One Way to Speed the Recovery? Help Households, Not Banks.

Mark Thoma August 30, 2011
http://www.tnr.com/article/economy/94333/thoma-balance-sheet-housing

As the Great Recession drags on and on, it’s natural to wonder if we will ever get back to normal. Why is the recovery from this recession taking so long? Why was the recovery from other severe recessions, for example the 1982 recession where unemployment reached 10.8 percent, so much faster? Part of the answer is that we are experiencing a “balance sheet recession,” and this type of downturn is much harder to recover from than the other types we have had in recent decades. But poor policy is also to blame. Unfocused stimulus packages don’t get to the root of the problem, and short-term spending cuts are counter-productive. Instead, we need policies that do a better job of targeting the specific problems associated with balance sheet recessions. There are several things policymakers could do to address this, and each would help to improve the economic outlook.

The length of time it takes to recover from a recession is determined, in large part, by the type of shock that caused it. Productivity shocks, monetary policy shocks, oil price shocks, and bursting stock and asset bubbles can all cause recessions, and the effects of some of these shocks can be reversed much easier than others. For example, in 1982 when Federal Reserve chairman Paul Volcker raised interest rates to fight inflation, investment and consumption plans were put on hold and the economy slowed considerably. But once interest rates returned to normal, consumption and investment plans were taken off the shelf and put into action and the effects of the shock passed quickly.

Historically, the recessions that are the hardest to recover from are those caused by collapsing stock and housing bubbles. When a fall in stock and housing prices wipes out retirement, education, equity, and other savings, the balance sheet losses can’t be recouped overnight. It can take years to recover what is lost. Examples of balance sheet recessions such as Japan’s “lost decade” in the 1990s and the Great Depression of the 1930s show how hard it can be to recover from this type of recession. More generally, recent work by economists Carmen Reinhart and Kenneth Rogoff shows that balance sheet recessions are “followed by a lengthy period of retrenchment that most often … lasts almost as long as the credit surge.”

But these examples also show something else: how costly poor policy can be. A slow, “lost decade” recovery like we are currently on our way to experiencing is not inevitable. The speed of the recovery from a recession depends critically upon how monetary and fiscal policymakers react, and a policy tailored toward the specific type of recession hitting the economy can shorten the recovery time considerably. One of the main reasons the outlook for our economy is so poor is that policymakers have done a poor job of matching the policies they put into place to the type of recession we are experiencing.

The first way to improve policy, then, is to directly target the root of the problem: household balance sheets. When banks were having trouble due to the toxic assets on their books, the Fed took them off their hands at very favorable rates, and then took additional steps to ensure the banks would be able to survive. Unfortunately, however, that help didn’t “trickle down” from banks to households.

But what if we had taken the hundreds of billions of dollars that went to banks and instead used those funds to help households pay their bills, particularly their mortgages? If the money had been used, for example, to fund a modern version of the mortgage relief program that worked so well in the Great Depression—a program that, unlike recent half-hearted efforts such as the Home Affordable Modification Program, allowed households to avoid foreclosure in large numbers—then the assets the banks hold would no longer be as toxic. Helping these households also helps the banks as the money “trickles up,” so it’s possible to address both balance sheet problems at once. If households have the ability to pay their mortgages and other bills, then the bank’s problems will take care of themselves.

Second, in addition to mortgage and foreclosure relief, a job creation program would do a lot to stop the deterioration of household balance sheets. The biggest problem that households on the edge face—and we see this in the foreclosure numbers—is job loss. Unfortunately, job creation programs that are so important to household balance sheet rebuilding have not received anywhere near the attention they deserve. Infrastructure investment with an eye toward projects that are labor intensive would help to create the needed jobs in the short-run and more growth in the long-run, and we ought to be pursuing this vigorously.

Finally, while mortgage relief and job creation programs are likely to have the largest impact on household balance sheets, any policy that gives households extra funds that can be used to rebuild savings (e.g. a payroll tax cut), or that promotes more employment (e.g. more aggressive monetary policy), would be helpful.

