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     Sep 30, 2009
Skewed up recovery
By Max Fraad Wolff

As consensus builds for economic recovery, mass anger is building in lock step. Consumer sentiment surveys show that the public does feel better about the economy. Stock and bond markets have been celebrating, in the United States and elsewhere, since March. Public officials have been speaking of the rebound for at least three months.

But unemployment continues to rise and poverty to deepen; foreclosures increase and house price declines also continue. Thus, the real economic situation for the least affluent 80% of Americans continues to decline amidst the recovery. This is creating anger and opposition that is exploding in unlikely places, debates and attitudes. This is one ingredient driving the anger at

"tea parties", health policy meetings, protests and proclamations.
In the United States, the national gross domestic product - the broad value of final goods and services sold in America - will grow in the third quarter of 2009. Interest rates on corporate debt, US government debt and mortgage rates are low. Corporate profits have rebounded on rising productivity, a falling dollar and rising sentiment. Why is our "recovery" so skewed up?

There are many and complex answers to this vital question. One answer is our reliance on monetary policies focused on addressing the financial crisis. This is one element of the structural economic decline that is battering American fortunes. We have a structural economic crisis and a financial crisis. These two different elements of the great recession have been confused and conflated by analysts, policy makers and public perception. This created excess focus on financial matters by most.

Angry masses see the recession as purely financial. This is false. Policy makers have rushed to address the financial crisis. This is near sighted. Monetary policies have dominated our policy response. We have addressed one of our afflictions and left the greater economic problems under-appreciated and unaddressed. This makes our recovery very fragile and skewed up.

Monetary policies have provided over US$11.5 trillion of assistance to our monetary/financial sectors since March 2007. The rules for remaining financial institutions have been re-written many times over the last 18 months. New access, support and assistance have been provided with each leg down.

The Federal Reserve has led this process. You can see this leadership in the $1.2 trillion, approximately 150%, increase in the Federal Reserve balance sheet. The Federal Deposit Insurance Corporation, the Treasury Department, Congress and two White House administrations have been deeply involved. You already know this and it has been exhaustively reported. What no one seems to have discussed is how this response skews up our "recovery".

Our leading responses to the crisis have been to slash interest rates and provide trillions of dollars in assistance to our financial institutions. This makes sense but betrays the structural problem.
We are a society that lives on debt and speculation. Our houses are ever more owned by investors - 2007 was the last year American's owned more than 50% of their homes. Today, America owns 43% of its housing stock, creditors own the other 57%. We have $10.4 trillion in mortgage debt and $2.5 trillion in consumer debt. Every month 350,000 American houses are being seized by creditors.

These numbers hint at the real problem. We are dependent on the financial sector. This is result of our structural economic problem. We have been over-consuming for 15 years. American wages, salaries and savings have not been enough. We have been borrowing and speculating for the difference. The world has joined the game with global financial deregulation and market integration. Real recovery will take time, and has not been attempted. Instead, we have been working and spending to put Humpty Dumpty back together again.

We have been straining to jump start the financial machine that has enabled a debt and speculation economy. This skews up the recovery. Low interest rates and enabling policies for lenders have succeeded in buoying our surviving firms. They borrow cheaply from the Federal Reserve, the markets and the public. Safe investments offer very low yields but they can borrow for even less. This pushes up earnings.

Even more essential, government programs buy and assure safe assets. The Federal Reserve has purchased $700 billion in mortgage-backed securities and plans another $500 billion to $600 billion in purchases over the next year. The federal government's Fannie Mae and Freddie Mac have purchased more than 75% of the mortgages and mortgage-backed securities sold in the first six months of 2009.

The Federal Reserve has also been buying US Treasury debt. This drops the returns on safe assets. People re-enter more risky markets and start speculating again. This is done by design to drop the price on mortgages. Thus, our policy response helps people with good credit to get cheap mortgages.

We are also providing assistance to financial institutions and returns to speculators. We are making vast sums of money available and make the returns on safe assets very low. You donít need me to tell you what this creates. This drives money into riskier and riskier investments. Look at stocks, particularly in the developing world.

This skews up our recovery. The job market continues to be very weak and it is clear that it will be several years before we create the 7 million jobs lost, let alone the backlog of missing jobs that we need. Our population growth suggests we need 125,000 new jobs a month just to keep at a standstill.

Weak job markets mean stagnant wages and rising productivity. It is hard to get wage increases and easy to be overworked in understaffed workplaces when fear runs high. People with bad or questionable credit don't get those new lower borrowing rates. Today's cheaper mortgages are hard to get for many and out of the question for those in trouble.

The rapid rise in asset prices does nothing fast and direct for the mass of Americans who own few of the assets. What is owned is squirreled away in battered retirement accounts. The stagnation in the US economy, a falling dollars and falling debt flow make foreign markets and enterprises more essential to enterprises. This directs attention, new employment and excitement to other nations. All of this shrinks the future importance of the lower 80% of Americans in global business terms.

Our skewed recovery is fragile and has left behind many people and businesses. This is rarely discussed and even more rarely understood. In the absence of discussion and understanding, anger simmers and erupts in odd places, times and ways.

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst, and editor of the website GlobalMacroScope.

(Copyright 2009 Max Fraad Wolff.)

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