The Evolution of the American Consumer
In our consumer driven economy, consumers may be avoiding the very thing that is crucial to recovery from the recent economic meltdown. The irony could not be greater – in a time when the economy needs their money the most, people are curbing their discretionary spending and possibly prolonging the pain.
The economic crisis is sure to be credited for major changes in the system. The days of unregulated capitalism and risky Wall St business are certainly behind us. What though, has the American consumer learned, and where will they go from here?
“Go shopping.” Who could forget President George Bush’s odd words of advice to the public after 9/11? Although he was ridiculed for saying it, the man had a point. Fast forward seven years, two elections, and an economic crisis, and those two simple words still ring true.
Recent behavior suggests that Americans might have gotten a long needed wake up call in regards to their spending habits. Decades of spending have given way to an uprise in savings and a new mentality about pulling out that credit
card. One not need look farther than the latest issue of Time to get the picture : frugality is suddenly hip.
70 % of our economy is consumer driven. A recent Gallup poll shows that consumer mood is improving, but spending tells a different story. After an incredibly weak holiday shopping season, consumers began spending more in January and February. However, the increase is minute, and it merely shows stabilization.Actual growth is what economists are concerned with.
With unemployment rates at record levels, it is no wonder people are reluctant to spend. However, the collective “hoarding” of money, while rational for an individual, can lead to serious problems on a larger scale.
A great example is the case of the auto industry. The decline in car sales caused a ripple effect that threatened to wipe out the entire industry.
Duke University professor Dan Ariely, in a recent interview with NPR, characterized this dynamic as a social coordination game between consumer and economy. He argues that, because of the way people react, recessions are mostly psychological
.
The savings rate in the United States had been flat for decades until the recent economic crisis, largely because of the spending and credit culture that dominated American households.
Recently, it has climbed to 5%. Considering that it has actually, in the past, been at 0%, this is a significant increase.And it continues to rise.
Experts also warn against saving too much .Simply put, a dollar saved is a dollar not spent. Without money circulating through the system, economic recovery is inevitably slow.
Below is a look at the dynamic between Americans’ saving and spending habits :
For the first time in 15 years, credit card debt has also recently shrunk.This is an indication that people are tying to rid themselves of debt, or scaling back their purchases. The credit card debt in 2008 reached a staggering amount of $951 Billion
It is no secret that Americans have been spending heavily and charging their purchases for years.After all, these habits prompted TIME magazine to list American consumers on their list of “who’s to blame” for the economic crisis.
The United States is the world’s largest debtor nation. Below is an alarming chart comparing debt to GDP:
Recent efforts to cut back, save, and get out of debt are surely healthy habits.
So, in a climate where excess is out, and moderation is in, what is the future of the American consumer?
Have Americans learned a lesson, albeit one that can potentially slow the conomic recovery?
The Economic Twist on Marijuana Legalization
Although it seems like no one in Washington is ready to have a serious discussion about it, those advocating the legalization and taxation of marijuana aren’t keeping quiet. Could they be right?
The economic crisis has made the issue a popular one once more. So popular, in fact, that it was the most buzzed about topic when the White House website allowed people to submit their questions its first virtual “town hall” meeting.
President Obama quickly dismissed the notion that legalizing – and, therefore, taxing and regulating – marijuana would be beneficial to the country’s economy.
It was just 2 months ago when California’s Tom Amniano drafted legislation to regulate the drug, estimating a tax windfall of over $1 Billion to help the state’s severe fiscal problems.
The bill hasn’t passed yet, but it might. Could the country follow in California’s footsteps?
Most Americans, according to a CBS poll, don’t agree with legalizing marijuana:
Politicians opposed are quick to voice their position. More than 500 economists, including Milton Friedman, disagree. They endorsed Harvard Economics Professor Jeffrey Miron’s 2005 tax estimations for the legalization of marijuana.
Here he is on CNN earlier this month:
According to his report, the United States could rake in over $10 Billion in tax revenues from the legalization of the drug. This figure doesn’t take into account the amount that would be saved from drug enforcement and jailing costs.
