The Myth of the Slow Crash Revisited – Eric Janszen

[EJ]

The Myth of the Slow Crash Revisited

In The Myth of the Slow Crash August 2007 we stated: “Just because it's big, doesn't mean an economy can't go down fast. In a debt deflation, the extreme rate of change even fools central bankers.”

Economic data coming out this week reveal an economy in free-fall.

The Stats

Every single working day in the month of December 2008:

• 190 U.S. companies filed for Chapter 7 or Chapter 11 bankruptcy protection
• 4,950 Individuals filed for bankruptcy protection
• 3,100 Homes went into foreclosure
• 26,190 Jobs were lost and 25,035 workers filed for unemployment insurance

For the year 2008, the $6.9 trillion in lost stock market value among 110 million households represents a per household loss of $62,727. The $6 trillion in lost residential real estate property value nationally in 2008 adds $54,545 per household for a total of $117,272 in lost household asset value in 2008, exceeding by 27% the national household median net worth in 2007 of $86,000. (Losses were concentrated in the middle quintiles aka "the middle class.")

The Old Timer Experts

Q: How is this current economic crisis different than what you've experienced before?

A: This is as big as the big Depression. This is a type of recession/depression that happens usually after the kind of greed sprees which are associated with bubbles.

- Stephen Jarislowsky, 83, founder of investment firm Jarislowsky Fraser Ltd. that manages about $52-billion in assets for pension funds, institutions and private customers, Financial Post, Dec. 29, 2008

“The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself.” - Former Goldman Sachs chairman John Whitehead, Reuters, Nov. 12, 2008

The People

Since March, the percentage of Americans largely ruling out the possibility of an economic depression in the next two years has shrunk from 40% to 25%, while the percentage saying it is "very likely" has grown from 23% to 35%. Although Americans who predict the worst for the economy remain in the minority, another 39% think a depression is "somewhat likely" to occur. - Gallop, Dec. 2008

Old timers like Jarislowsky and Whitehead foresee economic depression, 74% of Americans believe an economic depression in the next two years is either very or somewhat likely, and the statistics bear it out. Such is the fate of an economy as dependent on credit as the U.S. when the credit suddenly disappears and leaves old debts behind as unemployment rises and incomes decline. Debt deflations are no joke. Beware Relief Rallies. The US economy glides like a box of rocks. Don't stand under it.

The Culprits

On a more encouraging note, the mainstream press are finally starting to go after a few FIRE Economy bandits.

Nationwide Inquiry on Bids for Municipal Bonds
Jan. 9, 2009 (MARY WILLIAMS WALSH - New York Times)

The federal investigation that prompted Gov. Bill Richardson of New Mexico to withdraw his nomination as commerce secretary offers a rare glimpse into a long-simmering investigation of possible bid-rigging, tax evasion and other wrongdoing throughout the municipal bond business.

Three federal agencies and a loose consortium of state attorneys general have for several years been gathering evidence of what appears to be collusion among the banks and other companies that have helped state and local governments take approximately $400 billion worth of municipal notes and bonds to market each year.

E-mail messages, taped phone conversations and other court documents suggest that companies did not engage in open competition for this lucrative business, but secretly divided it among themselves, imposing layers of excess cost on local governments, violating the federal rules for tax-exempt bonds and making questionable payments and campaign contributions to local officials who could steer them business. In some cases, they created exotic financial structures that blew up.

People with knowledge of the evidence say investigators are not just looking at a few bad apples, but also at the way an entire market has operated for years.

“It’s rare to sell a Senate seat, but it’s not rare to sell a bond deal,” said Charles Anderson, who retired as manager of tax-exempt bond field operations for the Internal Revenue Service in 2007. “Pay-to-play in the municipal bond market is epidemic.”

Ever drive down your street and notice the lousy roads and sidewalks but the fine new school buildings, and fire and police stations? Ever wonder why? Road construction comes straight out of tax revenue, but those buildings just might be paid for using bonds floated in insider deals where tax revenue can be leveraged, leaving yet another FIRE Economy liability that will climb onto the backs of tax payers in 2009 and 2010 as local property and income tax revenues plunge and waves of municipal bond defaults mark the next stage of decline of the 1980 to 2006 FIRE Economy.

Most Americans have no idea yet just how broke we all are after if all the debt built up during the FIRE Economy era is finally accounted for, but if we look we can see the evidence everywhere. The challenge for the coming decade is coping with the debt while at the same time transitioning to a more productive and stable economic structure.

(Hat tip to iTuliper don for finding the muni story.)

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[BK]

Re: The Myth of the Slow Crash Revisited – Public Sector Employees

Another great article.

Any feeling as to when the Public Sector Employees will start to feel the pain.

Everyone I know in the "dreaded" Private Sector is anxious and worried about their financial future. Contrast that with Public Sector Employees I know who may worry a little about the economy, but will describe their own situation as set for life.

So, do you think the Feds will do what ever they have to to keep as many Public Sector Employees 'set for life'. Is there any chance that Municipal bankruptcies lead to elimination of Defined Benefit Pension Plans and are replaced with 401K savings plan?

