This document summarizes a presentation by Stephanie Kelton on the economic meltdown and prospects for recovery in Kansas City and beyond. It discusses the massive problems in the banking system and housing market nationally, with high unemployment and job losses. Regionally, Kansas City has seen job losses concentrated in services, government, retail, and other sectors. The document examines arguments over whether Alan Greenspan's policies as Federal Reserve Chair caused or failed to address the housing bubble. It outlines challenges globally, nationally, and for the Kansas City region from the recession and prospects for a slow recovery.

1. Did Greenspan ―Blow‖ It?
The Economic Meltdown
and
The Prospects for Recovery in
Kansas City and Beyond
Stephanie Kelton
Associate Professor of Economics
University of Missouri-Kansas City
February 2009
Stephanie Kelton, Associate Professor, UMKC 1

2. Nationally
 Massive solvency problems in
banking system
 Most severe contraction since the
Great Depression
 U.S. economy is shedding
600,000-700,000 jobs per month
(5 million since recession began)
 8.9% unemployment rate
 Consumer confidence at an all-time
low
 2 million home foreclosures
Stephanie Kelton, Associate Professor, UMKC 2

3. “By far the deepest global recession since the Great
Depression” (IMF, 4/22/09)
Stephanie Kelton, Associate Professor, UMKC 3

4. 5 Distinct Regions Unemployment Rate, February 2009
 Below Nat‘l Average
◦ Great Plains
◦ Northeast
 Above Nat‘l Average
◦ South
◦ Great Lake States
◦ West Coast
Stephanie Kelton, Associate Professor, UMKC 4

5.  Over 520,000 in
Services
 171,659 in
Government
 146,000 in Retail
 All other sectors
have less than
10%
Stephanie Kelton, Associate Professor, UMKC 5

6. Federal Government – 25,004 Children‘s Mercy Hospital – 3,602
Sprint Nextel Corp. – 16,403 KCK Public Schools – 3,500
HCA Midwest Health – 7,320
AT&T – 3,435
Mc Donald‘s USA – 7,111
North KC School District – 3,200
State of Missouri – 6,078
U. of Kansas Hospital – 3,020
Ford Motor Co. – 5,453
DST Systems – 5,200 Black & Veatch – 3,012
St. Luke‘s Health Sys. – 4,808 Truman Medical Center – 3,063
Hallmark Cards – 4,500 General Motors – 2,900
City of Kansas City, MO – 4,400 UMKC – 2,885
KCMO School Dist. – 4,399 Applebee‘s International – 2,744
Cerner Corp. – 4,309
Blue Valley School Dist. – 2,717
State of Kansas – 4,115
Lee‘s Summit School Dist. – 2,642
Olathe School District – 3,980
Honeywell – 2,604
Johnson County, KS Govt – 3,774
Stephanie Kelton, Associate Professor, UMKC 6

7. Used to measure the strength of Score > 1 indicates higher than
each industry, relative to the average concentration of that type
national average of employment and likely exporter
Stephanie Kelton, Associate Professor, UMKC 7

8. Economic Outlook in the KC Metro Area
 8,900 jobs lost between Nov. ‗07 and Nov. ‘08
◦ 4,900 on the Missouri side
◦ 4,000 on the Kansas side
◦ Most losses in construction, mfg and trade, transportation and utilities
◦ Modest gains in educ and h/care
 8.4% unemployment rate (highest since ‗90)
 Sprint-Nextel to eliminate 8,000 jobs (2,000 in the KC area)
 Forecast to lose 20,100 jobs in ‗09 (2% of all jobs)
 Regional Foreclosures were up 35% in ‘08
 13,609 properties in some stage of foreclosure (1.56% of all property in metro)
 New housing permits at lowest point since tracking began in ‗85
◦ Only 136 new permits issued metro-wide in Dec. ‗08
◦ Average in Dec. since 2000 over 730
Stephanie Kelton, Associate Professor, UMKC 8

9. ◦Did Greenspan‘s policies
cause the housing bubble
and ensuing meltdown in
financial markets?
◦Did Greenspan mishandle the
situation once the bubble
emerged?
Stephanie Kelton, Associate Professor, UMKC 9

