Friday, July 30, 2010

‘Cash-in’ Mortgage Refinancing Becoming Popular

The Mortgage Corner

The so-called ‘cash-in’ mortgage has become more popular of late for a number of reasons. It means paying down the mortgage, which is the opposite of cash-out refinancing where borrowers are taking cash out of the equity in their homes.

The main reasons homeowners are doing cash-in refinancing are first, bringing the loan amount more in line with lower home values. But also homeowners find that paying down, say, a 5 percent mortgage more quickly means they are saving 5 percent, vs. the very low interest rates from regular savings.

Amy Crews Cutts, deputy chief economist for Freddie Mac, says "The Fed doesn't intend to start raising interest rates for a while...you're not going to make money in CDs. (And) The stock market is giving people heart attacks on a daily basis with its ups and downs."

Consumers are paying down their overall debts with a vengeance in these uncertain times, as we have said in past columns—in part because mortgage rates are now at all-time lows, with conforming and so-called jumbo-conforming 30-year fixed rates below 4.5 percent. Even super-jumbo rates to $2 million are hovering around 5 percent these days.

And it looks like housing prices are finally on the mend with the latest (May) seasonally-adjusted Case-Shiller Home Price index up 1.3 percent. Economists caution that it is measuring prices during the height of the selling season, but 19 of the 20 cities in the index showed increases.

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The Composite 10 is up 5.4 percent compared to May 2009. The Composite 20 is up 4.6 percent compared to May 2009. This is the fourth month with Year-over-Year price increases in a row.

Here are some reasons borrowers might consider a cash-in refinance, according to CBS Marketwatch:

· If it allows the borrower to stop paying private-mortgage insurance, required when the mortgage is more than 80 percent of the home's value. Extra cash could allow a borrower to eliminate PMI, saving them monthly premium costs.

· Borrowers want to reduce their mortgage term, perhaps moving from a 30-year to a 15-year fixed-rate mortgage, Hsieh said. The extra cash can reduce the mortgage amount and make their monthly payments bearable.

· When the extra funds may get a borrower the lowest rates possible -- those that require a loan-to-value ratio of less than 60 percent and a FICO score above 740, said Jack Pritchard, a mortgage consultant who co-founded Refinance.com, a site that helps borrowers evaluate mortgage and refinancing options.

· Extra cash can also sometimes bring a mortgage under the conforming loan limit so the borrower doesn't have to pay higher jumbo rates. The conforming limit is $417,000 for single-family homes in many markets, and $729,750 in high-cost areas of the contiguous United States.

In what may be another sign of an improving housing market, the homeowner vacancy rate declined to 2.5 percent in Q2 2010. A normal rate for recent years appears to be about 1.7 percent, according to Calculated Risk. “This leaves the homeowner vacancy rate about 0.8 percent above normal. This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 500 thousand excess vacant homes.”

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Note that the vacancy rate rose sharply from 2006 to December 2007, the beginning of the Great Recession, a sign of massive overbuilding that caused the housing bubble. But it has now fallen, though not yet enough to erase the inventory overhang above historical vacancy levels.

But a recovery is in the offing as the combination of record low interest rates, a Fed still in the mood to be accommodative for an “extended period’, and housing prices back to early 2000 levels should entice more buyers into a buying frame of mind.

Harlan Green © 2010

Where is Harry Truman—Part III?

Financial FQs

Most historians consider Harry Truman as one of our great Presidents, even though he didn’t consider himself as such. It wasn’t until later years showed the greatness of “give ‘em hell, Harry”, as he was called once at a whistle-stop during his 1948 presidential campaign that defeated the heavily favored New York Governor Thomas Dewey.

He faced tough economics times, as we do now, with an even larger debt load due to WWII, and 5 million servicemen/women returning home and out of work. He was also was faced with a Republican Congress in 1946, unhappy with the huge debt load. Sound familiar, as we said last week?

