Where is the US economy headed?

Here is former Secretary of Labor and Berkeley Professor Robert Reich. I once sat next to him in a chocolate shop and cafe in Harvard Square after a performance at American Repertory Theatre, one of the few good things left in H Sq.

It's nonsense to think of the economy heading downward again into a double-dip recession when most Americans never emerged from the first dip. We're still in one long Big Dipper.

More people are out of work today than were last year, counting everyone too discouraged even to look for work. The number of workers filing new claims for jobless benefits rose last week to the highest level since February. Not counting temporary census workers, a total of only 12,000 net new private and public jobs were created in July -- when 125,000 are needed each month just to keep up with growth in the population of people who want and need to work.

Not since the government began to measure the ups and downs of the business cycle has such a deep recession been followed by such anemic job growth. Jobs came back at a faster pace even in March 1933 after the economy started to "recover" from the depths of the Great Depression. Of course, that job growth didn't last long. That recovery wasn't really a recovery at all. The Great Depression continued. And that's exactly my point. The Great Recession continues.

Even investors are beginning to see reality. Starting in February the stock market rallied because corporate profits were rising briskly. Investors didn't mind that profits were coming from payroll cuts, foreign sales, and gimmicks like share buy-backs -- none of which could be sustained over the long term. But the rally died in April when investors began to see how paper-thin these profits actually were. And now the stock market is back to where it was at the start of the year.

What to do? First, don't listen to Wall Street and the Right.

Forget the Neo-Hoover deficit hawks who say we have to cut government spending and trim upcoming deficits. We didn't get into this mess and aren't remaining in it because of budget deficits. In fact, the only way to reduce long-term deficits is to restore jobs and growth so government revenues rise and expenses like unemployment insurance drop.

Ignore the government haters who say we have to void or delay upcoming regulations of Wall Street and big business. We got here because Wall Street went bonkers, the housing bubble burst, and the middle class couldn't continue to spend because their health-care bills were soaring and their pay was stagnating. New regulations of Wall Street and big business are necessary to avoid a repeat.

And don't believe the supply-siders who say we have to extend the Bush tax cuts for the wealthy. Because the wealthy save rather than spend most of their incomes, extending their tax cut won't do squat. And restoring their marginal tax rate to what it was under Bill Clinton won't harm the economy. The Clinton years had the best sustained economy in American history.

The central problem is lack of demand -- and that's what has to be tackled.

Three of the four sources of demand have stopped working. (1) Consumers can't and won't buy because they're still under a huge debt load, can't get more credit, are afraid of losing their jobs (or already have), depend on two wage earners, at least one of whom is working part-time and pulling in less, or have to save. (2) Businesses won't invest and spend on creating more jobs if they don't see consumers willing to buy more. (3) Exports are stalled because the dollar is so high they cost too much, much of the rest of the world is still struggling with recession, and American firms can make things for sale abroad more cheaply abroad.

That leaves only one remaining source of demand -- government. We need a giant jobs program to hire people and put money in their pockets that they'll spend and thereby create more jobs. Put ideology aside and recognize this fact. If it makes you more comfortable call it the National Defense Jobs Act. Call it the WPA. Call it Chopped Liver. Whatever, we have to get the great army of the unemployed and underemployed working again.

Also: Put more money in consumer's wallets by eliminating payroll taxes on the first $20K of income (and make it up by applying payroll taxes to incomes over $250K.)

Also: Get more hiring by giving the states and locales interest-free loans -- so they can rehire all the teachers, fire fighters, police officers, and sanitation workers they've fired -- to be repaid when their state employment rates hit 5 percent or below.

Also: Get more credit by having the Fed return to "quantitative easing" -- expanding the money supply by purchasing mortgage-backed and other types of securities.

If we let the deficit hawks and government haters dominate this debate, as they have, the Big Dipper will continue for years. The Great Depression lasted twelve.

This post originally appeared at RobertReich.org.

