Friday, October 09, 2009

Continued from the previous post:

For small business borrowers, there are three problems. First, the fundamentals of their businesses have often deteriorated because of the length and severity of the recession—making many less creditworthy. Second, some sources of funding for small businesses—credit card borrowing and home equity loans—have dried up as banks have responded to rising credit losses in these areas by tightening credit standards. Third, small businesses have few alternative sources of funds. They are too small to borrow in the capital markets and the Small Business Administration programs are not large enough to accommodate more than a small fraction of the demand from this sector.

All of these factors will tend to inhibit the pace of the economic recovery.

Thursday, October 08, 2009

How the Economy Will Bring Down Obama pt 3

Continued from the previous post:

The third, and perhaps most important factor, is that the banking system has still not fully recovered. Bank credit losses lag the business cycle and are still climbing. Thus, while banks’ access to the capital markets has sharply improved, banks are still capital constrained and hesitant to expand their lending. Most importantly, some significant classes of borrowers—namely commercial real estate and small business—are almost wholly dependent on the banking sector for funds, and those funds are not easily forthcoming.

Wednesday, October 07, 2009

How the Economy Will Bring Down Obama pt 2

Continued from the previous post.

The second force that could restrain the recovery is the fiscal outlook. The fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent. This has to be the case if we are to ensure that fiscal policy is on a sustainable path over the long-run. This means that the positive impulse from fiscal stimulus will abate over the next year.

Tuesday, October 06, 2009

How the Economy Will Bring Down Obama pt 1

In about three years the GOP will ask the voting American public the same question Ronald Regan asked when he ran for President against James Earl Carter; 'Are you better off today than four years ago'. If the current Fed Reserve forecast is correct the answer will be no. That will lead to the defeat of Obama. Here are the remarks from the Fed.

The shock to household net worth seems likely to have several important implications for household behavior. The shock creates a risk that the household saving rate could increase further. For example, during the period from 1990 to 1992, the household saving rate averaged about 7 percent of disposable personal income, considerably higher than the 4.3 percent average rate during the first half of this year. If the household saving rate were to rise, then consumption would rise more slowly than income, making it more difficult for the economy to develop strong forward momentum. In addition, it seems likely that some workers will respond to the wealth shock by postponing their retirement. This suggests that the labor force participation rate may rise once labor market conditions improve. This would tend to push up the unemployment rate, all else being equal.

Monday, October 05, 2009

The source of Obama's stimulus push seem to come from Christina Romer who thought that FDR did not spend enough during the Great Depression. From the New Yorker:

One of her key papers as an economist at the University of California at Berkeley, where she had spent the previous twenty years, showed that, contrary to popular belief, Franklin D. Roosevelt’s spending programs hadn’t pulled America out of the Depression. (She found that monetary policy was the key factor.) Conservatives had seized on the paper to disprove the efficacy of fiscal stimulus, but Romer’s point wasn’t that Roosevelt had spent too much to no purpose; it was that he hadn’t spent enough. When faced with a severe recession, she believed in overwhelming force.

It seem intuitive to state that the 1940s and 1950s was an unusual time in world economic history because the US was the only viable and growing economy; producing everything the world wanted and employing Americans. FDRs huge budget out lays were recouped from taxes paid by various participants in this growing economy.

But today it seems like there is a lot of competition from other economies and the US would not be able to recoup the large federal deficits through growth. History never repeats but it does rhymes. In this case it seems that the ideologues have latched on to academic research that may not be relevant. Let's see what happens.