Unemployment going up up up

Bureau of Labor Statistics announced that 533,000 net jobs were lost in November, the last month to see this kind of drop was December of 1974! So doing some rough estimates of employment data and economic predictions of the unemployment rate, I calculated out what the possible job losses may be if the unemployment rate creeps up over 9% (we'll hold labor force participation constant, even though it will probably go down until May when the labor force participation may increase some):

If, as what is commonly predicted by economists, the unemployment rate reaches 9%, then another 3.57 million net jobs will be lost.

If the unemployment rate increases to 9.5% then the economy would have to shed another 4.34 million net jobs.

If the most feared happens and the unemployment rate hits double digits, 10%, then another 5.1 million net jobs will still have to go.

Just a little food for thought.


(NOTE: Labor force participation (LFP) will likely decrease as a result of long term unemployment, it's been noted that thousands of people last month were taken off unemployment insurance, a product of long term unemployment. So in reality if the LFP does decrease then my estimates are low as it will take more people to become unemployed for the unemployment rate to reach over 9%, or it could just make the unemployment rate not increase as much as economists have been predicting.)

Fannie/Freddie reality

The DOW has sunk 1500 points this month alone, and its not even 10 days into it. IBM stock is down by quite a bit, just barely at $90 share (p.s. if it gets under $70 share start buying). Since the economy is in the tanker it was fun for me to goto the Rochester Chamber of Commerce U.S. Congressional debate between Tim Walz (D) and Brian Davis (R). It came as no surprise to me that Brian Davis reiterated the false claim that Freddie and Fannie are responsible for most of the mess; it is just completely not true. This argument has been used before because the Republicans thought at one point Fannie and Freddie should be regulated differently and they of course blame the democrats for stopping them even though during that time they had no power in either the House, Senate or Presidency to stop any policies. But as the argument goes Clinton and all the other liberal forced Freddie and Fannie to make bad loans to people who couldn’t afford them, thus it is the liberals and there regulation that caused the mortgage crisis. This is of course silly, so here is the reality of Freddie and Fannie:

Fan and Fred were publicly traded corporation, like AT&T, IBM, Wells Fargo, Target, etc. They were owned by shareholders. They were once create and ran by the government but were, up until a month or so ago, own by stockholders. The Government provided some subsidies to them on occasions for stability.

So did Fannie and Freddie sell these subprime loans to people that couldn’t afford it? NO! [2] They work in the secondary mortgage market, meaning they buy mortgages from private lenders who maybe individuals, banks, realtors, or other types of businesses. Fannie and Freddie would then take these mortgages and securitize them, then turn around and resell them to investment institutions like Lehman Brothers, Goldman Sacs, Morgan Stanley, Merrill Lynch, etc. Fan and Fred acted as intermediaries packaging these mortgage backed securities (MBS). Some of the MBS would have adjustable rate mortgages (ARMs) that make them more susceptible to mortgage failure. These securities were highly leveraged using derivatives -- some of it created by Fred and Fan I give you -- but most of the derivatives were created by the investment institution that used the leverage to increase profitability (yet greatly increasing risk).

So the real culprit is the people who bought the mortgages (most of them middle class with fair credit [1]), predatory lending, greedy/risky investing and lack of Federal Government oversight. Fannie and Freddie are not the greatest concern and obviously not the biggest culprit, if they were not around or created by the government some other private business would have filled their shoes. Why? Because it was a very profitable business, both Fannie and Freddie were Fortune 500 companies.

There is also very little data that what the Republicans want to do with Fannie or Freddie would have done anything about the MBS market. So in the end blaming this all on liberals that got money from Freddie and Fannie is just nonsense and the belief that republicans were going to go and stop the crisis by regulating Fannie and Freddie is even more outlandish. Even if Republicans wanted to take over Fran and Fred earlier the companies only play in the secondary market, the subprime were issued by the lenders, the lenders then sell Fan or Fred the mortgage. If Fan and Fred didn’t exist the homeowners would still see defaults and foreclose because there were still involved in subprime lending. Fan and Fred really play a small role in this debacle; they were just too involved in the mortgage industry to not fail.

So even thought there is this tiring montra from the right that Frannie and Freddie, being GSE, were the cause of all of this, it’s just is not true.

[1] Rick Brooks & Ruth Simon, "Subprime Debacle Traps Even Very Credit-Worthy: As Housing Boomed, Industry Pushed Loans To a Broader Market", Wall Street Journal, December 3, 2007, at A1

[2] http://www.freddiemac.com/corporate/company_profile/our_role_secmkt/index.html

Washington Mutual fails

Washington Mutual failed yesterday as the financial industry continues to transform. WaMu is the largest bank in the history of the U.S. to fail. The FDIC seized it Thursday night. This company scaved off failure through the great depression but could not handle the 2008 financial crisis. The interesting part is that WaMu was presented earlier in the last few weeks about being bought out by JPMorgan. JP was offering about $4 per share, which was a great deal, but WaMu turned it down. Well then WaMu of course went belly up as there was $17 billion in deposits were taken out in 15 days, making the company insolvent and doomed to failure.

So why did they turn down the offer by JP? They were not being rational. Analyst predicted its failure but those running the company did not want to sell the company sell for what were virtually pennies. They thought they should get a better deal, they were wrong. Now the company is dead and the FDIC offloaded the assets of the company to, guess who, JP Morgan. Luckily none of the customers of the once proud company will lose any money, the stockholders are not so lucky.

Trickle down doesn't work, but trickle up may...

Trickle up economics has been proven right, again. The troubled banking system has proven that as middle-income to low-income people foreclose on their homes, lose their jobs, or have depressed wage growth, it flows to the top.

The mortgage foreclosures have been brought on by a host of events; deregulation in the market, short-selling, predatory lending, investment banking, et al, have helped bring us to where we are today. As low-to-middle income individuals started accumulating toxic debt they either assumed their incomes would growth -- which for the past 6-7 years they have not -- or they did not understand the terms of their indebtedness. Add to that increased fuel costs and you have a receipt for disaster for low-to-middle income people.

Next it’s Wall Street

Good new may not trickle down, but the bad news sure does trickle up. Wall Street now feels what others have been feeling. The huge profits that were being seen by these companies were unstable. As people stopped paying their bills and foreclosed on their homes, businesses saw less free cash flow as their revenue stream was derived from people making payments on their mortgages or paying off their debt. Investment banks that offered these loans, or who had purchased them, now do not have the liquidated capital to pay their fixed costs and general business expenses. When companies do not have cash they do a fire sale or they go bankrupt, either way people get laid off and the economy slows down.

So while wealth doesn’t trickle down to the bottom, poverty sure does seem to trickle up to the top.