With so much uncertainty, he did what great Presidents do, he became a transformational leader, in the words of conservative columnist George Will. And he suffered the slings and arrows of disapproval for it. “The President is always abused. If he isn't, he isn't doing anything,” is one of his better-known ‘Trumanisms’.

What were the lessons learned? Daughter Margaret put together a book of his pithy sayings, in WHERE THE BUCK STOPS-The Personal and Private Writings of Harry S. Truman. Edited by Margaret Truman. 388 pp. New York: Warner Books, 1989.

Maybe his outstanding trait was that he was plain spoken—who grew up on a small farm in the heartland of Missouri. And he never left his roots, retiring back to his Independence in 1954. He never loved Washington, D.C., either. He once advised, "If you want a friend in Washington, get a dog."

''''A good president just can't pay any attention when the press tries to abuse him, Truman writes; ''the papers often abuse him when he's right. It doesn't bother any man in office who wants to do the right thing,'' he adds. ''He goes ahead and does it no matter what the newspapers may say. I never cared anything about what they said about me as long as they didn't jump on my family. If they did that, then they got into trouble.

''It doesn't make any difference whether or not the thing he (the President) decides to do is unpopular, or whether his doing it makes him unpopular for a while. If he does the right thing the popularity will come. If he doesn't, well, then, too bad.''

But that was just the surface. His economic philosophy mirrored Roosevelt’s New Deal, because he was always for the underdog. In fact, he won over Dewey because the pollsters who had predicted his defeat forgot to poll those lowest on the economic ladder who turned out in droves to vote for him.

And we have the same need now to boost the earning power of those wage and salary earners lowest on the economic ladder who comprise more than 50 percent of the workforce, yet whose incomes have stagnated after inflation since the 1970s.

Job formation has really been increasing since January, and real estate prices have inched up, but sales remain stagnant. This is while corporations have reported record profits over the last 2 quarters with the highest profit margins since WWII, yet they have not been investing in either new plants or employees.

And so government has had to step in to counteract the cash hoarding of some $1.8 trillion being held by the S&P 500 corporations alone. But why such a fear of debt, when the Great Depression has provided us with a lesson of what needs to be done to counteract such fears?

Economist Paul Krugman has pulled up some of the Great Depression’s history and surprise, the Hoover Administration’s emphasis on reducing deficit spending increased debt as a percentage of GDP, while shrinking actual GDP growth (and revenues). But increased government spending (and debt) during Roosevelt’s New Deal increased economic growth, so though debt loads were high, it brought the U.S. out of the 1929-1933 depression and produced 3 years of growth. The double-dip only returned in 1937, when Roosevelt listened to the bankers and tried to reduce the deficit prematurely.

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“The experience of the 30s,” writes Krugman, “offers no support to those who worry about the debt consequences of deficit spending in a depressed economy — FDR didn’t do enough stimulus, but the spending he did do was not reflected in a spiraling, or even rising, debt burden. And the evidence is consistent with the view that austerity, Hoover-style, may well be self-defeating even in a narrow fiscal sense.”

Supporting the present picture is weak growth of the Conference Board’s Index of Leading Economic Indicators, a monthly snapshot of 12 important indicators that affect growth, such as interest rates, and hours worked.

"The LEI decreased in two of the last three months, but its level is still about 4.5 percent above its previous peak before the recession began," said Ataman Ozyildirim, economist at the Conference Board. "Moreover, the gains among the LEI components have been widespread, with the exception of housing permits and stock prices, pointing to an expanding economy, but at a slower pace in the second half of the year."

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A major reason for continued sluggish growth is that real estate, the traditional first responder to better conditions has still to work off more than 1 million units in excess inventory built up over the bubble years. Total inventory peaked in 2006, but months of supply didn’t peak until 2008, as the sales’ rate declined drastically with bursting of the credit bubble.

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This increase in inventory is especially bad news because the reported inventory is already historically very high, and the 8.9 months of supply in June is well above normal.

