Reflection off a car window in a very small town.
______

Europe Stumbles Toward Serious Crisis and America Worries

A major reason the stock market is tanking is the problems of the economies of the southern countries in Europe and how they threaten the European Union. It terrifies us. The countries are Portugal, Italy, Greece and Spain ( not too affectionately known as PIGS) and their economies are riddled with debt, deficits and a serious lack of competitiveness. The core question is whether other European Nations are going to come to their aid or whether a scenario like that in Iceland might emerge and actually threaten the whole economy of the European Union. That latter prospect scares us the most.

The scare is real because there is a good chance that Germany and France, who already have little political sympathy for the PIGS, just might stand aside and let them sink. Better heads realize that would serious threaten the Europe Union itself and put a damper on world economic recovery. Widespread sovereign defaults among the southern nations would make Iceland look like a tempest in a tea cup.

Though not in the European Union, England's and Ireland's economies are also in terrible shape and they are close by and economically well integrated. We, in America, are very concerned. The financial systems of the European Union countries are too tightly integrated to sensibly allow a collapse. Indeed, those countries' economies and ours are similarly integrated. The threat is real.

Greece is in the biggest trouble probably followed by Portugal, Spain and then Italy. The problem with stepping in to help these countries is that they have been perceived by other EU countries as lacking fiscal discipline, running big current account deficits and having high unemployment and anti-competitive policies. More recently, the UK and Ireland have been thought of as additional PIGS so the acronym has become PIIGGS. These problems are serious.

The analogy here is to the situation we had in our financial markets. Are the Europeans dealing with "moral hazard" because the PIGS in truth are simply "too big to fail" without being bailed out? The possible mess for the European Union might be a bit like the situation we would have faced in our fiancial markets had we allowed not ony Lehman Brothers to fail, but also Goldman Sachs, Morgan Stanley, Wells Fargo, Morgan Chase, Merrill Lynch, Bear Sterns, Citicorp, and Bank of America or a good number of them to fail. Imagine the mess and the consequences.

However, at present no consortium of countries is stepping forward and neither is the European Union itself prepared to seriously prop up or bail out the economies of these PIGS countries. The continuing resentment is tremendous and the situation is precarious. Too, there has been much political infighting in the EU over major EU political reforms and economic policy, but to little useful avail in regard to these problems.

What has happened instead is the EU has put on a considerable PR show, attempting to persuade the rest of the world that it is containing its problems and there is no real threat of the EU breaking up. Too, there has been a lot of talk about the "European Project" and the recently ratified Lisbon Treaty on trade, government and economic union, but critics argue that the EU has ignored its underlying economic problems and spent too much time on internal bickering. The worry is, without action, the other southern countries could go the way Greece is headed or worse.

The perceived lack of unity even over how to solve Greece's problems and to prevent them from spreading has spooked investors who are worried about sovereign defaults. The Euro has hit its lowest level against the dollar since May 2009. Juergen Michels, an economist at Citigroup in London, states the concern most succinctly, 'It is quite clear the EU doesn't have a plan for dealing with the crisis.'

Problems are heightened because the credibility of European economic policy makers is on the line. This is a test case of the ability of the new European Commission, the EU's new executive branch of government, and the Euro Group (all finance ministers) to impose the measures necessary to avert the crisis. Too many in these two groups, however, are thinking about austere fiscal discipline and new regulations, more appropriate for booming economies, and about other more cosmetic measures, instead of the possible need for serious bailouts of the southern countries analogous to what we did on Wall Street.

On the serious economic problems, the EU largely has its head in the sand and is in denial. For that reason, others, both here and abroad, are worried.
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My cat, waiting for me to return.
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The Labor Market Is Improving, No Matter How BLS Muddies the Water

First, the 4Q GDP growth rate comes in at 5.7%, and was seriously downplayed.Now, we have unemployment, according to BLS figures, coming in at a quite unexpected 9.7%, which nobody predicted. The stock market continues its nosedive.

Most economists, including yours truly, expected unemployment to come in at 10%, if not slightly worse. Face it. This number is a pleasant surprise, when viewed with other data from the labor market. Coupled with the preliminary 4Q GDP growth number, we have significant indications that the economy is in fact improving, no matter how much that defeats the expectations of many.

However, there is a serious cloud over this new unemployment number. The Bureau of Labor Statistics (BLS) changed horses on us in mid-stream and in several regards. The changes generate uncertainty and fuels the tiresome debate about whether we have a real recovery or not.

The lesser part of what happened is the BLS revised the earlier jobs number for December, with the result being to show the economy lost 150,000 jobs in December instead of the 85,000 initially reported. The current figure for January is different. It is 20,000 jobs lost... far less. These jobs number come from the BLS' business establishments survey of about 400,000 businesses.

The unemployment number comes from a different source: the BLS household survey, a monthly survey of about 60,000 households. However, there were changes there, too.

Here is what the BLS says about changes in the two surveys: "In addition, establishment survey data have been revised as a result of the annual benchmarking process and the updating of seasonal adjustment factors. Also, household survey data for January 2010 reflect updated population estimates."

Over longer time frames, the two different survey numbers are more consistent. For this January, however, they diverged.

The establishment survey showed a loss of 20,000 payroll jobs in January which is a marked improvement over December, but the household survey showed an increase in the employment level of 541,000, for the new 9.7% unemployment rate.

The troublesome factor is the household survey reflects this updated population estimate, which in all likelihood reduces the confidence level of the sample size used in the household survey. It may also impact the denominator, numerator or both of the unemployment figure. It is hard for me to say. The short of it is there is a cloud over the number. However, if we look at the jobs data, there is improvement in that the rate of drop in the number of jobs has fallen substantially.

Under both the new and the old system, I suspect that what we have nonetheless is a small drop in the unemployment rate for January. But it is criminal for the BLS to muddy the waters the way it has, without a good comparative explanation. It fosters distrust.

The economist who came the closest to predicting the new unemployment figure was Carl Riccadonna at Deutsche Bank, with a figure of 9.8%. As Mr. Riccadonna sees it, "Companies just can't meet demand requirements with their existing labor force, so they have to increase the number of workers. This report does seem to indicate the economy is moving in the right direction." I tend to agree.

Indeed, this is in fact more evidence of a V-shaped recovery than not, as unlikely as that seems to be. At some point, our prejudices and misconceptions have to give way to the data, mine included. I remain skeptical, but that is my natural mental posture anyway. I'm a bit of a disbeliever, like the old saw has it for those from Missouri.
And some economic improvement seems not just limited to us. Capital spending in Europe is also on the upswing. As one commentator put it, the European data show a capital spending up trend that is hard to deny. Too, most countries report that their economic momentum is picking up, so the improvement is not limited just to the U.S.

