In an attempt to stop the flow of foreclosures that is ravaging the companies, Freddie Mac and Fannie Mae have decided to put a temporary hold on new foreclosures and evictions. This hold will last till early 2009 and is meant to give homeowners the chance to work out loan modifications, hopefully allowing them to stay in their homes. Between the two companies this move is expected to affect around 16,000 homeowners facing foreclosure, according to the Wall Street Journal. So it seems that these 16,000 homeowners are getting a nice little Christmas present from Freddie and Fannie, as well as from taxpayers I presume.

If nothing else, it will be interesting to see how this idea works. I was skeptical at best when the foreclosure moratorium was discussed during the presidential debates, and I still don’t think this will work as well as they are hoping. Nevertheless, this shall give us an opportunity to test the program on a smaller scale, which it could open up the door for similar action by other lenders if it works.

My problem with this strategy: I predict that ultimately the homeowners will still be foreclosed on, but they will enjoy some free time in their homes. If the homeowner doesn’t stay in the home, or somehow sell it, then the delay will just put the lender in even worse shape than before. Because in the case of Freddie and Fannie this equates to taxpayers taking on the burden, I’m not too fond of the idea. It will work out better if the companies are selective about who qualifies for a foreclosure delay, but if they offer it to all owner occupants it is doomed to failure. The problem is most people are in foreclosure for a serious reason: Some people lost their jobs, some can’t afford the payment (with or without loan modification) and some people are choosing to enter into foreclosure because they are so far underwater on the house. The last reason is becoming a huge problem, and really should be the one most feared in this scenario. At least I can feel bad for the people who lost their jobs, or possibly even the poor sucker who got an interest only ARM sold to them that they couldn’t afford, but it is hard to feel bad for someone who can afford the payment and just wants out of their contract. Why on earth would we want to give these people another month, two or three of free housing? If they aren’t going to pay their mortgage and just plan on working the system, why should taxpayers be stuck with the bill? We already have to deal with the fact that we are going to lose money on the foreclosure, so why add anything else?

It will be interesting to see how this all plays out. I have my doubts, and I hope that I’m proven wrong and that this plan saves taxpayers a bunch of money. But unless we are able to create a method to accurately identify the homeowners who want help and can be helped, this is doomed to fail.

Labels: Banks, Fannie Mae, foreclosures, Freddie Mac, housing bubble, real estate

This article has been reposted from Economist's View. The full post can also be viewed on Economist's View.

Labels: Barack Obama, Bush, economy, politics

I read a couple interesting articles this morning that I thought I’d share. One article talks about how no one, including President-elect Obama, knows how to fix the financial crisis. The other offers a potential solution that will cost more than $1 trillion. I’ll summarize the two articles below:

The first article was written by Russell Roberts, economics professor at George Mason University, and published in Forbes. In his article, Roberts equates this financial crisis to raising children, saying that each one is different and there is no official manual on how to raise the perfect child. He goes through the measures that have already been enacted, saying how each one thus far has failed miserably. Many people have this belief that Obama will miraculously save the day, but Roberts points out that the only solution Obama has really posed thus far is to offer another stimulus package, and idea that has already been tried and failed. Paulson is lost at this point, and he doubts Obama will be the answer either. He ends his article saying:

“What if doing whatever it takes means doing less, rather than more?

That is the conundrum for Obama and the successor to Paulson. The more options there are, the harder it is to know which one is the right one. The more options you try, the more uncertainty is injected into the economy, and the more cautious are investors and employers and consumers.

Nobody knows what it takes to move the economy forward right now.”

The second article was written by Neha Singh and published by Reuters. This article is about the findings of Paul Miller, an analyst for Friedman Billings Ramsey. Miller has come up with a plan to save the U.S. financial system, and it will cost only $1 trillion to $1.2 trillion in additional capital. Basically, he says that in order to restore confidence and improve liquidity in the credit market, this injection needs to happen. In addition, rather than the investments being made via preferred shares or long term debt mechanisms, Miller thinks that in order for the plan to work the investments need to be common equity injections. The following is a quote from Miller: “Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis.” Miller says that even his plan will take a few years to fix things.

Obviously these two articles have very different views, but one thing they have in common is that they agree that the solutions proposed or enacted thus far have failed.

