IMF Numbers Show a Great Economic Hole That Will Frame Partisan Debate

The headline,"2008 profits plunge 85% for top 500 US firms," is largely about three wards of the state. AIG, Fannie Mae and Freddie Mac, together lost $208 billion. Add in the losses at Citigroup and Merrill Lynch, which totaled $56 billion, and the cumulative 2008 profits at the 495 remaining companies in the Fortune 500, were largely eclipsed. The total net among all 500 was $99 billion.

Those 2008 losses dwarf the positive results reported by banks this past week, which, as HuffPo's Julie Satow points out, were largely driven by accounting adjustments and one-time transactions. Those first-quarter profits may turn out to be a rounding error, if the estimates set forth in the International Monetary Fund's Global Stability Report prove to be correct. Nobody has a good take on the ultimate costs of the mortgage crisis, but the IMF believes the size of the problem is about double the amount estimated six months earlier. U.S. banks, which had $510 billion in write-downs through year-end 2008, can expect to write down another $550 billion in 2009 and 2010.

As for the entire U.S. financial sector, the IMF calculated credit losses six months ago to be in the neighborhood of about $1.4 trillion. Now the number is $2.7 trillion. As we see, most of the downward slide in the U.S. was attributable to home mortgages and consumer debt.

We are stuck with those losses whether we follow the policy direction set forth by Timothy Geithner, or Paul Krugman, or Elizabeth Warren. No serious person, and no one at the IMF, doubts that governments need to aggressively intervene to prop up the financial system, and that the cost of such intervention will be a drag on government finances for years to come. The IMF estimates that by the end of 2010 we will have spent 12.1% of our GDP on stabilizing the banks and the financial sector. Ireland's debt, as a percentage of GDP, will almost double. It is what Barney Frank called, "The great economic hole."

These numbers tell us all we need to know for the next two election cycles. Republicans and their allies will play off of resentment of the bailout, arguing that the financial costs are the result of the liberals' tax-and-spend policies, and that Obama's deficits dwarf those from the early Bush years. That effort is well under way at the tea party network, Fox News. Some notables at CNBC are also prone to echoing that sentiment.

The President and other Democrats will note that they are forced to clean up the mess created by their Republican predecessors. But memories can be short and patience will wear thin.

And Republicans are intent on revising the past with three recurring narratives:

1. Blaming the cause of the mortgage crisis on Fannie Mae and Freddie Mac,
2. Blaming the Democrats for insulating Fannie Mae and Freddie Mac from regulatory oversight, and
3. Claiming that subprime lending ran amok because of the Community Reinvestment Act.

Barney Frank gave a speech on the House floor to set the record straight. "I do not argue that we are facing a vast right-wing conspiracy," he said. "What we are dealing with is something, however, equally troubling. It is crass right-wing mendacity. It is systematic dishonesty, lying, distortions, misrepresentations, bad history being promulgated."

Rep. Frank was talking about hit pieces like this one, fabricated by Bret Baier for Special Report on Fox News. The segment has gone viral, with 4.3 million hits on Youtube.

For a definitive refutation, read Barney's Frank's speech.

Comments

[PhilipTaylor]

These Executives and Employees have taken so much of the Profits from their banks the Banks are Bankrupt!

These people who in 1980 made 20 times the average worker NOW MAKE 400 Times the Avg Worker!

Remember $10 to $100 Million Christmas Bonuses on top of $10 to $50 Million salaries!

They ruined their OWN Banks and want to continue while WE the taxpayers Bail their Banks OUT!

THEY RUINED THEIR OWN BANKS!

ROUND 2!

[WorkingClass]

The next two election cycles will be won by the party that best provides relief to a hungry, homeless, jobless population.

[Realization]

MinerSam's post includes: The leader of China said it well: "While there is a place for the VIRTUAL ECONOMY to preserve and create capital IT SHOULD NEVER BE ALLOWED TO HARD (Destroy) the REAL ECONOMY."

Take note, folks. The U.S. has to rejuvenate manufacturing and technology (not just Silicon Valley but manufacturing tech), eliminate the trade deficit, and stop excessive foreign borrowing or we won't be successful. That won't happen without policies. Other countries have game plans. The "free market" won't work by itself. It will just transfer U.S. wealth and knowledge to China, etc.

[grateful4thedead]

Well written piece; thank you, David.

As I always do, I ask that you disclose any and all positions in the financial sector. Thank you.

[MinerSam]

Democrats do not like to use Talking Points. Barney Frank told me so on the phone When I suggested one to him -- though concurred with it as fact.

However, to counter Republican Talking Point *Lies* Democrats MUST STATE FACTS:

1) That 80% of the debt we wracked up since George Washington -- prior to Obama, about $11 Trillion -- was wracked up by the Republicans.
2) The interest cost is about 350B a year if not mistaken.
3) The 4 Republican Tax cuts totalled $1.4 Trillion (About the Social Security SURPLUS these 8 years.
4) That only 9% of their Tax Cuts went into US Jobs (normally 24%).
5) The rest went SEEKING YIELD (OIL FUTURES AND CHOPPED UP MORTGAGES)
6) Yet Republicans still tout tax cuts as a solution (EVEN WHEN NO PROFITS ARE BEING MADE AND US COMPANIES PAY MUCH LESS THAN THE RATE ANYWAY) Not to mention having it be a tax deductible event to close up your factory in the US and open it up elsewhere. Which John Kerry would have changed.

The leader of China said it well: "While there is a place for the VIRTUAL ECONOMY to preserve and create capital IT SHOULD NEVER BE ALLOWED TO HARD (Destroy) the REAL ECONOMY."
Damage the Republican Tax cuts have done along with so much more damage...i­.e. election of Hamas, abandonment of Afghanistan at a CRITICAL TIME. etc etc

David please put the above into a NYT Op Ed..

[steppenwolfsayshi]

I agrre with you that Democrats really need to start using talking points!! Not all the time-Obama's narrative style is great but for the average speaker it organizes and simplifies arguments.

Reading Barnie Frank's speach, I wasn't very convinced he wasn't partially resposible. Of course the problem isn't giving loans to poor people, the problem is that Fredie and Fannie were using the complex financial instrustments that led to this mess (as well as cooking the books). He was supposed to be one the people overseeing them!

The Dems are going to need to create a counter narrative of what happened to explain why they did what they did (trying to give loans to the poor-a noble effort and they didn't understand the finacncial instruments used better than anyone else) and the shared responsiblity they had with the Republicans. I think some honest explanations would improve the publics confidence and reveal the Republican spin doctors for the liars and divisive fear mongers they are.

[OzDanJoaquin]

Wow. I knew we were doing a lot better in Australia than most of the other G20/OECD countries, but I didn't realize were doing THAT much better! Thanks David, another excellent post.