Other data indicate as well that conditions in the labor market are improving. Contrary to expectations, the U.S., factory payrolls figure increased 11,000 in January, a bigger jump than seen for many years. The median forecast called for a drop of 20,000. That is a 30,000 person difference, which is significant. It should be noted however, that government payrolls dropped by 8,000 (a development that might make many cheer were they able to believe it was permanent). The payroll pick up was largely in manufacturing where capital spending is also improving.

Comparably important as the drop in the unemployment rate, factories report a modest increase in the length of the workweek. Too, temporary workers grew by 52,000 which is quite significant. Also, the overall American workweek lengthened. These are significant collateral developments that portend future improvement in the unemployment rate, being precursors of the rate.

The truth is, I believe, notwithstanding the BLS mess, things are picking up a bit not only in the labor market, but also in the U.S. economy.
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Home Sweet Home. My Fair Weather Mariner 39 (aka Westsail 39 or 11.9m), is a fast, narrow, heavily ballasted (43% of displ), high-aspect (6:1), stiff, comfortable, ocean performance cruiser designed by Bob Perry that goes to wind well (30 deg w/ good headway), balances up easily and is also good up and down the Beaufort scale. It can be rigged as a cutter or a sloop. I use it as a sloop because it is easier to handle and points higher. The more you sail on oceans, the more you want a boat that can balance up and sail well in almost all circumstances. Many don't. Here the boat is about half prepared for a hurricane (cyclone, in the southern hemisphere). I don't get it fully prepared now because I would have to take things down and store them below and that would clutter up the interior living space.
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Obama's Administration Is Between Economic Rocks and Hard Places

Obama's administration is struggling to maintain economic grow, get a handle on the deficit and get and implement (1) his Financial Crisis Responsibility Fee (read, tax), (2) reforms of the banking system and (3) new financial regulations for Wall Street, most of which will have to pass Congress. This is a very tall order considering the disarray the Democrats are in after their big loss in Massachusetts and Obama's reduced political capital. Not only do the reforms and regulations hang in the balance, but so does the Senate Health Care Bill or any health care bill, for that matter. The deficit hawks are circling and if some had their way, Social Security would be looted to reduce the deficit. There are some serious nuts running loose, with big dollars and some support. Worse, elections are in the offing.

Although Obama has acted decisively and forcefully on the tax, reform and regulatory proposals, the truth sadly is support is waning on many of these issues. The mid-term and presidential elections in November 2010 and 2012 are constraining the political will of Congress to do what it should. It is sort of a time out to take voters' pulses and see if positions can be enlarged or entrenched. Sad, but true. The political tail is again wagging the dog. It is bad enough we have to deal with a Congress that is too "bought off" to be effective, but to suffer them running for office so soon just leaves them away from their desks too long. (Then again, maybe that is a good thing.)

Obama wants the Financial Crisis Responsibility Fee imposed. By its accusatory name you might guess it is going to be opposed by those accused who would bear its burden, namely, the largest financial institutions with the most non-depository liabilities to be taxed.The tax is expected to run for at least ten years and is intended to recoup some of the losses from the TARP program incurred to bail out those same institutions. But that is just to recoup expected TARP losses.

The problem remains of how do we prospectively deal with the losses expected from relatively uncontrolled systemic risk generated by these behemoths in the future. Several taxes are on the table to get revenues for a resolution fund as a sort of way to have these big financial institutions have monies available to clean up their own messes instead of leaning on the taxpayers, present and future. One thought is a Bonus Tax which has a real nice political ring to it. Problem is, as more bonuses are getting paid in stock which must be held on to for a while, rather than cash, how does the government collect it: run a delayed collection system? It is hard and not very practical.

Another way to go that is gaining popularity is a Tobin tax or a tax on all or most all financial transactions. This would be levied to create a resolution or clean-up-the-mess fund to cover bailout costs for those too big to fail in future crises. But can you see all those funds just sitting there surrounded by outstretched hands that cannot wait to meddle with them? Too, why should all fiancial transactions be covered. I did not do anything to have Wall Street develop systemic risks. The whole point here is to force Wall Street to set aside funds to cover its own debacles instead of taxpayers. Internalize the problem, if you will. Needless to say, Wall Street thinks these are all seriously bad ideas. Their candid response, which you will never hear, is why shouldn't the taxpayers bail us out if we can get away with it. We think that is a good idea. Candor, however, is not Wall Street's strong suit.

The trick is how to get Wall Street to pick up its own tab in the future. That issue is being given a lot of thought these days. Wall Street on the other hand is lining up its ducks to fight anything that stands a chance of working.
Then we have the Volcker structural reforms for financial institutions and also his and others regulatory reforms. Those have been written about by me and others so I do not go into them again here, except to say, again, Wall Street does not much like them and so therefore don't the Senate and House Banking Committees (or House equivalent). Actually, Wall Street should be glad no one is presently proposing to adopt more radical reform like breaking up too-big-to-fail financial institutions and reenacting Glass-Steagall. That, they really wouldn't like.

In all truth, on the deficit, Obama and the Administration cannot really get a handle on it now, try as they might. If some of the crazy proposals floating around out there to do so were adopted, we would spin right back down into recession. Fortunately, Obama and his Advisors know that. So the trick is to look like you are trying hard to do something when in fact you are doing next to nothing at all. Sort of like the $33 billion hiring and pay raise incentive program. A bit of cosmetic dustup, if you will. The problem is there is not much heart to do anything serious right now. Everyone has their eye on the electorate and upcoming elections and is too afraid to take much of a position.

Obama is actually a stand out in not pandering to this view. But what is one man to an ocean?
_______

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The elderly struggle to make a living.
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How to Get Volcker's Banking Reforms and Regulations Through Congress

Many are not happy with the extent and speed of our recovery. That is understandable. However, I think it is a mistake and a waste of energy to grouse about the better data as they come in. Too many do. Our energies should be directed elsewhere, where they might make a difference. Read this article if you will then, as a rallying cry against those who would block Paul Volcker's good enough reform proposals in the Senate and House Banking Committees. These Committees' members are already posturing to stymie the reforms and regulations proposed, being the good bought off lackeys they are. Let me develop these themes.