To be sure, recovering from a balance sheet recession is never easy, but our failure to put the right policies in place is a big reason why the outlook remains so bleak. Politicians do not appear to understand the nature and urgency of the problem we face. Instead of focusing on helping households, all of the attention is on short-run deficit reduction. While we need to bring the deficit under control in the long-run, short-run spending cuts simply make things even worse at a time when millions of households are still struggling with the aftermath of a financial crisis they had no hand in creating. Helping those households through mortgage relief, job creation, and other means ought to be our top priority. The fact that it isn’t—that we are focused, once again, on deficits and other financial issues rather than households and jobs—says a lot about whose interests have the most sway in Washington.

Mark Thoma is a macroeconomist at the University of Oregon. His research focuses on how monetary policy affects the economy, and he has also worked on political business cycle models. Thoma blogs daily at Economist’s View.

Economic Woes Lead to Proliferation of Tent Cities Nationwide

Joshua Rhett Miller August 11, 2011
http://www.foxnews.com/us/2011/08/11/economic-woes-lead-to-proliferation-tent-cities-nationwide

Lakewood, N.J. – While millions of Americans hold their collective breath as Wall Street wreaks havoc with their life savings and retirements, residents of Tent City, a tiny makeshift community about 70 miles south of New York City, have more immediate concerns: finding their next hot meal.

For this collective of homeless and unemployed former landscapers, service industry workers and military veterans, the mention of "tarp" is sure to start a conversation about temporary rooftops, rather than a debate over President Obama's $700 billion Troubled Asset Relief Program.

At Tent City in Lakewood, N.J., very few are lucky enough to leave.

It seems like a scene straight from "The Grapes of Wrath," but this is no Great Depression novel. This story takes place in 2011, and this New Jersey tent city is one of an untold number of such encampments across the United States, where unemployment has reached 9.3 percent and approximately 3.5 million people are likely to be homeless in a given year, according to the most recent estimates by the National Coalition for the Homeless.

Joe Giammona, 31, has been homeless for nearly four months, after moving from Florida following a relationship that "just didn't work out," he said. He briefly stayed at a rooming house in Asbury Park, N.J., but the accompanying drugs and violence chased him away. A former landscaper and general contractor, Giammona lost his job when his boss had to slash payroll.

"Ever since then, it's been impossible to find a job," he said. "They're just not hiring at this time. I've been everywhere."

Clad in a "Cape Cod" T-shirt, black sweatpants and filthy white sneakers, Giammona said he has relatives throughout New Jersey but refuses to "accept help" from anyone.

"I try to make the best of it," he said, while turning a hot dog on an outdoor grill. "I hope for hope."

Despite the optimistic outlook, Giammona, who looks for employment daily at nearby industrial parks or for any odd job as a day laborer, said life outside is no picnic.

"You're either rich or you're poor," he said. "There's no in-between anymore."

The Rev. Steven Brigham of the Lakewood Outreach Community Service Ministry established this tent city five years ago for Ocean County, N.J.'s unemployed and disenfranchised residents, many of whom had previously lived paycheck to paycheck. Whether by loss of a job, the death of a loved one or a failed marriage, the American Dream has turned into a waking nightmare for the camp's inhabitants.

The 2-acre, public-owned campsite, which sits just off a state road, is composed of dozens of tents, teepees and wooden shanties that will easily buckle with winter's first heavy snowfall. Residents cook food donated by local churches on outdoor grills, and there's even a shower room. When nature calls, outhouses are found fully stocked, and portable generators provide just enough juice to charge cell phones or fire up the radio for that night's ball game.

The amenities might be sparse, but for those in the "homeless hole," they can be invaluable to the soul, according to Brigham.

"Once you fall into the homeless hole, as I call it, it's very difficult to claw your way back out," he said. "But it does happen."

Marilyn Berenzweig, 60, and her husband Michael have been living in Lakewood's tent city for 17 months. Previously of Queens, New York, Berenzweig worked as a textile designer, but lost her job due to the souring economy.

"That's an industry that has almost completely vanished in the last few years," she said. "All of my friends are out of work. It's all gone to China."

Berenzweig, an avid reader who doesn't watch television, studies survivalist skills, particularly how early American housewives maintained a fire, chopped wood and heated water for cooking and cleaning.

"Survival is very hard without the modern conveniences," she said. "We took about a month to prepare and I camped as a child, but [Michael] kept saying, 'What do you mean no electricity?' But really, we're busy most of the day."

Berenzweig -- whose wooden shack is flanked by caged birds, including a talking starling -- said most of the campers are comfortable with the surroundings.