Of the two views, I tend to side with Roberts, author of the first article. I think that pretty much we are lost in the forest and going around in circles trying to get out, and as they teach you in Boy Scouts, when you get lost sometimes it is best to wait it out.

Miller’s suggestion, on the other hand, I find completely ludicrous. So instead of the government (i.e., taxpayers) getting preferred treatment for their extremely risky investments into struggling companies, they should settle for common equity investments that would surely lose a ton of taxpayer money? Sorry, but that sounds pretty dumb to me. And I’m certainly not willing to lose $1 to $1.2 trillion of taxpayer money to find out that this crazy idea isn’t going to work. There are a lot of ways that we can help the economy with that kind of money that would have a bigger impact. Besides, there is no way that plan would ever get approved without people rioting in the streets and threatening rebellion. People are already outraged at the current investments we are making into these companies, and if we were to take even lesser terms in exchange, look out. The only people who would support this plan would be shareholders in these institutions, and I don’t think anyone feels bad for them at this point.

Labels: Banks, Barack Obama, Bush, business, economy, housing bubble

With inflation concerns now being trumped by the fear of deflation, and the economy still struggling, the Federal Reserve is expected to cut the Fed Funds rate again during their next meeting in December. Kathy Lien examines this closer and shares her expectations in her blog post below.

US consumer prices dropped 1 percent last month, taking the annualized pace of growth to 3.7 percent, which is the lowest level since October 2007. Falling oil prices takes the credit for lower inflationary pressures with gasoline prices tracking the 50 percent decline in crude. Gas station receipts fell a whopping 14 percent and commodity prices have fallen in general, which has helped to push down transportation costs.

Although the core PPI numbers accelerated, core CPI dropped 0.1 percent and we expect it to head even lower. Less price pressure will give the Federal Reserve more room to cut interest rates. We expect the Fed to cut by another 50bp in December, but it is important to note that Fed Fund futures are pricing in a tiny chance of a 75bp rate cut next month.

The housing market continues to be one of the weakest links in the US economy. Housing starts fell to a record low while building permits dropped to the lowest level in close to 50 years. When you have an environment where foreclosures are rising at a very rapid pace, there is no desire by builders to break new ground.

This afternoon, we have the minutes from the latest FOMC meeting at which the Fed cut interest rates by 50bp to 1 percent. Given the continued concern reflected in Bernanke’s testimony to the House Financial Services Committee on Tuesday, the Fed is likely to support further easing.

Labels: Bernanke, economy, Fed, inflation

As part of the latest directional shift in the allocation of the bailout funds being managed by Hank Paulson, it seems homeowners have once again been overlooked. The bailout funds which were originally intended to boost the lending markets have now been earmarked to boost bank balance sheets. Paulson and Bernanke seem much more concerned with propping up failing banks than homeowners at this point. Anthony Freed from Your Mortgage or Your Life even goes so far as to call them liars. You can read more about this in his blog post below.

Two months ago, in late September, I penned a piece titled Liars, and the Lying Lies They Are Telling You, which examined just one single publicly available FDIC document from 2002 which shows beyond any doubt that the Feds were not only aware of the problems in the finance industry that have led to near economic collapse today, they were already convinced that there would soon be dire repercussions.

Yet, today we have Treasury Secretary Hank Paulson and his mini-me Neel Kashkari, as well as a host of other top Federal officials, testifying under oath that the threats to our economic security were not immediately apparent until just months ago - hence the gun-to-the-head threats that produced the biggest bailout of private industry in history, while prescribing less governance on the application of those funds than is required to redeem a typical twenty-cent manufacturers coupon for kitty-litter.

Now we will see Barney Frank and others on the Hill posture and shuffle, as they feign attempts to look like they are in control of anything whatsoever, and they will act surprised that they had handed Paulson and his boy a blank check, and they is spending it as they sees fit.

Well, there should be no surprise there if they actually took the time to read the legislation they passed.

Paulson, who is overseeing the bailout program for the Bush administration, changed course and announced last week that the government would not use any of the money to buy rotten mortgages and other bad assets from banks. That had been the centerpiece of the plan when Paulson and Bernanke originally pitched it to lawmakers.

“Our assessment … is that this is not the most effective way” to use the bailout money, Paulson said at that time.

