57 Comments

1. Lifeofthemind:

Eventually we run out of people to unemploy so the new unemployment figures have to go down.
Obama’s handlers need to swallow the past and shove it into oblivion. We can expect more talk of the future and present dramatics to distract us. As the lady almost said, Fasten your seat-belts. It’s going to be a bumpy decade.

Jun 6, 2009 - 5:59 am 2. novanglus:

The headline number of 345k was reduced by some 220k phantom jobs added by the BLS “birth death model”, which is supposed to represent the number of jobs added by the net of starts/ends of small businesses. Now, do any of us really believe that 220k new jobs were created in small businesses in May? I look at our downtown retail area in a mid-sized suburb and see several stores recently closed. Some of these small businesses may be laid off professionals who filed papers for an LLC, so they could eliminate a gap on their resume while they try to find a temporary consulting gig or a new job.

If you look deeper into the numbers reported, they don’t add up. Recall in April, BLS reported:

Nonfarm payroll employment continued to decline in April (-539,000), and the unemployment rate rose from 8.5 to 8.9 percent

Now in May, BLS reports:

Nonfarm payroll employment fell by 345,000 in May, about half the average monthly decline for the prior 6 months, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent.

Let’s think about this qualitatively. If the number of job losses is 64% of those reported in the prior month (lnumerator) and the pool against which they are compared against (denominator) is larger, then shouldn’t the increase in the unemployment rate be smaller too? Yet in April, unemployment went up 0.4% and in May it went up 0.5%. Hmmm. We live in an innumerate world, where people don’t get numbers.

So, dig a little deeper in the May report and they say:

Among the unemployed, the number of job losers and persons who completed temporary jobs rose by 732,000 in May to 9.5 million.

So, what is going on? Am I missing something obvious here?

BTW – if you are interested in an intelligent blog devoted to macroeconomic issues, check out CalculatedRisk

Jun 6, 2009 - 6:25 am 3. USMC Ken:

Help me out with this, does that chart mean that Barry is creating and saving even MORE jobs than he predicted? Man, he is good.

Jun 6, 2009 - 6:44 am 4. Herb:

This is your government giving you information that it gathered, compiled and analyzed in order to support or deter some course of action. I wouldn’t look at it too hard, you may not like what you see.

I thought that the unemployment rate was number of people looking over the size of the workforce. If either factor changes appreciably and is not explained in the rate, any comparisons of rates month over month is bogus. If the base numbers (size of workforce and number of people looking for permanent work(including temps)) are available, they are the important ones to examine for trends.

Jun 6, 2009 - 6:53 am 5. aaron:

2 novanglus: I’m one of those unemployed folks who started a small business. Unfortunately I don’t have any employees, income, or customers…

Maybe the decreasing rate of change means there’s not much left to lose. Like a bleeding animal that suddenly starts to lose a lot less blood out of it’s recently cut throat.

That’s a sure sign of recovery. /

Jun 6, 2009 - 6:58 am 6. novanglus:

aaron/5

Sorry to hear that. I have several friends who got cut this Spring and did exactly the same thing.

Jun 6, 2009 - 7:12 am 7. Quig:

Watch for the government to change the definition of employment/unemployment. A classic way to manipulate the numbers.

Jun 6, 2009 - 7:48 am 8. joe buzz:

Right on que a “former reporter” showed up over there and dissed their site as propoganda.

Jun 6, 2009 - 7:56 am 9. Jamie Irons:

wretchard writes:

‘Where are we on the curve’ is a slightly different question from ‘what kind of curve are we on?’

Now, there are only three data points, March, April, and May of 2009, but the curve connecting them to the “with recovery plan” curve is starting to look suspiciously like an exponential. One of the beauties of such a function is that its derivative (rate of growth) at any point is the value of the function at that point

d (e^x)/dx= e^x

…very simple, very direct and…very fast, and increasingly faster, when one gets past the “knee” of the curve!

Yikes!

But again, we’re only looking at three points and, as others have pointed out, there is an absolute limit to how many jobs can be shed.

Jamie Irons

Jun 6, 2009 - 7:58 am 10. AWH:

I believe that the curve for this recession will be different than in other recessions. Because of the banking crisis there was a huge drop in the velocity of money, corporations and people simply stopped spending. Companies reacted quickly to this slashing production and orders. Because of the way in which supply chains are linked today, the overall cuts happened faster and deeper than in the fast (rather than taking several months to work through the supply chain).

What this means is that there could also be a relatively quick upturn in the 3rd quarter. Now two other things are important to note:

– the future of the economy (longer term) is very much in doubt, the Fed has a sea of cash to draw down to avoid significant inflation, taxes are going up (don’t let the rhetoric fool anyone) and increased government spending and control mean a less dynamic economy.

- the stimulus has had NO economic effect on what is already beginning to be a recovery (through May 22, they spent only 36.7 Billion of the stimulus money, and through the first quarter government spending was a net negative on GDP)

The real consumption expenditures chart on this page is a good measure to track when looking at what’s happening with our economy in the short term:

http://www.ftportfolios.com/Commentary/EconomicResearch/2009/5/29/real_gdp_was_revised_up_slightly_to_a_-5.7percent_annual_growth_rate_in_q1

I am in the same situation as Aaron and, anecdotally, I’ve gotten several calls since the beginning of June, indicating to me that corporations are looking at that consumption data and their underlying inventory data and realizing that while demand may not be what they would like, it has not dropped off of the cliff and is actually coming back and their declining inventories mean they have to start making and doing things again.

