Forbes, the magazine of big business, has recently released an article arguing that New York City is unfairly subject to too many lawsuits. Most of the points that it makes are convincingly rebutted here. I'll add just a couple of points.
About a quarter of those payouts are in medical malpractice suits from the city's public hospital system. Some of this is an accounting issue.
Rather than securing and paying for medical malpractice insurance, the city's hospital system "self-insures." Thus, while medical malpractice insurance premiums don't show up on the books in other jurisdictions at "lawsuit" related costs, they do in New York City.
In most localities public hospitals would be the responsibility of a special purpose entity which is off the books of local governments (like Denver Health") or a county responsibility, K-12 education is organized in administratively separate school districts, and universities are independent entities or are a part of state government. While the article doesn't make the fact enitrely clear, the hospitals of New York City are organized as a separate non-profit corporation, just as they are in Denver. This means, as the article notes, that malpractice payouts come out of the hospital system's own budget, so the concern that taxpayers on the hook for lawsuits against the City' public hospitals isn't accurate. Even in states that have claims courts that cover municipalities, a public hospital system set up as a non-profit corporation probably wouldn't qualify to be heard there.
If the amount of the lawsuit payouts from the hospital system are accurate, they are about 3% of the system's operating revenues (confirmed here). While this is nothing to sniff at, it is almost identical to what hospitals in Pennsylvania pay, for example. At 2005 study commissioned by the New York hospitals claims that nationally, hospitals spend an average of 0.9% of operating expenses on medical malpractice related expenses. Malpractice expenses have remained relatively constant over the years as a percentage of operating revenues and are not an important factor driving the cost of hospital care in New York City or elsewhere. New York City's hospital system has responded to the number of medical malpractice claims it has to pay in part by implementing a "risk management system" which has reduced the amount of medical malpractice that happens.
Study after study has shown that bad debt, which flows from lack of health insurance, is a much more serious problem for hospitals and is driving up the cost of health care. A 2008 study found that 10% of health insurance premiums are attributable to costs shifted to customers with health insurance from customers who are unable to pay for care.
Of course, New York City, with integrated city and county government, its own K-12 education system, and its own university system that are part of the overall entity, is unusual in that regard, and not comparable to typical municipal governments, despite the comparison made to Los Angeles, Chicago, Houston, Phoenix and Philadelphia in the lede. When a government has all sorts of functions not carried out by the entities it is compared to, it is an apples and oranges comparison. Indeed, John P. Avlon's failure to recognize this distinction that goes to the core of his argument makes clear that his rant against New York City litigation is either fatally incompetent or dishonest.
15 July 2009
Lawyers As Specialist Strategic Actors
Most litigation attorneys typically represent a particular kind of party to a lawsuit over and over again. In criminal law, almost no American lawyer represents both the prosecution and criminal defendants at the same time in his or her career.
Likewise, in tort law (mostly personal injury cases), the vast majority of lawyers are either "trial lawyers" who represent people who were harmed in accidents, or "defense lawyers" who represent people who are sued for causing harm. I've worked on both sides of tort law, although not at the same time.
Similarly, in cases involving consumer transactions, the vast majority of lawyers who handle the cases either represent consumers, or represent people suing consumers. Most bankruptcy lawyers, in the same vein, either help people file for bankruptcy, or represent creditors in bankruptcy.
The law doesn't require that lawyers take sides, but it is a useful approach from a business development perspective and also makes it much less likely for conflicts of interest to arise in the lawyers practice, something that is legally regulated.
Tax lawyers in private practice represent taxpayers, while tax lawyers in government service typically represent the government as it tries to collect taxes and administer the tax system (a few anomalies arise when state and local governments seek to enter into tax sensitive transactions with non-governmental parties, for example, when I represented a special district to advise it on its withholding taxation options).
There are exceptions. While some family law lawyers typically represent husbands, or typically represent wives, the norm is to represent both routinely. Likewise, there is not a strong plaintiff or defendant orientation in business to business commercial litigation. But, the exceptions make up a fairly modest share of lawyers who routinely engage in litigation.
Often business development considerations align specialties in particular types of law more broadly. A firm typically represents either big businesses or individuals, not both (with the exception of some non-conflicting provision of the legal needs of management). The division may be even more fine. It isn't unusual for a firm that is involved in construction law to represent primarily general contractors, primarily subcontractors, or primarily property owners. White collar criminal defense lawyers often practice in different firms than lawyers for individuals accused of "blue collar" criminal offense, but often practice in the same firms as lawyers who handle professional licensing matters.
