The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Editor’s note: In part I of Barry Ritholtz’s interview with award-winning technician Paul Desmond of Lowry’s Reports, Desmond discussed his research identifying market bottoms. Today, he talks about a more recent analytical paper that looks at how to identify market tops:

I just got an email from a friend who I had pinged before and mentioned I was speaking with you. He writes: ‘Tell him I loved his early work with the Dave Brubeck Quartet.’ I don’t know how many times you’ve heard that joke.

(Laughing) Oh, many, many times, yeah.

OK, all kidding aside, let’s talk a little more specifically about your most recent paper analyzing market tops. You’ve put forth the idea that markets at tops give very identifiable signals, that markets can be timed, that “buy-and-hold” really ignores a lot of information that comes at you. Is that a fair statement? .

Yes, it is very fair. I think the problem is there are an awful lot of investors who will say you can’t time the market.

Well they are saying ‘they’ can’t time the market. They’re not saying ‘you’ can’t time the market (laughs).

‘They’ can’t time the market. And I think what they are doing is looking at fundamental information. And if you are looking at fundamental information, I think you are absolutely right. You cannot time the market off of fundamental information, because the stock market operates off of expectations as to what is going to happen six months or nine months down the road. In other words, investors don’t buy stocks because of what they know today. They buy because of what they think they are going to know six months or nine months from now. So the market is always ahead of the economy. And as a result, if you are trying to look at fundamental information, you are always too late.

If you look at technical information, you can see signs of changes in investor psychology that are consistent from top to top. And that’s what this study that we just did shows very clearly, is that there is an extremely repetitive pattern that occurs at major market tops, and that pattern is one of selectivity.

Meaning the market becomes increasingly narrow as it progresses?

Exactly. There is a process that goes on from day to day, when investors begin to run out of money. They’ve invested everything that they’ve got to invest, and therefore they are out of the game of buying stocks. At that point, they are simply holding, expecting the prices will go higher.

Let me ask you a question about that, though, because the counter argument would be: Well, people get paid every other week, and they are making contributions to 401(k)s and IRAs. These days, there is some $3 trillion in money market accounts. Do they ever truly run out of money or is it more a matter that the sentiment begins to shift?

Sure. Well it occurs at a whole series of different levels. For example, some investors simply invest everything they’ve got and they’re out of money. Others will look at stocks and say, you know, I was enthusiastic about it when it was $20 but now it is $60, I’m not so enthusiastic. Others will say, my wife wants to take a vacation, so I have to spend the money on a vacation instead of investing in stocks.

Whatever the reasons are, the enthusiasm for continuing to put money into stocks begins to fade. And as it fades, the demand side of the equation diminishes, but the selling side begins to pick up, so sellers then are dominating in the market, and that is what tends to send prices down.

And this is not the way we tend to see bottoms, like a 90% downside day. Tops are really processes, while bottoms are a specific point?

Exactly. The major emotion that’s present at a top is one of complacency, where people are fully invested in stocks, or are invested as far as they are going to get, but they are convinced that prices are going to keep going forever, and therefore they are willing to ignore the initial market declines that come along from time to time. As they say, they are ‘in for the long term.’

At market bottoms, you have a completely different pattern in which the dominate emotion is fear and panic. And what we found at market bottoms, for example, was that in a typical major market bottom, you see a series of 90% downside days, 90% of all the volume, 90% of all the price changes are on the downside. Now the interesting thing that we found was that you can have a whole series of 90% downside days. During the 1973 and 1974 bear market, there were 15 90% downside days.

Over how long a period of time?

Over about 15 or 16 months.

So you don’t necessarily buy the first 90% down day.

No. And that is the really critical point about market bottoms, is that you can have signs of panic-selling and it doesn’t really mean anything. The only thing that will turn a market around and head it higher, is when buyers are wiling to step up to the plate and begin to buy.

The real signal of a major market bottom is to first see a series of 90% downside days, which say, investors are panicking, and in their panic, they are exhausting the desire to sell, because everybody that wanted to sell will have done it. But the key ingredient is to watch for a 90% upside day, indicating the prices have dropped low enough.

