Business/Finance

Regime Change in the Stock Market: a comment

Numerian over at The Agonist has a good post today on the state of the equity markets. Basically, it’s an argument that I agree with pretty much completely—tracking short term movements these days as if they’re meaningful misses the big picture. And the big picture is deflation. Numerian is not alone. Paul Krugman and Martin Wolf (courtesy of Brad DeLong) have been banging the drum on this for a while now. Of course, as Numerian points out, if this is true, what’s holding the market up to its current level? Well, earnings always seem to be better than expected. As we have laid out in a couple of earlier posts, however, it’s pretty clear that equity analysts in the US routinely and consistently under-predict earnings, so no wonder the market stays up. I just want to offer some further thoughts on why this is all problematic.

Here’s how Numerian lays it out, pretty correctly, as far as I can tell:

Corporate earnings trump everything in the stock market, and unless there is some sea change in the prospect for corporate earnings, the stock market can push upwards even in the face of a persistent economic recession, or even a depression, which is what many consumers are experiencing. What, then, is the sideways trading we have seen both short term and long term telling us about corporate earnings?

It is telling us that the real battle in the stock market is not with the bulls and the bears, but with the corporations and the consumer. Corporations since the Ronald Reagan presidency have taken a larger and larger slice of the economic growth in this country, to the point where the imbalance is seriously against the consumer. Wages and benefits have stagnated for over 20 years in the US, while corporate earnings have surged. An estimated 30 million people in the US are living below the poverty level, while the top 1% of the population, who are mostly corporate executives and their families, enjoy unprecedented wealth from their stock grants and options.

The sideways trading we are experiencing is expressing uncertainty as to whether the era of corporate dominance at the expense of the consumer is over. Corporations have held the trump cards for over 30 years, having shipped millions of jobs overseas, laid off tens of millions of Americans, held salaries and wages flat, cut benefits, eliminated overtime, increased the workload, and converted employees to contractor status to avoid paying any benefits at all. These initiatives, along with generous reductions in their tax bills, to the point where any number of large corporations pay no tax at all, have fed directly into corporate net income and executive compensation.

All well and good. Numerian then goes on to wonder whether this state of affairs is likely to persist, and he thinks not, a point with which I would agree. It’s an important argument, because it reflects some of the political tensions we’re currently seeing in America, tensions that are likely to become more severe as time goes on unless there is a genuine populist revival. Numerian goes on to discuss why there’s no particular reason why stocks shouldn’t crater further. It’s a good piece. I just want to add a couple of points on why consumers are going to remain in tough shape for a while.

First, what’s wrong with deflation? There’s the obvious stuff about making debt more expensive, but consumers appear to be reducing debt levels. But if we’re talking about food and energy prices, maybe not much. Given the fact that payrolls have remained pretty stagnant over the past several decades, while food and energy prices have not, some reduction of price pressures in these areas would in theory be welcomed. But it’s not that simple. In fact, food and energy prices, which are currently pretty stable (and have been declining in the case of most agricultural commodities), are not likely to remain so. China has become the world’s largest energy consumer, according to the International Energy Agency, and is going to continue to import as much oil, coal and iron ore as it can for the foreseeable future. So much for energy prices remaining where they are. And we saw what happened to food prices two years ago when some shortages looked as if they were emerging. Since then, global food stocks have rebounded somewhat, but the UN Food and Agricultural Organization has cautioned that prices are unlikely to fall to their ten year average even with an improved outlook this year (and there are some commodities that remain near historic price highs at present). It’s not likely we’re going to see long term deflation for these categories. And this is before the medium term impacts of climate change start kicking in meaningfully. So in these two critical areas, we’re more likely to see long term inflation, not deflation.

