Posted by Michael A. Kamperman on July 10, 2009
In his column in today’s New York Times, Paul Krugman highlights the lack of political will in Washington to step up and do more right now to help the clearly struggling economy. He raises the question “what the president and his economic team should do now?” Professor Krugman wrongly assumes the Federal Reserve is out of bullets. The Federal Reserve still has quantitative easing available as a tool to stimulate the economy. The Fed should get a backbone and begin purchasing trillions of dollars worth of U.S. Treasuries right now. What the president should do is stake his presidency on turning the economy around. Whether President Obama and his advisors realize it or not the die for his presidency is already cast, and as this economy goes so goes his presidency. President Obama is not inheriting the same situation that FDR inherited. For comparison purposes, President Obama assumed the presidency at the end of 1930, not the spring of 1933 like FDR. The world didn’t realize they had entered the great depression at the end of 1930. By 1932, the voters in many countries were ready to throw the bums out and try anything. President Obama will become the next Herbert Hoover if the economy keeps sliding, not the next FDR. Without significant intervention on multiple fronts, including quantitative easing, the debt-induced deflationary depression we have entered will turn in to a new great depression. If President Obama understood that his whole presidency is on the line, then he would toss his cautious and patient approach aside and he would be willing to take risks. What needs to be done to restore the economy starts with throwing out the window conventional wisdom and the post World War II economic playbook.
Professor Krugman wants a larger stimulus package. But temporary measures will not restore the confidence of businesses and consumers to spend money in the face of rising unemployment. What President Obama should propose is permanent stimulus. The U.S. should immediately give all recipients of Social Security a 20% raise. And, the eligibility age for full retirement should be lowered to 60. Additionally, the eligibility age for Medicare should be lowered to 60 as well. Most people cannot afford to retire if they have to pay for the full cost of healthcare. It will cost approximately $120 billion per year to offer all Social Security recipients a 20% raise, and it could be implemented in less than one month. It will cost approximately $180 billion per year to lower the age for full Social Security benefits to 60. The details for the cost estimates can be found in the book How America Can Escape the New Great Depression. Most of the extra $300 billion per year in checks will be spent by our older consumers. Because the Social Security checks are permanent, some recipients will actually go out and commit to a new car loan, or a new mortgage. It will cost the federal government approximately $100 billion per year to lower the eligibility age for Medicare to 60. This will be a form of permanent stimulus to employers who will see the health care costs permanently lowered for their older workers. Lowering overall payroll costs will prevent some layoffs and may he even lead to a few new hires.
The biggest benefit is we will reorder our society. The U.S. will have millions of new relatively healthy retirees who can volunteer for the charity of their choice. And, the retirees will open up jobs for younger workers boosting their confidence. All of a sudden the unemployment rate will go down because people will have left the workforce for the right reasons. Rather than putting more stimulus spending in the hands of Congress to build more bridges to nowhere, let’s put the stimulus money in the hands of the people. The critics will say this creates another unfunded liability between now and 2109. It can be paid for if the Fed will print money and repurchase $10 trillion worth of our outstanding Treasury bonds. Other critics will say printing money will be inflationary. The forces of deflation are very powerful right now. We need the Fed to try and create some inflation. We need for home prices to stop going down and start going up. Zero percent interest rates are not doing it. President Obama, have the audacity to give us hope.
Posted by Michael A. Kamperman on July 7, 2009
Today Dr. Laura Tyson, a member of the President Obama’s Economic Advisory Council, called for a second economic stimulus plan focused on infrastructure spending. Unfortunately, the White House quickly said there was no immediate need for a second stimulus plan since they were still monitoring the effectiveness of the first plan. Considering that the unemployment rate of 9.5% is well beyond the Administration’s worst case assumption for 2009 of 8.9%, just what in the world are they monitoring? However, the key reason for the collapse of the economy and for its failure to revive is the credit markets broke and are still broken. The media’s focus on Dr. Tyson’s comments helped obscure the much more important insights from an article in today’s Financial Times titled Under Restraint, the link to which is found in the far right column. This article details how the securitization market for loans fell apart in 2007 and remains broken in the middle of 2009. The securitization market allowed banks to make mortgage loans, auto loans, commercial mortgage backed loans, and credit card loans, and then sell the loans to investment banks for a fee. Importantly, the banks also sold all of the risk and could then make new loans with the proceeds from the sale. This significantly levered the ability of a bank to lend money off of its existing capital base. The investment banks pooled the loans together and sold them to investors all over the world in tranches, most of which were rated AAA by the credit rating agencies. The subprime debacle killed this market, and it will not be coming back in its previous form.