Jun 6, 2009 - 8:01 am 11. sf:

Gee, let’s see here: MSM loves Democrats and Liberals, absolutely *worships* Hussein as a God (reportedly uttered by Newsweak’s Evan Thomas?), so would anyone be surprised to learn that the MSM spin machine is at full speed telling the public that the recession is over, Da One’s policies are miraculous and that all is almost back to the glorious days of…*BOOSH*?? Ooops.

Jun 6, 2009 - 8:04 am 12. Pascal:

Quig @7: You are surely correct.

It was done in Los Angeles with their crime figures. Altered numbers started being applied out of the blue in 1992, and became required policy in less than two years.

For example, when 5 cars are broken into on the same night on the same street, what was once reported as 5 crimes was officially recorded as 1. I think murder was the only crime not treated in this manner.

Nowadays, I cannot tell you from first hand experience any longer, but I suspect that when multiple crimes happen in the same neighborhood (whatever that means) in the same time period (whatever that means), it is recorded as only one incident.

Clinton demanded to see results for the money he sent to the urban centers to pay for his “100,000 added police” program. This urban center — long having been run by his kind of people — fell in line quickly.

I know I am not the only one who knows this. It’s always amazed me that I have never read this being disclosed elsewhere. I was hoping someone else would tell the tale, and no doubt every someone was waiting for someone else too.

So now I’ve told it — cowardly — as it is there is some small chance my record of this will now be buried here in the comments of our host’s site. A handful of readers may remember it. Probably all the wrong ones. :/

Jun 6, 2009 - 8:38 am 13. Whitehall:

I’ve seen others noting the “discouraged workers” meme from the early Bush years.

Yes, the unemployment rate is the number of people seeking work divided by the total active workforce (employed + unemployed but seeking).

Both factors can change. The discouraged workers are the ones who have given up on seeking work. Their number has got to be a SWAG and so very easy to politically manipulate up or down.

The BLS says their numbers have increased to 2.1 million:

http://www.bls.gov/opub/ils/ils74abs.htm

Thank goodness that I can support my family, come what may, by working on Chinese nukes.

Jun 6, 2009 - 8:38 am 14. erc rodson:

I work with contractors who do public works projects. The stimulus money for these jobs are just starting to get into the bidding process. This means that the actual construction workers won’t hit the jobsites for 30 to 90 days, depending on the ability of the public agency to evaluate the bids and award the contracts.

The initial stimulus hiring was almost all at the public agency level, finding people to bid out and then award the contracts for the stimulus-funded jobs. This only applies to those projects that already had the engineering and architectural designs done, which can take anywhere from three months to two years, depending on the complexity of the project and assuming that no environmental issues need to be documented. if there are environmental studies required, add anywhere from six months to six years.

The money dumped into the auto companies was spent a lot more quickly, to little effect except to delay the inevitable, while the infrastructure funds, which arguably will improve the quality of life for someone, is still in the pipeline.

Contrary to what one might expect, all the public agencies in Northern California are bidding out a lot of public construction jobs, funded by previous bond issues that they are still trying to plow through. New housing construction is pretty much dead, although there is some remodeling work starting to show up here again. That is almost all small business employment, not funded by public money.

Whatever good the stimulus money is going to do, it hasn’t done it yet, because most of it ain’t spent yet.

Jun 6, 2009 - 9:23 am 15. NahnCee:

I would love to see some statistician do a comparison between people who voted for Obama for President and people who have become unemployed since Janury 2009. Or even November 2008.

IF there is a just God, the vast majority of the unemployd will be the same young, stupid and lazy people who voted for Obama because he promised them free gas and mortgage payments.

Jun 6, 2009 - 9:56 am 16. jms:

I’m standing by my prediction that unemployment will reach 40% by the next presidential election.

We still haven’t had:

1) The complete business failure of GM and Chrysler as conservatives simply stop buying their cars. (Liberals drive imports and wouldn’t be caught dead in a Chevy.) The easiest company in the world to boycott is an auto company.

2) The takeover and destruction of the health care industry and resulting loss of jobs.

3) The collapse in tax revenue (as fewer and fewer people make enough money to pay taxes under the current rates), and the massive shifting of taxation to the lower and lower middle class.

4) Inflation.

Four years from now these days will seem like the “good times.”

Jun 6, 2009 - 10:35 am 17. Scythianeedle:

Been unemployed and looking for the fairly specialized work that I do during several periods in my life.

My perception is that once the unemployment benefits run out, and you’re still looking for a job or a contract or a quick freelance anything, you don’t show up on any gummint statistic. As long as you ain’t draining their coffers, you don’t exist.

The deluded fools that voted for Urkle and since lost their jobs are most likely still living the delusion. Since in that delusion everything Good is the blessing of the Sainted Democrats and their Annointed Leader, then every bad thing has to be the intended curse of CONSERVATIVES, NEO-CONS, and other unbelievers.

It will take a LONG time for reality to shoulder aside decades of brainwashing. Although in some rare cases awakening comes in a flash, like Pavel’s epiphany on the road to Damascus.

Jun 6, 2009 - 11:04 am 18. novanglus:

15/Nahncee: IF there is a just God, the vast majority of the unemployd will be the same young, stupid and lazy people who voted for Obama because he promised them free gas and mortgage payments.

