Marketplace Scratch Pad

Morning Reading

Scott Jagow Jun 9, 2009

The Treasury is set to tell us that 10 of the big banks will be allowed to pay back TARP money. This would seem a vote of confidence in the banks’ health. But many observers are saying don’t be fooled. The financial system is nowhere near out of the woods yet.

I highly recommend an editorial from the New York Times with the headline, The Economy is Still at the Brink:

The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse…

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed.

Remember last week when Treasury Secretary Tim Geithner told a Chinese audience their dollar investments were safe and the audience laughed? Well, the Washington Post has an op-ed that explains why maybe the Chinese shouldn’t be laughing so hard. Just look at what’s happened to global trade:

Those in that snickering Chinese audience should consider that, on paper, the United States looks relatively immune to this trade collapse. American exports are 11 percent of GDP, according to the World Bank. Compare this to the exports-to-GDP ratios, for example, of China (42 percent), South Korea (46 percent), Germany (47 percent) and Thailand (73 percent).

But author David Smick goes beyond wagging his finger at the Chinese. He explains how the global economy is “deglobalizing”:

World governments should listen carefully to President Obama, a leader with an uncanny ability to make activist, even radical, proposals sound benign. At the Group of 20 summit in London, for instance, Obama said that the United States cannot be the world’s consumer. On the surface, this sounds like a statement about the temporary condition of the business cycle.

Actually, Obama was talking about something far more significant — not outright Smoot-Hawley-style protectionism but a coming policy of small tax, spending and regulatory changes that will encourage this quiet trend toward deglobalization. Like it or not, this shift reflects a growing Washington mind-set that globalization has gone too far.

The Economist has an interesting take on the makeup of President Obama’s advisers — that there are too many economists, lawyers, scientists and union bosses and not enough actual business people:

Bringing an enterprise tsar into the White House could change this, by ensuring that every time one of Mr Obama’s other advisers suggests an intervention in the economy of any significance, he is at least forced to consider the question: “What does this mean for business, and especially for the entrepreneurial culture that has for so long made the American economy great?”

Finally, FT Alphaville has a nice, little analysis of the potential impact of so many people working part-time:

The part-timezation effect of slowing wage growth and declining hours has had one major impact on corporate America, says Rosenberg: a decreasing wage bill. Unfortunately, this comes at the expense of personal income and aggregate demand, which are needed to grow top-line revenues.

What it equals — in no uncertain terms according to Rosenberg — is a clear and ongoing ‘deflation alert’. A fact currently being ignored by the bond markets.

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