Moreover, given that wages and payrolls have been stagnant for so long, the only real source of wealth creation for Americans over the past several decades as been in house price appreciation—or else getting that second job in the family, which has happened as well. As a result, we had the lending frenzy that led to the crisis of the past several years, which the banks have come out of sort of all right, but not many consumers have. And, as Numerian points out, the banks aren’t really in that great shape either, when you think about it. And then there’s this, courtesy of Bloomberg (via The Big Picture):

It’s pretty clear that there’s a $4 trillion differential between mortgage values and actual assets. Where did that go? Into the ether, or it was never really there in the first place. In either case, how is it going to come back? Well, it might not, especially in the Sunbelt, although people continue to move there. But there’s still a glut of housing, new home construction remains in the dumps, and it may be a while before the average US homeowner may look at improving asset values. And as far as commercial real estate goes, yes, REITs were able to raise a whole lot of money last year (Zero Hedge has some interesting conspiracy theories on how this occurred), but those strip malls on the outer suburbs of Phoenix are still worth crap, and they’re not going to appreciate any time soon. And remember, that $4 trillion in devalued assets is probably still showing up at its original stated value, or close to it, at most financial institutions that carry them or assets based on them–most of this hasn’t been written down yet.

Where does this leave us? With a stock market that remains disconnected to much of the rest of the US economy. And if it’s going to reconnect, it will probably involve a move down, not up.

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19 replies »

  1. On the whole, I agree with Numerian’s sentiments, but I think we’re heading in the same direction for different reasons.

    His comments about inflation (“given that the Federal Reserve debases the currency by allowing some amount of inflation every year”), the balance of the economy (“Corporations since the Ronald Reagan presidency have taken a larger and larger slice of the economic growth in this country, to the point where the imbalance is seriously against the consumer.”), and nature of economic rebalancing (“This situation, ironically, gives the consumer the “leverage” to turn the tables against the corporations.”) all betray a rather faulty view of how economies work.

    For instance, monetary economists regard an inflation range of 1 – 2% as being essential to prevent economies from tipping into deflation. Deflation, as Bob points out, is awful and something that no person should regard lightly. Prices aren’t static (which is the failure in thinking that often trips people up, including Ayn Rand who seemed to have the idea that gold had some “objective” value, it doesn’t). Every price is a best guess that reconciles supply and demand. Ensuring that prices rise slightly every year isn’t “debasement” it’s essential to ensuring that a signal is sent to producers to keep producing. Otherwise they wouldn’t. And that’s deflation.

    On economic balance: all economies are balanced between the state and the individual companies/corporations/producers who contribute to the state. If anything, most countries around the world have become horribly overbalanced towards the state with government making up more than half of the total economy. Now, if you consider that the state doesn’t pay for itself but requires taxes and debt to finance its expenditure, the larger the state, the harder it becomes to support. If the balance is tipping towards corporations (it isn’t) then that would actually be a good thing in terms of financing the ambitions of the state. But the state isn’t being financed, hence the economic travails.

    On rebalancing: firstly, “corporations” & “government” is just short-hand for collections of people. These collections can either get big and powerful because they have lots of customers (e.g. Apple) or lots of staff (e.g. government) or some combination of the two (e.g. Walmart). Where an entity has some asymmetric control to raise prices as they see fit (to seek “rents”) then it is usually because they have some form of asymmetric protection (e.g. government ability to raise taxes, company monopoly rents).

    As long as a market is free and symmetric then customers automatically have the ability to “leverage” their demands against corporations or government. If it’s asymmetric then it really doesn’t matter what customers think or do. And that includes the perilous state of the housing market. The government has offered an ostensible guarantee and so house prices will not collapse. Banks have not failed to write off consumer loans. In fact they’ve been forced to write off more than they needed to. After all, many of the loans on their books are not due to be repaid for many years. Banks have been forced to make major debt allocations which are considered prudent by some and overly conservative by others. European banks are about to be subjected to a very similar process as US banks went through a year ago.

    Given all this, how exactly does a corporation grow in the absence of a consumer?

    Lastly, while Numerian appears to have a reasonable understanding of the mechanics of stock exchanges, he appears to have little insight into the economics of it or how it differs from the overall economy. “…like High Frequency Trading, are bound to be outlawed the next time another flash crash occurs”; no, they won’t be. They serve a purpose, increase liquidity and improve the working of the market. They didn’t cause the problem and markets are learning how to adjust to these systems.