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While the story of the collapse of the Celtic Tiger is not a new story, I did enjoy Theodore Dalrymple’s recent piece in City Journal: How the Irish Bubble Burst.

We are supposed to learn something from this incubator of a pure economic meltdown. I find this amazing:

Some 300,000 new dwellings now stand empty in the Irish Republic, a number whose equivalent in the United States would be approximately 21 million.

And the emigration begins…

Unemployment is now 13 percent in Ireland; it would be higher if 5 percent of the working-age population (principally the young and well-qualified) had not emigrated over the last two years.

A few months ago, I did a podcast interview with a friend of mine from Ireland who described the unsettling change in values during the boom a few years ago while on a family visit.

I observed what I later dubbed the “Irish Carpenter Syndrome” (my label for working and middle class Irish investors who were snapping up condos in Manhattan sight unseen) egged on by the currency imbalance.

The poster child for this phenomenon was The Centria Condo adjacent to Rockefeller Center (faces the famed Christmas Tree directly over the plaza) during the 2007 rush to snap up anything they could. 100% of the buyers in this building were reportedly Irish. The high flying Ireland-based marketing firm that sold these condos to investors, largely sight unseen, imploded along with the investors.

The urgency that permeated this NYT article harkens to another time.

“It’s an Irishman’s dream to be able to go to Manhattan and be able to buy property there,” said Mr. McCann, 36, who added that he hoped to buy more New York apartments.”

Yes, indeed.

by William K. Black

Originally published December 4th, 2008,
cato-unbound.org

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Our different views prove that hindsight is often myopic. Larry White’s take is that Clintonian regulations perverted private incentives.

The boom and bust happened in a system with … extensive legal restrictions on financial intermediation. Nor have we had banking and financial deregulation since … 1999.

(One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.) [T]o explain industry-wide errors we need to identify policy distortions capable of having industry-wide effects. The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s.

Perverse Compensation Systems are the Key

I disagree with Larry’s theses, but have space to demonstrate only an alternative perverse incentive. What went wrong is that modern compensation systems did not “align” interests, but rather created perverse incentives to engage in accounting “control fraud,” where the CEO uses an apparently legitimate firm as a “weapon” to defraud creditors and shareholders. [1] No regulation forced any lender to make a bad loan. Larry misses the key dynamic: “The greedy” do not “aim at profits, not losses” when compensation schemes are perverse. They maximize short-term accounting “profits” in order to increase their wealth. Making bad loans, growing rapidly, and extreme leverage maximize “profits.” Bad borrowers agree to pay more and it is impossible to grow rapidly via high quality lending. Lending to the uncreditworthy requires the CEO to suborn controls, maximizing “adverse selection.” This produced an “epidemic” of mortgage fraud, particularly in the unregulated nonprime sector. The FBI began warning in September 2004 about the mortgage fraud “epidemic.” [2] Fraudulent loans cause huge direct losses, but the epidemic also hyper-inflated and extended the housing bubble, and eviscerated trust, causing catastrophic indirect losses. When we do not regulate or supervise financial markets we, de facto, decriminalize control fraud. The regulators are the cops on the beat against control fraud—and control fraud causes greater financial losses than all other forms of property crime combined.

The most relevant economic works for understanding these crises are by Akerlof and Romer, Galbraith, and Minsky. Akerlof and Romer explain why “looting” (control fraud) can occur and the fraudulent steps looters take to optimize short-term accounting profits (which destroy the firm). [3] Note that they are writing about a form of a “market for lemons” in which the CEO maximizes information asymmetry. The failure of economists discussing the ongoing crises to cite the work of a Nobel laureate writing in the core of his expertise demonstrates why we have failed to learn the proper lessons from prior financial crises. James Galbraith extends Akerlof and Romer’s analysis to show why the state aids fellow control frauds. [4] Minsky describes the “Ponzi” phase of a crisis and why financial instability reoccurs. [5]

Modern executive compensation systems suborn internal controls. (Control frauds do not “defeat” controls—they turn them into oxymoronic allies.) The Business Roundtable’s spokesman, Franklin Raines, Fannie Mae’s former CEO, explained in a Business Week interview what caused the epidemic of accounting control fraud that became public in 2001 with Enron’s failure.

