California, An Economy in
Crisis
Bill Watkins
January 2009
Bill Said (April 2008):
“The FED is
creating dynamics
that will lead to a
crisis it can’t
contain.”
What is a Nash Equilibrium?
Multiple Equilibria
Outline
• United States
• California
United States
Economy
Bill Says:
Prior to September,
the economy showed
remarkable resilience.
What Happened?
First, we had Greenspan
Impacts of Greenspanian
Economics
• Trained market participants
• More volatile market cycles
– More frequent
– More amplitude
Moral Hazard is not just a
theoretical concept.
Then, We Increased Home Ownership
70%
69%
68%
U.S. Home Ownership Rates
67%
66%
65%
64%
63%
1968 1980 1984 1988 1992 1996 2004 2008
Then, the problem grew.
Problems
• Freddie Mac & Fannie Mae
• Securities
• Home sales
• Bailouts
Real Estate Values Fell
8.3 7.3
6.5 7.1 7.2
6.0
3.1
1.6 1.5
0.2
-0.2 -0.8
-5.4
-9.0
Real Estate Wealth Growth Rate -11.7
-18.8
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006 2007 2008
Finally, we had panic. We
switched to a bad equilibrium.
Credit Froze
Sort of
United States Bank Loans
Billion $
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
United States Bank Loan Growth Rates
40.0
30.0
20.0
10.0
0.0
-10.0
Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Commercial & Industrial Real Estate
Consumer Security
Other
Commercial Delinquency is Climbing Fast
percent
5 Delinquency Rates
4 All Banks, SA
4
3
3
2
2
1
C&I Loans
1 Credit Cards
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Asset Values Collapsed
5.6% 6.1% 6.3% 5.6% 5.5% 5.3%
4.6% 5.2% 4.0% 4.0%
3.8% 3.7%
-0.1%
-4.6%
Net Wealth Growth
-7.5%
-11.0%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006 2007 2008
Incomes Continued to Climb
8%
6%
4%
2%
0%
-2%
-4% Real per Capita Income Growth
-6%
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Still, Consumption Fell
8%
6%
4%
2%
0%
-2%
Real per Capita Consumption Growth
-4%
1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Demographics are exacerbating the problem.
We Had a Bailout
How Much Have We Spent?
Did it work?
What’s wrong with
government ownership of
financial institutions?
What’s wrong with bailouts,
or
why do we need failures?
What about Ben and
the Fed?
We’re Going To Have A New
Stimulus
As of 12/11/2008 only 14
percent of WSJ’s surveyed
economists thought the
recession would last past
2009Q3.
Can we make things worse?
Will we have a
depression?
Unemployment Rate
United States - (percent of labor force)
New Deal
25.2
24.1
22
Smoot-Hawley 20.3
19.1
17 17.2
16.3
14.3 14.6
Stock Market
Crash
9.9
8.9
4.2 4.7
3.2
1928 1930 1932 1934 1936 1938 1940 1942
Similarities
Differences
What about the Japan example?
Forecasting after a regime shift.
What will the recovery look like?
Probably not, but
The herd could turn.
I don’t think so
What will the recovery look like?
Probably not
Maybe
I don’t think so
Most likely
A Declining Economy
4.8%4.8%
2.8%
Real GDP Growth SAAR
1.5%
0.9%
0.0%
-0.2% -0.5% -0.3%
-1.5%-1.1%
-2.6% -2.7%
-3.5%
-4.0%
-6.2%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
Declining Investment
6.2% Real Investment Growth SAAR
3.5%
0.4%
-0.1%
-1.3%-1.6%
-3.1% -4.1%
-5.8% -4.9%
-7.0
-9.6%
-11.9% -11.5%
-15.0%
-23.0%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
Job Losses
1.6% 1.4%
1.0%
0.8% 0.9% Job Growth SAAR
0.5%
0.2%
-0.1%
-1.2%
-1.6%
-2.0%
-2.3% -2.5%
-2.8%
-3.2%
-3.7%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
High Unemployment
9.9%
9.0% 9.1% 9.1% 9.1%
8.3% 8.4%
Unemployment Rate
6.7%
6.0%
5.3% 5.2%
4.8%
4.2% 4.4% 4.7% 4.6%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
Credit availability, trade, and regulation are
real concerns. Each will have long-term
impacts.
