Fourth quarter GDP...

US GDP was expected to drop by more than 5% in the fourth quarter. By that measure, the 3.8% fall doesn't look so bad. Don't be lulled into thinking that recovery is in sight anytime soon, though: the Fed's statement at the conclusion of its meetings this week paint a grim picture, both in terms of the level of economic activity and of the success of monetary policy efforts to date.

In Mexico, we won't get the fourth quarter GDP figures for another three weeks. The November IGAE, published two days ago, presages a contraction in the fourth quarter that will pull the 2008 growth rate down from the projected 1.9% to 1.2% - 1.5%. In other words, the Mexican economy fell off the cliff in the fourth quarter of last year.

What FDR faced when he took the oath of office

"In 1933, the United States economy had shrunk by one-third in real terms since 1929. Industrial production had fallen by 40 percent. Unemployment had soared to 25 percent, from 3 percent in 1929."

FDR did not really understand or endorse Keynesian economics. "Yet despite New Deal programs and some aid to the states, total government spending — federal, state and local — as a share of the economy throughout the 1930s remained at just under 20 percent. (Today, total government spending is more than 35 percent, a larger buffer against weakness in the private sector.)" It took World War II for the Keynesian dictates to be put into practice: "By 1942, total government spending as a share of the economy rose to 52 percent, and peaked at nearly 70 percent in 1944, when unemployment fell to 1 percent."

From the New York Times, January 27, 2009

Bankruptcy as a step to solvency

The title of an article in the New York Times, which analyzes why bankruptcy can be the rational choice for debtors. One of the consequences of a credit bubble...

http://www.nytimes.com/2009/01/24/your-money/24cost.html?8mon&emc=ym

netbooks, cloud computing and virtualization

The future of IT, it seems...

http://www.nytimes.com/2009/01/26/technology/26spend.html?th&emc=th

And the single largest shareholder is.....

The US Government is the single largest shareholder in both CitiBank and Bank of America, with 7.8% of equity and 6.0%, respectively. "Nationalization" is a term that's starting to crop up in policy debates in Washington. Here's an article:

http://www.nytimes.com/2009/01/26/business/economy/26banks.html?pagewanted=2&_r=1&th&emc=th

John Rogers's article on bankruptcy in the US and Mexico

Here's the link...

http://docs.google.com/gview?a=v&attid=0.1&thid=11edc00903fac4d7&mt=application%2Fpdf&pli=1

The Swedish Solution

Back in the early 1990's Sweden had a severe financial crisis. The center-right Swedish government nationalized the banks, cleaned them up, then privatized them. According to the New York Times, "Former Swedish officials said that [the US government's failure to acquire voting equity and dilute existing shareholders] was a mistake, for political reasons if nothing else, because owners of bank stocks did so well in the boom years early in the decade."

The story can be found at:
http://www.nytimes.com/2009/01/23/business/worldbusiness/23sweden.html?th&emc=th

China: 2008 ends five years of double-digit growth rates

China's growth rate dropped to 6.8% in the fourth quarter, putting growth for 2008 at 9%. The Chinese authorities are projecting 8% growth this year but economists are skeptical, projecting 5% - 6% growth even with the US$585 billion stimulus package.

What Americans think about the economy

Hilights of the results of a CNN survey...

Only 13 percent think economy will recover within a year
Half of those polled think the economy is in very poor shape
74 percent say economy is most important issue facing the country
Top economic issue among those polled is unemployment

http://edition.cnn.com/2009/POLITICS/01/21/poll.recession/index.html

Bank stocks

You'll find a graph of the evolution of bank stock prices this year at the following link. Let's just say the slope is very steep, with the S&P Bank index down 31% this year.


http://money.cnn.com/2009/01/20/news/companies/banks_stocks/index.htm

Now comes the hard part...

The 44th president of the US took the oath of office a few hours ago. Now, let's see if the Senate approves his candidate for Treasury Secretary, Tim Geithner. His confirmation hearing starts tomorrow (Wednesday, January 21) morning.

President Obama and his team have a lot of work in front of them. Although Congress released the second tranche of the TARP (another US$350 billion), it's not clear how the funds will be used. It is clear that the first tranche didn't produce the desired results.

Three alternatives are receiving a lot of attention: 1) guarantee debt in exchange for warrants (the strategy used with Citibank in late November and with Bank of America last week); 2) buy toxic assets (the original TARP proposal); and 3) create a "bad bank" in which to stuff the toxic assets.

