Which is more important? Jobs or keeping the federal deficit down?

The Media Consortium has posted an excellent post at OpenLeft. Consider this:

...take a look at Friday's jobs report. As Tim Fernholz notes for The American Prospect, this report was the most disappointing piece of economic news in months. While the economy gained 431,000 new jobs during the month, 411,000 of them were temporary hires by the U.S. Census, meaning the private sector is not able to support much new hiring.

There's a critical lesson there: The only serious engine of job growth in the month of May was the federal government. Absent government hiring, the economy is not improving at all. There is an almost bottomless supply of critical social needs that require work right now, but no private-sector momentum to meet those needs.

The BP oil catastrophe should underscore how important new, green energy is to the U.S. economy-yet U.S. efforts to develop green energy solutions have fallen far behind those of China and other industrial powerhouse nations. Major federal investment into the research and implementation of green energy would be good for our environment and good for our economy."

The only strength in the American economy is federal spending. It is maintaining some employment where the private economy simply cannot.

Why does this matter? The Great Depression II was limited to merely the Great Recession in 2009 by this federal deficit spending. Right now is too damned soon to stop deficit spending that maintains jobs!!

Is deficit spending inherently bad?

Should a family ever borrow money to buy a house? If they can't, then available housing drops throughout the economy and so do jobs. but housing itself builds and protects families so that the children can grow up to join and expand the economy. It's investment spending both for the families and for the economy.

That contrasts with families that gamble away their income and have nothing to show for it, or economies that borrow money to go to war and have nothing to show for it. Some deficits are good, some are bad. Spending to protect jobs is inherently good spending, because ultimately the borrowed money can be repaid from the increased work performed by the economy overall.

Krugman explains the connection between GDP growth and unemployment

This is from Paul Krugman's blog Saturday.

August 1, 2009, 11:51 am

Growth and unemployment

A few commenters have asked how it’s possible to have a recovery with rising unemployment; also there seems to be some confusion about what I meant by saying that the unemployment rate isn’t much out of line. So I thought I’d offer a chart — and I learned something in the process.

So here’s what economists mean when they talk about “Okun’s law” (which, like almost everything in economics, is a rough rule of thumb rather than a true law.) On the horizontal axis is the annual rate of growth in real GDP, on the vertical the change in the rate of unemployment (so that if unemployment goes from 5 to 6 percent, that’s a +1). I start with 1995 because that’s about when there seems to have been a pickup in underlying US productivity growth, making comparisons with earlier years problematic.

What you see is that unemployment tends to fall when growth is high, fall rise when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising.

That’s how you can have a technical recovery that feels like a recession: real GDP may be rising, but if it doesn’t rise at a sufficiently high rate, unemployment keeps going up.

Now, notice the red dot at the upper left. That represents what happened from 2008II to 2009II: a huge fall in real GDP, a huge rise in unemployment.

So the recent report that the second quarter Gross Domestic Product only contracted by 1% instead of the very nasty drop of around 6% in the first quarter should result in a smaller increase in the unemployment rate. Of course, the change in GDP does not effect the unemployment rate immediately. There is a lag time.

In my opinion that still means that the economy is improving in a few sectors, especially housing. Those sectors are being "floated" on a sea of government supplied money and credit because the federal government is pumping stimulus money into the economy. The consumption that drives the overall economy is not yet self-sustaining, and gives no indication that it will be anytime soon.

Consumption itself cannot increase or even stop declining until the consumers start getting more money to spend, and they aren't getting it yet. In part that is because there is no increase in wage income, and in part there is a problem that consumers are sensible and want to build or rebuild their savings in case of future problems. Even if they get more money, consumers are going to delay a lot of spending until after they allay their fears of layoff or other job loss. Since Consumption is 70% of the total GDP, and investment that is directed at economic growth caused by an increase in consumption is another big chunks of the 30% of the economy that's left, the economy is not currently improving on its own and will not do so until consumers start making more money.

That means unemployment must drop dramatically, something that will only happen after the GDP has gone into positive numbers. The growth of GDP has to be a sizable one, according to Krugman, And the delay between the time change in GDP actually does turn back into growth until the employers decide it is a permanent or at least predictable change, then the time the employers take to decide to hire more labor and actually get it done, will probably take at least a year or more.

