SUBPRIME SURPRISES. Today, even Paul Krugman has changed his prediction

Northern Rock branch Digg!  The world cycle has  entered a recession phase  generated in the US last summer, deeply entrenched with the highly unstable nature of current growth and institutions, money and markets (for historical reasons, plus theoretical ones Political Economy illustrated since long: the roots are in Malthus and Marx, Keynes and Kalecki).   Credit and financial markets were obviously the first ones shocked by the subprime crisis, a necessary consequence and dead end of Greenspan’s Fed easy money policy in the 1990s, again since 2003, and a “free market” social engineering experiment in enlarging financial K circulation to a new expropriation domain: stealing wealth from fresh new victims, the poor (first) and the rich all over the world, from Latin ghetto home buyers to Northern Rock clients (see 2007, Oct. 26 Krugman’s blog post A Catastrophe Foretold and my comment upon his revelations, the same day on my blog). But this was only the beginning of the Financial K “conspiracy” (K for Capital).  In October-November 2007, hyper-sensible Baltic Dry index of maritime freights (indexes do have senses, sentiments and even a soul: did you know?) got the blues, reached a cyclical peak and started to decline – you can see the weekly updated graph also by clicking here – meaning that world commodity markets and manufacturing were already affected, not just global finance.When a US report told the services sectors were also declining, Wall Street (- 3% on Tuesday Feb. 4) got also the blues, started panicking and detecting the recession, a quarter after experienced Baltic freight traders. I am not sure this might be tagged text book “globalization” and “rational expectations” alike behaviour, I suggest irrational stupidity. Mr Bernanke never thought to rebuke such irrationalities: on the contrary, he hurried up ensuring he will carry on doing the dirty-hiding dirty job for WS boyz-and-banks, everything is under control, interest rates will go further down (so what ?), after the exhibition of a mix of power-willing and sheer impotence in the base rebate 4.25 to 3. We know things are very different, no one is in control of the recession: see 2 base papers, in January 5 and 8 Prof. Nouriel Roubini’s fundamental blog, (1) and – in French – the contribution by François Chesnais in Carré Rouge – La brèche no.1, 2008, pp. 17-31. Their 3 titles carry the message:

  1. The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster.
  2. Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not.
  3. Fin d’un cycle. Sur la portée et le cheminement de la crise financière (End of a cycle. On the dimension and path of the financial crisis).

 Today, even Paul Krugman is changing his prediction. Still resisting the idea, because he knows very well how devastating for the US the crisis might and perhaps will be, he admits a denti stretti that  “the double-bubble nature of the underlying problem — a housing bubble and a credit bubble combined” will be tougher than the 1980 and 1991 recessions. He even talks of a new President getting to the White House (Jan. 2009) in the middle of the storm: if you follow his NYT op-eds and blog (a must), you know that his adamantine intellectual honesty is at work. Being optimistic, I counter-argue that Ms. Clinton\Obama (or Mac Cain) will have to tackle either a long recession in her\his first term, or a full depression in both. My friend and colleague Carlota Perez started the epilogue of a very useful, almost prophetic post- Schumpeterian book by saying: “In June 2002, as this book is going to press, the world is at the turning point. The decisions being taken at this crossroads will determine how long, how deep and how widespread the current recession will be and whether what lies ahead is a depression, a gilded age or a true golden age”. We are back to that point, but the total lack of political-institutional decisions and longterm management (called for by Carlota), in such a crazy world, that it is hard to believe it is still Capitalism, stole us the golden age. Now we have choices and destiny in between a shaky cyclical recession, a decade of depression in the 2010s, and re-inventing Socialism. For empirical facts and analyses, search  my blog, or excerpts from my “blog before the blog” from summer 2007: where I report and discuss how the recession has been read in real time: e.g. by Attac in July 2007, The Economist in October, etc. You’ll perhaps come to the conclusion that Bernanke bosses, the Wall Street boyz: either they are analphabet, or they have no time to read anything, nor even economic news and bulletins. If the Fed wasn’t the Fed (a purely Keynesian matter, discussed also in some comments to Prof. Roubini’s blog) Bernanke, instead of burning billion $ in “rites of winter, then spring and summer”, should have just sent them a Xmas card with a free (0 cost) yearly subscription to: http://investmenttools.com/futures/bdi_baltic_dry_index.htm  NOTES _ (1) Prof. Roubini reached a climax when, in a creative Dostò-Shakespearian mood, he described Alan Greenspan’s decision making this way.To Raise or Not To Raise? Reading into Greenspan Hamletian Mind. Aug 29, 2004As Greenspan sips through long reams of obscure economic data (are cardboard production data a good leading indicator of economic activity?) while relaxing daily in his bathtub, he is pondering whether he should increase the Fed Funds rate at the September 21st FOMC meeting. Here is what he is mumbling in his mind, in between a bubble bath and endless wonky economic statistics:”Well, the September 21st decision will be a real tough one, the last one before the elections! I thought that the economy was perking up; and then we hit this Q2 “soft patch”! But is it really a soft patch as we have been claiming in public or the beginning of a deeper deceleration of the U.S. and global economy? Japan is also slowing down (…) and figures from Europe are the usual mixed bag with overall softness and a sub-part Q2 growth of 2%. So, I am usually as Kriptic in public as Delphi’s oracle but on this one I am a bit schizophrenic myself even in private. I haven’t really figured out what to do! I feel like Hamlet: to raise or not to raise?”

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Published in: on February 10, 2008 at 4:36 am  Comments (1)  
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  1. Baltic Dry Index (BDI) is now making its way back upward. Forward indicators on tradable swap contracts based on Capesize timecharter composite are actually priced above the spot levels on those routes (these are included with the BDI). Decline begins post 2008- but this year will not suffer drastically from oversupply of vessels coming in. And the BDI reflects localized supply and demand within shipping- short term its not a good indicator of world trade growth according to recent report from a top tier NY shipping analyst.

    So, I would not sell all my commodities, just ye anyway.

    bdp1 Consulting Ltd


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