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...
It’s taking so long because the left has no intention for it to end. This is by design. Anyone who thinks this administration, or any left-winger, wants prosperity and growth, anyone who thinks that is truly deluding him or herself.
We are bursting a debt bubble that built up over 20 years. Most of this debt is long term debt like 30 year mortgages. The only way this could get fixed quickly is a mass bankruptcy/default and start over, but this was not done due to the systemic pain involved. We have chosen the lost decades way.
It has to do with debt. We spent the last 30 years running up our debts (as indiviudals). And that’s not even including our ever expanding share of the Govenment’s debt. Sadly, our stupid Government thinks the debt will go away if we import enough illegals in to pay it off. Yeah, right.
To summarize: The Obama Regime is anti-life.
The solution is less government spending, less regulations and huge tax cuts for businesses and individuals. Reserve the silver bullets for the blood sucking vampires that make up the inside-the-beltway liberal elites.
Think its bad now ? Wait till next year .
This isn’t a recession. This is “normal” from now on. America is entering its “1970s Britain” phase.
I can, for the recrod, say the Depression started last week.
When I lost MY job.
OTOH, I was looking for work when I landed that gig and so I will again.
Give Obama time - sending an economy as strong and resilient as our's into a depression is hard work.
recrod = record
need more coffee too early.
When we came out of the recession of the early ‘80s, we were getting post-recession quarterly growth rates of 6 and 7 percent. That’s because Reagan cut taxes. Now, we’re getting anemic growth rates of 2.7 percent, because everyone knows that taxes are going up.
There's the dark cloud's silver lining.
Because at every opportunity the Obamb administration is not only doing the exact opposite things to those that would strengthen and accelerate the recovery, but also doing the exact things that will MAXIMIZE the length, severity and pain of the Great Recession.
I think the idea is to destroy the USA.
America’s worst enemy is its own Imperial Federal Government.
The only question is will we Patriots allow it to happen?
The Obama Regime is betting that we sit fat, dumb and happy until it’s too late.
Question: If the Feds rule as if the U.S. Constitution is a dead letter, does this not indicate a dictatorship already in power?
Sometimes you can read a book that will change your mind on some fundamental issue. Rarely, however, is there just one page that can undermine or destroy a widely-held belief. But there is such a page-- page 77 of the book "Out of Work" by Richard Vedder and Lowell Gallaway.
The first battle will be this fall and there will be many victories. I suspect that Obama only has 1 1/2 years in office before Pelosi trys to take over.
Is a "wazoo" similar to a "ying-yang"?
Bush may be a stretch, but certainly Halliburton has had a hand in the lengthy delay. Maybe someone should write a note Barney Frank.
Speaking from PA., there are going to be thousands and thousands of families wiped out financially. Our "rate caps" are coming off for energy; were looking at a 50% increase in our energy bills. Couple that with the Bush tax cuts expiring and Obie-care going into play; its going to be desolate.
I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.
This was not based on data, but rather on research which shows that tax cuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama's head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion.
If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession - at least the way I see it.
WHO trusts this government? Where is the confidence?
Business people have zero, see too much risk, thus cannot plan in the instability....
Employees get affected, unemployment rises, people get hurt.
Yeah oh yeah, marxism ~ Obamas fix, where bigger government is the employer.
The pipples see this man destroying America...thus all are affected.
I look forward to those DumBO voters having to work three jobs for the next 50 years to pay for my retirement today.
Ouch! you're killin' me. I am trying to stare at this future and I feel blahhhh!
Just make sure it gets done in the right order. FIRST, less government spending & regulations w/promises of future tax cuts, THEN begin broad tax cuts when at least a glimmer of optimism for the future kicks in. Tax cuts first with darkness & gloom still on the horizon will do little to stimulate economic growth. It will instead go to pay down debt & add to savings as corporations & individuals use it shore up their finances for a future expected onslaught. If we want tax cuts to be reinvested back into the economy to spur geometric growth, get the spending & regulatory roadblocks out of the way first. Kind of like getting our border w/Mexico locked down first, before even thinking about immigration reform.
Just make sure it gets done in the right order. FIRST, less government spending & regulations w/promises of future tax cuts
Anyone so easy to fool can not participate in our constitutional republic.
THE NEXT BIG ECONOMIC CRISIS
by DICK MORRIS
Published on TheHill.com on June 22, 2010
Many say that the situation in Greece is a harbinger of what is coming to the United States. They are right. But first it will come to states like New York, California and Michigan that are stretched way beyond their means and deeply in debt.
Until now, the problems in these states have been papered over by federal aid. Essentially, Washington has relieved these states (and the local governments they fund) of their constitutional obligations to balance their budgets by giving them welfare checks in the nick of time. Obama now seeks to pass $50 billion in additional welfare to the states.
But since these federal funds are not necessarily recurring — and the jobs and obligations they fund are — they simply enlarge each year’s deficit hole and enable the states to go more deeply into the red.