    Stock exchanges are bets on the future. The place where consumers of houses, groceries, fast food and video games live is the present. For instance, Apple’s “antennaegate” debacle wiped $2 off Apple’s share price at the same time as they experienced record sales of the iPhone 4. You could say, “See, investors have no understanding of market fundamentals. Apple is doing well.” But what investors are saying is, “We’ve already pocketed the win from the iPhone 4 because we expected it to do well. We’re now betting that, following on from Apple’s mess, they will be treated with more suspicion in the future which will have an impact on the future profits. So we’re getting out now.”

    Which goes back to my first point that prices aren’t static. They reflect a best guess on supply and demand; not just for now, but also for the future.

  2. These comments are reasonable, and there’s not much I disagree with in theory, except for High Frequency Trading–OF COURSE it will be banned or curtailed next time around if we have a similar crisis. Regulators aren’t always reasonable. Short selling serves a useful purpose too, and look at what happened there. And we had plenty of price information before HFT.

    But I’m not sure reasonableness matters. This is really a political discussion, not an economic one. The game was fixed in the early 1980s in America, such that asymmetries have run wild. And the political consequences (as well as the economic ones) have been to strangle the growth of the middle class in America. Where there was once a promise of entering the middle class on an average (whatever that means) salary, there no longer is one. Yes, in much of the world the state is perhaps a too large part of national economies–but that certainly isn’t the case in the US. This is why the calls for economic stimulus actually have different rationales in the US and elsewhere, say in the UK. In the US there just is no safety net for much of the population, and the only way to ensure that Americans have some access to these services in general (health care, for example) is to keep them employed. Which is what the US economy is failing to do. And it will get worse. The dilemma is this. Everyone in the US thinks they pay too much in taxes. In fact, the US is one of the more under-taxed industrial countries, but most people in the US don’t know this. So if you’re not going to provide these services because people won’t pay for them in taxes, you have to make sure that the economy isn’t also tilted against them by choking off job creation across the spectrum. But that is exactly what has happened.

    And on your point about where asymmetry comes from, you give us only two alternatives. Neither applies to what Numerian talks about, which is a US where the asymmetry has been created by regulators and Congress by design over the past 30 years to advantage corporations over workers (or whatever you want to call the populace). It’s the logical consequence of what I talked about earlier in my post on Barry Linn’s book on the US government giving up anti-trust enforcement. Again, this is political, but has obvious economic consequences. The whole point of the past thirty years has been to remove that leverage that consumers 9including job-seekers) would have in an open market.

    And banks have written off some stuff, yes–but not nearly enough. You may have noticed that the accounting rules were changed this year to make it easier to fudge on this. Which is exactly what the banks have done. Credit card exposures have been written off aggressively. Mortgages and consumer loans have not been–they’ve been written off somewhat. Nor has CRE exposure. Have those empty strip malls on the outer suburbs of Phoenix been written off? Nope. The banks are holding on there, expecting (and praying for) some recovery in asset values. But the US is so used to real estate always going up that the notion that it could go down and stay there just isn’t considered. And this is the real threat–that there will be a massive deflation in real estate, which continues to be the sole pinning of so much asset growth in the US, and really the only way that most consumers have of generating any wealth–they’re certainly not doing it from salaries.

    Yes, prices aren’t static. But that isn’t what this is about. It’s about the fact that at some point, prices and economic reality need to converge. Which they will, eventually. What Numerian is saying, if I understand this correctly, is that this process will drive stock prices down, and it’s not in the price yet. What that really says is either that investors are still in a considerable denial about economic reality within the US, or that economic reality is better than people like me think it is. If these are the only two alternatives, then it’s an empirical issue, and will be resolved over time. But there’s a third possibility–if the companies listed in the DJIA derive most of their revenues and profits overseas, there’s no reason why the performance of the DJIA should reflect what’s going on in the US economy anyway.