I just don't see where the Money will come from to pay for the Defined Pension Plans for Government Employees?

[don]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

[quote=EJ;70064][wrapright]Ever drive down your street and notice the lousy roads and sidewalks but the fine new school buildings, and fire and police stations? Ever wonder why? Road construction comes straight out of tax revenue, but those buildings are paid for using bonds floated in insider deals where tax revenue can be leveraged, leaving yet another FIRE Economy liability that will climb onto the backs of tax payers in 2009 and 2010 as local property and income tax revenues plunge and waves of municipal bond defaults mark the next stage of decline of the 1980 to 2006 FIRE Economy.

Love that touch, EJ. The shining symbol of over-compensated firemen and school teachers is a hidden fat hog of FIRE.

[strittmatter]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

How bout we look at the scam that preceeded the scam.

http://www.dentonrc.com/sharedconten...200367a9f.html

Note that:
In order to satisfy the taxing entity creation requirements set forth by the state, developers had to create a mock district with live mock voters. So they dragged trailer houses onto their various raw undeveloped properties and stocked them for the most part with college kids - rent free, in exchange for their mock votes.

The bonds that were later sold by these new districts have been severely downgraded by Fitch.

[ax]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

[quote=don;70083]

[wrapright]Ever drive down your street and notice the lousy roads and sidewalks but the fine new school buildings, and fire and police stations? Ever wonder why? Road construction comes straight out of tax revenue, but those buildings are paid for using bonds floated in insider deals where tax revenue can be leveraged, leaving yet another FIRE Economy liability that will climb onto the backs of tax payers in 2009 and 2010 as local property and income tax revenues plunge and waves of municipal bond defaults mark the next stage of decline of the 1980 to 2006 FIRE Economy.

Love that touch, EJ. The shining symbol of over-compensated firemen and school teachers is a hidden fat hog of FIRE.

Better hope that your house doesn't catch fire, don.

[FRED]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

[quote=don;70083]

[wrapright]Ever drive down your street and notice the lousy roads and sidewalks but the fine new school buildings, and fire and police stations? Ever wonder why? Road construction comes straight out of tax revenue, but those buildings are paid for using bonds floated in insider deals where tax revenue can be leveraged, leaving yet another FIRE Economy liability that will climb onto the backs of tax payers in 2009 and 2010 as local property and income tax revenues plunge and waves of municipal bond defaults mark the next stage of decline of the 1980 to 2006 FIRE Economy.

Love that touch, EJ. The shining symbol of over-compensated firemen and school teachers is a hidden fat hog of FIRE.

The teachers in the schoolhouse, the firemen in the firehouse, and the policemen in the police station are good uses of tax money.

The issue is the incremental debt payment on bonds floated to build a gigantic high school campus where a modest schoolhouse is needed, a five story fire station where a two story building will do, and a beautifully architected, waterfront courthouse where a more modest structure on less rarefied land is more appropriate.

[necron99]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

To Don...

The shining symbol of over-compensated firemen and school teachers is a hidden fat hog of FIRE.

I'm not a teacher or fireman, but with respect I must point out that a shiny new building is not the same thing as an "overpaid" fireman or teacher. The article describes the bond market as "pay-to-play," do you really think the rank and file employees see any of that money? Ya wanna talk about overpaid superintendents and University presidents, that's another thing entirely, but I don't think rank-and-file teachers and firemen have it any easier than, say, Engineers or carpenters.

Ya wanna talk about an overpaid "hidden fat hog of FIRE," come visit Mexico sometime, where Doctors are paid at about the same low level as schoolteachers... because (i) the State pays their tuition debts, so the doctors don't have that particular excuse for demanding money; and (2) both professions are considered equally life-critical. Meanwhile my doctor in the States gets paid six figures for glancing at my medical chart five minutes before my appointment and then telling me that exercise and diet will cure all my problems; then phoning-in a similar performance for the other 600 patients he's scheduled to see that day, while his interns and nurses do all the actual work.

[LargoWinch]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

For the year 2008, the $6.9 trillion in lost stock market value among 110 million households represents a per household loss of $62,727. The $6 trillion in lost residential real estate property value nationally in 2008 adds $54,545 per household for a total of $117,272 in lost household asset value in 2008, exceeding by 27% the national household median net worth in 2007 of $86,000. (Losses were concentrated in the middle quintiles aka "the middle class.")

This is a real eye opener regarding the scale of the economic devastation we are witnessing.

I assume here that the article refers to the nominal loss, which is even more discouraging when I try to think of it in real terms. Shivers are running down my spine when I do.

I am puzzled by one thing however: is it fair to assume that the upper class is also being heavily affected by the crisis? I am saying this, because I suspect they are owners of a significant portion of equities and real estate property.


PS to Ed. and crew: It appears that the following link as per quoted in the article: "The US economy glides like a box of rocks. Don't stand under it" is broken.

[necron99]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

comment removed

[ax]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

[quote=FRED;70098]

The teachers in the schoolhouse, the firemen in the firehouse, and the policemen in the police station are good uses of tax money.