Yes, there is much reasonable concern regarding the economy, but there is also the further point that, what do those complaining realistically expect from an economy (1) that was so far down the toilet a heart beat ago, and (2) that remains materially screwed up in too many regards. Railing against what little good news we get is no help at all. It is a waste of energy. It really is not going to change a thing. Deleveraging is slow, tough and it makes it hard to increase aggregate demand. Wall Street is no help in this scheme of things either. People continue to suffer in the meantime. The problem is recovery is the only place we can go to get some relief here, so we should not knock what good news we get. That is my view.

Wall Street, which has rewarded itself well for all of its misdeeds, was a major part of our problem during the recession from which we are emerging. Most agree that the housing bubble and Wall Street's manipulation of it caused the recession. Then, to top it off, the big banks and investment houses on Wall Street received buckets of money from the U.S. government to bail them out -- almost as a reward for getting so much wrong and their own mistakes. Most do not think that is appropriate, except for Wall Street itself and those sitting on the Senate and House Banking Committees, virtually all of whom have been "bought off" by Wall Street. My concern is this: if we cannot get a handle on Wall Street now, I think our problems will be multiplied many fold down the road in the next collapse and our banking system will remain compromised and dysfunctional. Reforms for the banking sector and regulations for Wall Street are imparative. If we had had them this time around, the recession would have been much, much milder. But what we should not do now is grouse about how slow and painful our recovery is. Action, not a doom and gloom attitude, is what we really need. We need to get something done for us, for a change.

There is an area where we can all do something that might significantly matter. But before I get to that, first let me provide some background.

Paul Volcker did an Op-Ed piece in the New York Times a bit back (http://www.nytimes.com/2010/01/31/opinion/31volcker.html), outlining the Administration's proposals for (a) reform of banking in the U.S. and (b) the regulation of Wall Street. The article is quite good and readable and I recommend you read and try to understand it. I have spelled out and outlined Volcker's article on this site in another article near this one. Those proposals, while not perfect, were actually very good. Several of us here wrote articles on the proposals and thought so. The general consensus of those who understand the situation is basic agreement. Well, we were not the only people to learn about those proposals. The House and Senate Banking Committees got wind of them too. Being bought off by the banking industry, they not surprisingly don't like them. They are too "populist." Here is the real reason they don't like the proposals, in a nutshell.

The finance industry - including banks, investment firms, insurance companies and real estate companies - has given $42 million in campaign contributions to lawmakers and their leadership political action committees since the current election cycle began in November 2008. The industry has concentrated its contributions on members of the House and Senate Banking committees and the congressional leadership. Just the 94 members of the Senate Banking Committee and the House Committee on Financial Services, both of which are considering the new reform and regulatory proposals for the finance industry, have received nearly $15 million of those campaign contributions. These fellows are seriously bought off. "Owned," if you will.

The names of the committees' members and what each got in detail can be quickly seen at http://www.citizen.org/congress/regulations/articles.cfm?ID=19085 but those getting over $100,000 are the following:

Financial Industry Donations to Members of Senate Banking and House Financial Services Committees

Sen. Charles E. Schumer (D-N.Y.) $2,274,799
Sen. Chris Dodd (D-Conn.) $781,598
Sen. Michael F. Bennet (D-Colo.) $616,704
Sen. Richard C. Shelby (R-Ala.) $548,050
Rep. Spencer Bachus (R-Ala.) $458,700
Rep. Jim Himes (D-Conn.) $439,573
Sen. Robert F. Bennett (R-Utah) $407,025
Sen. Evan Bayh (D-Ind.) $404,220
Rep. Carolyn B. Maloney (D-N.Y.) $403,250
Rep. Barney Frank (D-Mass.) $394,549
Rep. Melissa Bean (D-Ill.) $393,875
Rep. Paul E. Kanjorski (D-Pa.) $385,197
Sen. David Vitter (R-La.) $326,041
Rep. Jeb Hensarling (R-Texas) $325,079
Sen. James W. DeMint (R-S.C.) $320,130
Sen. Mike Crapo (R-Idaho) $303,971
Rep. Ed Royce (R-Calif.) $294,685
Rep. Ron Klein (D-Fla.) $282,131
Rep. Kevin McCarthy (R-Calif.) $280,025
Sen. Bob Corker (R-Tenn.) $251,043
Rep. Paul W. Hodes (D-N.H.) $243,700
Rep. Dan Maffei (D-N.Y.) $226,482
Rep. Erik Paulsen (R-Minn.) $225,613
Rep. John H. Adler (D-N.J.) $222,848
Rep. Bill Foster (D-Ill.) $203,103
Rep. Gregory W. Meeks (D-N.Y.) $193,305
Rep. Judy Biggert (R-Ill.) $187,407
Sen. Robert Menendez (D-N.J.) $184,600
Rep. Dennis Moore (D-Kan.) $184,422
Rep. Randy Neugebauer (R-Texas) $178,060
Rep. Patrick McHenry (R-N.C.) $176,046
Rep. Walter Clifford Minnick (D-Idaho) $171,203
Rep. Gary Peters (D-Mich.) $167,833
Rep. Scott Garrett (R-N.J.) $167,360
Rep. Edwin G. Perlmutter (D-Colo.) $160,613
Rep. John Campbell (R-Calif.) $157,101
Rep. Suzanne Kosmas (D-Fla.) $152,986
Rep. Lynn Jenkins (R-Kan.) $152,440
Rep. Michael N. Castle (R-Del.) $147,000
Rep. Travis W. Childers (D-Miss.) $142,340
Rep. Michele Bachmann (R-Minn.) $142,300
Rep. Thad McCotter (R-Mich.) $141,763
Rep. Tom Price (R-Ga.) $135,350
Rep. Leonard Lance (R-N.J.) $133,573
Rep. Michael E. Capuano (D-Mass.) $130,700
Rep. Christopher J. Lee (R-N.Y.) $126,048
Sen. Jim Bunning (R-Ky.) $117,920
Rep. Brad Sherman (D-Calif.) $117,850
Sen. Jeff Merkley (D-Ore.) $115,900
Sen. Sherrod Brown (D-Ohio) $113,450
Sen. Jon Tester (D-Mont.) $111,150

Source: Center for Responsive Politics (available at www.OpenSecrets.org). The complete and a more broken down list is available there and on the website below.

Remember, this list doesn't include monies the financial industry has contributed to the House and Senate leaders not on these committees. That is a wholly different set of buckets of cash.

Now if readers want to be dismayed and complain about something, consider the reaction of House and Senate Banking Committees members to Volcker's good reform and regulatory proposals and start writing some nasty letters to those these "sell outs," telling them to get "unbought" and vote in the "public interest" for the Volcker reform proposals or they will be out in the cold next elections. We need to rally here or big banking is going to shove it to us . . again.

