Momma Bear, The Recession and Obama

Why does it sometimes feel like bad news is the only kind there is? Lately you can't pick up a paper without a barrage of doomsday information: market volatility, rising gas prices, job losses, negative consumer spending reports. It's enough to make you hide in your house and never spend another dime. But, what's underlying all this doomsday economic news?

The forces creating these conditions are complicated, but they're not impossible to understand. Let me break it down a bit...

First of all, it's important to understand that consumer spending is two-thirds of the Gross Domestic Product (GDP), which drives the economy. So every time you remodel your house, take a vacation, or buy your kids those trendy new school clothes, you're contributing to the national economy.

Now you hear constant news about the fact that we're in a recession. But what does "recession" really mean? A recession is "a decline in a country's real GDP, or negative real economic growth, for two or more successive quarters of a year. What causes one? Fundamentally, I believe that this recession in particular, is consumer led, brought on by two converging forces: the housing bubble collapsing and the credit crisis.

Collapsing housing bubble: housing prices have decreased, which has led to a decrease in spending on housing-related projects, such as construction and home furnishings. It's not an anomaly if you drive down the street and see the same houses for sale, or new foreclosure signs popping up. Everything is stagnant. As the consumer has seen housing prices decrease it has had a "negative wealth affect," meaning we all feel less wealthy and less excited to spend on goodies like that new cappuccino maker, iPod, or Guitar Hero game.

Credit crises: The most important point about the credit crisis is that the once-easy credit is no longer there -- for businesses as well as the individual. You've probably heard a lot about how personal debt is bad, which in fact, it is, but the act of borrowing and spending helps keep our economy vital and moving. Think of it like this: you might leave it all out on the field in a tough soccer match, causing personal exhaustion, maybe even injury, but you have a great time and the whole team goes on to victory.

Remember those similar recession headlines you saw just seven short years ago? That threat of recession was never fully realized because the consumer saved the day. In 2001-2002, we had 9/11 and the technology bubble burst. With those two events influencing our economy, we should have seen a recession like we're seeing now, but we didn't because the consumer kept spending. They felt encouraged by rising housing prices. Not only were they spending money they had, but taking out home equity loans. The banks, encouraged by rising housing prices, were giving loans freely. Also during that time period we saw low interest rates and the Bush tax cuts. The economy bounced back relatively quickly and we never suffered a recession we could have.

Today we're seeing something very different. Let me paint the slightly grim picture for you: home values are decreasing and food and energy prices increasing. We're seeing that people can't or won't borrow against the value of their homes. Unemployment is rising, as noted in the jobs report. (Jobs report signals economic pain to spread - Apr. 4, 2008) It's hard not to feel or act like a Momma Bear in winter--you want to hoard all the food and nestle in until spring. Which is actually not a bad impulse. While we need to continue to spend money and participate in the economy, we also have to be patient and realistic about what this recession is going to mean for our lives. It's my opinion that we're going to have to weather this recession for at least a couple of years.

The federal stimulus package proposed by Bush, as well as the Federal Reserve interest rate cuts is not a panacea, but it is a move in the right direction. To the contrary, the tax hikes proposed by both Obama and Clinton (not as drastic on capital gains tax increases) are short-sighted and will only serve to prolong the recession. Both Democrats want to raise many taxes, including capital gains--that's the profit you make from your stocks and mutual funds, presently taxed at 15%. If they have their way that rate will nearly double to 28%. Your gut reaction may be that this is only going to affect the wealthy, but in fact, 80% of those who make below $100,000 pay capital gains taxes and 47% of those who make below $50,000 pay capital gains tax. (Obama's Tax Evasion -- WSJ.com) If Americans are forced to contribute more of their profits to the government, they will be feeling even less wealthy and spending even less. Both forces will cause the recession to drag on.

Obama and Clinton would like the voter to believe that an increase in capital gains tax will lead to higher tax revenues for the U.S. government. However, history tells a different story. Since 1962, any increase in capital gain tax resulted in less -- not more -- revenue. During last week's debate, Obama had no explanation for the discrepancy between his proposal and history's hard lesson.

