Recession

Imagining a Post-Recession America: On 'Combating Poverty by Building Assets'

Shweta Banerjee — Tue, 07 Jul 2009 19:37:00 -0400

When I first came to the United States as a student in Chicago in 2004, I realized how little I knew of the contradictions within this country. From the outside, it is the wealthiest nation in the world, with the most powerful army on earth and often referred to as the land of excess and opportunity. But to many outside the US it is a little known fact that there are deep pockets of poverty, tucked away in patches of its urban and rural areas. More recently, while working on poverty reduction programs in South Asia at the World Bank, I found it ironic to see homeless persons sitting under the pristine cherry blossoms outside its shiny building in Washington DC. It made me think about the need to apply innovations and successes from ‘developing countries' right here.

Ray Boshara's recent article "Combating Poverty by Building Assets" in Pathways magazine sheds some light on this issue. Boshara calls for a ‘new era of thrift' to be ushered in a post recession America and he explicitly draws on experiences from other national contexts.

Savings, not credit, is the first step in building assets. Instead of extending toxic sub-prime mortgages and deceptive credit cards without appropriate financial knowledge, savings-led strategies should form the core of anti-poverty efforts. During each financial rite of passage - at birth, at the workplace, at tax time and while purchasing a home - people should be given a savings product. For example, every child born into a low-income household should be given a $1,000 savings account and the opportunity to earn $500 in annual matching funds until 18 years of age. Both Great Britain and Sri Lanka have successfully launched child saving accounts; every family that leaves the hospital has an account for the newborn.

Borrowing from Singapore's Central Provident Fund, an American Savings Plan should be created in which every worker in the United States would be provided with an American Stakeholder Account. This account would grow from mandatory savings of 1-2% from both employers and employees.

Income and consumption-based evaluations which then inform income-based poverty programs, do not take into account the growth of assets. As first proposed by Michael Sherraden in 1991, and now widely proven by research across the world, the key to moving out of poverty lies in sustainable asset creation. As the article points out, even prior to the economic meltdown, one in three American households had no more than $10,000 in net worth and one in six had negative net worth.

Given the challenges many confront in savings and building assets, we should be open to lessons learned from policy efforts and programs around the world. There is much to be learnt from the Peruvian woman who saves a portion of her conditional cash transfer to open a small business, or the woman from a small village in India who, with her self-help group, has moved out of poverty. Now is an opportune time to redouble our efforts to promote savings and asset building, and smooth-out some of the hard edges of wealth inequality.

Shweta Banerjee is a consultant with the Global Assets Project of the New America Foundation.

Weighing in on Microfinance and the Financial Crisis

Jamie Zimmerman — Mon, 23 Mar 2009 20:24:00 -0400

Signs point to toughening times for the microfinance industry. A recent article from the Economist has echoed my concerns that selling microcredit (as a concept or a product) will grow increasingly difficult as the global economy stumbles (or crashes and burns) on the heels of a debt-led recession in the United States. Not only in the concept politically less appetizing than it was back when Muhammad Yunus won the Nobel Peace Prize in 2006, the capital fueling the industry is drying up. The similarities and differences between subprime lending that fueled the US recession and the "sub, sub, subprime" lending happening in developing countries through microfinance institutions have been debated and analyzed for over a year now. But only recently has the engine of seemingly-endless capital to MFIs around the world starting slowing, sputtering to slow chug in some instances.

The Economist article argues that the microfinance industry is more insulated from the crisis than many of my colleagues working in the sector would currently state. Just because the Grameen Bank has not faltered in this financial crisis doesn't equate to an entirely healthy sector. Moreover, the decrease in capital, and the resulting liquidity constraints and challenges institutions will face, does not represent the variety of challenges that MFIs, or the microfinance sector, could and will likely face as a result of this crisis. While I commend the Economist for putting on spotlight on this particular problem, the article fails to provide readers with the bigger picture.

Fortunately, CGAP just released last week a more thorough analysis of the potential impacts of the crisis on microfinance. The Focus Note reviews not only the challenges of the institutions, but also those of the clients that frequent these institutions to gain capital for their micro-business or, in many cases, borrow to smooth consumption over time. Essentially, the Note paints a relatively more nuanced picture of the crisis on the microfinance industry and tempers its optimism that the industry is "insulated from the problems of the global economy" (as is speculated in the Economist). On the other hand, CGAP does share my view that this crisis will bring opportunities that could result in a better functioning industry, with potentially better outcomes for the poor.