Fobaproa used a combination of capital injections and purchase of bad loans. Let's see if "Fobaproa Americana" ends up doing the same.

Hedge funds: returns were great, until they weren't...

An interesting graphical presentation of the growth and returns of hedge funds since 1998, done by the New York Times...
http://www.nytimes.com/imagepages/2009/01/17/business/20090118_HEDGE_GRAPHIC.html

Want to see what the incoming US President's advisers look like?

Pictures at the following link...

http://www.nytimes.com/packages/html/magazine/2009-inauguration-gallery/index.html?nl=pol&emc=pol

And consumer prices fall for the third consecutive month...

Alas, not in Mexico: it's in the US, where the CPI in 2008 was all of 0.1%. Mexico's inflation, in contrast, was 6.53% last year.

That did not stop Banco de Mexico (Banxico) from cutting the Mexican reference rate 1/2 of a percentage point, from 8.25% to 7.75%, this morning. Banxico hopes/expects (they use that lovely verb, esperar, that has both meanings) that December was the high point for price increases in Mexico. Banxico also points out that the trajectory of the exchange rate can affect that: in other words, if the peso doesn't come back a bit, we'll get more inflation from the depreciation.

And, yes, Virigina, there is still a "pass through" effect. When the peso falls substantially, as it has since October, peso prices rise to compensate partially.

Wouldn't it be nice if prices fell in Mexico too?

The US Bureau of Labor Statistics reports today that:

"The Producer Price Index for Finished Goods fell 1.9 percent in December, seasonallyadjusted. This decrease followed a 2.2-percent decline in November and a 2.8-percentdrop in October. Prices for finished goods other than foods and energy rose 0.2 percentin December compared with a 0.1-percent increase in the preceding month."

Americans spend more of their income on health care than on food -- and the % is rising...

The Post health and science reporter David Brown reports the following in "We All Want Longer, Healthier Lives. But It's Going to Cost Us.

"Americans spend a little less than 10 percent of their income on food, which is down from 25 percent in 1930. We spend twice as much -- 21 percent -- on shelter. Last year, 16 percent of the nation's gross domestic product went for health care. If health care costs grow at its present rate through the first three-quarters of this century, it will consume 38 percent of the GDP by 2075."

The more we learn, the worse it looks

In his remarks in London yesterday, Fed Chairman Bernanke made it clear that the banking system is still in very bad shape. Here's a link to a chart showing how the first US$350 billion of TARP funds have been allocated and the ratio of non-performing loans to cash on hand of the banks that received TARP capital. Ouch.

http://projects.nytimes.com/creditcrisis/recipients/table

Immigration reform is necessary now

From a New York Times editorial today:

"But the United States cannot afford to put immigration on a back burner and merely continue with the existing enforcement regime. The costs are too high for the country’s values. And they are too high for the economy. "

http://www.nytimes.com/2009/01/13/opinion/13tue1.html?th&emc=th

A different twist to the immigration - crime equation

From the New York Times:

"Federal prosecutions of immigration crimes nearly doubled in the last fiscal year, reaching more than 70,000 immigration cases in the 2008 fiscal year, according to federal data compiled by a Syracuse University research group. The emphasis, many federal judges and prosecutors say, has siphoned resources from other crimes, eroded morale among federal lawyers and overloaded the federal court system. Many of those other crimes, including gun trafficking, organized crime and the increasingly violent drug trade, are now routinely referred to state and county officials, who say they often lack the finances or authority to prosecute them effectively."

"United States attorneys on the Southwest border, who handle the bulk of immigration prosecutions, usually decline to prosecute drug suspects with 500 pounds of marijuana or less — about $500,000 to $800,000 worth. "

Here's the full story:
http://www.nytimes.com/2009/01/12/us/12prosecute.html?th&emc=th

Somebody knew about Madoff...

That it took Bernard Madoff's own confession to bring down his Ponzi scheme is especially shocking, given that it was laid out in a memo sent to the SEC in 2005. Read the memo in the following link:

http://www.slideshare.net/hblodget/markopolos-madoff-complaint-presentation/

Happy New Year: may it not be depressing

We're in a new realm of economics. This is what the 2008 Nobel Prize winner in Economics, Paul Krugman, has to say:

"the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment."

Martin Feldstein, Chairman of the Council of Economic Advisers under President Reagan, agrees on the urgent necessity of a large fiscal stimulus. Feldstein wants to see a stimulus of US$200-300 billion a year in each of 2009 and 2010.