I doubt that the economy could begin to show strong hints that it was starting to be self-sustaining again until Summer of 2010 or later.

This really is the worst economic downturn since the Great Depression of the 1930's. And it has taken nearly a decade to develop, with the signs of the downturn itself not being publicly obvious until late 2006 or early 2007.

The stimulus funds that have already been committed are only about 30% implemented at this time. It is really surprising that the mere 30% has begun to show significant effects this soon.

This link leads to Krugman's earlier post.

When does the economy start to recover on its own?

I got a good comment to my previous economic post and replied to it. The reply grew into what I think is worth another post of its own, so here it is. First, the comment.

Slice said...

The economy has to recover at some stage. Most likely towards the end of the year.

I agree with the first half of Slice's statement. But the second - recover by itself when?

The Depression lasted a decade until war spending was big enough at last to shake the economy loose. Japan's doldrums lasted at least a decade and they never fully recovered because so many competitors had popped up and Japan never made the necessary fundamental changed in their economy.

Right now I still see no reliable indication that the economy itself is trying to recover. It remains on life support based on government spending.

The economy itself will not recover until the consumers (70% of GDP)start spending again, and to do that they have to have more jobs, better pay, and less employment uncertainty. Right now all of these things are going the wrong direction.If consumers don't start spending, then investors will not invest in putting unused plant and equipment back into use because their is no market for the product.

Since investment is locked to consumption and lags behind it, there remain international trade and government spending. But international trade is still trending down, particularly since the Buy American actions are causing other nations to retaliate. That leaves only government spending to support the economy. It's all we have right now, and it's not enough to fund a recovery. All it has done is slow the collapse into what very probably was Depression II (if you don't count the Great Depression of the 1870's.)

Jobs and payrolls are the key. They are still trending in the wrong direction for the economy to help itself any time soon. It won't be this year. The lag time on creating new jobs, hiring and making masses of consumers feel secure enough to start spending again is at least a year from now, probably more.

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Addendum 3:14 PM
For an additional view of how long it will take to recover, the excellent blog Calculated Risk offers two strong views that the worst is not yet over.

1. Feldstein: Risk of Double Dip and
   
2. Philly Fed State Coincident Indicators: Widespread Recession in June

I trust both Martin Feldstein and the Philly Fed a lot more than I do the politically motivated anti-Obama Associated Press and their hand-picked hatchet woman, Nedra Pickler.

The difference between the Philly Fed and Marty Feldstein is that both of those are primarily analysts trying to understand what is actually happening. The AP and Nedra Pickler are both political advocates in the business of swaying public opinion, and they merely hide behind the Associated Press's long history as a relatively objective news source.

Economic uptick on the way?

I've been posting consistently gloomy economic prognoses for well over a year based on not seeing any hints that the economy might turn around. While I might not yet be ready to jump on the "It's almost over!" bandwagon yet, This Associated Press report is in fact the first indication I have seen of what might be a harbinger of economic recovery. So here it is:

More plans to build homes, higher stock prices and fewer people filing first-time claims for jobless aid sent a private-sector forecast of U.S. economic activity higher than expected in June.

It was the third straight monthly increase for the New York-based Conference Board's index of leading economic indicators, and another sign pointing toward the recession ending later this year.

Now I am suspicious of what this is an indicator of, and I am always suspicious with I see an AP news report with a byline by Nedra Pickler who has done some character assassination and misleading reports in the past and has earned a reputation of a reporter with a right-wing bias rather than of a reporter who tries to report as accurately and neutrally as possible.

Besides the suspicious nature of reporter herself, there is a question regarding the nature of the report itself. While these indicators may predict that the recession is nearing the end, they may also be very early and unreliable indicators. They may not indicate that the economy itself is beginning to recover on its own. They may be merely indicators that the stimulus funds are building up steam and becoming more effective.