In my opening remarks at the March 16 USAID panel on Microfinance and the Financial Crisis, I also outlined a number of challenges I either currently see or envision for the industry as the global crisis unfolds, many of which are reflected to some extent in the articles mentioned above, including decreased capital, weakening consumer confidence, increased pressure for tougher regulation, etc.. However, I foresee as serious opportunities for the industry. (Call me hopelessly optimistic, but I prefer to concentrate on opportunities whenever possible, particularly in troubling times.)

First, a debt-led global recession is indeed spurring some to cast a critical eye on debt-led poverty reduction like micro-credit. While this may be understandably worrisome for particular institutions, it's a huge opportunity for the microfinance field in general. The backlash against credit and subprime lending could very well lend itself to a microfinance industry whose health is dependent on a more diverse and balanced portfolio, particularly with an emphasis on savings. In fact, deposit-taking MFIs (who are less dependent on capital investments) are indeed the very institutions most insulated from the crisis so far. Next, the spotlight on savings is not limited to acknowledging the need for deposit-taking for an institutions fiscal health. The microfinance field as a whole is now paying long overdue attention to the other critical financial needs of the poor, namely access to effective and safe savings services. Finally, there is a growing recognition that all people, chief among them the poor and the vulnerable, need to save and create a safety net against economic shocks, rather than relying on credit alone. This is a lesson the US learned too late, but for the microfinance field, it's a very real opportunity to look at economic opportunity and resiliency in a whole new way.

(Transcripts and materials from the March 16 event, including perspectives from other panelists on this issue, can be found on the Microlinks site.)

COVERAGE: 14,000 Americans Losing Insurance Each Day, CAP Action Fund Finds

Kyle Noonan — Thu, 19 Feb 2009 18:20:00 -0500

The Center for American Progress Action Fund (CAPAF) has done some math and reports that 14,000 Americans are losing their health insurance each day. More evidence, as if we needed it, that the recession is exacerbating what was already a crisis of the uninsured. CAPAF estimates that about 48 million Americans lack insurance now, with the number going up as the economy goes down.

The report points out that Medicaid and SCHIP have prevented many of the new jobless from losing insurance. The additional funds for Medicaid, SCHIP and COBRA subsidies in the economic stimulus legislation will also "absorb" some of the newly unemployed, blunting the growth of the ranks of the uninsured. But to tackle the problem instead of just slowing the bleeding, we need comprehensive health care reform that covers everyone and controls costs.

The Roadblock to Obama's Infrastructure Dreams

Mark Paul — Tue, 09 Dec 2008 19:36:00 -0500

President-elect Obama's call for enormous new investment in national instructure has the potential, as Steve Coll recently noted, to both stimulate the economy in the short run and strengthen it for the long haul. But as the situation in California illustrates, the economy cannot get the full benefit of that infrastructure package unless the stimulus package also includes a large dose of direct aid to state budgets.

In every respect but one, California is ideally positioned to take advantage of Obama's infrastructure plans. With its congested freeways, crumbling levees, and burgeoning population, it has boundless infrastructure needs. It has existing voter authorization to issue tens of billions worth of state bonds to cover the state's share of cost for projects. It has a bountiful supply of workers, now idled by the collapse of housing construction, to retrofit buildings for energy efficiency or to repair schools and public buildings. It has a vigorous corps of entrepreneurs and venture capitalists to spur a wave of green infrastructure investments, contributing new ideas and technologies to the effort.

It has everything to carry out an infrastructure stimulus program except cash.

Speaking December 8 to an unusual joint session of the California Legislature, Treasurer Bill Lockyer announced that, as of December 17, the state of California, its till increasingly bare, will have to stop providing the short-term cash financing needed by most state infrastructure projects. Billions of dollars worth of planned and approved projects –– school builidings, road and transit projects, levee improvements –– will come to a stop, resulting in the loss of $12.5 billion worth of private sector activity and 200,000 jobs, according to Lockyer's estimate.

When the media and politicians talk about infrastructure and bonds, the discussion usually involves a simple shorthand: Voters approve bonds; state sells bonds; state uses bond proceeds to build projects. In actual fact, the financial plumbing is more tangled. Because of federal tax laws, most infrastructure financing must follow a two-step process. When a state agency is ready to begin an infrastructure project with authorized bond funding, it first applies for a loan from the state's Pooled Money Investment Account, the cash reserve where state and local revenues and special fund cash balances are temporarily parked until they are needed. This bridge financing is used to build the project. Once the project is ready, the state sells authorized bonds and uses the proceeds to pay the short-term loan with interest.

In normal times, this process works seamlessly and without any public attention. (In the 18 months I served as executive secretary of the Pooled Money Investment Board, I never saw a reporter at a board meeting.) But today it is ready to break down.

