Feel Free To Panic

"You better get on your knees and pray,
panic is on the way"
- Oasis

It's official, we are in a recession. So says the NBER, the organization that is assigned the noble duty of charting the boom and busts of the U.S. economy.

I'm only playing up to the hype that permeates the media and internets, there's no reason to panic yet. We just went through one of these recessionary periods seven years ago, no big deal. Anyway, economists say that recessions happen on the margins so most of you may end up doing fine. There is plenty of reporting on how the economic downturn is impacting our lives and fleshing out just where those margins are. A small sample of what I've found interesting over the last twenty-four hours.

It's Raining Bad News in Columbus
A follow up to my earlier post on the extreme duress being placed on State finances by lagging tax collections. Articles on GONGWER and the Plain Dealer add more information about the precarious position the Strickland administration is in. They are looking at another round of cuts followed by a new budget process that will require seismic changes in program spending to stay afloat. Ted can't even think about having the General Assembly freeze the final phase on cuts to the income tax lest he be branded "tax hike Ted". That ambitious plan to reform school funding is becoming more of a challenge every day.

Credit Market Bummer
Ignore the stock market for now and pain it is inflicting on your 401k. Market volatility is up so the wild swings in market value are becoming common place. The Volatility Index (VIX) has been averaging 40 as compared to the once normal 20. The real problem has been with the more pertinent credit markets. The untouchable ether where all financial activity comes to being.

Calculated Risk has continued to follow several key indicators and the news in the past few days is disconcerting. Credit markets are still exhibiting troubling signs including what CR called a "stunning flight" to Treasuries on Monday. This trend combined with other bad news (TED Spread up), indicates the problems that were caused by the collapse of the financial system have not gone away.

Portable Alpha, Sinkable Pension
The WSJ had a very interesting but short article on the plight of the Pennsylvania State Pension Fund. It looks like that fund and some others are taking huge losses from market downturns. Now, one would expect a pension fund to see a decrease in earnings and value considering the current market conditions. Unfortunately the managers at the PA pension fund had been imbibing the same elixir that other financial risk takers were drunk on. Using a hedging strategy called portable alpha the pension fund managers asserted they could beat the market and never pay the price for excessive risk taking. That decision hasn't worked out to well, they've lost billions in the last quarter alone.

The scope of problems and extreme difficulty the current financial crisis has created for public finance is impressive. There will most likely be more stories such as this one in the coming months.

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