As repeat players who clients have similar interests in every case, lawyers with this kind of specialization become not just advocates for clients in particular cases, but also advocates for interpretations of, and changes in, the law that favor their clients in their particular specialty. This is one reason that lawyers make up such a large share of lobbyists.
A particularly frank discussion of an area of law from this strategic point of view can be found at the Drug and Device Law Blog which is operated by two product liability lawyers who represent companies sued in product liability suits. Many of their clients will be sued only once or twice in the careers of the managers in place at that company. But, as litigators, they have an interest in taking the long view about what is or is not in the interests of their class of clients and developing a combined litigation, advocacy and legislative strategy that promotes those interests over, in their case, a quarter of a century. Their blog, which is well done despite its clear bias (most political and legal blogs have some sort of bias), is part of that overall advocacy effort.
Their post opens up noting:
Making a class of clients better off now than when you started isn't part of the job description for an attorney, thankfully, because the results are frequently beyond your control. But, a great many lawyers assume the responsibility anyway, and civic involvement to reform the legal system is specifically permitted by the rules of ethics for lawyers. Indeed, the ability of lawyers to participate in law reform is one of the important distinctions between "rule of law" states, and "rule by law" states, that take the mostly vestigial British tendency to speak of the "loyal opposition" and to view lawyers as "officers of the court" much more seriously than is the case in U.S. practice.
The ethical concern is professional independence. While on one hand, lawyers are zealous advocates for their clients (a word that has left the actual text of the ethical rules in many states), who are expected to take the side of their clients even when they know their clients are in some way in the wrong, lawyers are also supposed to exercise their independent professional judgment in cases. There is a potential (I don't accuse this blog's authors of having crossed the line despite their language that seems to imply that notion) to forget that the lawsuits are between your clients and their clients, not between you and the opposing counsel.
Indeed, one of the important lessons I learned from mentors while I have practiced law is the rhetorical usefulness of clearly distinguishing between you the lawyer, and the client you represent, in correspondence with opposing counsel and third parties. It keeps the discussion civil and makes it easier to engage in the passive-aggressive, tennis-like game called civil litigation.
The notion that the polity is full of special interests contending for political power is nothing new. The Founders were well aware of it when discussing the proposed constitution of 1789 in the Federalist Papers, discussions still widely read by political science students and law students today. But, nothing magical weds this kind of strategic advocacy to the legal profession. British barristers and advocates within the French Council of State are deliberately assigned cases in a way that puts them on both sides of litigation. A barrister may represent the prosecution one day and the defense another. The Council of State assigned lawyers working for it to defend the government from a complaint one day, and to represent a member of the public who has filed a complaint the next. My understanding, although it is very limited (based upon personal contacts with Japanese lawyers in law school many years ago) is that Japanese lawyers take a similar approach.
Part of the ability of advocates in those systems to take both sides is that somebody else is typically doing the grunt work. Stereotypically, a solicitor (non-trial lawyer) in the U.K. presents a case to a barrister, literally tied with a ribbon, containing all the preparation work that needs to be done in a case which the barrister will then present to a court. In criminal cases, non-lawyer members of law enforcement typically do all or almost all of the evidence gathering before the case is deemed ready to turn over to a prosecutor. Also, in criminal cases, it is common for a public defender, in a case that goes to trial, to test and question the sufficiency of the evidence presented by the prosecution, while offering relatively few defense witnesses or evidence to contradict prosecution claims.
In contrast, in U.S. law, it is typically for a client to have a "regular lawyer" who helps a client organize its affairs with the potential of litigation in mind, counsel the client as the events giving rise to litigation unfold, actively participates in the development of evidence and disclosure of evidence to opposing parties, conducts motion practice, and then represents the client at trial, and often, on appeal as well, if necessary. This is obviously not the work of a single lawyer in the case of a larger enterprise, but there is often a single or primary law firm for the company, and a single lawyer at that firm who coordinates the work and serves as the primary point of contact with the client.
When litigation is as vertically integrated as it is in the United States, it is harder for litigation attorneys to jump easily from one client to another with conflicting interests. Lawyers are more invested in, and more closely identified with, their clients than in many countries, despite the fact that formally, representation of a client does not directly imply that one identifies with one's client.
