Kenneth Kriz Associate Professor
UNO School of Public Administration
The Great Recession and What it Means for State & Local Public Finance
Outline • What Happened and Is Happening? • What Are the Consequences for Public Finance & Investing? • Is It Ending?
What Happened? • Economic growth stagnated – For the first time since 1953-54, real GDP down for 3 consecutive quarters
• Unemployment has risen from a low of 4.4% in late 2006 to 9.8% now, employment losses are at post-WWII highs • Massive dislocation of resources – Failure or reorganization of previously rock-solid financial institutions • The world’s 20 largest commercial banks lost a combined $1.1 trillion in market value
How Did It Happen? • “Liquidity Trap” • Theories of the Business Cycle – Rational Expectations
• “Financial Instability” - Minsky
Strong Growth in Early-Mid 2000s
Housing Bubble and Bust
Freezing of the Credit Market
Wealth Destruction
Economic Troubles
Effect on State & Local Government Finance • Revenue Effects – Strong Downturn in Economically Sensitive Revenues – Assessed Values Stagnant or Falling
• Expenditure Effects – Increased Demand for Public Services
• Borrowing Difficult and at High Rates Compared to Treasuries • Investment Portfolio Losses
Budget Troubles
Pension Investment Behavior • At the end of 2007, survey of 100 largest defined benefit pension plans indicated the following asset allocation Stocks DomesticBonds International Bonds Real Estate Alternative Assets Cash
55.73% 27.21% 0.84% 6.10% 7.68% 1.55%
Pensions: The Next Shoe?
Recession and Recovery?
Signs of a Recovery… • Economic – CFNAI increases – Industrial Production & Capacity Utilization rise – Asset prices stabilize
• Financial – Risk measures slacken – Credit eases – Bond spread narrows
But Maybe Not…