The New Economy
The Monitor's Money editor, Laurent Belsie, blogs about the economic changes now under way in the U.S. and around the globe.
Walter Lichtenberg sits on a park bench selling T-shirts and buttons at the Occupy Portland camp in downtown Portland, Ore., on Tuesday. The Occupy Wall Street movement has targeted the 1 percent richest Americans, but the solution will involve sacrifices from a far greater percentage.` (Don Ryan/AP)
Sorry, Occupy Wall Street: There's no 1 percent solution
What started as the "Occupy Wall Street" demonstration has turned into an "Occupy fill-in-the-blank" movement – with the blank being anything we blame for our own economic troubles.
The main target seems to be the vaguely defined "1 percent" – that tiny minority of the wealthiest individuals and biggest corporations, the only ones those with economic and political power seem to serve. So the Occupy movement targets the big banks – the culprits that got us into the financial crisis. Or the millionaires, because income inequality is at an all-time high. Or Congress, the lobbyists, and others in power who have failed to do good. All of them – it's their fault.
It's not that the outrage isn't justified. Policymakers catering to the oil and gas industry, to Wall Street, and to the rich and powerful deserve part of the blame. So do banks, ratings agencies, regulators, and others who set the stage for the financial crisis that triggered the recent ballooning of America's debt. And as the wealthy have gotten wealthier, policymakers have chosen to only reduce their tax burdens.
Meanwhile, policymakers seem to care much less about the poor. The share of Americans living in poverty has steadily increased over the past decade to more than 15 percent – the highest percentage since 1993 and approaching where it was when LBJ launched the nation's "war on poverty." How is that fair?
But we also have to recognize that our economic problems began long before the financial crisis and that the boundary between the wealthy 1 percent and the 99 percent that the protesters claim to represent isn't so crisp. Those big subsidies to the oil and banking industries also benefit the rest of Americans through lower gasoline prices and cheaper credit. And the majority of American voters went along with politicians who proposed very expensive deficit-financed tax cuts and deficit-financed prescription drug coverage, even though our young people – the very core of the Occupy movement – are the ones who will be stuck with the bill.
We all had a role in this, not just that 1 percent.
If there is a "change we believe in," we can't just complain about the status quo. We have to spell out the better life we want and the trade-offs we're willing to make to get there.
These are difficult trade-offs we each need to contemplate. Doing better for the other 99 percent of us requires real money, and that money has to come from somewhere. Are we willing to steer more federal funds to the most effective forms of spending in terms of both short-term stimulus and longer-term economic growth – policies that would also benefit Americans more broadly – and away from the less effective, less beneficial forms?
Would we be willing to receive less generous benefits from Social Security or Medicare or have our tax deductions reduced? Would we be willing to let go of our portion of the Bush tax cuts rather than insist that only millionaires and billionaires need to sacrifice theirs? And most important, if we want our "occupying" to catalyze real change, would we be willing to speak up loud and clear about our willingness to make these specific trade-offs to our policymakers?
In the end, it's easy to occupy Wall Street and protest what's wrong. Far harder is to occupy ourselves with the tough choices that could move America away from its crisis path and toward surer footing as the world's leading economy.
That's the protest message we need to hear.
– Diane Lim Rogers is chief economist of the Concord Coalition, a nonpartisan group advocating fiscal responsibility.
US soldiers assigned to Troop B, 5th Squadron, 73rd Cavalry Regiment, 3rd Brigade Combat Team, 82nd Airborne Division, run toward a UH-60 Blackhawk helicopter during an air assault training event in Baghdad in this 2009 photo. If the costs of the Iraq war balloon to $4 trillion, as some estimate, it would top even the costs of World War II. (Staff Sgt. James Selesnick/U.S. Army/Reuters/File)
Iraq war will cost more than World War II
Anyone curious about the cost of America’s wars in Iraq and Afghanistan can look it up on costofwar.com, up to the latest fraction of a second. Last weekend, the Iraq war had cost more than $800 billion since 2001; the Afghan war, $467 billion plus.
For the 8-1/2-year conflict in Iraq alone, that works out to nearly $3,000 a second.