Well, since college students overwhelmingly supported O, it is reported that <20% of them are graduating with a job. And there are also reports than many of them are being asked to defer their start dates until later this summer or even in the fall.

But they can still blame it on Bush for another year or so, before they have to look for someone else to blame.

Jun 6, 2009 - 11:15 am 19. John Lynch:

Damned if I know what’s happening. Anyone who says they do is full of it.

I can speculate, so here goes.

We have about a year before things start getting really bad for the government’s finances. If we don’t have some recovery by then tax revenue won’t be able to support the budget. Even with the optimistic projections from the administration and the CBO there is going to be a huge deficit. Reality seems to be a lot worse, which should have been predictable. (It seems to me that this recession is a lot worse than 1982, and we haven’t even hit the same unemployment rate yet. How they thought it would stay under 10% is beyond me.) The way treasury yields are going our ability to borrow is becoming a lot more limited than the administration thought.

At that point something has to give. It’s not the end of the world. California is working out a similar problem right now. The thing is that there is no one to bail out the feds. I imagine we’d see huge cuts in defense spending and a lot of social programs and education funds would be drastically reduced. Maybe Medicare would be cut as part of a giant single-payer system (to reduce costs!) Congress would logjam the way the California assembly did, so the cuts would eventually just happen by default.

The sad thing for the Democrats is that they finally got the power too late to enact their social democratic model. We’re already broke. You can’t add any more programs without cutting others. With a shrinking economy it’s worse than a zero sum game. It’s slicing a shrinking pie. The only way the President can get away with his transformation of society and government is if the economy grows. Yet he is wedded to an ideology that is hostile to growth (I don’t think that’s his intention but it is the result of his political choices). Sure, we can cut defense to the bone, but that’s still only about 1/5 of the budget. It’s not enough to pay for national health care, let alone everything else Obama would like to do.

If I were in the Republican leadership in Congress I’d start preparing the ground for the mother of all budget showdowns.

Now, if the economy recovers and we return to a 3% annual growth rate we’ll probably be OK. That may happen despite every attempt of the government to prevent it. America is a much bigger country than we see on TV, and it’s survived a lot worse.

Jun 6, 2009 - 12:57 pm 20. Unemployment: The Second Derivative « The View from Alexandria:

[...] what’s going on?

Jun 6, 2009 - 1:13 pm 21. RWE:

What I wonder is if the job losses are a reaction to the economic problems associated with the Design Margin finally being used up last fall – or if they are the result of businesses anticipating Cap and Trade, increasing taxes only on people above $250K, uh, $200K, uh, $175K, uh, $?, Single Payer/Multiple Loser Health Care, nationalization of key industries, the USA stepping back from the world, greater environmental regulations, hyperinflation, etc?

I mean, what kind of businessmen would look at the sitation and say “Now is the time to expand” or even “Now is the time to stand pat? Given what all Obama has said and what he has not said yet, I know of no industry that would consider even holding steady on their workforce.

I suspect that even the guns and ammo industry, currently at max output, fears our gun-controlled socialist future and is loath to ramp up its own capabilities even in the face of an unprecedented high demand.

Jun 6, 2009 - 2:04 pm 22. Eggplant:

AWH said:

“I believe that the curve for this recession will be different than in other recessions.”

I believe this recession is actually a depression and it might(?) even be worse than the Great Depression. It is my opinion that last year’s implosion of the finance and banking industries was effectively lethal. If the banking industry had undergone an honest audit then almost the entire industry would have been declared Chapter-II and the FDIC’s assets would have been zeroed out. Instead the federal government has allowed the banking industry to price their mortgage related assets at the pre-implosion value rather than true value. This has created the illusion that the banking industry’s book value is greater than zero. I believe the federal government has colluded with this fraud because it has no choice. To do otherwise would initiate a domino effect that would bankrupt the nation. I believe it is the intention of the federal government and banking industry to “talk up” the economy to the point that the banks can unload their “toxic assets” upon hapless suckers and thus avoid catastrophe. I do not believe such a fraud can hold up indefinitely and there is no one stupid enough to buy the toxic assets. Eventually the general public will realize that the emperor has no clothes and price discovery take place. After price discovery happens, the market will bottom out. Only after that happens can the economy begin to heal itself.

Different topic: Caroline Glick wrote a nice polemic against our fearless leader. Google “A Politically Convenient Speech” to link to it.

Jun 6, 2009 - 2:24 pm 23. Eggplant:

RWE asked:

“What I wonder is if the job losses are a reaction to the economic problems associated with the Design Margin finally being used up last fall..”

I believe the root cause of our current economic problems are the combined effects of Globalism and Peak Oil. I should emphasize that I think Globalism is a “good idea” because it discourages war and brings about greater economic efficiency. My quarrel with Globalism is it should have been constructed such that our unskilled workers were required to compete toe-to-toe with industrial slaves in China. That requirement alone would bankrupt the manufacturing industry of any nation that expected a living wage for its workers. The Peak Oil thing is a monument to human stupidity. We saw that disaster coming in the late 1950s and President Carter tried ineptly to do something about it. Instead, people opted to close their eyes, clap their hands and try to wish that disaster away. We’re going to have our noses rubbed in this for the next 20-30 years and probably go through another world war.

Jun 6, 2009 - 2:39 pm 24. RWE:

Eggplant: I think you have something there but my worst fear is not that the recession will become worse but that it will not.

