way "The Game" is played in Washington. Sure, Barack said he wanted to stop playing "the same old games of Washington", but he wants fast, substantial results, so that's what is required.

So, the question is what Progressive elements of the current, unseen American Recovery and Reinvestment Plan will need to be ditched and what minimal collection of Republican stimulus policies need to be added to get at least a dozen moderate Republicans to vote for the bill and to not have it be so toxic to the remaining right-wing Republicans that they engage in parliamentary stalling tactics.

Barack said:

I look forward to meeting next week in Washington with leaders from both parties to discuss this plan.  I am optimistic that if we come together to seek solutions that advance not the interests of any party, or the agenda of any one group, but the aspirations of all Americans...

The first part about "discuss this plan" suggests that his initial proposal is somehow already cut into stone and he will be like Moses presenting the Ten Commandments, but then he goes on to say "seek solutions that advance not the interests of any party, or the agenda of any one group", suggesting that significant changes would be permitted, even bi-partisan changes that are not strictly supported by only the Democrats. These are conflicting messages, but I suspect that is intentional on his part.

What Barack is really saying is that his initial proposal incorporates most if not all of the Progressive economic agenda, which should convince The Progressives that he is nominally on their side, but that he fully recognizes that compromise with moderate Republicans will be required and essential and in fact a good thing.

To be fair, Pelosi may in fact agree with this approach 100%, but for political reasons cannot and must not challenge The Progressives and admit that compromise will be even considered.

So, this necessary Democratic pandering to The Progressives means that an economic stimulus plan needs to be rolled out in this multi-step fashion, with step one being intentionally crippled to pander to The Progressives, step two being moderate Republicans shaking their heads "No", step three being Barack meeting with all of the "injured" parties, step four being Pelosi acknowledging that the Senate does not have the votes, step five being modifications to make the plan bi-partisan, and finally passable by the Senate.

-- Jack Krupansky