So President Obama’s announcement that all US troops will be out of Iraq by year end should mean some drop in ongoing military spending. But the budget relief probably won’t be as much as you might expect.
Tragically, beside the financial cost, there is the human toll. The war in Iraq has resulted in some 4,480 US troops killed and more than 32,000 wounded. (The Iraqis have suffered far more fatalities, about 654,965, according to the British medical journal The Lancet.) Thus, ongoing medical and disability claims and treatment of US veterans will boost the costs of the Iraq war even more.
Throw in the replacement of vehicles, weapons, equipment, etc., and the eventual tab for the United States could reach $4 trillion to $6 trillion, according to University of Columbia economist Joseph Stiglitz and Harvard University budget expert Linda Bilmes. Those are big numbers.
They would be on par with the $4.6 trillion the US spent on the recent financial bailouts, according to Barry Ritholtz, CEO of Wall Street research firm Fusion IQ and author of the popular blog The Big Picture. (Another estimate puts the bailout cost at $8.7 trillion.) The sum spent on the Iraq war could pay for a good chunk of Obamacare, professor Bilnes estimates. It’s more than the $3.6 trillion the US spent to fight World War II, even after adjusting for inflation, Mr. Ritholtz estimates.
Modern warfare is just plain expensive. The military has found ways to reduce the human toll of war (compared with Iraq, fatalities in World War II were far higher: 17 million combatants from some 70 nations, 19 million Soviet civilians, 10 million Chinese, 6 million European Jews, and so on). But political leaders always seem to underestimate the financial costs.
When President George W. Bush launched the war, charging incorrectly that Iraq had weapons of mass destruction, the Pentagon estimated its cost at $50 billion to $60 billion. Economic adviser Lawrence Lindsey got in hot water at the White House when he guessed in public the war could cost as much as $200 billion.
One oddity of the Iraq and Afghanistan wars is that even as military preparations were under way, Congress cut taxes in 2001 and again in 2003. These Bush tax cuts meant in effect that the wars were financed by adding to federal debt, rather than paid for from revenues. US outstanding debt zoomed from $5.7 trillion when Mr. Bush took office to $10.6 trillion when he left. And all but $700 billion of that debt was accumulated before the Wall Street bailouts began under the Troubled Asset Relief Program in October 2008.
Another interesting note: It is estimated Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and damage the Pentagon.
Mr. Obama aims to end the US combat mission in Afghanistan by the end of 2014, more than three years away and after many more billions of dollars will have been spent.
After the end of the Cold War, real US defense spending dropped by 40 percent during the 1990s. The savings were in the hundreds of billions of dollars.
It’s to be hoped that similar savings could be made with the end of the wars in Iraq and Afghanistan. Obama and Congress could then presumably afford to spend more federal money at home rather than abroad – and create more jobs for Americans.
– David R. Francis is a former business editor of The Christian Science Monitor.
Barney Frank (left), then chairman of the House Financial Services Committee, arrives for a 2009 committee hearing with Federal Reserve Chairman Ben Bernanke (center) and U.S. Treasury Secretary Timothy Geithner. Mr. Frank, now the committee's ranking member, is suggesting stripping the regional Federal Reserve Bank presidents of their role in monetary policy. (Kevin Lamarque/Reuters/File)
Fed bashing is back in vogue
Some believe the Federal Reserve has done too much – that two rounds of quantitative easing, the new "Operation Twist," and myriad interventions during the depths of the financial crisis have set the stage for runaway inflation. As evidence, they point to the enormous expansion of bank reserves and the skyrocketing price of gold (at least, until recently).
Others believe Chairman Ben Bernanke and his colleagues have done too little and that monetary policy remains too tight. They point to the 15 million Americans who are looking for work and the millions more who have dropped out of the labor force. Even more troubling, almost half of the unemployed have been without work for six months or more, something Mr. Bernanke rightly labeled a "national crisis."
The Fed's mandate is to strike a balance between these concerns – to pursue full employment and stable prices. That's a difficult task, especially when the US is struggling to recover from the worst financial shock since the Great Depression.
