The Great Recession One Year In

It is difficult to recall that one year ago, the greatest market break in our lifetimes had not occurred yet. Since then several things have clearly happened. First off, everyone is poorer but they also know today how much poorer and what they have to do to put themselves right. If it is bankruptcy, then so be it. The expectation that it may get seriously worse is now abating.

The banking system is still intact, though not so much poorer as with new stakeholders who will keep the reins tight. The banking system must have tight reins. Competing for higher rates of returns is not the way to run a bank. There you prosper by improving the quality of your loan portfolio. A good bottom line is a pleasant surprise at the end of the year.

We can be sure that ratios are been hauled back and that all those old loans are been reassessed and resolved as much as possible.

Equities are been sorted out and next years earnings will drive markets.

Employment is still quite weak and so is the housing market because we have not resolved the foreclosure crisis, although it is essentially locked for the moment. A wave of buying could resolve that problem if the right tools are put in place. It is still the best place to focus fresh lending.

Through all this, the energy business is on a tear and the wind business in particular. We need that energy and the short time from inception to build out makes it a financing cinch. We need all of it and more because we all know that the electric car is coming just as fast as we can solve the related problems. Winds great advantage today is thirty years of engineering in the bank. Geothermal will be as good twenty years from how.

If there is one thing that disturbs me today, it is the lack of technical vision coming out of the Whitehouse. In an America crying for brave new technology initiatives, I must go to South Korea and China who are getting of the button and diverting resources to do the best thing possible now.

Perhaps it is too much to ask, and yes, all the bad news has not hit home yet. But a government revenue guarantee will spring a massive energy build out over the next five years and it will all be financeable with no likely loss to the government. This would produce huge numbers of new jobs and suck up the slack. Canada learned this with the Tarsands which were launched fully in the face of the 1981 oil slump. Today it is the only trillion barrel reserve been actively exploited at reasonable levels and effectively at that. Research is now opening up superior protocols that will make it much better. None of this would have been possible had the government not stepped in with early guarantees.

Otherwise, for the next three years of Obama’s administration, we will be dealing with the fall out from bankrupt states. Which type of headline would you prefer?

In the meantime, this article by Zuckerman enumerates all the depressing news and interpretations. You do not want to know this, but we are living through a blow by blow recreation of the great depression. That is the bad news.

The good news is that a lot of the right things have been done to prevent a real depression and we are now entering a strong rebound. We can be nervously optimistic.

By MORTIMER ZUCKERMAN

http://online.wsj.com/article/SB124753066246235811.html

The recent unemployment numbers have undermined confidence that we might be nearing the bottom of the recession. What we can see on the surface is disconcerting enough, but the inside numbers are just as bad.

The Bureau of Labor Statistics preliminary estimate for job losses for June is 467,000, which means 7.2 million people have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

Here are 10 reasons we are in even more trouble than the 9.5% unemployment rate indicates:

- June's total assumed 185,000 people at work who probably were not. The government could not identify them; it made an assumption about trends. But many of the mythical jobs are in industries that have absolutely no job creation, e.g., finance. When the official numbers are adjusted over the next several months, June will look worse.

- More companies are asking employees to take unpaid leave. These people don't count on the unemployment roll.

- No fewer than 1.4 million people wanted or were available for work in the last 12 months but were not counted. Why? Because they hadn't searched for work in the four weeks preceding the survey.

- The number of workers taking part-time jobs due to the slack economy, a kind of stealth underemployment, has doubled in this recession to about nine million, or 5.8% of the work force. Add those whose hours have been cut to those who cannot find a full-time job and the total unemployed rises to 16.5%, putting the number of involuntarily idle in the range of 25 million.

- The average work week for rank-and-file employees in the private sector, roughly 80% of the work force, slipped to 33 hours. That's 48 minutes a week less than before the recession began, the lowest level since the government began tracking such data 45 years ago. Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity. If Americans were still clocking those extra 48 minutes a week now, the same aggregate amount of work would get done with 3.3 million fewer employees, which means that if it were not for the shorter work week the jobless rate would be 11.7%, not 9.5% (which far exceeds the 8% rate projected by the Obama administration).

- The average length of official unemployment increased to 24.5 weeks, the longest since government began tracking this data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) has now jumped to 4.4 million, an all-time high.

- The average worker saw no wage gains in June, with average compensation running flat at $18.53 an hour.

