Slow Motion Recession Catching Up With the States

The NY Times ran a story last week on the unique circumstances of the current recession, particularly in unemployment:

Joblessness has accelerated, and employers have slashed working hours even for those on their payrolls, shrinking the size of paychecks just as workers need them the most.

That's not the unique part, but still a stark reminder of how much trouble the everyday citizen is in. What's got economists scratching their heads is the timeline:

"It's a slow-motion recession," said Ethan Harris, chief United States economist for Lehman Brothers. “In a normal recession, things kind of collapse and get so weak that you have nowhere to go but up. But we’re not getting the classic two or three negative quarters. Instead, we’re expecting two years of sub-par growth. Growth that’s not enough to generate jobs. It’s kind of a chronic rather than an acute pain.”

Great, so the US economy has arthritis, not a minor sprain or pull. Even worse is what this will mean in the future:

Goldman Sachs forecasts that the unemployment rate will peak at 6.4 percent late in 2009 before the picture improves, meaning that the painful process of shedding jobs may be only half-way complete.

Yet the President threw a temper tantrum when the idea of extending unemployment insurance was brought up. While that ended up getting passed and approved by the President, it seems as though Congress is lagging a bit in addressing the larger issues associated with the recession.

According to Congressional Daily (subscription only), Congressional leaders love the idea of a second stimulus package, they just don't have the same sense of urgency that many other folks have.

The Senate agreed to the deal on the war package after House and Senate Democratic leaders said publicly that a second supplemental was needed to take care of items that were not included in the war spending bill.

Reid reiterated those sentiments in his comments Tuesday and mentioned increasing food stamp benefits, as well as funding to improve the nation’s crumbling infrastructure as two worthy areas of investment.

“There are all kinds of problems dealing with infrastructure, food stamps, just many, many different things,” Reid said. “We have a lot of suffering going on in America today.”

Senator Reid's got it right, there is a lot of suffering going on in America today. So if we're going to take our time with a second stimulus package, let's make sure we do it right.

A great place to begin would be to listen to the National Governors Association when they meet later this week for their centennial meeting. Among other things, they will be discussing the effects of the recession on state economies.

29 of these Governors will be dealing with a combined $48 billion budget shortfall. The ones who chose to raid their rainy day funds may face even worse problems in FY 2010, and according to the previous New York Times piece, unemployment will almost certainly be a staple of the new fiscal year as well. They need help in the form of federal aid to states. Something that Senator Schumer cited as a must for the next stimulus package back in June:

"I'm speaking for myself, but I think I mirror the leadership here, to just do rebate checks again, without some more serious structural issues, to do it without, say, unemployment insurance, without infrastructure, without some help for the states, would not have the kind of punch it needs," Schumer said.

If its not included the following story will becoming all to familiar to families across the country.

With job losses growing and working hours shrinking, many paychecks are eroding, prompting millions of families to cut their spending. Soaring prices for food and gasoline are overwhelming modest wage gains for most workers, leaving households with even less money to spend. All of which deprives struggling businesses of sales, prompting them to shed more workers, sending the cycle down another turn.

The clock keeps ticking Senator Reid, we need to make sure we get this one right.

Tags: Federal Budget, Recession, state budgets, unemployment (all tags)

Comments

2 Comments

Re: Slow Motion Recession Catching Up ...

I always thought of the economy as having three legs... Consumer Spending, Government Spending, and Business Spending.

Let's look at spending during the Bush administration:

Consumers
 -- Even though personal income has been relentlessly driven down, consumers have actually done their part.  Unfortunately they had to borrow money from their personal ATMs (homes) to fund the spending.  Now that funding has dried up and there is little left to pump back into the economy.

Government
 -- Has been spending plenty but it has concentrated that spending on foreign wars and Corporations headquartered in Dubai and other foreign countries.  So.. none of that spending (which we pay for) ended up in OUR economy.