So the Fed has been receiving a great deal of advice, mostly unsolicited, about what to do. Much of that advice is healthy and constructive. Financial market participants, monetary policy experts, and even economic columnists all bring important insights to the debate. For what it's worth, I think the Fed should continue its efforts to stimulate our moribund economy; unemployment is clearly a bigger threat than inflation.
But I worry when politicians get involved. Lawmakers need to ensure that Fed actions promote the public welfare. It was, after all, created by Congress. That doesn't mean that politicians should meddle in its policymaking.
History shows independent central banks do a much better job of controlling inflation than those that give in to political pressures. When the Fed caved into LBJ's desire for loose money in the 1960s, it set the stage for a decade of high inflation.
Low inflation is not the only benefit of independence. Once they've built a reputation for keeping inflation in check, central banks have greater ability to step in to support a troubled economy.
Unfortunately, a growing number of politicians are leaning on the Fed. Most egregiously, presidential aspirant and Texas Gov. Rick Perry said in August that it would be "almost treasonous" for it to pursue more monetary stimulus. The day before the Fed announced its September policy decisions, House Speaker John Boehner and three other GOP congressional leaders sent a letter discouraging it from "further extraordinary intervention in the U.S. economy...."
On the other side of the aisle, US Rep. Barney Frank (D) of Massachusetts, the ranking member of the House Financial Services Committee, is developing a proposal to strip the regional Federal Reserve Bank presidents of their role in monetary policy. (The policymaking committee has 12 seats, seven filled by Senate-confirmed, presidential appointees – two of which are currently vacant – and five that rotate among the regional banks.) Mr. Frank floated his proposal after three regional presidents voted against further policy easing, so it's widely viewed as an effort to sway those presidents into being more accommodating.
For all its flaws, the Federal Reserve does a better job of evaluating economic conditions and balancing short- and long-term economic goals than our elected leaders ever could. Politicians on both sides of the aisle should temper their impulse to influence what the Fed is doing. In hard times, its independence is more important than ever.
– Donald Marron is director of the Urban-Brookings Tax Policy Center.
Behind Qaddafi's death: demographics?
The pictures emanating from Libya – young men cheering the death of Muammar Qaddafi and shooting their guns in the air – are gripping. They're also a little misleading.
Libya has not taken a dramatic step away from dictatorship because of a surge of young people agitating for change, but precisely because there are relatively fewer of them.
That, anyway, is the argument of some demographers, who assert that population shifts are a major force behind the so-called "Arab spring" that has brought change to Tunisia, Egypt, and now Libya.
When demographer Richard Cincotta undertook three years ago to determine which nations had the best chance of becoming liberal democracies before 2030, he colored in all of North Africa, some of the Middle East, and on into central Asian countries such as Kazakhstan, Afghanistan, and Pakistan (see map above).
IN PICTURES: Qaddafi's last stand
The reason: Fertility is falling, which is allowing these nations' youth bulges to mature. That may seem counterintuitive, but too many young people pushing for change causes other elements of society to lean toward stability. In 2008, Mr. Cincotta wrote:
"Countries with a large proportion of young adults ... are saddled with a social environment where the regime's legitimacy is strained and the political mobilization of young men is relatively easy. The resulting politics tend to be fractious and potentially violent. In this stage, regimes typically concentrate resources on preserving their position by limiting dissent and maintaining order, a focus that engenders the support of commercial elites and other propertied segments of society."
But when the bulge matures, nations are poised for dramatic economic gains, often called the "demographic dividend." With fewer children to support and the bulge now concentrated in the prime working years of 30 to 64, families save more, workers are more productive, and wages go up. That's what's happening in Asia and Latin America. It's now beginning to happen in the Arab world.
That's an ominous development for dictators, Cincotta wrote:
"With much of society's political volatility depleted, authoritarian executives tend to lose the support of the commercial elite, who find the regime's grip on communication and commerce economically stifling and privileges granted to family members and cronies of the political elite financially debilitating."
Voilà, the conditions are set for an Arab spring.
Of course, there are many examples of nations that enact democratic reforms before the youth bulge has matured, but often these democracies are fragile, Cincotta writes. "Latin American countries have tended, as a group, to embrace liberal democracy while hosting a large youth bulge, which may partly explain why 60 percent of these states have flip-flopped between a liberal democracy and a less democratic regime at least once since the early 1970s."