The full service legal practice orientation is also one of the reasons that law does not make as much of a formal distinction between its "rainmakers" and service providers as many industries, despite the fact that it talks about the distinction a lot and gives the distinction considerable importance in compensation arrangements. Maintaining that relationship over time, which is quintessentially legal counsel work, is typically the job off the "rainmaker" who brought the client to the firm, even if much of the detail work is delegated to others. Clients have a right, protected by legal ethics, to terminate a lawyer at any time without cause, and must be wooed one day at a time, not once and for all.
Likewise, in tort law (mostly personal injury cases), the vast majority of lawyers are either "trial lawyers" who represent people who were harmed in accidents, or "defense lawyers" who represent people who are sued for causing harm. I've worked on both sides of tort law, although not at the same time.
Similarly, in cases involving consumer transactions, the vast majority of lawyers who handle the cases either represent consumers, or represent people suing consumers. Most bankruptcy lawyers, in the same vein, either help people file for bankruptcy, or represent creditors in bankruptcy.
The law doesn't require that lawyers take sides, but it is a useful approach from a business development perspective and also makes it much less likely for conflicts of interest to arise in the lawyers practice, something that is legally regulated.
Tax lawyers in private practice represent taxpayers, while tax lawyers in government service typically represent the government as it tries to collect taxes and administer the tax system (a few anomalies arise when state and local governments seek to enter into tax sensitive transactions with non-governmental parties, for example, when I represented a special district to advise it on its withholding taxation options).
There are exceptions. While some family law lawyers typically represent husbands, or typically represent wives, the norm is to represent both routinely. Likewise, there is not a strong plaintiff or defendant orientation in business to business commercial litigation. But, the exceptions make up a fairly modest share of lawyers who routinely engage in litigation.
Often business development considerations align specialties in particular types of law more broadly. A firm typically represents either big businesses or individuals, not both (with the exception of some non-conflicting provision of the legal needs of management). The division may be even more fine. It isn't unusual for a firm that is involved in construction law to represent primarily general contractors, primarily subcontractors, or primarily property owners. White collar criminal defense lawyers often practice in different firms than lawyers for individuals accused of "blue collar" criminal offense, but often practice in the same firms as lawyers who handle professional licensing matters.
As repeat players who clients have similar interests in every case, lawyers with this kind of specialization become not just advocates for clients in particular cases, but also advocates for interpretations of, and changes in, the law that favor their clients in their particular specialty. This is one reason that lawyers make up such a large share of lobbyists.
A particularly frank discussion of an area of law from this strategic point of view can be found at the Drug and Device Law Blog which is operated by two product liability lawyers who represent companies sued in product liability suits. Many of their clients will be sued only once or twice in the careers of the managers in place at that company. But, as litigators, they have an interest in taking the long view about what is or is not in the interests of their class of clients and developing a combined litigation, advocacy and legislative strategy that promotes those interests over, in their case, a quarter of a century. Their blog, which is well done despite its clear bias (most political and legal blogs have some sort of bias), is part of that overall advocacy effort.
Their post opens up noting:
The two of us have been practicing law now for a little over 25 years. Bexis graduated law school in 1982 and Herrmann a year later (see our bios - links at the top - for the gory details). At big firms it takes a few years – five at least – before we could start to have any real strategic impact on the cases we were working on. And it took a few years for us to get around to being product liability defense lawyers in the first place.
But now we’re here, there, whatever.
We’ve been doing product liability defense for the better part of a couple of decades, and we’ve got maybe a couple of decades more to go. So how are we – not just us, but this generation of the defense bar generally – doing at this midpoint of our careers?
Bottom line: Are our clients better off now than when we started?
Making a class of clients better off now than when you started isn't part of the job description for an attorney, thankfully, because the results are frequently beyond your control. But, a great many lawyers assume the responsibility anyway, and civic involvement to reform the legal system is specifically permitted by the rules of ethics for lawyers. Indeed, the ability of lawyers to participate in law reform is one of the important distinctions between "rule of law" states, and "rule by law" states, that take the mostly vestigial British tendency to speak of the "loyal opposition" and to view lawyers as "officers of the court" much more seriously than is the case in U.S. practice.
The ethical concern is professional independence. While on one hand, lawyers are zealous advocates for their clients (a word that has left the actual text of the ethical rules in many states), who are expected to take the side of their clients even when they know their clients are in some way in the wrong, lawyers are also supposed to exercise their independent professional judgment in cases. There is a potential (I don't accuse this blog's authors of having crossed the line despite their language that seems to imply that notion) to forget that the lawsuits are between your clients and their clients, not between you and the opposing counsel.