So there is good reason for the Fed to continue to hold interest rates at record lows, and Chairman Bernanke has promised to do so for “an extended period” in his latest congressional testimony. "We are ready and we will act if the economy does not continue to improve -- if we don't see the kind of improvements in the labor market that we are hoping for and expecting," he said.

Harlan Green © 2010

Friday, July 23, 2010

Why Does The Fed Hesitate?

Popular Economics Weekly

Fed Chairman Ben Bernanke just gave his semi-annual report to Congress, and it looks like Bernanke and his Federal Reserve Governors continue to be cautious in advocating more stimulus.  He said that the Fed had more ways to add stimulus but at present no plans to implement them. That is too bad, when a consensus is building that more monetary stimulus is needed to put monies into consumers’ pockets with jobs still hard to find.

Why have the Fed governors been so timid? It has more to do with ideology, than economic fundamentals. Since many of the Fed Governors are former bankers, they dislike debt, and the Fed has had to buy more than $2 trillion in mortgage-backed and Treasury securities to add liquidity to the system. This has kept interest rates at historic lows, but has only begun to bring real estate and job creation out of their doldrums.

Job formation has really been increasing since January, and real estate prices have inched up, but sales remain stagnant. This is while corporations have reported record profits over the last 2 quarters with the highest profit margins since WWII, yet have not been investing in either new plants or employees. Bernanke in his latest Humphrey-Hawkins congressional testimony said that it was because corporations had too much excess capacity, (which means they see insufficient demand for their products and services).

And so government has had to step in to counteract the cash hoarding of some $1.8 trillion being held by the S&P 500 corporations alone, to help stimulate that demand. But why such a fear of debt, when the Great Depression has provided us with a lesson of what needs to be done to counteract such fears?

Nobel economist Paul Krugman has pulled up some of the Great Depression’s history, which shows that the Hoover Administration’s emphasis on reducing deficit spending increased debt as a percentage of GDP, while shrinking actual GDP growth (and revenues). But increased government spending (and debt) during Roosevelt’s New Deal increased economic growth; so though debt loads were high, it brought the U.S. out of the 1929-1933 depression and produced 3 years of growth. The double-dip only returned in 1937, when Roosevelt listened to the bankers and tried to reduce the deficit prematurely.

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“The experience of the 30s,” writes Krugman, “offers no support to those who worry about the debt consequences of deficit spending in a depressed economy — FDR didn’t do enough stimulus, but the spending he did do was not reflected in a spiraling, or even rising, debt burden. And the evidence is consistent with the view that austerity, Hoover-style, may well be self-defeating even in a narrow fiscal sense.”

Supporting the present picture is weak growth of the Conference Board’s Index of Leading Economic Indicators, a monthly snapshot of 12 important indicators that affect future growth, such as interest rates, and hours worked.

"The LEI decreased in two of the last three months, but its level is still about 4.5 percent above its previous peak before the recession began," said Ataman Ozyildirim, economist at the Conference Board. "Moreover, the gains among the LEI components have been widespread, with the exception of housing permits and stock prices, pointing to an expanding economy, but at a slower pace in the second half of the year."

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A major reason for continued sluggish growth is that real estate has still to work off more than 1 million units in excess inventory built up over the bubble years. Total units of housing inventory peaked in 2006, but months of supply didn’t peak until 2008, as the sales’ rate declined drastically during the credit crisis and failure of lending institutions such as Lehman Brothers and Bear Stearns.

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This increase in inventory is especially bad news because the reported 8.9 months of supply in June is well above normal.

So there is good reason for the Fed to continue to hold interest rates at record lows, and Chairman Bernanke has continued his promise to do so for “an extended period” in his testimony. "We are ready and we will act if the economy does not continue to improve -- if we don't see the kind of improvements in the labor market that we are hoping for and expecting," he said.

Harlan Green © 2010

Wednesday, July 21, 2010

When Will Real Estate Recover?

The Mortgage Corner

The real estate market looks to be in limbo, but there is optimism that growing pent up demand will prevail as the jobs market improves. Although new-home construction has been stagnant, it hasn’t fallen substantially, while commercial property values are beginning to recover.