10.  Easy money following
the 2001 recession
◦ John Taylor
Fleckenstein and
Canterbery
◦ Baker, Palley, and Liu
◦ Poole and Parry
◦ Ron Paul
 Lax Regulatory Stance
◦ Harry Reid,
Christopher Dodd
◦ Edward Gramlich
(2000)
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11. Fed Reserve Chairman, Federal Reserve System’s Fourth Annual
Community Affairs Research Conference, Washington, D.C. April 8, 2005
Stephanie Kelton, Associate Professor, UMKC 11

12.  Correct to keep rates low in post-bubble
economy
 Risk Premiums, not interest rates, were too
low
◦ Berlin Wall, Soviet Union, China on property
rights, export-led growth in Asian Tigers, free
trade agreements
◦ Developing world growth rates
◦ Shift in share of world GDP
◦ Increase in global savings
◦ Decline in risk premiums
◦ Fueled housing demand worldwide
Stephanie Kelton, Associate Professor, UMKC 12

13. Stephanie Kelton, Associate Professor, UMKC 13

14. On Subprime Lending: On Regulation:
―There is no way to prevent
 The ―retraction‖ how innovative markets will
develop. All you can do is
 Favorable remarks set a general strategy.
were aimed at those [Deregulated markets are]
who would move or highly competitive,
refinance innovative, and dynamic—
but periodically visited by
wrenching crises.
 Low rates had little [Regulated markets are]
impact on use of more stable, but slower
ARMs growing.‖
 Gramlich‘s letter (Greenspan, 2008)
Stephanie Kelton, Associate Professor, UMKC 14

15. He has said:
◦ It is impossible to spot a
bubble until after it bursts
◦ It is dangerous to ignore
an emerging bubble
◦ It is dangerous to address
a bubble
◦ The best strategy is to
focus on the post-bubble
economy
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16. Early warning signs:
◦ Buying driven by anticipation of rising prices
◦ Home sales increase sharply
◦ Numbers of resort buyers, trade-up buyers and first-time
buyers all increase
◦ Houses purchased as ―investments‖
◦ High percentage of exotic loans
◦ Residential construction activity booms
◦ Expected rates of return based on recent experience not
historical norms
◦ Transactions costs not a deterrent
◦ Market was extremely liquid
Stephanie Kelton, Associate Professor, UMKC 16

17. “There are people making real estate
investments for residential and other
purposes in the expectation that prices can
only go up and go up at accelerating rates.
Those expectations ultimately become
destabilizing to the economic system”
(Jordan, February, 1999)
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18. He argued that:
◦ It was difficult to
speculate in housing
◦ Housing markets are
local
◦ National housing
bubbles are nearly
impossible
Stephanie Kelton, Associate Professor, UMKC 18

19. Stephanie Kelton, Associate Professor, UMKC 19

20. Froth was ―a euphemism for a bubble . . . all the froth
bubbles add up to an aggregate bubble‖ (2007)
So why didn‘t he target it?
 He targeted the stock market bubble in 1987
◦ DOW lost 508 points (22.5%) but rebounded by early 1988
 He targeted the stock market again in the mid-1990s
◦ First with rate hikes (1994) then with “irrational exuberance” (1996)
◦ Goal was to create uncertainty (certainty→euphoria)
◦ “when things get too good, human beings behave awfully”
 Beginning in June 1999, the Fed raised the ffr 175bp
◦ This was probably done in order to let some air out of the stock market
Stephanie Kelton, Associate Professor, UMKC 20

21. Stephanie Kelton, Associate Professor, UMKC 21

22.  Greenspan now
claims that the Fed
did act against the
emerging housing
bubble
 But long-term
interest rates were
falling as the Fed
raised short-term
rates
Stephanie Kelton, Associate Professor, UMKC 22

23. ―It is household consumption or
household demand more generally
that clearly is the source of strength
holding this economy together . . . I
suspect that without that support, we
would be observing much lower levels
of economic activity‖ (Greenspan,
August, 2001).
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24.  When he resigned on
Jan. 31, 2006, he was
widely hailed the most
successful central
banker of all time
 Perhaps he was more
concerned with his
legacy than with the
stability of the system
Stephanie Kelton, Associate Professor, UMKC 24