And there are no guarantees that nations poised to reap the demographic dividend will actually become liberal democracies. Think Putin's Russia, Lee Kwan Yew's Singapore, or Communist China.
Demographics "is overlaid with ethnic and tribal and religious differences," says Joseph Chamie, former director of the United Nations Population Division and now research director at the Center for Migration Studies in New York. Resource limitations, a lack of jobs, a poor work or savings ethic – all these can cause nations to miss the 35- to 40-year window of opportunity for dramatic change.
Will liberal democracies spring up in the rest of the Arab world? Cincotta is optimistic about the rest of North Africa as well as Lebanon. But he's not sure about the six Gulf states, because the high proportion of foreign workers there may well mask a more youthful indigenous population.
There are reasons for concern about the Middle East in the short term, Mr. Chamie agrees, but there's room for long-term optimism. "Demographics isn't destiny," he says. "But it's way ahead of anything [else] in second place."
Management guru Peter Drucker, seen here in this 2005 file photo, was a conservative who advocated corporate responsibility in a post-capitalist society. (Kyodo News/Newscom/File)
Corporate responsibility is a conservative cause
Not long ago, a libertarian paper asked me to write for it. But after I began by writing about the social responsibility of business, the publisher and editor stopped answering my e-mails.
I understand. As a conservative who agrees with the biblical notion that wealth creators have a responsibility to neighbors and the needy, I've learned that this old notion now strikes many on the right as very progressive, even new age. And I think it illustrates the emerging chasm between true conservatives, who value what humankind has learned over the millenniums, and today's libertarians, who value new and radical ideas that prize self-interest and denigrate all but the narrowest forms of responsibility.
I chalk this up to the current infatuation, among many on the far right, with the ideas of Milton Friedman (for business) and Ayn Rand (for individuals). Dr. Friedman, a Nobel laureate, believed that the only social responsibility of a corporation was to make money for shareholders. Ms. Rand, who wanted to be remembered as the greatest enemy of religion ever, once wrote "it is only in emergency situations [like shipwrecks] that we should volunteer to help strangers." She added we owe them nothing upon reaching shore. But before Mr. Friedman's libertarian business philosophy and Ms. Rand's similar new morality of atomistic individualism became fashionable, other conservatives were writing about social responsibility in a positive way.
Perhaps chief among them was Peter Drucker, legendary management consultant and author, who conservative magazine publisher Steve Forbes once described as having an "uncanny" ability to foresee the future. In his 1993 book entitled "Post-Capitalist Society," Dr. Drucker suggested that social responsibility would replace power as our central organizing principle when we tired of selfish democratic capitalism on the part of politicians and CEOs serving special interests. "There is no one else around in the society of organizations to take care of society itself." But he prudently added: "Yet they must do so responsibly, within the limits of their competence, and without endangering their performance capacity."
That nearly 20-year-old vision may finally be coming true today, though not for traditional moral reasons. Forbes magazine has seemed to favor Friedman over Drucker in recent decades. But its Sept. 26 cover story was entitled: "Social power and the coming corporate revolution. Why employees and customers will be calling the shots." Regarding the social media, which has organized the Occupy Wall Street movement in recent weeks, Forbes told CEOs: "This social might is now moving toward your company. We have entered the age of empowered individuals, who use potent new technologies and harness social media to organize themselves. You'd better get out of their way – or learn to embrace them." It added that all companies will soon become "social enterprises," so, contrary to Friedman, CEOs had better concern themselves with interests beyond their own and that of shareholders.
Properly managed, a revolutionary return to old moral sentiments might actually reduce animosity among America's political leaders. That's a crucial element in our political economy as trust was the lubricant of pre-Friedman and pre-Rand capitalism. Today's selfish activities by elites are grit in that lubricant. So here's a modest example of how we might get ahead of the curve in rebuilding trust in our organizations.
