Managing Expectations – The Aftermath of Financial Crises

In December 2008, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University followed up on work they performed a year earlier and produced a paper entitled “The Aftermath of Financial Crises” which they presented at the American Economic Association meeting in January, 2009 in San Francisco. They studied the 18 global banking and housing crises which occurred in the post World War II period and then added to them the US depression which began in 1929 and a banking crisis in Norway in 1899 for which they had housing data.

I mention their work for two principal reasons. First, looking forward from their initial work in December, 2007, they predicted the financial crisis that would occur in 2008. Second, their analyses of the historical crises noted above seems highly predictive of what has transpired since that time. Knowing we are not out of the woods yet and we still have huge variables in Europe, China, Middle East and US, I think the data show remedies to banking and housing crises take time. This latter issue is important as we must not look for panaceas or miracles to resolve the crises. It takes month by month progress on the journey upward, knowing that the market may fall back on occasion. In our political climate in the US which has little cooperation between factions and a huge amount of impatience, concerted effort is needed.

To keep things simple for me, I like to think the housing crisis and recession generally began at the end of 2007. In some areas of the country, California, Nevada, Florida, e.g. the housing crisis had already begun. I would also like to presume that the unemployment crisis started  at the end of 2008, but it actually started in some places and industries before then. The equity market began bleeding in the spring of 2008, but fell precipitously in September, 2008. For ease of the math, let’s presume it occurred in September, 2008. This makes the arithmetic a little easier to follow.

Their key conclusions are as follows:

  • “First, asset market collapses are deep and prolonged  Real housing price declines average 35% stretched over six years, while equity price collapses average 55% over a downturn of three and a half years.
  • Second, the aftermath of banking crises is associated with profound declines in output and unemployment. The unemployment rate rises an average of 7% over the downphase of the cycle, which lasts over four years.. Output falls (from peak to trough) an average of 9%, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
  • Third, the real value of government debt tends to explode, rising an average of 86% in the major post WWII episodes….The big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer….as well as often ambitious countercyclical fiscal policies aimed at mitigating downturn.” They note the cost to bail out and recapitalize the financial system is usually not the key driver of debt increase.

The above speaks of averages, but there are historical crises that were far worse and some that were even better than the averages noted. Yet, if we use the averages as a baseline, they show some telling results that are eerily accurate in the US, but also beg for patience as we work our way out of the crisis. First, they note the average equity downturn is 3 1/2 years. If we use the start of the downturn postulated by me of September, 2008 that places us at March, 2012 as when the equity market recovers. If you look at the first quarter of this year, many equity declines were largely restored and the market was on much better footing. It was not all the way back and has fallen off some since, but I found this math interesting.

The unemployment statistics have shown month by month growth for the last 26 months. It has been less than hoped growth, but jobs were added. We have not fully recovered and definitely have a way to go. Doing the same type of math with 4 years on average of unemployment during a financial crisis and beginning the fall off at the end of 2008, that would place our average recovery at the end of 2012. That may be too soon, but we seem to be slowly climbing our way toward that. While the President has aided the process somewhat, we could have done more with a more cooperative Congress. The President also made the ludicrous announcement after the stimulus in early 2010 that unemployment would be significantly improved by summer of 2010. That was not a very good prediction and gave too much false hope.

On the housing side, improvements are visible, but we have too many people underwater and in trouble with their homes and mortgages. Using the same kind of arithmetic, the above presumed start date of January, 2008 and an average housing decline of six years, that places us at the end of 2013 for a fuller housing recovery. That seems to feel about right given what is happening, but things could turn around in a bad way quickly with the other variables noted above.