- The goods producing sector is losing the most jobs -- 223,000 in the last report alone.

- The prospects for job creation are equally distressing. The likelihood is that when economic activity picks up, employers will first choose to increase hours for existing workers and bring part-time workers back to full time. Many unemployed workers looking for jobs once the recovery begins will discover that jobs as good as the ones they lost are almost impossible to find because many layoffs have been permanent. Instead of shrinking operations, companies have shut down whole business units or made sweeping structural changes in the way they conduct business. General Motors and Chrysler, closed hundreds of dealerships and reduced brands. Citigroup and Bank of America cut tens of thousands of positions and exited many parts of the world of finance.

Job losses may last well into 2010 to hit an unemployment peak close to 11%. That unemployment rate may be sustained for an extended period.

Can we find comfort in the fact that employment has long been considered a lagging indicator? It is conventionally seen as having limited predictive power since employment reflects decisions taken earlier in the business cycle. But today is different. Unemployment has doubled to 9.5% from 4.8% in only 16 months, a rate so fast it may influence future economic behavior and outlook.

How could this happen when Washington has thrown trillions of dollars into the pot, including the famous $787 billion in stimulus spending that was supposed to yield $1.50 in growth for every dollar spent? For a start, too much of the money went to transfer payments such as Medicaid, jobless benefits and the like that do nothing for jobs and growth. The spending that creates new jobs is new spending, particularly on infrastructure. It amounts to less than 10% of the stimulus package today.

About 40% of U.S. workers believe the recession will continue for another full year, and their pessimism is justified. As paychecks shrink and disappear, consumers are more hesitant to spend and won't lead the economy out of the doldrums quickly enough.

It may have made him unpopular in parts of the Obama administration, but Vice President Joe Biden was right when he said a week ago that the administration misread how bad the economy was and how effective the stimulus would be. It was supposed to be about jobs but it wasn't. The Recovery Act was a single piece of legislation but it included thousands of funding schemes for tens of thousands of projects, and those programs are stuck in the bureaucracy as the government releases the funds with typical inefficiency.

Another $150 billion, which was allocated to state coffers to continue programs like Medicaid, did not add new jobs; hundreds of billions were set aside for tax cuts and for new benefits for the poor and the unemployed, and they did not add new jobs. Now state budgets are drowning in red ink as jobless claims and Medicaid bills climb.

Next year state budgets will have depleted their initial rescue dollars. Absent another rescue plan, they will have no choice but to slash spending, raise taxes, or both. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history amid a deficit of $166 billion for fiscal 2010, according to the Center on Budget and Policy Priorities, and a gap of $350 billion in fiscal 2011.

Households overburdened with historic levels of debt will also be saving more. The savings rate has already jumped to almost 7% of after-tax income from 0% in 2007, and it is still going up. Every dollar of saving comes out of consumption. Since consumer spending is the economy's main driver, we are going to have a weak consumer sector and many businesses simply won't have the means or the need to hire employees. After the 1990-91 recessions, consumers went out and bought houses, cars and other expensive goods. This time, the combination of a weak job picture and a severe credit crunch means that people won't be able to get the financing for big expenditures, and those who can borrow will be reluctant to do so. The paycheck has returned as the primary source of spending.

This process is nowhere near complete and, until it is, the economy will barely grow if it does at all, and it may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of excessive debt has been completed. Until then, the economy will be deprived of adequate profits and cash flow, and businesses will not start to hire nor race to make capital expenditures when they have vast idle capacity.

No wonder poll after poll shows a steady erosion of confidence in the stimulus. So what kind of second-act stimulus should we look for? Something that might have a real multiplier effect, not a congressional wish list of pet programs. It is critical that the Obama administration not play politics with the issue. The time to get ready for a serious infrastructure program is now. It's a shame Washington didn't get it right the first time.

Mr. Zuckerman is chairman and editor in chief of U.S. News & World Report.

Shiller's Bad Recession

We are almost a year past the 2008 market break. Everyone has had a chance to review their personal outcomes and make whatever plans are possible to respond to the changed conditions.

Because the real estate market is still eroding, albeit slowly now as described in this article, household wealth continues to be under attack. Also because of the near ten percent unemployment rate, it is also true that most incomes are terribly vulnerable. In this environment, most folks who get new jobs will be accepting lower incomes.

