Sunday, October 3, 2010

Is Social Unrest Due to High Unemployment Possible?

Is social unrest due to high unemployment possible? I don't know. But the probability of social unrest due to high unemployment and the largest concentration of wealth since the Great Depression ensures that the probability is greater than 0%. This situation is far from over. Wait until it dawns on a lot of people that their house could be under water in terms of value or no appreciating value for the rest of their lives. Text in bold is my emphasis. From the UK Telegraph:

merica and Europe face the worst jobs crisis since the 1930s and risk "an explosion of social unrest" unless they tread carefully, the International Monetary Fund has warned.

"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment," said Dominique Strauss-Kahn, the IMF's chief, at an Oslo jobs summit with the International Labour Federation (ILO).

He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. "We are not safe," he said.

A joint IMF-ILO rep
ort said 30m (that is 30,000,000) jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. "The Great Recession has left gaping wounds. High and long-lasting unemployment represents a risk to the stability of existing democracies," it said.

The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the "employment intensity of growth" as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.

Olivier Blanchard,
the IMF's chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time.
"Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression," he said.

Spain has seen the biggest shock, with unemployment near 20pc. Britain's rate has risen from 5.3pc to 7.8pc over the last two years, a slightly better record than the OECD average. This contrasts with the 1970s and early 1980s when Britain was notoriously worse. UK jobless today totals 2.48m.

Mr Blanchard c
alled for extra monetary stimulus as the first line of defence if "downside risks to growth materialise", but said authorities should not rule out another fiscal boost, despite debt worries. "If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself," he said.

"Most advanced countries should not tighten fiscal policies before 2011: tightening sooner could undermine recovery," said the report, rebuking Britain's Coalition, Germany's austerity hawks, and US Republicans. Under French socialist Strauss-Kahn, the IMF has assumed a Keynesian flavour.

The report skirts the contentious issue of whether globalisation lets companies engage in "labour arbitrage", locating plant in low-wage economies such as China to ship products back to the West. Nor does it grapple with the trade distortions caused by China's currency policy, except to call on "surplus countries" to play their part in rebalancing.

The IMF said there may be a link between rising inequality within Western economies and deflating demand.

Historians say the last time that the wealth gap reached such skewed extremes was in 1928-1929. Some argue that wealth concentration may cause investment to outstrip demand, leading to over-capacity. This can trap the world in a slump.

Tuesday, September 7, 2010

Should We Let the Housing Market Crash?

Many are firm believers in the free market? Will you still believe in the free market if the price of your home drops another 10% - 20%? How about 30% - 50%? The Administration is low on ammo when it comes to the housing market. Should the Administration spend its last remaining ammo on creating more jobs or propping up a dying asset class? This is a good game in which to be a spectator. Text in bold is my emphasis. From Yahoo:

The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.

Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.

As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.

When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”

The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.

The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.

Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”

That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN that the administration would “go everywhere we can” to make sure the slumping market recovers.

Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.

Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.

“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.

Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success.

If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.

Builders are in even worse shape. Sales of new homes are lower than they were in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.

The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.

“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.

Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and five other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”

A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners who are just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.

The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble.

Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials now concede, the credit quality of the borrowers was too low.

With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances.

Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data compiled by the research firm CoreLogic.

“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”

This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors. “Then we’re back to Depression-era problems.”

Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.

William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption, as well as a potential lift of 5 to 10 percent in terms of housing prices.”

The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus.

Some members of the National Association of Home Builders say a new credit of $25,000 would spark demand, but they realize their chances of getting this through Congress are nonexistent.

“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.

That might give the Obama administration permission to take the risk of doing nothing.

Monday, September 6, 2010

The American People Speak on the Economy and It Ain't Good

The American people as a group have always had a fairly good grasp of the condition of the US economy. They may not always be smart, but they know what they see. As we move into the mid-term elections the economy will weigh heavily on the elections. All the media hype about the Republicans re-capturing the Congress is necessarily true. Also in the final analysis it makes no difference for 2 reasons:

1. Uncle Sam and the Fed are largely out of policy options. After all how do you get the US consumer to start spending when they are tapped out and they face unemployment rates hovering around 10%? The cover story in the Investors Business Daily that came on Saturday states that at the current trend the unemployment rate would not return to pre-2008 levels until 2017.

2. Ultimately Washing DC is so out of touch with the American people. They don't know what to do.

Test in bold is my emphasis. From

A new national poll released Sunday indicates that eight in 10 Americans say that the economy is in poor shape, and the number that say conditions are very poor is on the upswing after steady declines through the spring.

And according to a CNN/Opinion Research Corporation survey, more people blame the Republicans over the Democrats for the country's economic problems.

Eighty-one percent of the public rates the county's economic conditions as poor, with 18% describing the economy as good. Forty-four percent of people questioned describe economic conditions as very poor, up seven points from July.

The poll indicates that roughly half the country says that conditions have not improved in the past two years. The other half says that the economy has gotten better, but many of them expect things will get worse in the near future.

