“The crisis is over”

I felt it coming last week – a wave of positive stories about US banks doing better, with the icing on the cake arriving today with news of Citigroup’s record quarter. The markets have soared and gold has plunged.

I’m not the only one who sees this as a classic sucker’s rally. The Times’ smartest columnist looks at the breaking news and sees irrational exuberance aplenty.

Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.

Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.

I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.

Read the Krugman piece to see why the most that can be said at the moment is that things have been deteriorating a little less dramatically than in previous months. The economy is worse, not better, and all those factory closings and bankruptcies and high unemployment rolls are still looming. This holds for China too, where the propaganda wave insisting that China is back and has emerged from the crisis unscathed, if not stronger than ever, is deafening. The shock waves of GM disintegrating, along with a number of malls and real estate companies, have yet to hit. And again, we see parallel situation in China.

It seems that thinking happy thoughts can actually convince people we’re okay. I wish we were so I wouldn’t have to worry about my family and my mortgage. But I have to think we’re still at the beginning, not the end. We’ve still got two wars to fight on top of all our other miseries, and in case no one’s noticing, another looming hotspot is now a tinderbox that will almost inevitably suck us in.

Thinking happy thoughts is made possible by obfuscation of information. Behind the propaganda wave is a treasure trove of information the powers that be do not want you or me to know. It would spoil all the fun.

U.S. taxpayers need to know the risks behind the Federal Reserve’s $2 trillion in lending to financial institutions because the public is now an “involuntary investor” in the nation’s banks, according to a court filing by Bloomberg LP.

The Fed refuses to name the borrowers, the amounts of loans or assets banks put up as collateral under 11 programs, arguing that doing so might set off a run by depositors and unsettle shareholders. Bloomberg, the New York-based company majority- owned by Mayor Michael Bloomberg, sued Nov. 7 under the Freedom of Information Act on behalf of its Bloomberg News unit. It made the new filing yesterday.

“The Board’s arguments are based on wispy speculation, lack evidentiary support and are contradicted by economic theory,” said Thomas Golden and Jared Cohen, lawyers with New York-based Willkie Farr & Gallagher LLP, in a motion asking the judge to require disclosure.

“These government actions, which have been shrouded in secrecy, are at the heart of Bloomberg’s FOIA requests,” the attorneys said.

Why the shroud of secrecy, the omerta among the boys behind the curtain? It’s pretty obvious to me: they know if we know what they know there will be a stampede out of the dollar like we’ve never seen before. If you choose only to look at the warm and fuzzy reports the banks are putting out to make things look happy you’re only fooling yourself.

I think this will go on for a couple more months, maybe even through the summer. But as the reports come in from the big companies revealing a devastating recession that is only getting worse, the floodgates will have to open and hell will have to break loose. China may escape some of that because they can control information better and keep propping things up with more cash. But it’s got to get uglier for both of us. Domestic consumption is not going to save China. The bottom line is, too many Chinese consumers are simply too poor.

So as we enter a phase of increased optimism and hope, I am gloomier than ever. In case you’re feeling a deluge of optimism, please start reading this guy on a regular basis. He’s saying what I’m saying, only better.

The Discussion: 15 Comments

Yes the recession is still here and not going to leave town anytime soon. But you should notice that any recession has its end. The bottom line is that people have needs and there is huge potential demand outthere. Given time, demand will go up again, along with the productivity. I also believed that there might be one or two more deep jumps in stock market. But seriously, we are now standing near the bottom, if not already on the bottom floor. I really see hope in the economy.

April 17, 2009 @ 9:19 pm | Comment

From George Soros’ new book “The Crash of 2008 and What It Means”:

“The estimated nominal value of CDS [Credit Default Swap] contracts outstanding is $42.6 trillion. To put matters in perspective, this is equal to almost the entire household wealth of the United States. The capitalization of the U.S. stock market is $18.5 trillion, and the U.S. treasuries market is only $4.5 trillion.”

Basically, if one thinks through Soros’ theory of Reflexivity and how manipulation (i.e., propaganda) is responsible for the current financial/reality crisis, then the current crisis isn’t that much different from a totalitarian disaster like the Great Leap Forward. In fact, if you think about it, derivatives, and instruments like CDS, are almost as absurd as putting the family pots and pans into backyard furnaces.

April 17, 2009 @ 9:52 pm | Comment

To a certain extent I disagree with your conclusion over recent “happy news.” I’m not sure that anyone really knows how economics works, but to a large degree it’s a game of confidence. When people feel confident enough to invest, to hire, to purchase, that’s a good thing.

I notice that Philip Kunstler uses the elder Bruegel’s “Triumph of Death” to illustrate a supposedly realistic view of what’s coming. I too can call up masterpieces of art to illustrate my view, which is one of hope. My choice is Lorenzetti’s “Effects of Good Government.” Here’s the thing. Lorenzetti painted this fresco in Siena during the bubonic plague. The guy died from the plague. He knew all about despair, but he clearly knew something about hope, about the power of showing what a good economy physically looks like.

