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Tag Archives: recession

Today I read this unusual, honest story about how a financial advisor lost his home in the US.

The story gives us a good insight into how questionable banking practices actually affect individual families. Though obviously a bit embarrassed by his poor planning, the author’s account of the whole story gives me a better idea of how the whole recession began and how it impacted all kinds of people, even those well versed in financial planning can fall into trouble.

There are many stories these days of people who lost their financial bearings during the housing boom and the crisis that followed, but my story is a bit different from most.

I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others.

The thing that few people know, though, is that I learned a lot of this from experience. I made a bunch of mistakes, the very same ones that I now go around warning people to avoid.

So this is the story of how I lost my home, the profound ethical questions that arose along the way, and what my wife and I learned from the mistakes that led us to that point.

While the author naturally points to the importance of making wise decisions regarding debt and expectations, another lesson is that oversight of the financial sector is important both for banks and their customers.


US President Obama has introduced a new stimulus plan, one that should have been introduced two years ago.

Obama, scrambling to spur job creation, proposed a six-year plan on Monday to rebuild infrastructure with an initial $50 billion investment and prepared new business tax cuts.”We are going to rebuild 150,000 miles of our roads — that’s enough to circle the world six times. … We’re going to lay and maintain 4,000 miles of our railways — enough to stretch coast-to-coast,” Obama told a labor rally in Milwaukee where several thousand supporters cheered his every line.

Of course, Republicans and some business leaders were quick to criticize the plan, but the real advantage of it is job creation. The first stimulus was focused on the financial industry. It did not lead to more employment because the subsidies did not lead to more investment.

The White House stressed the plan would not add to the record U.S. deficit, a key issue for voters.

“One thing (Obama) is willing to put on the table is closing some of the tax loopholes for big oil and gas companies that currently get subsidies from taxpayers that they certainly don’t need. He thinks that is a perfectly good ‘pay-for’ to get this up and running,” the administration official said.

Not sure that eliminating that source of campaign contributions is going to help with Obama’s re-election, but this should continue to attract votes among middle class voters. From an economic standpoint, this is a better example of the kind of stimulus Keynes suggested for pulling out of a demand-deficient recession. Let’s wait and see of the US congress can throw-off the chains of their election funding and do something for the majority of Americans.

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The news seems more and more pessimistic about the prospects for recovery and growth in the west. Are Americans Worried About a Double Dip? was one story, and Strategies: A Market Forecast that Says Take Cover was another–just two of dozens of editorials written on the same theme.

It may be that this is partly a response to falling market values over the last several days. It might also be that investors are responding to negative reports by analysts and the shared pessimism becomes a self-fulfilling prophesy. A Bearish forecast brings down investment, jobs go missing, output drops, income drops, more bearish forecasts.

The traditional idea of the business cycle says that resource prices drop during a recession, and that brings new opportunities for investment and profit. Keynes explained that prices may be static for long periods of time, despite surpluses. While politicians have embraced Keynes’ suggestion of deficit spending, public fear of huge debt remains a big part of the argument, just as it did in the thirties.

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Robert Kuttner has a new article, Austerity Does Not Produce Prosperity. It is a strong statement that current thinking on the need to limit government debt is likely to extend the recession in Europe and the US. Kuttner makes it clear that he believes in Keynesian policy, and does not want to see the west succumb to concerns over debt.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery. But the problem with the austerity treatment during a recession is that if everyone tightens their belts at once, there is nobody to buy the products; the economy shrinks and repayment of debt is even more arduous. As John Maynard Keynes famously wrote, “The patient does not need rest. He needs exercise.”

Kuttner goes on to review the recovery of the Great Depression, when the US experienced a debt/GDP ratio of 120%. Of course, they went on to pay-off debt with rapidly expanding incomes through the 1950’s and 60’s.  Kuttner claims the situation today is different because the spending came in the 40’s because of the war, and common folk were helping finance the debt buying war bonds.

I am not so sure the US debt has not been helped along with spending in the military activity in Afghanistan and Iraq. Rather, the difference might be that these wars are not creating new industry and new training for workers.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls. Surtaxes on high incomes were over 90 percent. Interest rates were administered through a deal between the Treasury and the Fed, and the war debt was financed with cheap money.