For what you can do, see http://www.citizen.org/congress/regulations/articles.cfm?ID=19085. Click on the top heading "take action" and there is a laundry list there of how specifically you can help and what the many alternatives for action are for you to do something. Guidance is available there as well.

Hearing from Ma and Pa Fricket in Des Moines, Iowa might be one thing, but hearing from articulate and knowledgeable people could be something else entirely. We need to help ourselves here. Big banking sure won't and Uncle Sam is too handicapped.
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Lest nary a toe catch the sun and be browned
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The Economy is Recovering, So Why All the Moaning and Groaning?

To listen to people, Brad Delong for one, you would think we have no recovery and are sliding deeper into recession. The level of moaning and whining is though the roof. You would think, from the sound of it that the 4Q 2009 GDP figure came in at -5.7%, instead of +5.7%, much better than almost everyone's upwardly revised estimate. Too, we are acting like corporate earnings are tanking across the board. Recall that as recently as last December, 2009, many were still estimating 4Q GDP growth at 1.8% to 2.2%. 5.7% is really good, especially given the corpse we were very recently.

I believe the central reason for all the moaning and groaning over the economy and the Q4 GDP figure is something the famous economist, A.C. Pigou once said. It was basically to the effect that --

Optimism is born and grows as a normal child, but after the big crash, Pessimism is born fully grown.

I think that describes us collectively pretty well. I call it the "Pigou syndrome." Many suffer from it. We are stuck in a pessimist mode of thinking and see not much good with anything, although improvement is right under our noses.

So here's the conventional analysis: Yeah, it was 5.7%, but it is just mostly inventory rebuilding, with a few other minor, but unworthy things thrown in, nothing to take encouragement from. How quickly we forget the nasty and large negative growth figures we recently experienced. Our economy is like a huge and vast ship. It is foolishness to expect it turn on a dime, but that in fact is pretty close to what it is doing and certainly that is what too many want and expect. This is not sensible.

So efforts to rebuild depleted inventories contributed 3.4 percentage points to GDP, the most in two decades. Many view this as a gloomy proposition. However, what is reasonable to expect here? Inventories were drawn down. If businesses expected the recession to continue, they would not have rebuilt inventories. This figure would have come in much lower or even negative.

Another way to look at what we have here is this: businesses, realizing that market demand is developing strongly and quickly along the lines of a V shaped recovery, don't want to get caught with their pants down and so they quickly are rebuilding their inventories. If they had thought the outlook was stinky, they would not be rebuilding so quickly. Those businesses see better things ahead. Many, many eyes looking forward at all parts of the economy are involved here, not just the twenty or so sets of eyes belonging to various gloomy economic gurus.

Too, residential construction was up about 5.7% in Q4; so was consumer confidence. Consumer spending, which comprises about 68% of the economy, rose at a 2% pace, more than anticipated. Sure, durable goods decreased 0.9 percent, but they were just taking a breather from jumping 20.4% the quarter before. Nondurable goods increased 4.3% which is not shabby. Services increased 1.7%. Real nonresidential fixed investment increased 2.9% in the fourth quarter, in contrast to a decrease of 5.9% in the third. Equipment and software increased 13.3% in 4Q and real exports of goods and services increased 18.1% last quarter.

So what if unemployment did not drop. We know it is a lagging economic indicator, so what should we reasonably expect at this stage of the recovery? A dip of three percentage points? This is nonsense. First, hours worked needs to increase and then employment needs to increase and only then can we reasonably expect the unemployment figure to start to drop. I think we are being unrealistic and silly about this.

There is so much improvement, but still we act like the sky is falling and all is doom and gloom. We have what I call the "Pigou syndrome," described above. We need to get over it, adjust to the improvement in the data and have a bit of patience.
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With a very rosey dash.
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5.7% GPD Growth Figure for 4Q 09 Proves Many Wrong

The U.S. economy grew at 5.7% annual rate in the fourth quarter. This is the highest rate of GDP growth since 2003. This figure is up from 2.2 percent in 3Q 2009. The rise is well ahead of most expectations, especially those of pessimists. The contention is that the gain was substantially driven by rebuilding business inventories, but that is by no means all of it. There is also some good solid growth in there along with some residual effect of Obama's stimulus program. However, most earlier estimates of the GDP growth ranged from 2.8% to 4.5% taking those predictable factors into account.

The stock market shrugged off the good news and the DOW continued its correction toward the 10,000 range. The market seems to be getting it backwards these days, but we will have to wait and see. Many doubters are out there, but as sellers, it is interesting to see them prevail now. Keep in mind this is the preliminary figure. A second estimate or revision will follow and then we will get a third and final figure. Pessimists can still have hope for the possibility of future downward revisions.

Face it. This figure is not at all bad. Several points can be raised to detract from it, but even so, it stands out as a very good development, considering all the problems faced by our economy. It could have been much worse in light of those problems. That so many were wrong here is a further interesting point. Too many held to their earlier forecasts in the range of 1.8% to 2.2% and it is clear now they missed the mark in a major way. The figure also exceeded the 4.8% median forecast of the economists surveyed by Bloomberg News. The figure goes far to explain why Bernanke's confirmation should prevail.

A separate report has also showed that consumer sentiment as well as a barometer of business activity rose more than forecast in January. Some at least are getting it. As Bruce Kasman, at J.P. Morgan Chase and one of the very few who correctly forecast the gain in GDP, put it, "We are getting on to something that is pretty sustainable." Kasman sees continued growth in this same vein because both consumers and businesses are both starting to spend. Keep in mind here these figures are actual data which look backwards toward where we have been.

Further preliminary assessments show consumer spending, which comprises about 76% percent of the overall economy, rose at about a 2.1% rate after economists had projected a 1.8% gain, according to one survey. Efforts to rebuild depleted inventories are said to have contributed 3.4 percentage points to GDP figure, with some of the rest being the residual from the stimulus program. The inventory rebuild is the most in two decades. No one wants to be caught empty handed so the implicit forecast of businesses collectively here is highly favorable toward growth.

Other good news is the dollar rose and the trade gap narrowed for the quarter. Prices rose about 0.6%, significantly less than most economists had predicted here. This is not a banner day for most economists.

As to others, if there is a moral in this, it is that ideological biases can and did this time seriously cloud the judgment of those who have them. They sat to far to the down side. The old saw of "just you wait . . . " is failing big time here. Those people need to get with the current data, try to understand it and leave their biases at home.
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It stood out, to my eye.
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A Comprehensive Guide to Financial Reform

Volcker wrote an Op-Ed piece for the N.Y. Times the other day and discussed some of the financial reforms he thinks are necessary for our economy. Others are already in the works.