America's global corporations are aggressively lobbying their friends in Congress to reduce or eliminate the taxes on what they earn overseas. They currently keep that money overseas to keep it from being taxed. Some CEOs have publicly echoed Friedman by arguing they are simply acting in the best interests of shareholders. Such corporate moves irk many progressives, including President Obama, because they see such acts as socially irresponsible in an age of federal deficits, joblessness, and record poverty. They also argue that the last tax amnesty on such "repatriated" profits did nothing to curb CEOs from reaping big bonuses by laying off even more Americans in the name of productivity and efficiency.
But what if progressive politicians and conservative business leaders agreed to a deal that would help America without punishing shareholders with supposedly onerous taxes? Corporations might repatriate their profits with the 5 percent tax rate used during the last amnesty as long as they used the money to create jobs in the United States. Companies, not government, would decide what new jobs make economic sense. If it made no sense for a company to hire in the US, it wouldn't repatriate any profits, creating more wealth overseas, which is socially responsible in the larger sense.
The benefits of such a deal might be spread far and wide. More working Americans might then have money with which to buy, a favorite cause of progressives. Small US businesses, which used to be important engines of job creation but can no longer get financing for such, might win as major corporations could invest in more capital goods to equip those workers. Or major corporations might make loans to capital starved small businesses that are critical suppliers. The federal government might actually benefit as more people escape welfare and pay taxes. That broadening of the tax base is a favorite cause of libertarians anyway. Our young people might begin to believe America has a future after all. Our older people might invest in their future again.
The cost for all this? There might be some short-term taxpayer subsidy, since the Internal Revenue Service might have gotten more money (in theory, at least) from repatriated profits, assuming corporations had a change of heart and repatriated it despite the taxes. But the major cost would simply be surrendering the radical and selfish moralities of Friedman and Rand for the old conservative tradition of both personal and social responsibility. As Drucker understood, loving one's neighbor as oneself in business and politics is actually a sound organizing principle for any society.
– Gary Moore, an author and investment counselor based in Sarasota, Fla., runs financialseminary.org, which seeks to build bridges between the economic, political, and moral communities.
Raj Rajaratnam, co-founder of Galleon Group LLC, leaves Federal Court after his sentencing on Thursday. His 11-year sentence for insider trading was lighter than expected, but still sends a strong message to Wall Street. (Jin Lee/AP)
Insider trading: What's the fallout of Rajaratnam sentence?
By most counts, Raj Rajaratnam got a lighter-than -expected sentence for his insider trading conviction back in May. But his 11-year sentence and $10 million fine, handed down Thursday, was another potent reminder for Wall Street about the dangers of dabbling in white-collar crime, even victimless white-collar crime.
"Most people were expecting a slightly longer sentence," says Robert Mintz, a former prosecutor and head of the white collar criminal defense practice at McCarter & English, a large law firm with offices in Newark, N.J., Boston, and elsewhere. Nevertheless, “it sends a very serious signal that those who are inclined to game the system are going to get caught."
"Eleven years is a tremendous amount of jail time," says Stuart Slotnick, a managing partner at Buchanan Ingersoll & Rooney in New York. The sentence is particularly noteworthy since insider trading "is as close to a victimless crime as possible."
While Mr. Rajaratnam's 11-year sentence is the longest handed down solely for insider-trading charges, it's far less than the 20 to 24 years that the prosecution wanted. Nor does it match the 24-year sentence imposed on Enron CEO Jeffrey Skilling, who was convicted of insider-trading as well as other crimes in 2006 in the wake of the implosion of his firm.
Nor does Rajaratnam's $10 million fine come close to the $100 million in fines that Ivan Boesky paid in his plea deal over insider-trading charges in 1986. Mr. Boesky got a reduced three-year sentence for cooperating with prosecutors.
In addition to his fine, Rajaratnam was ordered to forfeit $53.8 million in illegal gains. He begins serving his sentence Nov. 28.
In handing down the lighter-than-expected sentence, US District Judge Richard Holwell cited Rajaratnam's health problems and his charity work on behalf of numerous causes as reasons for leniency.
But Wall Street is listening.
"Wall Street has already been listening," Mr. Slotnick says. "The many good people on Wall Street want to make sure that they don't run afoul of the law."
The Rajaratnam sentence makes the point, but what will really count is continued action by the Department of Justice to pursue insider trading and other securities fraud, Mr. Mintz says.
