Army of the James. Butler's dredge-boat, sunk by a Confederate shell, James River, Virginia
Ilargi: After a 50%+ rise in the US stock markets, against the backdrop of unprecedented injections of taxpayer funds (who were dirt poor even before their money was spent and are now dead broke), ongoing horrendous job losses and equally awful increases in foreclosures, it might be a good time to ask two questions:
- Why do people invest in stocks?
- What are the chances that stock markets will continue to rise?
The answer to the first, of course, is that they do so to make a profit, to get more return on their money than they would if they'd for instance put their money in the bank or buy bonds. Of course, this only works when share prices rise, as they have in the past 6 months. In the 6 months prior to that, not so much, obviously.
Which leads to the second question, and an assessment of the odds that the markets will keep going up. Somewhere down the line, even though you wouldn't know it to look at the past 6 months, these odds will; depend on what happens in the real world. There may be a certain tolerance for some job losses and other negative news, but that cannot be endless. As the government and the Federal Reserve will come under increasing pressure to wind down stimulus and easing measures, both from inside and outside sources, some sector or another within the economy will have to make up for what falls away. And do so at an especially precarious moment.
I gathered a large set of bullet points below that together should, I think, paint a rather comprehensive picture of what will be demanded of the economy in terms of performance. They also would seem to indicate that the economy is highly unlikely to provide that performance. In my view, it carries far too much dead weight on its back. Far too much.
One number that stands out for me is this from Money figures show there's trouble ahead :
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer:
"There has been nothing like this in the USA since the 1930s."
When economic data for Q3 are released in early October, there will be undoubtedly be all sorts of positive twists and turns. That is inevitable when you add up everything that's been thrown at the wall in the hope something would stick. Something always does. Still, when at the same time lending plummets to that extent, not much of it is likely to stick. That is one solid indicator of the extent to which the whole system depends on the government, i.e. the broke taxpayer.
John Mauldin calculates that in order to get U3 unemployment down from 9.7% now to 5% in 5 years, by late 2014, 250.000 jobs would have to be created on average each and every single month for 60 months. This is so far removed from any historical trend, certainly over the past two decades, that it would truly be a monster effort. It would also likely take an economic growth rate of somewhere between 5% and 10% over that entire period.
How that could ever be accomplished with the hundreds of billions in losses and writedowns that are yet to be reported and absolved is hard, if not impossible, to imagine. An economy that is in its worst shape in 75 years would arguably have to perform better than it has in all that time. I would be inclined to say we are entering into magical thinking territory, but then again, we seem to have settled there quite a while ago.
What should worry everyone, and certainly the government, is that 52.2% of all young (16-24 years old) people who are not students are unemployed. That is a recipe for social disaster. And it wouldn't be all that hard to design a program that would allow for small businesses to hire them with government assistance. Buy out one or two less bankrupt financial institutions and you can afford such a program and have money left for a manned flight to Venus. Alternatively, you'll have millions of kids who will turn 30 without ever having worked at all. Overall, there's one job for every 6 job seekers. For the foreseeable future, it would even be a major victory if that could be reduced to one available job for every 3 jobless workers.
Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year.
That is not a foundation to create record numbers of jobs on for years to come.
Oh, and how about this one for a little background info?:
[..] M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May [..]
The short and curly version: while stocks have gone up, the real world has been sucked down into a quicksand quagmire. To get back to the first question, Why do people invest in stocks?, the answer still stands: to make money. But when they think the risk of losing their money is too high, they will get out of stocks and into something else. The lucky ones, that is, who are gone in time. The rest, the delusional happy crowd that always enters last, when the party's largely over, will get fleeced.
Still, my bet is that there are not enough sufficiently delusional people left in the market to sustain this rally for much longer. Not with these numbers floating around. If only because too many remember what they lost last year. The fact that the rally’s lasted this long is not a sign that it's gpoing to keep on going; it means it's about to turn on a dime, bigtime.
But by all means, make up your own minds. Here come the bullets:
Welcome to the New Normal
- [The] headline unemployment number (9.7%) is what we see when we read the paper. What we typically don't see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a "marginally attached" or "discouraged" worker.
- Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment). And if you add those who are employed part-time for economic reasons (i.e., they can't get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)
- [..] each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last ten years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.
- [..] we are down almost 8 million jobs since the onset of this recession, and [..] there are almost 15 million people unemployed.
- [..] there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours.
- [..] when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month.
- [..] we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.
- There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force. Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.
- Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. 5% unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week.
- But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average, the creation of 250,000 jobs per month. As an AVERAGE!!!!!
- Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.
- If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000.
- Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now. Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%.
- There has never been a period of serious inflation in the US without wage inflation. But real incomes are falling, and there is little reason to believe we will see wage pressures within the next few years.
- We have enormous excess capacity - capacity utilization is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less. Housing is likely to be in a funk for at least two years. We are deleveraging, which is causing the velocity of money to slow.
All of this is very deflationary.
The dead end kids
- The unemployment rate for young Americans has exploded to 52.2%
- [..] without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost.
- During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50%.
- "They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."
U.S. Job Seekers Exceed Openings by Record Ratio
- According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.
- During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months. From the beginning of the recession in December 2007 through July of this year, job openings declined 45% in the West and the South, 36% in the Midwest and 23% in the Northeast.
- Since the end of 2008, job openings have diminished 47% in manufacturing, 37% in construction and 22% in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21% this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17% this year.
Job losses, early retirements hurt Social Security
- Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s.
- Applications for retirement benefits are 23% higher than last year, while disability claims have risen by about 20%.
- Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs. Some have no choice.
- This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago.
- Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.
- The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s [..] Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016.
- About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.
- In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year [..]
Money figures show there's trouble ahead
- The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy.
- Some expect US car sales to slump 40% in September. Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9% in August. New house sales are stuck near 430,000 – down 70% from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.
- If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23% in August; Japan's were down 36%; industrial production has dropped by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia and 11% in the US.
- Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years". He could only have thought such a thing if he was ignoring the money data.
- Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer: "There has been nothing like this in the USA since the 1930s."
- M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111bn since January.
A risky revival
- [..] the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
- There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending. The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.
- "[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets."
- "It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future."
Welcome to the New Normal
by John Mauldin
Unemployment is high and rising. But if the recession is over, won't employment start to rise? The quick answer is no. We look deeper into the Statistical Recovery and find yet more reasons to be concerned about near-term deflation. This week we consider all things unemployment and ponder the need to create at least 15 million jobs in the next five years to return to a full-employment economy - and the implications for both the US and world economies if we don't. Economic is often about what we can clearly see, and yet it is understanding what we can't see that gives us true insight. We start with a collection of facts that we can see and then begin a thought exercise to find the implications.
What We See
First, the unemployment rate is now officially at 9.7%. We are approaching the official high we last saw at the end of the double-dip 1982 recession. In the chart below, notice that unemployment rose throughout 1980 and then began to decline, before rising rapidly as the economy entered the second recession within two years. Also notice the rapid drop in unemployment following that recession, as opposed to the recessions of 1991-92 and 2001-02, which have been characterized as jobless recoveries. Unemployment was as low as 3.8% in 2000 and saw a cycle low of 4.4% in early 2007.
(For the record, all this data is available on the Bureau of Labor Statistics website. There is a treasure trove of data. They are quite open about what they do and how they do it. When I call to ask a question, they are quite helpful. How people interpret the data is not their fault.)
This headline unemployment number (9.7%) is what we see when we read the paper. What we typically don't see is the real number of unemployed. For instance, if you have not actively looked for a job in the last four weeks, even if you would like one, you are not counted as unemployed. You are called a "marginally attached" or "discouraged" worker. Often there are very good reasons for this. You could be sick, dealing with a family emergency, going back to school, or not have transportation.
Right now, about one-third of marginally attached workers actively want jobs but have not bothered to look because they believe there are no jobs in their area, at least not for them. If you add that extra 758,000 to the unemployment data, you get what is called U-4 unemployment, which today is 10.2%. If you count all marginally attached workers the unemployment number is 11% (U-5 unemployment).
And if you add those who are employed part-time for economic reasons (i.e., they can't get full-time jobs) the unemployment number rises to 16.8%. (That is called U-6 unemployment.)
