Tuesday, March 17, 2009

As long as only the canaries are dying: Was economic crisis really so hard to foresee?

[Editor's note: I've been waiting for someone to help explain our country's current financial crisis to me. I think I'm pretty smart, but like a lot of Americans, a) I don't pay enough attention to economic news, and b) I find a lot of economic/financial stuff difficult to grasp or at least mind-numbing. But I owe it to myself and to the health of my country to try to understand--even if this realization does come a little late.

Pamela Kemp of the great blog, Pam's Coffee Conversation, is a financial layperson who has been researching the economy for five years. She says "I make no pretense of being an authority," but through several posts on her blog she has broken the subject down in a way that folks like me can understand, citing relevant sources for more information. I have found that invaluable. A recent two-part series on Pam's Coffee Conversation tackles the "no one could have ever seen this coming" meme that even a financial novice like me recognizes as B.S. Read part one of the series below and head over to Pamela's blog for part two.

Pamela has also agreed to join me for the next episode of The Best of What Tami Said, at 4 p.m. EDT, this Sunday, March 22. Be sure to listen (and call) in. If you have some economic acumen and would like to join the panel, e-mail me at whattamisaid@gmail.com.]

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Saying "No one saw this coming" just doesn't ring true--Part 1 of 2


If you've been listening to the news coverage of the current economic crisis over the past few weeks, you've probably heard variations of one phrase repeated over and over and over again.

"No one could have seen this coming!"

"No one could have predicted this!"

"Who could have imagined that things would have gotten this bad."

Sounds true but there's one big problem. It isn't.

Saying that no one could have predicted the current economic crisis has the same hollow sound as the statement that no one could have predicted that Hurricane Katrina would have devastated New Orleans. Anyone who made the latter statement simply chose to ignore that Pulitzer Prize winning writer, John McQuaid predicted much of what happened during Katrina, three years before it happened, in his 2002 series for the Times Picayune, Washing Away. They are also ignoring the fact that, at least a decade earlier, conservationists and environmentalists warned that the destruction of Louisiana's barrier islands could lead to the devastation of a city that is below sea level.

So, I simply don't buy that no one in Washington or on Wall Street saw the economic crisis coming and you shouldn't either. As the saying goes, that dog won't hunt.

The economic indicators were certainly there. It's just that no one was paying attention, or cared, when it was only the canaries that were dying. It's also not a stretch of the imagination to believe that there were individuals and industries, (like banking and oil for example), who intentionally milked their cash cows dry before they sent them to slaughter.

Think that this is all conspiracy theory mumbo jumbo?

Let's look back.

In June 2004, The Economic Policy Institute (EPI) published the following information in their JobWatch Bulletin.

Record-breaking job loss continues for women

The 2001 recession inaugurated the only period of sustained job loss for women in the last 40 years. Women workers lost over 300,000 jobs between the start of the recession in March 2001 and March 2004, a 0.5% decline in their employment level.

Bush Administration's tax cuts not fulfilling job creation promises

The Bush Administration called the tax cut package, which was passed in May 2003 and took effect in July 2003, its "Jobs and Growth Plan." The president's economics staff, the Council of Economic Advisers, projected that the plan would result in the creation of 5.5 million jobs by the end of 2004 — 306,000 new jobs each month, starting in July 2003. The CEA projected that, starting in July 2003, the economy would generate 228,000 jobs a month without a tax cut and 306,000 jobs a month with the tax cut. Thus, it projected that 3,366,000 jobs would be created in the last 11 months. In fact, since the tax cuts took effect, jobs have grown by 1,365,000 — two million fewer jobs than the administration projected would be created by the enactment of its tax cuts.

Greatest sustained job loss since the Great Depression

Since the recession began 38 months ago in March 2001, 1.3 million jobs have disappeared, representing a 1.0% contraction. The Bureau of Labor Statistics began collecting monthly jobs data in 1939 (at the end of the Great Depression). In every previous episode of recession and job decline since 1939, the number of jobs had fully recovered to above the pre-recession peak within 31 months of the start of the recession. The picture is worse for private-sector jobs, which have dropped by 1.9 million since March 2001, representing a 1.7% contraction."

One month later, in July 2004 EPI reported that several states were still experiencing significant job loss and no signs of recovering from the 2001 recession.

"Over three years after the start of the recession, and 31 months into the official economic recovery, most states still have not recovered the jobs they lost. Thirty-one states have fewer jobs than when the recession started, and the shortfall is widespread, from Iowa (-27,300 jobs) to Washington (-13,000), and from Texas (-103,300) to Michigan (-213,300)."And while the Democrats and Republicans were busy replaying the Viet Nam war debate, New York Times columnist Eduardo Porter published an excellent article on the impact of skyrocketing healthcare costs on the job market.

In his August 2004 article, Rising Cost of Health Benefits Cited as Factor in Slump of Jobs, Porter wrote:

"Government data, industry surveys and interviews with employers big and small indicate that many businesses remain reluctant to hire full-time employees because health insurance, which now costs the nation's employers an average of about $3,000 a year for each worker, has become one of the fastest-growing costs for companies.

Health premiums are sapping corporate balance sheets even more
than the rising cost of energy."


Of course, in 2004 no one thought that any of these situations would last. Or did they?

Moving on to 2005.