1 Reply

From Morning Edition, NPR, today:

Throughout this year's debate over new financial regulations, Republicans repeatedly pointed to two economic bogeymen they blame for the Great Recession: Fannie Mae and Freddie Mac.

In the eyes of Republican lawmakers like Sen. Mitch McConnell, Rep. John Boehner and Sen. Lamar Alexander, Fannie and Freddie started the rush into risky home mortgages that ultimately shook the foundation of the whole economy.

Not everyone agrees with that assessment, but the government-sponsored companies have lost a lot of money on bad home loans, leaving taxpayers on the hook for hundreds of billions of dollars.

The Obama administration hosts a conference Tuesday on how to fix Fannie and Freddie, or replace them with something better.

'A Lot More Going On'

The two companies have long been the biggest players in the mortgage market, making them natural scapegoats when the market soured — especially among Republicans already suspicious of government involvement in financial affairs. Never mind that publisher Guy Cecala of Inside Mortgage Finance says Fannie and Freddie were not the biggest offenders in backing risky, subprime loans.

"Clearly there was a lot more going on than just Fannie Mae and Freddie Mac purchasing a few bad loans," he says. "In fact, the bulk of the bad loans weren't purchased by Fannie Mae and Freddie Mac.

"Yet, Fannie and Freddie carry the government guarantee; they're supposed to do good things for the housing market. And to some extent, everybody feels they let us down."

Fannie and Freddie were established decades ago to encourage homeownership by making loans more widely available. They provide money to lenders by buying up mortgages, keeping some and bundling others for sale to investors. Although both were private, for-profit companies, it was generally understood the government would back up Fannie and Freddie if they got into trouble. That's just what happened two years ago when the government took over the companies, leaving taxpayers with a very big bill.

Private Sector Replacements

"There's probably enough finger-pointing to go everywhere," says Michael Berman, incoming chairman of the Mortgage Bankers Association, which proposes replacing Fannie and Freddie with new, private companies that would take over the job of bundling mortgages for sale to investors.

For a fee, those bundles would still be backed by the federal government, but unlike Fannie and Freddie, the bundling companies would not be. Also, there would be strict limits on the kinds of loans they could handle.

"It would be a conservative lending environment with respect to the government involvement," Berman says. "The key is to make sure you have these kinds of classic, historically proven products like a 30-year mortgage, 15-year mortgage, that would be there through all times of the economy, including the kind of stress that we have today."

One question at Tuesday's conference is how big a role the government should play in that effort.

Quick Changes Unlikely

Consumer advocate Mike Calhoun of the Center for Responsible Lending says until their recent problems, Fannie and Freddie did a lot of good, popularizing the 30-year-fixed-rate mortgage for example.

"We need to be careful, the proverbial, don't throw the baby out with the bath water," Calhoun says.

He and other consumer advocates say Fannie and Freddie were simply following Wall Street's bad, private-sector example, when they began chasing the profits in riskier loans. Calhoun says the government is already cracking down on the most dangerous kinds of mortgages, as part of its financial overhaul passed by Congress last month.

"So if you'd had those standards in place before this last mortgage and financial crisis, we wouldn't have gone down that path," he says.

Don't look for any quick changes. Fannie and Freddie still bankroll 2 out of 3 new mortgages, and, Cecala of Inside Mortgage Finance says, the fragile housing market can ill afford any hiccups in its operations.

"Can we pull the plug on them anytime soon? The answer is clearly no. We can't pull the plug on them," he says.

Tuesday's conference at the Treasury Department is an early step toward drafting legislation to deal with Fannie and Freddie next year.

0 Replies

@okie,

okie wrote:

Cycloptichorn wrote:

Nothing they could have done post-2006 would have averted the disaster, Ican. You have been patiently explained this fact over and over again, and I'm starting to conclude that you are just too stupid to understand the situation.