Single-family housing starts were virtually unchanged from the previous month at a seasonally adjusted annual rate of 454,000 units in June. Meanwhile, a 21.5 percent decline on the more volatile multifamily side weighed down the overall housing production number, which fell 5 percent to a 549,000-unit rate.

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"As our most recent member surveys have indicated, builders remain very cautious in light of the sluggish pace of the economic recovery and the hesitancy they are seeing among potential home buyers," noted Bob Jones, chairman of the National Association of Home Builders (NAHB). "However, today's report is actually somewhat encouraging, because it indicates that single-family production is stabilizing following an expected lull that occurred with the end of the home buyer tax credit program."

Commercial real estate is also showing improvement, according to Moody’s, reaching its low point in January 2010. The Moody’s commercial same-property index has mirrored the Case-Shiller Home price Index improvement, which began its rise in March ‘09, but began its price rise 9 months later, in other words.

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U.S. commercial real estate prices increased 3.6 percent in May, the second consecutive monthly increase, as measured by Moody’s/REAL Commercial Property Price Indices CPPI. Commercial real estate prices in April rose 1.7 percent.

“We expect commercial real estate prices to remain choppy in the coming months,” said Moody’s Managing Director Nick Levidy in a release Monday. “The positive news of increasing prices over the past two months is tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession.”

Existing-home sales are also stagnant, and may have already experienced a minor double dip. Its future depends on the number of foreclosures still to happen, as a recent study said that in fact banks are selling more homes via REO sales than builders at the moment. Stats show that nationwide, in late 2006 new homes accounted for nearly 20 percent of all transactions, but in early 2009 the new home share was down to 14 percent, and starting in that month there were more REO sales in the preceding 12 month period than new homes sold. So for the last year and a half, banks have sold more houses than home builders, according to Calculated Risk.

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Existing-home sales were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2 percent from an upwardly revised surge of 5.79 million units in April. May closings are 19.2 percent above the 4.75 million-unit level in May 2009, so sales are still positive year-over-year.

The Obama’s Administration’s Comprehensive Housing Initiative has been helping to keep homes out of foreclosure. Its July joint report by HUD and the U.S. Treasury said record low rates have helped more than 7.2 million homeowners to refinance since April of 2009, “resulting in more stable home prices and $12.9 billion in total borrower savings”.

And, HAMP (the Home Affordable Modification Program) has helped over twice as many homeowners compared to foreclosure completions: Nearly three million borrowers have received restructured mortgages since April 2009, outpacing the 1.24 million foreclosure completions for the same period. As more families are able to remain in their homes, household assets continue to rise with $1.1 trillion in home equity gained since April 2009, said the report. A continuation of commercial real estate improvement will be a signal that businesses are recovering, as will job creation, which then will give a boost to residential sales as well.

Harlan Green © 2010

Sunday, July 18, 2010

Jobs, Jobs, and more Jobs Needed

Financial FAQs

Three new Federal Reserve Governors are up for confirmation that would fill out the Federal Reserve Board of Governors for the first time in years. And what are they saying? Surprise, surprise: “Fed Nominees Stress Job Creation,” was one of the headlines announcing their nomination by President Obama.

That is surprising because the Federal Reserve has since 1980 been fighting the specter (i.e, a ghost or phantom image, per Webster) of inflation. This is even though it has a twin mandate—promote growth (and jobs) while maintaining a stable currency (read low inflation rate). The two have come in conflict in the past, as when 1980 Fed Governor Paul Volcker raised the Fed Funds rate to 18.9 percent to dry out the double-digit inflation of the 1970s, causing two successive recessions (1981 and 1982).

And fighting inflation has had the upper hand ever since, which has resulted in the Fed raising interest rates at the drop of a hat, such as happened in 1994 that caused the Orange County bankruptcy, and job formation to suffer. The results are that job creation after the 1991 and 2001 recessions is the lowest on record.

