Trouble In River City

It's Obama's 100th day and we're supposed to be reveling in feel-good stories and optimistic about the future, but, um...

The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted.

The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter.

GDP, which measures total goods and services output within U.S. borders, has now dropped for three straight quarters for the first time since 1974-1975.

The only good news here is that inventory stocks have dropped, which means companies might have to start making things again if demand picks up. And consumer spending increased slightly. But we still have a major structural problem. The Federal Reserve believes that the ideal interest rate at this point would be negative five percent, an impossible figure. This is the kind of hole we're talking about. We're up to six banks that may need capital infusions in the wake of the stress tests, infusions that are unlikely to come from private investors. And unemployment probably won't rebound until next year.

Willem Buiter has reason for cautious pessmism. That sounds right.

...I support Sheila Bair's efforts to wrest authority to put the nation's biggest banks into FDIC receivership. I'm glad she's talking about this.

The “too-big-to-fail concept” should be “tossed into the dustbin,” and the FDIC should have the power to close “systemically important” financial firms, Bair said in a New York speech yesterday. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program,” she said.

“If the FDIC had the authority to close down non-banks as they’ve been able to close down banks, the cost to the taxpayer would have been much less,” said Sung Won-Sohn, former chief economist at Wells Fargo & Co. who is now a professor of economics and finance at California State University Channel Islands in Camarillo. “With the authority she’s talking about, the government could take preemptive action.”

You don't leave options like this on the table in a time of crisis.

Friday Blues

This is worse than expected.

The U.S. economy was hitting on almost no cylinders in the fourth quarter, as gross domestic product fell at the fastest pace since 1982 on sharp declines in consumer spending, investment and exports, the government said Friday. GDP fell at a 6.2% seasonally adjusted annualized pace in the final three months of 2008, revised from the initial estimate of a 3.8% drop, the Commerce Department reported. It was the worst decline in GDP since a 6.4% decrease in the first quarter of 1982. Economists surveyed by MarketWatch had expected a revision to a 5.5% decline.

If you just look at the job market, the 1st quarter of this year will be just as bad. New jobless claims yesterday rose to a new record of 667,000, also the highest since 1982.

And considering that we're in a more globalized economy than we were back then, the potential for worldwide unrest and resource wars is great.

As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a "lost decade," the result could be a global landscape filled with economically fueled upheavals.

Indeed, if you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania) and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations -- none as yet in the United States -- your map would already look aflame with activity. And if you're a gambling man or woman, it's a safe bet that this map will soon be far better populated with red and orange pins.

For the most part, such upheavals, even when violent, are likely to remain localized in nature, and disorganized enough that government forces will be able to bring them under control within days or weeks, even if -- as with Athens for six days last December -- urban paralysis sets in due to rioting, tear gas and police cordons. That, at least, has been the case so far. It is entirely possible, however, that, as the economic crisis worsens, some of these incidents will metastasize into far more intense and long-lasting events: armed rebellions, military takeovers, civil conflicts, even economically fueled wars between states.

Have a happy Friday!