In the Great Depression unemployment was so high that it was obvious there was a big problem. FDR’s attempts to fix it only made it worse.

From Obama we have already seen the beginnings of what will be an endless succession of New Federal Programs, New Federal Programs to Fix What The New Federal Programs Broke, nationalizations, price controls, subsidies, special taxes, Czars, and the bureaucracy to go with all of that.

The difference is that FDR looked at all of this and said, rather stupidly, “Whythell do we need all of these boards, committiees, and panels? and Obama seems to be saying, rather slyly, “Whythell don’t we have more boards, committees and panels? After all they inevitably employ and empower more minorities and Democratic Party operatives.”

But in any case, this approach will to some extent mask the true effects of both the economic downturn and of the actions taken to fix it. People will never realize what they lost and will be unable to imagine what they could have had – if only Fannie and Freddie and Barney had all been done away with, if Sarbanes Oxley and the CRA had been repealed, if the EPA had been reeled in, if we had finally decided to get our act together in space transportation, if Iran and North Korea had been turned into large scale simulations of the Moon, if the Fair Tax had been implemented, if…,if…., if… They will never know.

Jun 6, 2009 - 2:55 pm 25. whiskey:

There are a LOT more jobs that can be shed, and other that CANNOT due to Obama politics be shed.

White men are expendable, so employment in manufacturing, resource extraction, and transportation can be cut still further and will be as new taxes hit demand, new regulations increase cost, and amnesty is a done deal (trade higher priced White guys for Affirmative Action cheaper Mexican guys).

However, media types, advertising, marketing, and government workers are NOT expendable, since they are the Obama coalition. So expect female-friendly employment to continue, even if it means new taxes on top of new taxes. Obama has to take care of these people.

For the rest, he does not. They did not and will not vote for Obama in the first place.

The curve is clearly L shaped, a long, drawn out period of no real economic activity, no real wage growth stimulating demand or event like massive military production to dent unemployment and kick-start spending. It will go on for decades, as women have more demographic power (they are a larger group) allied with various non-White interest/racialist groups, Gays, etc. All of whom benefit by being employed in make-work government jobs or subsidized ones, vs. unemployed White guys. The Dem’s dream.

It IS vulnerable, however, to catastrophic drop in revenues ala Gorby being unable to pay his own and Eastern European goon squads due to oil price collapses. It could be a North Korean invasion of South Korea, an oil price shock, something that tips enough women unemployed to ally them with male unemployed and creates a cascade of political failure.

Obama is not that stupid. He knows his plans are economic disaster. That’s the whole point. He seeks to reward specific groups and stay in power that way. He needs only 52% and figures that even if conditions are miserable, as long as women do better than men, he’s got it made. He’s rolling the dice that he can prop up through subsidies enough female dominated employment to keep things rolling.

Jun 6, 2009 - 4:09 pm 26. Tony:

Let’s remember, unemployment averaged 17% for the first TEN years of FDR’s New Deal, as documented in Amity Shlaes’ excellent history of the Depression called “The Forgotten Man.” It was only the unique circumstances of WWII that brought the American economic calamity to an end.

And to this day, liberals and Democrats (is there a difference?) champion FDR as a hugely successful hero and cheer on President Obama to emulate and repeat FDR’s “triumph.”

Jun 6, 2009 - 5:16 pm 27. erc rodson:

Ref. # above:

The difference between California and the federal government is the federal government has the ability to print money and the authority to make their creditors take it in satisfaction of their obligations.

I have the mixed blessing of living in California: beautiful day here, gorgeous view out over San Francisco Bay, but our State government is an embarrassment. So, for that matter is our congressional delegation, with a few exceptions. And, yes, the People’s Republic probably holds a lot of California’s paper, too, since it has a higher yield rate than US notes.

It is so appropriate that we elected the Terminator in time for Judgment Day.

Jun 6, 2009 - 5:40 pm 28. arkroyal:

One of the best economic sites on the web:
http://market-ticker.denninger.net/

Jun 6, 2009 - 6:19 pm 29. Derek:

First, are the numbers reported seasonally adjusted? That could account for the difference in real numbers and percentage unemployment. There is a natural hire/layoff cycle in some industries that isn’t unhealthy, and can skew statistics either way.

Second, there are more than one driver of this recession. There was the credit crunch, housing collapse. Oil prices definitely contributed. And there is the normal stacking of stupidity at the top that recessions clear away. And throw in the new generation that is doomed to learn the same lessons that their predecessors learned the hard way.

Third, the systemic flaws of the US economy. It is 70% or so consumption. There are already 3 cars per household or something like that. Consumers could stop buying other than food and repairs for a couple of years without any problem. And they will if they feel insecure, or are trying to pay off debt. And everyone needs to pay off debt. No choice.

Any increase in demand for oil will drive the price up again.

The eternal trade deficit has caught up. The US dollar will drop, raising prices of commodities. The challenges of reindustrialization are huge. No matter how it is done, it will take years.

And throw in the inevitable. Tax revenues are falling off a cliff. Government cannot cut costs without serious and intense pressure. So taxes will go up in their various guises. The easiest politically is to increase the costs for business. And anyone in the market for credit is now competing with the US treasury. At the same time the IRS is getting beefed up.

The Obama industrial policy has a natural unemployment rate of 10-12%. In good times.

And right now no investment will happen in health care until it’s clear what the government will do. Same in energy. What percentage of the economy is that?