Now, stay with me for the next two tables taken directly from the BLS website. The first is the total number of people in the US civilian work force. Notice how each year the number of potential workers rises. In fact, the number of workers has risen by about 15 million over the last ten years. This is from population growth and from immigration. Also notice that the normal rise did not happen last year. That is because the number of discouraged workers has risen rapidly and, as noted above, they are not counted. We will revisit this point later. But for now, there are 154,577,000 people in the available work force.
Next we look at the tables for the actual level of employment. Here we note that we are down almost 8 million jobs since the onset of this recession, and that there are almost 15 million people unemployed.
Going back to the part-time workers, there are roughly 9 million people who are working part-time because of business conditions, or those are the only jobs they could find. The average work week is at an all-time low of 33 hours. The chart below is from my friend David Rosenberg.
David wrote in a special report today:
"What does all this mean? It means that when the economy does begin to recover, when we finally get to the other side of the mountain, companies are going to raise their labour input first by lifting the workweek from its record low. Just to get back to the pre-recession level of 33.8 hours would be equivalent to hiring three million workers. And, the record number of people working part-time against their will are going to be pushed back into full-time, which will be great news for them, but not so great news for the 125,000 - 150,000 new entrants into the labour market every month. They won't have it so easy because employers are going to tap their existing under-utilized resources first since that is common sense. Also keep in mind that there are at least four million jobs in retail, financial, construction and manufacturing jobs lost this cycle that are likely not coming back. In fact, the number of unemployed who were let go for permanent reasons as opposed to temporary layoff rose by more than five million this cycle. This compares to the 1.2 million increase in the 2001 tech-led recession and in the 1990-91 housing-led recession (when Ross Perot talked about the sucking sound of jobs into Mexico)."
Then there is the matter of average weekly earnings. If you adjust for inflation, workers are making roughly what they did in 1980. The chart is straight from the BLS website.
And What We Don't See
Those are the facts. Now it's time to look at what we don't see, and what you don't read or hear from the mainstream media.
We saw above that we are adding about 1.5 million workers to the workplace every year. That means over the next five years we are going to need 7.5 million jobs just to maintain that growth, or about 125,000 a month. That is on the low side of what economists normally estimate, which is around 150,000 per month. If we used the 150,000 estimate, it would mean we need 9 million jobs.
There are at least 1 million (and probably more like 2 million) discouraged workers who would take jobs if the economy got better. You can derive that number by going back to early 2007 and seeing the level of discouraged workers. That means, by the end of 2014 we are going to have 163 million people in the work force (see table above).
Today we have 139.6 million jobs, and that number is likely to slip at least another half million (last month the economy lost 216,000 jobs, with a very suspicious birth-death ratio accounting for a lot of job creation). So let's call it 139 million current jobs.
Let's assume that we would like to get back to a 5% unemployment rate. That would not be stellar, but it would certainly be better than where we are today. Five percent unemployment in late 2014 will mean 8.1 million unemployed. To get to 5% unemployment we will have to create 14 million jobs in the five years from 2010-2014. (163 million in labor pool minus 8 million unemployed is 155 million jobs. We now have 139 million jobs, so the difference is roughly 15 million.) Plus the equivalent of 3 million jobs that Rosenberg estimates, just to get back to an average work week. And maybe the extra 1.5 million a year I mentioned above.
But let's ignore those latter jobs and round it off to 15 million. Let's hope that by the beginning of next year we stop losing jobs. That means that to get back to 5% unemployment within five years we need to see, on average,the creation of 250,000 jobs per month. As an AVERAGE!!!!!
Look at the table below. It is the number of jobs added or lost for the last ten years. Do you see a year that averaged 250,000? No.
If you take the best year, which was 2006, you get an average monthly growth of 232,000. If you average the ten years from 1999, you get average monthly job growth of 50,000. If you take the average job growth from 1989 until now, you get an average of 91,000 a month. If you take the best ten years I could find, which would be 1991-2000, the average is still only 150,000. That is a long way from 250,000.
Want to get back to 4%? Add another 25,000 jobs a month to 2006.
Let's jump forward to next September. We will need at least 1.5 million jobs to take into account growth in the population. Plus another half million jobs that we are likely to lose before we start to grow again. What is the likelihood of average job growth of 160,000 a month? Anyone want to take the "overs" bet?
Go back to 2003, the year after the end of the last recession. A few hundred thousand jobs were created. Why so slow? Because employers gave more time to those who were already employed and to part-time workers. Because of the near-certain loss of jobs for the next few months and the slow recovery, it is a very real possibility that unemployment will still be well over 10% a year from now.
Even with robust growth of 200,000 jobs a month thereafter for the next two years, unemployment will still be close to or over 9%. That would only be an additional 1.8 million jobs (making the most optimistic assumptions) over the new jobs needed for population growth.
A Double-Dip Recession?
And that is before this administration makes the economically suicidal move to raise the top tax rate by 10%. The popular image is that those who pay the highest tax rate are Wall Street execs, bankers, and corporate moguls. The reality is that 75% of them are small business owners, and they are responsible for the large majority of new jobs that are going to be needed, not to mention a large part of consumer spending. If you tax them more you are going to get fewer jobs (as they will have less to invest) and less consumer spending.
A tax increase of the size being contemplated, with unemployment at today's level, will guarantee a double-dip recession, which of course means that unemployment will rise, not fall. Go back and look at that chart on unemployment. Notice the very steep rise in the second recession of the early '80s. That is what we could be facing.
Without getting too political, think about elections in 2010 with unemployment levels still rising. And fast-forward to 2012, with deficits (optimistically) projected to be almost $1 trillion and rising. With a tax increase giving us another recession? Will the bond market provide another $4 trillion? My question is, from where?
There has never been a period of serious inflation in the US without wage inflation. But real incomes are falling, and there is little reason to believe we will see wage pressures within the next few years. The opposite is likely to be the case.
Today's Wall Street Journal tells us that 5 million people have been unemployed for over 6 months. And the longer you are unemployed, the harder it is to get a job. That means you have to settle for a job with less income than you had before.
The only group to see a rise in employment? Those over the age of 55, as they have to take a job, any job, so they can save for retirement.
The Statistical Recovery
The economy is in the process of bottoming. The year-over-year comparisons are getting easier. We will find that new level of spending and economic activity and grow from there. But it is going to be awhile before we get back to full employment. While the numbers may say recovery, it is not going to feel like one.
Let's review quickly what I have written about the last four weeks. We have enormous excess capacity - capacity utilization is about 68%. Banks are cutting back on their loans, and consumers and businesses are borrowing less. Housing is likely to be in a funk for at least two years. We are deleveraging, which is causing the velocity of money to slow.
All of this is very deflationary. Will the Fed print enough money to reflate the economy? You better hope so. Will we have to deal with it later? Of course. We have no good choices. We are in for a long five years, at the least. Yes, there will be opportunities, and new industries will be created. But it won't happen overnight.
The dead end kids
The unemployment rate for young Americans has exploded to 52.2%-- a post-World War II high, according to the Labor Dept. -- meaning millions of Americans are staring at the likelihood that their lifetime earning potential will be diminished and, combined with the predicted slow economic recovery, their transition into productive members of society could be put on hold for an extended period of time.
And worse, without a clear economic recovery plan aimed at creating entry-level jobs, the odds of many of these young adults -- aged 16 to 24, excluding students -- getting a job and moving out of their parents' houses are long. Young workers have been among the hardest hit during the current recession -- in which a total of 9.5 million jobs have been lost. "It's an extremely dire situation in the short run," said Heidi Shierholz, an economist with the Washington-based Economic Policy Institute. "This group won't do as well as their parents unless the jobs situation changes."
Al Angrisani, the former assistant Labor Department secretary under President Reagan, doesn't see a turnaround in the jobs picture for entry-level workers and places the blame squarely on the Obama administration and the construction of its stimulus bill. "There is no assistance provided for the development of job growth through small businesses, which create 70 percent of the jobs in the country," Angrisani said in an interview last week. "All those [unemployed young people] should be getting hired by small businesses."
There are six million small businesses in the country, those that employ less than 100 people, and a jobs stimulus bill should include tax credits to give incentives to those businesses to hire people, the former Labor official said. "If each of the businesses hired just one person, we would go a long way in growing ourselves back to where we were before the recession," Angrisani noted.