As these deficits mount — particularly if a newly elected Republican House and/or Senate refuse to fund them — bondholders will get more and more nervous. Eventually, they will realize that the less solvent states are bankrupt and will refuse to buy their debt. Eyes in Sacramento, Lansing and Albany will turn helplessly to Washington to guarantee their debt, just as Athens turns to Berlin.
Republicans, if they control either or both Houses, should stand firm and insist that these states sink or swim on their own. America’s taxpayers will not take kindly to having to bail out other states — or even their own — to pay for years of reckless spending. Americans will swarm to the GOP and will hail its stand.
The time is long past when a local newspaper can generate sympathy — even from its own readers and the state’s own citizens — with a headline like “Ford to New York: Drop Dead.” Now people in other states (and even in the affected state) would stand up and cheer should the Republicans take so strong a position.
There is currently no legal procedure for a state government to go bankrupt. Congress, especially if it is Republican in 2011, should pass a mechanism that permits states to discharge in bankruptcy their collective bargaining agreements and contracts with municipal unions. Of course, this procedure would have to let school boards and local governments do likewise.
Obama will veto this bill and a stalemate will ensue.
On the left will stand Obama, the unions and the Democrats demanding bailouts for the states and, truly, an end to our federal system of government. Once Washington guarantees state debt and spending, there will be no more state governance, only national rule.
On the right will stand a Republican Congress refusing to do so unless the states declare bankruptcy and cleanse themselves of the union agreements that got them into trouble in the first place. The GOP will point out that state funding is leaking as surely as the Deepwater Horizon oil well and polluting our nation’s balance sheet as badly in the process.
The money will run out. States, school boards and localities will stop sending out checks. Emergency state funding may keep schools open, prisons locked and police and fire services running, but otherwise all hell will break loose.
Something will give in this national game of chicken. If it is the states and Obama that blink first, we will free our local governments of the grip of municipal unions, their rigid work rules and their unaffordable pensions. If the Republicans blink first, they will forfeit their right to represent the American people, having backed down from the challenge of our times.
This Armageddon looms in 2011, presenting us with either an opportunity to reform our government in fundamental ways or to set in stone our path to an Athens-esque meltdown.
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DESPERATE OBAMA MOVES LEFT
By DICK MORRIS & EILEEN MCGANN
Published on DickMorris.com on June 21, 2010
Drowning in oil, the Obama Administration is pulling out all the stops to halt the hemorrhaging of liberal support which is driving his ratings down to the low 40s—previously unexplored territory.
Obama has already lost all the Republicans and almost all of the Independents. But he has kept his head above water with the solid support of liberal Democrats and African-Americans. But now that the Gulf oil spill enters its eighth week, with no sign of abating, he is shedding Democrats. Rapidly.
It is not that the gushing oil will drive a single Democrat to vote Republican. The GOP’s strong support for off shore drilling will bar such switches. But the increasing image of incompetence, arrogance, conceit, aloofness, and poor management skills may induce millions of Democrats to stay home during the midterm elections of 2010.
The oil spill will not cost Obama the presidency in 2012. It is too far away for that. But it may be a big part of his losing Congress this year.
To forestall this possibility, the Administration is sending every possible signal to the left of its fidelity. To assuage the environmentalists, it is pushing new energy legislation, possibly resurrecting the cap and trade proposal. To bring back Latinos, he is espousing immigration reform, a cause he never got around to pushing until now when he needs their votes desperately. He has Rahm Emanuel out there knocking Republican Congressman Joe Barton of Texas for his knuckle-headed defense of BP. And he may be preparing to throw Rahm to the wolves and force his resignation as a sop to the leftists who feel that his pragmatism has hijacked the Administration.
But none of these measures will stop the gushing of oil.
Obama acts as if he and BP are in a zero sum game where the company’s loss translates into his gain. But BP is not his opponent. Building up the company’s negatives won’t help Obama keep control of Congress. And flagellating it in public will make people feel good, but it will just serve to emphasize the fact that the oil is still gushing.
Confronting a crisis that they cannot solve, presidents have a choice: Move the national attention to other issues even at the risk of appearing unconcerned or uninvolved in the crisis or focus on the crisis to prove that you care and are working hard to resolve it.
Clinton chose the first response to the Lewinsky/impeachment drive. Carter opted for the second in the Iran hostage crisis.
Now Obama appears drowning in oil. He can’t change the subject. He can’t stop the spill. Even his attacks on BP just serve to keep the oil at the top of the national agenda. If he moves on to other issues, he risks alienating the environmental left by appearing to let the oil gush while he turns his back.
To the right and the center, the oil spill is a management issue, indicative of Obama’s lack of administrative experience. Community organizers and law professors don’t know how to handle oil spills. But to the left, it is an environmental issue pure and simple. Each barrel of oil that flows into the Gulf is a sin against nature and alienates those for whom environment is the key issue. And Obama can ill afford to lose them.
So Obama is stuck, drowning in oil with no relief in sight.
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