Doug Henwood Q&A: Stabilization is a good thing, but it doesn’t equal recovery

Yesterday morning I caught up with author and economics journalist par excellence Doug Henwood for a check-in conversation about the mixed signals we’re seeing of late. This time around, we talk banks, employment, and markets. “Certainly it’s good to see that we’re not collapsing anymore,” he says, “but we’re not going to be playing ‘Happy Days are Here Again’ anytime soon.”

Henwood is the publisher of the Left Business Observer newsletter and the host of a weekly radio program that’s archived at the LBO website. He also writes a stand-alone LBO blog. You can find my past MinnPost interviews with him here and here.

SP: The last time we talked, you noted that slowing rates of decline were what passed for good news at the time. Since then, we’ve seen more indices slow down in their rate of decline. How do you read the state of the most important economic indicators at this point?

Doug Henwood: By that standard, we are getting better news lately. It’s pretty consistent. We’ve even seen some surprises on the positive side, particularly some of the manufacturing data from the private surveys and some of the regional Fed surveys. They’re all still negative, but they’re not as negative as they’ve been. We’ve seen some pickup in leading indexes. The Economic Cycles Research Institute’s weekly index has been turning up a little bit. Consumer sentiment measures are looking up a little bit.

So it’s a case of been down so long, it looks like up to me, I guess. But that period of real free-fall at the end of last year and the beginning of this year is over, and whether this is just a pause for refreshment or an actual sign of stabilization, I don’t know, but things are looking more stable than they did a couple of months ago, even though the job market is certainly not turning around at all. But the weekly unemployment numbers are improving and have been for the last month or so. They’re still high, but they’re not as bad as they were.

Putting it all together, there are, as they’ve been saying in the markets for the last couple of weeks, some signs of “green shoots of recovery.” But they could easily be stomped out.

SP: As you just said, we’re hearing that the financial system has stabilized to a considerable degree; even Paul Krugman, who’s been a vocal critic of the Obama administration’s approach, wrote on Monday — in what was otherwise a pessimistic column about the wage picture — that “President Obama and his economic advisers seem to have steered the economy away from the abyss.” But if the stabilization is predicated entirely on government lending and spending and there are limits to what the government can continue to do in this regard, then can you help us understand the sense in which we’ve achieved “stability”? Or is the suggestion here that the banks were not really insolvent after all?

Henwood: The government has been storing tons of money at the banks. The stimulus package has gotten most of the attention, but the things the Fed has been doing have been pretty extraordinary. They’ve been buying or backing trillions of dollars of securities, and that has really helped stabilize the system. But again, the operative word is stabilize. That doesn’t mean that things are going to turn around and head upward anytime soon. The same thing with the housing market — much of the problem in the financial sector is a reflection of what’s gone on in the housing market. And in some of the markets that first went into decline, we’re seeing a bit of a pickup, but even so not much of one. Some other markets are only beginning their decline. That’s certainly true of the New York City area.

So, you know — you can stop the collapse, but you can’t turn it around into prosperity. And it’s going to very hard to make that transition. The economy is very, very dependent upon the stimulus program and all of the Federal Reserve’s financial interventions — the TARP money, all that stuff. A good deal of the improvement in banks’ first quarter results were probably the AIG money that made its way to some of AIG’s trading partners.

Certainly it’s good to see that we’re not collapsing anymore, but we’re not going to be playing “Happy Days are Here Again” anytime soon.

SP: Bloomberg reported today that Sen. Tom Harkin will probably be forced to abandon his card-check bill to facilitate labor organizing owing to divisions among Democrats over the bill. Is there anything of promise happening in Washington with respect to workers and wages?

Henwood: No. Nothing at all. I have to say I was not surprised by what’s happened to EFCA. I didn’t think it was going to pass. It was just too much of an affront to American business and its power. There was just no way it was going to pass. I was a little amazed to hear some folks thought it would. I never thought it would, and I never thought Obama would make any kind of major issue of it. He said in an interview with the New York Times magazine that it would be nice if Wal-Mart workers made $20 an hour. Of course it would be nice, but he’s not going to lift a finger to do anything to try to make that happen. The combination of Republican opposition and conservative and moderate Democratic opposition is just too great to do anything that’s going to step on the profitability of corporate America.