Instead, Paulson said the department would focus on rolling out a capital injection program to pour $250 billion into banks in return for partial ownership stakes in them.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers. Locked-up lending is a prime reason why the U.S. is suffering through the worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.

FDIC chief Sheila Bair continues to be the loan voice - I mean lone voice - advocating that some of the crumbs of the Bailout Cake be scattered in the direction of distressed borrowers who are, or will soon be, facing foreclosure.

In a break with the administration stance, Sheila Bair, chairman of the Federal Deposit Insurance Corp., who also will testify Tuesday, recently proposed using $24 billion of the bailout money to help some American households avoid foreclosure. So far, the Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group(AIG Quote - Cramer on AIG - Stock Picks) — its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress’ first bailout installment of $350 billion.

As much as I appreciate that there is at least one person in the Federal Government’s ivory tower who has some sense of the pain and heartache that the American Homeowner is facing, even if her advocacy basically ends with the gavel and the conclusion of the hearings.

The hearings may address a lot of things today, but the most important thing they will not address is who is responsible for letting us get into this terrible position in the first place? Are we and the now completely vegetative national press, really expected to believe that no one saw this entire catastrophe heading our way, when a simple Google search will produce hundreds of documents that show that version of the truth is ridiculously false?

In the article Liars, and the Lying Lies They Are Telling You, I featured testimony by Karen Shaw Petrou and others who were sounding the alarm repeatedly, exposing the vulnerabilities to the system posed by the nearly industry-wide use of risk-abatement models that only work in a market that never contracts.

That was a fatal strategy on the part of the financial industry. The notion that Federal Regulatory agencies were not aware of the risks is patently false. From 2002:

“The next panelist, Karen Shaw Petrou, Managing Partner of Federal Financial Analytics, had a considerably different take on the appropriateness of the Basel initiative. Ms. Petrou said that she has significant concern with Basel II, not because the individual pieces of it are necessarily wrong but because “nobody understands how it all works together.”

Ms. Petroustressed that reliance on models on which the Basel rules are based must be evaluated with tremendous caution and a careful look at the bottom line. She also highlighted problems with the operational risk rule. Reputation risk is not included in the Basel definition of operational risk for purposes of determining a capital requirement. As another weakness of the Basel II proposal, Ms. Petrou stressed the difficulty with relying on models.

She suggested that the Basel Committee move forward only with the provisions of the rule on which there is widespread agreement and considerable evidence of immediate need.”

In the article, I half-jokingly asked if any readers happened to know where Karen Shaw Petrou was today, and wheter or not she was available to take either Paulson’s or Bernake’s jobs. Well, a friend from OpenSalon.com - Tom Cordle - was curious enough to follow through, and what he found is gold: More proof that the Federal Regulatory Agencies charged with protecting the economy, the nation, and the American taxpayer from the reckless profiteering that is the nature of capitalism were at best asleep on the job - at worst they were completely complicit in the manufacturing of this crisis.

The long and short of it is - WE ARE BEING LIED TO REPEATEDLY, AND THE PROOF IS AVAILABLE TO EVERYONE - CONGRESS, THE PRESS, AND ALL OF US…

Trillions of dollars of our tax money to bailout foreign investors, and nothing for distressed homeowners but failed programs and broken promises. The bailout money is now being directed to the Credit Card companies and foreign investors, and the icing is that they want us to believe that they never imagined this could happen.

That is a bald-faced lie. The following is subsequent Congressional testimony from Karen Shaw Petrou, this time the pudding is from 2006:

Testimony Of Karen Shaw Petrou

Managing Partner

Federal Financial Analytics, Inc.

Before the Subcommittee on Financial Institutions and Consumer Credit

Committee on Financial Services

U.S. House of Representatives

September 14, 2006

This panel has led the way in recognizing the critical importance of the Basel risk-based capital rules, starting the policy debate in early 2002 with the first Congressional hearings on the rules long before many in the industry realized their critical importance. I was honored to testify then to offer views on the rules at that early stage and am grateful again now to outline ways to modernize the regulatory-capital requirements governing U.S. financial-services firms.

