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Financial Skeptic Bulletin, August 2008

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[Aug 28, 2008] GDP Release Signals Further Decline into Banana Republic Status

Political manipulation? As one reader noted "Economics are politics. The golden rule: The man with the gold makes the rules. Want to know why? Follow the money. Politicians lie."
Last year, we put America on Banana Republic watch, and sadly, things appear to be playing out as we feared:
I'm certain you're familiar with the expression "death wish." I am beginning to wonder whether America has a banana republic wish. The country has been taking steps towards being a small-minded, elite-dominated, sham democracy.

Mind you, I am pointing to a tendency, not an established fact. The US isn't Haiti, or even Argentina. But we are moving in that direction on a variety of fronts, and the devolution seems so concerted that I wonder if there is some unconscious mass desire to give up on the messiness and ambiguity of an open society and surrender to the certainty of one with institutionalized inequality, more authoritarianism, but more predictability, and perhaps an illusion of greater security.

What triggered this line of thought? Something surprisingly minor: the April employment report,...But even this disappointing figure may have been the product of manipulation, as we will discuss in due course. And we've now had so many instances of what charitably may be called artful reporting that it's beginning to undermine my faith in government statistics. Unreliable government statistics are a Banana Republic Indicator..... the integrity of that data is becoming compromised on enough fronts so as to render them suspect. And inaccurate data leads to bad business and bad policy decisions. Bad policy decisions are particularly likely since the information is massaged so as to minimize unpleasant news.

What is remarkable is that today's 2Q GDP revision. from a 1.9% that most observers regard as likely to be revised downward (and initial releases are often revised by significant increments), has now been revised to a simply not credible 3.3%. We'll discuss in a bit how this artwork was achieved.

...Barry in a later post, with the help of a chart provided by Michael Panzner, found the real smoking gun: a laughable assumption for inflation. The lower the inflation assumption, the higher the GDP figure. Not only was the 1.2% chosen lower than CPI, which has been adjusted over time to underreport inflation so to reduce payouts on CPI-indexed programs, most notably Social Security, but as a commentor on Econompics noted, constituted the biggest gap between the GDP deflator and CPI since 1980 (squinting at the chart, that seems to be accurate)...

...Mind you, this massaging is taking place on top of long-running adjustments that make both GDP and inflation stats questionable. Is it time to revive the 1960s expression "credibility gap"?

Refreshingly, some in the MSM are coming close to doing so. This story in Bloomberg, "Lagging Incomes Signal U.S. Economy Weaker Than GDP Suggests," which came out within hours of the release, discusses the disparity between incomes data and GDP without taking on the GDP report frontally. That's a step in the right direction.

Anonymous said...
Some don't seem to understand what the GDP covers or what the GDP deflator measures. GDP covers more than the US consumer - GDP and its growth include the contribution of net exports. And exports have been undergoing disinflation due to the cheaper dollar. This brings down the deflator.

In other words, the proper inflation measure of GDP includes the effect of prices on foreign buyers as well as American consumers.

It's an open economy after all.

One of the bloggers you quote is also famous for promoting the idea that the measurement of savings is wrong because it doesn't include marked to market changes for assets.

Similar errors - the problem lies in not understanding (or being unwilling to understand) what the scope of the measurement is intended to be.

Yves Smith:
Anon of 10:07 PM.

With all due respect, with an export sector of roughly 15% of GDP, it is well nigh impossible to reconcile a 2Q GDP deflator of 1.2% with a CPI-U running at 4.3% over the last year (and stronger appreciation in 2Q) and a PPI rising at 8.9% in the last year (and again, faster in 2Q).

Nor is there any reason to expect that exports are decreasing their prices in dollar terms. A weak dollar in fact permits them to increase prices in $; that's an oft-cited worry, that manufacturers become fat and lazy with a weak currency, either increasing prices and fattening their margins, or simply failing to innovate since the price advantage lessens the pressure to improve features or quality.