"Roughly a third of all Americans say that the economy has gotten better and will continue to do so," says CNN Polling Director Keating Holland. "But one in five say that things have gotten better but will take a turn for the worse in the months ahead -- essentially predicting the "double-dip" that many economists are worried about."

So which party gets the blame for the country's current economic problems?

According to the survey, more Americans hold the Republicans responsible than the Democrats, with 44% blaming the GOP and 35% picking the Democrats.

"And when George W. Bush's name is added to the mix, the number who blame the Republicans rises to 53%, with just a third saying that Barack Obama and his party are at fault. That indicates why the Democrats are likely to mention Bush's name every chance they get between now and election day," Holland said.

But according to numbers released Friday, just four in 10 Americans say they approve of the job President Barack Obama is doing on the economy.

The 40% who give Obama a thumbs up is a new low for the president on the economy in CNN polling.

The CNN/Opinon Research Corp. poll was conducted Wednesday and Thursday, with 1,024 adult Americans questioned by telephone. The survey's overall sampling error is plus or minus three percentage points.

Tuesday, August 31, 2010

Gold - It Is Not That Its Back, It Never Left

Below is a summary of the recent gold activity and pricing. As the uncertainty in the markets and the economy continues more people are piling into gold as a pre-caution against weaker times. Actually, as the article points out if the economy weakens gold demand will increase. If the economy strengthens the demand for gold will also increase to satisfy jewelry demand. Heads I win and tails I win. The only question is how much gold should one carry in their portfolio? Text in bold is my emphasis. From

Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.

One of the biggest buyers has been Soros Fund Management LLC, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, described gold as “the ultimate asset bubble” at the World Economic Forum’s January meeting in Davos, Switzerland. Buying at the start of a bubble is “rational,” he said.

Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an Aug. 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tons. Soros declined to comment on the change, through a spokesman.

Gold may rise as high as $1,500 next year, 21 percent more than the $1,235 traded at 9 a.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.

Bullion gained 13 percent since January, beating an 8.4 percent return on Treasuries, an 8 percent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.

Investors are concerned the recovery is weakening. Sales of new U.S. homes fell to an all-time low in July, the Commerce Department said Aug. 25. The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, the department said Aug. 27. U.S. growth will slow to 2.8 percent next year, compared with 3 percent in 2010, according to the median of as many as 69 economists’ forecasts compiled by Bloomberg.

People “fear another crisis and so they will diversify into gold,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart, Germany, who was also the most- accurate forecaster in the first quarter. He expects gold to trade as high as $1,350 next year. Anne-Laure Tremblay, an analyst at BNP Paribas SA in London whose forecast was also the best in the period, is estimating a 2011 high of $1,370.

Bullion’s four-fold rally since the end of 2000 has attracted fund managers Eric Mindich and John Paulson. Mindich’s $13 billion Eton Park Capital Management LP bought almost 6.58 million shares of the SPDR Gold Trust in the second quarter, according to an Aug. 16 SEC filing. That’s equal to about 20 tons of gold. Paulson & Co., managing $31 billion, held 31.5 million shares in the SPDR Gold Trust, making it the largest investor, an Aug. 16 SEC filing shows.

Astor Asset Management LLC, with about $570 million of assets, once had as much as 10 percent of its holdings in the SPDR Gold Trust, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake at the end of last year for a profit and now owns silver, copper and a multicommodity ETP.

“We don’t believe we’re heading into a double-dip recession,” Novak said. “Gold carries some risk because a lot of people are piling into the trade.”

A plunge in equities may spur investors to sell their gold holdings to raise cash, he said. The Standard & Poor’s 500 Index dropped 14 percent since this year’s peak on April 26.

Investment demand of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London-based researcher GFMS Ltd. That trend continued into the second quarter, with total demand advancing 36 percent to 1,050.3 tons, the WGC in London said Aug. 25.

Earnings at Newmont Mining Corp., the largest U.S. gold producer, may increase 47 percent to $1.93 billion in 2010, according to the mean estimate of seven analysts’ forecasts compiled by Bloomberg. The 16-member Philadelphia Stock Exchange Gold and Silver Index advanced 8.7 percent since January.

Bets on gold may pay off even if economic recoveries strengthen. World growth will be 4.6 percent this year, the most since 2007, the International Monetary Fund said July 7. China, the second-biggest bullion buyer after India, will expand 10 percent in 2010, compared with 9.1 percent last year, according to the median of 24 economists’ forecasts compiled by Bloomberg.

Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country’s biggest bourse for trading physical gold.

While growth may curb investors’ appetite for gold to protect their wealth, it may also bolster purchases of jewelry, reviving demand that fell to a 21-year low in 2009, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich and the best forecaster in the last three quarters. He’s predicting a 2011 high of $1,350.

Analysts are getting more bullish. Their median estimate for next year’s average gold price climbed 5.7 percent since June 16 to $1,242, according to 17 forecasts compiled by Bloomberg. That compares with a 2.6 percent gain in silver forecasts, 0.3 percent advance in platinum predictions and a 4.2 percent jump in their palladium outlook.

