The Run on Greek Banks—Can the U.S. Stay Out of the Runners’ Way?

 By: Dr. Lynn Reaser

Events in Europe continue to spiral quickly downward.  The Greeks will vote in new national elections on June 17, which will be a referendum on the commitment to remain a part of the Eurozone.

Most Greek citizens want to remain a part of the Eurozone but are unwilling to make the continued sacrifices and endure the austerity that has been forced upon them to secure additional financial assistance.  Most Germans want the Eurozone to remain intact but resist sending even more financial aid to the weaker members.

 A run on banks has already begun in Greece, with about 800 million euros ($1 billion) being withdrawn a day.  As the June 17^th Greek election approaches, the outflow of funds is likely to accelerate.  Fears of a banking collapse might prod the Greeks and Germans to compromise.  Barring such an agreement, a Greek exit from the Eurozone would trigger bank runs in other nations, including Spain.

 In the U.S., the impact would be a stronger dollar, lower interest rates, lower oil prices, lower stock prices, and slower economic growth.  Preventing a deepening and widening of European bank runs will be critical to the world economy.

The Occupy Wall Street Movement—Helpful or Harmful?

By: Dr. Lynn Reaser

While the Occupy Wall Street Movement’s criticism of the fraud, financial abuses, and government “bailouts” of Wall Street are warranted, it is important not to extend the attack to business in general.

Entrepreneurs, such as Steve Jobs, who started out on a shoestring before climbing to the top one percent, have certainly benefited millions of Americans in terms of jobs, consumer products, or even increases in their 401(k) plans.  The last decade has been trying for all of us, but the median family income of Americans last year was still 8% in real terms above its level of 1985 and 14% above its level of 1975.

To regain our trend of rising living standards, the individuals and firms who create jobs and income for their employees need to be supported not chastised.

Q & A with Dr. Lynn Reaser

By: Dr. Lynn Reaser

Q: Is the $90 billion devoted to infrastructure in President Obama’s $447 billion jobs bill a good approach to boosting construction employment, and if so, what should the San Diego region spend its share on?

No.  While infrastructure investment may have merit in boosting our economic potential, this program will probably have only a limited impact on construction jobs.  First, the proposed $90 billion represents just 11% of last year’s depressed building expenditure total.  Second, these projects often require considerable time to secure all of the required approvals and permits.  They then often ramp up gradually as the design and engineering phases precede actual construction.  San Diego might most effectively deploy its share of federal funds in updating and repairing its basic infrastructure that may have been deferred because of budget cuts, including local roads, bridges, railways, water systems, and schools.

Q&A with Dr. Lynn Reaser

By: Dr. Lynn Reaser

Q:  Is the euro going to survive as a viable currency given the weakness of the European Union’s economy?

A: Yes.  European policymakers have a great deal of political and economic capital invested in the euro and will take every step possible to ensure its survival.  The common currency has reduced transactions costs in Europe and improved economic efficiency.  Northern Eurozone countries, including Finland, Germany, Austria, Belgium, and the Netherlands, have strong economic fundamentals.  Even with current grave concerns about Europe, the euro has recently equaled around $1.44 versus an average of $.90 in 2001.  If solutions to European’s debt problems among its southern members cannot be resolved, weaker nations, such as Greece, might leave (either temporarily or permanently), but the euro should survive.

Europe’s Debt Problems Crash on U.S. Shores

By: Dr. Lynn Reaser

The Federal Reserve is now worried that U.S. exposure to European banks is mounting while it is scrambling to find a way to protect the U.S. financial system from further chaos.  Stocks have plummeted.  Could it be as big a potential disaster as some are saying?

Fears are spreading that loans from European nations, the European Central Bank, and the International Monetary Fund will not be enough to solve the debt problems of debt-laden countries ranging from Greece to Italy.

As a result, these countries might be forced to ultimately default or restructure significant portions of their debt.  Reductions in principals paid, lower interest rates, or an extension of maturities will all impose losses on creditors.

Bank creditors holding European sovereign debt are consequently at risk of seeing their capital eroded and their financial positions substantially weakened.  A potential tightening of lending conditions, stock market losses, and fiscal austerity programs all threaten to start a negative feedback loop for the European economy with negative repercussions on the U.S.

The Federal Reserve is particularly concerned at this point that the U.S. arms of European banks might find funding from their parents in jeopardy.  Access to funds could be further strained by the selling of European exposure by U.S. money market funds, a shutoff in funding from U.S. commercial banks, and the withdrawal of deposits by U.S. customers.

U.S. Banks are in better position than in 2008, but European banks are in a worse predicament. Lack of transparency plagues European banks. Investors do not know how severe the damage could be.

Globally, entanglement and contagion risk does not appear to be as severe as existed after the subprime crisis, but no one can be sure of the web of exposure and possible losses that might be incurred across the financial system.

The Fed is certainly prepared to keep its discount window open to borrowers and to provide swap lines or dollars that may be needed by the European Central Bank. However, investors are looking for a bigger safety net to be provided by the Europeans or more convincing long-term solutions to Europe’s debt problems. Stay tuned.

Is the U.S. headed back towards recession?

By: Dr. Lynn Reaser

Mixed economic news and tre-mendous market volatility have raised new questions about the economy.  Are we headed towards a “double-dip” or retreat back into recession?

At this point, the answer appears to be “no”.  July’s job report was an important and positive sign.  Although not robust, the creation of 154,000 private sector jobs indicates that businesses still had enough confidence to hire despite tremendous uncertainty swirling around the U.S. debt situation.  We may not escape the “soft patch” in the economy quickly, but a fall back to recession appears unlikely.  July’s employment growth and increased wages should combine with lower oil prices and an ending of major supply chain disruptions to give the economy some lift in this year’s second half.  The primary risk facing stocks involves the ability of governments in Europe and the U.S. to get their financial houses in order.