Indeed, one of the important lessons I learned from mentors while I have practiced law is the rhetorical usefulness of clearly distinguishing between you the lawyer, and the client you represent, in correspondence with opposing counsel and third parties. It keeps the discussion civil and makes it easier to engage in the passive-aggressive, tennis-like game called civil litigation.
The notion that the polity is full of special interests contending for political power is nothing new. The Founders were well aware of it when discussing the proposed constitution of 1789 in the Federalist Papers, discussions still widely read by political science students and law students today. But, nothing magical weds this kind of strategic advocacy to the legal profession. British barristers and advocates within the French Council of State are deliberately assigned cases in a way that puts them on both sides of litigation. A barrister may represent the prosecution one day and the defense another. The Council of State assigned lawyers working for it to defend the government from a complaint one day, and to represent a member of the public who has filed a complaint the next. My understanding, although it is very limited (based upon personal contacts with Japanese lawyers in law school many years ago) is that Japanese lawyers take a similar approach.
Part of the ability of advocates in those systems to take both sides is that somebody else is typically doing the grunt work. Stereotypically, a solicitor (non-trial lawyer) in the U.K. presents a case to a barrister, literally tied with a ribbon, containing all the preparation work that needs to be done in a case which the barrister will then present to a court. In criminal cases, non-lawyer members of law enforcement typically do all or almost all of the evidence gathering before the case is deemed ready to turn over to a prosecutor. Also, in criminal cases, it is common for a public defender, in a case that goes to trial, to test and question the sufficiency of the evidence presented by the prosecution, while offering relatively few defense witnesses or evidence to contradict prosecution claims.
In contrast, in U.S. law, it is typically for a client to have a "regular lawyer" who helps a client organize its affairs with the potential of litigation in mind, counsel the client as the events giving rise to litigation unfold, actively participates in the development of evidence and disclosure of evidence to opposing parties, conducts motion practice, and then represents the client at trial, and often, on appeal as well, if necessary. This is obviously not the work of a single lawyer in the case of a larger enterprise, but there is often a single or primary law firm for the company, and a single lawyer at that firm who coordinates the work and serves as the primary point of contact with the client.
When litigation is as vertically integrated as it is in the United States, it is harder for litigation attorneys to jump easily from one client to another with conflicting interests. Lawyers are more invested in, and more closely identified with, their clients than in many countries, despite the fact that formally, representation of a client does not directly imply that one identifies with one's client.
The full service legal practice orientation is also one of the reasons that law does not make as much of a formal distinction between its "rainmakers" and service providers as many industries, despite the fact that it talks about the distinction a lot and gives the distinction considerable importance in compensation arrangements. Maintaining that relationship over time, which is quintessentially legal counsel work, is typically the job off the "rainmaker" who brought the client to the firm, even if much of the detail work is delegated to others. Clients have a right, protected by legal ethics, to terminate a lawyer at any time without cause, and must be wooed one day at a time, not once and for all.
The Bright Side Of The Economy
The economy sucks. But, the economic news isn't unequivocally bad, or at least could be worse. How?
The Stock Market Is Recovering
The stock market is up about 34% from its low five months ago, in what has been a more or less steady climb. Until then, the stock market was declining in value as fast as it had in the Great Depression, now it looking only a little worse than the bear market created by the 1973 oil crisis and the 2000-2002 tech bust. The bottom could fall out again, but each passing month of stock market recovery makes this seem less likely.
A strengthening stock market also greatly reduces the risk that pensions will remain underfunded and potentially unable to meet their obligations.
The Recession Is Nearing Its End
Bank of America Merrill Lynch actually thinks that the recession is over. The consensus isn't that perky, but still expects that the recession will end in late 2009, even if the subsequent recovery may be tepid and could be relatively short lived.
While Serious, This Recession Is Milder Than The Great Depression
Economists use the term "recession" narrowly to describe a decline in gross domestic product. This is on track to fall about 4% in the current recession. While this would make this the deepest recession since the Great Depression, GDP fell 10% in the Great Depression, more than twice as much as it is likely to fall in the current recession.
President Obama is predicting that unemployment will continue to rise for a few months reaching levels above ten percent, before it improves. Other economists predict a peak of 11% sometime in 2010, before declining sometime in the same year. But, there is a consensus that we are not heading towardsd the unemployment levels seen in the Great Depression. Then, unemployment peaked at 25% in 1932-1933; it exceeded 10% in 1930 and stayed above 10% until 1941, when the United States joined World War II. The U.S. is likely to have unemployment above 10% for just three months to fifteen months, depending upon whose talking.
