Cheer Up: Things Will Get Worse

Posted on January 29, 2010


Mid-week, the Wall Street Journal had negative news from Davos – a gathering of experts to discuss another kind of climate change – the fiscal climate change. Experts there say evidence supports negative change sometime this year.

The world faces a long, slow recovery “ending in subpar growth,” with the risk of a renewed recession along the way, said Nouriel Roubini, an economics professor at New York University who accurately predicted the financial crisis in Davos three years ago.

Mr. Roubini was uncharacteristically optimistic about the growth prospects for the world’s emerging economies. But even there he found nits to pick in the form of China’s risk of bubbles, Russia’s aging population and political obstacles to structural overhauls in Brazil and India. [Wall Street Journal]

The consensus in their view is that there will be a “U” or “W-shaped” global recovery.

Many leading economists and investors showed little confidence that good times are back. The U.S. and Europe will have “U-shaped” or “W-shaped” recoveries, economists on the panel argued, meaning they believe the upturn since late 2009 will fizzle out later this year.

This is cold comfort for those lifted by a Reuter’s report today:

The economy grew at a faster-than-expected 5.7 percent pace in the fourth quarter, the quickest pace in more than six years, as businesses reduced inventories less aggressively, the Commerce Department said on Friday.The first estimate put fourth-quarter gross domestic product growth at its fastest pace since the third quarter of 2003. The economy expanded at a 2.2 percent annual rate in the third quarter.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 4.6 percent rate in October-December period.

Which “prediction” is correct?  Here as in other instances the painful truth is that only time will proffer an answer.  One quarter of economic improvement does not a sustained recovery make any more than one swallow at Capistrano forecasts summer.

Of note at Davos was reaction to Obama’s push for bank regulation.

Mr. Roubini advocated the return of the Glass-Steagal Act of 1932, which separated commercial banking from investment banking after the collapse of many U.S. commercial banks in the 1930s.

Others countered that a push for more regulation could impose new risks.

Overreaction to the banking crisis by regulators and politicians could become a significant drag on economic growth, said David Rubenstein, co-founder of private-equity firm Carlyle Group. The idea that tougher regulation can avoid all future financial crises is an illusion, he said: “We’re not going to eliminate asset bubbles.”

The U.S. needs to improve the state of “three d’s: debt, the deficit and the dollar,” said Mr. Rubenstein, adding that the U.S. budget deficit is bigger than other countries’ budgets.

While David Rubenstein may appear to represent the proverbial fox in the chicken shed, the sad truth is that banks and brokerages will continue to discover ways to develop so-called derivative instruments no matter what regulations are in place. Asset bubbles will indeed continue and oversight of the overseers of financial institution regulation would not be out of the question if it were feasible.  Insider information will always be highly valued and available. Greed is a disease and its spread is not always known until its devastating effects have been felt.  Ask Bernie M.

NOTE: For an in-depth analysis of the viability of Obama’s projected policies toward large banks, see

The Economist: “Regulating America’s banks -Stage prop- the White House’s latest salvo against banks misses the target.”

_______________________

Mountain Republic – Bin Laden Not So Smart After All

VotingFemale Speaks! – Al Qaeda Watch: KSM Trial: Voter Majority Forces President to give up NYC as trial location; Voter Majority, the only true power in America

DancingCzars – Citizens Against Government Waste: Drum Roll Please!

HotAir – Dem sources: Senate “fix” for ObamaCare could add another $300 billion to price tag; Update: Dems ready for reconciliation, says Kyl

Frugal Cafe – “We’ll Pole Vault In” for Health Care Passage — Pelosi, You’re a Loon in Meltdown, but You’ve Got Crazy Spunk (video)

HotAir – Fourth-quarter GDP 5.7%