The problem is the securitization market accounted for $2.5 trillion in lending to the real economy in 2007. Most of the lending support offered by the Federal Reserve has propped up other areas of lending, and not the lending that came from the securitization market. The banks simply do not have the capital bases to absorb the lost lending from the securitization market. This is the root cause of the credit crunch. Until it is fixed the world economy will continue to not have adequate access to cash to grow the economy or stave off deflation. Yesterday, I read that an employed woman with a credit score of 705 was turned down by her local bank for the first time ever. She was attempting to purchase a $10,000 used car. If people with credit scores over 700 find credit conditions tight, imagine what it is like for those with scores under 690. Over half of the U.S. consumers have credit scores below 690 right now. According to Citigroup, the securitization market supplied from 30% to 75% of the lending to various sectors of the U.S. economy, such as the auto sector. Multiply this globally and it is clear a couple hundred billion dollars of roads and bridges will not offset a couple of trillion dollars of annual lending in the real economy.
The solution to fixing the broken credit markets has two components. First, there is not enough capital in the bond market to support all of the disparate credit needs. The Federal Reserve can fix this by printing $10 trillion and purchasing most of the outstanding U.S. Treasury bonds. The cash received from the sale of U.S. Treasuries will be forced into other more economically productive sectors of the credit markets. Second, the U.S. government can guarantee jumbo-mortgage backed securities and auto-backed securities to free up bank capital to lend to other sectors of the economy. President Obama needs to understand the economic pain we are experiencing is unnecessary. He can effect real change if he will simply stop listening to his political advisors to wait and see whether or not the first failed stimulus plan is enough, and instead demand drastic action.
Posted by Michael A. Kamperman on July 2, 2009
The U.S. lost another 467,000 jobs in June. The unemployment rate rose to 9.5%. While the headlines were bad enough, the devil was in the details. According to the U.S. Department of Labor statisticians, the number of people in the labor force shrank by 155,000 even though the population grew by an estimated 203,000. People are giving up looking for work. The number of people working for federal, state, and local governments shrank by 52,000. Tax revenues for state and local governments are falling. The State of California alone is trying to close a $27 billion projected budget shortfall for the new fiscal year that started yesterday with some combination of program cuts (jobs). The average work week went down to 33 hours per employee. For the first time in a long time average hourly earnings were unchanged from the previous month. The clincher is the average weekly paycheck fell by $1.85 to $611.49. Finally, the number of people unemployed 27 weeks or more rose by 433,000 to 4.4 million. To put that stat into English, well over half of the people that lost their job last November have been unable to find a job.
With weekly wages now beginning to fall the ability of people to pay back their debts is diminishing. And these are the people that still have a job. The natural reaction to working in an environment where you are uncertain about keeping your job, and you know there are no raises, is to save more and spend less. The natural reaction to being unemployed for more than 6 months is to lower your sights and to look for a position that pays less and is in a less desirable working environment. Real wages fell during the great depression and it was one of the main reasons the economy was never able to fully recover. The U.S. is now on the cusp of declining wages. If hourly earnings actually begin to decline along with the number of hours worked, then shaking off deflation will become extremely difficult.
There is an available solution. The Federal Reserve could print enough money to buy up almost all of the outstanding U.S. Treasuries. Additionally, the federal government could establish a “bad bank” and take all of the toxic real estate related securities off the books of the banks and replace them with a long term loan of freshly printed cash. The banks would then have time to pay off their problem assets and they would have cash to lend into the real economy. The federal government could also guarantee newly issued state municipal debt and new mortgage-backed and auto-backed securities. The U.S. does not have to suffer and see its economy slide into the abyss. But we will continue to sink until our leadership in Washington quits staring like a deer in the headlights at the economic crisis and gets moving.