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Chart Store week continues at the Big Picture. Today’s TCS table looks at rolling 102 week returns (previously reviewed as Another Look at Rally Intensity, see bottom).

Note that there has never been a run as intense as this one is, other than the post-1929 crash rallies in 1934 and 1937:

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S&P Composite 102 Week Rolling Returns

The Maestro:

“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”

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-Remarks by Chairman Alan Greenspan
At the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Consumer Finance
Washington, D.C.
April 8, 2005

A video honoring Ronaldo Luís Nazário de Lima, the greatest pure striker to ever grace the game. He has been an icon and a star of the Brazilian national team, and has forged a hugely successful career based on not just talent, but determination and a quest for excellence.

With the recent passing of what would have been Ronald Reagan’s 100th birthday — and with President Obama having  invoked his name — we have been treated to a steady stream of articles about our 40th president, most of them remembering him in the most glowing terms, particularly as it relates to his economic record.  There’s this piece by Larry “King Dollar” Kudlow and this one by Arthur Laffer, among many others.  But there are a few, like this one by Mike Kimel, author of the wonderful book Presimetrics (which I’ve temporarily put down to slog through the FCIC report) that, in my opinion, take a more objective view.  In fact, it was Presimetrics that motivated me to take my own look at  some data.

Reagan’s supporters have always glossed over the inconvenient truths about his economic record, as the aforementioned Mike Kimel points out:

By the time he left office, the national debt, which had been “approaching $1 trillion” had more than doubled to $2.7 trillion, and the stack of thousand-dollar bills that had been 67 miles high was now 193 miles high and rising fast. Interest payments on the debt—“over $90 billion” in 1981—were just shy of $200 billion in Reagan’s last year in office.

Using more relevant measures, real debt per capita (in 2008 dollars) grew from about $10,620 in 1980 to $19,860 in 1988, and from 32 percent of GDP to 51 percent of GDP over the same period. However you slice it, Reagan’s profligacy bore no resemblance to his promises.

Purely as a matter of academic interest, I believe that among the tailwinds I believe Reagan had was the country’s demographics:  The Baby Boom generation — some 76 million strong — was hitting its stride as Reagan took office, the oldest being about 35 when he took office, the youngest about 17.  I’ve not seen any studies on how much of an economic impact this might have had, but I would speculate it was not negligible.  Here is a chart showing just how big that pig in the python was in sheer numbers:

As noted, we’ll never really be able to quantify the influence of the Boomer cohort on the economics of the era, but common sense would tell us it provided some measure of benefit.  If anyone’s aware of some peer-reviewed work out there on this subject, drop a link or reference in comments — I’m very interested.  It’s interesting that the overwhelming body of work seems to be on the impact of an aging (retiring) Boomer population; precious little seems to have been done on how that cohort influenced our economy prior to their retirement years.

What I think might be instructive is an indexed look at Reagan and his successors (George H.W. Bush, Bill Clinton, George W. Bush, Barack Obama) in which I’ll level the playing field by rebasing many items to 100 at the beginning of each president’s term.  (Plug for FRED — the ability to manipulate, transform, mix & match data (~25,000 data sets) with FRED is truly one of the wonders of the internet and by far one of its best uses.  I cannot say enough about the work those folks do, and to their responsiveness when I have a question or encounter a glitch or problem.)

First up — since “Capital Markets” is one of TBP’s primary focuses — let’s take a look at the S&P500 by presidency.  I’ve set the dates on this graph in each instance to just after election day, which is to say the day we knew who would be the CEO of U.S.A., Inc.  In the case of the 2000 elections, I used December 13, 2000, the day after we knew the Supreme Court’s decision in Bush v. Gore.

Since it goes without saying that inflation touches just about every aspect of our lives, a look at CPI over the past 30 years seems appropriate:

And, since we generally measure our returns (particularly in capital markets)  on inflation-adjusted terms, I’ve indexed both the S&P500 and CPI to 100 at the start of each of the past five presidencies (essentially a combination of the two charts above):

Of course no discussion of the economy is complete without a look at GDP, here’s how that shakes out over the past 30 years:

Within his first term, Reagan produced a deficit that was 6 percent of GDP.  It was the highest the country had seen since the end of WW II.  He got it down to 3.1 percent by his last year in office.  (Note:  There is no indexing in the chart below.)

