Federal Reserve & Interest Rates

Although the economy returned to positive territory last quarter, an uncertain labor market is likely to put a damper on consumer spending and the holiday shopping season ahead.  On Friday, the Labor Department issued it’s October job’s report, which showed higher than expected job losses once again.

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade.

Now that unemployment has broken into the mythical double digit territory and slightly faster than many economists were predicting, it may give the government pause as it discusses exit strategies and an end to monetary and fiscal easing.  The labor market could very well put a damper on economic recovery over the long run and it could spur more fiscal spending into the new year.

This year’s stimulus package, while it also included tax breaks to spur consumer spending was also designed to create about 3 million jobs over a period of three to four years.  Thus far, little more than half a million jobs have been created and it pales in comparison to the over seven million jobs lost since the recession started.

Although the labor market typically lags behind the economy, some economists are predicting it could be as much as a year if not more before job creation begins again and that the unemployment rate could reach as high as 13% by then.  Even after the labor market starts to recover it liable to be a long and slow process, where we could still be over the double digit mark, two or three years down the road.

Federal Reserve Chairman Ben Bernanke gave an overview on Monday, on the impact of the financial crisis on Asia’s largest economies and it’s policy responses.  The growth in global trade allowed the financial crisis which began it this country to transmit it’s effects to the rest of the world, and Asian economies were hit hard but aggressive policy actions by many of those countries appears to have paid off.

In September and October 2008, as you know, the global financial crisis intensified dramatically.  Concerted international action prevented a global financial meltdown, but the effects of the crisis on asset prices, credit availability, and consumer and business confidence resulted in sharp declines in demand and production worldwide.  Reflecting this worsening economic climate, Asian GDP growth slowed further in the second half of 2008. 

For the region as a whole, the economic contraction in the fourth quarter of 2008 was pronounced, with activity falling at an annual rate of nearly 7 percent.  The fourth-quarter declines were especially dramatic in Taiwan and Thailand (more than 20 percent at an annual rate) and in South Korea and Singapore (more than 15 percent at an annual rate).  Among the major Asian economies, only those of China, India, and Indonesia did not contract during the crisis.

For most Asian countries, the severe drop off in global trade as well as disruptions in international capital flows played a large factor in the recessions of those countries.  However, low inflation levels allowed most of those countries to take aggressive stimulus actions and their economies appear to be on the brink of recovery.

Large trade and capital flow imbalances helped transmit financial instability to their economies and Bernanke points out that efforts need to be taken in the future to prevent this.  The United States need to increase it’s national savings rate but the large federal deficits expected over the next decade may make this difficult, on the flip side, Asian countries could reduce their overall savings rate by promoting domestic consumption, which may also prove difficult.

The lessons learned from the financial crisis has proved that global economies must take cooperative fiscal and monetary policy measures which are mutually beneficial.

Nearly a hundred banks have already failed this year and the FDIC’s bad bank list contains hundreds more that are in danger of failing in the next few years.  With it’s insurance fund running dangerously low, the FDIC put forward a plan earlier this month, in which banks would prepay three years worth of fees to replenish the fund.

It’s the worst stretch of bank failures since the Savings and Loan crisis of the 1990’s when nearly two hundred banks and thrifts failed, costing taxpayers over $100 billion.  The insurance fund has shrunk by nearly $35 billion since the recession began and has a little over $10 billion remaining.

While banking system has stabilized somewhat, it’s still in a fragile state and the continued weakness in the residential and commercial real estate markets will lead to more failures in the next few years.  At this point, the FDIC estimates that bank failures will cost the insurance fund $100 billion by 2013.

The proposed prepayment plan is expected to raise somewhere in the neighborhood $50 billion and while the banking industry isn’t happy about it, they prefer this option to a special fee assessment which was also a possibility. In May, Congress increased the FDIC’s line of credit with the Treasury to $100 billion, but it been reluctant thus far to borrow from the Treasury and putting more of the onus of bank failures on taxpayers.