April 17, 2009 @ 10:14 pm | Comment

I do understand your point about the confidence game, and we’ll only fully recover when people start spending, which will be based on their confidence that they don’t need to hoard every cent. But first things need to normalize and we all need to adapt to the new world order, wherein credit will not flow like tap water. That was the ultimate confidence game, and look where it led us. That normalcy will only come after the full shock and awe of this crisis has hit and we’re not there yet. To start borrowing and spending as we did before would be reckless at this point. We have to “eat bitter” as they say over here for quite a while more I’m afraid. Only after we’ve hit bottom can we start to stand up again. I have hope, and I have faith in America. But we still have a long ways to go before the sun shines again. Those who get sucked into the current pseudo-euphoria are bound to be disappointed.

Thang, thanks for the serious comment. I agree with every word.

April 18, 2009 @ 12:22 am | Comment

Richard, great post and comment. I agree that what many people still don’t seem to get is a “recovery” is going to look very different from the economic/financial world that led into this crisis. Besides, the years that led up to this mess were anything but “normal”- they were about fiat currency run amok. Demand is going to have a lot of trouble returning to previous levels if those levels were dependent on the now-dry torrent of cheap credit.

What must be extremely frustrating for the Obama administration is that 1) they are trying to build new economic foundations out of the ashes (health care, energy policy) while 2) are expected to revive wealth levels and asset prices that were driven by dangerous, unsustainable financial games. People talk about the end of cheap credit, but I’m not sure people are really adjusting to what that MEANS going forward beyond the current shock of rapid collapse. They still except spending levels to go back to where they were in the medium term. And that popping of that disconnect is really the second wave of trouble to come in this whole story. I hear commercial real estate is in a bit of trouble these days.

April 18, 2009 @ 1:54 am | Comment

“This holds for China too, where the propaganda wave insisting that China is back and has emerged from the crisis unscathed, if not stronger than ever, is deafening.”

Where exactly are you getting this propoganda from? Wen was just quoted as saying there’s positive signs but it’s still far from a recovery…

April 18, 2009 @ 9:00 am | Comment

Bob Page wrote: “I’m not sure that anyone really knows how economics works, but to a large degree it’s a game of confidence. When people feel confident enough to invest, to hire, to purchase, that’s a good thing.”

According to Soros’ book, it is this idea that one can use propaganda to manipulate reality (including the financial markets) that got us into this mess. It is this Karl Rove mentality that “…we create our own reality.” This is why “They” torture people: They don’t want the Truth. They know that with pain that they can get people to say whatever “They” want them to say. Torture is an instrument of propaganda.

The finacial crisis is a reality crisis akin to The Great Leap Forward. We can’t go back to having people drafting derivative and CDS contracts and doing off-book accounting, just as we can’t go back to backyard furnaces.

April 18, 2009 @ 10:17 am | Comment

DP, if you follow the daily headlines you will find more than enough of these articles. If, as I do, you spend much of your day actually sorting through such articles, you’d be hit on the head with the propaganda message. To point to an article that has a somewhat different (but actually very close) message does not negate all the other articles.

April 18, 2009 @ 10:32 am | Comment

I follow quite a few newspapers very closely and the quote of Wen is hardly an exception. Most newspapers strike cautious optimism but I haven’t seen any message where the propoganda insists China is back and more incredulously it has emerged from the crisis and unscathed. Perhaps you can point me to a few articles, I’d actually be quite interested in reading that.

April 18, 2009 @ 1:03 pm | Comment

DB, here’s the pattern to look for – stories that gush about how domestic consumption is rising and China is not going to be as affected by the crisis as others and that it is already recovering, followed by the “balance” you allude to, which is also mandatory: a phrase or graf such as “But it still remains to be seen whether China will actually achieve its goals in the light of the gloomy global recession.” That allows you to point to the article and say, See, it’s balanced, it’s not so upbeat – although the headline, lede and 85 percent of the body copy is jam-packed with party messages and feel-good talk of imminent recovery. I see it every day, day in and day out and reading articles like this is part of my job so I know what I’m talking about. I am not saying there aren’t articles that are darker and less optmisitic, especially in the op-eds. But in the news sections at the moment, it’s all recovery/stimulus/healthcare/happiness all the time. This is typical, but they’re all pretty much the same.

April 18, 2009 @ 9:21 pm | Comment

it’s so obvious that china is leading the world out of this mess because china is never in recession and is consuming. it’s so pathetic so called “economists” would peg anything below 8% growth a recession for china.

regarding consumption power, the top 300 million chinese have more net worth than 300 million ponzis, the second 300 million are catching up very fast. sure, china has problem with the 3rd, 4th and 5th 300 million, but i’m sure they are consuming.

April 18, 2009 @ 11:22 pm | Comment

“The crisis is over”

How many times are we going to hear this before the crisis is (really) over…

April 19, 2009 @ 7:02 am | Comment

“peg anything below 8% growth a recession for china.”
The moment growth cannot keep up with the demand of society… it starts to go backwards.

You can climb still up fast, buy if the escalator you stay on is running downwards faster…. that is a recession.

CH needs to climb faster than now just only to maintain the same position, like Alice in Wonderland.

April 19, 2009 @ 7:11 am | Comment

it’s so obvious that china is leading the world out of this mess because china is never in recession and is consuming. it’s so pathetic so called “economists” would peg anything below 8% growth a recession for china.

I rest my case about the propaganda campaign.

April 19, 2009 @ 7:41 am | Comment

If you’re concerned about the Federal Reserve’s secrecy, tell your congressman.

April 20, 2009 @ 1:59 pm | Comment

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.