Finally, what about inflation?
United States
Inflation percent Surplus % of GDP
20.0 10.0
5.0
15.0
0.0
10.0
-5.0
5.0 -10.0
0.0 -15.0
1901 1910 1919 1928 1937 1946 1955 1964 1973 1982 1991 2000 2009 -20.0
-5.0
-25.0
-10.0
-30.0
-15.0 Inflation Surplus % of GDP -35.0
California’s
Economy
Not What it Used to Be
The weakest economy in decades
10.0 California
Real GDP Growth Rate
8.0
6.0
4.0
2.0
0.0
Real percent change HP filtered
-2.0
1964 1969 1974 1979 1984 1989 1994 1999 2004
People are leaving
200,000
100,000
0
-100,000
-200,000
-300,000
California Domestic Migration
-400,000
1991 1996 2001 2006
We’re losing jobs.
1.5
2008 2007
1.0
0.5
0.0
-0.5
-1.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
California Job Growth (Y-O-Y Percent Change)
Retail Sales Are
Down.
6.1% 6.0%
4.2% California Real Retail Sales Growth
Year-on-year change
1.9% 2.4%
1.1%
0.5%
-0.7%
-1.8%
-2.4%
-3.2% -3.0%-2.6%
-3.6%
-4.6%
-5.9%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006 2007 2008
Retail Sales are Down
Across the Board
Other Retail -6.0
Service Stations 5.7
Home Furnish./Appliances -7.1
General Merchandise -3.7
Food Stores -3.2
California
Eating and Drinking -2.3 1-Year Real Retail Sales
Motor Vehicles & Supplies -5.5 Growth by Type - 2008 Q3
Bldg Mat'l and Farm -9.8
Apparel Sales -2.6
Tourism Is Down.
California Real Hotel/Motel
Room Revenue Growth
8.1
7.1 7.2 Year-on-year change
6.7
5.3
4.4 3.9 3.9 3.5
3.7 3.7
3.2
2.1
0.3
-0.1
-3.6
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006 2007 2008
Seasonally Adjusted Hotel/Motel Occupancy Rate
California - (percent)
70.4
69.7 69.8 69.7 69.6
68.8 68.8
68.4 68.2 68.3 68.2
67.8
67.3 67.4 67.2
65.0
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2004 2005 2006 2007 2008
Even the tech sector is having difficulty
obtaining capital.
Then, there is the
State budget
California
Forecast
Continued Economic
Crisis
2.2% 2.0%
1.1% 1.1%
0.7% 0.6%
0.2%
-1.2
-
1.9%
-
2.4%
California Gross -
3.0%
Domestic Product Growth -
3.7%
4.2%
- -
4.2%
-
5.0%
-
5.8%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2007 2008 2009 2010
More Job Losses
1.3 1.1
0.9 0.7
0.3 0.2
-0.1
-0.5
-0.9
-2.4
California Y-O-Y Job Growth
Percent -3.5
-3.9
-4.3
-4.6
-5.2 -5.0
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
High Unemployment
11.8
10.8 10.9 11.0 11.0
10.1 10.3
California Unemployment Rate
8.4
7.7
6.3 6.5
5.3 5.5 5.6
5.1
4.6
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
Declining Retail Sales
California Real Taxable Sales Growth
-0.4%
-0.7%
-1.7%
-2.2% -2.4%
-3.1%-3.2% -3.1%
-4.0%-4.0% -4.2%
-4.3%-4.2%
-4.5%
-5.0%-5.2%
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2006 2007 2008 2009 2010
How Not to Stimulate
Economic Development
• Balance the budget with one-time
federal bailout funds
• Increase regulation and taxes
• Invest in inefficient or unproven
technologies
Conclusion
California is not serious about its economic
future, and it will not reach its potential.
Thank you for not
shooting the
messenger.
Visit us at
www.ucsb-efp.com