He first argues no one can seriously contend that substantial reform is not necessary, a point on which I disagree. The big banks certainly like things the way they are, but that aside and aside from the reforms the Administration is already looking at, Volker has a number in mind himself.

But first, the reforms the Administration is already considering are these:

1. Appropriate capital and liquidity requirements for banks. Friedman and some Austrians have also sensibly suggested a reserve requirement of 1:1. That should be seriously considered here, too.

2. Better official supervision of banks by governmental officials. This seems more like a cosmetic no-brainer. The question is how and in what regards.

3. Improved risk management by financial institutions. It is all well and good to say this, but when very high profit alternatives come along, sound risk management tends to go out the window in good times. How to prevent this is a big question.

4. Better board oversight for financial institutions. Why should board members change their behavior? They don't get sued enough, thrown in jail or even have their hands slapped. Why should they do differently?

5. A review of accounting approaches toward financial institutions. A key question here is how to wean banks off abandonment of the mark to market rule and get them back to the point where they cannot write their own balance sheets.

A common thread I discern here is how to control the aggressive mind set of risk taking investment bankers who already invaded the banking industry, with the demise of Glass- Steagall. Dealing with it will be tough. When the shadow banking system collapsed, the surviving houses converted to banks and along the way taught banks how to misbehave as well. The question is what to do about it.

Volcker targets in on these issues as being important in righting the system, but probably the central concern, as he sees it, is the issue of moral hazard from the extensive and successful efforts to rescue large banks too "big to fail." Is it not a mistake to protect and shield managements, board members and stockholders from their own transgressions at taxpayer expense? Why should the big banks be given this competitive advantage smaller ones don't get. But what should we do here?

Volcker basically says we need closer and better regulation and supervision to balance the moral hazard, improved capital requirements and impose stronger leveraging restrictions, but that we also need to limit or stop the proprietary activities of banks, like trading for their own accounts, owning or sponsoring hedge funds and owning other private equity funds, among other similar activities.

The risks which arise from these more speculative activities are better suited for other financial institutions, in Volcker's view, that government should not have to protect, but can let fail. However, that said, look what happened when the investment house of Lehman Brothers failed. Other houses and banks thought they might be next. They paniced, called in positions and triggered the financial crisis that, with falling aggregate demand from the housing crash, led to the Great Recession.

I suggest two things. So far, this looks a lot like a proposal to reinstate key aspects of Glass- Steagall, and, two, prohibiting these activities by banks - mostly just the largest four or five are involved - may not be enough to prevent a large new shadow banking system from developing and pulling down the whole financial sector again, just as it did this time. The appetite for risk and profit on Wall Street is not to be underestimated. Watch Goldman Sach convert back to a house.

The point is that all investment houses and other financial concerns will have to be tightly regulated and supervised, too, but without the safety net that the government will provide the banks. They need to understand that up front and going in. Investment bankers are hard to regulate. They play fast and loose. Regulations with big teeth will be needed. Money gets their attention.

As Volcker explains it, many capital market companies, both because of their typically more limited size and more stable sources of finance, could not present a credible claim to be "too big" or "too interconnected" to fail. In fact, sizable numbers of such institutions fail or voluntarily cease business in troubled times with no adverse consequences for the viability of markets. But then again, what if they become quite large and all fail at once, like Lehman Brothers, Merrill Lynch and Bear Sterns?

Volcker recognizes this problem too, but I am not sure his solution is satisfactory:

"There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed."

In other words we regulate and supervise them aggressively, too. But this does not get us out of the woods and certainly puts a lot of strain on the mechanism of regulation where a common view is regulators become the captives of those regulated.

Volcker's answer to this position is we have a new "resolution authority" that can basically do what FDIC proceedings could have done for banks, including intervention and supervision when necessary. That new authority could go further, if appropriate and:

" . . . assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization . . . Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts. To put it simply, in no sense would these capital market institutions be deemed "too big to fail."

In other words, we take Lehman Brothers, Bear Sterns, Merrill Lynch and others all through bankruptcy-like reorganizations all at once and don't expect major disruptions in the financial markets. I don't think so. We need more here.

The more here is Volcker wants a designated agency " preferably the Federal Reserve" to be "charged with reviewing and appraising market developments, identifying sources of weakness and recommending action to deal with the emerging problems." It brings to mind how Greenspan handled or did not, these matters. Is the Fed the appropriate agency? The idea obviously is to nip problems in the bud before they become serious, but can this be done effectively when times are booming? I have my doubts.

Other reforms Volcker has in mind include more effective arrangements for clearing and settlement, restrictions on how derivatives may be used, what to do with large interstate insurance companies and how to rebuild an efficient and effective mortgage loan market, given the shamble ours is in now. Volcker also wants international cooperation and coordination of many of these matters.

Finally, Volcker let us know he understands what the real problems of reform are:

"I've been there 'as regulator, as central banker, as commercial bank official and director' for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to lay off tough regulation will remain most notably in the fair weather that inevitably precedes the storm."

We shall have to wait and see. I remain concerned, even if we can get the needed reforms and they are not blocked by the investment bankers, their paid cronies and their lobbyists.
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How wide and short thou art, a veritable ball to my eye, but a well shaded one.
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The Five Big Economic Reforms We Need

Moving out of this recession and hopefully more toward more normal times, there are five major reforms we need to undertake. They are the following:

1. We have to address the problem of the Fed. While it did pull us back from the brink, longer term, it has been a disaster. The purchasing power of the dollar has fallen by 92% since adoption of the Federal Reserve Act. The Fed, although heroic now, is a big problem, longer term.

2. We also need to address the "moral hazard" problem of our financial institutions being "too big to fail." Those institutions have taken unfair advantage and continue to do so today.

3. We need better regulation in our financial and related markets and to learn the lessons of how to do that from Canada. Our regulations are too few and not or badly enforced.

4. We need to address the mess that our federal budget has become and put our financial house in much better order.

5. We need to have Congress understand it must act solely in the public interest and stop injuring the middle class for the sake of its wealthy special interest patrons.

Obama's state of the Union message and earlier comments make it clear he truly wants to act on better regulation of our financial sector (3) and the "moral hazard" problem of "too big to fail." (2) This is a major undertaking. Larry Summers should be kept out of both efforts, lest he try to undermine each. His reputation and work history precede him here. He fought for deregulation before the collapse and was a major supporter of the big banks while at Treasury.