If you start adding up the sectors of the economy that are either sitting on their hands, moribund or just plain gone, it is considerable.

The stock market was somewhere around 14000, now at 8500. Does it make sense to apply that percentage to the economy as a whole as a base point.

Those graphs are describing a reality that we haven’t quite begun to comprehend.

Derek

Jun 6, 2009 - 6:31 pm 30. toad:

Just a small point but those are average unemployment figures. The higher figures seem to be in the Blues states. Also because economic news and operations can move much faster these days, things can unravel much faster. Investors and Companies are starting to move faster than the Administration. Current Federal revenue is dropping like a gut shot goose.

Jun 6, 2009 - 6:51 pm 31. Cadmus:

It’s all about the banks.

It is true that the faster we hit the bottom, the sooner we can begin the recovery. But, recoveries require funding to hire new people and purchase materials. It also requires consumers with money or credit to buy. All this, requires financial institution able and willing to lend to businesses and consumers. And, that is where the big problem is.

Socialistic programs will make things much worse. Few remember that countries like Argentina were once vibrant economies until they elected a socialist Government that ran their economies into the ground.

However, I wish it was as simple as getting rid of Obama or just preventing him from implementing his social programs. He will not be able to implement most of these programs any way since he will not be able to raise the funds. Raising taxes on a shrinking income base will only shrink it further and result in less Government funds. Our T-bills have been mostly purchased by foreign countries with money they made selling their products to the US. Now they do not have that money to buy them. China’s exports are down more than 40%, and others are just as bad. More T-Bills with no buyers, except the Feds, means printing money and inflation. Inflation makes T-Bills even more expensive to finance and less desirable. And, the cycle continues.

The financial problems started before Obama. I know about ACORN and all the issues related to introducing sub-Prime mortgages. But, that is only the tip of the ice burg. The sub-prime defaults could have been handled with relative ease, had it not been for other rules that stifled the industry and collapsed the whole system.

Briefly, the Mortgage-Backed Securities in all their forms are relatively new. There was no specific system to rate them or assess their value. The industry took the easy and lazy way out and simply applied the Bond rules to those securities, assuming they were debt instruments and fall in the same category. But, they are not. Bonds are backed by large companies with business operations and accounting standards. There is a single source of backing for the bonds and relatively easy to assess. The new securities were backed by millions of home owners, whose financial situations are totally unknown to their holders. This great unknown opens the way for severe over reaction when the holders begin to suspect the value of the securities. Suddenly no one wants to buy them, and they die a miserable death.

The bond rating system turns a bond into a single “C” rating, or junk, when it is at risk of loosing merely 1% of its capital. So when mortgage defaults rose, and the risk of loss exceeded 1%, they all became junk. ALL, since the securities were a conglomeration of mortgages mixed and remixed, that made every holder of these securities exposed to the total system. The mixing allowed the banks to get more money for their mortgage lots, as they hid the bad loans among the good, but they also made the whole system extremely unstable.

Junk securities cannot be held as assets on banks’ balance sheets. They have to be moved to the column of non-performing assets, which also requires the banks to shift more funds out of their assets column into reserves against those.

Even if banks managed to somehow manipulate their books to keep these securities as assets they had to mark them to market price, which is the price the last buyer was willing to pay for similar securities, since they are tradable securities, and have been all lumped together as equals. With no buyer available, the value became pennies on the dollar.

This greatly reduced banks’ assets on paper, and as such their ability to lend money, since banks could only lend up to ten times their assets. That left all banks with a loan portfolio exceeding their legally allowed limit, and they began to scramble to collect their money from the market. We all saw credit lines closed or greatly reduced to limit their exposure, but they still have not gotten to the level at which they need to be under the current rules.

Many banks have cash on hand, but cannot lend it businesses and consumers. Instead they buy T-Bills and wait. Or, they buy each other at pennies on the dollar – balance sheet again – while the economy wallows without the necessary credit facilities to function.

The mark-to-market rule should never have been applied to these securities. Stock values are based on the performance of the companies behind them, and all stocks of the same class are equal. Mortgages have an intrinsic value. If a mortgage continues to be paid, it retains its face value for the bank, regardless of what investors are willing to pay for another Mortgage Backed security. If any of us sell our homes, we will have to pay the bank the full balance of the mortgage, not a fraction. Even the fraction related to foreclosed homes eventually yield much more cash to the bank than investors are willing to pay for all the mortgages.

Everyone in Washington buried their heads in the sand and avoided dealing with this problem in an election year. The problem grew and festered until it completely imploded in September. Still the solution could have been simpler and cheaper on the Government, if it was not for cronyism and self-interest.

The Government should have temporarily suspended the mark-to-market for Mortgage Backed Securities and allowed (or required) the banks to buy back the securities with bonds backed by the banks’ financial performance, not the homeowners. This would have limited the losses for banks to the actual defaults, not all mortgages. It would have left most banks with enough assets to continue making loans, or at least sustaining the loans they had. Most would still be profitable, as the write downs of the securities are what turned profits into losses. Investors could look at the banks profits and balance sheets and assess the value of the bonds. Some with high exposure to toxic mortgages would have probably still failed. But, the financial system would have continued to function.

The above would have cost the tax payers a total of ZERO DOLLARS.

Furthermore, if necessary, the Government could have created a new bank, hiring some of the 250,000 laid off financial professionals, dedicated only to providing mortgages and business credit to keep the economy going. It would have required less capital than all the bailout programs, which accomplished nothing. The money would be invested, not handed out, and generating a profit for the Government. When the economy is back on track, the bank would be sold to private investors, potentially for a profit.