Further, as we noted in a recent post, policymakers are worried that much of our export gains are skewed towards commodities, not finished goods. You'd need to look at a US basket of commodity exports to come up with the right number to determine how their prices changed over the quarter.

Nevertheless, I imagine most readers of this blog would be delighted to bet $100 against you that US commodity export prices overall fell in dollar terms from the end of 1Q to the end of 2Q. The dollar rally did not occur until July.

The fact that Barry Ritholtz is off the mark upon occasion does not refute any of the arguments of his cited above.

And that marvelous tidbit from Genesis, that the deflator for non-financials was negative, says how dubious this entire exercise is.

David :

Tell me it ain't so. I heard the wildly optimistic 'growth' figure and wondered what country I am in.

Political manipulation?

However, perhaps the overwhelming profits in commodities (oil especially_) and estimated profits from future uncollected loans are skewing the figures. One gal making a million an hour makes 10,000 guys look like they're doing well even if they are losing individual income while they are included in the same quantity averaged with the million an hour person. That's the law of averages. Just a few wild successes make the whole pie look good. We know how a few Mobile Exxons are doing. Of course 10,000 small businesses are failing at the same time but that's statistic not parsed in the overall "growth".

Growth like this reminds me of cancer.

Anonymous :
menzie chinn i thought had a nice, balanced take, while merrill lynch's david rosenberg was quite critical if you can get a hold of the report; here it is in a nutshell:

So let's get the picture straight:

To believe in today's revised GDP data, we have to believe that...

1. We are seeing near-record deflation in the nonfarm nonfinancial corporate sector.

2. We are seeing double-digit earnings growth in the financial arena.

3. Productivity growth is running at a near-3.5% pace and as such, "potential" GDP growth is close to 5% (we'd like to believe that, but it can't be true).

4. Unit labor costs in the nonfarm nonfinancial sector were actually declining at a 2.2% annual rate in the second quarter (again, being bond bulls, nothing would make us happier if this were all true),

5. Somehow, in a quarter which saw the CPI rise at a 5% annual rate and PPI up by more than a 10% annual rate – both accelerating over the 1Q runup – the GDP price deflator managed to decelerate from a 2.6% annual rate in 1Q to a 1.2% annual rate in 2Q, the softest economy-wide inflation print in a decade (and recall, the 2Q ends in June when the commodity bubble was just about to reach its climax).

We are non-believers...

"[Freddie] had to pay hefty interest rates [in an auction of its debt yesterday]….Five-year notes were priced to yield 4.172%, or 1.13 percentage points above yields on safe Treasury notes, the highest "spread" Freddie has ever paid on such debt."
So the momentary backing off of Japanese investors in and of itself may not be as big a cause for concern as it appears to be. But there is a second-order question: if the populace of a country comes to regard US credits, public and private, as less than desirable, continuing large central bank purchases will become increasingly controversial.

Now China may seem immune to that sort of pressure, but recall even they have taken a lot of heat for the Blackstone investment and actually seem (as best I can judge at this remove) more than a tad embarrassed.

Skeptical CPA points to a similar line of thinking: the return on offer for US bonds is inadequate. quoting Steve Hanke at Forbes (August 11, no online source):

In short, the dollar rules, to the great benefit of the U.S. Could it lose its dominion? It could. ... For real rates, compare the nominal return on short-term Trasury bills (less than 1.5%) with the rise in the consumer price index over the last year (5%). Someone sitting on cash in the form of T bills is seeing his wealth shrink (and this is before income tax is subtracted). Neither U.S. savers nor foreign central banks are willing to undertake this sacrifice forever. ... Foreign central banks purchase roughly 80% of all the new debt issued by the U.S. government. ... By my calculation, approximately 55% of the increase in corn since 2001 can be accounted for by the dollar's decline. ... By denying a direct link between the dollar and commodity prices, the Fed is signalling that it wants room to move interest rates and the dollar down
Now to the story on Japan from Bloomberg:
Japanese investors made the biggest weekly net sales of overseas bonds since at least 2001 on currency swings and concern the U.S. housing slump will worsen.