Volker is a good choice to lead on new regulations. In that regard, Paul Krugman makes the excellent point that it was largely Canada's effective regulations that prevented it from having the major economic meltdown and recession we had. The lessons and regulation in Canada should be studied in this regard.

On "too big to fail and moral hazard," the advice of John H. Cochrane at the University of Chicago would be useful. Cochrane has an excellent article in the quarterly issue of Regulation entitled, Lessons from the Financial Crisis" in which he describes how, when Lehman Bros was allowed to fail, the big banks and financial markets panicked and threw us into turmoil and recession. They thought Lehman and themselves were too big to fail and all would be bailed out from the inane risks they were taking. When Lehman wasn't bailed out, they panicked.

The problem of the Fed (1) is major, continuing and threatening. I say threatening because I believe we are going to have to live with a new "lower normal" due to our continuing trade deficit and income maldistribution. If that is so, I fear the Fed will try to push the economy toward unsustainable levels of GDP, not recognizing this point, and we will be left with the consequences of a series of booms and busts. Whether a modified Taylor rule mandated by Congress, perhaps with a "free rein" exception upon Congressional Committee approval in the event of a crisis or emergency would remedy the problem or not, I cannot assuredly say. But we need to dig in here and fix our problem with the Fed. It is a long running one and needs repair. I think abolition of the Fed probably goes too far, but it is clear we need to do something here.

That we need to do something about the federal budget, the deficits and our inane defense budget is a foregone conclusion. (4) However, we need to be careful. Trying to balance the budget, curb federal spending and lowering the federal debt too soon could well kill our economic recovery. We manage too well to get Keynesian countercyclical policy precisely backwards and virtually all the time. However, when we have fully recovered, we need to act in major ways to fix these problems. They are presently out of effective control.

Dealing with a Congress that has been well bought off by special interests is the biggest and most difficult problem. (5) The United Citizens case that SCOTUS just wrongly decided is only going to make this problem worse. How the American voting public can effectively deliver the message to Congress that it had better start protecting and promoting the public interest instead of private interests is unclear. But the message needs to be delivered and delivered forcefully. Good thinking and suggestions are needed here.

If these reforms are not adopted over the next several years, it will be to our great detriment. We will pay for our failure in large and many ways in the future, if something useful is not done
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Flowers and Jesus to guide your way.
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Obama's Token Help for the Unemployed

Obama's coin toss to businesses that hire and give pay raises is really just token help. I mean, really, it is more just peanuts and political symbolism than anything. What is $33 billion in tax credits for new jobs and pay raises worth in targeting on a true 17.5% unemployment rate in an economy the size of ours? Not much I suggest. Worse, it is just the sort of market distorting incentives that Washington too often uses to create problems and resource misallocations. That it is so small just may be its saving grace in this regard, ironically enough.

What is behind this feeble effort? In a word, it is Larry Summers, Obama's chief economic advisor. Summers is basically a market fundamentalist who fought for deregulation of financial markets before the recession, as a high official in the Treasury Department. He and Greenspan worked especially hard to make sure the Fed and U.S. government did not do anything to regulate derivatives and credit default swaps well before the crash.

A clue here on what is going on is Summers recent statements, first, that 5.7% GPD growth for Q4 2009 is simply not enough and then, "it certainly doesn't suggest we are in any position to pop champagne corks." Summers explains, "We have a profoundly serious problem of unemployment and slow growth in middle income (families). We need to do a lot more." What is a lot more, you might ask? The answer is the $33 billion incentives program, most likely funded from TARP repayment funds, so as not to run up the deficit further. Yet what does Summers really think? A bit later, he tells us: "First comes GDP growth, then comes the number of hours people work, then comes the level of employment, then comes the level of unemployment. We have a long way to go." As I say, the 33 billion for incentives is just tokenism.

The real opportunity to help with unemployment has largely come and gone. It was the massive public goods project Obama proposed originally: the repair and improvement of the Nation's infrastructure. It never really got off the ground. Why, you might ask. Because Summers and the Wall Street bankers did not like the idea. That program too turned into tokenism. Just barely enough done to keep it from looking like Obama totally reneged on his campaign promise to "Rebuild America.". There is some real cynicism at work here, I suggest.

There is a second irony involved too regarding Obama's $33 billion for hiring and pay incentives. It is this: but for the fact we could have earlier instituted an effective infrastructure repair and rebuilding program and had it well on its feet by now seriously helping with unemployment, the current cosmetic tokenism may be precisely what is needed and not too late, in order to look like we are doing something about unemployment without running up larger deficits. If that is the case, then I suggest it is a bit of a fraud to sell the $33 billion incentives program as a real solution to anything here. The fact is unemployment will drop in time anyway and the Administration will assuredly attribute the drop to their incentive program, saying, "See, we did it." As I say, there is some real cynicism involved here and I am sure it does not sit well with Obama.

Fortunately, now Summers is being pushed quietly aside more than a bit with Paul Volcker's growing role in seeking effective regulation and restructuring of our financial institutions. Volker has the physical and intellectual stature to get the job done. (He would also be a good man to reform the Fed, too, when things improve.) Summers has been and remains ideologically opposed to such regulation, notwithstanding the economic fiasco we have just gone through, in regard to which he played too substantial a role on the wrong side of the fence. He is clearly not the man to do the job. Guys who make big mistakes should be canned, not hired again to solve those problems.

The Administration's real economic work now is to restructure and develop regulations for the banking and related industries. Obama is now turning aggressively in that direction. He needs to deal with the "moral hazard" problem and the "too big to fail" issue involved. Believing that were too big to be allowed to fail, the big banks took advantage and pursued risky high return investments, knowing Uncle Sam would come in and rescue them if their investments failed badly. That problem has got to be fixed. The bankers still think that way. That Volcker is an inflation hawk shouldn't be a problem in having him work on these problems.

In short, the $33 billion for hiring and other incentives is too little to be seriously useful. Not much can be done about unemployment now, short of another major stimulus program which (1) might not be necessary if the economy continues to improve well, and (2) would be properly opposed in the present circumstances by too many deficit hawks anyway. Obama is now starting to move in better directions, something I suspect he would have done earlier, but for listening to Summers.
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Not elaborate, but looking settled and quite comfortable
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The True Story of Easter

Isn't one mythological story as good as another? Anyway, this one, while a tad less reverent, is more succinct and better conforms to what we know about human nature. It is the written word of a friend who must remain anonymous so Pat Robertson doesn't put a contract out on him and other Christians won't hex him. Free speech is fine, in their minds, but not on religion. Sort of like how the Muslims view it. Think of this as a not so scholarly look at Biblical errancy.