The final comment in output shows a much quicker turnaround. Many have referred to this as the “jobless recovery,” but it makes sense. Business has to improve with the available resources you have before you begin hiring again. GDP growth has been apparent for several years, yet it is a little slower than desired. I would add a comment made by Thomas Friedman and Michael Mandlebaum in their book “That Used to be Us.” They noted that China’s GDP fall off in growth from 10% to 7% would impact the global economy far more than slow US or European growth. This shows that we are part of a whole, so we are impacted greatly by others. So, we can show improvement, but it can be dwarfed by China’s slower growth.

So, what can we draw from the above? We need a little more patience on the housing market (end of 2013) and unemployment rates (end of 2012). While the equity market and GDP growth make us feel a little better, we need to be mindful of the debt increase. We have to be smart to pay down the debt and deficit, but pay it down we must. That is why I am a fan of the Bowles-Simpson Plan – it attempts to do both.  Yet, at a bare minimum, we need our leaders to work together toward a reasonable solution that will pay down debt, but not stop growth. The last thing we need is what will unfortunately happen – partisan bickering over whose fault this is and why the bother has not done more.



Need for Light Rail Transit and a Little History on Collusion

With the needs for better traffic planning in larger cities to alleviate congestion, diminish smog and let people move more freely, there has been a growing push for light rail lines. These lines are electrified trains that run adjacent and across traffic at crossing lights. They have tended to be more economical to build and run than the major subway and elevated train lines serving our largest cities. With the environmental concerns over global warming and the need for less fossil fuel usage, you would think these developments would be a slam dunk.

Unfortunately, projects like these are fighting uphill battles as part of the budget cuts and cost estimates. Unlike an operational budget issue, these capital projects are building assets that would benefit the communities and address the issues noted above. There is no doubt we need the best cost estimates possible to make these things happen and we should blend federal, state and local money to do so, but we should not be making this so hard. For some reason, the conservative right has latched onto this issue and for the reasons noted above have been more adamant against their development. The skeptic in me thinks there is more to this than just the budget issues, as we want to continue our focus on driving rather than riding. To me, a vibrant transit system is needed for a cosmopolitan area. Otherwise, we are just creating a congested, environmental problem.

What is interesting to me is a significant number of cities in the US had electric rail systems before they were destroyed and replaced by buses and cars in the 1930’s and 40’s. What is disturbing is how this came about. I would like to say this was done with good stewardship, but the unfortunate reason is several companies with a vested interest in the outcome, colluded to monopolize the bus industry and replace the destroyed electric rail or trolley system with their buses and cars. In 1949, after the fact, GM, Firestone Tires, Standard Oil of CA, Phillips Petroleum and Mack Trucks were found guilty of “conspiring to monopolize” the bus industry and using buses and cars to replace the electric trolley system that companies they owned had bought up. This conviction was upheld in appeal.

Wikipedia has a good summary of how these companies went about it. Search on “General Motors Conspiracy” and you can pull it up.  In fact, GM set in motion this plan to “motorize” the mass transit system dating back to 1922. And, if you look at the names of the fellow conspirators, you will note that two are oil/ gas companies, one is a tire company, one is a maker of buses and one is a maker of cars and trucks. These motorized road vehicles companies and fuel companies conspired to destroy an electric, rail based system that relieved congestion and smog. Even if their motives were altruistic, this would not seem like good transit planning.

Why do I mention all of this now? Two reasons. First, I want people to know why it is important to look beneath the source of information and data on any issue, but especially those which include oil and gas. There is too much money at stake and, as noted above, stranger things have happened. Just today, it was announced the President is supporting fracking to my chagrin, but is wanting the chemicals used by the oil/ gas developers to be disclosed. Yet, the industry lobbyists have battled down this ruling to be they only need to disclose this after the fact. So, they will be permitted to frack and only disclose the toxic chemicals that could leak into the water supply afterwards. To be candid, we need to move away from fossil fuels as quickly as we can. The best way to do that is to drive less with those oil/ gas-powered vehicles. Electric rail systems are a key part of that strategy.

