Mish's Global Economic Trend Analysis

Hawaii Furloughs Its Children; Extreme City Moves; Who Is To Blame?
Financial Reform Act Requires 67 Studies and 243 New Rules Not Yet Created
Fooled by Stimulus - Structural Problems Still Intact

Hawaii Furloughs Its Children; Extreme City Moves; Who Is To Blame?

Posted: 09 Aug 2010 06:30 PM PDT

Cities and states are running out of cash. In response Governments Go to Extremes as the Downturn Wears On. Here are few examples from the article.

Hawaii Furloughs Its Children

Four-day weeks have been used by a small number of rural school districts in the United States, especially since the oil shortage of the 1970s. During the current downturn, their ranks have swelled to more than 120 districts, and more are weighing the change.

But Hawaii is an extreme case. It shut schools not only in rural areas but also in high-rise neighborhoods in Honolulu. Suffering from steep declines in tourism and construction, and owing billions of dollars to a pension system that has only 68.8 percent of the money it needs to cover its promises to state workers, Hawaii instituted the furloughs even after getting $110 million in stimulus money for schools.

Unlike most districts with four-day weeks, Hawaii did not lengthen the hours of its remaining school days: its 163-day school year was the shortest in the nation.

Children, meanwhile, adjusted to a new reality of T.G.I.T. Getting them up for school on Mondays grew harder. Fridays were filled with trips to pools and beaches, hours of television and Wii, long stretches alone for older children, and, occasionally, successful attempts to get them to do their homework early.

But if three-day-weekends in Hawaii sound appealing in theory, many children said that they wound up missing school.

"I'm really not a big fan of furloughs," said Nira Marte, a fifth grader, explaining that she missed the time with her friends and her teacher.

County Shuts Down Its Bus System

Clayton County [Georgia] decided to balance its budget by shutting down C-Tran, the bus system, stranding 8,400 daily riders.

The county — hit hard by the subprime mortgage crisis and the wave of foreclosures that followed — decided it could no longer afford spending roughly $8 million a year on its bus system, which started in 2001. It hoped that some other entity — like the state — would pick up the cost.

If the threat to shut the system down was a game of chicken, no one blinked.

Now all five bus routes are gone, and riders are trying to adjust.

Jennifer McDaniel, a hostess at a Chili's in the airport, was forced to spend her tax refund, and take out a big loan, to buy a car. Jaime Tejada, 36, a Delta flight attendant, wondered why transit was so much better in the countries he flies to.

And Tierra Clark, 19, who studies dental hygiene and works five nights a week at the Au Bon Pain at the airport, was left with an unwanted new expense. "I'll have to call a taxi from now on — $13.75 every night," Ms. Clark said, as she rode the very last C-Tran bus home.

Lights Out In Colorado Springs

Ever since Colorado Springs shut off a third of its 24,512 streetlights this winter to save $1.2 million on electricity — while reducing the size of its police force — many residents have said that they feel less safe.

To close a budget gap — the city's voters, many of whom favor smaller government, turned down a property tax increase in November, and a taxpayer's bill of rights makes it hard for city officials to raise taxes — Colorado Springs has stopped collecting trash in its parks, stopped watering many medians on its roads and reduced its police force.

The sprawling city of roughly 400,000 at the foot of Pike's Peak — which covers 194 square miles — made national news when it auctioned off its police helicopters. But less-heralded police cuts could have more impact: the force, which had 687 officers two years ago, is down to 643 and dropping. At any given time, the department estimates that there is a 23 percent chance that all units will be busy.

So it has reduced the number of detectives who investigate property crimes, cut the number of officers assigned to the schools and eliminated units that tracked juvenile offenders and caught fugitives. Officers no longer respond to the scene of most burglaries, at least if they are not in progress.

Common Themes

One thing these stories all have in common is public unions and high public union costs. There did not need to be police layoffs in Colorado Springs, nor does there need to be teacher furloughs in Hawaii.

To save jobs and services, all the unions had to do is agree to lower salaries and benefits. But the unions won't do it. In response, cities like Colorado Springs should outsource their police departments to the local sheriffs' association. They should also outsource every other city service as well, all to the low cost bidder.

The city's reaction was to stop collecting trash in its parks. Such actions are tantamount to blackmail, hoping to get voters to approve tax hikes.

Who Is To Blame?

Corrupt politicians willing to buy union votes in conjunction with corrupt unions willing to bribe politicians are the primary parties to blame.

However, lazy voters do not get off scot-free. Voters can and should act responsibly.

This puts the ball back in the voter's court.

In general terms, not just in relation to Colorado Springs, the correct response from citizens should be to get rid of the mayor and any council members who are unwilling to take on the real problem confronting the city: police and firefighter wages and benefits.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Financial Reform Act Requires 67 Studies and 243 New Rules Not Yet Created

Posted: 09 Aug 2010 11:11 AM PDT

Previously I did a tongue-in-cheek post claiming that the Financial Reform Bill was a Stunning Success given that it accomplished virtually nothing while doing no further major economic damage.