"Happy Easter!... the day of Easter Bunnies and Baby Jesus... I still don't get the Jesus resurrection thing... I believe he was with Mary Magdalene for one long weekend... came out of the love cave... his homies thought he had been killed by Pontius the Pilot (...didn't realize they had airplanes back then, either) and saw J'Man coming out all disheveled and shit... and believed he has arisen... someone had arisen, but they were sure it was him, lookin' different and all.. and the little comment he made about Mary Magdalene making him "...see God...." was perhaps taken out of context... don't you think? Anyway... Happy Easter."

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In a side yard, next to the foundation pillars of a house that burned.
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The Economic State of Our Union: What Obama Won't Tell Us.

Our government needs to run well and serve the people much better. This is a tall and tough order. First off, we have Kenneth Arrow's Impossibility Theorem working against us. In a nutshell and simplified, it says that there is no voting system that can take the ranked preferences of individuals in that system and have any result satisfy even a very large percentage of those voters. Markets are much more responsive to and satisfy many more individual preferences than any voting system and government can. So we start off with a major handicap in having government do things right from the get-go.

A clear implication here then is markets should be maximized and government should be minimized. Unfortunately, we are more than quite close to getting that backwards. Government is much too big and markets are shrinking. If we look at the enumerated powers of Congress set out in the Constitution, we can see that our federal government has, by using mostly the Commerce Clause, hugely expanded the powers of Congress to (1) enlarge government and (2) interfere in the economy. As I say, instead of expanding markets and minimizing government, we are getting it backwards. Government is too big and many markets are shriveling or compromised as I describe here.

As bad, government interferes in markets by altering the incentives in those markets to cause serious resource misallocations. A prime example of this is the tax laws regarding housing. Mortgage loan interest and some closing costs are deductable. This induces over investment and over employment in the housing and housing related markets. It skews the market results off optimum and leaves too few resources in and for other markets. Government does this in far too many markets. We recently saw the results in the housing market, when it crashed.

Except for health care where, for technical reasons, markets are known not to function properly on their own, government inference in markets should be limited only to policing markets to assure fair play and non-abuse of those markets. Unfortunately, our government does that poorly too. The ineffectiveness of the SEC is an example. Too, often, as Chicago economists argue, regulators become the captives of those regulated. The banking industry is a good example here. In short, we interfere where we should not, to alter incentives and misallocate resources, but then do an abysmal job of interfering in markets where we should to police and rid them of bad buyers and sellers. Again, this is government is getting it backwards.

Where the government tries to adopt counter cyclical Keynesian policies to stabilize the economy, too often government gets it backwards and increases aggregate demand by deficit spending during business cycle peaks and then wants to, as now, balance the budget and cut deficit spending back while we are in recession. Again, government is getting it backwards.

Against this background of misdeeds and ineptness, Congress has further damaged the economy by injuring the American middle class and the small businesses the middle class operates. Special interests have in effect bribed Congress and government into adopting laws and regulations which favor the wealthy and are against the middle class. As a result and as Harvard Professor Elizabeth Warren explains it, for long stretches of time, the growth in the nation's GDP in recent years has gone almost entirely to the top 1% or less of the population.

With this damage to the middle class which spends most of what it earns on consumer goods and services, unlike the wealthy who buy a much larger percentage of financial assets, aggregate demand in the U.S. has been badly damaged and financial markets have been over inflated. This is again is the government getting it backwards and damaging small business and the economy.

In regard to the finances of government, the government should be viewed as a sort of fiduciary to the people, with many of the accountability obligations that entails. Unfortunately, that is not the case. Government spends money and accounts for it irresponsibly and treats tax revenues and borrowings as though the money belongs to those in Congress to do with it what they want. Again, this is the government getting it backwards here.

When our big banks were about to fail because of their own bad judgment and financial misdeeds, our government jumped in to bail them out with considerable effort and expense, instead of letting them undergo FDIC proceedings which can range from mild supervision all the way up to outright bankruptcy-like reorganization, but in any event would have assuredly either eliminated existing managements or at a minimum, seriously reduced banker's salaries and bonuses. The result of our mistaken efforts is the high salaries and bonuses of the same bankers continue and the banks are still awash in bad debt, but now it is masked over by abandonment of the mark to market rule. Again here, the government has gotten it backwards. They did what they should not have done and didn't do what they should have.

The government has a maximum defense budget for this year of over $663 billion dollars. A big budget to be sure. After all we are terrorized and need to deal with terrorists. But we do so ineffectively by starting big wars where we should not: Iraq, Afghanistan and now marginally Yemen, instead of using special forces commando strike teams, like are now used in Pakistan, to track, kill and keep terrorists off balance in their hiding places. Civilians on commercial aircraft are more effective at dealing with terrorists about to injure us than all of this huge war machinery. The only people pleased with the status quo are in the defense industry where profits are doing quite well, thank you. Again, on defense, this is big government getting it backwards. But, hey, what is $663 billion for defense annually compared to the absolutely outrageous cost of the Senate Health Care bill estimated to run all of $87 billion annually to provide every American with health care coverage. Again, government is getting it backwards.

It should be noted that, in regard to each policy or practice here, "getting it backwards" isn't just getting it wrong; it is getting it wrong by about as much as possible. It is not being a bit off optimal, it is being way wrong or as wrong as can be. That we are "getting it backwards" in so many important areas suggests or implies, objectively considered, extreme foolishness or perhaps even sabotage, hard as that is to imagine or believe.

As a nation, we cannot continue to do so poorly, by getting so much backwards, and still fare well as a free society with a thriving economy. Instead we are getting just about what we should expect and deserve from the economic State of our Union, lamentable as that is.
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A flower run over on a drive. A metaphor for our Democracy
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Fixing Our Democracy to Give the Economy a Chance

Face it. Our democracy is broken. As bad, what we have for governance in its place is destroying the economy. Congress is really not worth a fig. It does a poor job too much of the time and is simply too bought off by special interests not to be hurtful to the economy. In fact, what Congress does seriously damages the economy.

Watch what will happen to our efforts to seriously regulate the banking industry. Even if we do manage to get a few good regulations past Congress, those doing the regulating will soon become the captives of those regulated. There is simply too much bribery money and promises of later rewards floating around. As things stand, the situation is essentially hopeless. Whether he wanted the result or not, Obama is too close to, if not in bed with the banking industry. TARP I and II made sure of that. So too did keeping Paulson on as Secretary of the Treasury. He did more good for Goldman Sachs in that position than he ever did as CEO of the Company. Witness the AIG bailout for Goldman. The banks looted the Treasury and did it while engaging Obama on his watch.