During previous recessions, in the early '80s, early '90s and after Sept. 11, 2001, unemployment among 16-to-24 year olds never went above 50 percent. Except after 9/11, jobs growth followed within two years. A much slower recovery is forecast today. Shierholz believes it could take four or five years to ramp up jobs again. A study from the National Longitudinal Survey of Youth, a government database, said the damage to a new career by a recession can last 15 years. And if young Americans are not working and becoming productive members of society, they are less likely to make major purchases -- from cars to homes -- thus putting the US economy further behind the eight ball.
Angrisani said he believes that Obama's economic team, led by Larry Summers, has a blind spot for small business because no senior member of the team -- dominated by academics and veterans of big business -- has ever started and grown a business. "The Reagan administration had people who knew of small business," he said. "They should carve out $100 billion right now and create something like $5,000 to $6,000 job credits that would drive the hiring of young, idled workers by small business."
Angrisani said the stimulus money going to extending unemployment benefits is like a narcotic that is keeping the unemployed content -- but doing little to get them jobs. Labor Dept. statistics also show that the number of chronically unemployed -- those without a job for 27 weeks or more -- has also hit a post-WWII high.
Another Reason We Won't Have A V-Shaped Recovery: Jobs
In order for the U.S. economy to go roaring right back to the 3%-4% long-term growth the bulls are looking for, consumer spending will have to rebound.
Consumer spending is still 70%+ of the economy, and it's hard to get a supertanker cruising along at top speed if 70% of its power is removed.
In order for consumer spending to come roaring back, however, one critical thing has to happen:Consumers have to be employedIf consumers don't have jobs, they don't have much disposable income. They also can't borrow as easily (because, at least temporarily, banks have decided not to be stupid). And if consumers aren't employed, companies that sell to them can't grow as quickly, which affects the other 30% of the economy.
And how is consumer employment going? Badly.
The unemployment rate is now nearing the post-war peak of just over 10%. Yes, the unemployment rate is a lagging indicator--in part because it doesn't count unemployed people who have given up looking for a job. (As a recovery begins, these folks start looking for jobs, so the ranks of "unemployed" as defined by the BLS suddenly swells). But the rate is high enough that, unless it drops sharply, it's hard to see where the disposable income necessary to drive strong consumer spending growth (and borrowing capacity) is going to come from.
In the recession of the early 1980s, the unemployment rate dropped quickly in the beginning of the recovery. In the two more recent recessions, however, it did not.
The bulls say we'll have a sharp recovery this time because the rate of jobs recovery matches the rate of decline: Panicked employers cut too many jobs and now they'll have to hire them back. Anything is possible, but this bullish argument does not explain how the job market will rapidly absorb the huge amount of slack that is not reflected in the unemployment rate. It also does not explain how companies will rapidly increase their payrolls when they're selling to consumers that are hunkering down and trying to rebuild savings.
- A record-low work-week suggests that employers have a lot of room to ramp production without hiring new employees (or old ones back). David Rosenberg estimates that just increasing the work-week back to normal levels will be the same as creating 3 million jobs.
- Consumers still have debt coming out of their ears (consumers are customers of most of the companies that need to start hiring)
- Consumers' wealth has been clobbered, so they need to start saving instead of spending again (ditto)
- Approximately 4 million jobs in finance, construction, and real-estate are gone for good (or at least a while)
- Getting the unemployment rate back to 5% in 5 years would require average monthly job creation of 250,000. The average for the major boom of the 1990s was 150,000. The average for the past 30 years has been about 50,000.
- The number of job openings to unemployed job-seekers has now hit a record high of 1-to-6. So it will be a long time before we get back to normal on this ratio, let alone create a job-seekers' market.
U.S. Job Seekers Exceed Openings by Record Ratio
Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse. Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.
And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls. "There’s too much uncertainty out there," said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. "There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing." The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.
In Milwaukee, Debbie Kransky has been without work since February, when she was laid off from a medical billing position — her second job loss in two years. She has exhausted her unemployment benefits, because her last job lasted for only a month. Indeed, in a perverse quirk of the unemployment system, she would have qualified for continued benefits had she stayed jobless the whole two years, rather than taking a new position this year. But since her latest unemployment claim stemmed from a job that lasted mere weeks, she recently drew her final check of $340.
Ms. Kransky, 51, has run through her life savings of roughly $10,000. Her job search has garnered little besides anxiety. "I’ve worked my entire life," said Ms. Kransky, who lives alone in a one-bedroom apartment. "I’ve got October rent. After that, I don’t know. I’ve never lived month to month my entire life. I’m just so scared, I can’t even put it into words." Last week, Ms. Kransky was invited to an interview for a clerical job with a health insurance company. She drove her Jeep truck downtown and waited in the lobby of an office building for nearly an hour, but no one showed. Despondent, she drove home, down $10 in gasoline.
For years, the economy has been powered by consumers, who borrowed exuberantly against real estate and tapped burgeoning stock portfolios to spend in excess of their incomes. Those sources of easy money have mostly dried up. Consumption is now tempered by saving; optimism has been eclipsed by worry. Meanwhile, some businesses are in a holding pattern as they await the financial consequences of the health care reforms being debated in Washington.
Even after companies regain an inclination to expand, they will probably not hire aggressively anytime soon. Experts say that so many businesses have pared back working hours for people on their payrolls, while eliminating temporary workers, that many can increase output simply by increasing the workload on existing employees. "They have tons of room to increase work without hiring a single person," said Heidi Shierholz, an economist at the Economic Policy Institute Economist. "For people who are out of work, we do not see signs of light at the end of the tunnel." Even typically hard-charging companies are showing caution.
During the technology bubble of the late 1990s and again this decade, Cisco Systems — which makes Internet equipment — expanded rapidly. As the sense takes hold that the recession has passed, Cisco is again envisioning double-digit rates of sales growth, with plans to move aggressively into new markets, like the business of operating large scale computer data servers. Yet even as Cisco pursues such designs, the company’s chief executive, John T. Chambers, said in an interview Friday that he anticipated "slow hiring," given concerns about the vigor of growth ahead. "We’ll be doing it selectively," he said.
Two recent surveys of newspaper help-wanted advertisements and of employers’ inclinations to add workers were at their lowest levels on record, noted Andrew Tilton, a Goldman Sachs economist. Job placement companies say their customers are not yet wiling to hire large numbers of temporary workers, usually a precursor to hiring full-timers. "It’s going to take quite some time before we see robust job growth," said Tig Gilliam, chief executive of Adecco North America, a major job placement and staffing company.
During the last recession, in 2001, the number of jobless people reached little more than double the number of full-time job openings, according to the Labor Department data. By the beginning of this year, job seekers outnumbered jobs four-to-one, with the ratio growing ever more lopsided in recent months. Though layoffs have been both severe and prominent, the greatest source of distress is a predilection against hiring by many American businesses. From the beginning of the recession in December 2007 through July of this year, job openings declined 45 percent in the West and the South, 36 percent in the Midwest and 23 percent in the Northeast.
Shrinking job opportunities have assailed virtually every industry this year. Since the end of 2008, job openings have diminished 47 percent in manufacturing, 37 percent in construction and 22 percent in retail. Even in education and health services — faster-growing areas in which many unemployed people have trained for new careers — job openings have dropped 21 percent this year. Despite the passage of a stimulus spending package aimed at shoring up state and local coffers, government job openings have diminished 17 percent this year.
In the suburbs of Chicago, Vicki Redican, 52, has been unemployed for almost two years, since she lost her $75,000-a-year job as a sales and marketing manager at a plastics company. College-educated, Ms. Redican first sought another management job. More recently, she has tried and failed to land a cashier’s position at a local grocery store, and a barista slot at a Starbucks coffee shop.
Substitute teaching assignments once helped her pay the bills. "Now, there are so many people substitute teaching that I can no longer get assignments," she said. "I’ve learned that I can’t look to tomorrow," she said. "Every day, I try to do the best I can. I say to myself, ‘I don’t control this process.’ That’s the only way you can look at it. Otherwise, you’d have to go up on the roof and crack your head open."
Job losses, early retirements hurt Social Security
Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that's happened since the 1980s. The deficits — $10 billion in 2010 and $9 billion in 2011 — won't affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.
Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn't expect the increase to be so large. What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security. "A lot of people who in better times would have continued working are opting to retire," said Alan J. Auerbach, an economics and law professor at the University of California, Berkeley. "If they were younger, we would call them unemployed."
Job losses are forcing more retirements even though an increasing number of older people want to keep working. Many can't afford to retire, especially after the financial collapse demolished their nest eggs. Some have no choice. Marylyn Kish turns 62 in December, making her eligible for early benefits. She wants to put off applying for Social Security until she is at least 67 because the longer you wait, the larger your monthly check. But she first needs to find a job.