I think what we’re going to see in the medium to longer term is some sort of austerity program. We’re spending enormous amounts of money to stabilize the financial system and stimulate the economy. The federal government is going to emerge from it with enormous amounts of debt that’s going to have to be paid off. And while it’s possible that we’re going to see increases on the upper brackets to pay for some of it, I think we’re also going to see real constraints on Medicare, Medicaid, and Social Security. I think we’re going to see an austerity program for the lower and middle income ranks, and keeping down wages is going to be part of that.

I don’t think we’re going to see anything coming out of Washington designed to boost wages. If anything, we’re going to see things coming out of Washington designed to keep a lid on them.

SP: Do you think that in the course of Obama’s first term, we will see a concerted effort to go after the Social Security trust fund and the $2.5 trillion that it’s owed?

Henwood: I think we’re going to see things chipping away at it — adjustments to the cost-of-living formula, increases of the retirement age. I don’t think we’ll see a wholesale attack on it, but cutbacks are virtually certain. And Medicare even more so. There’s a real effort to cut back on Medicare spending, because that is the real problem with the long-term picture for the federal government. No one wants to talk seriously about a single-payer program, which is the only way to solve this problem in the longer term. So they’re going to take a knife to Medicare.

SP: The assumptions underlying the stress tests of the 19 biggest U.S. banks seem to have been jiggered from the start to ensure banks would look as healthy as possible. Yet the results of those tests have nonetheless turned into a political hot potato, with plans regarding their disclosure changing every couple of days. How do you read what’s going on here?

Henwood: I think they were designed not as fact-finding missions but as efforts at reassurance. They’re never going to disclose any major holes in the big banks’ balance sheets. There was a New York Times headline yesterday or the day before that put that very bluntly — that these [stress tests] are intended to reassure the markets.

To be credible, they have to say that some of the banks are deficient in their capital, but not with very large numbers attached to those deficiencies. They’re trying to reassure people, and they have to give the appearance of credibility in their reassurances. But the assumptions they’ve used, for example, the worst-case scenario is unemployment going a little over 10 percent. That seems to be the likeliest scenario, and the worst-case scenario would be considerably worse than that–more like 15 percent unemployment. But if they used that, they would have gaping holes in the balance sheets of the biggest banks. So they have to cook the thing. I think the whole thing was precooked from the start.

SP: Stocks have risen about 30 percent since their low point in March, and there are all sorts of folks proclaiming the return of the bull market. But stocks also staged rallies more or less like this as the country was descending into depression in the post-1929 world. Is this a bear rally or a real rebound?

Henwood: Predicting the stock market is a very risky thing to do, so everything I might say should be read in that light. But it does look very much like a bear market rally. They’re usually very short, very sharp, and produce this sense that everything is okay again. And then it heads south again. I don’t think we’re going to see another slide like we saw from 1931 to the bottom in 1933 because of the scale of the government intervention. But I don’t think we’re going to see a bull market of the sort people got used to in the ’80s and ’90s. I think the stock market is going to do a lot of nothing for a long period of time. The era when financial assets were better than gold is past us. This 30 percent [rise] is nice if you hold stocks, but I don’t think it’s the beginning of a new bull market or anything like that. It’s the market’s way of celebrating that the economy is not falling apart.

SP: An enormous number of things remain unclear at this point and will for a long time to come, but if you were writing a history of the Obama administration’s response to the crisis, how would you grade them at this point?

Henwood: That’s pretty tough. The stimulus package was pretty good given the constraints of American politics. The financial bailout has been awful. It’s really just an attempt to restore the status quo before things fell apart. They’re doing nothing to address the fundamental structural problems of an economy that’s really hollowed out at the core and excessively dependent on finance.

Obama said a few weeks ago that we can’t have an economy in which the financial sector makes 40 percent of the profits and the top 1 percent gets all of the income gains. And we can’t–that’s not sustainable and it’s not just. On the other hand, he’s not doing anything really fundamental to change that. It’s the same old gang running the show; it’s government by Goldman Sachs and Merrill Lynch. And none of the longer-term issues are being addressed.

