Thursday, April 2, 2009

Martin Feldstein: Economic Recovery Has Long Way to Go

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Since I probably tend to skew to posting information from what are considered more liberal economists, I'll make some equal time for one of the deans on the conservative side: Martin (Marty) Feldstein. I agree with just about every thing he says. As I've been saying the past few weeks I am now coming around to a government induced double dip recession. Much like the Bush spring 2008 stimulus (under $200 Billion) masked the reality of what was under the surface so will the (more than 4x the size) Obama 2009 stimulus. Just as we did in 2008, we'll hear the pundits point to "economic data that is clearly just fine thank you" (leaving out how much money was being thrown into the system in such a concise period) and that people saying that dreams of "we'll skate through this" were just doomsday types.

Leaving out the fact interest rates from the Federal Reserve have been lowered to "zilch-ish" and the loads of dollars infused into the system from their hands, just the federal stimulus alone will be massive. Estimates are $100B (more than half of the stimulus plan) will fall in this quarter alone, and then Q3 and Q4 2009 will also be supersized. Hence all economic figures we will shall see in the "year or so" to come will be altered by borrowing from the future to pump up today's reality. Otherwise known as mirage economics. Then sometime in early 2010 after the sugar high wears off, we'll be back to an economy with higher unemployment we have now and quite possibly higher inflation (yeh! its 1970s redux!) - of course interest rates will still be rock bottom as government tries everything in their power to get people to over consume again because the solution to massive debt is... more massive debt. That's all we know how to do now. So we should expect the stock market to be heartened by this borrowing from the future to gloss over reality today JUST as it was heartned post Bear Stearns when Bush's stimulus glossed over economic reports with sunshine for a handful of months. What we are doing now makes that look like child's play.

I still stick to my version of [Dec 15, 2008: The Economic "Recovery] but it will be partially hidden by an avalanche of your grandchildren's (SLASH) China's money. At the heart we need jobs - and not just transfer payments from one pocket to another. Newspaper jobs won't be coming back, (many) automotive jobs will not be coming back, state jobs (if they respect a balanced budget) will see significant losses in the year ahead, (many) of the high paying financial jobs will not be coming back, and (many) service/retail jobs won't be coming back as the US consumer will be desperate to rebuild balance sheets devastated by two bears in stock market in 1 decade, interspersed with a housing bubble. If you can tell me (ex federal government spending) where we are going to be making up a good 5-7 million jobs I'd love to listen. People have already forgotten the "jobless recovery" that came in the early part of the decade ... the economic figures improved post 2002 but we stubbornly could not create jobs. Ah, but we "solved" that - housing bubble time... 40% of US profit growth came from "financials" - as did much of the job growth - blue collar work (building) and white collar. And around that grew a halo of service jobs to service all these housing workers. So we need a new national bubble since "building things" (ex houses) is best left to other nations... I'll be interested to see what the government thinks up.

What jobs will we be getting back? Mortgage refinance professionals should be booming for the next year. Start training ...

Roughly a 9 minute video from CNBC (the first 7 minutes apply to this conversation; the last 2 apply to charitable contributions)

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The economy is headed for a “very long and damaging economic downturn” that will not see any recovery in 2009, well-known economist Martin Feldstein said on Wednesday.

“We’ve got a long way to go before this [economy] turns around,” he told CNBC and said this recession is “worse than anything we’ve seen since the 1930s.

Feldstein, former chief economist for President Reagan and now president emeritus of the National Bureau of Economic Research, said the Federal Reserve’s recent efforts to stimulate the economy would be ineffective in the long run because they are not targeting the real problem that is causing the downturn.

“I the monetary policy is not working because the credit markets are dysfunctional,” said Feldstein. “So the Fed is being helpful by providing credit and stepping into the commercial paper market, but that doesn’t’ really make credit available through normal channels to responsible borrowers.”

Feldstein also criticized Obama’s stimulus plan, saying that although there might be a temporary upturn, it will last no more than five months. Like the Fed’s actions, Feldstein said the stimulus package does not target the real problem in the economy.

I think the way the stimulus package was put together was very rushed—a much too much responsibility to the congress, too little guidance. So while it was a big package, it was not a very effective package in terms of stimulating the economy,” he said. “It will raise the level of GDP by a little bit and that will look like an increase in the growth rate. But I think nothing fundamental will have changed. We will continue to see the economy sliding down.”


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