Cycloptichorn

It has patiently been explained to you numerous times that at least the Republicans recognized it as a problem and wanted to try to fix it,

No, they didn't! They didn't KNOW what the problem was, didn't see the problem - just like most of them still can't even describe what caused the market to crash, just like you can't. You think that Fannie and Freddie were the source of the problem, and that changing things with them would have stopped the crash. For the last goddamn time, it wouldn't have done anything at all to stop it. The elements were already well in place by 2006.

Quote:

but Democrats said it is no problem, with some like Maxine Waters and others even insinuating racism in her opposition to fixing the problem. The only logical conclusion is that the Republicans are not without blame, but the Democrats deserve by far most of the blame. Only your extreme partisan defense of the incompetent Democrats will lead you to disagree with this, cyclops, and I think you know it.

You don't even have the most basic understanding of why the market crashed; why should your 'logical conclusion' be taken seriously?

Do me a favor and tell me how reforming F/F in 2006 would have prevented the crash, Okie. In detail.

Cycloptichorn

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@georgeob1,

Quote:

Even without the credit default swaps, the collapse of the housing bubble alone would have caused a major recession - though Lehman brothers and AIG might not have failed..

See, this is where your explanation really turns into bullshit. We would not have seen a major recession without Credit Default Swaps. Bear Stearns, Lehman, and JD Morgan would have had little to do with the housing market and would have rode things out just fine. There would have been much less over-leveraging on everyone's part.

You blame the drop in housing prices on the crash - but such prices are cyclical and are going to drop no matter what we do. Obviously it doesn't cause a recession every time housing prices drop, let alone a major one; what was the difference this time? The Credit-Default Swaps, which exposed our major players to the pernicious market.

This isn't even a matter of opinion, it is one of fact. You are factually wrong when you blame housing prices for the recession.

Cycloptichorn

0 Replies

@okie,

okie wrote:

Bush and Republicans wanted more and better regulation of Fannie and Freddie, and they were blocked by Democrats. Have you even read the posts about this yet, pom?
http://able2know.org/topic/47327-560#post-4318698

What, specifically, would you have changed at Fannie or Freddie to keep the recession from happening, Okie?

Cycloptichorn

1 Reply

@georgeob1,

george, I agree with you; what precipitated the crisis was the loans given to unqualified buyers. The CDSs were an after-thought by financial institutions as money makers they wrapped up as derivatives and traded like gold - always seeking higher profit. The SEC failed to value those derivatives while the credit raters continued to give them a high rating. They were asleep at the switch.

2 Replies

@cicerone imposter,

cicerone imposter wrote:

george, I agree with you; what precipitated the crisis was the loans given to unqualified buyers. The CDSs were an after-thought by financial institutions as money makers they wrapped up as derivatives and traded like gold - always seeking higher profit. The SEC failed to value those derivatives while the credit raters continued to give them a high rating. They were asleep at the switch.

ci, I congratulate you and agree with your agreement with George. I think George has it tabbed pretty well, which is pretty much the way I think it also happened. To add to the above, at the root of the loans given to unqualified buyers is one huge factor, the Community Reinvestment Act. A quick search of it defines it, this from Wikipedia:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act

"The Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII of the Housing and Community Development Act of 1977, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining."

The obvious point here to be addressed is the term "discriminatory," which was based upon the ability to be a sound borrower, not based upon race. Banks had determined that some neighborhoods were very poor risks for lending money, due to a number of factors, including default rates, crime rates, declining or unsound property values due to maintenance issues, and other factors. I am sure that if a profit could be made on the loans with comparable risk as other neighborhoods, the neighborhoods would not have been red-lined, after all the banks did not care what color the people were that gave them the money. In fact, some of the banks may have even been black owned, or partially black owned. I am also going to guess that many white neighborhoods around the country were also redlined. If anyone in the banking industry has information on this, it would be interesting.