Kish lives in tiny Concord Township in Lake County, Ohio, northeast of Cleveland. The region, like many others, has been hit hard by the recession. She was laid off about a year ago from her job as an office manager at an employment agency and now spends hours each morning scouring job sites on the Internet. Neither she nor her husband, Raymond, has health insurance. "I want to work," she said. "I have a brain and I want to use it." Kish is far from alone. The share of U.S. residents in their 60s either working or looking for work has climbed steadily since the mid-1990s, according to data from the Bureau of Labor Statistics.
This year, more than 55 percent of people age 60 to 64 are still in the labor force, compared with about 46 percent a decade ago. Kish said her husband already gets early benefits. She will have to apply, too, if she doesn't soon find a job. "We won't starve," she said. "But I want more than that. I want to be able to do more than just pay my bills." Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year. The increase in early retirements is hurting Social Security's short-term finances, already strained from the loss of 6.9 million U.S. jobs. Social Security is funded through payroll taxes, which are down because of so many lost jobs.
The Congressional Budget Office is projecting that Social Security will pay out more in benefits than it collects in taxes next year and in 2011, a first since the early 1980s, when Congress last overhauled Social Security. Social Security is projected to start generating surpluses again in 2012 before permanently returning to deficits in 2016 unless Congress acts again to shore up the program. Without a new fix, the $2.5 trillion in Social Security's trust funds will be exhausted in 2037. Those funds have actually been spent over the years on other government programs. They are now represented by government bonds, or IOUs, that will have to be repaid as Social Security draws down its trust fund. President Barack Obama has said he would like to tackle Social Security next year.
"The thing to keep in mind is that it's unlikely we are going to pull out (of the recession) with a strong recovery," said Kent Smetters, an associate professor at the University of Pennsylvania's Wharton School. "These deficits may last longer than a year or two." About 43 million retirees and their dependents receive Social Security benefits. An additional 9.5 million receive disability benefits. The average monthly benefit for retirees is $1,100 while the average disability benefit is about $920.
The recession is also fueling applications for disability benefits, said Stephen C. Goss, the Social Security Administration's chief actuary. In a typical year, about 2.5 million people apply for disability benefits, including Supplemental Security Income. Applications are on pace to reach 3 million in the budget year that ends this month and even more are expected next year, Goss said. A lot of people who had been working despite their disabilities are applying for benefits after losing their jobs. "When there's a bad recession and we lose 6 million jobs, people of all types are going to be part of that," Goss said.
Nancy Rhoades said she dreads applying for disability benefits because of her multiple sclerosis. Rhoades, who lives in Orange, Va., about 75 miles northwest of Richmond, said her illness is physically draining, but she takes pride in working and caring for herself. In June, however, her hours were cut in half — to just 10 a week — at a community services organization. She lost her health benefits, though she is able to buy insurance through work, for about $530 a month. "I've had to go into my retirement annuity for medical costs," she said.
Her husband, Wayne, turned 62 on Sunday, and has applied for early Social Security benefits. He still works part time. Nancy Rhoades is just 56, so she won't be eligible for retirement benefits for six more years. She's pretty confident she would qualify for disability benefits, but would rather work. "You don't think of things like this happening to you," she said. "You want to be in a position to work until retirement, and even after retirement."
Cash-strapped sell their kidneys to pay off debts
British victims of the credit crunch are offering to sell their kidneys for £25,000 or more to help pay debts, an investigation by The Sunday Times has revealed. At least a dozen adverts have appeared on the internet offering kidneys for sale from British "donors". Five of the sellers corresponded with undercover journalists, who posed as friends and relatives of sick patients to negotiate sales.
One person willing to sell a kidney is a 26-year-old mental health nurse who said he needed the money to pay debts after a business he set up went bankrupt. Another is a 43-year-old taxi driver from Lancashire, who wants to raise cash to pay off some of his mortgage and buy a new kitchen. Both men said they wanted to help those in need of kidney transplants at the same time as relieving their financial difficulties. A leading doctor said the phenomenon highlighted the need for a public discussion of the issue of selling organs.
Professor Peter Friend, a former president of the British Transplant Society, said: "The West has outlawed it for all sorts of good reasons, but the result is it goes underground. It is really important to have a debate." Nearly 7,000 people in the UK are waiting for kidney transplants and 300 died last year while on the waiting list. Offering to sell an organ in England, Wales and Northern Ireland is an offence under the Human Tissue Act even if the seller is planning to travel to another country for the transplant operation.
Yesterday William Henderson, the taxi driver, justified his offer to sell a kidney by saying: "I thought I was going to give another man a chance of life. I wanted to help myself at the same time. We are in the middle of a giant credit crunch." He added: "A guy from Pakistan wanted one, but I turned him down. I think he was more buying it to sell it on. I’d rather . . . it’s got somewhere good to go."
Money figures show there's trouble ahead
by Ambrose Evans-Pritchard
Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise. Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.
Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked". Car sales were up 28% in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."
Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40% in September. Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9% in August. New house sales are stuck near 430,000 – down 70% from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.
We are moving into a phase when most OECD states must retrench to head off debt-compound traps. Britain faces the broad sword; Spain has told ministries to slash 8% of discretionary spending; the IMF says Japan risks a funding crisis. If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23% in August; Japan's were down 36%; industrial production has dropped by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia and 11% in the US.
Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring. The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world. Yet hawks are already stamping feet at key central banks. Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?
Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years". He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months. I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.
So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral." Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.
Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early Summer: "There has been nothing like this in the USA since the 1930s." M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1% rate since April. Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.
Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says. Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.
A risky revival
by John Authers
This should have been a week for traders in the stock market to feel good about life. US stocks have rallied by close to 60 per cent in barely six months since they hit bottom in March. The Federal Reserve meanwhile pronounced this week that "economic activity has picked up" – the most confident language the central bank has used for some time.
But Crispin Odey, one of London’s most respected hedge fund managers, was seeing things differently. He chose Wednesday, the day of the Fed’s pronouncement, to ruminate, both in a note to clients and in the Financial Times, that the rally was "entering a bubble phase". The word "bubble" is highly emotive but Mr Odey could justify it. He argued that markets were being distorted by governments’ deliberate attempts to push down the price of money by buying bonds, a policy known as quantitative easing.
"At some point the quantitative easing will have to come to an end," he said, "but, until it does, this bull market is sponsored by [Her Majesty’s Government] and everyone should enjoy it." The remarks struck a chord. Stocks endured a sharp sell-off after his words . The fear that the unprecedented supply of cheap money from governments is creating another bubble has been circulating in Wall Street and the City of London for months.
To some, this seems alarmist. History is full of examples of strong rallies after big sell-offs – it is all part of the "physics" of markets. The all-time highs for developed market stocks, set in 2007, are not in sight. On conventional valuation measures, stocks are nowhere near as expensive as at the top of past investment bubbles. Also, the economic "free-fall" at the end of last year appears to have been halted. In addition, the Fed’s pronouncement signalled interest rates will remain low for a while – a sweet spot for risky assets such as stocks. A strong recovery for share prices since March, when there was a real fear of a second Great Depression, seems reasonable.
But the question of whether this is a real recovery or a bubble must still be asked, and there are worrying signs. The rally has been achieved with global economic growth barely above zero and unemployment still rising. The S&P 500 index of US stocks is already far above the forecasts nine out of 10 Wall Street strategists have in place for the end of the year, according to a Bloomberg survey. Concerns are prevalent that US consumers will not return to their old buying habits because of high unemployment and the debts they need to pay off.
There are also concerns that China, the other leading source of growth, has achieved that only by stoking lending – notably, Chinese stocks sold off sharply in August when authorities hinted at tightening lending. The speed of the rally is itself cause for concern. Historically, big sell-offs have typically been followed by big bounces. But as measured by the S&P 500, the current rally is stronger after six months than any predecessor, including those that followed the lowest points of the market in 1932, 1974 and 1982.
Relationships between markets also imply unhealthy levels of speculation. Currency and stock markets had minimal correlations before the crisis took hold in 2007, while oil and stocks were usually inversely correlated. But oil and stocks have been rising in tandem this year, just as they fell together during the crisis, while the correlations between the dollar and stock markets remain remarkably close.