Again the grand total cost to tax payers would have been ZERO DOLLARS.

Even if the bank is mishandled and the eventual sale does not completely cover the cost, the cost to taxpayers would still be much less than today’s cost, and we would be in a much better position to shoulder the load.

These types of proposals have been made and ignored.

Why didn’t anyone in Washington act along these lines? Were they asleep at the helm? Or, did special interests overtake the country’s interests? And, who’s interests?

Cadmus

Jun 6, 2009 - 8:17 pm 32. Tamquam:

The banks are making loans. I’m in real estate, I see it every day. People are scrambling to get ‘good deals’ on lender owned properties. Not a single one, unless it is a scrofulous falling down pile of junk, goes for less than asking price because people are having bidding wars over them. A good 98% of them are bought with borrowed money. In upscale South Pasadena I have a client willing to offer full price all cash for a million dollar home, but he keeps getting out bid. The banks are lending.

Jun 6, 2009 - 8:29 pm 33. Paul Milenkovic:

Cadmus:

Your accounting of the financial crisis is why I no longer believe in wind power.

The big power plants are like to big corporations with balance sheets (availability factors) on which you can rate debt.

The wind generators are like the individual mortages. You are suppose to be able to bundle them to average out the risk (variablity of the wind in a given location), but wind can die out over a continental scale for weeks at a time (the mortgage crisis).

It seems we are not learning from the financial crisis and seeking to do the same thing to create an electric power crisis.

Jun 6, 2009 - 8:43 pm 34. Derek:

Cadmus: most of the banking crisis has been ‘fixed’ by printing money and the fed/treasury buying up trashy assets.

Tamquam: how do the prices compare to what they were a year or so ago?

Derek

Jun 6, 2009 - 9:24 pm 35. Robohobo:

From Stop The ACLU: http://www.stoptheaclu.com/2009/06/06/evan-thomas-obama-is-sorta-god/

The 0bamanation is sorta god? That is what he does say.

There is a perfect storm brewing. The end of it will not be pretty no matter how it is colored.

I am one of the unemployed. I got laid off from the small firm I worked for on 11/3/08. Yup. I have watched our industry (semiconductor) contract in the US & Europe for years and move offshore to those places that have slave labor – China, Taiwan, Singapore, Thailand, etc. India is the next area for growth. We are short sighted and/or stupid.

There are NO JOBS to be had out there. None. Not even simple shit. Compound it with the new racism, my age, where I live, etc. and I am f–ked.

So, where on the curve? As it says, off of the curve. I think the end is going to be so bad that middle aged white guys like me will have nothing left to lose. Why do you think the ammo and firearm shortages exist?

Jun 6, 2009 - 9:29 pm 36. WillDoMathForFood:

If there is one thing I consider myself good at, engineer-math-geek that I am, it’s analyzing data. And while I think that it’s much too early to draw many conclusions about where those unemployment numbers (the red dots) are actually going, there’s one thing that really stands out in my mind. It’s not so much that the Administration’s numbers are wrong, but that they are wrong right from the start. So while the reality is undetermined, the projections look like fantasy. (Maybe their macroeconomic models are written by the same folks who write the global warming models?) Oh, and here’s another thing I find kind of interesting: even if you do believe the macroeconomic model projections, a couple of trillion dollars of stimulus is buying us a maximum 1.75 percentage point reduction in unemployment. I think that’s a pretty lousy return on my ~$2T.

Jun 6, 2009 - 10:57 pm 37. Tamquam:

Derek: “how do the prices compare to what they were a year or so ago?”

Depends on where you are. In upscale South Pasadena prices have remained constant over the last two years (that is about to change, though). Across the bridge in NE Los Angeles prices have dropped 31% over the last 12 months, and 50% over the last two years. Prices have stabilized a little recently as people able to obtain low interest rate loans have been buying like crazy. That will not last. In the next 60-120 days the second wave of Alt-A and Pay Option ARMs will begin to adjust, at that point the second wave (tsunami!) will hit. Meanwhile banks have been holding a “shadow inventory” of properties they have foreclosed on but not put on the market amounting to, in my estimation, between 70-85% of the total properties they own. Presumably they were waiting for the TARP to buy them up. Now they’re afraid to put them on the market because if they do the market will be glutted and values will fall like meteors. Which they will anyway. The only reason to buy now is get a loan at a decent rate in 2009 dollars and wait for inflation to kick in and reduce the relative cost of your payments. Better to wait and see if you have income next year and if so, buy at a substantially lower price.

Jun 7, 2009 - 9:13 am 38. NahnCee:

You might want to mention that South Pas is white, and either retired or professional, while East LA (across the bridge) is brown, illegal and very familiar with Home Depot parking lots.

I’m hearing that banks are overwhelmed with their foreclosed properties because they’re bankers and not real estate experts, and they simply don’t have the staff to even *know* what the things are really worth — so they’ve been sitting on them while trying to dig their own way out of the paperwork. So in order to get them on the market, the banks are having to hire outside experts to get a handle on what they’re really holding, and how best to off-load them.

I don’t know what they’ll do with properties in East LA with a price tag of over a half a million dollars when there’s no one who actually has a job who will live in that part of the city, and the people who *do* live there won’t be eligible for credit ever ever again.