According to the Marijuana Policy Project, there are more arrests for marijuana posession each year than for all violent crimes combined
The legalization of marijuana could also have positive implications for the ongoing drug related violence on the US Mexico border.
The drug is the largest source of revenue for the multibillion dollar drug cartel business.
Speaking to a reporter, a Mexican Ambassador suggested that the idea merits a serious discussion
Unemployment in the US has now reached a 25 year high and isn’t showing any signs of stopping. Four Republican governors, however, are taking a strong stand against accepting federal money in the stimulus bill intended to help those in need.
The numbers are quite sobering :
8.55% – national unemployment rate
13.2 Million – number of unemployed Americans
2 Million – number of jobs lost this year
5.1 Million – jobs lost since the recession began
663,000 – jobs lost in March 2009
South Carolina governor Mark Sanford was the first of the four to lead the way in rejecting federal stimulus money. In total, he is said to be rejecting aout $700 Million in aid. A fierce opponent to Preisdent Obama’s stimulus package, he has been widely criticized for his position, with his state having one of the highest unemployment rates in the country, 11%.
He has said that, in the long run, the money will hurt the federal budget deficit, as well as hurt his state’s economy.
“We need to look longer term and much more holistically at the notion of economic stimulus.”
Some, like Democrat James Clyburn, have accused the governor of using his position to posture himself for a future presdential run.
“As South Carolina’s unemployment rate is rising to double digits, parents are losing their jobs and families are losing their homes,” Clyburn said. “Governor Sanford will sleep well at night because he has improved his ‘conservative record’ and raised his national profile.”
Like Sanford, Lousiana Governor Bobby Jindal has also drawn his fair share of attention for his refusal to accept federal money. With his state’s unemployment rate sitting at 5.7%, estimates have s hown that the funds he is rejecting could help u to 25,000 residents. Jindal’s main complaint is that accepting the money would require a change in state law.
He has stated he is only helping the unemployed who already qualify for unemployment benefits. Jindal is rejecting $100 Million designated for his state.
Alaska Governor Sarah Palin announced she would be rejecting $288 Million dollars for her state. WHile the largest sum of money is intended for educational services, she is also rejecting money for emergency food assistance, unemployment services, and homeless grants. Her state currently has an 8% unemployment rate.
Texas Governor Rick Perry is refusing the largest amount of money, $556 Million. He has complained tha the money, which would help the unemployed in his state, comes with too many strings attached. His state, which has an unemployment rate of 6.5%, covers the smallest number of unemployed.
The unemployed in these four states aren’t without hope, however. James Clayburn wrote a clause in the stimulus package allowing state legislators to accept money refused by their respective governors
The Alaska state legislature has already bypassed Palin in efforts to get the federal funds.
Question for the White House
We’ve heard repeated warnings about the systemic shock that would result from the failure of AIG. Should the company continue to need taxpayer money to stay afloat, how long will it continue to get assistance until a new approach is considered?
China’s Worries
In addition to this, China’s central bank governor proposed today the idea of coming up with a new currency that could eventually replace the dollar.
Considering that China is the US’s largest foreign investor, these are 2 developments worth paying close attention to.
A Bit of Good News on Wall St. (for now)*
While it may be premature to break out the champagne, the financial world experienced a welcome bit of good news in response to Timothy Geithner’s plan to deal with banks’ bad assets that continue to threaten economic recovery.
Although it has been hinted at for some time, the Treasury Secretary unveiled the details of his ambitious plan to stabilize the nation’s banking system.
The plan, titled the Public-Private Investor Program, will essentially set up partnerships with private investors using taxpayer money to buy the assets from banks.
Senator Harry Reid voiced his support for the plan,insisting that doing nothing is not an option.
The Dow reacted to the news by surging almost 500 points in the hours after the announcement, its biggest gain since November 21. It was only 2 weeks ago that it reached its lowest point in 12 years.
Chief investment officer of Harris Private Bank expressed optimism:
“I think the stock reaction is a vote of confidence in the plan” , he said.
The plan, which could reach a cost of $1 Trillion over time, is nevertheless a big risk the government is taking. Geithner said the goal is to buy $500 Billion in assets, many of which are subprime mortgages.