In my computer search, I turned up an interesting person, a Gale Cincotta, another community activist from Chicago that apparently had a pretty big hand in stirring up all of this originally in Chicago in the 60's, helping lead to the CRA. I have quoted the important part about Cincotta below, and highlighted in red the really particularly damning part, so that pom and cylcops can criticize my use of red and bold, etc. But if it helps emphasize the important truths here, that is why I do it, just as ican does in his posts. I like the part where it says the real estaters had a feeding frenzy like locusts and left husks of houses in devastated neighborhoods in their wake. I don't think it is far off, because if there is one age old rule, when government intrudes into the free market, it always without fail creates unintended consequences every single time.
http://alyssakatz.com/blog/a-glimpse-of-gale-cincotta.html

"Gale Cincotta, who was a 1960s Chicago housewife when her efforts to improve her sons’ school led her into much bigger battles over the forces besieging city neighborhoods back then – namely the refusal of banks to make home mortgage loans and a misguided, criminally executed effort by the U.S. Department of Housing and Urban Development to remedy that problem. In the early 1970s, that government program sparked a feeding frenzy among real estate agents and lenders for the hundreds of millions of dollars in insured loan money it unleashed; like locusts, they left husks of houses in their wake, devastating city neighborhoods across the country."

2 Replies

@okie,

The CRA had nothing to do with the crisis whatsoever, Okie, and you haven't shown how it has at all. You just assert that it did with no evidence.

Once again: I challenge you to specifically tell me how you would have reformed the system to prevent the crash. I do not believe you have even the slightest ability to answer that question, because the truth is that you are deeply ignorant as to the causes of the crash.

Cycloptichorn

0 Replies

@okie,

okie, It's only because you can't see that my posts are consistent; I've said these things before - maybe using different words, but the concept is always the same.

1 Reply

@Cycloptichorn,

Cycloptichorn wrote:

What, specifically, would you have changed at Fannie or Freddie to keep the recession from happening, Okie?

Cycloptichorn

First of all, it is highly questionable whether Fannie and Freddie should have even been created, and I doubt I would have supported their creation. That is number one. After their creation, I think it was a huge mistake for the government to essentially guarantee billions, perhaps trillions, in loans through the support and policies of both the Community Reinvestment Act and Fannie and Freddie. I think I read one time that Fannie and Freddie was involved in something like 40% of all home loans in the country, is that right? CRA was obviously a very bad piece of legislation, because any time you force private companies to engage in very risky business actions wherein they probably would otherwise lose money, while guaranteeing they don't lose money, it is obviously or self evidently a very stupid move by politicians.

Now, after this whole mess was set into motion and things were headed for disaster in the 90's and into the Bush Administration, I don't know if the eventual disaster could have been averted or at least reduced in proportion, but I would have called Fannie and Freddie on the carpet and would have gone over their books with a fine tooth comb. Those people cooking the books should have been prosecuted, and the needed corrections should have been made to how it was being done. Also, I think more regulation of the loan bundles should have been instituted, at least those involving Fannie and Freddie, which by the way Bush, McCain, and other Republicans advocated. I think those actions would have slowed down the profiteering of selling loan packages between banks, and may have reduced the over inflation of home prices during those years, thus making the bubble smaller and softening the blow later on.

As an aside, I remember getting notices that our home loan had been sold or transferred to another institution, this happening two or three times, and I remember wondering why are they doing that considering I am paying my payments without fail and they should be making money, why sell it to someone else? Actually, I have ended up paying for my house in full, so whatever was involved, the end result was that the company at the end got their money back. I still have this belief that without Fannie and Freddie coming on the scene, the banks would have stuck to their original business of making loans to make money on those same loans, and all of that trading and selling may never have taken place. That is not what I am totally sure of however because I am not familiar with the banking business.

One of the biggest reasons I think the CRA lies at the foundation of the problem is that a very respected banker in the area with tons of years in the business, he said that it did. I am just now asking a friend of mine that I think has been in the banking business a long time, his opinion, and if I get a reply, I will also record that.

1 Reply

@okie,

Quote:

Those people cooking the books should have been prosecuted, and the needed corrections should have been made to how it was being done

That was all very general. Tell me specifically: what changes in 2006 would have averted the crisis in 2008? What were those 'needed corrections?'