  3. I’ll tackle three points:

    1) Banning,
    2) Asymmetry as a result of regulation,
    3) Pricing convergence.

    They’re all related, obviously 😉

    Sure, short-selling has been banned but it effects an astonishingly small amount of trades and it only (currently) effects naked shorts. There are various ways to short (including just not buying) and no-one, including Angela Merkel, will ever be able to ban them all. However, I get your point, there are still ways that politicians can erect blockades to the smooth running of the market process.

    Asymmetry. I should have been more clear. There is no way a private company can create a monopoly for itself without the connivance (or lassitude) of the state. The problem is exacerbated if the state is already a key player in that market. With banking the US is a major player in housing loans and so efforts to protect banks from disclosure are self-serving (since Freddie and Fannie should just be wound up is unrehabilitable bankrupts).

    I realise that such asymmetry is built into all country’s political and social fabrics, but you have to admit at least I’m consistent as flagging it as the “real” problem that needs to be solved.

    Pricing convergence. Well, here’s the issue. If politicians ban markets from sending price information rapidly through any means necessary, and politicians and incumbents act to create monopolies and other market asymmetries, it should come as no surprise that pricing information is often wrong, that corrections take a long time to permeate, and that bubbles can often inflate without countervailing attitudes have any opportunity to express their interests.

    In other words, how can one hope not to see instability if the very system and response to market risk acts to increase such instability?

    To conclude, I don’t disagree with many of Numerian’s conclusions, I just disagree with his analysis of how that instability came to be. I have the sense (although he makes no outright recommendations) that he would demand action that would promote further instability through increased state intervention and asymmetry (even if it is in the “opposite” direction) rather than through improving the flow of information in the market.

  4. Agreed on all three. But again, these are economic arguments that don’t address the political context that has existed in the US for the past 30 years. Which means on your final point, I don’t agree. I don’t get that reading. I think his preference (as would be mine, certainly) would be to reduce the regulatory and legal constraints that led to the asymmetries in the first place. For example, I would be delighted if the US were to start enforcing realistic anti-trust measures again, as opposed to the charade of the past 30 years. And I think the federal government should get out of the business of union-busting that so characterized the Reagan and both Bush administrations. If it’s the asymmetries that are a major cause of the (presumed) price misinformation, then that would seem to be the logical way to go. But these things take time–it’s always a process, not an event. Where Numerian and I might agree, and you might not, would be on the need for government stimulus measures to offset the asymmetries as a short term fix.

    I added this at the end of my earlier comment, though, because I think it’s relevant:

    But there’s a third possibility–if the companies listed in the DJIA derive most of their revenues and profits overseas, there’s no reason why the performance of the DJIA should reflect what’s going on in the US economy anyway.

    Many of the companies I pay attention to, Caterpillar, for example, derive most of their revenues and earnings from outside the US. I suppose the question is how generalizable this is across the index. Sounds like a good project for some MBA thesis.

  5. Wufnik, I think this is all going to be part of the global “rebalancing”. No one country is going to have sufficient market power to drive overall market change. So global talkshops like the G20 become even more important. I’m not sure that is going to make US policy-makers happy, or the various pundits who feel “something” should be done (assumably by the US government).

    Brian, energy as a whole is a relatively small component of the overall global economy. This is very different from the oil shocks of the ’70s when so much of the world’s economy was entirely industrial. We’re now in the “post” industrial economy – more services, more social media, more froth – so energy prices have less play. Plus, alternative energy is growing in scale. That does have a marginal impact on energy prices and there is an expectation that this impact will continue to grow.

    Sentiment and market confidence will continue to hold sway. And that has to do with precisely what Wufnik and I are “squabbling” over; disclosure, good regulations, and political clarity.

    • Gavin – My research indicates that 15-20% of the global economy exists to drill, mine, transport, and burn fossil fuels for electricity, heat, and transportation. And that doesn’t include such things as the energy consumed in mining, the use of oil and natural gas as plastic feedstocks, and the like. Bump up the price of natural gas and oil (especially) and not only does the price of transporting products go up accordingly, but so too does the price of creating the product. Bump up the price of coal and natural gas and it gets more expensive to heat homes in the winter, cool them in the summer, and those services that rely on electricity (internet and communications) or natural gas (nearly every restaurant out there) all lose profit or have to raise prices accordingly.