How's that? Well, they may not yet be indicators that the economy is trying to regenerate itself. They may be indicators that the economy is sort of in the mode of a gasoline engine that coughs and sputters, then dies again when it has problems and is trying to start. But while I am suspicious of reading much positive into these indicators, at the same time they are still the best news out of the economy in well over a year. Again back to the metaphor of the gasoline engine that is trying to start but can't yet do so, that is a real indicator that the gasoline engine does not have something that totally prevents it from starting.

To again shift metaphors, these may not be indicators of a true dawn. They may instead be little more than indicators that resemble the false dawn that sometimes is noticed early on a cloudy day as the sun's rays are reflected to the ground before the sun itself actually has risen. So I find it guardedly good news.The time is too early to believe that the economy is actually coming back.

Why are all the newspapers collapsing?

David Love has some ideas what's wrong. Here are some of my favorites:

I would suggest some additional reasons that some newspapers have failed. Too often, they simply have not served their readers, and the product, like a GM car, has lost its appeal. Many news companies— not just papers, but TV as well—are owned by corporate conglomerates and entertainment companies. This reality is reflected in the softball, celebrity gossip orientation of many so-called news outlets. Governed by the bottom line and cost-cutting measures, these papers have eliminated their City Hall beat reporters, and other reporters who are in tune with the pulse of a given city. In the absence of seasoned journalists who can actually report on anything, because those people were already laid off, these newspapers become a collection of news wires and press releases, in a pamphlet. And who is paying for that when you can read it online?

The damage has been done in terms of the giant pass that the news media have taken on the important issues of the day. During the Iraq War, the mainstream media took the opportunity to act as nationalistic cheerleaders, the propaganda arm of the Bush White House— beating the drums of war and almost celebrating the thousands upon thousands of deaths that would inevitably occur.

As cheerleaders for corporate America, the mainstream press fell asleep on the Wall Street crisis. Over-caffeinated blowhard snake-oil salesmen posing as business journalists were in abundance during the heyday of the financial sector. But where were the probing exposés on the problems of deregulation, and the thoughtful analyses on the consequences of gluttony on Wall Street?

Even as we speak, what about coverage on the thwarted assassination plots against President Obama? Or a meaningful discussion on the malicious and deleterious effects of U.S. drug policy? How about a substantive debate in the mainstream news about the madness that represents America’s gun policy, and the lethal combination of gun proliferation, economic recession and untreated mental illness—of individuals and of the society— that plays itself out in communities throughout the country?

Well, many newspapers and other corporate news venues will not offer and have not offered such valuable content. Their game is trifling and sloppy. So if they die, it wouldn’t be too soon, as they provided us little benefit in the first place. That is why people increasingly turn to independent news sources

One that David mentions that I suspect may be a really critical component is the fact that the papers I know of did quit doing City Hall and around the town coverage and replaced it with stuff like E! TV coverage of entertainment. As David says "Governed by the bottom line and cost-cutting measures, these papers have eliminated their City Hall beat reporters, and other reporters who are in tune with the pulse of a given city."

I think this became a lot worse when the Reagan administration stopped enforcing anti-trust and explicitly permitted local city newspapers to buy out and shut down their competitors. The result was no competition. Newspapers no longer had to spend money providing news their readers really wanted about their towns and cities. Instead they became boosters for whichever developers had taken over city hall during the last election and the newspapers pushed the latest great economic development plan - usually tourism or bringing conventions to town.

The result is that we are rapidly losing the journalistic expertise those newspapers built up over the years, what few elements of it their corporate masters had left to them after the last rounds of cost-cutting.

It's a dammed shame. It really looks like Capitalists and their accountants cannot manage a successful newspaper.

Goldman Sachs thinks the recession will continue to get worse next year and into 2010.

This must be a lot like it feels to be on a submarine that has gone into an uncontrolled crash dive. The economic future looks bleak.

WASHINGTON (MarketWatch) -- The unemployment rate is expected to rise to 8.5% by the end of next year and inch even higher in early 2010, economists for Goldman Sachs wrote Friday. The cumulative trough-to-peak increase of more than 4 percentage points in the jobless rate would be the most since World War II, they said. [Snip]

"We do not see a resumption of anything close to trend growth before 2010."