The state's cash reserves, already depleted by years of internal borrowing and budget gimmickry, are fast draining as the recession drives down revenue collections. To make matters worse, the meltdown of the financial markets prevented the state earlier this autumn from being able to sell the full amount of revenue anticipation notes it normally issues to keep its cash drawer full until most of its tax revenues arrive in the spring. Because the pool in the state's cash reserve is already so low, all of the remaining dollars will have to be loaned to the general fund over the next several months to pay day-to-day bills, leaving none available for infrastructure financing. And without drastic and immediate action by the Legislature to raise taxes or cut state programs, the state will run out of cash, in February or March, for any purpose. In Governor Schwarzenegger's words, California is "headed toward a financial Armageddon."

Yet even drastic action won't be enough to make infrastructure financing available in California for more than a few months. At the same joint session, Controller John Chiang told lawmakers that the state's revenue loss is so great that the cash crisis will return next summer, at the beginning of the next fiscal year, in which the state faces a projected deficit of $19 billion, roughly equal to 20 percent of its general fund. To close that deficit by spending cuts alone would require closing the University of California and the California State University system, ending welfare payments, and eliminating all state funding for the developmentally disabled, for mental health, and for In-Home Supportive Services.

Given that the California Legislature has been unable, to date, to take budget actions, either tax increases or spending cuts, far less painful than these, it seems unlikely that California finances will permit the normal funding of infrastructure at any time in the next several years.

Obama has said he will provide infrastructure funding for the states, which must use it quickly or lose it. But without federal assistance to cope with its budget calamity, California, and likely other states as well, will be in no financial shape to take full advantage of this infrastructure moment. As I have written before, using the coming stimulus bill to bolster state finances is essential to prevent state budget actions from deepening the recession. But as California's plight illustrates, generous assistance to the states, on the order of $100 billion to $150 billion, is also vital to making Obama's infrastructure hopes come alive.

Why the States Belong in the Stimulus Package

Mark Paul — Mon, 17 Nov 2008 23:05:00 -0500

With state revenues in free fall, governors are banging on the door of Congress, calling on lawmakers to put assistance to the states at the top of the list in the next economic stimulus package. In the ubiquitous media shorthand, the states want a “bailout.”

This shorthand, however, muddies the issue and the stakes here.

Giving help to the states is not the same thing as opening up the Treasury to shore up a failing private bank or manufacturer. States and the federal government are partners. In much of what the states do––educate, medicate, and incarcerate––Washington sets the standards and requirements, whether through No Child Left Behind, Medicaid, or the constitutional prohibition against cruel and unusual punishment. The big items in state budgets––schools, health care, social services––are, to varying degrees, jointly financed by state and federal dollars. When those budgets must be deeply cut, it is not just a state issue. National purposes are being defeated, too.

The shorthand about “bailouts” also misses the central reason for including the state in a stimulus package: to bolster, or at least protect, the economy.

When recession drives state budgets out of balance, states have only two choices, both of them bad.
The first is to cut spending. But every dollar of state spending eliminated to close a budget deficit is a dollar of demand potentially removed from the larger economy. When teachers are laid off and the blind and disabled have their grants cut, they spend less for goods and services. State spending cuts throw the economic multiplier effect into reverse.

The second choice, raising taxes to close a deficit, also weighs down the economy. Tax increases on low- and middle-income households, which generally spend nearly all of their income, reduce their ability to consume. That is less true of higher-income households, which can choose to reduce their saving to sustain their current levels of consumption. But even taxing the rich to close state deficits is likely to drive down demand and slow the economy further.

To understand how bad those choices can be, consider California’s budget situation. It faces a deficit of $28 billion over the next year and a half. Let’s assume it must close that deficit with a combination of tax increases and spending cuts, which would be the case if Congress does not include the states in the stimulus package. And let’s assume that those measures reduce effective demand by an equal amount.

The result? Demand would shrink by about 1 percent of California’s gross state product, making the recession that much worse.

So the question for the stimulus package isn’t, as the media shorthand puts it, whether to “bail out” the states. It’s whether Washington will stand idly aside and watch the states, forced to balance their budgets, take fiscal actions sure to make the recession deeper and longer.

U.S. Labor Market Continues to Disappoint

Ian McAllister — Thu, 19 Jun 2008 16:02:00 -0400

The number of workers filing new claims for unemployment benefits fell by 5,000 last week to 381,000, a smaller decrease than analysts had predicted. The four-week average of new claims, a less volatile measure, rose to 375,250 from 372,000, indicating that the U.S. labor market remains weak and far away from a recovery. Coming after last month's half percent spike in unemployment to 5.5%, these figures add further gloom to the current picture of the U.S economy and will put pressure on the Fed hold its target funds rate at 2% when it meets next week.

