My Two Cents - "The Flip Side of a 'Jobless Recovery'"

10/16/2009

Perhaps one of the most preposterous statements made during the ongoing financial crisis was by Ben Bernanke when he stated that we would have a ‘jobless recovery’. Certainly this is not a new term, but that doesn’t change the fact that in concept, the idea that a real recovery can occur with rising unemployment seems pretty ludicrous. Again, the devil is in the details and it all comes back to how you define your terminology and ask “A recovery for whom?”

A number of months ago, I pointed out the somewhat flawed rationale of using GDP itself as a gauge of economic growth since government spending is a portion of that measurement. Normally, this wouldn’t be a huge problem, but when the government tries to in essence become the economy by spending exorbitant amounts of borrowed money, then GDP loses its usefulness as a measure of genuine economic growth. I willingly admit that it is exceedingly difficult to argue against government spending to a construction worker who is able to remain employed because of a road project paid for with stimulus borrowing. However, we all need to be concerned with the undeniable fact that more and more of our national well-being is becoming dependent on the hazardous practice of reckless borrowing and debt monetization.

Unfortunately, in Bernanke’s jobless recovery, there are few winners and many losers.

Foreclosures Continue to Increase

Home foreclosures in the third quarter of 2009 hit an all-time record high according to RealtyTRAC. Nearly one million homeowners received a foreclosure notice during the past three months. Nevada continues to lead the pace nationally with 1 foreclosure notice for every 23 homes. Nevada is no surprise, but Vermont, on the other hand, is. Vermont, which had barely been impacted by the housing crisis until recently has seen foreclosure rates jump 170% from the same quarter a year ago. Keep in mind that foreclosures continue to run rampant despite numerous fixit attempts at the Federal, GSE, and state levels. The system is still clearly reaping what it has sown over the past decade. These numbers would be far worse if lenders were foreclosing on all the properties that met the criteria. In many low-income areas, lenders aren’t foreclosing at all, opting instead to leave the properties in abeyance and allowing the residents to remain.

Many borrowers are unable to refinance even with historically low interest rates thanks to Bernanke’s MBS buying program because their credit is destroyed. Unemployment certainly isn’t helping. The lack of accumulated savings has left many folks with little or no wiggle room to deal with financial hardships.

The fact of the matter is that as bad as foreclosures are right now they’d be several orders of magnitude worse if it weren’t for government intervention. Unfortunately, this rationale will be used moving forward to justify even more intervention. Obviously the reason things aren’t getting better is because government hasn’t done enough or done it long enough… right? I fully expect to see the $8000 tax credit for first time buyers eventually extended to any buyers, and then somehow fit into refinancing deals as well. Maybe a government-sponsored mortgage holiday is in the works. You laugh? I know people howled when I mentioned the idea of government stimulus by handing out store gift cards, but several politicians have already mentioned doing exactly that.

It is also clear that the Fed has made the decision to work the demand side of the equation by monetizing the mortgage-backed securities market. The Fed has purchased nearly a half trillion dollars worth of MBS in the last 2 quarters in an attempt to artificially suppress rates. During this period, they made one concerted attempt to back off on the purchases and rates immediately shot up as was documented in my 6/5/2009 missive. This action, coupled with the first-time homebuyer tax credit has been a shameless effort to lure renters and younger people into sopping up the excess inventory from foreclosures. This while new home construction continues, albeit at a lower pace. Does all this sound like a recipe for a genuine recovery?

Employment

It continues to be my opinion that the headline unemployment rate will never reach 10%. I realize this is a considerable stretch simply because it is already on the precipice, but I’m sticking with it. Frankly, the headline number, while heralded by the telescreen, is largely irrelevant in the real world. A closer approximation lies in the BLS’ broadest measure U6 (shown below) and even that understates unemployment due to the use of the arbitrary and capricious birth-death model. For decades now, BLS has engaged in the highly questionable and political practice of changing methodologies when the numbers become unfavorable.

Shadowstats does a fine job of keeping up the tradition of the older, more accurate methodology and states employment to be nearly 22%. This is a level of depression proportions, but you wouldn’t know it watching the telescreen. Perhaps again the devil is in the details and when you coalesce the consumer confidence numbers, and the massive and ongoing retrenchment in consumer credit, which I have been screaming about as a signpost for over 3 years, it is easy to see that things on Main Street are not what many would like us to think they are. The retrenchment is certainly good news for the consumer, but bad for growth in our twisted world. Given the proclivities of the American consumestocracy to blow money over the past decade, it is probably a reasonable assumption that the retrenchment is not voluntary. 22% unemployment and a shattered consumer hardly seem like firm foundations from which to build a recovery - even a jobless one.

Credit Card Resets?

And now we move on to our ‘salt in the wound’ section of this week’s journey. We all know very well about the $23.7 trillion (courtesy Bloomberg.com) lavished on the financial system to ‘rescue’ it. We know about the tens of billions in bonuses handed out by financial firms and the nonsensical battles over the AIG handouts Congress occupied itself with while Rome burned. We know full well about the federal reserve’s efforts to artificially manipulate interest rates lower and essentially give away money to the banks, then pay them 15 basis points to store their reserves at cartel headquarters. So after receiving all these perks of the well-connected, the banks are doing the logical thing: they’re sticking it to the consumer.

How, you say? In the form of higher interest rates on credit cards, additional fees, higher minimum payments, and ironclad rules on repayment terms with substantial penalties for non-compliance. So all of those folks who dodged a bullet on mortgage resets just might get one after all when they open their next credit card statement. After all, if we can’t get consumers to take on debt, we can do the next best thing – charge them more for the debt they do have, right? You can’t make this stuff up. The above are just a sampling of the stresses that exist on the backbone of our real economy: Main Street. So the next time you hear a government or quasi-government official discussing economic optimism or a jobless recovery, all you need to do is ask yourself, “For Whom?”

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.