Government spending.  Huge issue right now, right?  If nothing else, Reagan was certainly a small-government expense cutter.  Or was he?  Here’s a rebased chart of Federal Government Consumption Expenditures divided by GDP and indexed to 100 at the beginning of each president’s term.

Reagan’s expenditures as a percent of GDP were elevated for his entire presidency.  George H.W. Bush managed to cut back somewhat, but it certainly is interesting to see who the real cost-cutter was.

Not only did Clinton cut the Federal Government’s Consumption Expenditures, he actually reduced the size of the Federal Government’s payroll:

(Note:  This series is from BLS.gov; FRED does not capture it.)

(The decennial spikes are, obviously, related to the influx/outflow of census workers.)

While Clinton cut the number of Federal employees, the economy surged in terms of private payrolls:

Reagan did preside over a period of significant dollar strength:

So, there’s a quick look at the past five presidencies in terms of Private Payrolls, Federal Jobs, the dollar, GDP, Government Expenditures, Inflation, Surplus/Deficit, the stock market, and an open question about how the Baby Boom generation may have figured into it all.  Hope it’s been informative — I think it most definitely tells a story about economic stewardship.

When commenting, in addition to Barry’s standing caveat, please keep in mind these very sound pieces of advice and commentary from Mike Kimel’s Rules to Write By (one of which — #14 — addresses a gimmick that makes my blood boil):

14. No magic lags. Be consistent in your use of lags. If your analysis says that Reagan is responsible for growth during the Clinton administration, he better be responsible for growth during the Bush 1 administration too. And if Reagan is responsible for events that happened four to twelve years after he left office, explain why he isn’t responsible for events that happened 13 years after he left office. Also, explain why some predecessor of Reagan’s isn’t responsible for growth during Reagan’s administration.

19. Regardless of what you want to believe, real economic growth during the Reagan administration was slower than real growth during the FDR, JFK, LBJ and Clinton administrations. Two of these administrations raised marginal tax rates and one cut them. What these administrations had in common was a vision for expanding the role of government.

Barry is taking a well needed break but I’m certain he’s never far from his laptop.  He asked me to drop in occasionally so please be patient with me.

Today Fannie Mae announced the “STAR Program” to measure servicer performance that they hope will provide more transparency.

A key component of the STAR Program is the Servicer Performance Scorecard, which provides monthly performance snapshots and trends for key performance indicators to help servicers effectively assess their progress. Top-ranked servicers will be eligible to receive incentive awards and recognition. Rankings of top performers will be made available to the public in an annual scorecard.

Looking back to Fed Governor Tarullo’s testimony on mortgage servicing before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C. on December 1, 2010…

Because mortgage servicers maintain the official accounting of all amounts paid and owed by borrowers, they serve as the critical link between borrowers and mortgage holders. In addition, servicers manage loan defaults, including the negotiation of loan modification and repayment plans with borrowers.

Enforced loan servicer standards are needed but this feels like an honor system despite claims of creating “transparency.” The largest banks comprise the who’s who list of loan servicers with a built-in conflict of interest and therefore will continue to be a key stumbling block to mortgage mods and a more responsible foreclosure process for a while.

Now that the regulators are awake, it’s weird that Fannie comes out with this program as an enforcement action against most of largest is under way (sorry, American Banker subscription). Regulators hope this will send a message for servicers to clean up their act.

Incentivizing for good behavior, penalizing for bad behavior. All in the same week.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Originally published at New Deal 2.0

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What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.

1. The financial sector harms the real economy.

Even when not in crisis, the financial sector harms the real economy. First, it is vastly too large. The finance sector is an intermediary — essentially a “middleman”. Like all middlemen, it should be as small as possible, while still being capable of accomplishing its mission. Otherwise it is inherently parasitical. Unfortunately, it is now vastly larger than necessary, dwarfing the real economy it is supposed to serve. Forty years ago, our real economy grew better with a financial sector that received one-twentieth as large a percentage of total profits (2%) than does the current financial sector (40%). The minimum measure of how much damage the bloated, grossly over-compensated finance sector causes to the real economy is this massive increase in the share of total national income wasted through the finance sector’s parasitism.