25. ―I was aware that the
loosening of mortgage
credit terms for subprime
borrowers increased
financial risk . . . But I
believed then, as now,
that the benefits of
broadened home
ownership are worth the
risk. Protection of
property rights, so critical
to a market economy,
requires a critical mass of
owners to sustain political
support‖
(Greenspan, 2007)
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26.  Greenspan is a self-described
libertarian
 He counted among his formative
influences the novelist Ayn Rand,
who portrayed collective power
as an evil force set against the
enlightened self-interest of
individuals
 He was deeply committed to the
belief that those participating in
financial markets would act
responsibly
 He tethered the health of our
nation‘s economy to this faith
Stephanie Kelton, Associate Professor, UMKC 26

27. Greenspan has conceded
that the meltdown
revealed a flaw in a
lifetime of economic
thinking:
―Those of us who have
looked to the self-
interest of lending
institutions to protect
shareholder equity
(myself especially) are in
a state of shocked
disbelief.‖
Stephanie Kelton, Associate Professor, UMKC 27

28. Complacent
Not The Root Cause
and
Complicit
Stephanie Kelton, Associate Professor, UMKC 28

29.  Modern compensation systems did not
―align‖ interests In a sampling of files, Fitch found:
◦ Current system not only allows but
encourages fraud  66% Occupancy fraud
◦ Made possible by decades of  51% Property value or condition issues —
deregulation Materially different from original appraisal
 48% First Time Homebuyer
 Profit margins on prime loans are  44% Questionable stated income or
extremely low employment
 22% Hawk Alert — Fraud alert noted on
 Requires CEO to maximize growth credit report
through ―adverse selection‖  18% Credit Report — Questionable
ownership of accounts (name or social
◦ Unregulated nonprime sector security numbers do not match)
◦ Liar‘s loans, NINJAs, etc.  16% Credit Report — Based on
―authorized‖ user accounts
 Synthetic Derivatives that were  16% Straw buyer/Flip scheme indicated
impossible to value properly based on evidence in servicing file
 16% Identity theft indicated
 Aided by the rating agencies that gave  10% Signature fraud indicated
AAA ratings to CDOs without sampling
loan files (Fitch Ratings, Special Report, Nov. 2007)
Stephanie Kelton, Associate Professor, UMKC 29

30. “The potential impact of
mortgage fraud on financial
institutions and the stock market
is clear. If fraudulent practices
become systemic within the
mortgage industry and mortgage
fraud is allowed to become
unrestrained, it will ultimately
place financial institutions at
risk and have adverse effects on
the stock market.”
-Chris Swecker, former FBI Assistant
Director, Criminal Investigative Division,
Introductory Statement: House Financial
Services Subcommittee on Housing and
Community Opportunity, 7 October 2004
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31. Globally
◦ Worst economic downturn since WWII
◦ Protests, riots, suicides, civil unrest
◦ Protectionism
◦ Anti-Semitism
Nationally
◦ Will probably take 5 years to recover
◦ Fiscal stimulus is too small
◦ Bailouts have done little (if anything) to
shore up confidence
◦ Monetary Policy has nowhere to go
◦ States are slashing spending to deal with
budgets gaps of about $120 billion
Regionally and Locally
◦ Helped by large share of jobs in federal
government, health care and education
◦ Large employers in some industries will
cut 25% of labor force
◦ Serious concerns about state funding in
KS and MO
Stephanie Kelton, Associate Professor, UMKC 31

32.  Regional Decline
 Will set off intense competition
and beggar-thy-neighbor
policies
 Time-honored tradition:
pay-to-play
◦ MO: $170M on historic preservation
tax credits (more than total for 19
CCs)
◦ IA: $302M in ‗07 and ‗08
◦ MN: proposing $50M in new tax
credits and reduction in business tax
rate over next 6 yrs
◦ OH: Lt. Gov. looking to use tax
breaks to create/save jobs
◦ KS: $1.3B over last 5 yrs and some
legislators pushing for more
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33.  Long-term perspective
 10-year transportation plan?
 Saudi-Arabia of wind?
 Area development?
◦ Casinos, water park, aquarium, etc.
◦ JoCo Education Research Triangle Authority
◦ NBAF
◦ $200M ―Green Impact Zone‖ in KCMO
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