Anonymous said...
According to U.S. Dept of State, United States 2006 GDP component makeup was:

67.8% Service
12.4% Government
12.1% Manufacturing
4.9% Construction
1.9% Mining
0.9% Agriculture, Forestry, and Fishing


Banks Need Fistfuls of Dough Through End of 2009, Thanks to Refis

Many investors might have decided to sit with their 2 year paper; others may have gotten in opportunistically, finding what looked to be an attractive trade.

But anyone looking at these credits now is going to be worried about the risk of further downgrades. That, plus the sheer amount of paper on offer is going to mean these deals will need to carry healthy spreads to get done.

Of course, as the article notes, financial firms could simply shrink their balance sheets. And even though that is what ultimately needs to happen (the US is overleveraged), its the last thing the Fed or Congress wants to see, since deleveraging is deflationary.

From the Wall Street Journal (hat tip reader Steve A):

At issue are so-called floating-rate notes -- securities used heavily by banks in 2006 to borrow money. A big chunk of those notes, which typically mature in two years, will come due over the next year or so, at a time when banks are struggling to raise fresh funds. That's forcing banks to sell assets, compete heavily for deposits and issue expensive new debt.

The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months....

As banks scramble to pay the floating-rate notes, they could see profit margins shrink as wary investors demand higher interest rates for new borrowings. They're also likely to become less willing to make new loans to consumers and companies, aggravating economic downturns in both the U.S. and Europe.

"It's going to be a bigger problem now than it was in the first half of this year, but it's going to continue on for probably at least a nine-month period," said Guy Stear, credit strategist at Société Générale SA in Paris.

By the end of this year, big banks and investment banks such as Goldman Sachs Group Inc., Merrill Lynch & Co, Morgan Stanley, Wachovia Corp., and U.K. lender HBOS PLC must each redeem more than $5 billion in floating-rate notes, according to a recent report from J.P. Morgan. Other big lenders such as General Electric Co., Wells Fargo & Co. and Italy's UniCredit Group also face big bills in coming months, the report says.

As we and the Journal noted earlier, the GSEs have over $225 billion to refinance by the end of September.

"Too Big to Fail- We'll See about That,"

"We are approaching a solvency crisis that we think is about to result in an avalanche of asset sales"

The mess in the U.S. financial system is making me nostalgic for the dot-com collapse of 2000-2002.

The U.S. credit crunch turned 1 year old this month, and the situation clearly isn't improving. Major financial companies continue to reel from huge losses on defaulted home loans. Barring a dramatic turnaround in the economy, commercial real estate loans could become the next black hole -- although the banks will say, as they did initially with home loans, that commercial losses should be "manageable."

The unwinding of any market mania takes time, of course, and produces many casualties. That's the ugly side of capitalism at work.

...But the list of potential victims now includes too many of the biggest institutions, which in turn have financial ties to countless other players in the business. Every huge tree that falls can take down a lot of other trees.

... if regulators are ready to play tougher with other financial companies in jeopardy, they are likely to have plenty of opportunities to demonstrate their resolve.

That's because the banking and brokerage businesses have entered a second phase of the bad-asset workout, according to one large hedge fund manager whose views circulate on Wall Street but who doesn't seek or want publicity.

The first phase, the manager says, involved attempts by loss-ridden financial companies to raise fresh capital from investors. Some were successful, some were not.

The second phase, now underway, involves fire sales of assets by banks and brokerages that have no choice but to shrink themselves because there isn't enough willing and able capital out there to buttress every damaged balance sheet that needs it.

And as assets are dumped at fire-sale prices, that will trigger markdowns of similar assets, further weakening the finances of banks and brokerages across the board.

"We are approaching a solvency crisis that we think is about to result in an avalanche of asset sales," the hedge fund manager says.

Good luck, Chairman Bernanke.

[Aug 25, 2008] IMF cuts forecasts for world growth ahead of G20 meeting

Times Online

In a note prepared for a meeting of the Group of 20 (G20) nations next week, the IMF predicts world growth this year of 3.9 per cent, down from the 4.1 per cent estimated in its World Economic Outlook last month, a G20 finance official told Reuters. It expects growth of 3.7 per cent in 2009, down from 3.9 per cent.

