by Calculated Risk on 7/12/2008 08:00:00 AM

Note: I'm hiking in the Sierras, but I thought I'd leave some thoughts on employment. I'll be back Saturday night or Sunday morning.

I'm pessimistic on employment - I think problems in the labor market will linger - but I do not think unemployment will rise to 8% (a severe recession) during this economic downturn.

Note: just because unemployment doesn't rise to 8% doesn't mean many more people aren't hurting. Many people will probably be underemployed, and real wages (purchasing power) will decline for many employed Americans.

There are several reasons for my optimism (if you can call it that!). One of the reasons is the makeup of U.S. employment.

Click on graph for larger image in new window.

The first graph shows the year-over-year change in employment for manufacturing, construction, and everything else. Manufacturing and construction employment are more susceptible to large swings year-over-year, as these areas typically experience booms and busts.

It is reasonable to expect that construction employment will continue to decline significantly - perhaps another 1 million construction workers will lose their jobs as Commercial Real Estate (CRE) construction declines later this year and into 2009.

However manufacturing employment will probably only decline slowly for two reasons: 1) the weak dollar is helping with exports, and 2) manufacturing employment never recovered from the bust of a few years ago. So the decline in manufacturing employment will probably not be severe.

And these two volatile areas of employment make up much less of the total U.S. employment than during earlier recessions.

The second graph shows the percent of total U.S. non-farm workers employed in manufacturing and construction. Manufacturing employment has been declining steadily - and will probably continue to decline as a percent of total employment. The same percentage swing in manufacturing employment now will have a much smaller impact on total employment than during previous recessions.

Construction employment will probably decline sharply, but this only accounts for just over 5% of total employment.

The next most volatile area is retail sales employment, and the current downturn will probably see a significant decline in retail employment. And many service employees will be underemployed - and that is painful too.

But over all, total employment probably won't decline enough to cause unemployment to rise to 8%.

by Calculated Risk on 7/11/2008 10:00:00 PM

Hiking in the Sierras ...

by Tanta on 7/11/2008 08:16:00 PM

Full press release here:

IndyMac Bank, F.S.B., Pasadena, CA, was closed today by the Office of Thrift Supervision. The Federal Deposit Insurance Corporation (FDIC) was named conservator. The FDIC will transfer insured deposits and substantially all the assets of IndyMac Bank, F.S.B., Pasadena, CA, to IndyMac Federal Bank, FSB. Brokered deposits will be held by the FDIC and those insured deposits will be paid off when the insurance determination is complete. IndyMac Bank, FSB had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008. As conservator, the FDIC will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

Insured depositors and borrowers will automatically become customers of IndyMac Federal, FSB and will continue to have uninterrupted customer service and access to their funds by ATM, debit cards and writing checks in the same manner as before. Depositors of IndyMac Federal Bank, FSB will have no access to on-line and phone banking services this weekend. These services will be operational again on Monday. Loan customers should continue making loan payments as usual.

by Calculated Risk on 7/11/2008 04:00:00 PM

It's Friday. Time to check with the FDIC.

Here is the FDIC Failed Bank List.

Please send any stories to Tanta.

by Tanta on 7/11/2008 02:00:00 PM

I hate prepayment penalties and always have. In theory, they work just like an early withdrawal penalty on a certificate of deposit: you are paid a higher rate of interest in exchange for giving up liquidity for a stated period of time. In the case of mortgage loans, you are (presumably) offered a lower interest rate in exchange for giving up liquidity for a stated period of time.

In reality, few borrowers are, in my experience, capable of calculating the relative savings of the penalty loan accurately, or fully assessing the risk they take by accepting the penalty. This is without even getting into issues of predation or steering or failure to disclose adequately.

Case in point, from the Sacramento Bee:

When Carol Wallace sold her Sun City Roseville home two years ago, she got an expensive reminder from her lender.

She owed $5,964. Why? She had paid off her adjustable-rate mortgage early.

The lender offered to waive it, Wallace said, if she'd buy another house with one of their loans. But here was the point: She had cancer and didn't intend to buy again. She had to pay up.

Two years later, still ill, Wallace still fumes.

"It's written in my paperwork when I die to remind my kids," she said. "It says if there's a class action lawsuit, to remember me, to get my $6,000." . . .

Wallace said she knew she had a prepayment penalty. "But I didn't think it would be a problem because I didn't think I would have to move," she said.

Very few people, I suspect, make any decision about buying or financing a home, including but not limited to the prepayment penalty option, based on their fear that they might be diagnosed with a disabling disease in the next three years. We tend to think that people who obsess about very low-probability, very high-severity events are, well, obsessives.

Wallace was, unfortunately, the one it happened to. I suspect she thought--perhaps we all think--there should be some sort of "hardship exclusion" in her case. But there isn't one, and people sign these things all day without worrying that there isn't one. Perhaps they think to themselves, as Wallace did, that they would only move if they were forced to. By a hardship. Which isn't excluded.

And Wallace thinks she should be part of a "class action." I am trying to imagine how large a "class" of borrowers who suffered a very low-probability event would be.

I have myself come to the conclusion that prepayment penalties should be banned entirely. Not because Ms. Wallace's logic makes any sense to me, but because it doesn't make any sense to me but I suspect it does to most people with a prepayment penalty. And that is evidence enough that consumers cannot understand them.

by Tanta on 7/11/2008 11:11:00 AM

This clears things up:

Secretary Henry M. Paulson Jr. made the following comment today on news stories about "contingency planning" at Treasury:

"Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

"We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and with the companies. OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

by Calculated Risk on 7/11/2008 10:00:00 AM

I'll be out of communication range today. Please send all stories to Tanta.

Thanks, Best to all, CR

by Calculated Risk on 7/11/2008 08:45:00 AM

Oil nearly $146.

Import Prices up 2.6%

From the WSJ: U.S. May Trade Gap Unexpectedly Shrinks

I'll be out today. Please send stories to Tanta. Best to all.

by Tanta on 7/11/2008 08:44:00 AM

The whole essay is worth reading, if only as a refreshing change from the overheated rhetoric of the last few days. Note that Pearlstein will be having an online chat today at 11:00 Eastern to discuss Fannie and Freddie.

A financial crisis like this one calls for policymakers and regulators who can keep a cool head and remain flexible and practical rather than insisting on strict adherence to economic orthodoxies. Not every instance of regulatory forbearance need be viewed as a step down a slippery slope toward Japanlike stagnation. Nor is it particularly constructive to characterize every instance of government involvement in the private sector -- whether it be refinancing a troubled home mortgage, opening the Fed lending window to cash-strapped investment banks or orchestrating a private-sector rescue of a failing hedge fund -- as a massive government bailout.

As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.

A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.

If this blog's comment threads are any kind of representation of a slice of reality--I am often agnostic on that question, but still--there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of "pragmatism," but I for one would rather try debating with a pragmatist than a purist or a moralist.

by Calculated Risk on 7/11/2008 12:54:00 AM

Two articles ...

From the WSJ: Mortgage Giants Face Pressure Over Capital

Even as federal officials sought to reassure investors about the financial health of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold.
...
One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

From the NY Times: U.S. Weighs Takeover of Two Mortgage Giants

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.
...
Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Guaranteeing the debt of Fannie and Freddie would not double the public debt because they have somewhat offsetting assets. This would lower the borrowing costs for Fannie and Freddie and is probably the most effective solution (if one is needed). Its not clear to me how a conservatorship helps. Pretty scary discussion ...