Sad to say, much of what I will say today is what I said in 2002 and at several later hearings on the proposal in the House and Senate. For example, in 2002, I urged the regulators carefully to consider the competitive implications of their rules. The House Financial Services Committee has pressed hard on this point and the agencies are now paying heed to it, but I fear that many aspects of the most recent proposal still do not address ongoing problems raised by the unique nature of the U.S. industry. It is different in many key respects from other national financial-services regimes, and U.S. rules must thus be carefully tailored to reflect U.S. reality.

There is, though, one key difference between 2002 and now: the Basel risk-based capital rules - for better or worse - are final everywhere else but here. Thus, we no longer have the luxury of pushing for a better international Accord. That is now final, and banks around the world will start to operate under it in January of 2007. This means not only that internationally-active U.S. banks will operate under anachronistic capital rules that place them at a disadvantage and that put the banking system at risk - that would be bad enough. However, it also means that foreign firms may have an undue capital advantage with which to enter the U.S. and acquire banks and other financial-services firms. As I said before this panel in May of 2005, M&A by global firms here is fine if it’s a fair fight. It isn’t fine, though, if our domestic institutions are gobbled up by foreign competitors able to engage in “regulatory arbitrage” solely because we can’t make up our minds on our capital standards.

What are the key U.S. financial-system realities that must be kept carefully in mind as new capital rules are finalized? Put very simply, they are:

• We are facing emerging financial risks, most notably in housing and mortgage markets. We can debate all day long if the housing “bubble” will burst or fizzle, but we know for sure that U.S. consumers are highly leveraged and are making use in unparalleled fashion of high-risk mortgage products. The current Basel I rules applicable to all U.S. institutions woefully under-capitalize high-risk assets, creating a regulatory incentive for banks to hold them. Getting the risk right in risk-based capital is not just an issue for model builders. It’s a critical challenge to protect the FDIC and the economy more generally.
• In the U.S. bank regulatory capital rules cover only insured depositories and a subset of parent holding companies. We have a wide range of charter options, the consolidated supervised entity (CSE) importantly among them, that permit astute companies to pick and choose among the charters. Outside the U.S., almost all firms fall under the Basel rules, eliminating much of the competitiveness concerns critical in the U.S. The Basel rules as now finalized may be good, bad or indifferent, but they will apply with few distinctions outside the U.S., ensuring the proverbial “level playing field.” We will have a most uneven one - with dangerous systemic-risk ramifications - if the final U.S. bank capital rules do not reflect our charter and supervisory diversity. The proposed operational risk capital standard is particularly problematic in our competitive and legal reality.
• We have a unique capital requirement, the “leverage” standard proposed now to continue under the Basel IA and II regimes. Advocates of leverage argue that it will counteract possibly risky drops in regulatory capital. However, the leverage standard, while providing false comfort, exacerbates the charter disparities noted above because it applies only to some financial-services players, not to all of them. It is, further, no panacea for the problems in Basel. This panel will well remember the thousands of banks and S&Ls that failed in the 1980s and early 1990s even as the leverage standard applied to each and every one of them.
• We have thousands of banks, savings associations and credit unions - not just the four or five big players that dominate most other markets. Initial plans simply to ignore all but the biggest U.S. banks in the Basel rules have rightly been shelved, but the current proposal still has unnecessary restraints on what size institution may choose which capital regime. Each insured depository and, when applicable, holding company should choose the rules it thinks are right for it, not have that choice defined by its regulators. Supervisors have full powers - actually expanded under the Basel proposals - to intervene and add more capital if they think an institution’s choice is risky.

With these thoughts in mind, I offer and urge the following recommendations related to the Basel rules in the U.S.:

• First, we need to get our rules in place as fast as possible. If we can’t make up our minds on the more complex issues, leave them aside and finalize at least the simpler, “standardized” sections of the rules (revised for U.S. mortgage and other issues as necessary) and the Basel IA requirements. As noted, the current Basel I rules encourage risk-taking because there is no regulatory capital penalty for it. A simple rewrite that better equates risk-based capital to risk is urgently needed, and debate over the fine points of these highly-complex rules should not deter action on their key points on which there is, in fact, broad general agreement.
• Second, we should not cling to the leverage standard in hopes that it will protect us from “undue” capital drops. I very much doubt that risk-based capital under Basel II would drop here in anywhere near the amounts suggested by the fourth quantitative impact study, which was based on top-of-the-cycle numbers and back-of-the-envelope estimates. Putting banks and their holding companies through all of the hoops and all the added expense of the Basel rules and then slapping the leverage standard atop them undermines the entire point and purpose of the Basel standards and - importantly - is far from the guarantee of safety and soundness hoped by those now pushing for retaining the leverage standard. It should be discarded - especially for holding companies - and regulators should rely on their own powers and market discipline to press banks that might consider unwise capital reductions to think again.
• Third, the U.S. rules should not include an operational risk-based capital (ORBC) standard. The Basel IA proposal rightly does not include this and it should similarly be omitted from the Basel II rules. While this will put the U.S. Basel II rules at still more variance with the international Accord, it is necessary because of the lack of any agreed-upon methodology or measurement systems for operational risk. Worse still, a focus on ORBC will distract both banks and supervisors from urgently-needed disaster preparedness and contingency planning - capital is no substitute for back-up systems and advance planning as was made all too clear after September 11 and Hurricane Katrina.
• Finally, we must make up our mind and move forward. All of the benchmarks, caveats, limits and questions in the Basel II rules create wholesale uncertainty about what capital rules will apply when to whom. As noted, U.S. banks operate in the real world of aggressive competitors at home and abroad. We have proposed imposing not only new risk-based capital standards, but also new powers for regulators to buttress these - Pillar 2 - and new disclosure standards - Pillar 3 - to enhance market discipline. Far too little attention has been paid in the current debate to these critical elements of the overall Basel framework - indeed, they are almost unmentioned in the current notice of proposed rulemaking. Rightly structured, however, these two additional pillars will give U.S. regulators all the tools they need to ensure that capital is right for each bank under their purview without forcing institutions into the one-size-fits-all leverage standard, benchmarks, and other constraints on Basel now under consideration.

In conclusion, Basel critics might wish none of this had started and the U.S. could just get back to Basel I as is. This is understandable given all the flaws in the initial proposal and all the problems to which regulators turned a deaf ear for so long. However, it is critical to remember that Basel I as is rewards risk-taking and the leverage standard as is will do nothing to constrain this. It is also vital to remember that major competitors at home and abroad are now or will soon come under a more risk-sensitive capital regime with no leverage standard. Each and every one of these firms is a major force to be reckoned with in the U.S. whether or not it chooses to become a bank under the Federal Reserve’s domain or headquarter itself here.

Thus, Basel II is here like it or not. Charters will be selected and deals done based on it, like it or not. The longer U.S. banks are kept under Basel wraps, the fewer of them there will be under our traditional regulatory framework. The longer Basel I is in place, the riskier our banking system will be - leverage standards now have no meaningful impact on risk other than to encourage taking it. Unless Congress is prepared to rewrite our rules and force all banks - big and small - and all competitors under the same capital regime - a major challenge that would keep Congresses busy for years to come - U.S. banks cannot be the last ones allowed to come under modern, risk-sensitive regulatory capital standards.

This article has been reposted from Your Mortgage or Your Life. The full post can also be viewed on yourmortgageoryourlife.wordpress.com.

Labels: Bernanke, economic stimulus, economy, Fed, housing bubble, real estate

October brought us, among other things, record lows for housing starts and permits, according to a U.S. Census Bureau news release. Housing starts reached an annual rate of 791,000 in October, the lowest level since the department began tracking starts in 1959, according to a CNNMoney article. Building permits also fell 12 percent to an annual rate of 708,000 in October, breaking the previous low of 709,000 in March 1975, according to the same article. While this is certainly bad news for homebuilders and the economy, it is just what the real estate market needs to eventually recover.

Most people are stuck on how these numbers are horrible things, unable to see past the initial job losses and financial stresses on homebuilders. The truth is that this is 100 percent necessary right now, and the market is doing exactly what it needs to do. There are way too many homes for sale right now and the last thing we need at this time is more homes to add to that bloated tally. We need to cut the amount of new homes being brought onto the market and allow the existing inventory to move. Once the existing inventory gets back to normal ratios, then we might actually begin to see a recovery in the real estate market.

The bad part is that homebuilders are always behind the curve. They stop building too late and they start building too late. This means that, in all likelihood, homebuilders are going to be slow to respond once the need for new housing is already upon us. When that time comes, we are likely to see a run-up in prices on existing housing as buyers are forced into competition for available housing. There is no need to panic, though, if you are in the market for housing, because we aren’t going to hit that point for a long time.