A sign at the entrance to the headquarters of Solyndra LLC is shown in Fremont, Calif., last month. The recent bankruptcies of solar-cell manufacturers Solyndra and Evergreen Solar are evidence that clean energy technologies – or clean tech – has not delivered on its promise. (Robert Galbraith/Reuters/File)
Clean energy falls short so far
Recently PayPal cofounder Peter Thiel made headlines when he declared that "Clean tech is an increasingly large disaster that people in Silicon Valley aren't even talking about anymore."
The sector doesn't have enough original ideas, Mr. Thiel said, and many clean energy technology companies are being run by idealists who are short on business savvy.
Those comments drew a sharp rebuke from fellow venture capitalist Vinod Khosla: "I challenge anyone to claim that clean tech done right is a disaster." Over the past year, Mr. Khosla noted that the three clean tech initial public offerings that he has been involved with have generated more than $1 billion in profits. Six more IPOs are in the pipeline.
So who is correct? Are clean tech sectors – such as biofuels, wind power, solar power, efficiency, green chemistry, and automobiles – flops or booming successes?
It depends on who's doing the measuring.
If the goal of clean tech is to displace consumption of fossil fuels, then we have to call some sectors a flop at this point. The US Environmental Protection Agency has rolled back the advanced biofuel mandates by more than 90 percent because companies could not deliver. To date, there is still no qualifying production of cellulosic ethanol, even though 350 million gallons were mandated for 2010-11. None of the IPOs Khosla mentioned are yet producing and selling commercial quantities of product.
If the goal of clean tech is to make money for investors, then call it a winner – but only for some.
The industry has been very successful at attracting investment: from $20 billion globally in 2005 to $150 billion in 2010, according to the Renewables 2010 Global Status Report, and it continues to grow. However, the report also notes that the investments are being driven by governments, and that venture capital and private equity investment in clean tech fell from $9.5 billion in 2008 to $4.5 billion in 2009. This may signal that private investors have lost some of their appetite for the sector.
If the goal is to create jobs, then clean tech has not yet proved itself. Just because companies make venture capitalists money doesn't mean they're successful businesses. Look at the recent and highly publicized bankruptcies of solar-cell manufacturers Solyndra and Evergreen Solar.
Why did they fail? Not because they were clean tech, but because they couldn't compete with Chinese manufacturers. This is a situation some other US industries know all too well.
Perhaps the best we can say at this point is that the report card on clean tech is incomplete. It is likely that the industry will create some long-term winners, just as the dot-com bubble produced some very profitable Internet companies. But those winners might not produce transportation fuel, and they might not be located in the United States.
For the world, clean tech can still qualify as a success if new sources of power significantly reduce reliance on fossil fuels and cut global emissions of greenhouse gases. In terms of American policy, such a turn of events would probably be viewed as a failure if we import the majority of our clean tech products.
While it's too early to conclude that the Silicon Valley brand of clean tech has failed, we can say that it has not yet delivered on its potential.
– Robert Rapier is chief technology officer of Merica International, a Hawaii-based renewable energy company, and writes the R-Squared Energy Blog.
Joya Green (right), with Metro Fair Housing Services, discusses employment opportunities with Kimberly Anderson (left) of Atlanta, during a job fair at a Goodwiill store in Atlanta. Employers added 103,000 jobs in September, a modest burst of hiring after a sluggish summer. (David Goldman/AP)
If jobs report is positive, why is Wall Street so gloomy?
Every day, millions of Americans get up, go to work, and move their companies forward. The economy doesn't look great from Main Street, but it's not falling off a cliff, either.
Then there's Wall Street, with its wild gyrations and euro-jitters. And from economists and analysts, too, comes an increasingly negative picture of what's happening in economic activity.
What's going on? There's a disconnect, which at its heart is about reality and expectations.
On Friday, the Department of Labor offered a fresh dose of reality, which was largely positive: The economy added 103,000 jobs last month, far better than the 60,000 jobs that economists expected, on average. The growth in jobs was enough to keep the unemployment rate steady at 9.1 percent.
