Paul Krugman, "The Jobless Trap": Castigating Obama

Why are the columnists of The New York Times so down on Obama? Yesterday we had Maureen Dowd telling us that Obama has proven himself totally ineffectual ("he still has not learned how to govern") (see: http://jgcaesarea.blogspot.co.il/2013/04/maureen-dowd-no-bully-in-pulpit.html). Today, in his New York Times op-ed entitled "The Jobless Trap" (http://www.nytimes.com/2013/04/22/opinion/krugman-the-jobless-trap.html?_r=0), Paul Krugman begins by stating:

"F.D.R. told us that the only thing we had to fear was fear itself. But when future historians look back at our monstrously failed response to economic depression, they probably won’t blame fear, per se. Instead, they’ll castigate our leaders for fearing the wrong things."

A "monstrously failed response to economic depression"? Hey, Paul, aren't you being a bit harsh on the president? We might have high unemployment, but we still have "Hope," "Change" and "Forward." Obama is still learning the ropes, and you might just want to cut him some slack.

Jocundity aside, Krugman continues his opinion piece by highlighting America's disastrous unemployment numbers:

"Now, some unemployment is inevitable in an ever-changing economy. Modern America tends to have an unemployment rate of 5 percent or more even in good times. In these good times, however, spells of unemployment are typically brief. Back in 2007 there were about seven million unemployed Americans — but only a small fraction of this total, around 1.2 million, had been out of work more than six months.

Then financial crisis struck, leading to a terrifying economic plunge followed by a weak recovery. Five years after the crisis, unemployment remains elevated, with almost 12 million Americans out of work. But what’s really striking is the huge number of long-term unemployed, with 4.6 million unemployed more than six months and more than three million who have been jobless for a year or more. Oh, and these numbers don’t count those who have given up looking for work because there are no jobs to be found."

Krugman is correct. These figures are horrifying. However, we disagree as to how to put people back to work. Krugman believes that federal government borrowing still poses no danger and that the federal government should spend more to create jobs:

"America isn’t and can’t be Greece, because countries that borrow in their own currencies operate under very different rules from those that rely on someone else’s money. After years of repeated warnings that fiscal crisis is just around the corner, the U.S. government can still borrow at incredibly low interest rates.

. . . .

The main reason our economic recovery has been so weak is that, spooked by fear-mongering over debt, we’ve been doing exactly what basic macroeconomics says you shouldn’t do — cutting government spending in the face of a depressed economy."

But Obama's first term stimulus packages didn't work. Should good money be thrown after bad? Could it just be that something else, more fundamental, has been corrupted in the US? My belief is that US financial markets have been destroyed by legalized hedge fund manipulation and SEC indifference and that we have entered an era in which these markets no longer serve as economic growth engines.

What went wrong? The Washington Post recently refused my opinion piece submission on this topic, but I'll say it again here for the umpteenth time - the 2007 cancellation of the Uptick Rule is destroying the US economy. Allow me again to explain:

Micro-cap company "X" has designed and patented a revolutionary widget. Recently, the achievements of "X" have made their way into the news, and its shares have risen. Farmer Joe, who attends night school and reads the financial news, decides to buy 1,000 shares of "X". However, Farmer Joe is unaware that Slick Eddy at Hedge Fund "Z", who couldn't care less about the merits of company "X"'s widgets, has also noticed the rise in the share price of "X". With almost unlimited resources behind him, Eddy borrows "X" shares from various financial institutions and begins to sell vast quantities into the market, causing a precipitous decline in the market price of "X". Eddy then blocks any rally in the share price by activating a computerized program to immediately sell 100 shares at the bid after any purchase. Worried by the huge downswing in the price of "X," and also concerned that at the end of each trading day "X" always goes down (Eddy often sells into the market during the last seconds of trading), Farmer Joe dumps his shares at an enormous loss ("Someone must know that something is wrong at 'X'"). Having succeeded in panicking Farmer Joe and other small investors in "X", Eddy buys back the shares at a significantly lower average price than that at which he sold them, resulting in enormous profits for Hedge Fund "Z". Eddy's bosses note his "fine" work and reward him with bonuses as the shares of "X" tumble.

Of course, there are those who will say that ultimately the stock market is "efficient", and the price of "X" will recover to an appropriate level. However, in the process we have witnessed the flow of wealth from Farmer Joe and other small investors to Hedge Fund "Z" and Slick Eddy.

Also, consider the damage to company "X", which, owing to doubt raised by the run on its shares, is suddenly unable to raise additional funds to finance expanded production of a new line of widgets, declares bankruptcy and fires its staff.

Sure, there are instances when the scientific and/or commercial progress of a company shorted by Hedge Fund "Z" is so great that Hedge Fund "Z" must buy back the shares at a higher price, but these losses are more than covered by its programmed downward manipulation of the shares of many other companies.

I would only add that it has become known to me that although financial institutions are required to "borrow" the shares that they short, many financial institutions are ignoring these regulations: "If you look the other way regarding the shares of company "X" that I borrowed and should have returned long ago, I will look the other way regarding the return of the company "Q" shares that you borrowed.

In short, US financial institutions have been given carte blanche to cannibalize the economy, and we are witnessing their dirty work. Indeed, it's time for "Change."