So far, government action has produced little that is concrete. They certainly have prevented a total banking implosion by printing money to fill the shortfall produced by massive asset write downs in the banking sector. At this point that sector knows were it stands and if they begin supporting lending in the housing sector which I expect them to do we will see that sector quickly sort itself out.

With luck, we can have a land rush through 2010 and see the bulk of the inventory cleaned up over the next two years, driven by buyers prepared to rent the houses.

The big present concern is to get the economic core back into economic expansion and hiring mode. As I have already posted, our best chance there is to backstop a massive expansion of the power business in preparation for electrification of the personal transportation business. A lot of metal must be cast and shaped to build all those windmills and it is all best done in the Midwest.

This is where the government can get the biggest response for effort and outlay.

In answer to the question of can the economy deteriorate much more? The answer is not that likely. It would require a further attack on household incomes more than anything else. We are still losing jobs and that should have largely run its course.

The restoration of consumer spending will be slow for another year but then should start recovery. Credit cards will have been paid down and the credit system should then be fully functional.

This should all add up to a sharp rally this fall, instead of further declines.

Economist Shiller Sees 'Bad Recession,' Stocks Could Drop Again
Sunday, July 19, 2009 5:34 PM

http://moneynews.newsmax.com/headlines/shiller_recession_housing/2009/07/19/237119.html?s=al&promo_code=83A5-1

Esteemed economist Dr. Robert Shiller was among the very few to warn of a housing bust before it happened.

Now he tells Newsmax and Moneynews.com that, although the housing market could be approaching a bottom, prices might remain in the “doldrums” for years to come as the United States remains in a “liquidity trap” comparable to the one it faced during the Great Depression.

Though stock market prices are valued fairly now, Shiller said, equities remain a “risky” investment because the United States has not turned the corner on its fiscal crisis. He warned that stock prices “could fall dramatically.”

Editor's Note: To see Dr. Shiller’s full video interview, Go Here Now.

Shiller is the co-creator of the closely watched S&P/Case-Shiller Home Price Indices. His books include "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It."

During an interview in 2006 with Newsmax’s Financial Intelligence Report, Shiller accurately warned of a looming price bust in housing. During a recent interview, Newsmax.TV’s Dan Mangru asked Shiller where he sees the housing market going from here.

"In the United States, home prices have been dropping at a rapid clip," Shiller responded.

"However, in the latest S&P/Case-Shiller data, the rate of decline seems to be reduced, and in fact, in seven of our 20 cities, home prices were rising in April. So it does seem to me that we are getting closer to a bottom at the very least."

Last week, demand for home-purchase loans decreased and the unemployment rate now stands at 9.5 percent, Mangru pointed out, and asked: Are home buyers just scared?

"I think having really high unemployment is naturally scaring people," Shiller said.

"And we don't know that it's over yet. We had a really bad unemployment report, and unemployment could easily exceed 10 percent. People know that. That's one reason the personal savings rate has risen to 6.9 percent, levels we haven't seen in decades.

"Even though the confidence surveys seem to be relatively upbeat, I don't know if it really translates into willingness to purchase yet."

Unlike other analysts, Shiller doesn’t believe the key to a U.S. economic recovery lies in the housing sector. He argues that the United States should first get its credit markets in order and get banks lending money again.

He told Newsmax.TV he doesn’t think some proposals calling for increased tax credits for all home buyers is a good idea.

He sees the $8,000 tax credit for new home buyers as stimulative because it forces new home buyers into the market rather than existing homeowners who would put their existing properties up for sale.

In discussing the overall economy, Shiller said the United States had avoided an economic “catastrophe” because of intervention by the Federal Reserve and Treasury, but the nation remains in a “bad recession.”

Instead, Shiller foresees a “risk of a weak economy for years to come.”

He advises conservative investors, especially those who are retired and on fixed incomes, to be wary of stocks.

Shiller compared the country’s economic crisis to the same “liquidity trap” the United States faced in the Great Depression. The federal government needs to pump more economic stimulus, via increased spending or tax cuts, into the economy, he said.

He thinks the first stimulus wasn’t enough and has unwound too slowly.

Asked whether he sees the Fed's increase of the nation’s monetary base as inflationary, Shiller said no, at least for the near future.

However, he suggested that the economy could face “the possibility of substantial inflation” a “few years down the road.”

He believes that investing in commodities is a “smart thing to do,” regardless of whether inflation hits.