      Large industrial energy users may be a smaller piece of the overall economy, but I think the service sector relies on cheap and abundant energy as much as the globalization of production does. And so I’m having a hard time seeing how that 15-20% of the global economy doesn’t directly impact the size and shape of the other 80-85%.

  6. I agree–Capital is being re-deployed on a massive scale, frankly, quite on a scale never really seen before, and it will take time for regulatory bodies, and everyone else, for that matter, to adjust. It will be a shock to the US, frankly, when it discovers it’s not calling the shots any more.

    On energy, of course prices will continue trend up. Peak oil is here (say, in this decade), and we’ve suddenly discovered that this great new technology we have for getting oil out of areas that used to be problematic has some downsides. Oil shale, we know, has significant costs as well, both in what’s left and in terms of the energy required to generate it. “Clean coal” remains a myth, and coal’s carbon cost will just prove too costly at some point–there are a number of US utilities who are very aggressively moving out of coal into something else (usually gas) right now. Alternative energy is growing, yes, but it’s still only a marginal contributor, although it will be a more important contributor in fifteen to twenty years.

    Natural gas is a different story, though. If shale gas can actually be obtained without significant environmental damage, that that would be a game-changer. However, the environmental costs, particularly on water tables, remain a bit unclear. But there is certainly no shortage of gas, especially in the US and Russia (and Iran!).

    Now, here’s the thing. It depends on whether you’re in a part of the world where energy is cheap, or expensive. I live in a part of the world where energy is expensive, and has been for some time. So the marginal impact of price rises can be significant, obviously, but everything is already geared to energy being expensive, so the overall impact is relatively muted. In places where energy is cheap, however, it’s a different story. India has just eliminated subsidies for gasoline which is a good and necessary thing. But the economic adjustments, particularly by those who were dependent on gasoline being cheap for one reason or another, are going to be very interesting to consider–especially by the Indian government. Think also of the US south, or midwest, or west. Once gasoline, or energy for air conditioning, is no longer cheap, what’s the impact? There will certainly be a large economic impact in the US if higher energy prices mean that people can’t afford to live in permanently air conditioned environments any more, like the Sunbelt.

    So I’m a lot less sanguine about energy than Gavin, although he’s right–on a global scale it’s not as important as it used to be. But on a regional scale, in some cases it’s actually more important than it used to be. The US industrial sector has spent 40 years generating huge gains in energy efficiency. Over the same time frame, the US transportation sector (except for railroads) has generated little gain, as has the residential sector. That means the gains are there to be had, but again, these things take time. In the interim, the kind of shocks we saw two years ago will continue to cause problems. All it would take is some sort of Mideast event, actually.

  7. Sure, but I think that figure includes capital, R&D, labour, distribution, insurance, etc…. The actual energy cost is a small component of that. A carbon tax would have quite a big impact (depending on how it was implemented and priced) but energy price market-based fluctuations wouldn’t be as huge.

    I mean, consider that chocolate prices of raw cacao have just risen precipitously, that isn’t going to have much of an impact on the chocolate you buy in the supermarket.

  8. @Gavin “The government has offered an ostensible guarantee and so house prices will not collapse. Banks have not failed to write off consumer loans. In fact they’ve been forced to write off more than they needed to.”

    As far as I can tell the data as well as the accounting rules talks a different language.

    It is still allowed to apply the mark to model accounting (which is no doubt more convenient than the mark to market in times where the values of the “assets” drop). I would like to post the following abstract o the BoA 2009 report “The fair values of deposits, commercial paper and other short-term borrowings, and certain structured notes that are classified as long-term debt are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves and volatility factors.”

    Which pretty much means that you do not have to write-down anything but to feel free to calculate any amount you think may be reasonable.

