You have to start to wonder how it is that every significant economic prediction put out by this Administration falls short. How is it that President Obama’s circle of economists, led by Lawrence Summers, misses the mark, time after time? Was deception a necessary ingredient in selling the biggest bailout of banks ever, anywhere?
No sooner had the stress test been announced by the new Administration than the OECD predicted that one of the test’s central working assumptions — 3.6 per cent GDP growth in the US for the fourth quarter of 2009 — was far off the mark. OECD, and many others since, put US growth in the 1-2 per cent range for Q4. In fact, economists — especially the ones whose paychecks are not derived from market gains — are now saying that US growth is likely to remain on the low side not just now but for years to come. Lost in the shuffle is the point that stress tests were to assure some protection of taxpayer money used in the bailout of financial institutions.
Unemployment? Most reports now predict it’ll run in excess of 10 per cent , considerably higher than what the White House was saying back in February. Remember when the Gang of Summers predicted a gain of 600,000 jobs by summer, only to now reveal that more than 2 million have been lost? And that’s putting aside from jobs data those who’ve given up looking or temps who want full-time work but can’t get it– which makes the jobless scene significantly worse than the current 9.5 per cent suggests.
Official predictions of mortgage assistance became a fiction in no time, too. Banks are doing very little on that front, as is now widely reported and which was entirely predictable. The one exception is where banks have been sued by states for mortgage fraud (most banks are settling quickly) and have been ordered to provide relief by the courts. Despite those efforts, we are now witnessing a wholesale transfer of wealth out of minority and working class communities — what some are gloomily calling historic in magnitude — as homes are forfeited in cities and towns across the country and new landlords arrive, heroes of the free market.
A few banks are back in the black already and they are trumpeting it. One profit center: late fees. About $25 billion was earned last year in credit card late fees. Banks have announced higher profit goals for such fees and are on course to achieve them this year. It’s a full-fledged growth industry, the kind the Gang of Summers needs to breathe new life into our nation’s financial services industry– the key to America’s recovery. So next time you pay a late charge chalk it up to national duty. Before the fallout, as much as 1 in 3 dollars of GDP was attributed to financial activity, a huge increase from the 1960s and before. The Summers formula puts us back on track to be nation that makes money on money.
I asked Rahm Emanuel last summer if he had concerns that the US would follow other empires — Spain, Holland, Britain — in demise when finance hit 30 per cent of economic activity and collapse ensued (a theory, hardly radical, popularized by Kevin Phillips). Emanuel laughed it off, saying “speculation is good”. For him it was; he made $15 million speculating in the energy sector between government jobs.
Back to the rest of us. No surprise people are struggling to keep up with payments, as wages went down in June, continuing a multi-decade trend. The cost of living went down as well, by 1.3 per cent in May from a year before — the biggest drop in 60 years — and still Americans struggle to get by. With the Fed and financial press gripped by fears of inflation and its prospective effects on US government borrowing, deflation remains dominant— as it was in the 1930s, when few goods at any cost were sold en masse.
Which takes us to the “credit crisis” itself. Was there not a high mathematical probability that expanding credit in an era of stagnant wages was a doomed project, making a bubble burst all but inevitable? Especially when the credit is in the form of high-interest sub-prime mortgages and high-interest credit cards? Just like the science of opinion polling, you only get answers to the questions you ask. And mathematicians up and down Wall Street seemed to have simply eschewed plotting macro, long-term wage trends against credit. Two years appears to be the maximum period of reference invoked on Wall Street, according to former Lazard banker William Cohan in his new and disturbing book on Bear Stearns, “House of Cards”.
Honestly, it starts to feel an awful lot like the West Wing is playing a “Bait ‘n Switch” game and brings to mind a tall tale from another era told by Bill Clinton and HIS resident economic whiz (and Summers’ mentor), Robert Rubin, when they sold a dislocation/low-wage scam, called NAFTA, with promises of better jobs for laid off Americans down the road. Clinton, Obama, Rubin, Summers…. Axelrod, Emanuel.. these men share many traits, it would seem, such as extolling the virtues of patience. And the fact that they are all loaded.
Not to worry. Last week Lawrence Summers assured us that “the stimulus is on track”. “Bait ‘n Switch” starts to feel an awful lot like the Voodoo Economics of the 1980s, when the big wage decline was just being put in motion.
CARL GINSBURG is a tv producer and journalist based in New York. He can be reached at carlginsburg@gmail.com