Month: March 2016

Why ‘good’ job numbers leave us feeling mad, sad and worried

Posted on by j.giglio

Earlier this month the Bureau of Labor Statistics released its February jobs report. The unemployment rate of 4.9 percent is the lowest since February 2008 and suggests nearly full employment, but the real picture is far more mixed.

The report finds that the country created 242,000 new jobs last month, well ahead of the Wall Street forecast of 190,000. It also revised its December and January reports to add a total of 30,000 more jobs. The numbers suggest that even in the face of financial market turmoil and slowing global demand, the

U.S. has averaged about 228,000 new jobs over each of the last three months.

Still, many of the jobs were concentrated in low-wage sectors. Retailers added 54,900 jobs last month and restaurants and drinking establishments another 40,200. Manufacturers cut their payrolls by 16,000 jobs as slow growth in key markets around the world and the rising value of the dollar reduced demand for U.S. products. By far the weakest sector for job growth was the mining sector, which includes oil and gas producers. It cut jobs for the 17th straight month, losing 19,000 in February.

Hiring by employers directly associated with consumers has more than offset layoffs by manufacturers and fossil fuel companies, the two sectors squeezed by declining oil prices and a strong dollar.

An increase in the labor force participation rate was an encouraging sign. The rate of 62.9 percent is the highest in over a year as more than half-a-million people joined the labor force. Fewer and fewer people appear to be sitting on the sidelines.

But there is more to the story. The headline unemployment number does not account for the underemployed, such as those who are involuntary working part time. And even though labor participation rose, there are still many long-term unemployed and discouraged workers who have stopped looking because they believe no jobs are available for them. When these groups are included, the February unemployment rate rises to 9.7 percent, which suggests that the labor market is far from overheating.

Other downbeat notes were that the average length of the workweek declined by 0.2 hours, aggregate hours worked fell 0.4 percent, and average wages fell by 3 cents to $25.35 an hour. This put the yearly wage growth at 2.2 percent, just slightly ahead of core inflation rate. That makes it difficult for the average American to keep up with the staples of a middle class life. Indeed, real wages for most American workers have been flat lining since the 1970s.

A 4.9 percent unemployment rate masks the fact that things are not going very well for a large share of American workers. Jobs may be plentiful, but they are not paying much. It may be good news that the economy is growing at 2 percent, but ordinary Americans are not reaping the benefits of that growth.

Things are tough on Wall Street, too. Average bonuses paid out in the financial services sector tumbled 9 percent last year to the lowest level in three years, according to new figures from the New York State comptroller. Of course, that average $146,200 bonus is still nearly three times the median annual U.S. household income of about $52,000.

In light of these disparities and glass-half-empty job numbers, is it any wonder that average working class Americans are seething with anger, are anxious about the future, and are feeling betrayed? Stalled incomes may be fueling the hard line positions on illegal immigration and opposition to job-destroying trade deals that spur the rise of both Donald J. Trump and Bernie Sanders, the yin and yang of America’s season of political discontent and economic stagnation.

If that continues, voters might find themselves liking the cure even less than they like the illness.

originally published: March 19, 2016

Remembering a day that was too big to forget

Posted on by j.giglio

This month marks the anniversary of the collapse of Bear Stearns, once Wall Street’s fifth-largest investment bank. The demise of the 85-year old institution signaled the real start of the 2008-2009 financial crisis. Eight years later, we can only hope our leaders learned something from the experience.

The collapse and Bear’s subsequent bailout by the Federal Reserve, with the support of the Treasury Department and JPMorgan Chase sent shockwaves throughout the financial system. Bear’s incredibly rapid demise raised serious questions about the banking industry’s use of leverage, inadequate oversight of commercial and investment banks, and the role of the Fed and other regulators in preventing the failure of major financial institutions.

Late on Sunday afternoon, March 16, 2008, Bear’s board of directors accepted JPMorgan Chase’s offer to purchase the company. Less than 18 months after its stock was trading at an all-time high of $172.61 a share, Bear Stearns had little choice but to accept the humiliating offer of $2 a share.

JPMorgan Chase later raised the bid to $10 per share and the Fed provided $30 billion in collateral guarantees to facilitate the deal. The Fed considered Bear too large and too interconnected to fail and saw no choice but to arrange a bailout to prevent a global market crisis. It was hoped that the Bear rescue would nip the problem in the bud and avoid the damage to the larger financial world that many policymakers thought would result from the failure of a major investment bank.

The precise nature of the transaction seemed unclear, but the Fed appeared to be accepting responsibility for the toxic, illiquid assets on Bear’s balance sheet if their eventual liquidation resulted in a loss. In this sense, it appeared that the Fed became the residual owner of these securities and put the federal taxpayer on the hook for Bear’s reckless risk taking activities. Some believe that this action exceeded the Fed’s power.

The first sign of trouble at Bear was the July 2007 collapse of two of its hedge funds. The funds had invested heavily in collateralized debt obligations backed by subprime mortgages, and their failure alerted the rest of the financial system to this contagion.

The hedge funds’ collapse also raised concerns about the firm’s own exposure to mortgage-related securities. It damaged the firm’s reputation, weakened its finances and served as the precursor to Bear’s ultimate collapse. Within a year “the plumbing had stopped working” and credit ceased to flow through the financial system.

Hopes that a global financial crisis could be averted proved misplaced just six months later when Lehman Brothers, another bank that was heavily involved in the mortgage business and was even larger than Bear filed for Chapter 11 bankruptcy on September 15, 2008. The public backlash against the Bear bailout made rescuing the 158 year-old Lehman Brothers politically untenable, especially just weeks before a hotly contested presidential election.

The 2008-2009 financial crisis proved to be the most expensive in history. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd­ Frank), one of the most sweeping financial reforms in U.S. history.

The law’s stated aim is to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Essentially, Congress’s intent was to reduce system-wide risk and to prevent another financial collapse.

Let’s hope policy makers actually learned enough about how the economy and the financial system fit together from the 2008-2009 financial crisis to avoid future learning experiences. They would be well advised to recall the words of that prolific author, anonymous, who said, “The past is prologue: but which past?”

originally published: March 5, 2016