Friday, November 07, 2008

It's the Economy

November 7, 2008, 8:30

President Obama: "It's the Economy"

In 1992 James Carville felt obliged to keep his candidate, Bill Clinton, "on message" with the famous wall sign that read, "It's the economy, stupid!"

It's still the economy for our newly elected president, but President Obama is reluctant to call anyone "stupid." He's just taken on Rahm Emanuel as his Chief of Staff to do that.

("In the Clinton administration, he [Rahm Emanuel] was aggressive, frequently profane and instrumental in shaping domestic policy on issues like health care, welfare and trade. He earned the nickname Rahmbo for his determination and take-no-prisoners approach — an advantage when trying to bring a thorny issue to resolution, but a style that can be off-putting to those accustomed to gentility. . . . His manner can also create enemies, and Mr. Emanuel has ruffled the feathers of many on Capitol Hill, particularly black and Hispanic lawmakers." Carl Hulse, "Rahm Emanuel," New York Times, November 6, 2008.)

So today our new president is meeting with some 17 of his favorite economic advisers, following which he is scheduled to hold his first news conference since being elected. Jeff Zeleny and Jackie Calmes, "Obama, Assembling Team, Turns to the Economy," New York Times, November 6, 2008; John Eggerton, "Parsons, Schmidt on Obama Advisory Team; Former Time Warner chief, Google CEO named to president-elect's Economic Advisory Board," Broadcasting & Cable, November 7, 2008, 9:03 a.m. CT ("According to the Center for Responsive Politics, Parsons contributed to the campaigns of both Obama and John McCain, but gave OBama the maximum individual contribution of $4,600, while only $1,500 went to McCain.").

Here are some of the economic realities President-Elect Obama, his advisers -- and you and I -- are going to have to confront:

Economy Watch

Here's a very brief excerpt from the latest take on the global economic collapse by the International Monetary Fund. Although the organization focuses on national, rather than personal, finance the implications for each of us are clear. Unless you're planning national economic policy there's no need to master everything in this 321-page "book," but a scan of the Executive Summary might be at least informative, and possibly even useful, for each of us.

The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. . . . The situation is exceptionally uncertain and subject to considerable downside risks. The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control.

Global Economy under Stress

After years of strong growth, the world economy is decelerating quickly (Chapters 1
and 2). Global activity is being buffeted by an extraordinary financial shock and by still-high energy and other commodity prices. Many advanced economies are close to or moving into recession, while growth in emerging economies is also weakening. . . .
International Monetary Fund, "World Economic Outlook," October 2008 (321 pp.).

Meanwhile, the latest economic data from the United States, including unemployment (which it looks like, after today's report, will be at or over 1,000,000 for the first 10 months of this year alone), wages, hours and consumer spending, is consistent with the IMF's analysis:

The American economy lost another 240,000 jobs in October, the government reported Friday morning, the 10th consecutive monthly decline and a clear signal that an accelerating slowdown is assailing households and businesses.

The unemployment rate climbed to 6.5 percent , the highest level since 1994 and up from 6.1 percent the month before.

Adding to the gloom was a steep downward revision in payroll numbers for September. The Labor Department said that employers slashed 284,000 jobs that month, far higher than the 159,000 that was initially reported. . . .

Above all, the latest monthly snapshot of the jobs market reinforced how the economy remains gripped by a potent combination of troubles — plunging housing prices, tight credit and shrinking paychecks — with all three operating at once in a downward spiral.

Companies have been . . . cutting working hours for those on the payroll. Millions of Americans accustomed to borrowing against homes to finance spending have lost that artery of cash as home prices have fallen.

Wages have effectively shrunk for most workers, as rising costs for food and fuel have more than absorbed meager increases in pay. . . .

In October, weekly wages for rank-and-file workers . . . [grew] well below the rate of inflation. . . .

Consumer spending dropped between July and September — the first quarterly decline in 17 years — further eroding the motivation for businesses to hire. . . .

Many economists now expect the unemployment rate to reach 8 percent by the middle of next year, a level not seen in 25 years. Most forecasts envision the economy shrinking well into the next year and perhaps until 2010. . . .

The widely watched Institute for Supply Management survey fell in October to depths last seen 26 years ago, reflecting shrinking industrial activity and suggesting weakening demand for goods as the economy slows.

That weakness has gone global, as many other major economies also succumb to slowdown — from Spain and Britain to Japan and Brazil — and as financial crisis now snuffs out economic activity in much of the world. . . .

Many economists expect this picture to worsen as the consequences of the global financial crisis ripple out to businesses and households. . . . Credit remains tight for businesses and homeowners.
Peter S. Goodman and Michael M. Grynbaum, "Unemployment Rate at 14-Year High After Big October Losses," New York Times, November 7, 2008.

And who's watching out for us taxpayers? Not only is there not as much monitoring as I'd like to see regarding the corporate excesses by those companies we've been bailing out -- golden parachutes, bonuses, and multi-million-dollar salaries for the executives who brought on this economic disaster, not to mention the elaborate and expensive entertainment they provide themselves with our dollars, and their using money intended for loans to customers to simply merge themselves into even larger institutions -- but it now turns out we're going to be paying the lawyers who are defending those few who are actually being taken to court for their literal or figurative crimes.

When the government took over mortgage giants Fannie Mae and Freddie Mac, taxpayers inherited more than just bad debts. They're also potentially on the hook for tens of millions of dollars in legal fees for the executives at the center of the housing market's collapse.

With the Justice Department investigating companies involved in the mortgage and financial meltdown, executives around the country are hiring defense lawyers. Like many large companies, Fannie and Freddie had contracts promising to cover legal bills for their executives.

When the Treasury Department delivered a $200 billion bailout to Fannie and Freddie, that obligation passed to the government, which may find itself paying for the lawyers defending the executives against the government's own prosecutors. . . .

Legal fees can add up quickly. After Freddie Mac restated its earnings in 2003, it became embroiled in several investigations and lawsuits. By the middle of 2005, the company had paid $16.8 million in legal fees for its executives and employees."
Matt Apuzzo, "Taxpayers May Pay Legal Bills for Mortgage Execs," Associated Press, November 7, 2008.

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