Financial Markets

Today, as Republicans release a manifesto labeled as an alternative budget and President Obama meets with CEOs of major banks, we're pleased to present you with some helpful thinking on these issues.

First, though, I'd like to draw your attention to an April 1 NDN event: The G-20 Summit and Beyond: Challenges Facing The Global Economy. This event, to be held at NDN and hosted by NDN President Simon Rosenberg, will feature NDN Globalization Initiative Chair Dr. Robert Shapiro and Dr. Moisés Naím, the Editor-in-Chief of Foreign Policy magazine. Click here to RSVP.

• The New Treasury Program: Sound Economics, Resting on Some Wishful Thinking by Dr. Robert Shapiro, 3/25/2009 - Shapiro points out that, since we've never seen this kind of crisis before, there's little way to know what will work to fix the financial system, but that doing nothing is unacceptable.

• Hope and Optimisim II by Michael Moynihan, 3/16/2009 - Moynihan looks at some recent developments in the financial world and sees cause for cautious optimism. 

• Weekly Kos Poll, GOP Still at 16 Percent, Messaging the Economy by Simon Rosenberg, 3/14/2009 - The strongest argument for President Obama's economic plan is that, despite strong productivity and GDP growth over the last eight years, the typical American family saw its standard of living decline.

• How Long the Recession Could Last - and Why It Matters So Much by Dr. Robert Shapiro, 3/12/2009 - Shapiro arguest that the Great Recession is anything but traditional, so there's little reason to expect a traditional recovery.

• Sustainable Funding for Sustainable Infrastructure by Michael Moynihan, 3/9/2009 - The old system for infrstructure funding is inadequate for creating a robust, clean infrastructure driven future.

• GOP Economic Policy as an Exercise in Grief Management: Denial, Anger & Rush Limbaugh by Dr. Robert Shapiro, 3/5/2009 - Shapiro puts on his psychologist hat and argues that the only explanation for the current Republican thinking on the economy is that they are angry and in denial about losing.

• The Utter Bankruptcy of Today's Republican Party by Simon Rosenberg, 1/28/09 - Rosenberg argues that Republican opposition to the economic recovery package represents the ideological bankruptcy of the party.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

• Making the Struggle of Every Day People the Central Focus of the National Debate by Simon Rosenberg, 8/17/2008 - As the 2008 presidential campaign entered a crucial phase, Rosenberg argued that political leaders must focus on raising the wages and incomes of Americans.

With President-elect Obama and congressional leaders meeting this week to discuss the economic recovery and reinvestment package, NDN is re-releasing a selection of its economic policy analysis and recommendations from the past few years. I hope you find these essays, memos, and papers helpful.

Background: Economic Recovery and Reinvestment

• Getting the Stimulus Right by Michael Moynihan, 1/6/2009 - Moynihan makes a number of suggestions for ensuring that the upcoming, record-size stimulus package is a success, including a board to oversee the vast expenditures.

• A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy, 11/18/2008 - NDN's Green Project hosted this discussion with Congressmen Jay Inslee and Earl Blumenauer, FERC Comissioner Jon Wellinghoff, Kurt Yeager, and Reid Detchon on the benefits of modernizing the nation's electric grid as part of a clean infrastructure agenda.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure
  by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• Solar Energy: The Case for Action by Michael Moynihan, 8/1/2008 – This major paper on the dynamic solar industry argues that accelerating the deployment of solar energy must become a top economic policy priority of the United States.

• The Green Economic Opportunity and Energy and the American Way of Life, 8/1/2008 - This two-part event featured an address from U.S. Senate Assistant Majority Leader Dick Durbin on the benefits of a low-carbon economy and Roger Efird, Greg Kats, Jack Hidary, and Shyam Kannan discussing green buildings and clean technology.

• Investing in Our Common Future: U.S. Infrastructure by Michael Moynihan, 11/13/2007 - This
  far-reaching paper proposes a set of measures rebuild and advance our aging infrastructure. These proposals include a GREEN Act to require that federal infrastructure and buildings meet a higher set of environmental standards that not only address issues such as global warming but also establish American leadership in green technologies.
• Tapping the Resources of America's Community Colleges: A Modest Proposal to Provide Universal Access to Computer Training by Dr. Robert Shapiro, 7/26/2007 – This innovative proposal details how every American can have access to computer training, thereby upgrading the skills of the nation’s workforce.

• A Laptop in Every Backpack by Simon Rosenberg and Alec Ross, 5/1/2007 – Rosenberg and the One Economy Corporation’s Ross offer a modest proposal for putting a laptop in the backpack of every American sixth grader, as connectivity to and facility with the global communications network are essential for success in the 21st century.

Background: Keeping People in Their Homes, The Bailout

• If Detroit Goes Down, Will It Take the Economy -- and the GOP -- With It? by Dr. Robert Shapiro, 11/19/2008 - Shapiro argues that, since the Bush Administration is at least partially responsible for the economic situation facing the automakers, it should put its weight behind helping the industry and its workers.

• Notes on the Financial Crisis by Michael Moynihan, 9/26/2008 - Moynihan examines the panic fueled by the Bush Administrations inadequate response to the financial meltdown.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective. 