Gold averaged $1,166.37 since January, heading for a ninth consecutive year of higher average prices. That’s the longest streak since at least 1920.

Options traders are also betting on prices rallying. The biggest position is in call options expiring in November 2010, giving traders the right to buy the metal at $1,500 by then. The next biggest position is the call option for $2,000 expiring in November 2011, data from the Comex exchange in New York show.

“Investors’ interest is still growing and still hasn’t reached a reasonable part of their portfolio,” UniCredit’s Hitzfeld said. “Gold is still an under-owned asset, that’s perfectly clear.”

Sunday, August 29, 2010

Bernanke Lays Out Policy Options for US Economy

Ben Bernanke, Chairman of the Fed outlined his policy options to help the US economy in a speech on Friday. The stock market loved it as the DJIA closed up 165 points after starting off with some pretty sluggish prices earllier in the day. Allow me to go over these rather quickly:

1. Quantatitive easing - silly me I did not realize this was a choice. If Uncle Same can't sell its debt someone has to buy it.

2. Promising to keep rates low - you have to be kidding me. Promises are just that, promises. Maybe they will and maybe they won't.

3. Paying 0% interest of bank excess reserves at the Fed - we are basically there now.

4. Targeting higher interest rates - silly me I did not realize this was a choice. I assumed it was inevitable.

Don't get me wrong I think Ben Bernanke is doing the best he can. Besides I would rather have an expert on the Great Depression as Fed Chairman then a lot of people. But, the list tells me just how short of ammo the Fed really is. Text in bold is my emphasis. From The BBC:

Federal Reserve chairman Ben Bernanke has laid out four "unconventional" policy options to boost the US economy.

Top of the list is more "quantitative easing" - mass purchases of debt.

Speaking to fellow central bankers at the annual Jackson Hole symposium in Wyoming he said the recovery had slowed to "a pace somewhat weaker" than forecast. . . .

. . . . His speech came in the wake of a string of disappointing US economic data in the past month that point to a sharp slowdown in the second half of the year.

Earlier on Friday the US Commerce revised its estimate of second quarter GDP growth down to 1.6%, although this cut was much lower than most Wall Street analysts had expected. . . .

. . . ."The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation [a falling rate of inflation]," Mr Bernanke said.

He said the unorthodox policy options each contained risks and would only be used if the outlook worsened further.

Policy Option Pro Con

1. Quantatitive easing (buying up debts).
Worked during the crisis. Holds down long-term borrowing costs.
Hard to quantify effect, and may be less effective when markets are not under stress. Markets may worry about whether the Fed can safely exit its investments. Inflation risk.

2. Communication (promising to keep rates low for longer, or until certain conditions are met).
Should lower longer term interest rates.
Promises cannot be binding, and conditions for raising rates may be hard to pin down.

3. Paying zero interest on banks' excess reserves at the Fed.
Interest rate cuts are well understood.
The effect on borrowing costs would be small (0.1%-0.15%). A zero rate could undermine the functioning of money markets.

4. Targetting a higher inflation rate.
Could help reverse a prolonged period of deflation (falling prices) like in Japan.
Not popular at the Fed. Makes inflation expectations more uncertain. US is not in deflation yet, and the risk is low.

Mr Bernanke was keen to emphasise the apparent success of earlier quantitative easing - including the purchase of $1.25 trillion worth of mortgage debt - in lowering borrowing costs.

The Fed already decided to extend this policy on 10 August, when it announced that any mortgage repayments it received on its investment would be reinvested in US government bonds.

Other options included reducing to zero the interest paid on excess reserves held by banks with the Fed, and committing to maintain rates low for a longer period.

He also discussed the option of raising the Fed's inflation target - something proposed by some economists - though he said it had no support at the Fed.

In his review of the US economy, Mr Bernanke expressed particular surprise at the rise in the savings rate of US consumers, and the sharp rise in the US trade deficit.

He also noted that business investment in structures - such as commercial real estate - had failed to rebound.

In order for the recovery to be sustained, he said, consumer spending and business investment needed to pick up more quickly.
(Isn't that the point business and the consumer lack sufficient demand to make the economy go.)

Friday, August 27, 2010

Economic Growth in Q2 2010 was 1.6%

The Q2 2010 GDP numbers are revised downward by one-third in the most recent BEA revision. Revisions are to be expected in GDP numbers. What surprises me is that people get excited about the first press release of GDP numbers. Maybe now people will begine to realize on weak the economy really is. In addition the realization that the unemployment rate is going to remain at current levels for awhile because the economy is too weak to create jobs. From CNN

The U.S. economy sputtered to a near stop in the second quarter, according to new estimates from the government released Friday, although the slowdown wasn't as bad as many had feared.

The nation's gross domestic product, the broadest measure on the amount of spending by consumers, businesses and government, was revised sharply lower to an annual growth rate of 1.6% in the three months ending in June. The initial reading had been for a 2.4% growth rate in the period.