It seems to me that Kuttner is pointing out enough differences that there may be room to disagree with his main point, that we should follow history’s example.

Fears of a hand-cuffed financial industry have driven the value of the Euro to 18 month lows, and markets world-wide are dropping in value because of fears for the European economy.

The president of the European Central Bank, Jean-Claude Trichet, in an interview published Saturday, warned that Europe was facing “severe tensions” and that the markets were fragile.

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.

At the same time, some European producers are happy with the Euro devaluation, as export revenues have already increased and export demand should increase. World-wide, one fear stems from the big increase in government deficit levels.

The world’s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to precrisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually.

If the fears turn-out to be justified, this seems a classic example of crowding out, where government deficit spending raises interest rate to levels that discourage private investment.

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beverly-hillbilliesA good editorial here about monetary policy, focused on the Federal Reserve and how it has dealt with the recession. Some valid criticisms here–rewards for the “imprudent financial firms at the expense of their more prudent rivals,” and a recent policy reversal that is poorly timed.

Then the amusing bit, critiqueing Bernanke’s claim that the recession was nearly over.

One doesn’t usually turn to old TV shows for economic insights. Yet the best way to put the Fed’s role in the recent crisis in perspective is by recalling an episode of “The Beverly Hillbillies” – the one in which Granny convinces everyone that a spoonful of her medicine can cure the common cold. Sure enough, it can: It just takes between a week and 10 days.

I like the mataphor. The message–of course–is that recessions are self-curing too, and Bernanke and money policy do not deserve credit for a recovery.

chinaascendingThe NY Times reports that Asia’s Recovery Highlight’s China’s Ascendance. This is something I predicted when US and China’s stimulus packages were introduced, and the statistics are coming out now. Though the US economy is still three times the size of China’s, it is China and the rest of Asia that is leading the world out of the global recession.

One question mark remains about China’s recovery, and that is whether Chinese consumers can make-up for the lost demand in exports to the US and Europe. One positive sign,  Chinese banks lent a record 1.1 trillion dollars in the first half of 2009. Another positive sign, US and European companies still find China a more affordable production location, and worker training has improved. As long as trade barriers do not become too popular, I think China will continue to lead the world out of recession.

Do you agree?

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silver-liningTurn economic setback into opportunity–this is a nice sermon, or political speech–maybe even a script for a life tutor dealing with a depressed patient–but it is hardly helpful or informative for most people. Yeah, getting laid off gives you time to try alternative ways to spend your time, and if you have some money laid aside, you might open your own business or try some volunteer work, like mentioned in the article.

Truth is, one of the problems of this recession is that people were overspending and unable to keep up with their debt. Those people get laid off and they have to find a job quick, even if it means flipping burgers for some fast-food joint, or mopping floors somewhere. That is the reality more often than not.

Opportunity? The opportunity was always there, and even more so when the economy is strong. This message only works for people like the former Wall Street couple mentioned in the  article.

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foreignHere is a story on how high tech companies in the US are having a hard time recruiting innovative engineers because of tough immigration requirements.

The immediate question–Why is the US not able to produce its own innovative engineers? It does get briefly mentioned in the article but is quickly dismissed as, “a slouching education system that cannot be easily fixed.” Interesting because many Americans argue that US education standards–at least at university level–are the best in the world.

Another engineer claims that there are plenty of qualified Americans for these jobs, hinting that companies hire the foreign engineers because they are cheaper. The real point for these people is protectionism and buy American nationalism, but whether the US produces its own engineers or not, it benefits everyone to have cheaper resources, including cheap innovation.

Like has been mentioned before in this space, that protectionist attitude will, more than anything else, keep the US in recession and world trade stagnant.

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recession-cartoonThe New York Times has published a collection of photos called Picturing the Recession. Some things you would expect there, like empty shops and restaurants. Also some surprises, like a photo of girls offering free hugs, doing their bit to help people feel better.

We are also invited to submit our own photos with comments about how the recession has affected our lives. Might be fun to contribute but I have no idea what to photograph. Some interesting stories there as you go through the comments.