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Iowa and the Economic Crisis: December 2008

posted on December 18, 2008 at 5:54 PM

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In total the U.S. has committed in one form or another more than eight trillion dollars to rescue the nation’s financial system.  

Much of the relief is in the form of additional insurance, as well as loans that in some instances are already providing a return to the U.S. treasury. 

The hope is the government’s investment will stabilize the economy and provide a financial return that will off-set the historic expenditures.  The fear is an economic meltdown, if it doesn’t work.  

Certainly Americans are bracing for the worst.  In fact the crisis is provoking conduct that is nearly 180 degrees against the national behavior.  For the first time in a long time, Americans are trying to save.  

New Federal Reserve data shows U.S. households last month paid down debt for the first time since the central bank began keeping records in 1952.

Normally, that would be a positive longer-term trend, but in an economy, 70% of which is dependent on retail sales, saving is adding an additional chill to an iced economy.

The effect of the consumer pull-back is rippling across the economy.   The cost of living plunged 1.7% last month – the biggest drop since 1947 when records were begun.  

The economic slowdown is as apparent in Iowa as anywhere.   A spectrum of workers is being laid-off --from the state’s usually stable financial sector to factory floors and construction. 

The rate of home foreclosures has ebbed, but the rate of delinquent payments is growing.   And like the rest of the country the drop in housing starts and requests for new mortgages is the most acute since the depression. 

Car dealers remain fearful about their future as they view lots full of cars barren of tire kickers.

Be it consumer or financial, few investments today, seem worth the risk.   Economic observers, like Iowa State economist Neal Harl, suggest the structure and conduct of the economy is undergoing a profound shift, possibly for the long-term.

Neal Harl, Iowa State University: "I think first we have to realize that this may not be a conventional decline.  A conventional decline there's a fairly sharp drop and then a climb out that usually is completed in two to five years at most.  This one I don't think is quite of that type.  I've been saying that the signals are pointing in a different direction to what I call a down shifting, to a new lower level and that's why I don't think our remedies are working particularly well." 

Adding to Iowa’s woes: the cost of the historic floods of 08 persists and will endure for some time as an economic drag.  

Iowa’s farm economy was booming a year ago with historic high grain prices and robust demand for Iowa-made ethanol fuel.  But since then commodity prices have plummeted. 

The drop has not helped ethanol producers who had committed to buy grain at high prices.  Additionally, demand for ethanol has fallen sharply in the wake of plummeting oil prices. At least two ethanol refiners in the state are seeking bankruptcy protection, and the rest are seeing profit margins dissipate as the price of ethanol falls, and the availability of operating money from lenders lessens. Plans for expansion in the sector have been shelved, further reducing activity in the state’s construction sector.  

Confirming the weakness in the state’s economy, the flow of state government tax revenues has tapered.   Projections are the state’s budget for the current fiscal year will fall short of money needed to fund commitments by 100 million dollars. Projections for the next fiscal year are not encouraging.   

 

Tags: economy Iowa public service

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