The report fed into growing fears that the nation could be at risk of a new economic downturn known as a double-dip recession. While the economy is still growing, growth of less than 2% is considered too weak to prompt businesses to start hiring again.

"The case for more action from policymakers to support the recovery and return the job market to health is now overwhelming," said Josh Bivens, economist with the Economic Policy Institute, a labor-supported think tank.

The downward revision was mostly due to businesses doing less to restock their inventories than previously estimated in the face of weak consumer demand. Inventories grew by only $19 billion in the quarter, down $28 billion from the earlier estimate.

Construction spending also came in weaker than assumed at the time of the original reading, with non-residential building taking the biggest hit.

A bigger-than-expected trade gap also trimmed GDP, as rising imports and weaker exports both worked against output by U.S. businesses. . . . .

. . . . "The immediate reaction suggests an attitude shifting from the glass half empty to half full," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. "The bigger picture issue remains unchanged: there is simply not enough water in the glass to quench our thirst."

While the report might not be as bad as feared, one concern is that even weaker growth could lay ahead.

The economy continued to get a lift in the second quarter by spending authorized by the stimulus act passed at the start of 2009. The Congressional Budget Office recently estimated that added between 1.7 to 4.5 percentage points of growth in the second quarter, meaning the economy would have retreated without that spending. But that spending will fall off in the second half of this year.

In addition, the economy could lose more steam because of the weakening housing market. While investment in new homes shot up 27% in the second quarter due to a tax credit for home buyers that ended in June, more recent readings show home sales hitting record lows since the end of the second quarter.

"The second quarter wasn't as bad as the headline GDP figure looks but, unfortunately, that doesn't mean the third quarter is going to be any better," said Paul Ashworth, senior U.S. economist for Capital Economics in a note to clients. "It could easily be even worse."

Thursday, August 26, 2010

Shareholders Win Rights to Infuence Boards

I wonder how this will work out? Reminds me of the old Bob Dylan song, "Time They are A-Changing".
Text in bold is my emphasis. From Reuters:

Shareholders won more power on Wednesday to shake up corporate boards in the United States after the financial crisis exposed weaknesses in how companies were managed.

The Securities and Exchange Commission voted 3-2 to adopt a rule that gives shareholders an easier way to nominate company directors.

Activist shareholders who want more say on how companies are run have long sought the ability to place their nominees' names on company proxy statements.

That demand increased after the government used billions of tax dollars to prop up companies like American International Group Inc and Bank of America Corp.

"The market meltdown represented a massive failure of oversight by boards as well as by regulators," said Ann Yerger, executive director of the Council of Institutional Investors, which represents big investors.

"Proxy access gives investors a way to hold directors accountable so they will be motivated to do a better job of monitoring and, if necessary, reining in management," she said.

The business community, Republican lawmakers and two dissenting Republican SEC commissioners think the rule will harm capital markets and give fringe groups too much power.

Under the rule, shareholders must hold at least 3 percent of the company's stock for at least three years to nominate directors. Shareholders must hold the stock until the date of the meeting at which director elections are held. Shareholders would be allowed to nominate up to 25 percent of companies' boards. They would not be allowed to nominate a director if their intent were to take over or change control of the company.

Companies with less than $75 million in market capitalization would get a three-year delay in compliance, to give the SEC time to study implementation in larger companies and make adjustments, if necessary.

Shareholders meeting certain conditions would be allowed to submit proposals to change rules to make proxy access easier. The SEC rule would act as the minimum standard.

The rule will go into effect 60 days after publication in the government's federal register. Eligible shareholders most likely will be able to place their nominees on the corporate ballot at 2011 annual meetings, which typically take place in May.

In the past decade, two other SEC chairmen have tried to adopt proxy access rules with no success. This time, the SEC has backing from the Dodd-Frank financial reform bill, which affirms the agency's authority to adopt proxy access rules.

"As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman Mary Schapiro said at a public agency meeting.

The legislation will help shield the SEC from some lawsuits. In the past, business lobby groups have threatened to challenge the SEC on grounds that the agency did not have the authority to adopt the rule.

Now, the business lobby will probe the rulemaking process and the rule for any weaknesses.

"We will use every available option" to fight the proxy access rule, said Tom Quaadman, a vice president with the U.S. Chamber of Commerce, the country's largest business lobby.

Republican Commissioner Kathleen Casey, who also voted against a proxy access rule in 2007, said today's rule was fundamentally flawed and she does not expect it to survive court scrutiny. Fellow Republican Commissioner Troy Paredes said the rule imposes a minimum right of access even if shareholders would prefer no proxy access -- an area that might be ripe for lawsuits.

The SEC had contemplated setting the holding period for stock ownership at one year, and creating a sliding scale ownership threshold between 1 percent and 5 percent.

Critics argued that the one-year holding period was too short and that requiring shareholders to own only 1 percent of a large company would make it too easy for companies to fall prey to special interest groups.

The Council of Institutional Investors, which represents investors that hold more than $3 trillion in assets, said 3 percent was a "very challenging but reasonable hurdle to impose on groups of long-term investors."

