When Will the Recession End? Don Nichols Professor Emeritus of Economics and Public Affairs, UW-Madison: The La Follette School of Public Affairs, and WAGE 5/5/09

Wisconsin Unemployment Rate Matches the US in March at 8.5% (seasonally adjusted) The March Wisconsin seasonally adjusted unemployment rate was 8.5%, the same as the U.S.. February was slightly revised up from 7.7% to 7.8%. The WI unemployment rate growth in the last three months closed a gap of 1.3 percentage points with the U.S. as shown in the Chart (left). The non-seasonally adjusted unemployment rate in March was 9.4% in Wisconsin, higher than the national rate of 9.0%. The unadjusted March rate was 4.4 percentage points higher than the rate of 5.0% for Wisconsin in March of In the last 50 years, Wisconsin unemployment rate only reached the current level of unemployment during the early eighties recession. See Chart (right)

Three Bubbles Have Popped 1Housing was Over-Built in Housing got Over-Priced in the same period 3Housing was irresponsibly financed as part of a Risk-Pricing bubble.

The End of the Housing Bubble Housing Got Over-Built and Over-Priced. The Recent Decline in Home Construction was severe, but did not by itself cause a Recession. However, the Ongoing Decline in Home Prices will Continue and its Effects Are Severe Enough to Cause a Recession.

The Decline in Home Prices The Decline in Home Prices is not over, but there are signs of stabilization. Home prices are local. Prices in many localities never declined. Prices in a few others are starting to stabilize. Declines remain severe in Florida, the Central Valley (CA) and some cities, i.e. Las Vegas.

House Price Declines have Also Popped a Risk-Pricing Bubble The Popping of the Risk-Pricing Bubble has Led to a Tightening for Credit of All Kinds The Tighter Credit and the Decline in Home Values have caused a Decline in Consumer Purchases.

The Credit Crunch Defaulting Mortgages and the Prospect of Further Defaults Have Led to huge Losses by the Big Banks. These Losses have Reduced Bank Capital to Levels that Preclude them from lending. The Seizing up of credit is a major cause of the Recession we are in.

Household Net Worth Down 18% The large drop in net worth is mainly due to a larger drop in assets than liabilities This drop suggests a major drag on spending through the wealth effect for some time to come. Adding to that will be the impulse to increase savings. It’s important to point out that the aggregates are like means, and in no way describe the median household. Holdings of financial assets, especially stocks, are heavily concentrated at the top end. In fact, the aggregate numbers correspond with a household roughly at the 95th percentile of the wealth distribution. Only about half of all households own any stock at all, and of those that do, average holdings are quite small. And only about 60% of households own their houses.

No Help Expected From the Rest of the Private Economy Business Investment is Declining Exports have Weakened. Weakness Abroad will Keep Exports from Growing

Public Spending to the Rescue State and Local Governments can’t help because They must balance their Budgets. The Federal Government must fill the gap.

Economic Stimulus Package Total of $787 billion in spending and tax cuts $308 billion in appropriated spending $269 billion in direct spending (refundable portion of tax credits, unemployment benefits, Medicaid reimbursement to states, etc.) $211 billion in tax cuts Source: Author 51

Financial Support (The “BAILOUTS”) Over $1 Trillion in Purchases of Financial Assets Commitments for Several Trillion More Old troubled assets are included Financial Support for New Private Spending is About to be Emphasized

The Anatomy of a Recovery 1House Prices Must Stop falling 2Consumers Can Then Increase Spending 3Credit Default Swaps Can Then be Priced And Normal Banking Can Then Resume 4Stock Prices Can Begin to Recover