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 55.73%
DomesticBonds 27.21%
International Bonds 0.84%
Real Estate 6.10%
Alternative Assets 7.68%
Cash 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…