Before the SEC adopted the rule, shareholders could nominate directors but had to wage proxy fights to do so. That process is considered expensive and burdensome, according to activist shareholders.

Wednesday, August 25, 2010

A View on Social Security

Social Security will plague us for a long time and it needs to be fixed. Unfortunately, it is so entangled in Washington that solutions are hard to come by. The author of this article has an interesting point of view. He is also the author of a new book “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking” which could prove to be intersting. Text in bold is my emphasis. From Bloomberg:

Social Security just celebrated its 75th birthday. Love it or hate it, it has done its job and should retire. We need a new system, the Personal Security System, which retains Social Security’s best features, scraps the rest, and covers its costs.

Social Security’s objective -- forcing people to save for retirement -- is legit. Otherwise millions of us would seek handouts in our old age.

But Social Security has also played a central role in the massive, six-decade Ponzi scheme known as U.S. fiscal policy, which transfers ever-larger sums from the young to the old.

In so doing, Uncle Sam has assured successive young contributors that they would have their turn, in retirement, to get back much more than they put in. But all chain letters end, and the U.S.’s is now collapsing.

The letter’s last purchasers -- today’s and tomorrow’s youngsters -- face enormous increases in taxes and cuts in benefits. This fiscal child abuse, which will turn the American dream into a nightmare, is best summarized by the $202 trillion fiscal gap discussed in my last column.

The gap is the present value difference between future federal spending and revenue. Closing this gap via taxes requires doubling every tax we pay, starting now. Such a policy would hurt younger people much more than older ones because wages constitute most of the tax base.

What about cutting defense instead? Sadly, there’s no room there. The defense budget’s 5 percent share of gross domestic product is historically low and is projected to decline to 3 percent by 2020. And the $202 trillion figure already incorporates this huge defense cut.

The 3-Year-Old Vote

Reducing current benefits, most of which go to the elderly, is another option. But such a policy is highly unlikely. The elderly vote and are well-organized, whereas 3-year-olds can neither vote, nor buy Congressmen.

In contrast, cutting future benefits is politically feasible because it hits the young. And that’s where Congress is heading, starting with Social Security. The president’s fiscal commission will probably recommend raising Social Security’s full retirement age to 70 from 67, for those who are now younger than 45. This won’t change the ages at which future retirees can start collecting benefits. It will simply cut by one-fifth what they get.

Some political economists point to Social Security’s 2010 Trustees Report and say, “Leave it alone. The system won’t run short of cash until 2037.”

Misleading Accounting

Unfortunately, the Trustees’ cash-flow accounting, like all such accounting, is arbitrary and misleading. In fact, Social Security is broke. Its fiscal gap, which the Trustees measure correctly, is $16 trillion.

This gap is small compared with the U.S.’s overall $202 trillion shortfall, not because the Trustees treat Social Security’s $2.5 trillion trust fund as an asset (a questionable choice), but because they credit one-third of federal revenue to the program.

But dollars are dollars. If we re-label Social Security “payroll” taxes as “general revenue wage taxes,” Social Security’s fiscal gap increases by $60 trillion, and the fiscal gap of all other government activities falls by $60 trillion, leaving the overall $202 trillion gap unchanged.

Even by the Trustees’ measure, there’s a massive problem. Coming up with $16 trillion requires permanently raising revenue or cutting benefits by 26 percent, starting now. In other words, the program is 26 percent underfunded.

Hitting Young People

Now cutting benefits of new retirees by 20 percent, with an increase in the so-called full retirement age, starting 20 or so years from now isn’t the same as immediately cutting the benefits of all retirees by 26 percent. Hence, the fiscal commissioners will need to hit young people with an even bigger whammy if they really want to solve Social Security’s long-term woes.

Most likely, Washington will simply raise the retirement age and kick the can further down the road. This is what the Greenspan Commission did in 1983, knowing full well that by 2010 the system would be in even worse shape.

I say, retire Social Security and replace it with a version that works. Do this by freezing the current system, paying today’s retirees their benefits, while paying workers only what they have accrued so far once they retire.

Next, have all workers contribute 8 percent of their pay to the new system, with half going to a personal account and half to an account of a spouse or legal partner. The federal government would make matching contributions for the poor, the disabled and the unemployed, permitting the system to be as progressive as desired.

Going Global

All contributions would be invested in a global, market- weighted index of stocks, bonds, and real estate. The government would do the investing at very low cost and guarantee that contributors’ account balances at retirement would equal at least what was contributed, adjusted for inflation.

Between ages 57 and 67, each worker’s balances would gradually be swapped for inflation-indexed annuities sold by the government. Those dying before 67 would bequeath their account balances to their heirs.

While this plan has private accounts, Wall Street plays no role and makes no money. Additional contributions would be used to fund life- and disability-insurance pools.

Our nation is in terribly hot water. Business as usual is no answer. The only way to move ahead is to radically reform our retirement, tax, health-care and financial institutions to achieve much more for a lot less.