Paul Krugman pointed out Friday:

Gurk! ZIRP!
That’s Zero Interest Rate Policy — which is now, in the wake of this morning’s terrible employment report, inevitable. Yes, we’re Japan.

Add to this the news of a retail sales collapse, and we’re looking grim, grim, grim.

Monetary policy obviously isn’t enough. It’s time to raise Keynes: we need big fiscal stimulus, now now now. [Snip]

The unemployment rate has now risen more than 2 percentage points from its pre-recession low. In 1990-1992 the unemployment rate rose 2.6 percentage points. Given what’s happening to retail sales, manufacturing, and so on, it’s now a certainty that unemployment has a lot further to rise. So the “worst recession in 25 years” thing is now baked in. The only question is whether we hit “worst slump since the Great Depression” territory.

Add to that the new bank failures announced yesterday

• Security Pacific Bank, Los Angeles, CA and
  
• Franklin Bank, SSB, Houston, TX

Add also Freedom Bank, Bradenton, FL which failed October 31 and Alpha Bank & Trust, Alpharetta, GA which was closed by the FDIC October 24th, and the total for 2008 on the FDIC failed bank list is 19 banks.

There will be more as the economy worsens.

One other thing to consider. When the economists imply that the economy will turn around in 2010, they are basing that on historical trends, not on any current indicators. But this is already a Recession for which the only appropriate historical trend is the Great Depression. Economists now know this one will get worse all next year. They are guessing when they mention when the Recession will be over. There are no indicators telling when recovery will start.

So how long will the recession last? No one knows. All the wizards magicians wise old men economists can tell us is that it will be getting worse into 2010. The bottom is at this time unknown and unknowable.

---

Addendum 11/9/08 3:25 pm
Robert Reich provides a good explanation of what is happening to the economy.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.

Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down.

I is investment. Absent consumer spending, businesses are not going to invest.

Exports won't help much because the of the rest of the world is sliding into deep recession, too. (And as foreigners -- as well as Americans -- put their savings in dollars for safe keeping, the value of the dollar will likely continue to rise relative to other currencies. That, in turn, makes everything we might sell to the rest of the world more expensive.)

That leaves G, which, of course, is government. Government is the spender of last resort. Government spending lifted America out of the Great Depression. It may be the only instrument we have for lifting America out of the Mini Depression. Even Fed Chair Ben Bernanke is now calling for a sizable government stimulus. He knows that monetary policy won't work if there's inadequate demand.

So the crucial questions become (1) how much will the government have to spend to get the economy back on track? and (2) what sort of spending will have the biggest impact on jobs and incomes?

The answer to the first question is "a lot." Given the magnitude of the mess and the amount of underutilized capacity in the economy-- people who are or will soon be unemployed, those who are underemployed, factories shuttered, offices empty, trucks and containers idled -- government may have to spend $600 or $700 billion next year to reverse the downward cycle we're in.

The answer to the second question is mostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation. Even conservative economists like Harvard's Martin Feldstein are calling for government to stimulate the economy through infrastructure spending. Infrastructure projects like these pack a double-whammy: they create lots of jobs, and they make the economy work better in the future. (Important qualification: To do this correctly and avoid pork, the federal government will need to have a capital budget that lists infrastructure projects in order of priority of public need.)

Government should also spend on health care and child care. These expenditures are also double whammies: they, too, create lots of jobs, and they fulfill vital public needs.

Lowering the interest rate and expanding the money supply can do no more than it already has. What is needed is stimulus, and the only player that can do that is government. That means the federal government has to spend borrowed money - a lot of it. Only after that is done will the economy begin to turn around.

And, yes, that is pure Keynesian economics.

The dangers of "reform" as an unquestioned goal

Ian Welsh questions to the apparent demand for "reform" when no one bothers to understand why things were initially set up the way they are now. Here are some of his really excellent examples:

You should never, ever, make a policy change unless you can say why the policy was enacted in the first place. You should never, ever, make a policy change unless you are able to make the argument for not changing it.

This is a constant problem. People want “reform” (the most debased word in the political lexicon, since most reforms aren’t) but they never seem to understand the costs of change.