Financial Times commentator John Gapper praised the news today, but others, such as Paul Krugman, are not convinced. Stephen Leeb , president of Leeb Capital Management, is among the skeptics :
“The plan is a rehash of what we’ve seen before and it still doesn’t resolve the issue of how to value the bad assets.”
For those who might see a glimmer of hope after the market uptick, bank analyst Richard Staite warns about getting too optimistic after today’s rally:
“I’m not surprised to see this intitial reaction, but I think we really have to wait until we actually put the plan into practice. We still haven’t seen any investors who are willing to buy these toxic assets.”
* markets subject to change
The AIG Circus
The current populist outrage over the bonuses promised to AIG have both distracted us from the bigger picture and put the new administration in an incredibly difficult position.
The insurance giant, which has now received over $175 billion in taxpayer money in an effort to keep it from collapsing, has come under intense scrutiny after news that it plans to distribute $165 million in bonuses to employees.
The outrage that news of the bonuses sparked have dominated recent news broadcasts as well as public debate. Questions quickly arose about who allowed the bonuses, and, consequently, who knew about them (and, more importantly, when).
Senator Chris Dodd, who wrote the infamous provision in the economic stimulus package that cleared the path for the bonuses, became an early target of anger. Treasury Secretary Timothy Geithner also came under scrutiny after claiming to only know about the bonuses on March 10th.
President Obama himself voiced his disapproval of the bonuses, and assured the public he was exploring every legal avenue to get the money back.
So the president is angry, Congress is angry, and the American people, who now own 80% of the company, are definitely angry. New York’s Attorney General is so angry, he issued a subpoena to obtain the names of the AIG employees receiving the $165 million.
It is hard to argue that the people of AIG, supported by taxpayer money, deserve any kind of lavish compensation. However, what the administration can (and should) do is far more complicated than a matter of fairness.
In reaction to the news, the House passed a bill imposing a 90% tax on such bonuses, and the Senate is now working on its own version of the bill, which is expected to reduce the tax burden to about 30%
The Obama administration has signaled support for the idea of punitive action, but it is unlikely that the President will sign off on the House’s version. A great debate has sparked from the bill over its constitutionality, and many have concerns over passing legislation targeting such a small group of people.
The government is also attempting to lure investors into buying up toxic assets at the root of the banking crisis, and passing this kind of legislation runs the risk of scaring private investors off.
Economist Paul Krugman is obviously not impressed with the pending legislation.
Senator Gregg Judd voiced his concerns :
“Let’s not overreact in a way that basically has the Congress grabbing its pitchforks, and charging up the hill, and abusing what is a core authority of a government, which is the authority to tax its people”
Speaker of the House Nancy Pelosi disagrees:
“We want our money back now for the taxpayers. It’s not that complicated.”
Insuring the Insurer
The nation’s banking crisis has now spread to include the FDIC.
It was just last week when FDIC chairman Sheila Bair warned that the corporation’s funds that protect deposits could become insolvent in response to recent bank failures. It is currently at its lowest level in 25 years, $19 Billion. IndyMac’s failure alone drained the fund of more than $10 Billion.
In contrast with that warning, Bair announced today that the FDIC did have enough money, but is only seeking a cushion. She also said that the number of failing banks will continue to increase, but didn’t provide any specific names.
They said they are setting aside $22 Billion to cover losses this year . With the fate of many of the nation’s large banks still unknown, it is unclear whether this will be enough. They currently gurantee a pool of assets for Bank of America and Citigroup valued at $12.5 Billion
The fund, which protects deposits up to $250,000, has been drained by the recent string of bank failures. So far, 16 have fallen in 2009 in addition to the 25 failures in 2008. In order to rebuild the depleted fund, a one time emergency fee and other fee increases on banks was approved last week.
The banking industry, which is responsible for FDIC funding, protested with outrage.
Bair responded, saying :
“Banks, not taxpayers, are expected to fund the system. Asking for taxpayer support could paint all banks with the ‘bailout’ brush”
Just one day later, it was announced that it could reduce the fees if Congress would expand their existing $30 Billion credit line with the US Treasury.
Senator Christopher Dodd introduced legislation on March 5th to allow the FDIC to borrow up to $500 Billion from the Treasury Department until December 2010.