Even more tragic was the insane idea of 'giving' out tax stimulus rebates in the hopes that they would magically fix the debacle.  Well, guess what? It didn't work and only added another $150 Billion to our debt.  Stupid!

Business
 -- Business is supposed to hire people to complete the economic circle.  You know, the old, Bob's a baker and takes the money from selling bread to Mary the blacksmith for shoeing his horse.  Mary take it to Sam the Cobbler for new leather work gloves.  Sam then... da, da, da, da...

Well Business HAS been hiring Millions of people - IN INDIA AND CHINA! - and they've cut millions of jobs HERE and cut benefits and doubled people's workloads.   OH, and they lent us money on our houses that they shouldn't have.

Synopsis
 -- The economy can (somehow) manage to survive on ONE leg, the Consumers, for a while.  But now, we consumers have been bled dry and we're not buying.

So here we are, Business in America has cut it's own throat.  They killed the Golden Consumer Geese and their ain't no more eggs.

Business forgot their part of the bargain.

The good news is, when we get over it... when we realize we don't need all their junk and meaningless services... we can strike out on our own and become Butchers and Bakers and Bricklayers and FARMERS back in our own communities again and we don't need Big Business at all to survive!

We had a revolution to free ourselves from King George, now it's time to have another one to free us from Big Business.

Big Business in America is dead... they just don't know it yet.

by wblynch 2008-07-10 01:25PM | 0 recs
Don't believe the bull about Fannie and Freddie...

Bernanke's saying Fannie Mae and Freddie Mac will be fine. That's a crock of shit. Just look at their stock prices to see that the market already knows the writing's on the wall.

In the first quarter of this year, they guaranteed or underwrote 81% of ALL mortgages. That's a phenomenally scary reality.

Fannie and Freddie have roughly 1% in reserves for their portfolio. That means if the market value of their assets drops more than 1%--which it has already, exponentially--they're upside down.

So, lets say housing drops a total of 30% from its highs in '06/'07. Last I checked, that means: a.) 30% of the primary net assets of the average American have simply evaporated; and, b.) 30% of Fannie's and Freddie's assets--which they've guaranteed or underwritten--no longer exist.

Fannie and Freddie then end up with a $420 billion loss, since they're currently holding $1.4 trillion in mortgages. (30% of $1.4 trillion in paper equals $420 billion.)

That's a $420 billion writeoff for the government which may be handled in one of two ways: a.) bankrupt the two companies (and their stockholders as well as the banks that have their paper bought/guaranteed by these two firms), b.) let the government come in and commit to covering the debt, which will essentially make our children and grandchildren indentured servants, in terms of their taxes...or BOTH.

Oh, one other minor detail...the effect this will have upon our real estate market is devastating. Essentially, with 81% of the underwriting/guarantees no longer available to support home lending in the U.S., there will be very little mortgage lending going on...perhaps for a decade or two...no homes being bought means no furniture, appliances, consumer electronics, garden supplies, construction jobs, etc., etc., or consumer purchases...and on and on and on...since our entire economy relies upon homeownership and the related consumer spending it encourages/requires/supports. With people losing 30% of their net worth, and with most of those folks being upside down in their primary investment (their homes), they're not going to be rushing out to WalMart to buy the latest-large screen t.v.

Borrowing against your home equity is pretty much history...since there will be very little home equity in the entire country.

It's lose-lose, all around. And, there's little we can do about it, except to make these large financial institutions eat this stuff, and let them go bust.

Instead, Bush is bailing them out and leaving the onus of cleaning all this shit up to the next 3, 4, or 5 presidents.

So, of course, the government's going to continue to say "No problem..." Until they're no longer "the government" (Bernanke will be the only one left to take the flack) and the next five) president(s) moves into 1600 Pennsylvania Avenue to attempt to deal with the truth.

The term "being setup for failure" would be the world's biggest understatement to describe all of this that's occurring now.

by bobswern 2008-07-10 02:37PM | 0 recs

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