Obama's First Blunder

The US government cannot hire everyone with a minimum wage job and expect any success. Russia tried it for seventy years and it did not work. The first round of stimulus prevented a total implosion of the banking system. This second round is merely a flushing of cash into government programs and fixes little. It does not restore the collapsed credit system.

Firstly, the US government must intervene to rewrite all outstanding mortgage contracts to properly release and restore credit to the credit users. Left to themselves, everyone will sooner or later be forced to walk away from their own mortgage. There is just too big an overhang to possibly be absorbed by normal market turnover. The current contract structure will simply grind the market down to levels were the underlying land value will be zero and the house value will be the cost of construction, depreciated and deflated to meet current construction costs. And no one, including you will have any credit whatsoever.

I have explained that a fifty percent take back formula will immediately put a floor under all this real estate and generate a land rush that drives prices back up while restoring credit to millions. It will be also the cheapest solution and possibly the most profitable if anyone wishes to listen. It will end the USA part of this global crisis.

In the meantime, we also have to try to help the Europeans to fix their disaster. Their problem is a surfeit of fraudulent US investments manufactured in New York. First, it must be disclosed and quantified. Then a work out has to be put in place that allows the banks to stay in business. A huge amount of depositor’s capital is now frozen because they financed funny paper unbeknownst to themselves.

I also do not know if the insurance industry is still solvent. Their silence is astounding and a lot of their stuff will take a long time to sort out because they have to rematch their books. You simply do not wake up in the morning and find that the world’s largest banks have disappeared and not be badly damaged. The problem is that it takes a long time to for these folks to determine the losses as many assets are illiquid to begin with and the globe is in the middle of an asset repricing binge.

Right now, it is desperately necessary to rewrite the mortgage contracts and underwrite the program. Otherwise, inaction will bring on the second great depression as everyone loses all credit. That is why stocks are in persistent decline.

The stimulus package is a frothy distraction driven by a sudden enthusiasm to throw money at the problem instead of moving to end the whole problem. The Japanese tried it for ten years until they finally did the right thing. Already two months of this is enough.


February 20, 2009

The Market Is Shorting Obama's 'Stimulus'

http://www.realclearmarkets.com/articles/2009/02/the_market_is_shorting_obamas.html

By George Bittlingmayer & Thomas W. Hazlett

President Barack Obama’s “stimulus” plan invokes the 1930s fiscal strategy put forward by British economist John Maynard Keynes, who saw capitalism as pretty much spent. Having exhausted their store of innovative ideas, investors curled up. Workers lost jobs, spent less, and sent still other workers walking. Budget deficits – government spending without taxes to “pay as you go” - would pull unemployed workers off the street and arrest the downward spiral. Investors’ “animal spirits” would be calmed, new capital risked, and economic vitality restored.

So the Obama theory – government spending is stimulus. If so, financial markets should feel the love. The U.S. budget is awash in red ink, and $800 billion more of it should easily move the needle on our economic prospects. Indeed it has – in the wrong direction. Financial markets don’t want more government debt or a scramble for “shovel-ready” spending projects. They want the skeletons in the banking sector’s closet exposed and expunged.

The Bush Economy went up in smoke in September-October 2008. The financial meltdown hit Wall Street, devastating bank equities and laying waste to America’s 401-Ks. The Republican ticket, McCain-Palin, was a 50-50 bet on Sept. 15; by Oct. 15 it was a 5-1 long-shot. Voters saw the carnage: the Dow Jones Index lost 17% of its value from Sept. 2 through Nov. 3. In a flash, Americans lost years of toil, and Republicans the election. Decisively.

The election marked a turning point. Investors looked forward to the economic policies crafted by Democrats in Congress and the White House. More pointedly, they wanted decisive, well-crafted action on the banking crisis. Hence the Dow soared 6.5% Nov. 21 on news that Timothy Geithner, the highly-respected head of the New York Federal Reserve Bank, was Obama’s pick for Treasury Secretary.

Yet, from Nov. 4, 2008 through Feb. 12, 2009, the DJI overall fell 18% -- a larger drop than during the Sept-Oct plunge. In January, when the Obama plan, promising far greater deficits than the two much smaller “emergency stimulus” plans signed by Pres. George W. Bush in 2008, was unveiled, the market tanked – the worst January performance in 113 years.