The IMF's forecast for growth in the US this year remains unchanged at 1.3 per cent, but it trimmed its outlook for 2009 from 0.8 per cent to 0.7 per cent, Reuters reports.

It also revised expectations for growth in the eurozone: down to 1.4 per cent for the rest of 2008 from 1.7 per cent in July, and down to 0.9 per cent for 2009, from its earlier forecast of 1.2 per cent.

[Aug 25, 2008] Hamilton on Recession Indicators

From Professor Hamilton at Econbrowser: Recession indicators

Many people may not care whether our current situation meets the formal definition of a recession, but as I've explained previously, you should. ...

I do think there's a pretty strong case, based on the employment and unemployment numbers, that we are currently in a recession. ... the whole reason I'm interested in this question of whether our current difficulties should be classified as a recession, is that if we are in a true recession, the process is going to feed on itself, and more bad things are ahead of us. If it's a real recession, it should be evident in the 2008:H2 GDP numbers.

See Jim Hamilton's graphs.

I believe the economy is in recession and the negative feedback loops have started to kick-in. Good examples are less business investment and less local government spending - both impacting employment. These will be classic symptoms of a recession.

[Aug 25, 2008] LA Times: FBI Saw Mortgage Fraud Threat in 2004


From the LA Times: FBI saw threat of mortgage crisis

Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

As the article notes, the FBI had other priorities, and they didn't really have the resources to investigate the growing epidemic of mortgage fraud, and most of the mortgage lenders didn't seem to care:
Officials said they began approaching mortgage companies and others in an attempt to raise awareness about the growing fraud problem. But the lenders had little incentive to cooperate because they were continuing to make money.
More warnings that were ignored.

[Aug 24, 208] Home Sales Probably Held Near Decade Low: U.S. Economy Preview by Shobhana Chandra

Looks like we were present on the opening ceremony. The real game might start only in the 4th quarter or beginning of 2009. We might realize that freedom to shop is actually it's opposite

The real-estate recession will persist into next year as stricter lending rules and higher borrowing costs shackle demand. At the same time, equity is disappearing as home prices fall, and wages aren't keeping up with inflation, depriving Americans of the means to maintain spending, the biggest part of the economy.

``The economy is going down a shaky path,'' said Maxwell Clarke, chief U.S. economist at IDEAGlobal Inc. in New York. ``We're not going to see a rebound in housing anytime soon. Consumers are living hand to mouth, and the outlook for spending is very weak.''

...Consumers, after getting a temporary lift from the government's tax rebates earlier this year, are focusing on buying necessities and hunting for bargains to stretch their paychecks following the jump in food and fuel costs.

...Commerce Department figures on Aug. 29 will underscore the dimming outlook for consumer spending, according to the Bloomberg survey.

The report is also projected to reinforce concern over inflation ...probably rose 4.5 percent in the year ended July, the biggest 12-month gain since 1991.

...The one bright spot for the economy remains the narrowing of the trade deficit. A surge in exports caused the economy to grow even faster in the second quarter than previously projected. Revised figures from the Commerce Department, due Aug. 28, may show the economy expanded at a 2.7 percent annual rate from April through June, up from an advance estimate of 1.9 percent issued last month, according to the survey median.

``The data releases this week should illustrate the stark contrast between how well the economy performed in the second quarter and how bad the outlook for the second half of the year is,'' said Paul Ashworth, international economist at Capital Economics Ltd. in London.

Other reports this week may show orders for durables goods stalled in July and confidence among American consumers was little-changed this month from multiyear lows reached earlier this year, even as gasoline prices retreated.

[Aug 22, 2008] If Only Central Bankers Would Hit Bottom

I'm told that alcoholics and addicts have to hit bottom before they are able to renounce their self destructive ways. Ironically, their personal collapse makes them more capable of change than scientists, who, according to Thomas Kuhn in his landmark, The Structure of Scientific Revolutions, were so incapable of abandoning core beliefs that it would take an entire generation for significant advances to become widely accepted. The old guard literally had to die off before the new paradigm could take hold.