Labels: economy, housing bubble, real estate

Considering all the bad news in the headlines now, the fact that prices are falling is probably making most people ecstatic. The biggest excitement of course is likely surrounding gas prices, which fell nearly 25 percent last month, according to a Bureau of Labor Statistics (BLS) press release. And while prices of goods other than food and energy actually rose 0.4 percent last month, according to the same report, as the cheaper commodity prices come into play for manufacturers, we are surely going to see these prices fall soon enough. Since Americans, along with the rest of the world, are in penny-pinching mode right now, these new lower prices are a godsend. This good news, though, could quickly turn bad if it gets too out of control.

Of course we like to see prices fall; that means we can now buy more stuff than we could before, and for the most part falling prices are a good thing, especially when they had been inflated so much in recent years. What we have to watch out for is deflation. Deflation can be a horrible thing, and even though you might think it is good, it most certainly is not. Deflation leads to lower company profits, layoffs, business closures, falling wages, loan defaults (deflation increases the real interest rate on loans) and so on. People lose the incentive to spend, and borrowing becomes nearly extinct as borrowers don’t want to borrow and banks don’t want to lend. Deflation can even be the catalyst that pushes a country into a depression, and we know we don’t want to go there again.

Deflation is an extremely scary thing to think about in reality, and the only scarier thing to think about is the fact that we might not be able to prevent it from happening. Typically, preventing deflation has been as easy as lowering interest rates and adding to the monetary supply. Interest rates are already at 1.0 percent, meaning there really isn’t much more room to maneuver. Japan had to deal with their own bout of deflation during their so-called lost decade, and they weren’t able to dig out of it even with interest rates at 0 percent. Sure, there are a few other things that the government can pull out of its sleeve, but again, there is no guarantee that anything is going to work this time around.

If the government is able to help us prevent deflation, it is also possible that they could end up creating another boom and bust cycle. The following is an excerpt from an opinion piece by Gerald P. Driscoll, the former vice president of the Federal Reserve Bank of Dallas, published in the Wall Street Journal:

“The economy now confronts deflationary forces. If past is prologue the Fed will concentrate on those deflationary forces for too long and rekindle an asset boom of some kind. The fiscal "stimulus" being contemplated by Congress could be another economic accelerant. If both the fiscal and money stimulus efforts kick in just as market forces also kick in, we're likely to see another unsustainable boom that will be followed by a bust.”

Either way it seems that we are likely headed for an undesirable outcome. This reminds me of the game Operation I used to play when I was a kid. The smallest mistake in any direction is going to cause all heck to break loose. I don’t know about you, but I sure hope Obama and his new staff have amazingly steady hands.

Labels: economy, inflation, Oil, recession

It appears that Bush and Paulson are content to leave their mess for Obama to clean up. Rather than push forward with new initiatives that can help relieve pressure on the financial system, they would rather wash their hands of the situation. Considering the magnitude of our problems, though, the economy might not be able to wait for Obama to take command. Kathy Lien investigates this issue in more depth in her blog post below.

There are increasing signs that the Bush Administration wants to leave the clean up job to Barack Obama.

According to Treasury Secretary Paulson, even though the first half of the $700 billion bailout package is being used up quickly, the Bush Administration will not be asking Congress for the remaining $350 billion.

With 8 weeks to go before Bush leaves office, the current Administration is more focused on wrapping things up than starting new initiatives.

Paulson said it best:

“I’m going to do what we need to do to keep the system strong but I’m not going to be looking to start up new things unless they’re necessary, unless they make great sense” and “I want to preserve the firepower, the flexibility we have now and those that come after us will have.”

This was the same spirit that Bush took at this weekend’s emergency meeting of G20 nations that I talked about this morning. The meeting was a big disappointment as the Group failed to deliver any specific solutions. Instead, they set an action plan for March 31 and another meeting for April 30th. The G20 is clearly waiting for the new Administration to take charge before putting the pedal to the medal. The only question is, will the global economy be able to wait that long.

This article has been reposted from Kathy Lien. The full post can also be viewed on KathyLien.com.