Today I see I was overly optimistic (which as regular readers know is simply part of my nature).

There are 67 Studies and 243 New Rules that still need to be done, and Lord only knows what kind of damage those will entail.

Please consider Crash of 2015 Won't Wait for Regulators to Rein In Wall Street

The financial system experiences a crisis "every five to seven years," JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the Financial Crisis Inquiry Commission in January. By that measure, the next crash could come by 2015 -- years before new banking reforms are in place.

Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world's banks until 2018 to comply with limits on how much they can borrow. Parts of the Volcker rule, a provision of the new Dodd-Frank Act that would force firms to cut stakes in in-house hedge funds and private-equity units, may not go into effect for a dozen years.

"Based on our experience of government's ability to execute these things effectively and in a timely way, we are almost uncovered now from any future financial risk for at least another 8 or 10 years, and that's a little scary," said Roy Smith, finance professor at New York University's Stern School of Business and a former banker at Goldman Sachs Group Inc.

Banks will have until the beginning of 2013 to meet the new minimum capital requirements and "several years beyond that" to create new capital buffers and meet more stringent definitions of what constitutes capital.

The Dodd-Frank Act requires 67 studies and 243 new rules to be created, according to law firm Davis Polk & Wardwell LLP. The act creates a Financial Stability Oversight Council with 10 voting members, including a to-be-named insurance expert and heads of at least 3 regulatory agencies awaiting new leaders. The law's Volcker rule, which bans banks from proprietary trading and limits investments in private equity and hedge funds, requires a study by the council before rules are drafted.

The Basel committee, which in December proposed a set of new guidelines for leverage, capital and liquidity, came under attack by financial companies and some governments who thought the limits would curb lending and hamper an economic recovery.

The Basel committee, which in December proposed a set of new guidelines for leverage, capital and liquidity, came under attack by financial companies and some governments who thought the limits would curb lending and hamper an economic recovery.

[In response] The Basel committee agreed last month to give banks more leeway in the types of assets they can count as capital.

In effect, the policy allows banks several years of padding their capital with future profits instead of imposing immediate remedies, a policy sometimes referred to as "regulatory forbearance" that's a little like allowing drivers to build up speed before buckling a seatbelt.

Delaying reform until "2018 is like doing nothing because you know the world will change many times between now and 2018," said Simon Johnson, former chief economist for the International Monetary Fund who is now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "You should worry a lot about the next round of the cycle."

Note the line about padding bank profits before there is any reform. Think those reported bank earnings were real?

JPMorgan Chief Executive Officer Jamie Dimon is highly likely correct about another financial crisis before 2015. If so, expect JPMorgan's derivatives unit to be smack in the middle of it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Fooled by Stimulus - Structural Problems Still Intact

Posted: 09 Aug 2010 12:20 AM PDT

Bill Watkins, a California Lutheran University professor, provides a nice summary on New Geography of the failure of various stimulus efforts to do anything meaningful in the wake of a collapse by Lehman, a collapse he says is a "regime shift".

Please consider Flexible Forecasting: Looking for the Next Economic Model by Bill Watkins.

The world changed in September 2008. We call it a regime shift. It's a move from one (good) equilibrium to another (bad) equilibrium. Statistical models that worked well in the old regime don't work in the new regime. We hustled to adjust our models, but admitted that with limited experience in the new regime, we were less confident in our forecasts.

Some economists didn't recognize the regime shift. They went about their business using the same old models in a new world. Comments about the length of a typical recession or about how sharp declines are followed by rapid recoveries were clear signals that the speaker didn't understand the situation.

Some economists were fooled by the stimulus. The rules of accounting cause government spending to be reflected as an increase in economic activity. Stimulus plans such as Cash for Clunkers and tax credits for home purchases moved the timing of transactions, artificially reinforcing the direct spending impacts. Similarly, bailouts and foreclosure prevention programs postponed the recognition of losses.

Many interpreted the resulting increase in last winter's reported activity as permanent, but that could not be. We were not building anything or laying the groundwork for sustained prosperity. Instead, we were just continuing the previous decade's consumption binge. The banks had failed, but the government had stepped in. It became the mother of all banks, borrowing from future citizens and other countries to fuel today's consumption.

Today, enough time has passed that even the most slowly adapting forecasters are forced to confront the post-2008 data and the government's failed economic efforts. As forecasters confront these facts, their forecasts are becoming increasingly gloomy. Now, forecasts of protracted malaise or even a double-dip recession are increasingly common. Why?

Because we borrowed to extend a consumption binge, and we compounded that error with omissions and perverse policy.

The stimulus's omissions are glaring. We didn't significantly invest in infrastructure that would improve our future growth. We failed to address the weaknesses in our education sector that fuel increasing inequality, sentence many to a life of hopelessness, and permanently constrain our economic growth. We did nothing to encourage small business's growth; in an example of perverse policy, we are actually creating a new regulatory regime that favors large companies.

