Howard Davidowitz, chairman of Davidowitz & Associates has an interesting take on the economy that I happen to agree with.

Please tune into “The Worst Is Yet to Come”: If You’re Not Petrified, You’re Not Paying Attention.

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was “preposterous” to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

“We’re in a complete mess and the consumer is smart enough to know it,” says Davidowitz, whose firm does consulting for the retail industry. “If the consumer isn’t petrified, he or she is a damn fool.”

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: “The worst is yet to come with consumers and banks,” he says. “This country is going into a 10-year decline. Living standards will never be the same.”

“We’re now in Barack Obama’s world where money goes into the most inefficient parts of the economy and we’re bailing everyone out,” says Daviowitz, who opposes bailouts for financials and automakers alike. “The bailout money is in the sewer and gone.”

Bailout Money Wasted

Davidowitz is correct about money going to the most inefficient parts of the economy. Bailing out AIG just so it can payoff Goldman Sachs is hardly a good use of taxpayer money. Nor is forcing a shotgun marriage between Bank of America and Merrill Lynch, only how have taxpayers pick up the tab.

Please see Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis for my take on the coercion Paulson used on Bank of America CEO Kenneth D. Lewis, pressuring Lewis to go along with a merger he clearly knew was not in shareholder best interests.

Here is a snip from Geithner’s Plan Can Succeed: “The Plan: Dump $500 billion of toxic assets on to unsuspecting taxpayers via a public-private partnership in which 93% of the losses are born by the taxpayer.”

Chrysler Hijacked

Please consider “That’s Not the American Way”: Chrysler’s Bailout and the Road to Ruin.

Chrysler’s plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says Howard Davidowitz, chairman of Davidowitz & Associates.

Barack Obama’s plan is to “sustain the union” in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation. “We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn’t survive and can’t survive in the long run, anyway.”

More generally, the Chrysler saga is evidence of how “we keep putting more money into hopeless companies,” he says. “That’s not the American way. We let inefficient companies collapse and be replaced by more efficient companies. That’s the only way this economy can work.”

By propping up inefficient companies and keeping zombie banks alive, Davidowitz says “we are exactly on the same path as Japan,” which is now two decades into its economic malaise.

“That’s a big problem for the financial stability of the U.S.,” says Davidowitz, who had a hard time envisioning an alternative to a very grim scenario for America: “With big government, mad borrowing, and not letting things fail, there’s no way we can have [rising] living standards,” he says.

Ding, Ding, Ding we have a winner. I have talked about the Zombification of Banks on at least 12 occasions starting no later than March of 2008.

By the way, it’s not just Chrysler bondholders who are being kicked in the teeth as Karl Denninger points out in Holding GM Debt? Gubbermint Is Robbing You!

President Obama and Geithner have declared that it does not matter what the law says – they are going to do whatever the hell they want. They just got done ramrodding Chrysler bondholders with the exact same “deal”, shoved down their throats, and allegedly enforced with threats of tax audits and other jackbooted actions if the bondholders resisted in court.

FDR’s policies prolonged Depression by 7 years

UCLA economists calculate FDR’s policies prolonged Depression by 7 years.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

NIRA’s labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor’s bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes,” Cole said. “Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

How Democrats Failed to Learn From FDR’s New Deal

Minyanville Professor Scott Reeves is explaining How Democrats Failed to Learn From FDR’s New Deal.

Franklin Delanor Roosevelt is popularly regarded as the man who saved democratic capitalism with vigorous governmental intervention. But a distinction must be drawn between FDR the brilliant politician who prepared the nation for World War II and kept Britain afloat after the defeat of France, and FDR the economic illiterate.

In the 1930s, the conventional wisdom was that capitalism had failed. FDR apparently never challenged that assumption. But the failure of government – not the free market – created the Great Depression. The economic collapse could have been avoided.

In many cases, FDR’s policies deepened the depression and created needless hardship for those he sought to help.

Here’s how:

Tax Hikes

FDR nearly tripled the tax burden between 1933 and 1940, boosting excise, income, inheritance, corporate, and dividend taxes and slapping a tax on “excess profits.” The highest individual tax rate soared to 79%. High taxes sucked money out of the private sector, smothered entrepreneurship and killed incentives to work and invest. By contrast, Treasury Secretary Andrew Mellon helped spark an economic boom in the 1920s by backing a plan to slash the top individual tax rate to 25% from 73%.

High Employment Costs

The New Deal raised the cost of employment, making it expensive to hire new workers and contributing to the nation’s high unemployment rate. The National Industrial Recovery Act and the Davis-Bacon Act mandated artificially high wages, further crimping private employment. The new minimum wage cut demand for unskilled workers. The new Social Security tax raised compensation costs. Compulsory union membership often fostered violent tactics – and the goal wasn’t increased efficiency or innovative products to grab market share. The WPA and other government agencies “created” jobs, but at great cost – private sector employment was lower in 1940 than it was in 1929.

Brutalizing Business

FDR railed against “economic royalists” and “privileged princes” who sought to establish an “industrial dictatorship” and a “new despotism.” Roosevelt issued about 3,700 executive orders, many limiting business activity, and let lose a plague of anti-trust lawyers on American industry. New securities laws made it difficult to raise capital.

Obama is now looking ahead to the next election and is attempting to buy union votes at the expense of everyone else but especially legitimate bondholders with senior rights. In a possible repeat of Smoot Hawley, Congress is again threatening to label China a currency manipulator. And like FDR, Obama is targeting corporation with anti-trust legislation (while consolidating already too big to fail banks into even bigger banks.

One thing’s for sure. If you’re not petrified of what Obama’s doing , you’re not paying attention.

Mike “Mish” Shedlock
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