The implication of such correlations is alarming. Tim Lee, of Pi Economics in Connecticut, puts it this way: "[Since early 2007] 40 per cent of all movement in the S&P 500 can be predicted or explained from the movement of the yen and vice versa. If we assume, quite reasonably, that the yen and the S&P 500 should be fundamentally unrelated instruments, this implies a breakdown of efficient price discovery in the markets."
So does this qualify as a bubble? The classic definition came from the economist Charles Kindleberger in his 1978 book Manias, Panics and Crashes. For him, a bubble is a phenomenon of mass psychology, and refers to the last stage of an investment mania, when assets are bought "not because of the rate of return on the investment but in anticipation that the asset or security can be sold to someone else at an even higher price". The bubble bursts when there is no longer a "greater fool" ready to pay too much for the asset.
Thus, in a true bubble, stocks are wildly overvalued compared with their fundamental measures, such as their earnings or the value of the assets on their balance sheets. But conventional valuation measures of stocks suggest they are still far from a true bubble. US stocks are trading at a multiple of 18.7 times their average earnings for the past 10 years, according to the data kept by Professor Robert Shiller of Yale University. Historically, extremes in cyclical price/earnings ratios have accurately signalled long-term market peaks and troughs. The cyclical p/e stood at 27 immediately before the crisis in 2007, for example, and reached 43 at the peak of the internet boom. So it looks premature to say stocks are in a bubble.
. . .
But an argument that this is an incipient bubble, carrying real risk that a mania will develop, is easier to sustain. First, according to Kindleberger, bubbles are driven by cheap credit. With US interest rates at zero, credit is very cheap. Second, many investors seem to be using bubble-like logic; they believe others will soon be prepared to buy even more.
There are true "bulls" who believe the global economy will recover strongly from here, bringing up corporate earnings in its wake. But others focus on the cash that has been on the sidelines, and on the pressures on fund managers who want to avoid the embarrassment of having stayed out of the market during the rally.
Mark Lapolla, of Sixth Man Research in California, who has called aggressively for investment in the market, says he "cannot emphasise strongly enough just how big a role simple game theory will play". He argues it is large equity mutual fund managers who are driving the market. Most have done well this year, and are ahead of the benchmark stock market indices against which they are compared. "Therefore the incentive is to not lose ground rather than gain it," he says, so they will stick closely to stocks in the main indices to protect their year-end bonuses.
Jeremy Grantham, co-founder of GMO, a large Boston-based fund manager, says: "Fund managers are simply not prepared to take the career risk of being wrong for a little while and losing business." Thus they are herding into the index, though Mr Grantham – who advocated buying at the bottom in March – already considers stocks too expensive given the many risks in the world economy.
Another concern comes from more recent history. After the internet bubble in 2000, world stocks endured a bear market, falling 49 per cent before hitting a bottom shortly before the invasion of Iraq in March 2003. They then enjoyed a four-year rally in which the main stock indices doubled. It was rational, and successful, to be in the market from 2003 to 2007 but with hindsight it was a "fools’ rally", triggered by cheap money, as Alan Greenspan’s Fed cut its target interest rate to 1 per cent. This fuelled a bubble in mortgages and housing.
The 2003 bounce came when stocks were not cheap – they traded at a multiple to cyclical earnings of about 21, according to Prof Shiller, when at the bottom of previous bear markets this multiple had fallen below 6. So it looks as though cheap money stopped markets taking all the medicine they needed. Similarly the current rally began with stocks trading at a multiple of 13 times the previous 10 years’ earnings. This was the cheapest in 21 years but still double the lows seen after previous great sell-offs, implying cheap money had once again saved prices before all speculative excess had been cleaned out of the system.
. . .
The danger, in this scenario, is that lenders lose confidence in the creditworthiness of governments, which could cause rates to rise and spark a renewed sell-off. But that is not imminent. Just as it made sense to stay in the market while the booming mortgage market kept credit unnaturally cheap, it may make sense to do so while state intervention keeps credit unnaturally cheap. And when bonds and cash pay so little, raising the risks of inflation in the future, the rational response is to buy assets that generate more reliable cash flows, such as stocks; or that act as a hedge against inflation, such as commodities. On this logic, investors may as well heed Mr Odey and "enjoy the bubble".
They should do so now because, if this theory is right, the denouement will be painful. David Bowers of Absolute Strategy Research in London, who has been bullish for a while and advises staying in stocks, says: "It’s the last game of pass the parcel. When the tech bubble burst, balance sheet problems were passed to the household sector [through mortgages]. This time they are being passed to the public sector [through governments’ assumption of banks’ debts]. There’s nobody left to pass it to in the future."
"We’re speaking Japanese without knowing it"
When you’ve studied "eight centuries of financial folly," as international economists Carmen Reinhart and Kenneth Rogoff have, patterns begin to emerge. The most striking pattern they’ve found is that people never learn. We gullible humans make the same mistake time after time, which is believing that the laws of financial physics have been repealed for us. Thus, Americans proclaim confidently that there’s no chance the U.S. will get caught in Japanese-style stagnation. Sure, deflation became entrenched in Japan starting after the stock-market crash that began in 1990. But this time is different, right?
Don’t be so sure. Reinhart says Americans seem to be unwittingly repeating the mistakes of the Japanese, including propping up "zombie" banks that aren’t healthy enough to make new loans and get the economy growing again. Americans kid themselves, she says, by saying, "These are not zombie loans. They’re just non-performing." Summarizes Reinhart: "We’re speaking Japanese without knowing it." (I love that quote.)
Reinhart and Rogoff spoke at a lunch for economics reporters at the Princeton Club in New York, where they discussed their comprehensive new book, "This Time Is Different: Eight Centuries of Financial Folly." To me, one of the most important findings of the book is that generations of economists, right up to the present, have misunderstood the causes of sovereign defaults (i.e., when a country fails to make payments on its foreign debt). It turns out, they say, that a country is much more likely to default on its foreign debt if it’s carrying a lot of domestic debt. No wonder: A country will try repaying its own citizens (who vote) before it worries too much about foreign creditors (who don’t vote and, in any case, tend to be stupidly forgiving).
OK, the importance of domestic debt may not sound too surprising. What’s surprising, rather, is that this factor was completely neglected in most economists’ work. One reason: Governments have not made data about the quantities of their domestic debt available to researchers. Reinhart and Rogoff compiled it and are planning to make it available to other scholars. One footnote: The U.S. does not have foreign debt, in the way that Reinhart and Rogoff use the term. Instead, it has lots of domestic debt (like Treasuries) that happened to be owned by foreigners. To them, foreign debt is debt that is issued in a foreign jurisdiction, usually in that foreign nation’s currency. The U.S. can still stick it to foreign creditors by inflating the dollar so much that foreign-held Treasury bonds become close to worthless. That is exactly what the Chinese are worried about lately.
The Mortgage Machine Backfires
by Gretchen Morgenson
With the mortgage bust approaching Year Three, it is increasingly up to the nation’s courts to examine the dubious practices that guided the mania. A ruling that the Kansas Supreme Court issued last month has done precisely that, and it has significant implications for both the mortgage industry and troubled borrowers. The opinion spotlights a crucial but obscure cog in the nation’s lending machinery: a privately owned loan tracking service known as the Mortgage Electronic Registration System.
This registry, created in 1997 to improve profits and efficiency among lenders, eliminates the need to record changes in property ownership in local land records. Dotting i’s and crossing t’s can be a costly bore, of course. And eliminating the need to record mortgage assignments helped keep the lending machine humming during the boom. Now, however, this clever setup is coming under fire. Legal experts say the fact that the most recent assault comes out of Kansas, a state not known for radical jurists, makes the ruling even more meaningful.
Here’s some background: For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate. During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.
To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder. Cost savings to members who joined the registry were meaningful. In 2007, the organization calculated that it had saved the industry $1 billion during the previous decade. Some 60 million loans are registered in the name of MERS.
As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them. "MERS is basically an electronic phone book for mortgages," said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. "To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork."
The system also led to confusion. When MERS was involved, borrowers who hoped to work out their loans couldn’t identify who they should turn to. As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower. Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say.
While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling. The case involved a borrower named Boyd A. Kesler, who had taken out two mortgages from two different lenders on a property in Ford County, Kan. The first mortgage, for $50,000, was underwritten in 2004 by Landmark National Bank; the second, for $93,100, was issued by the Millennia Mortgage Corporation in 2005, but registered in MERS’s name. It seems to have been transferred to Sovereign Bank, but Ford County records show no such assignment.