Stanford economist Robert Hall, Chairman of the NBER business cycle dating committee, has attempted to explain why those two so-called modern recessions differed from the past, but comes up with no conclusive answer. “The facts are perplexing,” writes Hall in a recent Stanford paper, “employment falls at least as far as in past recessions, without identifiable driving forces.”

But Nobelist Paul Krugman has an answer in his blog. It is called demand-side (vs. supply-side) economic policies that have not been adequately utilized.

“One vision, which is the one I subscribe to, is basically an updated Keynesian view: sticky prices revised gradually based on unemployment and excess capacity, the possibility of persistent economic malfunction because people are trying to hoard cash rather than buying real goods. And this view also said that we were and are in a liquidity trap, in which things that might have been inflationary under other conditions — like a large expansion of the monetary base — weren’t at all inflationary under current conditions. In fact, the likely outlook was for falling inflation, and possibly deflation.

“The other vision was basically a crude quantity theory of money view: hey, the Fed is printing money, the government is running deficits, so high inflation, maybe even hyperinflation, is staring us in the face.”

“Sticky prices” refers to the theory that prices are slow to adjust downward during recessions. But that doesn’t mean that disinflationary, or even deflationary forces are not at work. And once they do begin to adjust downward in a sustained way, watch out. Profits and then wages are sure follow, resulting in a downward spiral of incomes and jobs.

“The past year has, in effect, been a fairly clean test of these two views,” says Krugman. “And what has happened has been very much what people like me said would happen: in the face of persistent high unemployment, inflation has fallen despite all that money creation, and interest rates have stayed low despite those budget deficits. If you bet on inflation and rising rates — which, by the way, Eric Cantor, the Republican House whip, did — you lost a lot of money.”

Yet in spite of this history, the Fed is still reluctant to add more stimulus to monetary policy. It has stopped buying mortgage backed securities (though interest rates are still at record lows) in a bid to boost real estate, and stated it is basically standing pat on monetary policy in its latest FOMC meeting.

Krugman thinks this is wrong-headed thinking. The latest Federal Reserve growth projections see core PCE inflation rising 1.2 to 1.6 percent through 2010, well within its stated target range of 1-2 percent. “I have no idea why Fed presidents expect core inflation to rise over the next two years,” he said. “Historically, high unemployment has been associated with falling, not rising inflation. In fact, my bet is that we will be near or into deflation by 2012. But even given the Fed’s own projections, it’s not doing its job, it’s missing its targets. Yet it apparently sees no need to act.”

Hence the Obama Federal Reserve appointees emphasis on job creation, rather than fighting inflation. The inflation numbers bear this out. We are approaching the danger zone of deflation, resulting in a vicious downward spiral of prices with stagnant growth, or stagdeflation, if you will.

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Lower energy costs tugged down on the consumer price index in June, resulting in a third consecutive decline in the headline number. In June overall CPI inflation dipped 0.1 percent, following a 0.2 percent decline in May. The latest month matched the market projection for a 0.1 percent decline. Excluding food and energy, the CPI edged up to 0.2 percent after a 0.1 percent uptick in May.

Why the probability of deflation, when the economy seems to be recovering, with GDP growth positive over the last 3 quarters? The Japanese experience of deflation for 2 decades that set back their economic growth (and position in the world) is the best example. It portrayed the classic liquidity trap. No matter how much money was created by its central bank, investors and consumers refused to spend it. And so once the deflationary spiral downward began, it took decades to arrest. Their central bank did not react quickly enough to the bursting of both stock market and real estate bubbles that had reached record highs in 1990-01.

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The problem by Japanese economist Richard Koo is that this is a ‘balance sheet’ recession. I.e., so much U.S. debt was piled up in the last decade with 2 wars and tax cuts to pay for, that both consumers and government must bring their balance sheets back into balance before what is called aggregate demand increases substantially.