The Personal Security System is a major step in that direction. It meets all the legitimate goals of Social Security without the system’s waste and penchant for robbing the young.
Economy to Remain Weak, Probability of a Double-Dip Remains High

President of the Chicago Fed, Charles Evans, maintains for the economy will remain weak for the foreseeable future and that the chances of a double-dip recession although low are increasing. Check out the last few sentences about financial education, the real diamond-in-the-rough in this article. Text in bold is my emphasis. From Reuters:

The risks of a double-dip U.S. recession have risen in the last six months, Chicago Federal Reserve Bank President Charles Evans said on Tuesday.

While a new contraction in the economy is still not the most likely scenario, high unemployment and a fractured housing sector make this recovery a fragile one, he said.

"A double dip is not the most likely outcome but I am concerned about how strong the recovery will be," Evans said at a housing event in Indianapolis.

Against that backdrop, Evans said the Fed's ultra-easy monetary policy is appropriate.

In response to the financial crisis of 2007-2009, the U.S. central bank cut short term interest rates to near zero, and also undertook a host of emergency measures such as U.S. Treasury bond and mortgage debt purchases to keep borrowing costs down.

The Fed announced earlier this month it would add to this stimulus by investing proceeds from maturing mortgages securities in its portfolio into Treasury debt.

Evans said unemployment, currently at 9.5 percent, is likely to remain uncomfortably high for the foreseeable future.

His comments came just before a report on existing home sales showed a record monthly drop in existing home sales to their lowest level in 15 years.

In his speech, Evans argued that the securitization process, in which mortgages are repackaged into bonds that are then sold to investors, reduces the incentive of lenders to modify troubled home loans.

In remarks that focused on the country's housing market weakness and various attempts to ease it, Evans said efforts to modify home loans to prevent foreclosure were a "drop in the bucket" compared with the problem at hand.

"The securitization process appears to have created conflicts between the interests of servicers and lenders," Evans said. "These and other impediments have kept the number of modifications lower than we might have hoped."

The U.S. housing market has been in a downturn for about three years now, with home construction running at less than a quarter of its boom-time peaks and prices down sharply across the country.

Many economists worry that, without housing as an engine of growth, the economy could take much longer than usual to recover.

Evans also cast some doubt on the value of financial education in preventing mortgage and other borrower distress, a break from Fed tradition.

"Staff members at the Chicago Fed have recently undertaken a thorough review of studies evaluating the effects of financial education. What they find is that the evidence on the effectiveness of education and counseling is rather mixed," he said.

Tuesday, August 24, 2010

Existing Home Sales are Down 27% in July

The forecast for the July drop in existing home sales was supposed to be about 12%, instead it was 27%. Well, that will put a tamper on an already skiddish stock market. I wonder what the August numbers will bring before he head into the fall/winter doldrums for housing sales? Text in bold is my emphasis. From

With home sales plunging to their lowest level in 15 years, economists warn that a double-dip in housing prices is just around the corner, threatening to further slow the overall recovery.

Existing home sales sank 27.2% in July, twice as much as analysts expected, to a seasonally adjusted annual rate of 3.83 million units. Much of that drop is attributed to the end of the $8,000 homebuyer tax credit.

That credit brought buyers out in droves, as they tried to sign home contracts before the April 30 deadline. Now, two months later, sales are 34% below April's tax incentive-induced peak.

"Home sales were eye-wateringly weak in July," said economist Paul Dales of Capital Economics. "It is becoming abundantly clear that the housing market is undermining the already faltering wider economic recovery. With an increasingly inevitable double-dip in housing prices yet to come, thing could get a lot worse."

The sales pace of all homes -- single-family homes, townhomes, condominiums and co-ops -- is at the lowest since NAR began tracking the figure in 1999. Sales of single-family homes, which account for a bulk of the transactions, are at the lowest level since May 1995.

"Consumers rationally jumped into the market before the deadline for the homebuyer tax credit expired," said Lawrence Yun, NAR's chief economist. "Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September."
(Once again overly optimistic comments from the NAR).

Price and inventory: The NAR report showed that the median price of homes sold in July was $182,600, up 0.7% from a year ago. Just under a third of homes sold during the month were distressed properties.

Total housing inventory rose 2.5% to 3.98 million existing homes for sale. That represents a 12.5-month supply at the current sales pace, up from a 8.9-month supply in June. A six-month of supply is considered normal.

Sales by property and region: Sales of single-family homes sank 27.1% in July compared to the prior month, while condominium and co-op sales tanked 28.1%.

The Midwest fared the worst last month, with sales dropping 35% to an annual pace of 800,000 units in July. that's 33.3% lower than a year earlier.

Resales in the Northwest dropped 29.5% from the previous month to an annual pace of 620,000 units.