Not only that, the Labor Department revised upward its estimates of employment growth that occurred in the previous two months: July saw 127,000 net new jobs added (revised from 85,000); August saw 57,000 (revised from zero).
“There is no hint in September's Employment Report that another recession is starting,” noted Capital Economics, a Toronto-based research firm, in a written analysis.
Many sectors of the private-sector economy are expanding. Professional and business services added 48,000 jobs in September. Health care added 44,000. Technology companies continued to expand. And even construction began to show some growth after seven months of stagnation.
“In general, what we hear from our customers is that their businesses are doing OK,” says Scot Melland, CEO of Dice Holdings, which runs specialized career websites in the technology, financial services, and healthcare industries. “But there is a concern about the financial crisis in Europe and, as a result, the future.”
Such fears are understandable. If Europe’s financial system plunges into chaos, it would ripple throughout the world, slowing growth and hurting global banks. If Greece defaults precipitously on its debts, it could weaken confidence in other indebted nations’ sovereign debt.
By the market's close, however, any positive momentum from the jobs report was lost to worries about new downgrades of Spanish and Italian debt. All three major stock indexes closed down modestly.
Such worries weigh heavily on Wall Street, and not just in terms of sentiment. The US financial sector lost 8,000 jobs last month, more than any other sector except government (-34,000) and manufacturing (-13,000), which employ more people.
When the financial sector is contracting, it's hard for the economy to recover strongly. And it doesn't help that many of the analysts who are making those gloomy forecasts also happen to work in that sector.
This doesn't mean that Wall Street is out of touch. Analysts worry about looming threats to growth, which aren't as visible from Main Street. And they understand that last month's job growth is still, by historical standards, incredibly weak for an economic recovery.
The economy has to create more than 103,000 jobs a month simply to absorb the natural growth in workers, let alone cut into the nation's still-high unemployment rate.
The disconnect is about expectations. Prepared for the worst, Wall Street still seems to be expecting a strong rebound. Main Street has adjusted its expectations downward.
“This is not the strong recovery we’d all hoped for,” says Mr. Melland. But “at this point we've come to the realization that this is not a normal recovery.”
This photo taken last month shows a home with a for sale sign in front, in Newton, Mass. The average rate on fixed 30-year mortgages fell to 3.94 percent this week, the lowest rate ever. So is it time to refinance? (Steven Senne/AP/File)
30-year mortgages fall below 4 percent. Time to refinance?
The average rate for a 30-year mortgages dipped below 4 percent for the first time in history this week.
Economic models suggest that interest rates might have been lower in, oh, about the time the Japanese attacked Pearl Harbor in 1941. So what’s next?
Rates could fall further.
“I think rates are going to go lower,” says Gary Shilling, an economist in Springfield, N.J. “I’m predicting we’ll go to 1.5 [percent] on the 10-year” Treasury bond, which often moves mortgage rates. The 10-year bond yield dropped below 2 percent in September, leading to multidecade lows in mortgage rates.
In the week ended Oct. 6, the average conventional 30-year fixed mortgage hit 3.94 percent (with an average 0.8 points to refinance), according to Freddie Mac, the mortgage giant based in Washington, D.C. Average rates for fixed 15-year loans fell to 3.26 percent (with an average 0.8 points), also a historic low.
So is it time for you to refinance? That depends on individual circumstances.
Many homeowners don’t qualify for a new loan because the value of their homes has fallen so much that they’re “underwater” – they owe more on the loan than the property is worth. Others don’t have enough equity left in their home to get a low rate. Still others no longer have full-time jobs – or their credit scores have dropped, making banks leery of lending to them.
Those who do qualify may be waiting for rates to go lower.
“In normal times, people would be leaping in to refinance,” says Stephen Thode, a real estate expert at Lehigh University in Bethlehem, Pa. “But by no means do people think that interest rates are going to go up.” Their patience could be rewarded. More debt jitters in Europe could send investors scrambling into less risky investments, such as US Treasury bonds. That would reduce interest rates. Ditto for a new recession in the United States.
Typically, the spread between the 10-year Treasury bond rate and 30-year fixed mortgage rate is 1.5 to 1.7 percentage points. But this summer that spread rose to more than two percentage points, says Mike Fratantoni, vice president of research at the Mortgage Bankers Association in Washington.