So, what does this mean for Momma Bear? Vote wisely. I'm not advocating one candidate over another; I'm advocating educated voting. Think about the real life consequences for pulling the lever for your favorite candidate. It's not just a popularity contest.

It also means that you should rest assured that nothing lasts forever. It does none of us any good to hide and hoard. Instead we need to make wise decisions for our families and healthy, realistic decisions for our nation's economy. And most of all, dispel fear by learning about the underlying dynamics of our economy. It is complicated, but it's also critical to your family and our nation.

www.chicksandbalances.blogspot.com

Comments

[peaceandfreedom]

Part 1

I agree with ROL, and here"s why: Let me preface by saying that the American consumer is the most gullible being on the planet. Maybe that comes from being isolated between two oceans and never having had a war fought on our soil that gives other folks a more finely developed BS meter. So, yes, we have bought into the whole idea of having more than we should and saving less than citizens in any other developed country. We also work harder and longer hours for less than other countries. And, education on how the financial system really works would be an excellent idea! Then maybe policy would be set by the people and not the oligarchs.

Let"s look at history: Clinton repeals Glass-Steagall, financial corporations consolidate laying the groundwork for the sub-prime market manipulation that ensues. Shortly after, we have the end of the so-called "Tech Bubble," another orchestrated economic event that allowed old money to crush new technology and buy it on the cheap.

[peaceandfreedom]

Part 2

After Bush takes office, the economy goes from a surplus to a shambles. Every dollar has been wrung from the tech sector, we have no industry to speak of to manipulate. With the economy stumbling toward a real Depression due to Bush"s record setting borrowing and infrastructure destroying tax cuts, they needed a sector that would churn enough cash to give the impression of real growth in the GDP. Only housing"and the deep pockets of the middle class"could accomplish that.

But this time there is no warning of irrational exuberance! Greenspan; 1. Lowers the Fed rate (something he controlled assiduously during Clinton), targets the housing market as the new lending emporium, and; 2. Instructs lenders to offer "more creative" loan products"read sub-prime, or what was previously referred to in the industry as junk loans!

These two acts cause rampant RE price inflation as the cheap money meets "liberalized" loan qualifications. After a speech in early 2004, Greenspan was asked by worried BANKERS about the growing RE price pressures and inflationary effects on the dollar of his cheap money policies; his answer, "Don"t worry, we have everything under control." Sure they did. That"s why mortgages were securitized and sold as packages all around the world to sovereign wealth funds, other banks, pension funds, and always with the vaunted AAA rating, even though they were leveraged sometimes as high as 32 times!

[Rule Of Law]

Part One

Let's get our terms correct first:

A recession:
"a decline in a country's real GDP, for two or more successive quarters of a year: BUT, this recession has been caused by corporate and federal policy that's emptied the consumer's pocketbook, eroded, their real wages, eaten up their savings and left them unable to continue being the cash cow that bails out the Bear Stearns and Goldman Sachs of the world.

Collapsing housing bubble:
Is really, The Sub-Prime Mortgage and Predatory Loan Scandal! Houses don't just magically "bubble." But predatory loans cause people to default ,and that coupled with tightening of the money supply by the same huge corporations that created these suspect loans, drives down prices. That is a Corporate level swindle.

And re consumer's willingness to borrow; With Fed rates verging again on record lows ( established by Greenspan in the first recession of this decade and prompted the irrational runup in housing prices) we haven't seen banks passing low rates on to even qualified lendees. They're hoarding low interest money to pump up their bottom lines and reserves and to gamble with in the world money markets.

We control this no more than the passing of laws destroying bankruptcy protections, while leaving them intact for corporations. To say the consumer's leading this Recession is bunk! Inflation is up, the the dollar is down, and the money is not being made available. These are top-down corporate level manifestations of a bankrupt economic policy.