They fell by 25% in the West and 22.6% in the South.
Good Summary about Housing and Consumer Spending

Below is a good summary of the current housing and consumer spending activity in the US. Many economists/media pundits in the US are really stuck because they do understand how the economy can grow without the push of housing demand and consumer spending. I think it is really a good question. If the US consumer is not able to drive demand in the economy what do we do? Even if you increase the supply of goods, who is going to buy them? People say - make the banks lend more. What if people do not want or cannot borrow? What do you do with an economy when debt-driven demand is no longer an option? When you realize there are no real answers to these questions you come to understand that these are large structureal issues in the economy that will take a long time to resolve. All of sudden the "lost decade " seems a real possibility. Just food for thought.

Text in bold is my emphasis. From

Housing led the U.S. out of seven of the last eight recessions. This time, it may kill the recovery.

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.

“If foreclosures continue to mount and depress home prices, that could send the economy back into a recession,” said Celia Chen, an economist who tracks the industry for Moody’s Analytics Inc. “The housing market and the broader economy are closely intertwined.”

Spending on home construction and items such as furniture and stoves accounted for about 15 percent of gross domestic product in the second quarter, according to West Chester, Pennsylvania-based Moody’s Analytics. Real estate also can influence consumer spending indirectly. When values soared in the mid-2000s, people used the boost in equity to pay for cars and vacations. After prices fell, homeowners lost that cushion and curbed spending.

A report tomorrow by the Chicago-based National Association of Realtors will show July sales of existing homes plummeted 12.9 percent from June, the biggest monthly loss of 2010, according to the median estimate of economists surveyed by Bloomberg.

New-home sales, which account for less than a 10th of housing transactions, stayed at the second-lowest level on record last month, economists predict Commerce Department data will show on Aug. 25.

Housing in ‘Doldrums’

“Housing continues to be stuck in the doldrums,” said Jeffrey Frankel, a member of the business-cycle dating committee at the National Bureau of Economic Research, the arbiter of when U.S. recessions begin and end, and a professor at Harvard University in Cambridge, Massachusetts.

With 14.6 million Americans out of work, homeowners are struggling to hold onto their properties. One in seven mortgages were delinquent or in foreclosure during the first quarter, the highest in records dating to 1979, according to the Washington- based Mortgage Bankers Association. Foreclosures probably will top 1 million this year, said RealtyTrac Inc., an Irvine, California-based data company.

Federal efforts to help have had little success. Of 1.31 million loan modifications started under the Obama administration’s Home Affordable Modification Program, 48 percent were canceled by the end of July, the Treasury Department said Aug. 20. More than half of all modifications defaulted again within 12 months, the Office of the Comptroller of the Currency said June 23. (Let's not get too excited about these numbers. Experience has taught me that, "loan mods" are hard to justify and the success rate is only about 50%.)

Excess Supply

Shadow inventory, or the number of homes repossessed or in default that eventually will be offered for sale, stood at 7.3 million in the first quarter, according to Laurie Goodman, an analyst in New York at mortgage-bond broker Amherst Securities Group LP. As those properties hit the market, prices will come under pressure and buyers will wait for better deals.

“The only thing that’s going to fix the housing markets right now is a work-through of what excess supply is on the markets and improvement in unemployment,” Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.” “That process is a very, very long-term process.”

On the Sidelines

. . . . Home prices tumbled 33 percent from their July 2006 peak to the low in April 2009, according to the S&P/Case-Shiller 20-city index. They may drop another 20 percent by 2012 if the economy slips back into a recession, according to Chen, the Moody’s Analytics economist.

Gross domestic product increased less than 1.5 percent in the second quarter, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey. That’s down from the 2.4 percent rate initially reported by the Commerce Department last month. Growth may ease to 1.3 percent by the first quarter of next year, according to the New York-based Conference Board.

‘Epidemic of Thrift

Consumer spending rose 1.6 percent in the second quarter, down from 1.9 percent in the previous three months. Purchases of home furnishings and appliances fell 1.7 percent to an annual pace of $256.5 billion in June from a 2010 high in April, according to the Bureau of Economic Analysis.

“There is an epidemic of thrift,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Households and businesses are super-cautious right now. Sometime in the next 6 to 12 months, we’ll start to see more movement on home and car purchases and greater willingness on the part of businesses to hire.”

Federal Reserve policy makers on Aug. 10 made their first attempt to shore up the recovery by pledging to keep their holdings of securities and prevent money from draining out of the banking system. They said the economic expansion probably will be “more modest” than earlier anticipated. The Fed has held the target for its benchmark lending rate near zero since December 2008 and purchased $1.43 trillion worth of debt to keep rates low and bolster housing.
Buyers’ Survey

“Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” the Fed said in a statement.

The average U.S. rate for a 30-year fixed mortgage dropped to 4.44 percent in the second week of August, the lowest recorded by McLean, Virginia-based Freddie Mac, the second- largest mortgage buyer. A July survey by the Conference Board found 1.9 percent of the respondents planned to buy a home in the next six months, near December’s 27-year low of 1.7 percent.

A sustained economic recovery depends on the job growth required to boost consumer spending, said Behravesh of IHS. The unemployment rate may average 9.6 percent this year, based on the median estimate of economists in a Bloomberg survey. That would be the highest annual rate since 1983.