Bear with me in delving deeper into this comparison. The Wikipedia entry on Kuhn's work gives a sense of the power and durability of existing frameworks:

There is a prevalent belief that all hitherto-unexplained phenomena will in due course be accounted for in terms of this established framework. Kuhn states that scientists spend most (if not all) of their careers in a process of puzzle-solving. Their puzzle-solving is pursued with great tenacity, because the previous successes of the established paradigm tend to generate great confidence that the approach being taken guarantees that a solution to the puzzle exists, even though it may be very hard to find. Kuhn calls this process normal science.

As a paradigm is stretched to its limits, anomalies - failures of the current paradigm to take into account observed phenomena - accumulate. Their significance is judged by the practitioners of the discipline. Some anomalies may be dismissed as errors in observation, others as merely requiring small adjustments to the current paradigm that will be clarified in due course. Some anomalies resolve themselves spontaneously, having increased the available depth of insight along the way. But no matter how great or numerous the anomalies that persist, Kuhn observes, the practicing scientists will not lose faith in the established paradigm for as long as no credible alternative is available; to lose faith in the solubility of the problems would in effect mean ceasing to be a scientist.

In any community of scientists, Kuhn states, there are some individuals who are bolder than most. These scientists, judging that a crisis exists, embark on what Thomas Kuhn calls revolutionary science, exploring alternatives to long-held, obvious-seeming assumptions. Occasionally this generates a rival to the established framework of thought. The new candidate paradigm will appear to be accompanied by numerous anomalies, partly because it is still so new and incomplete. The majority of the scientific community will oppose any conceptual change, and, Kuhn emphasizes, so they should. In order to fulfill its potential, a scientific community needs to contain both individuals who are bold and individuals who are conservative.

We are desperately in need of radical new thinking among the financial elite. We may not simply be at the end of an era, we may be on the verge of a reformulation of capitalism itself. However, the signs are that there are few iconoclasts among the policy elite. Central bankers in particular seem hopelessly stuck in their world views, starting with their conception of their role.

Bloomberg's story, "Central Bankers at Retreat May See Few Options to Fix Economy," would normally get me riled up, but I am suffering from central banker fatigue. Railing at them is an exercise in futility, so I'll just hit the high points and encourage readers to jump into the fray.

Key excerpts:

The world's top central bankers gather at their annual U.S. mountainside symposium today with a sense there's not much more they can do to repair credit markets and rescue the global economy.

Reports in the last week showing a surge in inflation reinforce expectations that Federal Reserve Chairman Ben S. Bernanke will have to keep U.S. interest rates on hold. Similar conditions in Europe are paralyzing his counterparts at the Bank of England and the European Central Bank.

``All the central banks can provide now is time for the banking system to heal,'' Myron Scholes, chairman of Rye Brook, New York-based Platinum Grove Asset Management LP and a Nobel laureate in economics, said in an interview. ``What more they have to offer is now very limited.''....

``There isn't a lot they can do'' now, said former Fed Governor Lyle Gramley, senior economic adviser at Stanford Group Co. in Washington. ``The Fed really has to hope and pray that credit markets begin to heal by themselves.''...

The Fed, while leaving the benchmark interest rate unchanged for its last two meetings, says financial markets ``remain under considerable stress.'' One gauge watched by the Fed, the premium for banks to borrow for three months over a measure of the future overnight lending rate, averaged 0.77 percentage point last week, the highest since April.

The Fed's rate cuts also have failed to pass through to the housing market. The average rate on a 30-year fixed mortgage was 6.47 percent last week, about where it was a year ago....

Apart from lowering rates, Bernanke has pushed the limits of the Fed's powers to ease the crisis in credit markets. In December, he started auctioning 28-day loans to commercial banks. He followed that in March with a $200 billion program to auction Treasuries to investment banks in exchange for mortgage-backed securities and other debt. Bernanke also offered cash loans to other bond dealers that trade with the Fed.