The U. of Michigan had a record plunge in its sentiment survey, as if to emphasize the precariousness of consumers’ balance sheets. The economic recovery is slowing and consumer spirits are falling. Consumer sentiment literally plunged in the mid-July reading, down nearly 10 points to a 66.5 reading that pushes this index back to the lows of last year. Both the expectations and current-conditions components show roughly 10 point drops.

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Even the minutes to the Federal Reserve’s last FOMC meeting emphasized the fragility of this recover. Fed officials noted that "the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably," according to the minutes. So emphasizing jobs formation is a must for the Fed’s monetary policy.

Harlan Green © 2010

Wednesday, July 14, 2010

Where is Harry Truman—Part II?

Popular Economics Weekly

What is the case for not providing more additional stimulus spending to boost economic growth? Harvard Econ Prof Gregory Mankiw, former Bush White House economic advisor, gave this rather bizarre prediction for the future behavior of employers on his Blog. It seems that more stimulus spending creates more debt, ergo raises the prospect of higher taxes.

So, “businesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future,” he says.  “The more the government borrows, the higher taxes will need to go, the more distorted the future economy will be, and the less attractive is investment today.”

Yes, it is true that debt levels figure into both investment and spending decisions, but no one has been able to quantify how much. Consumers, for instance, are still paying down debt in record amounts. So much so that the personal savings rate has risen to 4 percent, from zero in the past decade. But consumer spending has also ramped up to almost 4 percent, which means incomes are increasing. Therefore, it doesn’t look like anyone is yet worried about higher future taxes.

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Consumer credit contracted a sharp $9.1 billion in May with April revised to show an even more severe $14.9 billion contraction, as we said last week. Revolving credit contracted $7.4 billion and contracted $8.3 billion in April. Non-revolving credit shows a $1.8 billion contraction in May on top of a $6.5 billion contraction in April. Neither category is likely to show much improvement in June given indications from retail sales and last week's soft unit vehicle sales.

So, what’s going on—are consumers retrenching?  That might be part of the story.  Outstanding consumer credit can decline either due to consumers paying balances down or because banks and finance companies are charging off bad credit. But the charge offs are actually a positive for consumer spending—more discretionary income is freed.  The big picture is that the consumer is still cautious, says Econoday.

So why would such a reputable economist as Dr. Mankiw advance an unproved hypothesis? Some of it has to do with discredited economic theories that say our economy is a zero-sum game. When the government spends money, it takes away investment from the private sector. Households seem to operate that way, for instance. There is only so much money to go around, right?

But what happens when businesses hoard their cash, as they are doing now? The $1.8 trillion being held by the S&P 500 largest corporations are not being used—either in R&D that would create future products and services, studies show, or increasing their production capacity.

And so economic activity stagnates. Money sits at basically zero interest, earning zero returns—unless government steps in to borrow that money to directly create jobs, as it has been doing in green technologies, or to retain jobs with infrastructure investments.

That is the real debate. Conservatives want government to shrink spending, in order to shrink the amount of debt. This is because too much debt devalues the debts of creditors, which mostly reside on Wall Street. Whereas Keynesian economists believe in stimulating demand by putting more money into consumers’ hands that will stimulate more revenues going into the coffers of both government and private industry.

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Year on year, personal income growth for May posted at 1.6 percent, easing from 2.6 percent in April. It became positive again in July 2009, at the end of the Great Recession. Year-ago headline PCE inflation edged down to 1.9 percent from 2.0 percent. Year-ago core PCE inflation firmed down to 1.3 percent from 1.2 percent in April. Falling prices might be the reason consumers remain cautious buyers.

But overall, the consumer sector is slowly gaining strength in terms of spending power, thanks in large part to government stimulus programs. Purchases have been a little erratic due to off and on auto and home buying incentives. But the consumer sector took one step forward in May, helping the recovery continue.

So what is the lesson from “give ‘em hell, Harry” that we asked last week? Econ Professor and columnist Paul Krugman thinks most who oppose government stimulus oppose government in general. President Truman believed in the New Deal, and the need for government support during tough economic times.

