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The Great Recession and What it Means for State & Local Public Finance

The Great Recession and What it Means for State & Local Public Finance. Kenneth Kriz Associate Professor. UNO School of Public Administration . 1. Outline. What Happened and Is Happening? What Are the Consequences for Public Finance & Investing? Is It Ending?. What Happened?.

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The Great Recession and What it Means for State & Local Public Finance

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  1. The Great Recession and What it Means for State & Local Public Finance Kenneth Kriz Associate Professor UNO School of Public Administration 1

  2. Outline • What Happened and Is Happening? • What Are the Consequences for Public Finance & Investing? • Is It Ending?

  3. 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

  4. How Did It Happen? • “Liquidity Trap” • Theories of the Business Cycle • Rational Expectations • “Financial Instability” - Minsky

  5. Strong Growth in Early-Mid 2000s

  6. Housing Bubble and Bust

  7. Freezing of the Credit Market

  8. Wealth Destruction

  9. Economic Troubles

  10. 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

  11. Budget Troubles

  12. Pension Investment Behavior • At the end of 2007, survey of 100 largest defined benefit pension plans indicated the following asset allocation

  13. Pensions: The Next Shoe?

  14. Recession and Recovery?

  15. Signs of a Recovery… • Economic • CFNAI increases • Industrial Production & Capacity Utilization rise • Asset prices stabilize • Financial • Risk measures slacken • Credit eases • Bond spread narrows

  16. But Maybe Not…

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