The percentage of jobs lost for the entire recession, likewise, has been serious, the worst of any post-World War II downturn with the exception of 1948, currently 4.7%, and this recession may yet produce a greater precentage of lost jobs than the 1948 recession when 5.2% of jobs were lost. Job losses aren't over yet. But, this is still not nearly so bad as the crushing loss of jobs seen in the Great Depression.
In the current bear market, stocks fell 56.8% from the peak, compared to 89.2% from the peak in the Great Depression.
Inflation Is Under Control
Core inflation for the past year (as measured by the consumer price index) has been 1.7%, which is an economist's dream. By that measure, we are not experiencing deflation, which can cripple an economy, but are not experiencing high inflation, which can also be a problem. Total inflation is negative 1.2% for the year (i.e. modest deflation), but the difference is due almost entirely to the decline in fuel prices from a year ago, which were exceptionally high then. Fuel prices increases account of 80% of the inflation observed in June as they have started to rise.
The worst economic collapses have been accompanied by either deflation or hyperinflation.
Retail Sales Are Stabilizing
Retail sales appear to have stabilized for a couple of months. They were previously plummeting.
In a related trend, consumer sentiment, while not positive, remains well above the low point it reached at the peak of the crisis.
Foreign Trade Is Stabilizing
Both exports and imports are starting to stablize after crashing dramatically from 2008 peaks. The trade deficit meanwhile, is at the lowest level since 2000, and the trade deficit excluding petroleum is at the lowest level since 1998. Net petroleum imports currently account for almost exactly half of the trade deficit, after a decade in which net petroleum imports were a minority of the trade deficit.
In May, 2009, the U.S. had "exports of $123.3 billion and imports of $149.3 billion resulted in a goods and services deficit of $26.0 billion." Of this, $13 billion consisted of net petroleum imports. The U.S. imports about 21% more goods and services than it exports. At its peak, three years ago, the trade deficit was about $40 billion a month larger than it is now.
Major Companies Are Emerging From Bankruptcy
Operational divisions GM and Chrysler have emerged from bankruptcy, locally, Frontier airlines is about to do the same.
The FDIC Worked
The FDIC insured 8,305 commercial banks and savings institutions with a total of $13,847 billion in assets at the end of 2008.
In all of 2008, one of the worst years in the recent history of banking, 98 new FDIC banks were established, while 25 failed and 5 were involved in "assistance transactions." "This is the largest number of failed and assisted institutions in a year since 1993, when there were 50. At year-end, 252 insured institutions with combined assets of $159 billion were on the FDIC’s “Problem List.” These totals are up from . . . 76 institutions with $22 billion in assets at the end of 2007." The average troubled bank at the end of 2008 had about 630 million in assets (1/25,000th of the total assets of insured institutions). The average FDIC insured institution has about $1.5 billion in assets.
Put another way, 99.6% of FDIC commercial banks and savings institutions didn't fail or require FDIC assistance in 2008, and "problem banks" (a much larger category than failed banks) made up just 3% of all banks with less than 1.2% of the assets of FDIC insured banks.
So far in 2009, 53 banks have failed and required FDIC intervention, and those institutions had total assets of roughly $35 billion, more than half of which involved the three largest failed banks (about 0.3% of the assets of all FDIC insured banks).
Historically, there were more than 53 bank failures in every year from 1936-1939 (the Great Depression) and from 1984-1992 (the S&L Crisis).
Most of those banks have been small, and only five states have seen banks with combined assets of more than $2 billion fail, in order of billions of dollars of assets of failed banks: Florida, Georgia, California, Illinois and Colorado. Six of the banks closed in Illinois were owned by the same family. Just three of the banks, one in Florida, one in Georgia and one in Colorado has $2 billion or more of assets.
In contrast, the vast majority of independent mortgage finance companies making subprime loans, many doing hundreds of millions or billions of dollars of business each year, are no longer in business, and all of the free standing investment banks in the U.S. have gone out of business or been acquired by other types of institutions as more highly regulated divisions.
Risk Premiums For Big Business Loans Have Returned To Normal
The genuine financial panic of late 2008, evidenced by a phenomenal surge in interest rates for all but the safest investments, is essentially over.