Jun 7, 2009 - 10:22 am 39. John Lynch:

I’m still amazed that they didn’t predict unemployment passing 10%. It peaked at almost 11% in 1982 and this recession is clearly worse. What were they thinking? Plus, why on earth did they think the “Recovery Plan” would work quickly when it was filled with programs that wouldn’t kick in for years? This is easy, predictable, stuff here. White Swans all around.

Jun 7, 2009 - 1:43 pm 40. Unsk:

Cadmus, Great post!

Unsk

Jun 7, 2009 - 4:11 pm 41. JoeHil:

“Current Federal revenue is dropping like a gut shot goose.”

Somebody needs to tell thos moron we president we have that people didn’t vote for him but against Bush. Obama is a complete loon. An alegedly smart guy who got to be editor of the Harvard Law Review and hasn’t got a single article or note or anything else under his name. It is also pretty obvious that his autobiography while well written was also obviously well edited by an experienced writer.

Further he has no legislation under his name that wasn’t essentially assigned by eperienced and powerful jegislators in the Illinois Senate. Additionally he has no legal experience to speak of, no business experience, and he biggest accomplishment is giving a speech and being an affirmative active appointee as a pert-timr prof at a third tier law school. In short he is a total non-entity who has been handed the biggest job in the world based solely on the fact that he is not George W Bush and we can feel good about ourselves for voting for a “clean, well spoked, minority” in the words of that other world class non-entity who was on the ticket.

How high that unemployment curve is going to go is anybody’s guess but it is somewhere well past 10% and the turnaround if and when it comes will be at a social cost few Americans can even imagine today. We are headed off the map and in uncharted waters with a lunatic at the helm. Ahab after a white whale. Class warfare always ends badly for all classes.

Jun 7, 2009 - 5:53 pm 42. AWH:

“Cadmus, Great post!

Unsk”

Totally agree, the Mark-to-Market (or FAS 157) impact on this economy has been huge. While they finally made changes, the changes weren’t as big as they should have been, but they are much, much better than it was last year. If someone wanted to piece together a conspiracy that would be a good place to start – why put in FAS 157 in November of ‘07 – the year prior to the next election?

Unfortunatly, it’s hard to argue for a conspiracy when Bush should have had people who knew better in position to stop this (and should have killed SOX much earlier, as well).

Jun 7, 2009 - 6:25 pm 43. John Lynch:

It doesn’t matter why people voted for Obama. They voted for him. I remember people saying that Bush didn’t have a “mandate” after 2000, and should have somehow governed from the center to reflect the closeness of the election.

Well, it didn’t work out that way. Why people voted the way they did doesn’t matter much, nor is it really notable. Exit polls tend to be very unreliable (remember “moral issues” in 2004?)

Jun 7, 2009 - 6:38 pm 44. AWH:

John Lynch,

I would put the caveat out there that Bush did not run as a moderate or as a Liberal, so it didn’t make sense to act that way when in office.

On the other hand, Obama took pains to not be considered a Liberal and emphasized his bi-partisanship and moderation. To me that makes it understandable if people have a strong adverse reaction to his policies once he is in office. I suspect that we haven’t even seen the tip of the iceberg in that regard.

Jun 7, 2009 - 7:26 pm 45. JoeHill:

“It doesn’t matter why people voted for Obama. They voted for him.”

Yeah legally and constitutionally it doesn’t matter but politically is something else. In the words of Dirty Harrt “A man has got to know his limitations.”

It possible for a person with no manadate to enter office and build one or to enter office with one and lose it. It is poitical suicide to enter office with no mandate, enact sweeping changes, and have them all be be the worst possible changes.

FDR had a manadate so even if he did make some horrible decisions he would be forgiven. Bush had no mandate when he came in to office but he certainly did have one after 9/11 and history will certainly forgive him even if a war weary populace eventually tossed him out.

Obama and the far left which he represents will not survive without resorting to extra-constitutional means if they are only 50% right and he and they would have to have a face to face with God on the road to Tarsus before they would believe they could be wrong. In short Obama is a man who doesn’t know his limitations. Kinda like Captain Ahab.

Jun 7, 2009 - 8:09 pm 46. JoeHill:

By the way the reason why that curve is going up even while job losses are supposedly decreeasing is because as male heads of household lose their jobs wives and to a lesser extent children try to enter the marketplace in order to make ends meet. Additionally there is probably no real slowdown in illegal immigration which depresses wages and again forces wives into the job market. On top of that folks close to retirement age look around and sense Social Security and Medicare are in trouble and inflation will be taking of so they are not leaving the job market.

Also the H1B’s and H1L’s and the other outsourcing of high tech jobs has pretty much put the kibosh to the idea that there will be some way to solve unemployment through retraining and education. This is especially true since all the government attempts to make higher ed more affordable through Perkins loans, Stafford loans, and various tax breaks have only driven the “cost” of education higher. So surprise surprise kids cannot afford college so they try to enter the workforce.

Obama with a little help from compassionate conservatives is busily brewing the perfect economic storm, a once a century calamity.

Jun 7, 2009 - 8:24 pm 47. buddy larsen:

AWH/42; don’t forget the other two gems of 2007, the uptic rule revocation (which allowed the September 08 debacle) and the extension of allowable lending leverage (which allowed LEH to leap off a bridge and set off the Panic) from 12:1 to 40:1 !

There’s a book in there –hell i could write the damn thing myself.