So I think they get a good grade for preventing total disaster. To be honest — I’ve certainly been very critical of Obama, but if McCain had won, we’d be having a very different conversation. We’d be in really deep trouble, I think, because there wouldn’t have been anything like this stimulus package. The psychological aspects are also important. It’s important that Obama is a serious and comforting figure. That’s better than having a short-tempered nut in the White House.

In terms of letter grades, I’d say B+ on the stimulus package, C- on the financial bailout.

SP: I did an interview with Kevin Phillips a couple of weeks ago, and he’s very harsh on Fed chair Ben Bernanke for attempting to reinstate the bubble years through his monetary policy. He doesn’t extend that blame for re-bubbling to the Obama administration. Yet isn’t the whole thrust of their policy based on the assumption that the dicey assets were not really overvalued in the first place, and that we just need to restore confidence to make people see that?

Henwood: Oh, yeah. They’re turning to the same set of people who caused the problem to solve it. They’re looking to hedge funds using a lot of leverage with government backing to clear the toxic assets off the banks’ balance sheets. It’s as if leverage and speculation are going to save us from the problems that leverage and speculation created.

Bernanke — I don’t know what else Bernanke could do, really. Phillips does have a point that he’s trying to restore the system as it existed before the bubble burst. But on the other hand, he’s trying to do everything he can to prevent a re-run of 1929-33, which means throwing enormous amounts of Federal Reserve money at the markets. I think Bernanke is doing about as well as he can given the constraints of institution and politics and consciousness and power that prevail in the United States.

The administration could be in a position to challenge that prominence of financial power, but they’re not really. You know, Roosevelt gave a speech in October of 1936 at Madison Square Garden in which he listed all the forces that were arrayed against him — all the forces of money and power that hated him — and he said, I welcome their hatred. You could not imagine Obama ever saying that. Now we can criticize the New Deal and Roosevelt for many things, but they were much more willing to be aggressively experimental in economic management, and to challenge the plutocracy. The Obama administration is not doing any of those things. They’re just being somewhat on the center-left side of orthodox and doing nothing to challenge the intellectual or political dominance of the plutocracy.

SP: The most striking thing to me is that if you look at the New Deal, there were lots of measures undertaken by FDR to improve the hand of labor. There’s just no attention to the income gap and the weak position of workers here that I can see.

Henwood: No, none at all. The Roosevelt administration made great efforts to put the unemployed to work in a lot of public sector jobs. To be fair, we don’t have an unemployment rate of 25 percent as Roosevelt did when he took office. But we do have an awful lot of unemployed people, and the unemployment rate is rising. When we get the numbers on Friday morning, I suspect it’s going to be close to 9 percent, the highest it’s been in many, many years. There are an awful lot of people who are barely getting by, and we’re really seeing very few direct efforts to address that.

We’re getting all this indirect spending on infrastructure, we’re getting all this money injected into the financial markets, but no support — economic, or moral even — for people at the bottom of the income ladder and the edge of despair. We’re still in a world in which the ideology of Reagan and Thatcher are pretty dominant. There’s been no serious challenge to that.

One of the reasons Roosevelt could do what he did was that in the decades before he came into office, there was a lot of political and intellectual ferment in the society. There were a lot more critical-thinking capital-p progressives. There were socialists and social democrats, labor radicals. There were all kinds of things at the time. We don’t really have that now. We have a tremendous intellectual torpor throughout the society.

So it’s not just the fault of the leadership. The society itself is different, to our great disadvantage. It would be nice to see a little more intellectual and political ferment picking up in the society as the economy languishes, but I think a lot of liberal and moderate-left types are still just so starry-eyed about the Obama administration that they’re letting him have a blank check on pretty much everything. Not just domestic economic policy, but the war in Afghanistan as well. There’s no serious opposition developing to that, either.

It would be nice to see some of that energy developing, but I think it’s going to take another year or two before people’s disappointment with President Hope & Change matures into something more critical than we’ve been seeing.