At its worst, the interest rate spread between high grade and low grade 30 day non-financial commercial paper (i.e. short term loans) was 5.00 percentage points. It is now 0.59 percentage points, which while considerably higher than it was before the financial crisis, is still almost back to normal. Thus, fear of default on short term loans to less creditworthy large non-financial businesses has declined by a factor of ten.
The TED spread, which is the difference between the interbank rate for three month loans and the three month Treasury has dropped to 0.339 percentage points from a peak of 4.63 percentage points. This is within the normal range of under 0.5 percentage points and represents the fear banks have that fellow banks will default.
The interest rate spread between Aaa and Baa rated thirty year bonds and thirty year Treasury bonds has also dropped back into the high end of the normal range, about 1 percentage poinits of the Aaa rated bonds and 3 percentage points for the Baa rated bonds. At the peak of the financial crisis in 2008, the spread was almost 3 percentage points for Aaa rated bonds and more than 6 percentage points for Baa rated bonds. These speads are quite direct market based risk premiums that reflect the market assessment of the likelihood that these bonds will default.
The financial markets are no longer assigning outrageous risk premiums to relatively safe loans. A few months of utter panic in the financial markets has been replaced by business as usual with a slightly elevate concern that less credit worth big businesses may default on their obligations.
The return to normalcy has allowed the Federal Reserve to reduce the short term loans it made to banks, and to non-financial companies that couldn't find commercial paper lenders.
Housing Is More Affordable
Housing affordability, which is a product of median housing prices, mortgage interest rates and median family incomes, was greater in April 2009 than in any time since records were first kept in 1971. Housing affordability remains very high, although not quite at the peak reached in April. The median family has more than 170% of the income needed to afford a median home nationally, and more than double the income needed to afford a median home in the Midwest.
A year ago, the median family in the West could not afford a mortgage payment on a medium priced home. Now, the median family in the West has 151% of the income needed to do so.
The flip sides, of course, are that many families are too worried about unemployment to buy a home, and that mortgages are harder to obtain now that underwriting standards for mortgage lending have tightened. Loans with low down payments and loans for people who have irregular incomes or subprime credit are now much harder to secure. Still, with housing prices down, it takes less money down to make a reasonably large down payment.
Those not interesting in buying homes are finding that it is easier to find an affordable apartment as vacancy rates rise, and that rents are falling.
Office Space Is More Affordable
Households looking for a place to live aren't the only beneficiaries of the collapse of the housing bubble. Office space is also easier to find, and rent for office space is declining, often dramatically. This takes economic pressure off a wide variety of businesses.
Savings Rates Are Up; Consumer Debt Is Down
Personal savings as a percentage of disposable income are at 6.9% as of May, 2009, the highest it has been since December 1992 (with the one month exception of December 1993 when it reached 7.6%) and about the same as the fifty year average. See also here.
Consumer debt levels meanwhile have declined about $100 billion nationally from a peak of $13.9 trillion in 2008. This is still almost double the amount in 2000, however, so it isn't wonderful. "Household debt peaked at 133% of disposable income in 2007 vs. 65% in the mid-1980s."
While these are baby steps, the was a growing consensus before the financial crisis that people were saving too little and borrowing too much for consumer spending. This wasn't necessarily irrational on the part of the consumers. It was in part due to a perception of real estate and stock market wealth that, in the end, disappeared before it was realized. But, a return to more normal savings levels and a decline in consumer debt levels are positive trends.
The Stock Market Is Recovering
The stock market is up about 34% from its low five months ago, in what has been a more or less steady climb. Until then, the stock market was declining in value as fast as it had in the Great Depression, now it looking only a little worse than the bear market created by the 1973 oil crisis and the 2000-2002 tech bust. The bottom could fall out again, but each passing month of stock market recovery makes this seem less likely.
A strengthening stock market also greatly reduces the risk that pensions will remain underfunded and potentially unable to meet their obligations.
The Recession Is Nearing Its End
Bank of America Merrill Lynch actually thinks that the recession is over. The consensus isn't that perky, but still expects that the recession will end in late 2009, even if the subsequent recovery may be tepid and could be relatively short lived.
While Serious, This Recession Is Milder Than The Great Depression
Economists use the term "recession" narrowly to describe a decline in gross domestic product. This is on track to fall about 4% in the current recession. While this would make this the deepest recession since the Great Depression, GDP fell 10% in the Great Depression, more than twice as much as it is likely to fall in the current recession.