In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing. Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.
The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property. By letting the sale stand and by rejecting Sovereign’s argument, the lower court, in essence, rejected MERS’s business model.
Although the Kansas court’s ruling applies only to cases in its jurisdiction, foreclosure experts said it could encourage judges elsewhere to question MERS’s standing in their cases. "It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning," said Christopher L. Peterson, a law professor at the University of Utah. "If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them."
In other words, banks holding second mortgages could find themselves in the same pair of unlucky shoes that Sovereign found itself wearing in Kansas. Asked about the ruling, Karmela Lejarde, a spokeswoman for MERS, contested the court’s reasoning. "We believe the Kansas Supreme Court used an erroneous standard of review; this is not the end of the judicial process," she said. "The mortgages on which MERS is the mortgagee will remain binding contracts."
BUT Patrick A. Randolph, a law professor at the University of Missouri, Kansas City, who described himself as a friend of MERS, described the recent decision as unsettling. "This opinion is hostile to the notion of MERS as nominee and could lead to problems for it in foreclosing," he said. "The entire structure of MERS as a recorded nominee could collapse in Kansas, and that could lead to a patch-up job where they would have to run around and re-record the mortgages." If so, MERS would be hoisted on its own petard. And it would be a rare case of poetic justice in this long-running mortgage mess.
Derivatives: Bailed-Out Banks Still Making Billions Off Risky Bets
Derivatives is one of the dirty words of the financial crisis. Though these often-risky bets were blamed by many for helping fuel the credit crunch and the downfall of Lehman Brothers and AIG, it seems that Wall Street has yet to learn its lesson. U.S. commercial banks earned $5.2 billion trading derivatives in the second quarter of 2009, a 225 percent increase from the same period last year, according to the Treasury Department.
More than 1,100 banks now trade in derivatives, a 14 percent increase from last year. Four banks control the market: JPMorgan Chase, Goldman Sachs, Bank of America and Citibank account for 94 percent of the total derivatives reported to be held by U.S. commercial banks, according to national bank regulator the Office of the Comptroller of the Currency. The credit risk posed by derivatives in the banking system now stands at $555 billion, a 37 percent increase from 2008. "By any standard these [credit] exposures remain very high," Kathryn E. Dick, the OCC's deputy comptroller for credit and market risk, said in a statement.
The complex financial instruments, which take the form of futures, forwards, options and swaps, derive their value from an underlying investment or commodity such as currency rates, oil futures and interest rates. They are designed to reduce the risk of loss for one party from the underlying asset. Trading in an unregulated $600 trillion market, they were partly blamed for igniting the financial crisis a year ago. The New York Times reported earlier this month:Derivatives drove the boom before 2008 by encouraging banks to make loans without adequate reserves. They also worsened the panic last fall because they inherently tie institutions together. Investors worried that the collapse of one bank would lead to big losses at others.
The Obama administration has included oversight of derivatives as part of its overhaul of financial regulations. Wall Street is fighting back as it seems to have returned to its much-criticized practices. Last Thursday former Fed chairman Paul Volcker, who now heads the White House Economic Recovery Advisory Board, warned lawmakers about the danger lurking behind derivatives. Testifying on Capitol Hill, Volcker discussed how "opaque trading in complex derivatives [have] become so large relative to underlying assets" and how "more and more complex financial instruments limit the transparency of markets," he said.
"As a general matter, I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets," he added. But the OCC argues that derivatives trading is not inherently risky, explaining that banks are trading these instruments every minute of every day with institutions more creditworthy than a typical borrower. "The system has always worked on derivatives," said Kevin M. Mukri, an OCC spokesman. "You have higher-quality counterparties -- higher quality than in any other line of business." Furthermore, "the purpose of derivative trading to to mitigate risk -- not increase risk," he said. "Without derivatives it would be a very hectic marketplace."
Yet some well-respected investment banks seem to be exposed to significant risk, judging by their credit exposure from derivatives contracts. Goldman Sachs, formerly a pure investment bank, is now a bank-holding company regulated by the Federal Reserve. It owns Goldman Sachs Bank, an FDIC-insured depository. The bank has about $20 billion in total risk-based capital -- in short, the money it has to cover creditors in case they go belly-up. But the bank has about $186 billion in total credit exposure from its derivatives contracts.
Much of that $186 billion could be backed up by collateral -- banks with at least $100 billion in assets held a combination of cash, bonds and securities against 63 percent of their total net credit exposure as of June 30. But the OCC doesn't break that down by institution, and Goldman Sachs doesn't disclose it either. Nonetheless, the bank's exposure to derivatives losses is about nine times the amount of capital it has set aside. "It's extraordinary for a commercial bank," says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington D.C.-based think tank. "And it really gets down to the central point with Glass-Steagall -- what's the separation here between government-insured deposits and speculative investment banking activity? You'd be very hard pressed to find out with Goldman right now."
Glass-Steagall, a Depression-era banking law that prohibited commercial banks from engaging in the investment business, was essentially repealed in 1999. Some economists have pointed to the repeal as the central cause behind the financial crisis. "Given Goldman Sachs's history as a securities firm, as opposed to being... a traditional commercial bank, you would expect that our derivatives exposure is higher than our exposure to other assets," says company spokesman Samuel Robinson. "It's much higher [because] we don't have a lot of these other assets."
Goldman Sachs announced that it would become a bank holding company last September, less than a week after Lehman Brothers declared bankruptcy. Coming under the Federal Reserve's protective umbrella gave the firm "access to permanent liquidity and funding," Lloyd C. Blankfein, chairman and CEO of Goldman Sachs, said at the time. Baker says that now that the firm is a bank holding company, the bank's exposure to losses from derivatives contracts (compared to available capital) poses particular problems. Now, "the public is on the hook for that. If they run into trouble they could go to the Fed and borrow at the discount window [and] they have access to the FDIC's special lending [program]," he explains. Goldman Sachs has issued about $25 billion in FDIC-backed debt as of June, according to regulatory filings.
"You're having the protections for what's supposed to be relatively boring commercial banking applied to risky investment banking. It's a real serious problem," Baker says. Robinson says that the firm's exposure to potential losses from its derivatives deals, as defined by the OCC, is misleading. "It includes a regulatory-defined measure ... which in aggregate does not represent the firm's ... risk exposure," he says. For example, it doesn't factor in hedges against potential losses or collateral put up by counterparties. "You can have an exposure that's fully hedged, but the hedging benefit does not appear anywhere in the [OCC's] analysis," Robinson says.
Last October Goldman received a $10 billion taxpayer bailout, which it repaid in June. The federal government earned $1.4 billion on its investment. JPMorgan Chase has about three times the amount of their capital exposed in derivatives deals; Citibank about double. For comparison's sake, if all commercial and industrial loans held by U.S. banks went bust the banking system has just enough capital set aside to cover those losses. Not all banks are so heavily invested in derivatives. PNC's exposure (relative to capital) is at 28 percent, and U.S. Bank, the country's sixth-largest by deposits, comes in at seven percent. "It's tough to think of the world without derivatives," Mukri said "And it's not a pleasant world either."
Ohio AG Targets Bank of America, Execs Over Merrill, Seeks Billions
Ohio Attorney General Richard Cordray said Monday his office could soon seek "billions" from Bank of America Corp. and some of its executives, including Chief Executive Ken Lewis, over the bank's handling of its merger with Merrill Lynch & Co. earlier this year. Cordray has filed a lawsuit on behalf of five pension funds accusing the bank and four executives, including Bank of America Chief Financial Officer Joe Price and Merrill's former chief executive, John Thain, with concealing widening losses at Merrill ahead of a shareholder vote last December to approve the deal. The lawsuit also names Bank of America's chief accounting officer, Neil Cotty.
Shirley Norton, a Bank of America spokeswoman, said: "We are confident we disclosed all that was required and look forward to presenting our position to the court." Cordray's announcement is the latest legal challenge to Bank of America and its chief executive over the bank's purchase of Merrill Lynch during the depths of the financial crisis. New York Attorney General Andrew Cuomo, the Securities and Exchange Commission, a U.S. Treasury investigator and lawmakers in Congress have all said they are investigating the conduct of Bank of America executives surrounding the Merrill deal.