    Therefore I would like to understand how you came to the conclusion that the banks wrote-down more than they needed to.

  9. Dormorant, thank you and well spotted. Mostly that’s just an “abbreviation”. As you point out, banks can pretty much mark-to-model and won’t write off debts if they can conceivably get away with it. There is no legislative requirement to do so. But as I pointed out, prices are set by markets.

    Banks had no liability to mark down their non-performing assets but market conditions dictated that they mark down sufficiently (and beyond) in order to restore market confidence (and restore some financial liquidity to the world).

    US banks have been relatively quick to do so while European banks still lag (as do banks in many other countries). That was my core point which I’m afraid was a little lost in everything else I was attempting to say.

  10. But Gavin, here’s the problem–they were quick on some kind of loans (credit cards) but have been slow on other kinds. CRE in particular, and home mortgages in general. There’s still a ways to go here. I take your point on European banks, but I think you’ll find that’s regional as well. Yes, there will be some writing off of Spanish real estate and that sort of thing. But nowhere in Europe do you have anything like the total real estate exposure that US banks have. And since a lot of this is never, ever going to be worth what the banks are carrying to for even at reduced levels, there’s more to come, and it’s likely to be worse than whatever Europe will be writing down. A lot of this is in the outer suburbs of he Sunbelt, and it’s just not coming back. “Outer Suburbs”, by the way, is a concept that has never materialized in Europe, where home ownership is lower, and where suburbs, if they exist at all, don’t extent thirty or miles or more from city centers. And it’s a concept that relies, as I’ve said before, on energy being cheap, since the only way to get around these places is by car. So unless gasoline goes back down below $2 a gallon (which would be a 50% drop from current levels), you’re just not going to see real estate values in many parts of the US going back up strongly. At best, they might stabilize, which would be helpful. But once they stabilize, the banks are stuck–they’ll have to mark to market then–their accountants will force them to. And I bet it won’t be pretty.

    And sorry, anyone who reports under US GAAP or any other international accounting standards does have a responsibility to adhere to those standards, including the valuation of assets. If they flaunt these, companies can be penalized by the SEC and/or whatever stock exchange they’re listed on, and are open to investor lawsuits. So there are legal requirements here that need to be observed, although there are no “legislative” ones. It’s not as discretionary as you make it sound.

  11. Thank you for the reply Gavin anf wufnik.

    I agree with wufnik as for the home mortage area the banks have in my view not written-down their assets to a mark-to-market-level (for various reasons e.g. as this would further debase the value of these assets). In order to see a true recovery in this area I would assume that this will not happen until the gap is closed.

    I disagree with wufnik with regard to the exposure of EU banks to real estate. I live in Germany and it is true that Germany has not had a housing crisis. Housing in Germany is very stable.

    In Spain however it is very different. In Spain there IS a significant housing crisis going on and Spain lost a high share of its GDP due to the beak-down of their housing markets (the building construction made up about a 15-20% share of the GDP; not anymore). The housing crisis in Spain is accompanied by a high unemployment rate which makes a recovery very difficult. The ECB had a hard time in the past 2 years to save Spanish banks from insovency (which was done behind the scenes basically). Wiki has a bit of data but there are plenty of other souces (http://en.wikipedia.org/wiki/2008%E2%80%932009_Spanish_financial_crisis).

    So the EU has also its weaknesses in the mortage sector but it is more country specific.

  12. Yes, it is more country specific–I thought I had mentioned that, but apparently not. Spain is the glaring example of crappy Mortgage lending in the EU. Fortunately, it’s not that widespread a problem across the EU, although in places like Spain, where it was compounded by cheapo mortgages for second homes for people from Britain, it will clearly take a while to work out. The Cajas are clearly in some degree of difficulty. Denmark, which has a relatively large mortgage market, seems to be in pretty ok shape, on the other and.