President Obama is predicting that unemployment will continue to rise for a few months reaching levels above ten percent, before it improves. Other economists predict a peak of 11% sometime in 2010, before declining sometime in the same year. But, there is a consensus that we are not heading towardsd the unemployment levels seen in the Great Depression. Then, unemployment peaked at 25% in 1932-1933; it exceeded 10% in 1930 and stayed above 10% until 1941, when the United States joined World War II. The U.S. is likely to have unemployment above 10% for just three months to fifteen months, depending upon whose talking.
The percentage of jobs lost for the entire recession, likewise, has been serious, the worst of any post-World War II downturn with the exception of 1948, currently 4.7%, and this recession may yet produce a greater precentage of lost jobs than the 1948 recession when 5.2% of jobs were lost. Job losses aren't over yet. But, this is still not nearly so bad as the crushing loss of jobs seen in the Great Depression.
In the current bear market, stocks fell 56.8% from the peak, compared to 89.2% from the peak in the Great Depression.
Inflation Is Under Control
Core inflation for the past year (as measured by the consumer price index) has been 1.7%, which is an economist's dream. By that measure, we are not experiencing deflation, which can cripple an economy, but are not experiencing high inflation, which can also be a problem. Total inflation is negative 1.2% for the year (i.e. modest deflation), but the difference is due almost entirely to the decline in fuel prices from a year ago, which were exceptionally high then. Fuel prices increases account of 80% of the inflation observed in June as they have started to rise.
The worst economic collapses have been accompanied by either deflation or hyperinflation.
Retail Sales Are Stabilizing
Retail sales appear to have stabilized for a couple of months. They were previously plummeting.
In a related trend, consumer sentiment, while not positive, remains well above the low point it reached at the peak of the crisis.
Foreign Trade Is Stabilizing
Both exports and imports are starting to stablize after crashing dramatically from 2008 peaks. The trade deficit meanwhile, is at the lowest level since 2000, and the trade deficit excluding petroleum is at the lowest level since 1998. Net petroleum imports currently account for almost exactly half of the trade deficit, after a decade in which net petroleum imports were a minority of the trade deficit.
In May, 2009, the U.S. had "exports of $123.3 billion and imports of $149.3 billion resulted in a goods and services deficit of $26.0 billion." Of this, $13 billion consisted of net petroleum imports. The U.S. imports about 21% more goods and services than it exports. At its peak, three years ago, the trade deficit was about $40 billion a month larger than it is now.
Major Companies Are Emerging From Bankruptcy
Operational divisions GM and Chrysler have emerged from bankruptcy, locally, Frontier airlines is about to do the same.
The FDIC Worked
The FDIC insured 8,305 commercial banks and savings institutions with a total of $13,847 billion in assets at the end of 2008.
In all of 2008, one of the worst years in the recent history of banking, 98 new FDIC banks were established, while 25 failed and 5 were involved in "assistance transactions." "This is the largest number of failed and assisted institutions in a year since 1993, when there were 50. At year-end, 252 insured institutions with combined assets of $159 billion were on the FDIC’s “Problem List.” These totals are up from . . . 76 institutions with $22 billion in assets at the end of 2007." The average troubled bank at the end of 2008 had about 630 million in assets (1/25,000th of the total assets of insured institutions). The average FDIC insured institution has about $1.5 billion in assets.
Put another way, 99.6% of FDIC commercial banks and savings institutions didn't fail or require FDIC assistance in 2008, and "problem banks" (a much larger category than failed banks) made up just 3% of all banks with less than 1.2% of the assets of FDIC insured banks.
So far in 2009, 53 banks have failed and required FDIC intervention, and those institutions had total assets of roughly $35 billion, more than half of which involved the three largest failed banks (about 0.3% of the assets of all FDIC insured banks).
Historically, there were more than 53 bank failures in every year from 1936-1939 (the Great Depression) and from 1984-1992 (the S&L Crisis).
Most of those banks have been small, and only five states have seen banks with combined assets of more than $2 billion fail, in order of billions of dollars of assets of failed banks: Florida, Georgia, California, Illinois and Colorado. Six of the banks closed in Illinois were owned by the same family. Just three of the banks, one in Florida, one in Georgia and one in Colorado has $2 billion or more of assets.
In contrast, the vast majority of independent mortgage finance companies making subprime loans, many doing hundreds of millions or billions of dollars of business each year, are no longer in business, and all of the free standing investment banks in the U.S. have gone out of business or been acquired by other types of institutions as more highly regulated divisions.