Those who worry about too much debt are worrying about the wrong debt. Stimulus spending creates short term debt that will come down when economic activity picks up. But longer term debt that will be carried by future generations comes from entitlements like social security and Medicare, which are projected to grow exponentially with retiring baby boomers. How to pay for those entitlements is a decision which should be faced by the present generation, rather than passed on to their children and grandchildren.

Harlan Green © 2010

Wednesday, July 7, 2010

Where is Harry Truman, When We Need Him?

Popular Economics Weekly

Newsweek’s chief foreign correspondent Fareed Zakaria wrote a very interesting column recently. He said, “The American economy is sputtering and we are running out of options…Can anything protect us from the dangers of stagnation or a double dip?”

Well yes. Bring back another “Give ‘em hell” Harry Truman, or have President Obama choose him as a model for how to weather the next year during an election season. President Truman was given that nickname for a reason. The post-WWII economy was going through the same malaise as today. Federal debt had ballooned to 120 percent of GDP to pay for war (vs. 80 percent today), unemployment was high, and Republicans crying deficit reduction had triumphed in the 1946 Congress.

Truman and the Democrats were alone in trying to keep the U.S. economy afloat, in other words. What was his response? Instead of compromising with deficit hawks by cutting spending, he blasted the “do nothing 80th Congress of that time”, advocating Universal Health Care and extension of unemployment benefits. So when the deficit hawks in Congress voted down those benefits—both ‘blue dog’ Democrats and Republicans, we might add—he was able to blame them for the continuing malaise. Then he upset heavily favored New York Governor Thomas Dewey in 1948—it was one of the most famous comebacks in Presidential history.

Why is this malaise dragging on so long? With some $1.8 trillion in cash sitting on S&P 500 corporations’ balance sheets, and profit margins the highest since WWII, employers are refusing to hire more workers. Overall payroll jobs in June fell back 125,000 after spiking a revised 433,000 in May and after a 313,000 jump in April.  The net revision to combined April and May was up 25,000.

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Zakaria maintains this is because of too much economic uncertainty. “"Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what's in store for us for the future," said one CEO he interviewed. “Another pointed out that between the health-care bill, financial reform and possibly cap-and-trade, his company had lawyers working day and night to figure out the implications of all these new regulations,” said Zakaria.

But that is not the real reason for the reluctance of businesses to hire. They are flush with cash, and demand is growing, after all. It’s because businesses have been living in a bubble they are reluctant to leave. It is called supply-side economics, because of a succession of business-friendly administrations that believed the bulk of government benefits should be directed to business, rather than consumers. This was mainly in the form of tax breaks, which are of little benefit to consumers—most of whom pay a payroll tax that has never been cut. Business tax breaks are an indirect form of government support, but nevertheless result in reduced revenues.

Yet consumers have been spending more as wages and salaries—80 percent of the workforce—are rising; have been rising in fact since July 2009, the nominal end of the Great Recession.

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Even home prices are increasing. Seasonally adjusted, the Case-Shiller Home Price Index 10-city composite advanced 0.3 percent, as we said last week, after rising 0.1 percent in March. The year-on-year rate, a comparison less exposed to seasonal variation than the month-on-month comparison, is at plus 4.6 percent on the unadjusted side and at plus 4.7 percent when adjusted, up 1-1/2 percentage points from March on both scores. Yet with the tax credits expired, price gains are likely to soften in the near term or even turn a little negative.

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So what is the lesson from “give ‘em hell, Harry”? Truman was not afraid to take on those who wanted to reduce government, when government was the only support for both businesses and consumers during tough times. Zakaria also admits as much: “The economic crisis forced the government to expand its authority in dozens of areas, from finance to automobiles,” he said.

Businesses and consumers are saying they have lost confidence—in both government and private business to lead us out of this recession. Businesses will begin to hire when such confidence is restored, which means financial regulations are in place they can count on. Real estate prices must continue to rise, as well, before homeowners regain their confidence. So the Obama administration must send out strong signals that such stimulus will continue, until business hiring kicks in.

Harlan Green © 2010