The House of Representatives already approved an increase in their line of credit to $100 Billion. In October, the limit on deposit insurance was increased from $100,000 to $250,000.
FDIC spokesman Andrew Gray said in an interview that :
“Insured depositors need to know they are fully protected. We’re backed by the full faith and credit of the US government. We can, and always will be able to, meet our obligations to insured depositors.”
Edmund Mierzwinski, director of a Boston consumer watchdog group, isn’t that optimistic:
“If the FDIC is saying that there is this serious problem, then we should all be concerned. I think there is a chance the FDIC is going to have to ask taxpayers for money in the future.”
The Fate of AIG
Fears over the future of AIG grew stronger after news broke that the company suffered the largest quarterly loss in history and is set to receive federal aid for the fourth time in six months.
AIG, the world’s largest insurer, reported a loss in the fourth quarter of 61.7 billion dollars, bringing down its stock price to under $1.
Amidst the news, it was announced that the government would provide the company with another $30 billion in federal aid, bringing the total amount to $180 billion. The current plan is the fourth attempt to save the company from collapse out of fears that its collapse could pose a serious systemic risk at home and around the world.
The company first received federal funds in September, only to get more in November as it continued its struggle to stay afloat. The money is an attempt to enhance its liquidity and capital, but the company is still finding it difficult to sell their assets to pay back government loans.
AIG has been under intense scrutiny for their risky business practices that led to their near collapse, something that is not lost on Ben Bernanke, who said in a recent Congressional hearing :
“I think if there’s a single episode in this entire 18 months that has made me angry, I can’t think of one more than AIG”
While many are saying things like this, most agree that the failure of the insurance giant would have serious consequences for the economy. AIG holds 375 million policies with a face value of 19 trillion dollars.
It has been argued that its collapse would mean people would not be able to get their insurance from competitors at the same price, or worse, that the entire industry could collapse.
The following is an excerpt from a joint statement issued by the Treasury and the Federal Reserve:
Given the doomsday risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government action will be estremely higher than government inaction
In our global economy, the domino effect of the economic crisis is impossible to ignore. Representative Paul Kanjorski of Pennsylvania warned of the possible effect on the European economy
Nervous investors and anxious taxpayers have little else to do but wait and see whether the latest attempt to save AIG will proudce anything to be happy about…
The Guessing Continues
Two big developments on the financial front have everyone talking and many rightly anxious .The government’s stake in Citigroup grew to 36% after a conversion from preferred stock to common stock. Meanwhile, Treasury Secretary Timothy Geithner’s stress tests for large financial institiutions are set to begin this week to help determine whether they have the capital to withstand more shocks to the economy.
The question over whether to nationalize the banks is alive once again, and the list of those in support is growing more diverse. Something interesting must be going on when Alan Greenspan, Paul Krugman, Christopher Dodd, and Lindsey Graham seem to be on the same page. But then again, Timothy Geithner hasn’t backed down from his position against nationalization. The Obama administration seems skiddish about going down that road.
Ben Bernanke also opposes the idea, but admitted in a recent hearing that :
“It may be the case that the government will have a substantial minority share in Citi or other banks”
The government aid that has been given to the banking system so far hasn’t produced the desired results. In fact, many argue that the taxpayer money thrown at the banks is unlikely to cleanse their balance sheets of toxic assets, which are the real problem.
When it comes to bank insolvency, there are three ways to fix this : the free market capitalism approach, the government aid approach (what we’re doing now) and nationalization. Nationalization of the banks is what most other countries have done – and this has resulted in succesful resolutions.
The prospect of nationalization is nothing short of taboo in this country,yet the health of our economy certainly depends on the health of our financial institutions. Paul Krugman has warned about zombie banks and repeating Japan’s mistakes from their lost decade.
Politics and economics are now intertwined, something that David White doesn’t think is a good thing :
“The fact that the world’s most gifted economists..are having real trouble getting their collective arms around exactly what needs to be done to fix a painfully obviously broken economic system, should tell us something about the presentation of economic issues for the average layperson by the average politican.”
Economy, Interrupted 