Risk Premiums For Big Business Loans Have Returned To Normal
The genuine financial panic of late 2008, evidenced by a phenomenal surge in interest rates for all but the safest investments, is essentially over.
At its worst, the interest rate spread between high grade and low grade 30 day non-financial commercial paper (i.e. short term loans) was 5.00 percentage points. It is now 0.59 percentage points, which while considerably higher than it was before the financial crisis, is still almost back to normal. Thus, fear of default on short term loans to less creditworthy large non-financial businesses has declined by a factor of ten.
The TED spread, which is the difference between the interbank rate for three month loans and the three month Treasury has dropped to 0.339 percentage points from a peak of 4.63 percentage points. This is within the normal range of under 0.5 percentage points and represents the fear banks have that fellow banks will default.
The interest rate spread between Aaa and Baa rated thirty year bonds and thirty year Treasury bonds has also dropped back into the high end of the normal range, about 1 percentage poinits of the Aaa rated bonds and 3 percentage points for the Baa rated bonds. At the peak of the financial crisis in 2008, the spread was almost 3 percentage points for Aaa rated bonds and more than 6 percentage points for Baa rated bonds. These speads are quite direct market based risk premiums that reflect the market assessment of the likelihood that these bonds will default.
The financial markets are no longer assigning outrageous risk premiums to relatively safe loans. A few months of utter panic in the financial markets has been replaced by business as usual with a slightly elevate concern that less credit worth big businesses may default on their obligations.
The return to normalcy has allowed the Federal Reserve to reduce the short term loans it made to banks, and to non-financial companies that couldn't find commercial paper lenders.
Housing Is More Affordable
Housing affordability, which is a product of median housing prices, mortgage interest rates and median family incomes, was greater in April 2009 than in any time since records were first kept in 1971. Housing affordability remains very high, although not quite at the peak reached in April. The median family has more than 170% of the income needed to afford a median home nationally, and more than double the income needed to afford a median home in the Midwest.
A year ago, the median family in the West could not afford a mortgage payment on a medium priced home. Now, the median family in the West has 151% of the income needed to do so.
The flip sides, of course, are that many families are too worried about unemployment to buy a home, and that mortgages are harder to obtain now that underwriting standards for mortgage lending have tightened. Loans with low down payments and loans for people who have irregular incomes or subprime credit are now much harder to secure. Still, with housing prices down, it takes less money down to make a reasonably large down payment.
Those not interesting in buying homes are finding that it is easier to find an affordable apartment as vacancy rates rise, and that rents are falling.
Office Space Is More Affordable
Households looking for a place to live aren't the only beneficiaries of the collapse of the housing bubble. Office space is also easier to find, and rent for office space is declining, often dramatically. This takes economic pressure off a wide variety of businesses.
Savings Rates Are Up; Consumer Debt Is Down
Personal savings as a percentage of disposable income are at 6.9% as of May, 2009, the highest it has been since December 1992 (with the one month exception of December 1993 when it reached 7.6%) and about the same as the fifty year average. See also here.
Consumer debt levels meanwhile have declined about $100 billion nationally from a peak of $13.9 trillion in 2008. This is still almost double the amount in 2000, however, so it isn't wonderful. "Household debt peaked at 133% of disposable income in 2007 vs. 65% in the mid-1980s."
While these are baby steps, the was a growing consensus before the financial crisis that people were saving too little and borrowing too much for consumer spending. This wasn't necessarily irrational on the part of the consumers. It was in part due to a perception of real estate and stock market wealth that, in the end, disappeared before it was realized. But, a return to more normal savings levels and a decline in consumer debt levels are positive trends.
Russia Scraps Most Tanks
Russia is down to 6,000 tanks, 60% in storage, from 53,000 at the height of the Cold War in 1991.
NATO military requirements were driven to a great extent by the scale of the Russian military, so this may allow the U.S. and Europe to trade guns for butter.
The current tank fleet has about 260 T-90s and 1,200 T-80s (a third in storage). These are roughly equal to early model U.S. M-1s. Most of the current Russian tanks are late model T-72s, some of them upgraded with excellent electronics (fire controls systems and thermal sights).
NATO military requirements were driven to a great extent by the scale of the Russian military, so this may allow the U.S. and Europe to trade guns for butter.
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The Green Building In Denver blog offers tips and news on solar energy technology from a Denver expert in the field.
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