McCain: I won’t be a rubber stamp for Obama

I just posted this in a different thread. I do expect the recession to still be raging two years from now, so I’d vote against it, both on principle and on the politics:

Even though Greenspan’s experiment has caused the greatest credit crisis since 1931, Bernanke continues to pursue the same failed idea, of excessively easy credit to reflate the currency. The Austrian School has pointed out that after a credit bubble has burst, easy credit will not restart it. So far, that is what is happening. Right now the fear is of major money center banks failing completely, despite the bailouts to date. Another $350B of TARP won’t stave off a bankrupt industry $3T on the hole.

John Mauldin offered a guestblog called The Great Experiment which puts all of us as guinea pigs in a grand exercise of academic economics. Welcome to the petri dish! In 1933 debt to GDP grew to 300%; in 2003 we went over 300% and are flying over 360%. Bernanke has tried to reflate, growing reserves 2000% and making M2 grow an astounding amount of 18% on the last quarter, all for naught: the velocity of money (its turnover) is plummeting and is unlikely to reverse as people hunker down for the Greater Depression. Household wealth has fallen $10T, and this is expected to lower spending by 3.4% per year for the next three years, as compared with 2.9% growth in the prior five years. A net drag of 6.3% of GDP per year, or 19% over the next three years.

Obama’s $850B stimulus is unlikely to have any impact beyond extending the disaster farther out. It contains payoffs to political constituents and pet projects that have been kicking around for years, but almost nothing that will create future wealth or prosperity. All the jobs created will be temporary and go away when the money dries up. Whither the Obama Hope Rally? The market sees it as a $850B black hole of waste, not as a kickstart to a new economy. This waste is borrowed, hence pulls capital out of productive use, deepening the problem. The only prescription that might work is a permanent one, like a major tax cut – for example, ending corporate income taxes completely to spur private investment and competitiveness.

During Greenspan Indian Summer, we borrowed more than we grew, and it is becoming clear that a lot of the money borrowed was squandered in frauds and conspicuous consumption. Perhaps half the excess borrowing of $4T over GDP growth was wasted, putting us into a $2T hole. The first bubble, real estate, peaked in 2005, and put housing way above the long term trendline of prices. They have to fall – and the value has to be lost – before we can grow that sector again The second bubble in commodities lasted into July 2008, and left huge destruction across almost all markets, but at least these markets seem to have corrected already – the excess has been lost.

On top of this $2T hole we had the overhand of the 2000 dot-com bubble, estimated in one of a series of great analyses by Karl Denninger as another $1T of excess. By keeping the party going, Greenspan prolonged the day of denouement. We might be roughly only at a $3T of excess or 20% of GDP, except for actions taken since the meltdown. The Bush stimulus of $170B was mostly saved or wasted; it created no lasting prosperity. The part of the initial TARP that seems to have dissolved in waste is around $175B or half the amount given out so far; adding these wasted amounts to the Obama stimulus we might be around an additional $1.2T of wasted spending that deepens the hole.

This means the Greenspan Indian Summer has taken a $1T problem and grown it to a $4.2T debacle, or 30% of GDP. With the profound change of consumer behavior, to save rather than spend, we potentially have another 19% of GDP to fall. Perhaps the two calculations overlap a bit, but it is safe to estimate that the coming GDP drop will be at least 35% of GDP, or about the level of the first part of the Great Depression (35% down in the first wave, 20% down in the second).

venividivici on January 25, 2009 at 9:22 PM

Seven Percent Solution on January 25, 2009 at 9:51 PM

I used to think Congress’ incompetence was of the genial sort that could be ignored, but it’s definitely turning into the malevolent sort that needs to be stopped immediately.

You know it’s a terrible piece of legislation since the Democrats want GOP support. If the thing was so great and wonderful, the Dems would be ecstatic to pass it without a single GOP vote, just to take all the credit. All other discussion of the merits of the bill are just noise compared to that simple fact. The Democrats are willingly putting junk into law that they know won’t work except as political payoffs and they want the GOP to take part of the blame later on. If the Democrats don’t believe it will work, why should I?

venividivici on January 25, 2009 at 10:29 PM