Past Not Repeated

Home construction and property sales led the way out of the previous seven recessions going back to 1960, according to PMI Group Inc., a mortgage insurer in Walnut Creek, California. New- home sales improved an average of eight months before the beginning of economic growth, and single-family housing starts improved seven months before recovery.

That didn’t happen in the last recession. Sales of new houses fell in five of the eight months before economic expansion began in 2009’s second half. Housing starts fell in two of seven months. . . .

Monday, August 23, 2010

Housing is Probably Gone for a Long Time

Finally someone has published a realistic article about what is really occurring in the housing market. I do not consider the housing market dead, but I do think buying a home is a cash flow and liquidity decision: Cash flow - is it cheaper to rent or buy? Combined with Liquidity - how much of my assets do I want tied up in a potentially illiquid asset. Where I live it is cheaper to rent then buy, especially given the liquidity issue. If you want to be able to pick up and leave in a relatively short time period - don't buy a home. Comments in bold are my emphasis. From the NY Times:

Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.

The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.

More than likely, that era is gone for good.

There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.

“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.

The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.

Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.

“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.

The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.

That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.

“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”

Other buyers have grand and even grander expectations.

In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.

With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.

“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.

For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.

The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.

Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.

By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.

“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”

Not everyone views the notion of real appreciation in real estate as a lost cause.

Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.

“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”

Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.

Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.

Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.

His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”

Thursday, July 15, 2010

The Lost Decade?

I am not sure how the American as a whole view our economic prospects for this decade. But, they should be considering a Lost Decade as a "very real" possibility. The "non-media" forecasts that I see basically has the economy flat out to 2013 - 2015. The old growth engines are not there, namely, housing and consumer spending. From

The risk of a double-dip recession is getting a lot of attention, but even that grim prediction could prove a little too optimistic.

Disappointing job reports, weakness in housing and consumer spending and problems in world financial markets have raised concerns about the U.S. economy stalling out later this year. Now some economists are starting to talk about an even worse fate: a prolonged period of very weak growth, a so-called "lost decade." Comment

"The probability of a lost decade is significantly greater than a double dip," said Sung Won Sohn, economics professor at Cal State University Channel Islands.

"We don't have too many engines of growth functioning right now -- housing, consumer spending, exports are all sputtering. I have a hard time seeing where we can get 3% economic growth back."

A lost decade, or something like it, could feel like a never-ending recession to many Americans, as the economy does not grow fast enough to recoup lost jobs, and investments like homes and stocks continue to lose value.

The most famous lost decade occurred in Japan in the 1990s. From 1992 through 1999, the Japanese economy grew by less than 1% a year. It has yet to fully recover from the economic weakness and falling prices it suffered during that period.

There are a number of similarities between conditions in Japan in the 1990's and the United States today. Japan had a real estate bubble inflate and then burst, resulting in banks choked with bad loans on their balance sheets and a cutback in lending.

The Bank of Japan did what it could to spur the economy, including cutting its key interest rate to near 0% and pumping money into the economy through asset purchases, just as the Federal Reserve has done over the last two years. But those steps had limited effectiveness.

And Japan suffered through bouts of deflation, in which falling prices caused businesses to cut production and employment, a scenario all too familiar to U.S. workers.

Deflation has been relatively rare in U.S. history, with no significant examples since the Great Depression. But with inflation nearly non-existent, some Federal Reserve policymakers said at their June meeting that they were worried about the threat of deflation.

Sohn puts the chance of a prolonged period of weak growth as high as 40%, with the chance of a double dip only 20%-25%.

"If I had a choice I would much rather have a double dip and be done with it. A lost decade is much more dangerous, economically, socially and politically," said Sohn.

The growth produced during U.S. recoveries has been trending lower over the last 40 years or more, according to Lakshman Achuthan, managing director of Economic Cycle Research Institute. He believes underlying changes in the economy will cause that trend to continue.

Achuthan said he's worried that with increased volatility, recessions are likely to become more frequent, causing the economy to lose more ground in upcoming recessions than it is able to recover from during growth periods.

"That's how you lose a decade," he said. "You get stuck in an era when you spend more time in recession than expansion."

James Hamilton, professor of economics, University of California San Diego, said much of past economic growth was built upon unsustainable deficit spending, by both governments and households. Huge, persistent trade deficits also provided a drag on the U.S. economy. It will require some painful structural changes to free the economy from those constraints.

"The pattern for growth we had been relying upon was unsustainable," he said. "These are long-term challenges." While he believes a double-dip recession will be avoided, weak growth is the best we can hope for, at least in the next few years.

Plenty of economists believe there are significant differences between Japan in the 1990s and the United States today, and that another lost decade is unlikely. They point to Japan's shrinking population compared to the growing U.S. population, as well as Japan's dependence on exports, rather than internal consumption, to drive the economy.

"You can draw some parallels, but while history can rhyme, it rarely repeats," said Carl Riccadonna, senior U.S. economist for Deutsche Bank. But while he doesn't expect a U.S. lost decade, even Riccadonna is not expecting strong growth.

"We're definitely looking at a subpar recovery," he said.