Labels: Barack Obama, Bush, economy, politics

The Organization for Economic Co-Operation and Development (OECD) released updated economic projections on several countries late last week, and while some are calling the projections grim, they look extremely optimistic to me. The report projects different economic variables through 2010, but the one I want to specifically focus on is employment. In their report they see the U.S. capping out with an unemployment rate of 7.6 percent in the first quarter of 2010. Considering that we are already at 6.5 percent, and news of mass layoffs keep coming with no end in sight, it is hard to believe that we won’t easily surpass 7.6 percent next year.

The big headline in the papers this morning is the 50,000+ people that are getting laid off by Citigroup, on top of previous layoffs the company has already announced this year. Things certainly are not getting better in the financial industry, and really the outlook is not the great anywhere else, either. If the automakers don’t get a big bailout we will soon see tens--if not hundreds--of thousands more people laid off there, not to mention all the vendors and suppliers who would also be forced to lay off workers. Nearly every industry you can think off, short of medical and a few others, is in belt tightening mode right now, and more layoffs are all but imminent.

The OECD projected the unemployment rate to be 6.5 in Quarter 4 of this year; considering that we are already at 6.5 after October’s announcement, we are sure to beat that number. In addition, we must also remember that the Labor Department has been drastically underreporting jobless claims in initial reports. I blogged about this recently, but if they keep the underreporting ratio intact from the past couple months, we could see up to 200,000 more jobs lost than was originally announced for October. That would be scary, considering that the numbers for November look like they are going to be bad, too. We could very well end up with an unemployment rate over 7 percent by the end of the year, a number the OECD is not projecting us to top until Quarter 2 of 2009. By then we might be over 7.6 percent--who knows?

Really, I don’t see how we won’t top 7.6 percent unemployment before 2010, short of an amazing government intervention orchestrated by President-elect Obama. However, that of course would have its own set of ramifications for us to deal with. This problem isn’t going to get better any time soon, and this recession will be deep and hard felt. We can hope for the best, but just make sure to prepare for the worst. The way people have been talking about this OECD report as being overly grim, I just don’t think enough people truly see the big picture.

Labels: business, economy, recession

How long will the recession last? I don't know for sure, but we may be able to say something about how long labor markets will continue to struggle even after output growth begins to increase. The next two graphs show the unemployment rate and the employment to population ratio since 1948:

Notice that in the last two recessions, unlike those that came before, these measures of labor market performance continue to deteriorate even after the official end of the recession (as dated by the NBER). The delayed recovery can be seen more clearly in a graph of the two series since 1985:

This means that once the trough of the recession in output growth is reached - and we are not there yet - then there will be a considerable period of time before the labor market recovers if this downturn is like the last two. How long of a time period?

Output growth troughs very near the NBER assigned date for the end of recessions:

Focusing on the last two downturns, the trough of the 1990-91 recession was in March 1991. However, the peak unemployment rate wasn't until June, 1992, 15 months later. The employment to population trough was a bit earlier, December, 1991, but it was still 9 months later (and there is a second, slightly higher trough a few months later - see the red line in the second graph above).

The 2001 recession has a trough in November, 2001, but unemployment doesn't peak until 20 months later in July, 2003. The employment to population trough is 22 months later in September, 2003. Summarizing:

Thus, once the recession has officially ended, the average number of months until unemployment peaks is 17.5, and the average time until the employment to population ratio troughs is 15.5 months.

So, if the past two recessions are a reliable guide, expect around five quarters or so of additional labor market problems even after output growth turns around.

Is the past a reliable guide? I wish I could answer, but as far as I know the exact reason for the increased time until the labor market recovers observed in the last two recessions is unknown (there has always been some delay, but lately it has increased considerably). One reason could be that labor hoarding has increased due to higher training costs or some other reason. With firms retaining more labor through the downturn and hence more excess capacity than in the past, they can expand output once the recovery starts for a longer period of time without increasing the labor force, or at least not increasing it by much. With employment growing slower than population, and also growing slower than the number of people looking for jobs, the measures above would increase for awhile even after the economy turns around. If firms also install labor saving equipment at a greater rate than in the past as the recovery begins, or if the equipment is installed at the same rate but it is even less labor intensive than in the past, the growth in employment could be even slower. But as I said, even though there has been lots of research into this question, the exact reason for the change in labor market behavior is not known with certainty.

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