When you reduce capital gains taxes you push money into the secondary securities markets and reduce consumption demand. You make the rich richer, and people who work for a living comparatively poorer.

When you get rid of estate taxes you will increase the amount of money that living people have to pay in taxes and help create a class of rich people who never earned their own money.

When you reduce the progressivity of the taxation system overall you reduce growth in demand for general goods and services and increase the demand for financial products and luxury goods.

When you reduce funding for public health you increase the spread of STDs and you create a pool of people who will act as carriers for infectious diseases, thus making even rich people more likely to suffer from and die from disease.

When you make it impossible for rich people to cut large checks to politicians, and don’t allow public funding, you make fundraising take up much more of the time of politicians and require many more compromises, not fewer compromises. They wind up owned by more people, not fewer people.

Examples are endless.

Reagan came into office by blaming government for all the failings of America, economically, socially and in Vietnam, up to that point. He was also riding on a wave of right-wing resentment about the massive defeat of Goldwater in 1964 and what they considered then (and still do) a coup de etate that removed Richard Nixon from office. Reagan's classic sound bite line "Government is not a solution to our problem, government is the problem." encapsulated all the resentment felt by the American right wing while offering the solution. Eliminate government.

The conservatives didn't want to hear disagreement or defenses of government. They just wanted "reform." They considered the explanations to be nothing more than opposition to the great, simple, solution they had to offer and they didn't want to hear it.

Well, the examples above were all predictable. An experiment wasn't needed to show that increasing the reward to investment would damage consumption, and that our economy is over 70% based on consumption demand. That's logic, and the conservatives base their "great ideas" on feelings and simplicity. But Ian has more:

The rule of “reform” is that it moves in cycles. First the rich are taxed lightly. Money concentrates in their hands, the economy financializes, real economic activity grows more slowly than before, the poor and middle class borrow themselves into bankruptcy. The economy crashes. Taxes are shifted to being highly progressive, demand improves. Once things are good for long enough that those who remember are dead or retired (once the Lost Generation lost power) it begins to seem “unfair” to tax the rich so heavily. They get rid of most of it. The economy financializes, real economic activity grows more slowly than before, etc…

In businesses the same things happen. Some manager decides costs are too high and outsources operations. Costs are reduced, and he gets a promotion. The new manager discovers service is worse and that anything extra he wants done costs a lot of money and requires contract renegotiation. He decides that the loss of control is costing them more money than its worth. He brings the operations back inside the company. Control increases, the amount of money being generated increases, but costs also accelerate. He gets promoted. A new manager comes in. He notices that costs are too high….

Those were cyclical examples. Sometimes things aren’t cyclical. Sometimes they’re just bad and lead to bad places. When Spain financialized its economy, it never recovered, because by the time it was clear that there was a problem that the next treasure ship wouldn’t solve, the middle class had been destroyed to the point where it couldn’t be rebuilt. All that was left were poor people and rich useless people living on “incomes.”

When GM and Ford decided that they were finance companies, when they decided to stop being controlled by men who had been engineers, and have suits control them, they let their engineering cultures decay. Now, building lousy cars that aren’t worth what they cost to build, they keep trying to dig themselves out by new financing schemes, by promotions, by cost cutting… But the problem isn’t their financing, the problem isn’t their sales force, the problem isn’t primarily their costs (they could get rid of their pension obligations, their health obligations and cut wages in half and they would just go bankrupt slower), the problem is that they have a lousy engineering culture. And none of what they’re doing is designed to fix that - it’s all spreadsheet management, running around trying to change the numbers in the cells on management’s excel sheets. Which doesn’t make better cars.

Developing nations train and reward engineers, not financial experts and bankers as the U.S. has done for over a generation now. I know a number of engineers, and almost all of them at about age 40 went back and got MBA's instead of advanced engineering degrees.

Bankers don't create new products that matter, nor do they increase economic productivity. Engineers do that. But the American economy has been financialized, and not longer can compete internationally.

It's time to dismantle the disastrous Reagan Revolution reforms and get the engineers back into running American companies with advice from financial experts and economists.