In fact, a U.S. judge recently rejected a proposed $33 million settlement between Bank of America and the SEC over $3.6 billion in bonuses the SEC says Bank of America inappropriately allowed to be paid to Merrill employees late last year. The judge said the settlement is too lenient on Bank of America executives. Bank of America and Merrill agreed to merge last September as the financial crisis raged and the collapse of Wall Street titan Lehman Brothers Holdings Inc. threatened the livelihoods of other securities firms.
In December, before Bank of America shareholders voted to approve the deal, losses at Merrill Lynch widened sharply. Merrill, under then-CEO Thain, nonetheless paid out $3.6 billion in year-end bonuses before the deal closed and Thain has said that Bank of America approved the payments. In January, after the deal closed, Bank of America disclosed the Merrill losses to shareholders and also disclosed a fresh infusion of support from the U.S. Treasury, which agreed to absorb some of Merrill's future losses. Lewis has said he was pressured by then-Treasury Secretary Henry Paulson to go through with the deal, even as losses at Merrill widened, and to delay disclosing Merrill's deteriorating condition.
Although Merrill's businesses have already contributed profits to Bank of America's earnings this year, the flurry of probes has been a significant distraction for the bank and its embattled CEO. Lewis has made headline-making trips to testify before Congress and to answer questions from Cuomo. The lawsuit by Cordray's office in Ohio accuses executives at Bank of America and Merrill of breaking securities laws by concealing information from shareholders. Filed on behalf of five pension funds from Ohio, Texas, Sweden and the Netherlands, the litigation marks an attempt by the funds to recoup losses they suffered when Bank of America's share price fell after its purchase of then-crumbling Merrill Lynch.
The pension funds filed a legal document in March detailing hundreds of millions in losses, but have yet to formally declare how much in damages they're seeking. A spokesman for Cordray's office said the estimates of losses in the filing represent a "snapshot in time." He said, "Estimates of losses in these types of cases will change as the case moves forward based on court rulings and other factors." Cordray made it clear Monday that he will seek damages from the bank as well as executives specifically.
Like Cuomo, Cordray also said Monday he will ask for sworn testimony from executives. That process of interviewing the bank's leaders could bring renewed scrutiny of Thain, who was praised last year for agreeing to sell the company to Bank of America. Lewis then demanded Thain's resignation in January after Lewis grew angry about the way Thain handled the unexpectedly large fourth-quarter losses at Merrill.
China's Surge Confirmed by HSBC Move
In a highly symbolic move, HSBC announced the relocation of chief executive Michael Geoghegan from London to Hong Kong.
Stephen Green, chairman, old the Financial Times. ”Asia and China are the centre of gravity of the world and of our business. To drive the business, you have to be here – Hong Kong is the gateway to China”. Hong Kong and China together accounted for 40 per cent of HSBC’s pre-tax profits in the first half of the year and analysts predict this could reach 50 per cent in the next five to 10 years.
Do you believe it? China’s finance ministry announced in late June that half the $173 billion in central government spending had already been allocated to specific projects. Of much greater importance to China’s rebound are two other government efforts that are paying big dividends: reckless lending and oodles of export subsidies. The state-controlled banking system here opened the spigots with $1.2 trillion in extra lending to Chinese consumers and businesses in the first seven months of this year. This is for an economy with a GDP of about $4 trillion. Although most believe that China’s substantial stimulus package announced earlier this year is being invested in infrastructure, many analysts agree with my perception that most of it is ending up in overheated stock and real estate markets. The Chinese refer to this as “stir fried” markets.
This inevitably leads to the issue of credit quality and the possibility of China’s own homegrown debt bubble. Pivot’s research shows that rather than China having a manageable public debt to GDP ratio of 35%, then inclusion of off balance sheet items like guarantees of local government bonds brings this number up to closer to an uncomfortable 62%.
In addition, China’s non-performing loan data is clearly being managed and does not even include the $200 billion of bad loans from Chinas top four state-owned banks that were moved “off balance sheet” to state-run asset management companies. In return, the banks received $200 billion of bonds that are still on the books of the banks at face value even though their real value is a small fraction of face value. As the bonds come due, they are being rolled over for another 10 years.
China’s bank lending explosion has led to credit to GDP during the first half of 2009 rising to 140%, levels equal to America in 2008 and Japan in 1991 just before their market meltdowns. Chinese financial institutions extended $1.2 trillion worth of local currency loans in the first eight months of this year, an increase of 164 percent from the same period in 2008. China’s top banking regulator, Liu Mingkang, last week warned of growing risks to the country’s financial system as a result of the rapid expansion of new loans. “This year, all kinds of risks have arisen in the banking sector along with the rapid credit expansion,” said Mr. Liu in a recent written statement.
Beijing also has given huge tax breaks and other assistance to exporters. They include placing broad restrictions on imports and intervening heavily in currency markets to hold down the value of the renminbi, to keep Chinese exports competitive even in a weakened global economy.
Even so, American trade data shows that imports from China only eroded 14.2 percent in the first seven months of this year while imports from the rest of the world plunged 32.6 percent. China’s trade surplus, already the world’s largest, was $108 billion for the first seven months of this year. At least a third of the extra bank lending in China appears to have gone into real estate and stock market speculation.
Real estate markets throughout Asia are moving and few faster than in Hong Kong.
Two new luxury flats in Hong Kong have been put on the market for a record per square foot price of HK$75,000 (US$9,640) as the buoyant economy and stock markets on the Chinese mainland lift demand for exclusive properties beyond pre-crisis levels.
Prices for luxury apartments in Hong Kong, where property investment is a passion for many, have risen about 26 per cent since their peak ahead of the collapse of Lehman Brothers a year ago, according to DTZ, a property adviser.
Dutch Banks Have Adequate Capital In Test Scenario - Finance Ministry
The Dutch Finance Ministry Monday said that a stress test carried out by the Dutch Central Bank (DNB) showed that the 15 largest Dutch financial institutions won't need new government aid, except for state-owned ABN Amro and Fortis Bank Netherlands NV. The stress test assumed the Dutch economy would shrink by 6.3% over the period 2009-2010, while unemployment would rise to 9.7%, stock markets would fall 50% and house prices would decline 30%.
"If the fictional circumstances of the stress test would occur, the participating banks and insurers would need to write down an amount of around EUR47 billion. Even though losses would be high, the sector has enough buffers to be able to cope with them," Finance Minister Wouter Bos said in a letter to parliament. He added all banks' Tier 1 capital ratios would, if the stress test scenario occurred, remain within the regulatory capital requirement level of 4%. However, it added DNB could require financial institutions to have a higher Tier 1 ratio then the required 4%, based on the institutions' specific risks, while financial markets may also require higher capital levels for banks and insurers.
Bos, in the letter, said that although he didn't expect any financials, expect state-owned ABN Amro and Fortis Bank Netherlands, to need additional government aid, he couldn't rule out that banks or insurers would be required to raise additional capital. Earlier Monday, the finance ministry said it would give parliament details of its plan to recapitalize the group created by the combination of ABN Amro and Fortis Bank Netherlands in October. The level of refinancing will be based on how much capital is demanded by the DNB, plus costs related to the separation of ABN Amro from the former holding and its integration with Fortis Bank Netherlands. The Dutch government in October last year nationalized Fortis Bank Netherlands and the Dutch parts of ABN Amro, as part of a rescue operation.
The Shame in Breaking Records
by Mehmet Oz
As I listened to 14 month old Analeigha Rivera's tiny heart in the Reliant Center in Houston, I could hear the murmur interrupting her regular rhythm as blood swished through a hole between the main chambers of the heart. An echocardiogram confirmed the diagnosis, so I could show her mother Victoria exactly where the problem was and explained to her that if little Analeigha didn't get supervised care by a pediatric cardiologist, we might miss our window to prevent life-threatening damage.
I looked in her mother's tear-stained eyes and heard the same story that hundreds of others have recounted to me -- Victoria had a job but had lost her insurance. So Analeigha had nowhere to go. After I explained to her that we had resources on-site to help plan the next steps, one of my staff took me aside and told me we had just broken the record for the most people seen in a free clinic in one day. That's when my spirit sank a little.
I have always had a competitive personality. I have always tried to inspire those around me to win. But when I found myself on CNN on Saturday afternoon announcing that we had made history, I didn't feel an ounce of pride. Instead, I felt the underlying frustration that has slowly boiled every time I look into the face of a person on whom I am about to perform surgery who has no means of affording the care they need because they lack health insurance. I wanted to channel this outrage and use my new show as a way to put a face to these people.