The stock market’s primary worry surrounds the financial health of governments as fears persist that Spain and Italy could follow the paths traveled by Greece, Portugal, and Ireland.  These fears spread to the U.S. last Friday as S&P downgraded its rating on U.S. debt.  The U.S. Federal Reserve’s action on Tuesday, indicating that policymakers will hold interest rates close to zero for at least two years, provided some solace.

On balance, investors should not make major changes in their long-term investment plans at this point.  Markets are too volatile.  Corporate balance sheets are strong.  The public sector just needs to get its financial house in order.

A Debt Ceiling—Is It Really Necessary?

By: Dr. Lynn Reaser

Amidst the ongoing melodrama in Washington, D.C., Americans are decrying the disfunctionality of our government.  Many are also beginning to question why we are inflicting this crisis on ourselves by trying to lift a self-imposed debt ceiling of $14.3 trillion.

As it turns out, the United States is the only industrialized country aside from Denmark that has a mandatory debt ceiling.  Denmark’s ceiling is also quite liberal in that it is well above the actual debt level.  It should be noted that Denmark has shown quite good fiscal discipline.  It has a ratio of total government debt to GDP (gross domestic product) of about 45% versus the 80% average existing in the total European Union.

In the United States, doing away with the debt limit at this stage could signal to the markets and the world that we have given up efforts to put our financial house in order.  While the debate over the debt limit has been tortuous, it has focused the attention of Congress, the White House, and the public on the importance of reducing the size of the nation’s deficit and the growth of our debt.  This was not the case a year ago.

It is unfortunate that Washington only acts when compelled to do so, but the U.S. debt already amounts to about 70% of GDP (gross domestic product) with further increases in the years ahead without meaningful change.  It is vital that action be taken.

Tipping Point Q&A: Dr. Reaser’s Response to the Debt Ceiling

Tipping Point Q&A: Dr. Reaser’s Response to the Debt Ceiling
By: Dr. Lynn Reaser

Q:  Will the U.S. government default if the debt ceiling is not raised by August 2?
A:  This is very unlikely as the government would probably pay interest and principal payments due its various creditors (U.S. and other owners of Treasury securities).  The government would, however, not be able to pay all of its other spending obligations.

Q:  Could social security payments be stopped?
A:  They could, although the government would probably temporarily halt, limit, or defer other spending obligations, such as to various federal contractors.

Q:  S&P and Moody’s are talking about downgrading the U.S. credit rating.  Will this happen and what could the consequences be?
A:  The rating agencies assess various securities according to their perception of risk to help guide investors.  They first indicated they would downgrade their rating if the debt ceiling were not raised.  Now, they indicate that the rating could be reduced if a “major” deficit reduction plan is not achieved.  Given the significant erosion in the credibility of rating agencies following the last financial crisis, it is not clear how much impact a downgrade would have.  However, there would probably be at least some adverse effects on stock prices and the dollar.

Q:  What is the worst case scenario if Congress and the President fail to forge a solution to the debt ceiling impasse?
A:  A severe financial disruption along the lines following the collapse of Lehman Brothers could ensue.  Stock prices could plunge, the dollar fall sharply, interest rates spike, and financial markets freeze up.  However, unlike the 2008 situation, where policymakers could not quickly correct the aftermath of a housing and credit bubble, the current situation does have a political solution.  A plan to reduce the deficit over time and shore up the U.S. fiscal situation can be crafted and already has blueprints drawn up by deficit reduction commissions.  Hopefully, a political solution will take place before, instead of after, financial markets force it on us.

Jobs—Temporary versus Permanent Positions

By: Dr. Lynn Reaser

Given the recent, disappointing jobs growth report, are many companies getting too used to a lean permanent workforce and will depend on temporary workers for the foreseeable future?

Although firms tapped temporary staffing firms about six months before permanent hiring started in March 2010, temporary hiring has declined during the past three months, while permanent private sector jobs have expanded further.  Thus far in the recovery, temporary help has grown by fewer than 500 thousand jobs, while over 1.9 million positions have been added to companies’ direct payrolls.

Firms can rely on productivity gains only so long before customer service begins to suffer.  However, firms will need to see a more stable policy environment and a more consistent improving trend in their own businesses before we can expect stronger gains in permanent workforces.

South Korea, Colombia and Panama Trade—Will the U.S. Be a Player?

By: Dr. Lynn Reaser

Congress should swiftly move to ratify the trade pacts with South Korea, Colombia, and Panama because of the positive effects for businesses, consumers, and international relations.  Reducing tariffs faced by U.S. exporters will help producers of a wide variety of products ranging from agriculture to technology.  Last year, San Diego shipped $14.5 million of merchandise to the three nations, double the volume of the prior year. Lower tariffs on our side will also reduce prices paid by consumers and firms using imported materials.  Last year California’s volume of exports and imports with the three countries totaled nearly $35.0 billion.

The European Union two weeks ago implemented its trade pact with South Korea.  Canada’s trade agreement with Colombia will go into effect next month.  The U.S. should not be locked out from a freer flow of capital, goods, and technology.

The major roadblock to the bill’s passage involves controversy over the Trade Adjustment Assistance (TAA) program, which expired at the end of last year.  This program furnishes training, unemployment benefits and health-care subsidies for workers displaced as a result of globalization.  The U.S. Department of Labor was charged with delivering an assessment of the program’s effectiveness four years ago.  Its report will apparently not be completed until the end of this year.  Last year, TAA cost $975 million, amounting to an average of about $4,100 per person for the 235,000 workers covered.  Without information on its efficacy, Congress cannot debate the TAA on any intelligent basis.  However, out trade pacts with these three strategic nations should not be held hostage.