[ChicksandBalances]

I respectfully disagree that this recesssion has been caused ONLY by misguided policy. Also, re housing bubble - mainly cause of very low interest rates AND people's desire to own a home at any cost - something that has been promoted by this administration (I agree). But we as a country do not save and love debt - highest credit card debt ever. I believe alot of this is about education. Banks will not yet pass on low rates yet - you are right they must keep money in reserves

[peaceandfreedom]

Part 3

And every time they changed hands, the leverage increased and the amount of fiat money"paper transactions"grew exponentially. The trillions of dollars outstanding in the market from these manipulations has yet to be factored into the predatory lending meltdown. As for Bush"s misnamed "stimulus package" and more Fed rate cuts, they will only bail out the usual Corporate suspects, while continuing the inflationary pressure on our struggling dollar. Both are guaranteed losers!

I"m not talking about "house flippers" or speculators, I"m talking about the two Million foreclosures last year alone, of single family, owner occupied Homes"not investments, and how many of those loans (many in litigation for fraud) were doctored by the lenders, who gave assurances to the buyers that everything was kosher; Buyers who believed them, because in America, when the guy in the suit tells the guy in the blue collar that everything is ok, we believe.

Stupid us. We wanted a piece of the American dream, not a mansion in Grosse Point. The MSM is screaming that our dream is in reach, and the mortgage vultures are calling with the deal of the century"all based on policy created at the top of the food chain, from Greenspan, Rubin, and Goldman-Sachs, on down! Were we dupes? You betcha. Were we to blame? Get real.

[280park]

You're wrong that two negative quarters of GDP growth are required for recession. You don't have to look far, just the 2001 recession, to find that the "definition" fails. If you think for some reason there was no recession because it didn't fit your "definition" maybe you should ask the Three Million people who lost their jobs in that recession.

[Rule Of Law]

Hold your jets. THAT'S HER DEFINITION! It is textbook, btw, though it doesn't reflect the gradual erosion of wages, benefits, purchasing power, etc that we have endured for the past 7 years. So before you put your foot any deeper, you might actually read her entire wrong headed blog AND my answer, and you might actually find out we agree.

[Rule Of Law]

Part two

The fact that we are where we are should tell us all we need to know about Bush's misguided tax decreases and the massive borrowing they have caused, the attendant devaluing of the dollar and the inflationary pressure put on the prices of consumer goods that all of this has led to. When JFK and Bush I raised taxes, the economy improved drastically. Bush cut taxes--look where we are! And for buy and hold investors, which means most middle class individuals who do invest, capital gains tax is something to deal with far down the road--not the bogeyman it is for institutions, investment banks and the ultra-wealthy who play the market daily like Vegas.

Continuation of this wretched neo-con economic policy--which is just what Hillary has in mind--Will destroy this country. We must institute fair taxation (did you know that over 40% of corporations pay no taxes at all?) End the borrowing to pay for the war. Reduce the size of all financial businesses to where they are no longer "Too big to fail," and then tax them--especially the hedge funds that skip by at 15%--accordingly. The down and dirty, on the cheap recession avoidance used in 2001-02 laid the ground work for this even worse correction. We must not make the same mistakes again.

[280park]

You need to read this article on HuffPo: http://www.huffingtonpost.com/2008/04/21/could-the-recession-have_n_97858.html

[ChicksandBalances]

Thank you - very informative!!

[AJinCamden]

You wrote...
"...I'm not advocating one candidate over another;...

I believe you very clearly did.

[bmora]

Wow, you have a very myopic (credit crisis & housing market) view of the current state of the economy. It's like you know nothing of economics, but that can't be true. You owned your own business. You also failed to support your assertions with research, but, hey, that gets in the way and takes up valuable time. Besides it"s much easier to cut and paste from the RNC website. I won"t even begin to refute or test your assertions because you fail to shore up your thesis in any meaningful way.

[ChicksandBalances]

If you have a thoughtful comment, I would love to discuss.

[elbowguts]

The whole relationship between capital gains taxes and revenue collected is not as neat as you or Charlie Gibson would like us to believe.

Yes, there is evidence that lowering capital gains taxes initially results in a revenue increase because it incents people to realize gains (and thus pay taxes), while raising the tax may incent people to not realize gains and thus lower revenue. But, economists disagree on whether these effects hold true for longer periods of time.

One must really get to the human behavior in response to the rules rather than just simply pretend there is some infallible rule that raising capital gains tax will automatically result in lower revenue (or vice versa). To do otherwise is intellectually dishonest.