Snapshot asks, to what degree will falling consumer spending be exacerbated by labor market weakness?

Wall Street Journal - Jobless Claims Fall in Latest Week
Bloomberg - U.S. Initial Jobless Claims Fell to 381,000 Last Week
Reuters - Treasuries extend losses after jobless claims
Associated Press - Stocks trade mixed after dip in jobless claims

Prices Fall and Sales Rise, Light at the End of the Tunnel for Housing?

Ian McAllister — Wed, 28 May 2008 16:06:00 -0400

Housing prices continued their downward slide in April with a monthly decrease of 2.2%, a decline of 14.4% from last year's levels. In an unexpected twist, monthly home sales actually rose by 3.3%. Some optimists see this as an indication that the market is nearing its bottom and beginning to work its way through a massive glut of unsold homes as sellers cut their overvalued asking prices and buyers open their wallets to bargains. Others point to worsening consumer confidence and tighter lending requirements as evidence that April's sales figures were a statistical blip in a market that has much further to fall.

Snapshot asks, to what degree will further credit turmoil stop buyers from clearing the housing market?

Wall Street Journal - Home Sales Rise in Hard-Hit Areas
Bloomberg.com - U.S. Home-Price Index Fell 14.4% in March
Washington Post - Existing Home Sales Rise as Prices Plummet
New York Times - Home sales post unexpected April increase
Yahoo News - Home sales unexpectedly rise in April

Consumer Spending Sending Mixed Signals for U.S. Economy

Ian McAllister — Wed, 14 May 2008 15:23:00 -0400

A 0.2% overall decline in April retail sales masked divergent patterns in U.S. consumer spending. While auto spending decreased by 2.8%, spending on non-auto goods actually rose by 0.5%, a larger than expected increase. With consumer spending accounting for over 70% of the U.S. economy, some see this resiliency as a sign the economy may be closer to recovery than previously thought. Others say it's a statistical blip and expect continued contraction throughout 2008 as gas prices and inflation increase.

Snapshot asks, will high gas prices and weak auto sales further drag down consumers in 2008?

Financial Times - US retail data show signs of resilience
Wall Street Journal - Weak Recession? Not So Fast, Say Some
Haver - U.S. Retail Sales Fell, Non-auto sales firmer
Reuters - Bullish ex-auto U.S. retail sales cheer dollar

The Recession is Hiding in Housing

Sam Sherraden — Tue, 06 May 2008 17:05:00 -0400

Some are questioning whether the US is in a recession. Job losses last week were less than expected at -20,000. Many expected between -75,000 and -80,000. The stock market has rallied and the Dow Jones Industrial Average broke through the 13,000 mark last week. The Federal Reserve cut interest rates by 25bp but two members of the FOMC dissented. Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, argued there was no need for a cut. Despite a blip of positive news, the prospects for the U.S. housing market and American consumer are likely to continue to drag on the economy. For a graphic representation of how damaged the US housing market is, see Ben S. Bernanke's Mortgage Delinquencies and Foreclosures.

Snapshot asks, if this recession is led by falling housing prices and damaged consumers, when will it be worst?

Financial Times - US Jobs Surprise
BNP Paribas - US: Employment Falls Less Than Expected
US Department of Labor - U.S. Employment Situation April 2008
Wall Street Journal - Jobs Data Show Hopeful Sign, Though Economy Still Ails
Ben S. Bernanke - Mortgage Delinquencies and Foreclosures

No Sign of a Bottom

Sam Sherraden — Tue, 29 Apr 2008 20:49:00 -0400

The Conference Board's consumer confidence index fell again to 62.3 from 65.9 in March. The index was dragged down by the present situation index, which measures consumers' assessment of current economic conditions. Housing data also weighed on the economic outlook. Home prices from the largest urban areas around the country fell 13.6% in February from prices a year earlier. Given the slowing consumer and the rapidly declining housing prices, economists fear a "negative feedback loop," in which consumers, hurt by deteriorating house prices and poor consumer credit conditions, buy less and damage corporate profits.

Snapshot asks, will the struggling consumer keep the U.S. in a prolonged recession?

Wells Fargo - Atypical Recession - Atypical Recovery
Deloitte & Touche - Keeping Your Cool Through a Financial Crisis
Bloomberg - Harvard's Feldstein Says Economy in Recession, `Getting Worse'
Wall Street Journal - Consumer Confidence Stays Weak