Second, the finance sector is worse than parasitic. In the title of his recent book, The Predator Statehttp://books.simonandschuster.com/Predator-State/James-Galbraith/9781416566830, James Galbraith aptly names the problem. The financial sector functions as the sharp canines that the predator state uses to rend the nation. In addition to siphoning off capital for its own benefit, the finance sector misallocates the remaining capital in ways that harm the real economy in order to reward already-rich financial elites harming the nation. The facts are alarming:

• Corporate stock repurchases and grants of stock to officers have exceeded new capital raised by the U.S. capital markets this decade. That means that the capital markets decapitalize the real economy. Too often, they do so in order to enrich corrupt corporate insiders through accounting fraud or backdated stock options.

• The U.S. real economy suffers from critical shortages of employees with strong mathematical, engineering, and scientific backgrounds. Graduates in these three fields all too frequently choose careers in finance rather than the real economy because the financial sector provides far greater executive compensation. Individuals with these quantitative backgrounds work overwhelmingly in devising the kinds of financial models that were important contributors to the financial crisis. We take people that could be conducting the research & development work essential to the success of our real economy (including its success in becoming sustainable) and put them instead in financial sector activities where, because of that sector’s perverse incentives, they further damage both the financial sector and the real economy. Michael Moore makes this point in his latest film, Capitalism: A Love Story.

• The financial sector’s fixation on accounting earnings leads it to pressure U.S manufacturing and service firms to export jobs abroad, to deny capital to firms that are unionized, and to encourage firms to use foreign tax havens to evade paying U.S. taxes.

• It misallocates capital by creating recurrent financial bubbles. Instead of flowing to the places where it will be most useful to the real economy, capital gets directed to the investments that create the greatest fraudulent accounting gains. The financial sector is particularly prone to providing exceptional amounts of funds to what I call accounting “control frauds“. Control frauds are seemingly-legitimate entities used by the people that control them as a fraud “weapons.” In the financial sector, accounting frauds are the weapons of choice. Accounting control frauds are so attractive to lenders and investors because they produce record, guaranteed short-term accounting “profits.” They optimize by growing rapidly like other Ponzi schemes, making loans to borrowers unlikely to be able to repay them (once the bubble bursts), and engaging in extreme leverage. Unless there is effective regulation and prosecution, this misallocation creates an epidemic of accounting control fraud that hyper-inflates financial bubbles. The FBI began warning of an “epidemic” of mortgage fraud in its congressional testimony in September 2004. It also reports that 80% of mortgage fraud losses come when lender personnel are involved in the fraud. (The other 20% of the fraud would have been impossible had these fraudulent lenders not suborned their underwriting systems and their internal and external controls in order to maximize their growth of bad loans.)

• Because the financial sector cares almost exclusively about high accounting yields and “profits”, it misallocates capital away from firms and entrepreneurs that could best improve the real economy (e.g., by reducing short-term profits through funding the expensive research & development that can produce innovative goods and superior sustainability) and could best reduce poverty and inequality (e.g., through microcredit finance that would put the “Payday lenders” and predatory mortgage lenders out of business).

• It misallocates capital by securing enormous governmental subsidies for financial firms, particularly those that have the greatest political power and would otherwise fail due to incompetence and fraud.

2. The financial sector produces recurrent, intensifying economic crises here and abroad.

The current crisis is only the latest in a long list of economic crises caused by the financial sector. When it is not regulated and policed effectively, the financial sector produces and hyper-inflates bubbles that cause severe economic crises. The current crisis, absent massive, global governmental bailouts, would have caused the catastrophic failure of the global economy. The financial sector has become far more unstable since this crisis began and its members used their lobbying power to convince Congress to gimmick the accounting rules to hide their massive losses. Secretary Geithner has exacerbated the problem by declaring that the largest financial institutions are exempt from receivership regardless of their insolvency. These factors greatly increase the likelihood that these systemically dangerous institutions (SDIs) will cause a global financial crisis.