The "uninsured" -- that word we keep hearing as our elected officials grapple with a reform initiative that dominates headlines, talk shows, and political rhetoric. But the "uninsured" is a word that refers to people in the abstract. I wanted to show America who these people were, their struggles, their fears, their true challenges. I had spent time at free clinics before, and wanted to shine a spotlight on this remarkable movement for all Americans, so we partnered with the National Association of Free Clinics to hold the free clinic in Houston's three football field size Reliant Center. This was an essential teaching opportunity as our nation finds itself in a time that tries our very soul.
We picked Houston because it has the highest rate of people living without insurance in the nation - 30% or about 1.3 million residents. Texas leads all 50 states with 25% of its residents living without insurance; the national average is a whopping 15%. We announced the clinic last week and after an article appeared in the Houston Chronicle on Wednesday, pre-registration surged and we had to close appointments by early Friday afternoon with 2000 people scheduled to receive free health care. Saturday turned out to be the largest health relief mobilization in Houston since Hurricane Katrina. More than 700 doctors, nurses and volunteers turned out to help. The part that you have to understand about Saturday is that it wasn't in response to a disaster - it was just another day in Houston.
And show up they did. They came as entire families. Many drove hours to get there; others hitchhiked. I walked out at 5am and greeted the first woman on line, Karen, a working school teacher who could not keep up with her insurance payments. Think about it for moment - sitting on the pavement at 5am in the dark waiting for a massive convention center to open just to see a doctor? This is what it's come to, and it should frustrate you as it does me. So many patients had tragic stories that still burn in my heart. Most were embarrassed to seek help and many felt invisible in society, like they didn't matter anymore.
Bobby Parker, a 63 year old woman from the Houston suburb of Channelworth had severe hypertension, putting her at grave risk for stroke and cardiovascular disease. She needed immediate care and I escorted her over to the mobile medical unit for more extensive screening. With us walked her 19-year-old granddaughter Amanda who suffers with acid reflux disease. She recently lost her Medicaid and cannot afford medical care to evaluate the problem or her prescription to keep it under control, giving her severe discomfort from the heartburn and putting her at risk for esophageal cancer. Her grandmother has an advanced degree in social work and worked her entire life in social services helping those in need. Should either woman be in this situation?
Anthony DeLane saw the free clinic on television that morning and decided to show up for problems he was having with his foot. Anthony actually had a diabetic foot ulcer with exposed bone that incurred a serious infection that was making its way up his leg. People often lose toes or feet at this advanced stage. Anthony works long hours as a commercial driver but doesn't have health insurance. He was rushed to the hospital and will get the care he needs to hopefully save his foot. Can you imagine the irony of a truck driver losing his foot so he can longer work, all because he could not afford health coverage?
These stories put a face on 47 million Americans without coverage. Many are hard-working people who took a wrong turn in their lives; 83% of the 4 million people seen last year in free clinics were employed. Analeigha's mother worked. Anthony Delane worked. Bobby Parker had worked her whole life. Should working people not have an option to see a doctor when there is bone protruding from their foot? If most of the people we saw Saturday were employed, it should be apparent to all of us that many people are one paycheck away from losing their existing insurance. These people work hard. They went to school. They deserve better from us.
I am asked constantly what my personal views are on the health care reform debate happening in Washington. People ask me which senator's plan I like. I really have no interest in discussing the dollars and cents of health care or specific insurance plan options. I purposefully extricate myself from that conversation because I don't think 14-monthold Analeigha's heart is a political discussion.
Smart people are working on the legal and financial nuances of fixing health care in America. Others are creating a distraction for reasons I can't imagine. My best contribution is to bear witness to the true nature of the life-threatening struggle facing one in seven Americans and make them real to my television audience and the American people so our policy makers have the empathy of the electorate while making decisions. My hope is that we get to a day when I never have to watch an echocardiogram on a floor normally reserved for rodeo trade shows.
My hope is that no one else ever has to break our record. While I am proud that the patients who came understood someone loved and cared about them and got them desperately needed care, I feel a sense of shame that Saturday had to happen at all. Do you?
David Paterson On Meet The Press: "I'm Blind, I'm Not Oblivious"
David Paterson thrived politically as a state senator, working his way up in a nearly all-white Albany political structure. Now, he's governor, and things have never been worse. For nearly a year, Paterson, the state's first black governor, has been battered by a faltering economy and with poll numbers hovering at record lows. This week, he learned President Barack Obama's administration is worried he'll drag other Democrats down in 2010 if he runs for a full term, perhaps even threatening the narrow margin the party needs to ward off filibusters in the U.S. Senate.
These days, Paterson finds himself very much alone. Paterson said Sunday on NBC's "Meet the Press" that Obama never directly asked him to step aside, and he wouldn't discuss what presidential aides may have told him confidentially. But the legally blind governor added he's heard the message from Democrats in New York and Washington: "I'm blind, I'm not oblivious." "But I am running for governor," he said. "I don't think I am a drag on the party. I think I'm fighting for the priorities of my party."
At an Associated Press event in Syracuse last week, Paterson said that when he was Gov. Eliot Spitzer's lieutenant governor, he had never envisioned becoming the state's chief executive. "I had this grand plan that Hillary Clinton was going to become president," he said. "Maybe the governor would appoint me to the Senate."
In January 2008, that was the plan. Paterson worked to draw black voters to Sen. Hillary Clinton's presidential campaign. On TV screens and front pages, he was wedged next to President Bill Clinton and closer to the senator than Chelsea. Democrats thought it was a well-deserved fit for Paterson as a reward for bringing the party close to controlling the state Senate for the first time in decades. Former New York City Mayor Ed Koch said Paterson was capable, highly intelligent and courageous. Paterson was the dashing statesman in an otherwise plodding Albany. He was smart, collegial, a reformer, ambitious and funny – on purpose.
Now, for many, he's a punch line. Even Paterson is starting to talk about exit scenarios. "I don't think anyone who is clearly hurting their party would take an action like running when it is going to make the party lose," he said. Then he added a shot: "I'm not sure those that are always calling for loyalty in the Democratic Party have been loyal themselves." Albany's top two legislative Democrats – Assembly Speaker Sheldon Silver and Senate Conference Leader John Sampson – last week committed to Paterson "right now" and "until otherwise known." Another Democratic pal, Rep. Gregory Meeks of Queens, called Paterson "my governor, my friend, who has done a relatively good job."
For a sitting governor, that praise is a few shades shy of faint. All of this comes days after Washington Democrats sent a clear message that Paterson should step aside for the popular Attorney General Andrew Cuomo. They are concerned that a weak top of the ticket could hurt other Democrats, including Kirsten Gillibrand, whom Paterson appointed to fill Clinton's Senate seat. A Paterson run could even entice Republican savior-in-waiting Rudy Giuliani to run for governor. "He needs a game-changer," said Lee Miringoff of the Marist College poll, which found Paterson had a 17 percent approval rating. Many, however, say the game is over.
Last week's criticism and an apparent snub by Obama who gushed over Cuomo during a New York visit was embarrassing publicly for Paterson. Worse, it may be lethal financially, giving Democratic campaign contributors cover to cut checks to Cuomo and, with the apparent blessing of the nation's first black president, not worry about a backlash. That will make Paterson's decision for him. It was the same force that made Cuomo exit the 2002 race for governor as money and support flowed to then-state Comptroller Carl McCall in his losing campaign to unseat Gov. George Pataki.
Without friends, a free flow of campaign cash and the contacts made from a previous campaign for governor, Paterson is mostly alone. Inheriting the job 18 months ago when Spitzer resigned amid a prostitution probe and governing through the worst fiscal crisis in state history left him saying "no" to powerful, well-funded special interests, while repeatedly committing his own political missteps, including the ugly process to replace Clinton with Gillibrand.
Paterson angered the Kennedy family when he didn't embrace Caroline Kennedy for the job and a Paterson operative later leaked unsubstantiated rumors about her in an attempt to show she was ill suited. He is left with a message that is not much more than his character – which polls show New Yorkers like – and how he feels he kept the state from worse fiscal fates faced by other states. So Paterson says he's "clearly running" even as Democrats urge him to reconsider. "You don't give up because you have low poll numbers," he told "Meet the Press." "If everybody can tell what the future is, why didn't they tell me I'd be governor? I could have used the heads-up."