The issue is the incremental debt payment on bonds floated to build a gigantic high school campus where a modest schoolhouse is needed, a five story fire station where a two story building will do, and a beautifully architected, waterfront courthouse where a more modest structure on less rarefied land is more appropriate.

California is finding this out firsthand....

"Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms."

http://www.bloomberg.com/apps/news?p...d=a5GbgGwA7BKM

[don]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

[quote=ax;70092]

Better hope that your house doesn't catch fire, don.

You managed to completely misunderstand my comment.
Congratulations

[don]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

To Don...

I'm not a teacher or fireman, but with respect I must point out that a shiny new building is not the same thing as an "overpaid" fireman or teacher. The article describes the bond market as "pay-to-play," do you really think the rank and file employees see any of that money? Ya wanna talk about overpaid superintendents and University presidents, that's another thing entirely, but I don't think rank-and-file teachers and firemen have it any easier than, say, Engineers or carpenters.

Ya wanna talk about an overpaid "hidden fat hog of FIRE," come visit Mexico sometime, where Doctors are paid at about the same low level as schoolteachers... because (i) the State pays their tuition debts, so the doctors don't have that particular excuse for demanding money; and (2) both professions are considered equally life-critical. Meanwhile my doctor in the States gets paid six figures for glancing at my medical chart five minutes before my appointment and then telling me that exercise and diet will cure all my problems; then phoning-in a similar performance for the other 600 patients he's scheduled to see that day, while his interns and nurses do all the actual work.

Talk about being misread, not once but serially.

Emails can be tough at times to discern the tone and color. I understand that.

My comment was not meant in any way to denigrate the firemen or school teachers. It was meant as a comment on FIRE's never tired of wanting to cut salaries, pensions, benefits, etc of people just like firemen and school teachers- you guys think I'm not aware that working people's pensions haven't been raped and pillaged by the scams and frauds of FIRE- and low and behold, these same FIRE men are in up to their shoulders in rigging the public trough. Hope that clears up my one liner. Perhaps it ignited, however inadvertantly, an emotional response to the thread of what I can only characterize as a visceral hatred of working people that some of our Libertarian members keep ready and lit for all occasions. Rampant militarism, a totalitarian state, a corrupt-to-the bone government, a casino economy, and their evergreen primary fear- UAW workers have negotiated a partial shield against the depradations of the FIRE economy's fangs that are sunk into healthcare. Maybe that was it ;)

[lakedaemonian]

Re: The Myth of the Slow Crash Revisited – Public Sector Employees

Another great article.

Any feeling as to when the Public Sector Employees will start to feel the pain.

Everyone I know in the "dreaded" Private Sector is anxious and worried about their financial future. Contrast that with Public Sector Employees I know who may worry a little about the economy, but will describe their own situation as set for life.

So, do you think the Feds will do what ever they have to to keep as many Public Sector Employees 'set for life'. Is there any chance that Municipal bankruptcies lead to elimination of Defined Benefit Pension Plans and are replaced with 401K savings plan?

I just don't see where the Money will come from to pay for the Defined Pension Plans for Government Employees?

I think a big part of the next leg of the downward spiral will include local/state retirees that get thrown under the unsustainable bus.

[necron99]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

Talk about being misread, not once but serially. Emails can be tough at times to discern the tone and color. I understand that. My comment was not meant in any way to denigrate the firemen or school teachers. It was meant as a comment on FIRE's never tired of wanting to cut salaries, pensions, benefits, etc of people just like firemen and school teachers-

Apologies.
Nice recovery.

Basically you're right that some of us hear too much of this meme that the lowest-paid, least powerful public servants (just like unionized auto workers) are somehow to blame for trillions upon trillions of dollars of economic troubles which only upper management could create. I reacted with a hair-trigger.

Just for the record, I found it hard to tell from your post that you were using the word "symbol" in a sarcastic, facetious way, i.e. a "scapegoat" which doesn't represent reality. It sounded like you were using "symbol" as "exemplar". Scare quotes around 'symbol', or maybe a wink-smiley instead of a full smiley, might have done the trick.

There are too many iTulipers for me to keep track of which avatar has which political leanings, so I mistook you for one of the Rothbard-type Libertarians we occasionally see on these pages... I offer my apologies.

[BK]

Re: The Myth of the Slow Crash Revisited – Eric Janszen

I agree good Teachers, Firemen, and Police are key to order in society. But, when these Defined Benefit Pensions were designed the System Could Count on most Retirees dropping Dead by 75 years( or even younger) or so. How does the System Fund Pensions when most Retirees live way past 75 year.

The FIRE System allowed for greater and great improvements in wages/benefits for Public Employees. Anyone heading a Public Pension Fund will need magical abilities to generate the Cash flow to meet these entitlements. The Tax Revenues generated by Real Estate, Finance, and Insurance created a false sense of financial security that made for dramatic improvements in Pay for all Public Employees during the last 20-25 years.

No were are stuck with a Wage and Benefits system that can't be funded.