The Unpredictability of Life

For those who are visually minded—here is a collection of “27 Visualizations and Infographics to Understand the Financial Crisis.”  Click on any one of them to bring them to full, readable size.

While entertaining, they also make a point that mainstream economists seem to want to deny: this crisis was not a surprise.  That is not to say that anyone could have predicted its starting date.  Rather the growing inequality, debt, and housing bubble all pointed to an eventual day of reckoning.  In short, we are experiencing a structural crisis and meaningful solutions are going to require significant structural change.

Contrast this understanding with Federal Reserve Chairman Ben S. Bernanke’s recent commencement address at the Boston College School of Law which stressed the theme of “the inherent unpredictability of life” and how we need to learn to “deal with that reality.”  Translation: we don’t want to change the system so you better learn to adjust to far worse living and working conditions.

I wonder how many applauded.

Green Shoots

Anybody see the so-called little “green shoots” of economic recovery?

For more charts–including ones on industrial production and capacity utilization–showing the same downward general trend read: “Nonexistent ‘pre-recovery’ in Manufacturing Suggests US Treasuries a Buy.”

Making The Housing Crisis Real

If you are having trouble imagining the extent of the housing crisis, try these census bureau numbers (as reported by U.S.A. Today):

• A record 1 in 9 U.S. homes (14 million housing units) are vacant, “a glut created by the housing boom and subsequent collapse.”

• That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied only part of the year.  The combined vacancy rate is almost 15%.  This is higher than previous recession peaks: 11% in 1991 and 9.4% in 1984.

• Homes priced at $500,000 or more are just as likely to be empty as homes that cost less than $100,000.

Now try these numbers from the real estate website Zillow (as reported by the Los Angeles Times):

• Approximately 22% of American homeowners now owe more on their property than it’s worth.

• U.S. home prices were down 14% in the first quarter of this year compared with the first quarter last year.

• Those who bought their homes during the height of the bubble are in the most trouble; nearly 60% of mortgages issued in 2006 are now underwater.

A lot of personal tragedies lie behind these numbers.  They also mean growing state and local government budget shortfalls with negative consequences for far more people.

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The Chrysler Bailout And The UAW

The media is making a determined effort to present the Chrysler bailout as a real boon for UAW members even if it means playing fast and lose with the facts.

For example, we are told that the UAW will own 55% of the new Fiat-Chrysler company stock, suggesting that the workers will really be running the company.  The truth is that this stock will be held by an independent retiree health fund—not the union.  The UAW will have only one of nine seats on the board of directors.

For a reality check, let’s look at things from a worker perspective.

First, thanks to Doug Henwood (editor of Left Business Observer) you can read what Chrysler workers received from the UAW leadership.  The leadership is clearly trying to put the best face on a bad deal.

Then, you can read an assessment of the contract by a retired UAW member.  Some highlights:

• Retirees will lose all dental and vision coverage as of July 1, and perhaps all health coverage in six years

• There will be a wage freeze until 2015.  All new workers hired until that date will be paid $14 an hour (with no raises possible until 2015)

• Work breaks will be reduced from 16 minutes to 13 minutes

• Workers will not be allowed to vote on future contracts until 2015—that should tell you everything you need to know

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Unemployment–Making Sense Of The Numbers

The April (U-3) unemployment rate hit 8.9%.  That means some 13.7 million people are now officially unemployed; 27.2% have been out of work for more than six months (a record high).  The more comprehensive (U-6) unemployment rate reached 15.8%.  That is a lot of people and a lot of suffering.

Despite the gloomy numbers, analysts keep telling us that things are getting better.  As the New York Times put it: “the deterioration [in the unemployment rate] was slightly milder than expected, buoying hopes that better days are approaching.”

Before getting out the credit cards remember that most of these analysts denied the existence of a housing bubble and once it broke have consistently downplayed the seriousness of the resulting crisis.