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

• NDN to Congress: "Keep People in Their Homes" by Simon Rosenberg and Dr. Robert Shapiro, 9/17/2008 - NDN made this leading statement on the need for the federal government to keep people in their homes.

Background: A New Economic Strategy for America

• The Idea-Based Economy and Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 1/23/2008 – In this important paper, NDN Globalization Initiative Chair Dr. Robert Shapiro examines how and why U.S. companies and workers lead the world in developing and applying new intellectual property, and why this leadership in innovation constitutes a critical U.S. advantage in globalization.

• NDN Poll Memos: American Voters' Views on the Economy and Globalization - Clamoring for Change, Persistent Pessimism, Democrats dominating on economic issues, 11/2/2007; Americans’ Views of the Present and Future Economy: Anxiety and Opportunity, 11/6/2007 - NDN’s comprehensive polls of American attitudes in 2007 about the economy make it clear that that the American people understand the current era of globalization, but are frustrated with the inability of their leaders to provide an economic framework that adequately and effectively deals with its impacts.

• The New Landscape of Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 6/20/2007 – Shapiro offers this forward-looking paper on the current state of globalization and how America can thrive in this new economic era.

• Meeting the Challenges of the 21st Century: Crafting a Better CAFTA by Simon Rosenberg, Dr. Robert Shapiro, and Joe Garcia, 6/9/2005 - NDN calls on progressive policymakers to face squarely our own vision of how globalization can and should work, as well as how America can best promote economic and political progress by our Latin American neighbors.

Today's New York Times editorial page argued that the federal government must do more to keep people in their homes. Since the financial crisis started, NDN has observed that homes are at the root of the financial crisis.

Treasury Secretary Henry Paulson does not seem like the sort of man who suffers fools gladly. Yet, he apparently is tolerant of, or powerless against, a White House that remains opposed to direct government action to prevent foreclosures — a program that is essential to keep millions of Americans in their homes and head off an even deeper financial catastrophe.

Nearly three weeks ago, Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, told Congress that the agency was working closely with Mr. Paulson’s department to develop a robust anti-foreclosure plan. Since then, the Treasury Department has balked and equivocated while the White House has argued that it is already doing plenty to help homeowners.

After a year of doing far too little to stem a flood of foreclosures, the problem is getting worse. Defaults lead to foreclosures that push down all house prices. Those falling prices — combined with rising unemployment, falling incomes and another expected surge in monthly payments on adjustable rate loans — will surely lead to more defaults and deeper price declines, threatening bank solvency and prolonging the credit crunch.
...

All roads, into and out of this crisis, run through the housing market. Mr. Paulson should be pressing for a streamlined plan that includes permanent modifications to troubled loans. That is the only way to keep Americans in their homes, save the banks and the economy.

For more on NDN's campaign to keep people in their homes, click here. 

At this point there is almost nothing that Bush touched that he didn't break:

Congressional leaders and both presidential candidates are proposing billions of dollars in tax breaks and other measures to stoke economic growth, a surge in spending that could send the federal deficit soaring toward $1 trillion this year, creating the deepest well of red ink since the end of World War II.

The government already has embarked on an unprecedented spending spree to halt the implosion of the U.S. financial system and is borrowing money at levels that some economists fear could undermine the nation's economic security for years to come. Congress could consider additional spending as soon as next month, potentially digging the nation's hole even deeper.

"We're going to make Ronald Reagan look like a piker in terms of deficit creation, I think," said Rudolph Penner, a senior fellow at the Urban Institute who served as director of the Congressional Budget Office during the Reagan administration.

The numbers are adding up fast. Since President Bush signed an economic stimulus package in February, authorizing billions of dollars in rebates for American taxpayers, the government has pledged as much as $1.5 trillion to prop up the teetering economy. It has approved new mortgages for struggling homeowners, salvage operations for faltering financial institutions and a historic $700 billion bailout plan to pump money into banks paralyzed by the financial crisis.

The Treasury Department so far has borrowed nearly $500 billion from pension plans, foreign governments and other investors to replenish the coffers of the Federal Reserve. Since the end of August, the national debt has jumped from $9.6 trillion to $10.3 trillion, with borrowing for the bank bailout yet to come.

Meanwhile, the budget deficit -- the annual difference between government spending and tax collections -- has risen rapidly. It jumped from $162 billion last year to $455 billion in the fiscal year that ended in September, largely because of the cost of the stimulus package, as well as slowing tax revenues and rising expenses in Iraq and Afghanistan.

The budget picture looking forward is even bleaker. While the deficit is projected to be about $550 billion for the fiscal year that began Oct. 1, budget analysts have yet to figure in the effects of a recession, which could easily tack on another $100 billion. They also have not included the first $250 billion being spent on the bailout plan, which the White House budget office said this week must be added, even though much if not all of the money is eventually expected to be returned to the Treasury.

And with options for a second round of stimulus spending starting at $52 billion -- the size of the package proposed earlier this week by Republican presidential candidate John McCain -- it's not hard to imagine the deficit rising to $1 trillion. That would approach 7 percent of the economy, a yawning budget hole not seen since 1946.