Second, I mention this as conservatives are asking for fewer regulations and the elimination of some agencies. I worked in business and can say with certainty – businesses need to be regulated – it is that simple. If we don’t they will take advantage of situations to maximize short-term profit. The collusion verdict noted above was too late. Industries pay lobbyists a great deal to take the teeth out of regulation. The EPA has been fighting an uphill battle for years. We actually need the EPA to do more, not less. And, nowadays industries need only contribute to campaigns to share their viewpoints and push their desired outcomes. It costs too much money to run for office. This makes the lobbyists work easier.

In closing, I would ask that we all try to understand the stories beneath the news. When we see people against ideas that seem to be for the greater good, we should ask  ourselves why and look into it. Otherwise, we will miss the more elegant solutions and may avoid finding out who is more interested in an outcome than others. Not everyone is altruistic.


Context is Everything

In our impatient, sound byte society, where the news reporters tend to pluck phrases and nuggets as news and we viewers take what the say as gospel, we many times miss the real story. That is one of the reasons I watch PBS News Hour, as they take the time to do more in-depth reporting by people who know their subject matter. One of my constant themes is explained by this title – context is everything. Anyone can be made to look foolish by taking their words out of context. Plus, in so doing, the real story is often missed.

I was reminded of this yet again yesterday, so I thought it would be good to highlight an example of what we call news and public discourse, masking the real story.  The Head of the South Central Region for the Environmental Protection Agency (EPA) resigned this week over words taken from his speech two years ago in Dish, Texas. The site will become more relevant as more of the story is told. Al Armendariz’ resigned over remarks made in the speech saying he would “crucify” companies for not adhering to compliance with the EPA standards. From what I have read, he has been a good public servant and was a good champion for the EPA who has been historically held at bay by lobbying efforts of the various industries they try to patrol.

So, the big story was around his resignation and his unfortunate use of the term “crucify.” Opponents of the EPA cited this as over-zealous and how dare he discuss crucifying these legitimate business  interests. The context is the real story. Dish, Texas is the community near a hydraulic fracturing site where bedrock is blasted by chemically loaded water to release natural gas. For more on “fracking” please refer to an earlier post on “The Perils of Fracking.” Mr. Armendariz’ was making a speech in Dish as there is evidence of contaminated water and air pollution which are two of the major drawbacks of  fracking. The real story is the extreme measure of harvesting natural gas is poisoning the water supply of a nearby town and arsenic, mercury, methane and others gases are being released into the air. Although not stated in the article fracking takes a significant amount of water that should not be reused and Texas is having severe drought problems.

To be perfectly clear, we are more concerned that a fine public servant doing an unpopular,misunderstood, but much needed service used the word “crucify” than the reason why he was there. The reason being the oil/gas industry is polluting the water and air supply of children (and adults) in an adjacent town. Not to mention that Texas, where water is being trucked into some towns can ill-afford the loss of any water. This is the news the oil/ gas industry spends so much money on to mask it from society. This is why they fight the EPA and want it diminished or disbanded – one of the dumbest ideas I have heard. The next time you hear that comment, ask the person do you really want to live in a country that does not police these issues?

On other subjects, the context that seems to get lost in news reporting and public discourse, would include, but not be limited to:

I am bemused by the position of the religious right on contraception. 99% of Catholic women use (or have used) birth control, but the Pope wants to beat on nuns for daring to counter the views of a bunch of old men. This also bleeds into the discussion around Planned Parenthood.  Let me be plain on this. Young people are going to have sex and it will continue until they die. You can preach abstinence all you want, but it will not even make a dent. It is like trying to hold back a flood with sand bags. So, unless you want unplanned children and expose your children to STDs and AIDs, my advice is to promote as much knowledge about sex as possible. I would even suggest churches have balanced sex education classes. And, for those of you who say my child is not having sex, note that I live within three hours of well-known religious university. People who went there say the kids go wild there as they have been restrained for so long.