Jun 7, 2009 - 9:26 pm 48. buddy larsen:

By September Debacle i mean the 70% collapse of the big bank stocks in a half dozen trading days, at short volumes ten times normal, and including some unknown number of “phantom shares” generated by illegal (but not-enforced!) naked short-selling. Some billions of these phantoms now rest in the settlement que at the DTCC, where some evidence (see Judd Bagley’s piece of May 2009) is now suggesting that the US gov’t is quietly hiding the evidence.

Wonder why –? One would expect perp walks instead. Very mysteri-a-soros.

As is the Bush admin’s thoroughly baffling and maddening silence.

Jun 7, 2009 - 9:42 pm 49. Tamquam:

38. NahnCee: “East LA.” Hardly. Highland Park. The denziens of South Pas might be hazy on the difference, but the difference is there, and the prices reflect it. East LA, a 90%+ Hispanic is several miles from Highland Park, 60% Hispanic and lower middle class, is suffering an even more.

Jun 7, 2009 - 10:10 pm 50. buddy larsen:

Those three 2007 SEC rule changes could not have been better designed to act in sequence to abruptly swell the bubble, pop it predictably, and then during the resulting crisis quickly merge huge chunks of American business into the government.

Repeat, Those three 2007 SEC rule changes could not have been better designed to act in sequence to abruptly swell the bubble, pop it predictably, and then during the resulting crisis quickly merge huge chunks of American business into the government.

Jun 8, 2009 - 5:11 am 51. Ben Franklin:

I own a small business. One other factor that isn’t being considered is how many hours are being cut. Some of my employees are now working on an as-needed basis. There is no overtime allowed for the rest. I know this isn’t exactly on point to the question at hand but I expect there are people who will run out of savings and quit part-time work to draw unemployment before their meager savings runs out. Under-employment is something that isn’t amenable to being measured so easily as unemployment.

I wouldn’t assume that decent people will be at the bottom of the barrel. Obama supporters tend to be the least skilled, competent or intelligent employees so they have almost universally been laid off in large numbers by small businesses. They might as well have just quit their jobs as to vote for Chauncey Gardner. The effect is the same.

If you have a guy who used to hold a higher position that you can get for the same money as the lower quality employees the small business employer has been subjected to recently then there will be jobs for them… low paying, menial ones that used to be held by Obama-bots but skill will trickle down as there is less room at the top.

Unemployment benefits will delay a lot of people trying to re-enter the workforce. I expect a new perpetual welfare class to arise as duration limits are removed from such benefits.

Given the deficits being run there are only a few ways to make up the shortfall; hyper-inflation, higher taxes on a broader swath of the population, repudiation of the debt. The first two are the plan with the debt repudiation being the fallback position. We are going to get stagflation as an object lesson to all of the people who are too young to remember Jimmy Carter or who are citizens of other countries now voting in our elections.

Of course, the only rational way out is through deep federal budget cuts, reduced regulation and low taxes while maintaining a steady money supply. If history is any indication we will get around to trying this about 50 years or so from now.

Jun 8, 2009 - 9:41 am 52. buddy larsen:

…if we’re not a glowing wasteland, a prison colony, or an outpost of Burkina-Faso.

Actually, no joke, if current trends continue, we’ll be Islam east of Mississippi and Greater China to the west. Two brand new alphabets for the kids to start learning.

Either that or –we have to find a way to keep universal suffrage from eating its host. What were we thinking, anyway? Might as well give your ten year old the keys to the car and an expense account at the local saloon. If we made the voting age 25, who’d complain –everyone younger will be there soon enough. And everyone older will have a nation to live in.

Jun 8, 2009 - 10:12 am 53. Cadmus:

If we count under-employment, and people not working, but not in the Government’s unemployment statistics, we will more than double the unemployment numbers.

Just think of all the independent labor, skilled labor sole proprietors, etc who are not making any income, or barely so, but do not get counted.

In addition we have the loss of all the money the illegal immigrants were cycling through the economy. They were never counted, but millions of those worked and spent a good portion of their income on rent, utilities, food, cloths etc. All this is gone as the construction industry collapsed. This translates into a very large amount of consumption.

Cadmus

Jun 8, 2009 - 2:57 pm 54. Robohobo:

buddy @ 52: We may have another nation. One that exists under the radar. The one where the able and skilled hunt for their food and run small family gardens. Barter for other needs.

We could do this in the areas of the country away from the coasts and large population centers. Those areas are useless to the rest of us who are used to or have ever lived in the country. Hey, folks, we do not need you. Go find an old book called “Ecotopia”, scrub the deranged hippy ideas out of it and you have what I am talking about.

Jun 8, 2009 - 8:58 pm 55. buddy larsen:

Lot to be said for the 19th century, Robo –seriously –not kidding. Manners, skills, expectations –the list is long of more human (and humane) categories of endeavor.

Jun 9, 2009 - 12:35 am 56. joe buzz:

plot update:
geoff at IB responded to the comments and posts about the data points being slightly off along the x axises and update the graph here.

Jun 9, 2009 - 6:50 am 57. Lilongwe Joe:

Hey! JoeHil 41!

For all the many problems with our President, he was not “an affirmative active appointee as a pert-timr prof at a third tier law school”. He was a lecturer (not a professor) at the University of Chicago, one of the best law schools in the country. However, as you suggest, I’m still not sure why…

Jun 9, 2009 - 2:51 pm

Sorry, comments for this entry are closed at this time.