As the United States faces up to
recession, or near recession, disturbing trends
are taking shape. Early pain was concentrated in
all things housing. Home prices, construction,
home improvement have been sliding since August
2007. Months of loud pronouncements gave
reassurance that the troubles would be small and
restricted. Virtually every major piece of
economic data released in 2008 has proved this
forecast false.
Housing remains at the
center of the storm. Economic and credit winds are
knocking down jobs, profits, confidence and
spending. Wall Street has been sliding since
summer 2007. Stock prices are off by about 10% in
the past few months.
The pain has been
concentrated in financial firms, mortgages lenders
and all who hold bundles of consumer debt. Here
the
losses have been massive and
destabilizing. Banks, mortgage lenders, investment
houses have seen hundreds of billions of dollars
vanish and small firms are falling or being
swallowed up.
There has been little help
to the macro-economy. What help has come, has been
targeted at investors and banks. Further, it has
been targeted to the largest and most powerful
firms. We have seen select bail-ins and take outs.
Bail-ins allow firms access to new, greater and
subsidized cash for survival. Take-outs occur when
authorities allow some to fail or actively assist
in their being taken over.
As recession
sets in, government officials, business, workers,
consumers report pain. The United States has lost
232,000 jobs this year. The losses piling up in
and on millions of American households are large
and growing. High mortgage debt and low prices are
pushing the lower middle class into poverty. Homes
are underwater when more is owed on them than they
are worth. Over ten million households already owe
more on their homes than they are worth. This
number is growing and will continue to grow as
house prices fall further.
Help has
arrived for select investors, dominant banks and
businesses. As house prices and jobs continue to
fall, millions of American families are left
waiting. The firms who lent are also suffering.
The largest and best positioned are receiving some
real help from America's central bank and
financial regulator, the Federal Reserve.
There have been two forms of help so far.
The Fed has slashed the interest rates it is has
direct influence over. These are the Discount
Rate, the interest rate the Fed charges qualified
borrowers for loans, and the Fed Funds Rate, the
target for interest on interbank loans. The
interest rate reports you are seeing and hearing
about are the cuts in the Discount and Federal
Funds Rate. These actions make more and cheaper
cash available to those pained by the size and
poor performance of the loans they have already
made, bought and sold.
The Discount Rate
has been lowered seven times from 6.25% to 2.5%.
The Federal Funds Rate has fallen from 5.25% to
about 2.25% since August 2007. In time and subject
to some uncertainty this helps the overall
economy. More and less costly money usually
filters through financial institutions into public
hands as more and cheaper credit.
The
second form of help has been regulatory change.
New forms of inexpensive loans and easy access to
these have been introduced since the credit crisis
began last summer. Over the past six months the
Federal Reserve has made more and larger changes
to our financial system. Each new innovation and
program makes greater assistance to increasingly
distressed leading financial firms available. No
similar help has been directly given to America's
families.
Among the helpful innovations,
the New Term Auction Facility (TAF) has allowed
large banks to borrow massive amounts of cash
against collateral that can't be sold for close to
face value. Banks are allowed to drop-off loan
bundles for cash or government securities at their
local Federal Reserve Bank; US$260 billion was
loaned through the TAF to large banks in
twice-monthly auctions since December 2007.
Borrowing has been increasing as banks are
charged the ever lower discount rate for 28-day
loans. Since the take-out of Bear Stearns and
investment bank bail-in of March 16, 2008, other
new innovative help has been announced. On March
11, 2008 The Fed began allowing select financial
firms access to 28-day loans of safe US Government
Debt in exchange for much less safe debt. As of
April 03, 2007, $100 billion had been borrowed.
Investment banks have now been invited to
join those borrowing large sums at the discount
window. Our leading banks got the most and the
most rapid help. Current outstanding loans of cash
and Treasuries by the Fed total over $320 billion.
That is a lot of help. My point is not that the
help should not have been given, although serious
timing and method concerns remain. I am pointing
to a pattern of where help is directed and where
it is not directed.
Many households have
gotten no direct help and are still waiting for
help to filter down from banks of come as small
checks in May. We now know that the economy is in
or near recession. We know that households are
suffering. The Fed calculates how much after-tax
income households spend on paying debt - it works
out the value of debt service payments and divides
this number by after-tax income. This produces the
debt service ratio, a measure of the cost of debt
to American households. The most recent number,
end of 2007, shows that 14.32% of after-tax income
goes to debt service.
Unemployment is
rising, prices are rising and the majority is
being neither immediately nor directly helped. The
Fed's actions to help banks and lower interest
rates are flooding the economy with cash. Lower
interest rates and rising amounts of dollars
decrease the value of our currency and risk
inflation. Travel abroad or attempt to buy
imported goods and you will see the cost our
monetary policy has.
The decline in the
value of our money is increasingly showing up as
inflation. Foreign lenders, buyers and those
selling anything priced in US dollars demand more
of our dollars as each one declines in worth. You
can see the effects in food prices, energy prices,
metals and basic materials prices.
This is
where we are; the early months of a recession are
always difficult. As time passes and pain
intensifies, fighting begins over who gets help,
how much help and when. This has begun.
So
far the help offered to the public has been little
and lagging. As debates rage about how much help
is needed, the best-connected and best-positioned
firms have been demanding and getting generous
sums. More, or at least some, targeted assistance
to America's troubles families is required.
Artificially keeping house prices up is not wise
and will not be possible. House prices need to
continue to fall and will. This will place
increasing pressure on household balance sheets.
To begin to address this situation, we
need to concentrate on elevating earnings and
reducing debt levels. This will require the kind
of creativity and expense reserved for banks so
far.
Max Fraad Wolff
is a doctoral candidate in economics at the
University of Massachusetts, Amherst, and editor
of the website GlobalMacroScope.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