America's growing plutocracy

America is becoming a nation in which wealth dominates the government and in which the financial rewards from the economy are monopolized by wealth instead of ability and accomplishment. The term for that is "plutocracy." The ideal of America has always been a society that was a "meritocracy" in which ability and accomplishment dominate government and the rewards from the economy flow to those who are most productive. We are losing that ideal.

What is the difference? In a meritocracy society rewards those who demonstrate personal abilities that increase economic and social productivity and who are useful to others. In a meritocracy the government is run by individuals who have demonstrated personal achievements. In a plutocracy, society rewards the holders of great wealth rather than those who have personally accomplished things of note.

The key government policies in a plutocracy are those that protect great wealth and the ability to keep it in the family. In a meritocracy the key government policies are those that grow greater wealth for society, and instead of allowing it to remain concentrated in a few pockets already dominated by inherited wealth, they spread it to those who contribute most to building society and to increase economic productivity.

But don't people with great wealth get rewarded for their achievements? No, generally they are rewarded for their personal networks and ability to raise funds needed to build organizations (productive or not) which they will then dominate because of their networks among the wealthy. I offer as an example George W. Bush, who has never in his life achieved anything, but because of his family and its wealth he was handed a series of jobs at the top of oil companies, then handed a professional baseball team, and finally was handed the Governorship of Texas followed by the Presidency of the United States. At no time has he ever achieved, let alone exceeded, expectations. There is one exception. He was placed in government by those who have great wealth, generally inherited, and his job has been to appoint government officials who act to protects and augment families with great wealth.

Just my opinion? Go look at the chart that Kevin Drum has posted and read his explanation. The top line on his chart - the one that shows the income flowing to the top 1% of America families - shows clearly that America is rewarding wealth, not ability or productivity.

Protecting and rewarding wealth is the central purpose of the conservative movement, even when it makes American society less productive.

Likely effect of disastrous employment figures

Bonddad referred me over to Mish's analysis of the really, really bad employment report. His analysis is:

Two days ago in Mass Layoffs Soar I proposed "One of these months there is going to be a massive "unexpected" downward jobs revision. More than likely that will be used as an excuse by the Fed to cut (or further cut) rates. It won't help."

So Soon?

The August BLS Employment Situation Report shows that "One of these months" has already arrived.

Nonfarm payroll employment was essentially unchanged (-4,000) in August, and the unemployment rate remained at 4.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 3 months, total payroll employment changes have averaged 44,000 per month and private sector employment changes have averaged 72,000 per month (as revised). In August, employment in manufacturing, construction, and local government education declined, while job growth continued in health care and food services.

Participation Rate Sinks to 65.8%

How does the BLS hold the unemployment rate low with such pathetic numbers? The answer is of course the participation rate.

"In August, the civilian labor force edged down to 152.9 million, and the labor force participation rate decreased to 65.8 percent. The declines were largely due to a drop in labor force participation among teenagers; their participation rate fell to 39.7 percent."

Well participation rates can't go negative so this source of nonsense will eventually have to stop.

Mish is saying that the employment figures were only as positive as they were because the Bureau of Labor Statistics (BLS) is fudging the figures like mad. Or, as he states it, there is a great deal of BLS "moonbat activity" designed to make the already bad looking numbers from showing the true dimensions of the disaster that has occurred. If economic numbers in tables don't cause your eyes to glaze over I strongly suggest that you go read his report in full.

From the macroeconomic point of view, these numbers point to the coming problem in the economy.

Gross Domestic Product (GDP) = Consumption (C) + Investment (I) + Government Expenditures (G). [GDP=C+I+G)]

But since Bush took office, "I" and "G" have not become significantly larger. Think about it - for the tax cuts to have kept the economy working, "I" would have had to increase. it didn't. What has kept the economy from going into recession has been the continued consumer ("C") spending.

But real wages have not increased since the Clinton administration. Consumption spending ("C") has been the main cause of any increase in GDP since Bush entered office, and that has been manipulated to prevent recessions from causing Bush to be defeated for reelection in 2004.

