Thursday, February 12, 2009

We Have Met The Enemy...and It Is Us.

First the stock market...

After the stock market stumbled to the best test yet of the late November 2008 lows, traders experienced a major bounce off today's lows to close largely even for the day. If you're a technician, however, the afternoon bounce wasn't all that significant, with still substantial volume in the day's declining stocks. Yes, the technology-heavy NASDAQ market saw a much greater proportion of its volume in higher trading stocks. However, this is all "technical stuff" and reflects less the current or even future status of the economy.

Market analysts continue to lag reality with their rosy forecasts for corporate earnings, so many stocks look inexpensive. But, as usual, aren't they missing the greater picture here?

Now the broader outlook and the "Enemy"

3.6 million jobs lost over the past 13 months, about half of those in the past three months. There is no evidence that the rate of job losses has reached bottom. And the employment picture does not account for the even greater numbers of part-time workers that want full-time work but cannot find it. Nor does it account for the millions that have simply dropped out of the workforce over the past several years...OK, over the past eight years.

Yes yes, economists will tell you, with significant justification, that employment is a lagging indicator of economic growth - or lack thereof. So no, we won't see the end of the "Great Recession" (I did not coin that name myself.) when we see the end of the current unemployment trend.

Here's the thing. Now follow me on this. Businesses lay off - fire - workers for two general reason: 1) demand for their products declines or is projected to decline; 2) a business' profits are declining or predicted to decline.

It is the latter that is so troublesome. We are caught on a seeming perpetual motion machine. Businesses respond to reduced demand, actual or projected, by firing workers. Firing workers further reduces potential demand for products. Firing workers places more mortgages and credit cards at risk. Increasing the pool of risky mortgages continues the pressure on home values. Increasing THAT pressure increases the risks of credit card delinquencies and defaults. All of this circles back to the banking and business communities, resulting in yet more firings. The downward spiral puts pressure on commercial real estate markets as a result of store closings and other business "downsizing," putting even more pressure on the banking system.

Now certainly, none of this is news to many readers. But it is to some.

So how do we get off the gerbil's treadmill? Hmmm?

Historically - well we do not have a lot of precedence for messes like this - governments intervene and spend money in an effort to a) maintain and create jobs, b) maintain or strengthen social safety nets, and c) stimulate the availability of capital for lending and investment.

President Obama will shortly sign into law "The Stem." While we can point to many aspects of it as "better than doing nothing" as the Republican Party would have us do - what else would you expect from them; they have a lot of experience doing nothing, going back to Herbert Hoover.

The Stem is loaded with ineffective tax cuts. Obama bought three needed Republican votes with those. The Stem is light on infrastructure investment. Yes, there is money for energy, roads, dams, yada yada. But is it sufficient to really make a difference? This commentator would love to believe so. But we need lots more than $789 billion, considering that more than $250 billion of the Stim is tax cuts. Any credible economist agrees that we get far more bang for the buck with actual spending as opposed to tax cuts. But Republicans are not very good students of facts. Hence the ridiculous magnitude of tax cuts in the Stim.

Oh, did I mention that if you are unemployed, you can look forward to receiving $25 a week more in unemployment benefits? $25? That just might pay for your gasoline while searching for those disappearing jobs, not to mention the ones that the Stim will not create thanks to the tax cuts.

If you are employed, you can look forward to $400 a year in tax cuts ($800 if you file a joint tax return). $400? Oh, that's about $14 a week. Heck, we can all return to Starbucks.

If you are receiving Social Security benefits, smile when you receive that one-time $250 extra super-duper bonus check.

And the latest? The rumors / news that rallied the stock market this afternoon? Our government is considering a plan to finally help struggling homeowners. While the details have not yet been formalized, it looks like the federal government may be going into the mortgage subsidizing business, not to mention credit card financing. As it stands at this hour, the Treasury may use part of the remaining TARP funds to subsidize those good ole' banks and reduce interest rates on deteriorating loans. They may even cram down principal values on those loans to reflect the collapse in home values. Oh all of this will be "standardized." So all banks will conform to the same set of standards when evaluating mortgages - assuming all of this comes to pass, of course.

Now I am all for FINALLY helping homeowners. Something in this regard is long overdue. You didn't, however, expect that George W. Bush and his pals would help anyone, did you? It was always up to Obama.

The problem is, sadly, this type of government-subsidized assistance - which could run into the hundreds of billions of dollars even if they are currently talking about $50 - $100 billion - can only serve to place an artificial floor on home values. When would it stop? Beyond the folks that will meet the standards for the program initially, we still have two issues. First, when does the flood of qualifying people end? Second, if you fail to qualify by just a skinny little hair of an actuarial formula, what then? Does the government modify its "standards" downward? And when does THAT stop?

I am not suggesting that I have a better solution. Fact is, no one does. We are swimming in uncharted waters.


One thing that does occur to some of us that think about these issues, though. What if, what if businesses that could actually afford it, public and private, maintained higher levels of employment even if it meant lower profits for their owners? Why do profitable businesses find it necessary to "downsize," to "rationalize their size," to "adapt to new economic realities?" More employment maintained, fewer mortgages and credit cards at risk, less stress on stressed health care and social services systems, more folks actually able to buy stuff.

So OK, my company (well not really mine) generates profits of only $100 million in 2009 instead of the possible $200 million - which, of course, is down from 2008's $400 million. But that $100 million keeps lots of folks employed. And there's a multiplier effect in all of it, as I think I've tried to outline.

And before I forget, I sure did get a chuckle out of those large bank CEOs testifying on Capital Hill the other day, largely suggesting that few, if any, people have had their credit card interest rates explode or credit lines cut since those very same banks took tens of billions of dollars from the TARP.

There is ample evidence that they, indeed, have done that, and done it indiscriminately. This becomes another perpetual motion machine. Slash lines of credit on folks, even if they are strong, consistent payers, and guess what? Their credit scores go down, making them appear to be higher credit risks. So they do not qualify for that new lower-cost mortgage or a new car loan. All thanks to the banks. The banks that our tax dollars are saving from insolvency.

Now not all business owners or managers are cruel. Some people do step up and work overtime to preserve jobs. But many, and I'm mainly talking about large employers here, just don't get it.

We Have Met The Enemy...and It Is Us.