You and Ican have hung your hat on the idea that the Dems ignored opportunities to solve the problem; specifically tell us how they could have solved the problem. Just saying 'the necessary corrections would have had to been made' is a sign that you don't know what would have to have been changed....

Quote:

One of the biggest reasons I think the CRA lies at the foundation of the problem is that a very respected banker in the area with tons of years in the business, he said that it did. I am just now asking a friend of mine that I think has been in the banking business a long time, his opinion, and if I get a reply, I will also record that.

Appeal to Authority - logical fallacy. Without evidence to back it up, it's just another dude's opinion. You should be able to provide that evidence easily if what you say is true.

Cycloptichorn

2 Replies

@Cycloptichorn,

You are trying to hide behind the fact that solving the problem in 2006 wasn't possible, this after all of the mistakes were already made - causing us to go down this road to begin with. I doubt the problem could have been totally solved, but I do think that we should have at least recognized it was a problem and should have tried to soften the blow. That is what Republicans were saying, while Democrats like Maxine Waters and Barney Frank were accusing Republicans of manufacturing a crisis and that there was absolutely no problem. All of this simply illustrates the fact that they did not know what they were doing, and they still do not. They are not living in reality. And I don't think you are either, cyclops.

1 Reply

@okie,

okie wrote:

You are trying to hide behind the fact that solving the problem in 2006 wasn't possible, this after all of the mistakes were already made - causing us to go down this road to begin with.

Hide behind that fact? That's one of the central tenets of my argument, and the opposite of what Ican - and in the past YOU - have claimed! Amazing that you would make such a statement.

Quote:

I doubt the problem could have been totally solved, but I do think that we should have at least recognized it was a problem and should have tried to soften the blow.

By 2006, nothing you could have done with Fannie or Freddie would have 'softened the blow.' This is the entire point. You are trying to correct the exact wrong part of the problem.

I repeat: no changes to the way Fannie or Freddie operated in 2006 would have prevented the financial crisis in 2008.

Quote:

All of this simply illustrates the fact that they did not know what they were doing, and they still do not. They are not living in reality. And I don't think you are either, cyclops.

I think it's safe to say that I know far, far more about this issue than you do. I've done significant amounts of research into the actual causes and what ACTUALLY happened when our markets crashed. The reasons don't rely on ideological explanations like the ones you give.... they are factual and historically accurate accounts of what really went on.

Cycloptichorn

0 Replies

@Cycloptichorn,

Cycloptichorn wrote:

Quote:
One of the biggest reasons I think the CRA lies at the foundation of the problem is that a very respected banker in the area with tons of years in the business, he said that it did. I am just now asking a friend of mine that I think has been in the banking business a long time, his opinion, and if I get a reply, I will also record that.

Appeal to Authority - logical fallacy. Without evidence to back it up, it's just another dude's opinion. You should be able to provide that evidence easily if what you say is true.

Cycloptichorn

Logical fallacy, nonsense. I am the first to admit I am no expert on banking. When it comes to energy issues and global warming, things like that, I think I have a bit more expertise and experience to offer the subjects. I am certainly going to trust the opinions of known experts and people that have built a solid track record in a business, people that I trust are smart and have reason to know the answers, over the opinions of people like yourself and other political hacks. If you want to know something about something you feel a lack of knowledge about, who do you consult, cyclops? Do you go to a fortune teller to find out about the nuclear industry? Oh heres a good question, do you go to a community agitator or organizer to find out about economics?

By the way, you do not have to agree with those people I consult. I am looking for more assurance for what I should believe about this.

3 Replies

@okie,

okie, You admit you are "not an expert in banking." LOL Let me make it crystal clear, that you are no expert in anything that has to do with economics or politics.

In order for any poster to get respect, one must be able to provide credible sources for claims made. I have "never" seen your opinions backed with credible sources to support it.