While we are on the subject of Planned Parenthood, the issue is more global than the US. When funding for Planned Parenthood dries up, it affects others on the planet. Here is the context – there is a high correlation between family size and poverty. So, it is incumbent for  parents to plan for their families. The other issue of import is the Earth can only support so many people. We are just shy of 8 Billion. A study was done in the UK a few years ago. It noted if people consume like the average citizen of a poor country in Africa, the Earth could support about 15 Billion. If they consume like the average North American, the Earth could only support about 2 Billion people. This begs for the use of planned parenthood and birth control and is the bigger story.

I may offend some with this next statement, but things have gotten out of control. The NRA has way too much influence and every politician, not just Republicans, are scared of them. We have more guns than people in the US. Let me say this again. We have more guns than people in the US. Pick up any paper and read the news around the region – murder, suicide, murder, accidental shooting, murder, etc.- are reported consistently. For context purposes, there is high propensity of depression on college campuses and the NRA wants to arm the students. Arguments with family and friend escalate into a shooting because a hand gun was nearby. Yes, you are partially right NRA, “guns don’t kill people, people kill people. The last phrase should be “people who have access to guns kill people.”  I like Chris Rock’s solution to gun violence – make the bullets cost $5,000. That will minimize gun deaths. As an US citizen, there is no reason a civilian should possess an AK-47. So, the real story is too many people are dying needlessly in our country. More guns  to reduce the number of gun deaths would be like putting out a fire with kerosene.

Global warming is the story, but we debate too much on personalities. For all the good Al Gore did with his documentary on global warming, it unfortunately put a political face on the global warming debate. So, the other side had to defeat Al Gore and win. Unfortunately, the story is the planet is heating up and the data is overwhelming. For the former NASA employees who want 100% causal proof, you will never get there, so we cannot put off planning looking for perfection. Already there is sufficient correlated, highly correlated and, in some cases, causal data and the impact of global warming is showing up and will continue to show up. The problem is we cannot wait until the sea encroaches fully on low-lying areas to say see we told you so, as it takes about 15 years to make a difference. We need to act now. That is the story, not the diminishing few who cry foul. We need active and real discussions around the problem and long term solutions. We need the GOP at the table with their ideas.  And, we need them to today. That is the context.

I could go on, but let me close with a major theme of our times. Since politicians now continuously run for office, it is difficult for them to agree with the positions espoused by the other side. This is a problem for both sides of the aisle, but I would not be President for all the tea in China. When everything you do is chastised, critiqued and lampooned by the opposing party, it makes it difficult to govern and for us to be governed. The President has actually done a better job than the GOP would let you believe. He has not been perfect, but he does not get his “propers” from the opposing force. So, when the GOP criticizes him for not doing enough, it amazes for the lack of context. The GOP Congress has fought him at every turn, even ideas that many in the party agree make sense. For example, unbiased economists would tell you the stimulus package worked, it just was not enough. So, when a new stimulus is needed, we cannot even talk about it. Housing based recessions take on average six years to come out of – a 2007 Harvard/ Maryland Professors study of all housing recessions over time. We have had modest growth for 25 straight months. Could the President have done more – yes? Could Congress have helped more – absolutely?

We have to move away from these “zero sum” exercises, where someone wins and someone loses every argument. Oftentimes the news stories are around the game of politics rather than the substance of issues. I detest news stories on who gains and loses from a verbal miscue. The other stuff is harder to report and harder still to decipher. Yet, that is where we all must do more work. On this last issue, it is the US citizens who lose when politicians do not work together. So, whether it is political, economical, environmental or other type of issue, we need to look for the context in everything. Who said it, why did they say it, when did they say it, where did they say it and what else was said at the same time. I would like people whose words are being insufficiently reported to step up and say “yes, I said that and here is why. Next question.”

Quoting my old boss, he would say “my daddy used to tell me believe half of what you read and nothing of what you hear.” So, dig deeper when you hear something said and look for its context. It may make all the difference.