"We manage to adapt and make the environment adapt to us, too," she said. "I could live here for the rest of my life, that wouldn't bother me."

Ocean County officials, however, are currently entrenched in a lawsuit to demolish the camp in a case that has reached New Jersey Superior Court. A status conference on the case is scheduled for Sept. 13, according to the campsite's attorney, Jeffrey Wild.

"As soon as our firm learned that homeless men and women had been sued for ejection and that they had no other place to go, we agreed to represent the homeless and seek to fight the underlying problem: the lack of any available emergency shelter in Ocean County," Wild wrote in an email to FoxNews.com. "My fathers and his sisters were raised by a single mom during the Great Depression. They often could not make rent, and often had to leave in the middle of the night the day before rent came due. Thus, I have always known that with a little bad luck -- a lost job, an illness -- any of us could be homeless."

Similar legal fights are occurring nationwide. In Providence, Rhode Island, tent cities have sprung up in a city park off Pleasant Valley Parkway, forcing city officials to seek a preliminary injunction to eject the homeless group. Campers without a permanent residence also took to public property in Colorado Springs, Colo., before its City Council passed a no-camping ordinance in February 2010. A homeless outreach program there continues to seek housing for small families at motels and shelters.

Elsewhere, like in Virginia Beach, Va., more than 20 residents of a tent city were told to vacate in April the small cabins they called home. Similar situations have also unfolded in Olympia, Wash., and Sacramento, Calif., where homeless advocates and authorities have long negotiated for a city-sanctioned encampment.

Meanwhile, back in Lakewood, when asked what he'd tell Obama if he had a chance to meet the president during his Midwest listening tour, Brigham said he hopes to hear how Obama plans to stop the steady outsourcing of American jobs .

"Outsourcing American jobs to other countries is causing the average American to be out of work and unable to support himself," he said. "If at all possible, [Obama] needs to take measures to stop that outsourcing so the average American can carry his own weight.

Brigham said he'd also like to see Obama -- the "captain of the ship" -- focus on building more affordable housing on small pieces of land.

"Homes that people can really afford," he said. "Build them small."

Moving away from the country's dependence on oil would also go a long way toward recovery, Brigham said.

"He's got to make some serious moves to get off the oil," Brigham said of Obama. "It's an addiction and it's going to destroy us unless we're able to adjust and get to a more sustainable form of energy."

Above all, Brigham said he'd like to see Obama "raise the spirits" of the average American.

"We don't want to see the boat go down and he's the captain of the ship, so he has to do something or say something to make us feel better about the situation of our nation," he said. "It's so bleak out there."

The Lesser Depression

PAUL KRUGMAN
July 21, 2011
http://www.nytimes.com/2011/07/22/opinion/22krugman.html

These are interesting times — and I mean that in the worst way. Right now we’re looking at not one but two looming crises, either of which could produce a global disaster. In the United States, right-wing fanatics in Congress may block a necessary rise in the debt ceiling, potentially wreaking havoc in world financial markets. Meanwhile, if the plan just agreed to by European heads of state fails to calm markets, we could see falling dominoes all across southern Europe — which would also wreak havoc in world financial markets.

We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.

In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.

Let’s talk for a moment about why our economies are (still) so depressed.

The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.

So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.

Yet the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe.

On Thursday, the “heads of state or government of the euro area and the E.U. institutions” — that mouthful tells you, all by itself, how messy European governance has become — issued their big statement. It wasn’t reassuring.

For one thing, it’s hard to believe that the Rube Goldberg financial engineering the statement proposes can really resolve the Greek crisis, let alone the wider European crisis.

But, even if it does, then what? The statement calls for sharp deficit reductions “in all countries except those under a programme” to take place “by 2013 at the latest.” Since those countries “under a programme” are being forced into drastic fiscal austerity, this amounts to a plan to have all of Europe slash spending at the same time. And there is nothing in the European data suggesting that the private sector will be ready to take up the slack in less than two years.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

Did I mention that the European Central Bank — although not, thankfully, the Federal Reserve — seems determined to make things even worse by raising interest rates?

There’s an old quotation, attributed to various people, that always comes to mind when I look at public policy: “You do not know, my son, with how little wisdom the world is governed.” Now that lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.

A version of this op-ed appeared in print on July 22, 2011, on page A21 of the New York edition with the headline: The Lesser Depression.