Some economists say that prospect should dampen talk of further spending. Others say it's better to spend the money now in an effort to protect jobs and smooth over the harshest effects of a recession than to lose the money later through sharply lower tax collections and higher unemployment payments. Economists advising House Democrats are urging a spending package of as much as $300 billion, arguing that the economy could shrink by about that much over the next year.

Read the rest of the story from the Washington Post here.

As of 445pm today, the website of the New York Times led with this headline:

Stocks Plunge 8% on Economic Gloom

Steven Pearlstein has a wonderful close to his column today:

In putting several trillion dollars in government funds on the line, the country has now done just about everything that Wall Street could have asked to address the financial crisis. The question now, as John Kennedy might have put it, is what Wall Street is ready to do for its country. So far, the answer is not much.

After getting their closed-door briefing yesterday from Paulson on the government's latest initiatives, Wall Street's finest literally ran from the Treasury to their waiting limousines, bypassing a media scrum eager to convey any scrap of wisdom or insight.

Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.

After yesterday's "historic" meeting, we are told by industry apologists that we are supposed to be grateful to nine leading banks for having "volunteered" to accept additional capital from the Treasury, along with a government guarantee for newly issued bank debt, even if it means having to accept a dilution of existing shares and a few harmless restrictions on their operations.

Pardon me if I'm less than blown over by this munificent offer, but it hardly seems commensurate either with the severity of the current crisis or the depth of the banks' culpability in fomenting it.

If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed.

There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush. Wall Street, by contrast, has served up a nothing sandwich, a lack of leadership that's been stunning.

On the day it was announced that he had won the Nobel Prize for Economics, Paul Krugman joins NDN in singing the praise of Gordon Brown and in asking the question the public, the media and Congress must be asking - why did this White House get it so wrong?

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson - after arguably wasting several precious weeks - has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don't know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It's hard to avoid the sense that Mr. Paulson's initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson's fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn't making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.

The major Western nations are on the verge of adopting a strategy to deal with the financial crisis pioneered by Gordon Brown earlier this week.  The FT has an interesting piece today that reflects on what this means for the previously struggling British Prime Minister.

As he has over the last few weeks Joe Nocera does a great job putting these extraordinary events in perspective.  And yet another story warns of the possible devasting impact of credit default swaps, a subject that needs immediate attention from Washington's policymakers.

Congress tried late last week to stall the financial crisis by pledging to spend $700 billion on devalued securities held by financial institutions, and by Monday morning, it was clear that the pledge wasn’t enough to reassure investors or restart lending.

Instead, a classic panic has set in here and around much of the world as public confidence in banks, other financial institutions and the markets themselves has nosedived; at the same time, banks and other financial institutions are wary of loaning money to potential borrowers. This panicked mindset threatens the economy more today than the continuing turmoil in the housing and financial markets. 

We must now recreate baseline confidence before we can repair the continuing damage to our financial and housing markets.  

Financial and broader economic panics thrive on a combination of huge and unexpected setbacks and a serious absence of information. They unfold when people face enormous uncertainty about matters vital to them, such as the value and security of their homes,  retirement accounts and college savings. Panics thrive when people see everyone else, including those with the power and position to manage such weighty matters, struggling with the same uncertainty. 

People feel threatened and powerless to do anything, not because they have no options, but because they have to evaluate or choose among those options, and they worry that more unexpected calamities could overtake whatever course they decide upon. That’s where tens of millions of Americans – and Europeans and Asians as well – have found themselves this week. They don’t understand why the value of their homes and investments has plummeted so suddenly, and they see that those ostensibly in charge of the economy in Washington and on Wall Street have little grip on this as well. The result is that spending and investment are shutting down, dragging the entire economy into what seems very likely to be the worst downturn since the 1930s. 

The remedy to this panic is information, which only the nation’s leaders can generate and demonstrate they understand. For example, the Federal Reserve and the FDIC should have legions of examiners working around the clock to re-audit the conditions of all major financial institutions, starting with commercial banks. The Treasury and Fed could then report to the public on each institution’s financial health and their confidence in its continuing financial health. The largest group would still be judged healthy; another group could be designated as worth watching, with measures to help it move to the first group; those in trouble would be identified with a plan of action to help them recover, if possible. Without this information, most people have been panicking that almost every institution and every investment might well be in serious trouble.  

This program won’t solve the capitalization crisis across financial institutions, much less the crisis gripping housing markets, which itself has driven so much of the current upheaval. But it would staunch the panic as investors, business owners and families come to feel that they finally know where the problems lie and what the government and nation’s business leaders will do to address them.

At the same time, our leaders can finally begin to address seriously the housing and capitalization crises in an economic environment in which businesses and people will be able respond reasonably and predictably.

From the WSJ tomorrow (via MSNBC) an article that offers more evidence that much more pain is to come, and that we must find a way to keep people in their homes:

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults - the very misfortune that touched off the credit crisis last year.

The result of homeowners being "underwater" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners underwater is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30 percent in some areas, roughly 12 million households, or 16 percent, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4 percent underwater in 2006 and 6 percent last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners underwater in this period than any time in our history."