With that in mind, let’s take a closer look at the current unemployment numbers, those “milder than expected” ones.  As Dean Baker explains,

The economy lost another 539,000 jobs in April, down from an average of 680,000 over the prior five months. . . . When making comparisons with prior months, it is important to remember that there has been a consistent pattern of sharp upward revisions to job loss numbers in subsequent reports. The number of jobs lost in February and in March was revised up by 66,000 in this report. On average, the initially reported job loss for the last five months has been revised upward by 86,200 in subsequent reports. If the April job loss is subsequently revised upward by a comparable number, then the rate of job decline, apart from the census workers, will be the same as the average for the prior five months.

You may be wondering about Baker’s reference to census workers in the quote above.  Well, one of the main reason that these numbers look better is that the federal government added 66,000 jobs in April, mostly because of the upcoming 2010 census.

In sum, we are far from out of the woods.  And in the meantime our safety net is anything but adequate.  Only 36% of the unemployed are receiving unemployment benefits and as the percentage of long term unemployed grows this coverage problem will grow worse.

Not surprisingly, as the Daily Kos reports:

For the fourth time in five months, enrollment in the food stamp program, now called the Supplemental Nutrition Assistance Program, exceeded the previous record. The government reported Thursday that 32.55 million people received food stamps at the latest count. The average monthly benefit is $112.82 per person.

This is not the time for patience.  Economic recovery is going to require more aggressive action to create well-paying, secure, union jobs that are designed to produce the goods and services we need.

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Grade Inflation

The government is working overtime to convince us that the banking system is now stable and the economy poised for recovery.  It just isn’t so and this continuing effort only delays the kinds of discussions and debates needed to fashion a useful recovery strategy.

So far according to Bloomberg news, “Government loans, spending or guarantees to rescue the U.S. financial system total more than $12.8 trillion since the international credit crisis began in August 2007.”

That is a lot of money and we have gotten relatively little for it.  The Treasury Department’s survey of lending by the nation’s biggest banks revealed that “Bank lending to consumers and businesses for many types of loans fell in February despite the billions of dollars in government support the banks received. . . . While the median level of activity in mortgage lending rose 35.4 percent and home equity lines of credit grew 17.7 percent, lending to businesses for commercial and industrial loans plunged 47 percent.

The government has now completed its stress tests on the country’s 19 largest banks.  The tests were designed to reveal whether the banks had adequate capital.  The tests themselves quickly became suspect when the government announced that it was sure all the banks would pass.

In fact, its criteria for measuring stress are inadequate because conditions have been rapidly deteriorating.  For example, as reported earlier, its baseline scenario included unemployment rates of 8.4% in 2009 and 8.8% in 2010.  We are way past that.

The banks will pass not only because the stress levels are too low, but also because the government has relaxed the standards banks must use for valuing their assets.  Most importantly it is now allowing banks to use their own models rather than the market to determine the value of their toxic assets.

Passing grades are getting easier, but that doesn’t mean that economic conditions are really improving.

The Chrysler Bailout

According to the New York Times the Chrysler bailout puts the UAW in the “front seat.”  Who is kidding whom?

As illustrated in the above Wall Street Journal graphic, the UAW retiree health fund will own 55% of Chrysler stock.  This sounds impressive until you know the real story.  Several years ago Chrysler, in a cost cutting effort, negotiated an agreement with the UAW to free itself from paying for retiree health care.  It agreed to put tens of billions of dollars into an independent fund which would be responsible for managing retiree health costs going forward.

That was the plan.  But Chrysler hasn’t yet paid the money.  The new arrangement has the firm providing the health plan with stock rather than the promised money.  Retired workers aren’t happy.  It is important to emphasize that it is the independent health fund (which is not managed by the UAW) that will own the stock, not the UAW.

Who is in the drivers seat becomes clear when one looks at the proposed board of directors for the new company.  As the Wall Street Journal explains: “The U.S. government will name four Chrysler board members, Fiat will name three, the UAW one and the Canadian government one.”  The UAW gets only one seat despite the fact that, as the above graphic also shows, it is the UAW that will be contributing the greatest amount of money (from wage, benefit, and pension concessions).  Fiat, which is providing no money, will run the new company.