Skip to comments.Why is the Recession Taking So Long to End?
Posted on 06/26/2010 9:12:28 AM PDT by K-oneTexas
It seems like it is never going to end, doesnt it? It is getting to be Kind of a Drag, as the Buckinghams used to sing.
There are lots of reasons why this recession is taking so long to break out of. We happen to think that the Obama White House and Congress have played two very wrong cards in their efforts to turn around the economy: 1) excessive direct federal spending when a good jolt of business-targeted tax cuts would have jump-started the economy and 2) laying down a never-ending list of new humongous federal programs that will have to be paid one day with higher taxes on business, frustrating new investment and subsequent job creation.
But a friend of ours who worked in Washington for years in Congress and at OMB as an analyst pointed out a very important dynamic that many of us do not know about, which is why guys like him are now known as 'experts', because they worked inside the belly of the beast for so long.
His explanation helps to reveal clearly why this recession is stretching into multiple years instead of being just a brief 6-12 months setback as in past recessions for most people.
It all has to do with the Federal Reserves balance sheet (click on link) which I first raised to peoples attention earlier this year.
Oddly enough, this gentleman told us the following story on the same day that another friend called to say: I am finally retiring from the Fed after decades of public service this year. God Bless America!
And he was the one who told us about how the balance sheet will be reduced like just so many digits on a computer game screen that all the younger people can do blindfolded several months ago.
Anyway, here is what is really going on about why this recession is lingering on, and on, and on according to both of these guys:
There is very little, in fact, scant discussion being given to the now $2 trillion-plus Federal Reserve balance sheet.
While real estate and commercial property assets put on the Fed books were a boost to the economy when bought during the meltdown of 2008-09, because that injection of money at least arrested the rapid rate of decline in real estate values, we are now faced with the "drag" of those very same toxic assets being paid down by borrowers.
When the Fed bought mortgages from the collapsing banks, they put $1.5 trillion (created out of thin air) into the economy which was paid to bondholders, developers, realtors, closing attorneys, appraisers and so on and then this money was reused to pay grocers, department stores, buy cars etc. by these same people.
The good old multiplier effect and velocity of money phenomenon. All the things we should have learned in high school economics classes. Money invested into something gets used to pay people who use that money to buy other things. The very life-blood of a healthy, vigorous economy based on private sector investment and activity.
Back in the good old days, this is what happened when people took a loan out from their friendly neighborhood bank (remember them?), bought a house and furniture and appliances and all that money got circulated throughout the local economy and kept people employed for decades at a time.
Today, things are much different. An owner of a mortgage now owned by the Federal Reserve earns a living (hopefully he/she is still gainfully employed), and makes a $2,000 per month mortgage payment. Of that, say $400 goes to taxes. The remaining $1,600 goes to pay principal and interest, both of which now go to the Federal Reserve who holds their mortgage, NOT the local bank.
The "drag" on the economy happens after the employer pays salary to the same employee who then uses $2000 per month to pay for the house mortgage; $400 to taxes, $1600 to principal and interest. Instead of being "multiplied" in the economy by 2:1, 3:1, or 4:1 by going to the local bank, re-lent, spent at a grocery store or used at a local department store by others, that $1,600 now goes into the abyss at the US Federal Reserve as loans are paid down to zero.
And this money is never to be seen again.
The Fed is not a commercial lending institution. Its primary function in life is to provide a solid and sound currency for the US economy and grow the money supply in a responsible manner to account for a growing population base and (hopefully!) a growing economy again one day.
The money now paid to the Fed evaporates as the Federal Reserve sheet declines in balances. As these loans are paid down, they are not recycled through the economy in the form of new loans. They are deleted like so many digits in a computer video game once again!
Who says video games are stupid and a waste of time and talent? You might be able to get a high-paying job at the Fed pushing buttons all day long deleting these assets it seems to us. It might be a lifetime job, sad to say, based on the enormous amount of personal and commercial real estate mortgages that need to be cleaned up nowadays.
Some experts now expect that reducing the Federal Reserve balance sheet of mortgages will slow the economy by perhaps 1% of GDP (from where it would have been otherwise) while they are paying it down over the next what? 3 years? 5? Please dont say 10.
With a GDP still over $14 trillion in value, still larger than China with its billion+ people by a factor of 3, that drag on the economy represents job loss and production/service value loss of close to $140 billion per year in 2010, 2011 and beyond. If we had that sort of extra growth in the economy instead of 'wasting' it paying down problem loans, a lot of people would be able to get back on their feet and keep more businesses from going under.
It is also quite clear to see why the Fed is reluctant to sell the mortgages they now own into the current depressed real estate market. Such a glut of new assets on the market would drive an already depressed real estate market down even further and faster. It would cause even a larger abyss of economic activity lost.
Fortunes delayed; jobs not created.'
So there really is no silver bullet or magic carpet ride to get us out of this current situation, ladies and gentlemen. We are just going to have to hold tight and let the Fed work off its inventory of excessive assets before things will get better.
In the meantime, you college grads, you might want to apply for a job at the Fed and use your video games skills to delete all these loans when paid. They might be able to use your services tapping away at these digits on a screen for years.
Because of Bush of course.
Because if government intervention and regulation.
The recession is dragging on because we lack leadership in the White House. Few people have any faith that the current resident has the knowledge ability leadership to solve any problems we have and many think that most everything he does makes things worse. Not a recipe for getting out of a recession.
recession almost over and the GREAT DEPRESSION IS ABOUT TO START!
Central planned economy based off consumption. Throw in high private and public debt burdens, taxes, budget, nation building, illegals, etc. and people expect something else?
Who said it was going to end?
The economy is not going to rebound any time in the near future, because every business owner and worker in America knows that our taxes are going up out the wazoo at the beginning of next year.
Very simple. It isn’t getting better. Obama and crew are spending all of their time lying and cooking numbers. Go change a hundred for five twenties...odds are at least one of them is what would used to be called a ‘misprint’. Uneven printing on the page (lop sided), won’t go through an automatic bill acceptor, etc. They are printing worthless scrip so fast they can’t even keep up the quality control....it is that bad.
Next year will make this year look like an expansion. Taxes are going up next year so business has brought profits into this year and at low taxes. Nest year will be really bad.
We have a communist regime in power in washington DC.
The leadership in DC is anti business, anti success, anti capitalist, anti free market, anti free and fair trade.
The only thing they are pro for is taxes and the growth size and scope of government power and of government spending, creating huge new government bureaucracies.
All of these things are recipes for economic disaster as Jimmy Carter learned the hard way in his presidency.
All is going according to Big Brother’s Plan.
The capitalist American economy is scheduled for collapse in 2011!
When it does, all Comrades will have to depend on the Ministry of Plenty for their rations, as well as their jobs.
A GLORIOUS AGE about to dawn...
The Age of Big Brother.
Think it’s bad now ? Wait till next year .
I hate to break this news, but it’s barely begun.
Obama and Company and Congress.
How can anyone expect a recovery under those circumstances.
Prices are higher for electricity, food, gas & everything else - so normal sane people & small businesses - unlike the politicians - are cutting back on their spending.
Not to mention paying down their individual debt as much as they can and as much as possible not to incur any more debt in the near or far future (unlike government).
Worse than you think.
The civil war will very likely break out in 2011.
All healthy countries have a civil war as the Communists attempt to take control.
It’s like the HIV virus attacking a healthy body that fights back and attempts to rid itself of the deadly virus.
Sometimes with success...
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