Explaining Southern California's economy

A quick note on the Davos World Economic Forum in a time of crisis

Michael Wuertenberg/World Economic Forum/Flickr

Rep. Barney Frank (D-Mass), speaking at 'The Next Global Crisis' session of the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, Jan. 27, 2010, at the Congress Centre.

The World Economic Forum — often described as a gathering of the world's business, government, and financial elites — will touch down in Davos, Switzerland this week. It's currently being much discussed and blogged about, especially given that the repercussions of the financial crisis are still being felt. Unemployment in the U.S. is still alarmingly high, at 8.5 percent. Europe still seems pretty far from fixing the deep problems of the euro and of averting a wider sovereign debt crisis. Growth in the developing world is slowing. 

So in a way, Davos 2012 isn't about elitist hobnobbing but rather about Davos saving...itself. The pressing problems of the world aren't on the agenda. The ongoing economic travails of the West are. Writing for Reuters, former White House official Larry Summers offers the following:

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Falling unemployment plus rising GDP growth equals a Happy New Year

A jobs sign hangs above the entrance to

KAREN BLEIER/AFP/Getty Images

A jobs sign hangs above the entrance to the US Chamber of Commerce building in Washington, DC. New claims for US unemployment insurance dropped last week to a level last seen more than three years ago, government data showed December 15, 2011 in a sign of stabilization in the troubled jobs market.

There's been a big debate in economics over the past few months about whether the U.S. will fall into another recession. One side points to continued high unemployment and sluggish growth, as well as the perception that the economy is in the dumps (and in an economy, perception is very important to consumer behavior, which accounts for 70 percent of economic activity in the U.S.). 

The other side says, basically, that we aren't seeing unemployment go up or GDP growth go down, and besides, most industries have declined so far that there's nowhere to go but up. Therefore, no double-dip recession.

The data favors the latter argument. This is from the LA Times:

Growth has picked up steam through the fall as dropping gas prices put more money in consumers' pockets and businesses rebuilt their inventories. Economists project the annualized growth rate from October through the end of the year could be as high as 4%.

Helping fuel that recovery is continued improvement in the job market.

New jobless claims declined again last week, falling to 364,000, the lowest level since April 2008, the Labor Department said Thursday. The four-week average of 380,250 is below the 400,000 figure that economists say is key to cutting into the unemployment rate.

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Remember Lehman Brothers? It's coming out of bankruptcy

Financial Crisis Inquiry Commission Holds Hearing In Washington

Chip Somodevilla/Getty Images

WASHINGTON - SEPTEMBER 01: Lehman Brothers former Chairman and CEO Richard Fuld is sworn in before testifying to the Financial Crisis Inquiry Commission about the roots and causes of the 2008 financial and banking meltdown in U.S. and worldwide markets on Capitol Hill September 1, 2010 in Washington, DC. The commission begins two days of questioning about how two specific financial companies, Wacovia and Lehman Brothers, failed and why some institutions were considered "too big to fail" while others were allowed to fail. (Photo by Chip Somodevilla/Getty Images)

Not that that means anything. All that's left of the once-proud Wall Street investment bank, whose bankruptcy precipitated the financial crisis, is $65 billion. And every single penny of that is spoken for.

This is from Reuters, via the LA Times:

Unsecured creditors will receive about 21 cents to 28 cents on the dollar, depending on the type of security they held. Shareholders, whose stock in the company hit a high of $86.18 in February 2007, according to Reuters Data, will receive nothing.

The company had $639 billion in assets when it went bankrupt. Some of that money was returned to brokerage customers in a separate proceeding. There remains $65 billion to be returned to creditors who have $450 billion in claims, a group that includes debt investors and trading partners from before the bankruptcy, such as Goldman Sachs.

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Why Warren Buffett can't lose on Bank of America

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Justin Sullivan/Getty Images

Bank of America customers use an ATM on January 21, 2011 in San Francisco, California. Bank of America reported today that it has reached an agreement for an $8.5 billion settlement with a group of investors who lost money buying mortgage-backed securities from Countrywide Financial.

Recall, if you will, this past summer when Warren Buffett put a floor under Bank of America's then-plummeting stock, serving up a $5 billion "Buffett bailout." Now, as one of the worst years for bank stock ever winds down, Bank of America has been headed South again. Yesterday, it dropped through the symbolically important $5 per share level (it's back up over $5 today). As the Wall Street Journal reports, Buffett is now like a lot of people who hold BofA mortgages: $1.5 billion underwater.

Is Buffett concerned? Probably not:

Don’t worry about Buffett, though. He is guaranteed a profit on his BofA investment. The banking giant must repay Buffett’s $5 billion, plus a 5% premium, at any time. Plus, the world’s third-richest man will rake in dividends of $300 million a year from BofA, and he won’t give up those payouts no matter what sub-basement BofA shares tumble into.

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Bank bailout math: It was actually $29 trillion

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AP Photo / J. Scott Applewhite

The Federal Reserve Building in Washington, DC.

How big was the too-big-to-fail bailout of U.S. banks? If you said, "$700 billion," then you'd be limiting yourself to the Troubled Assets Relief Program (TARP) that was authorized in late 2008, in response to the financial crisis.

But if you're a student of economist L. Randall Wray at the University of Missouri-Kansas City, backed by a Ford Foundation grant to find out just how much the bailouts cost, you'd have a slightly different answer: $29 trillion. Almost $30 trillion, actually, if it's your policy to round up from $600 billion.

Here's Wray, at the Huffington Post:

[A]nalyses of the bail-out variously put the total at $7.77 trillion (Bloomberg) to $16 trillion (GAO) or even $24 trillion. He argues that these reports make "egregious errors," in particular because they sum lending over-time. He also claims that these high figures likely include Fed facilities that were never utilized. Finally, he asserts that the Fed's bail-out bears no relation to government spending, such as that undertaken by Treasury.

All of these assertions are at best misleading. If he really believes the last claim, then he apparently does not understand the true risks to which he exposed the Treasury as the Fed made the commitments.

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