Obama being too close to the bankers is the principle reason we do not have a good infrastructure repair program in place to help the economy and the unemployed. The bankers don't want that. Instead, they want the deficit reduced right now, even if it means looting Social Security to do it. What they don't realize is that their plans and policies will throw us right back into recession. So far, what is good for the bankers, as they perceive it, is truly bad for the economy. The bankers and their lobby are damaging and have seriously damaged our economy, and still we put up with the rats. Are we daft or what?

Worse, this entire situation will deteriorate further with the new SCOTUS decision to remove limitations on some corporate campaign contributions. That decision and others similar to it are based on the incorrect idea that campaign contributions are identical to free speech and are therefore protectable under the First Amendment. This is wrong. Free speech seeks to influence by the persuasiveness and merits of the ideas it urges. Campaign contributions seek to influence by purchasing cooperation from government officials. The two are quite different. In fact, campaign contributions undermine free speech by purchasing air time for bad ideas, as though those ideas have been found worthy by many others - itself a fraud -- and by blocking the good ideas of free speech out or shouting them down.

More private interest money will flood the hallways of Congress after this latest decision by SCOTUS. It is crazy and we are nuts for putting up with what is going on. Our economy has been sabotaged by highly paid and wealthy special interests who operate against the middle class and are destroying our economy by destroying that middle class and the small businesses they run that mostly make up our economy.

I do think our democracy is badly broken and has had it. The question is, is it even theoretically fixable and with it our economy? I think it is. However, the public is a long way from (1) understanding the problem, and (2) understanding what to do about it to fix it.

As I see it, only five things together can resurrect our democracy to its former glory and enable our economy to ultimately do better and grow in the long run as it used to:

(1) strong campaign finance reform with draconian teeth,

(2) have everyone abandon the absurd notion that campaign contributions are protectable as free speech and seriously limit them,

(3) aggressively regulate and control lobbyists and their access to Congress (Yes, regulate the Right of Petition just as other constitutional rights are regulated in the public interest),

(4) redistribute income back to the middle classes against the special interests that have used government to take that income away from the middle class, and

(5) pass a law, or better yet, a constitutional amendment requiring that any legislation passed by Congress or any regulation promulgated by government must not be directly or indirectly adverse to the national public interest.

This program would fix things both our democracy and our economy, in time. (1) through (3) are designed to directly stop the special interest bribery of Congress and governmental officials that is so undermining us and the economy. (4) is designed to give CPR to the middle class that has been knocked out and is in shock, along with the small businesses they run. (5) is to stymie legislation and regulations that serve special interests at the expense of the public or other significant groups and to kill incidental legislative pork.

However, don't hold your breath here on any of these. Seems we are going to stay broken and have our economy in recession, at least for a good while, until the public figures it out the problem and then learns to demand the right reforms, starting with kicking those in power out and electing those who will adopt these measures.

Until then, sit back, pop the tab on a beer or pour a glass of good Merlot and watch some argue the earth and universe were created 4,000 to 6,000 years ago and others do our public social order and economy serious injury just to get some more money. With so much greed, cynicism and stupidity at work in and around the process of our government, our situation is truly breath taking in its ignorance and blatancy.

We must fix matters.
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It almost looks like the siding melted here.
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As Goes Housing, So Goes the Economy

There is a significant misconception afoot. It is that our unemployment problem has arisen largely out of the manufacturing sector of the US economy. To be sure, they have been changes there, but the real story is what has happened to employment in the housing and housing related markets which more recently employed about one out of every six employees in the private employment sector.

From 2001 to mid 2005, 43.0% of all new private sector jobs created in the U.S. were in housing or housing related markets. That's astonishing, when you think about it, especially considering the Greenspan Krugman housing bubble developed largely thereafter. But it also explains why, with the housing market in so bad a slump and house prices unable to hold their own, current unemployment remains so high.

As Eric Fisher and Peter Rupert, both of the Federal Reserve Bank of Cleveland, explain in their paper, The Decline of Manufacturing Employment in the United States:

"Manufacturing's share of employment in the United States has been falling for at least 50 years. The share of manufacturing employment in 1950 was about 35% and in 2004, it was about 13% . . . There were 103 million workers in manufacturing and services in the United States in 2001; if the historical relationships from 1986 had held, then there ought to have been 25.4 million manufacturing workers. Instead there were 7.7 million [or 30%] fewer workers."

The authors go on to explain "relatively rapid technological progress in manufacturing had a very strong effect on the decline of employment in manufacturing." That is machines replaced people. High and rising productivity created much unemployment in manufacturing and where manufacturing employment was not tied to significant technological progress, we simply lost the employment to more competitive workers in other countries.

But the question then is where did those unemployed workers from manufacturing go? Many if not most migrated into the housing and housing related sectors, I submit, some drawn there by the federal tax and other laws favoring over investment in housing and some drawn there by the housing bubble. To be sure, some migrated into other parts of the service sector, but not as many as went into the housing related markets.

From 2001 to mid 2005, 43.0% of all new private sector jobs created in the U.S. were in housing or housing related markets. Housing related markets largely took up much of the slack from manufacturing and did so even more as the housing bubble grew and developed.

Viewed differently, why were so many employed in housing, you might ask. The answers are that many displaced from manufacturing found work in those markets; others were induced to leave their employment in other sectors and get on the band wagon with housing when the housing bubble got underway.

Finally, continuing all along, federal policies and laws unduly favored over investment in the housing and related markets and had done so for years. Deductible interest paid and selected deductable closing costs, among other rules and laws, seriously misallocated excessive resources, including employment, to the housing sector, as did the later housing bubble itself. It seemed like everyone and his brother wanted a real estate or contractor's license.

When the housing bubble burst and Wall Street's house of cards collapsed, very many in the housing related markets became unemployed. Exact numbers are hard to come by here, but assuredly jobs lost in the housing and housing related markets account for a large portion of the current official unemployment rate of about 10%.

These facts and this analysis have serious implications. Chief among those implications is this: until housing and its related markets materially improve, there can be little prospect of the economy improving and therefore employment improving much. It is no longer the case that as goes General Motors, so goes the country. It is much more, as goes housing, so goes economy and with it, lagged a little bit, employment.

This is not an optimistic outlook, especially inasmuch as the rally in housing prices has now faded and the chance of further housing price declines ahead has increased. These developments, coupled with so much former employment and employment growth tied to housing, makes the outlook for our economy even more ominous at present. I have become more pessimistic because of this background and these developments. The stock market doesn't seem too happy of late either.
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