Then there were the actions that will probably restrain future economic growth. The minimum wage was raised. We had health care reform, but we didn't address the real problem: the fact that the health care consumer pays an insignificant portion of the bill at the time of consumption. We had financial reform that failed to address the fundamental problems of too-big-to-fail, and we protected risky activities, increasing the regulatory burden and crippling the ability of small banks. We halted much of our offshore drilling.

Looking forward, there is little reason for optimism. We're considering huge increases in our energy costs through greenhouse gas regulation. We have a massive tax increase scheduled at the end of the year.

While a double-dip recession is not the most likely outcome, we can't reject the possibility. More likely, we face a long slow struggle to overcome ourselves and restore real prosperity. The forecasters' consensus appears to be moving toward accepting that reality.

Massive Policy Errors

Bill Watkins discusses many of the things I have been talking about on this blog for years. Nonetheless, I thank him for a nice summary of why stimulus failed and also for recognizing that stimulus measures would fail in advance. Policy errors certainly have been rampant and very few economists saw them.

Watkins thinks economists now understand the "regime shift". More than likely, most of them don't. Instead, economists have a tendency to project current economic status forward, without understanding why. Because things have slowed down, economists became a more realistic. I doubt their understanding is much better.

If there is another round of stimulus accompanied by another uptick in the economy (the former is likely coming but probably not the latter), I have no doubt economists would think we are off to the races again and this was just another "soft patch".

In contrast, I propose we are going to flirt in and out of recession for perhaps a decade, just as Japan did. Interestingly, every time the Japanese economy rebounded slightly, economists thought "thank God, deflation is over", only to see the Japanese economy relapse.

Problems Many, Solutions Nonexistent

Tide of Debt: Consumers are swimming against a tide of debt with no way to pay it back.
Demographics: Boomers are heading into retirement scared half to death because they did not save enough.
Jobs: There is no source of jobs
Wages: Global wage arbitrage
Attitude Changes: a secular shift in the attitudes of consumers towards housing and risk taking is underway.
The Fed is powerless to change attitudes.

Regime Shift? What? When?

Lehman filed bankruptcy in September of 2008.

For comparison purposes, I started posting on the phenomenon of people Walking Away from their houses in January of 2008. Here are some Links to Walking Away articles.

What is the real regime change: People willing to walk away from their homes for the first time in history, or the bankruptcy of a single company?

That people would voluntarily walk away from their homes is without a doubt a "game changer". It turned economic theory 180 degrees. Almost no one thought that would happen.

In contrast, nothing especially important changed in September of 2008. That Lehman would file bankruptcy is at best a symptom of attitudes that had long since changed.

It's a Totally New Paradigm

Secular attitude changes like "walking away" had their roots in the busting of the housing bubble.

Flashback Saturday, March 26, 2005: It's a Totally New Paradigm

Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

"I just don't think we have what it takes to prick the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."

"I look at this as a short-term investment," said Mr. Farquharson, 36, who works for a venture capital firm, "and plan to unload it as soon as things look dangerous."

Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

Here are some links to the housing bubble chart updates, all made in real time.

One of my favorite updates of that chart regards the cover of Time Magazine going "gaga" over real estate one year after the bubble burst, but before anyone important even recognized that fact.

Inquiring minds may wish to consider US vs. Japan Land Prices Pictorial Update for a discussion of Time Magazine going "gaga". They even used the word "gaga" on the cover.

Regime Change Started in 2005

The regime change that Bill Watkins mentions, actually began in 2005 with the busting of the housing bubble. It took a couple more years before economists noticed because commercial real estate kept the game going for a while longer.

Commercial real estate follows residential housing with a lag, and from 2005-2007 stores like Home Depot, Lowes, Walmart, Pizza Hut, were still in rampant expansion. That expansion provided enough jobs to mask what consumers finally started figuring out: "home prices will not rise forever".

Nonetheless, Bill Watkins is actually ahead of the game in understanding there was a regime change. In 2008 Ben Bernanke was still in denial over the housing bubble and he had amazingly optimistic ideas where the unemployment rate was headed.

Even now, Bernanke displays little public awareness of what is going on. It would be interesting to hear what he says in private at the FOMC meetings in comparison to the soundbites the Fed delivers to the public. If FOMC soundbites represent what the man really thinks, Bernanke is nearly as clueless as ever, with little understanding of what went wrong or why, what the policy errors were, and what the Fed's role in this mess was.

Attitudes are the Game Changer

Watkins missed when the regime change occurred and possibly what the regime change even is (changing social attitudes on housing, consumption, risk taking, and debt, by consumers and banks alike).

The "attitude change" was the game-changer, NOT the event (the collapse of Lehman).

Nonetheless, Watkins is light-years ahead of most economists and economic cheerleaders in understanding that we did have had a massive regime change, that the regime change is lasting, and that stimulus efforts to date have done nothing to fix the structural problems at hand.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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