More pointedly, key political victories for the Team Obama spending plan have not been viewed as buying opportunities on Wall Street. A string of negative market reactions began with the December 18 announcement of a stimulus bill of $700 billion (Dow down 2.5%), continued with the January 7 announcement that the actual plan would be “on the high side” (-2.7%) and continued with last week’s 61-36 Senate vote supporting the Administration’s fiscal plan. The White House victory and the new bank bail-out plan announced the following day by Treasury Secretary Geithner were met with a 5% wipe-out in the DJI, and a decline in Treasury bond yields, indicating a “flight to quality.”

There are many problems with Keynes’ “stagnationist thesis,” as Joseph Schumpeter called it, not the least of which is that it didn’t test so well when applied by New Dealers. U.S. unemployment was perniciously high throughout the 1930s, peaking at 25% in 1933 but still over 17% in 1939.

Many claim that World War II brought us out of the Great Depression, but the lesson to be learned is still being debated. Federal budget deficits soared (reaching 26.5 % of GDP in 1942 as calculated by Harvard economist Robert Barro), providing Keynesians an argument for spending as stimulus. But WWII also brought a profound shift in the New Deal’s regulatory policies. Attorney General Thurman Arnold’s vigorous campaign to break-up “the bottlenecks of business” in major industries like steel, chemicals and electrical equipment was shuttered, and America’s largest corporations enjoyed a respite from threats of dismemberment (Arnold was kicked upstairs to a judgeship). As Thomas K. McCraw writes in his superlative Schumpeter biography, “Under the life-and-death pressure of war mobilization… the Roosevelt Administration, which had been hostile toward alleged monopolies, now decided that big business must lead in the job that had to be done.”

The only thing guaranteed by the spending stimulus is more national debt. One stroke of the presidential pen has now increased it by $800 billion. Democrats recently screamed about W-era profligacy. On July 28, 2008, Sen. Kent Conrad (D-ND), Chair of the Senate Budget Committee declared, "If they gave out Olympic medals for fiscal irresponsibility, President Bush would take the gold, silver and bronze. With his eight years in office, he will have had the five highest deficits ever recorded. And the highest of those deficits is now projected to come in 2009, as he leaves office."

Kent Conrad was right. The projected 2009 deficit then stood at $482 billion. In January it was forecast by the Congressional Budget Office at $1.2 trillion. Pres. Obama’s new plan now ups that to $1.7 trillion. If W got the gold, the new Administration has landed the Platinum in just its qualifying heat.

If historic U.S. budget deficits are any indication, the economy is already “stimulated.” The predicted 2009 federal deficit stood at 8.3% of GDP before Obama’s package sent it to about 12%. This is a stunning level of debt, double the previous post WWII high when Reagan’s 1983 budget deficit amounted to 6% of GDP. That time around, the 10.8% unemployment rate, the worst since the Great Depression, was soon reversed.

Keynesians claim that the Reagan boom was an outcome of just this deficit strategy; for sake of argument, let us assume the Keynesian position. Reagan’s budget deficit, half the size of Obama’s as a fraction of GDP, was able to pull the economy out of an unemployment trough deeper than the 7.6% hole we’re in today.

How do economists know that, while a deficit amounting to 6% of GDP budget was sufficient to spur the economy back to health in 1983, it will take more than twice that federal borrowing to do the same now? They don’t. Economic models are all over the place in their projections. Indeed, Prof. Barro’s cutting edge analysis of fiscal policy finds no historical stimulus from peacetime deficits. Of course, we’ve never seen so massive a deficit – one that would bar the U.S. from membership in the European Union, on grounds that our government finances are a mess -- and so we lack empirical evidence to inform the precise experiment we’re running today.

We do, however, know the accounting trends: our government faces massive new spending increases as Baby Boomers retire and their Social Security and Medicare bills come due. Market investors are wary of new spending, guaranteeing either future tax increases or inflation, as a run-up to the demographically guaranteed spending spiral. The quest for “shovel-ready” projects makes one think, Where’s Senator Ted Stevens when we need him? In any event, this fiscal bridge to nowhere is not spurring markets.

Government deficits are nonetheless being sold as doctor’s orders, an elixir that – while it looks ugly and tastes bitter – will propel us back to economic health. Yet the best forecast currently on the table is the one made by investors risking their own money. They are shorting the “stimulus.”

George Bittlingmayer is the Wagnon Professor of Finance at the University of Kansas. Thomas Hazlett is Professor of Law & Economics at George Mason University.