As I wrote earlier, Federal Reserve Chairman Alan Greenspan wanted Bush reelected and the Republicans to remain in power. He did it by lowering interest rates and by failing to regulate the quality of mortgage loans that banks were issuing.

The resulting housing bubble kept both employment its resulting consumption spending artificially high. But the economy needed to go into recession early in Bush's first term, so the efforts to artificially pump up the economy required more and more effort as time went on. Or to say it another way, the housing bubble was created to artificially pump up the economy for political purposes, but the longer the bubble was permitted to last, the more damage it did to the economy.

Greenspan started slowly rising the interest rate in February 2005 to try to slowly correct the damage he had done, but it didn't work.

A housing bubble takes a long time to demonstrate its damage. I'm sure that the mortgage companies could see it in 2006, but it did not become publicly known until the largest mortgage company in the nation (Countrywide) announced that it was having problems in early 2007. The damage of the bubble has been slowly surfacing since then, The credit crisis from this Summer are just the latest effects. Countrywide has announced that it expects a 25% drop in mortgage lending next year, and is now laying off 20% of its workforce (a number that has not yet made it into the BLS statistics.)

There are more economic problems to come. The only thing no one knows is how severe they will get. Recession? More likely now than not.

One thing about this, though, is that the President usually gets credit or blame for the status of the economy because he was in office when it happened, no matter what he did. In this case, however, George Bush and the Republicans are directly responsible, and demonstrably so.

The Bush administration has been faulted for politicizing a lot of things that should not be politicized so that they can keep Republicans in power. Attorney General Alberto Gonzales has just resigned over the scandal of politicizing federal Justice. Michale Brown was fired as head of FEMA because FEMA had been made a dumping ground for unqualified political activists and the disaster in New Orleans proved it. Here we can see how the same process of politicizing everything the government touches has also effected how the economy is managed by the Federal Reserve.

There is nothing in America (or Iraq) that the Republicans and the Bush administration have touched that is not the worse for it. Our next recession (among many other disasters) has been worsened by our Republican party.

Remember that when you go to vote next. That vote is the only protection we, the average American people, have from the Republicans.

Fed takes action to improve market liquidity

Bondad reports on the market reaction to the Federal Reserves 1/2% decrease in the discount rate.

What is "the discount rate?"

US banks use a fractional reserve system. All this means is a bank much have x% of its total assets on hand at any given time. However, in a banks usual business affairs their reserves may dip below this percentage amount. When this happens, banks must borrow short-term money from somewhere. Usually, they go to other banks. The interest rate banks charge each other is the Federal Funds rate. In addition, a bank can go directly to the Federal Reserve and borrow money. The Fed will charge the bank the discount rate. Going to the Federal Reserve to borrow money is a last resort and is usually considered a sign of weakness. Therefore, lowering the Discount rate is largely a symbolic gesture because it isn't used nearly as much as the Federal Funds rate.

Go read Bonddad's report on what the market did as a result. He posts neat tech analysis charts.

Bonddad describes the subprime mortgage loan mess

The Subprime mortgage loan originators have been having a set of real problems for the last few months as the value of homes they have loaned money to buy drops. This is a direct result of the housing bubble, which burst last Summer, and the nunmber of highly risky loans used to buy many of those homes.

Go read Bonddad's excellent description here.

Everyone has known this was coming since at least 2004 when then Federal Reserve Chairman Greenspan told people to use any loans they could get to buy real estate. The fact is, real estate building and sales have been the mainstay of the American economy since 2002. It was beginning to slow down, and Greenspan knew that only real estate-related business activity could keep the economy going.

The assumption was that the rest of the economy would pick up before the bottom fell out. Only that hasn't happened.

Been wondering why the stock market hiccupped?

I was too.

And I hadn't found an explanation that I felt was anything more than some stockbroker or his analyst trying to tell me "Oh, don't worry. We have it all under control. Keep sending us your money and we'll all continue to get rich together." [Note: When the market goes south, they still keep the part of the money you sent them that was labelled "fees." The rest of your money just disappears without even the dignity of a puff of smoke.]

I forgot to check Robert Reich's blog. Then I got to them this morning and "Voila." There was the answer.