    More importantly, though, since the overall European mortgage market is smaller, there’s less to securitize. There are few European mortgage ABS products, simply because of the difficulties of securitizing stuff equally across countries–mortgage markets are different, legal systems are different, etc. Which means that there are fewer problematic European ABS on European bank balance sheets–the problematic stuff is basically still US ABS products. And my understanding is that European banks just have less of this stuff, both absolutely and relatively, that US banks do.

  13. Sure wufnik, but that didn’t stop European banks (and German ones) buying up debt from the US. From an article I wrote a few months ago:

    “IKB Deutsche Industriebank, based in Germany, set up the Rhineland Fund in 2002 in order to buy up US mortgage bonds. The highest yielding bonds, those with the greatest risk and associated higher interest rates, were the subprime bonds. In 2006, when the dangers of the US subprime market were becoming obvious to everyone, the portfolio manager of Rhineland, Dirk Rothig, tried to change the focus of the fund and unwind its exposure. When his proposals were rejected he quit. Late in 2007, the whole house of cards came tumbling down and IKB had to be bailed out by the German government at a cost of over $10 billion.”

    In other words, while many European countries may have had no local property or asset bubble, that doesn’t mean their banks didn’t pile in elsewhere. Germany is mightily exposed to Greek debt too.

    Taking you up on your earlier point about energy price variation depending on local markets. Agreed, far too many countries “bought” civil stability by subsidising fuel. Certainly prices for the poor go up when fuel prices go up, however, governments were running unsustainable fiscal policies to pay for these subsidies.

    Higher fuel prices may have made such policies even more unsustainable but such price increases are not of themselves leading to massive price instability.

  14. Oh, no disagreement that European banks bought crappy US mortgage ABS products. And all sorts of other crappy ABS stuff too. Just not as much of it. I’m willing to wait a couple of years to see where this stuff ends up. It’s not going to be where it is today. Then we can do a final count of exposures. I’m still betting there’s more pain to come in the US than anyone expects. Keep a count on the number of US banks closed by the FDIC–we’re already at 103 so far this year. In 2009 , there were 140 in total. In 2008, 25. In 2007, 3. Any bets on when this peaks? Keep in mind that the financial system in Europe is relatively concentrated as compared with the US–there are fewer financial institutions, so the collective holdings of crap will be more concentrated. But in the US, you have all sorts of places where this crap is held, including thousands of smaller banks that don’t really have any functional equivalents in Europe.

    Well, on energy prices, yes, there’s been a lot of local variability because of subsidies. And if we’re going to encourage India to eliminate them (and Indonesia, and other countries that subsidize gasoline prices), we should at least be consistent. That’s my point. We’re not. Here’s a thought experiment–spend some time in the US sunbelt, where you can’t live without (1) driving, and (2) air conditioning. And then do an estimate of the tens of billions of annual subsidies that go to the US oil and gas industry (which is hard to do–the GAO tried it a couple of years ago, and at the end couldn’t come up with a final tabulation) that generally keep the costs of these activities below where they would be if market prices prevailed. At some point the US government should have to end these subsidies. Which will make living in the US sunbelt much more difficult for a lot of people, unless they all have little miniature nuclear power plants in their jetpacks or something. But this isn’t the poor–it’s the middle class. So I’m not holding my breath.

  15. Ah, yes, US energy subsidies. And subsidising corn-biofuels while putting trade tariffs on cheap Brazilian sugar. While sporting a budget deficit bigger than the universe. Let’s not get started on this ;p

  16. Come on now, guys, the US is a bastion of free markets. We don’t subsidize, because that would be big government, socialism and assorted other evils that make the Baby Jesus (founder of this great nation) cry.

    We have a right to live in the sunbelt, and the tertiary rights that go with it…including, but not limited to, cheap electricity for airconditioning and water enough for 18-hole golf courses and throwing away at least 1.6 gallons of drinking water per flush.

    Oh, and Reagan proved that deficits don’t matter…unless it’s a Democrat in the White House and then they’re basically the end of the world. Regardless, what are huge deficits against the investment of tax cuts for the wealthiest and the military hardware to bring freedom to brown people?

    /sarcastic threadfuck