This suggests that even if nothing changes and interest rates stay where they are, mortgage rates could drift down to about 3.5 percent over time.
But why wait to finance?
"You can take a chance and maybe rates will fall a little further, but how much of a difference will that make on your monthly payments?" asks Polyana da Costa, a mortgage reporter for Bankrate.com, a financial-rate information website. "And what if while you're waiting for the lower rates, the value of your house drops or your employment situation changes? If that happens, no matter how low rates go, you might not be able to refinance. If you think you qualify for a refinance now, it's probably a good idea to go for it."
Baby boomers and other longtime homeowners should consider a 15-year fixed-rate mortgage, says Frank Nothaft, chief economist for mortgage giant Freddie Mac. “You can’t beat a 15-year. The amortization schedule guarantees you’ll have it paid off right about when you retire.”
To see if it’s right for you, figure out the cost of refinancing. (It can easily cost $2,000 or more because of title insurance and an array of local government and other fees.) Then figure out how long it will take to pay that back with the money you save every month with the lower rate. (Personal finance programs, like Quicken or Microsoft Money, have calculators that simplify the math.)
If the payback is a year or less, then it's generally a good idea to consider a new low-rate loan.
Or try this online calculator from three economists, which specifically aims to tell homeowners when mortgage rates have fallen so far that it's no longer worth waiting for rates to go down before refinancing.
But be aware: There is a risk to owning a home in the first place.
Mr. Shilling, for one, thinks home values still will fall another 20 percent. His recommendation: Sell your house and rent.
“There's no free lunch in this deal,” he says. “You didn't get em [low rates] because you've got a friendly banker. You got ’em because economic conditions are terrible…. Except for house appreciation, owning a house is not a good deal.”
Apple CEO Steve Jobs smiles with a new iPhone at the Apple Worldwide Developers Conference in San Francisco in this 2010 file photo. He died Wednesday. (Paul Sakuma/AP/File)
America could use another Steve Jobs
When Fortune magazine picked Steve Jobs as “CEO of the decade” in 2009, it pointed to his outsize impact on four industries: music, movies, mobile telephones, and, of course, computers. “Remaking any one business is a career-defining achievement; four is unheard-of,” it raved.
After Mr. Jobs’ passing on Oct. 5, many will be raving about how he revived Apple by rolling out “insanely great” consumer products like the iPod, the iPhone, and the iPad, and created iTunes, the biggest music store in the world.
But there is an older incarnation of Jobs that was equally important for Americans, if not as consumers, then as citizens. It was the very beginning of the 1980s, after the United States had suffered an unprecedented decade of self-doubt and crisis: Watergate, the loss of the Vietnam war, the Iran hostage crisis, two oil embargoes, stagflation, Detroit’s plunge in the face of Japanese auto imports, and (what came to be known as) malaise.
As bad as things were, Americans nevertheless could point to the exciting things coming from the computer industry: the microprocessor from Intel, the DOS operating system from Bill Gates and Microsoft, and the Apple II from Jobs. Mr. Gates and Jobs, in particular, defined a prototypical kid genius, working out of a garage, and creating whole new industries that could take over industrial leadership from General Motors and US Steel.
Entrepreneurship entered the national conversation in a major way. America had something transcendent and innovative that Japan could not reproduce.
The rest is history. Jobs and Gates went on to create industrial titans. In recent years, Jobs eclipsed his longtime rival with his series of “insanely great” computer products. By 2011, Apple would rival Exxon as the world’s most valuable company.
And America finds itself, again, having endured a decade of crises: 9/11, two wars, the near melt-down of the financial industry, and the worst economic downturn since the Great Depression.
Amid these blows to national self-confidence, America could use something positive to point to.
It’s out there. Thousands of kid geniuses are laboring away in garages and labs, classrooms and cubicles, on the cusp of creating the next big thing that will revive America’s economy in a way that no government program or spending cut can.
Trouble is, we don’t know who those entrepreneurs are or what they’re working on. Americans could use a face for its entrepreneurial genius.
Americans could use another Steve Jobs.
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