1 Reply

@okie,

okie wrote:

Cycloptichorn wrote:

Quote:
One of the biggest reasons I think the CRA lies at the foundation of the problem is that a very respected banker in the area with tons of years in the business, he said that it did. I am just now asking a friend of mine that I think has been in the banking business a long time, his opinion, and if I get a reply, I will also record that.

Appeal to Authority - logical fallacy. Without evidence to back it up, it's just another dude's opinion. You should be able to provide that evidence easily if what you say is true.

Cycloptichorn

Logical fallacy, nonsense. I am the first to admit I am no expert on banking.

I would be the first to confirm that. Nevertheless, you have committed a Logical Fallacy with your Appeal to Authority.

Here, I'll show you how this fallacy works: I also have a friend who has been a banker for a long time, and he says your friend is full of ****. So obviously I'm right, and your banker friend is wrong, because my friend says he is. Wouldn't you agree?

Quote:

When it comes to energy issues and global warming, things like that, I think I have a bit more expertise and experience to offer the subjects. I am certainly going to trust the opinions of known experts and people that have built a solid track record in a business, people that I trust are smart and have reason to know the answers, over the opinions of people like yourself and other political hacks.

I'm not offering you opinions, Okie. I am offering your facts. You can choose to accept those or not, but you are wrong to wave your hand and discount them.

Any point you think I need to expound more on, with links to evidence, you go right ahead and ask. We've been through this before and it was embarrassing for you.

Quote:

If you want to know something about something you feel a lack of knowledge about, who do you consult, cyclops? Do you go to a fortune teller to find out about the nuclear industry? Oh heres a good question, do you go to a community agitator or organizer to find out about economics?

I don't ask anyone's opinion when I need knowledge about something. I look for facts and make my own decisions about what is right or wrong. You should try it.

Cycloptichorn

1 Reply

@cicerone imposter,

cicerone imposter wrote:

okie, You admit you are "not an expert in banking." LOL Let me make it crystal clear, that you are no expert in anything that has to do with economics or politics.

In order for any poster to get respect, one must be able to provide credible sources for claims made. I have "never" seen your opinions backed with credible sources to support it.

I am expert enough to balance my checkbook every month, to pay my bills, and have a little money in the bank. I have also over 20 some years in business of making a profit and a living doing it, and have paid all of my taxes in the process. That is more expert than the Federal Government as it stands today, ci. And I have at least read a couple of basic books on economics, one being by Thomas Sowell, and he has provided the source of many of my opinions about Economics, so I figure that should carry some weight. At least he makes infinitely more sense than the silly opinions of liberals on the subject.

By the way, I may take you off of ignore at some point. I actually found one of your opinions that I agreed with, so if you can reduce the insults to a trickle, I might consider it. I find myself clicking on your ignored posts and reading them still.

2 Replies

@okie,

Elementary my dear Watson. Did you finish high school?

1 Reply

@Cycloptichorn,

Cycloptichorn wrote:

I don't ask anyone's opinion when I need knowledge about something. I look for facts and make my own decisions about what is right or wrong. You should try it.

Cycloptichorn

Interesting. So if you need to know something about how to plumb a new bathroom you may want built, you go to the library or internet or somewhere and try to figure it out yourself? You don't ask a friend that is a plumber or the plumbing inspector in your area for example?

You certainly go about a subject different than I do. If I know anyone that has what I believe is great expertise or experience in regard to an issue or subject that I might encounter on this forum, I am going to ask them about it and at least have their opinions thrown into the hopper or mix of what I might be able to learn in regard to the issue or subject. After all, people with experience in an industry lived the issue, perhaps for many years, they didn't simply form an opinion as a political hack or observer. And I believe knowledge from actual experience is far superior to that of the academic world.

3 Replies

@cicerone imposter,

cicerone imposter wrote:

Elementary my dear Watson. Did you finish high school?

Yes, but did Obama and his economics advisors finish high school? He can't balance a check book. How come?

0 Replies

Where is the US economy headed?

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