3. The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.

4. The financial sector’s predation and its leading role in committing and aiding and abetting accounting control fraud combine to:

• Corrupt financial elites and professionals, and

• Spur a rise in Social Darwinism in an attempt to justify the elites’ power and wealth. Accounting control frauds suborn accountants, attorneys, and appraisers and create what is known as a “Gresham’s dynamic” — a system in which bad money drives out good. When this dynamic occurs, honest professionals are pushed out and cheaters are allowed to prosper. Executive compensation has become so massive, so divorced from performance, and so perverse that it, too, creates a Gresham’s dynamic that encourages widespread accounting fraud by both financial firms and firms in the real economy.

As financial sector elites became obscenely wealthy through predation and fraud, their psychological incentives to embrace unhealthy, anti-democratic Social Darwinism surged. While they were, by any objective measure, the worst elements of the public, their sycophants in the media and the recipients of their political and charitable contributions worshiped them as heroic. Finance CEOs adopted and spread the myth that they were smarter, harder working, and more innovative than the rest of us. They repeated the story of how they rose to the top entirely through their own brilliance and willingness to embrace risk. All of their employees weren’t simply above average, they told us, but exceptional. They hated collectivism and adored Ayn Rand.

5. The CEOs of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.

The CEOs can directly, through the firm, and by “bundling” contributions of its officers and employees, easily make enormous political contributions and use their PR firms and lobbyists to manipulate the media and public officials. The ability of the financial sector to block meaningful reform after bringing the world to the brink of a second great depression proves how exceptional its powers are to corrupt nearly every critical sector of American public and economic life. The five largest U.S. banks control roughly half of all bank assets. They use their political and financial power to provide themselves with competitive advantages that allow them to dominate smaller banks.

This excessive power was a major contributor to the ongoing crisis. Effective financial and securities regulation was anathema to the CEOs’ ideology (and the greatest danger to their frauds, wealth, and power) and they successfully set out to destroy it. That produced what criminologists refer to as a “criminogenic environment” (an atmosphere that breeds criminal activity) that prompted the epidemic of accounting control fraud that hyper-inflated the housing bubble.

The financial industry’s power and progressive corruption combined to produce the perfect white-collar crimes. They successfully lobbied politicians, for example, to legalize the obscenity of “dead peasants’ insurance” (in which an employer secretly takes out insurance on an employee and receives a windfall in the event of that person’s untimely death) that Michael Moore exposes in chilling detail. State legislatures changed the law to allow a pure tax scam to subsidize large corporations at the expense of their taxpayers.

Caution: Never Forget the Need to Fix the Real Economy

Economic reform efforts are focused almost entirely on fixing finance because the finance sector is so badly broken that it produces recurrent, intensifying crises. The latest crisis brought us to the point of global catastrophe, so the focus on finance is obviously rational. But the focus on finance carries a grave risk. Remember, the sole purpose of finance is to aid the real economy. Our ultimate focus needs to be on the real economy, which creates goods and services, our jobs, and our incomes. The real economy came off the rails at least three decades ago for the great majority of Americans.

We need to commit to fixing the real economy by guaranteeing that everyone willing to work can work and making the real economy sustainable rather than recurrently causing global environmental crises. We must not spend virtually all of our reform efforts on the finance sector and assume that if we solve its defects we will have solved the other fundamental reasons why the real economy has remained so dysfunctional for decades. We need to be work simultaneously to fix finance and the real economy.

First Bernanke, now the GAO: It appears the adults — an admittedly small group of folks in Washington DC —   are beginning to assert themselves.

The GAO issued a research report discussing what raising the US Debt Limit is about:

“The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Rather, it is a limit on the ability to pay obligations already incurred.

While debates surrounding the debt limit may raise awareness about the federal government’s current debt trajectory and may also provide Congress with an opportunity to debate the fiscal policy decisions driving that trajectory, the ability to have an immediate effect on debt levels is limited. This is because the debt reflects previously enacted tax and spending policies.”

That is your wonk update of the day . . .

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Source:
Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market
Highlights of GAO-11-203 report to the Congress
February 2011
http://www.gao.gov/new.items/d11203.pdf