In March, 2005 Nobel Prize Winning Economist and New York Times Columnist, Paul Krugman wrote an article, The Debt-Peonage Society, in which he discussed the best bankruptcy bill that the banking industry could buy.

Krugman wrote:

"The credit card companies say this is needed because people have been abusing the bankruptcy law, borrowing irresponsibly and walking away from debts. The facts say otherwise.

A vast majority of personal bankruptcies in the United States are the result of severe misfortune. One recent study found that more than half of bankruptcies are the result of medical emergencies. The rest are overwhelmingly the result either of job loss or of divorce.

To the extent that there is significant abuse of the system, it's concentrated among the wealthy - including corporate executives found guilty of misleading investors - who can exploit loopholes in the law to protect their wealth, no matter how ill-gotten.

One increasingly popular loophole is the creation of an "asset protection trust," which is worth doing only for the wealthy. Senator Charles Schumer introduced an amendment that would have limited the exemption on such trusts, but apparently it's O.K. to game the system if you're rich: 54 Republicans and 2 Democrats voted against the Schumer amendment.

Other amendments were aimed at protecting families and individuals who have clearly been forced into bankruptcy by events, or who would face extreme hardship in repaying debts. Ted Kennedy introduced an exemption for cases of medical bankruptcy. Russ Feingold introduced an amendment protecting the homes of the elderly. Dick Durbin asked for protection for armed services members and veterans. All were rejected.

None of this should come as a surprise: it's all part of the pattern."

It was the Krugman op-ed and Mark Trahant's article for the Seattle Intelligencer in April, 2005 that really started helping me connect the dots.

In his article, The Economy is Based on Borrowing, Trahant reported:

"Where you see the effects is in the shrinking paycheck of median household income. In real dollars, the median household income has declined $971 in 2001, $502 in 2002 and $63 in 2003 -- a cumulative loss of $1,536.

Health insurance has declined for all wage groups -- and pension coverage is shrinking, too, down from more than half of all workers in 1979 to about 45 percent in 2002.

How does a family pay for all these wage and benefit cuts? We borrow more.

Nearly 18 percent of households showed a zero or negative net worth in 2001 -- and government figures show that many families are paying 40 percent of their income just to keep up with their debt.

It's also true that home ownership rates are on the rise but the debt side of that picture is troublesome, too. Last week, a mortgage association reported that 36.6 percent of mortgages are based on adjustable rates. As interest rates go up, so will debt obligations -- and the risk of insolvency for any family already on the edge."

You didn't have to tell me about living on the edge. I was there.

My employer was outsourcing jobs, increasingly taking advantage of the H1B Visa laws, cutting overtime hours, hiring temps instead of filling full-time positions, cutting benefits, expecting a lot more and reminding you constantly of how easily you could be replaced. While this was going on, our house decided that everything old would breakdown, a parent was diagnosed with a serious illness, and the stress of all of the above left me with diagnoses of carpal tunnel syndrome, possible fibromyalgia, stress-related pulmonary hypertension and lots of medical bills. Yes, I know about teetering on the edge.

Of course, all of those hours spent in doctor's offices weren't wasted. I caught up on my reading. So by the time I read EPI's January, 2006 State of the Union report I wasn't surprised. The report referenced Ross Eisenbrey's article, "What's Wrong With the Economy", which cited the following:

Profits are up, but the wages and incomes of average Americans are down.

More and more people are deeper and deeper in debt.

Job creation has not kept up with population growth, and the employment rate has fallen sharply.

Poverty is on the rise.

Rising health care costs are eroding families' already declining income.

At this point, corporate profits were up and executives were making record salaries and bonuses. The rich were getting richer while the middle class was on a downward slope and the poor were getting poorer. You don't have to be able to understand Einstein's theory of relativity to understand that something was amiss.

In February, 2006 New York Times reporters Vikas Bajaj and Ron Nixon reported on the troubling rise in foreclosures among minority homeowners.In their article, For Minorities, Signs of Trouble in Foreclosures they reported:

"President Bush cites rising minority ownership as a milestone achievement under his "ownership society" programs.

But hidden behind such success stories lies a disturbing trend: in the last several years, neighborhoods with large poor and minority populations in places like Cleveland, Chicago, Philadelphia and Atlanta have experienced a sharp rise in foreclosures, in some cases more than a doubling, according to an analysis of court filings and other housing data by The New York Times and academic researchers.

The increase in foreclosures could be the first of a wave of financial distress for many minority homeowners, experts say, because they are twice as likely as whites to have taken out expensive subprime mortgages, most of which will jump to higher interest rates in the next two years, according to an analysis of data that lenders disclose under the federal Home Mortgage Disclosure Act."

Canaries were dying in the coal mines. Was anyone paying attention?

This was 2006. Banks were still extending credit, people were still "flipping" houses and buying newer and larger cars, the oil industry was making record profits and Wall Street executives were raking in 9 figure bonuses--not salaries--bonuses. Not to be outdone, the pharmaceutical industry was marketing new diseases and the drugs to treat them. While war contractors in Iraq were building prisons that would never be used and sewage systems that did not connect to residential dwellings.

And in 2006, James Scurlock produced "Maxed Out", a documentary that would change the way the I viewed the economy and the banking industry forever.




Read part two

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