Financial Crisis

At this year’s Jackson Hole conference for central bankers, Fed Chairman Ben Bernanke admitted that the economic recovery so far this year has been “somewhat less vigorous than we expected,” but he expressed hope that the economy would return to a more satisfactory growth rate next year.  Considering that the Fed was already projecting a markedly slower recovery than America experienced after previous deep recessions, the Fed’s economic objectives are far too modest.  Ideally, the US economy should be growing at a 5 percent rate in 2010 and 2011 to recover lost ground and get work

The US is suffering from the worst labor market crisis since the Great Depression.  After hitting a high of 10.1% in October of last year, the unemployment rate has stalled at 9.6%, more than double what it was in 2007 before the Great Recession gripped the economy. The primary culprit behind today’s high unemployment rate is inadequate demand.

President Obama, his economics team, and the Chairman of the Federal Reserve continue to display a curiously detached view of the economy.  Just the other day, the president indicated that “it took nearly a decade to dig the hole that we’re in” as if that provided an excuse for the lassitude he continues to display in regard to the problem of unemployment.

In July 2008, in a memorandum for the Obama campaign team and later published in Challenge,  I wrote as follows:

If the above analysis is correct, the political capital of the new presidency risks being depleted, quite quickly, in a series of short-term stimulus efforts that will do little more than buoy the economy for a few months each. Since they will not lead to a revival of private credit, every one of those efforts will ultimately be seen as “too little, too late” and therefore as ending in failure.

There is much debate over whether the Federal Reserve  should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others.

Last week, the Congressional Budget Office (CBO) released its updated Budget and Economic Outlook, which provides their latest baseline projections for the coming decade. Under current law, CBO estimates debt to rise from about 60 percent of GDP currently, to nearly 70 percent by 2020. However, this current law baseline assumes that a number of current policies scheduled to expire under current law will actually do so, a highly unlikely scenario. Absent policy change,  the debt is likely to grow far more quickly  

By all indications, housing is heading for a double dip. The dramatic fall in new home and existing home sales in July along with the increase in the inventory of unsold houses will almost certainly be followed by a new decline in housing prices in a few months' time.

A double dip in housing will add yet another drag to an already weakening economy, further eroding consumer confidence and precipitating a new round of bank failures. In this sense, housing is a leading indicator -- of another recession.

For more and more Americans, the dream of a secure retirement has become increasingly threatened. The Great Recession has taken its toll on a retirement system which has been in place in the United States since WWII. Retirement was conceived as a "three-legged stool," with the three legs being Social Security, pensions and personal savings centered around homeownership.

The Dodd-Frank Wall Street reform bill  is now the law of the land. It’s hard to know if it can prevent the next financial meltdown. Yet for most families, a better question is whether the law is strong enough to remake the financial services marketplace.

Last week, the Social Security and Medicare Trustees released their 2010 reports on the financial status of both programs. Last Friday, we offered an analysis of the Trustees’ Social Security projections. We also recently looked at CBO’s interpretation of the effect of health reform on the long-term. This paper will focus on the Trustees’ projections for Medicare.