With all these programs in place, Fed officials may be reluctant to do more without assurance that it will ease the credit crisis and not do more harm.

``They have done a lot, and at some point they simply have to give the markets the time needed to heal,'' said former Fed researcher Brian Sack, senior economist at Macroeconomic Advisers...

Some, such as former Bank of England policy maker Willem Buiter, who will address the meeting tomorrow, argue that the Fed's actions to date store up trouble for the future.

``There will have to be a lot of soul searching about whether central banks, in their rush to forestall a financial disaster, have created moral hazard and perverse incentives on an unprecedented scale,'' Buiter said.

The repeated use of the word "heal" says that the Fed has done a great job of pre-selling its message and the words of realists with Buiter will fall on deaf ears.

So what's wrong with this picture? Here is a starter list. Readers are encouraged to add to it.

1. There is a remarkable lack of introspection. The Fed (and by extension other central banks) seem to think they performed ably and are victims of circumstance. They seem to see themselves as agents that act on the system, and implicitly deny their role in creating the current circumstances.

2. Part of the lack of introspection is how mission creep worked to their disadvantage. The Fed in the old days understood its job: take the punchbowl away before the party got good. But Congress gave the Fed the dual mandate of price stability and creating full employment. The Fed was effectively given responsibility without having authority, yet over time seemed to develop unwarranted belief in its ability to deliver on these objectives (as opposed to the more modest aim of doing what it could around the margin to help). We recall hearing paeans to the financial authorities almost like clockwork before crises (well, maybe not 1997-1998): "Gee, they have things so well under control, we won't have a recession."

That false confidence got worse under Greenspan, who loves scouring data and took an inordinate interest in the stock market, indeed, seemed to regard rises in the averages as validation of his policies (see here for a longer discussion). And this misguided thinking conditioned Bernanke's reflexes when the crisis hit, His priority became validating asset prices, when the experience of Japan showed what a misguided course of action that was. Indeed, the most successful example of coping with a housing/banking crisis was Sweden in the early 1990s, when the markets were permitted to fall but the authorities moved quickly to recapitalize the banking system. Funny that we never hear anyone in the officialdom mention that model.

The Fed even considers itself to be in charge of the stability of the financial system , even though Congress has not added that to its job description. Moreover, the Fed has direct oversight over only a relatively small subset of market participants. For instance, only 15% of non-agricultural debt in the US falls under its purview.

Now the US central bank could kid itself that it, along with its peers, was doing a good job based on the so-called "Great Moderation," a twenty-year period that featured more stable growth (although it also came with more frequent financial crises). However, economist Thomas Palley disputes the conventional account of the success of this period and the contribution of central bankers to it:

It is often said that the winners get to write history, which matters because the way we tell history frames our understandings. What is true for general history also holds for economic history...

The last twenty-five years have witnessed a boom in the reputation of central bankers...based on an account of recent economic history that reflects the views of the winners...

The raised standing of central bankers rests on a phenomenon that economists have termed the "Great Moderation."... the smoothing of the business cycle over the last two decades....

Many economists attribute this smoothing to improved monetary policy by central banks....This explanation is popular with economists since it implicitly applauds the economics profession by attributing improved policy to advances in economics and increased influence of economists within central banks....

That said, there are other less celebratory accounts of the Great Moderation that view it as a transitional phenomenon, and one that has also come at a high cost. One reason for the changed business cycle is retreat from policy commitment to full employment. The great Polish economist Michal Kalecki observed that full employment would likely cause inflation because job security would prompt workers to demand higher wages...rather than solving this political problem, economic policy retreated from full employment and assisted in the evisceration of unions. That lowered inflation, but it came at the high cost of two decades of wage stagnation and a rupturing of the link between wage and productivity growth....

With regard to lengthened economic expansions, the great moderation has been driven by asset price inflation and financial innovation, which have financed consumer spending...

The important implication is that the Great Moderation is the result of a retreat from full employment combined with the transitional factors of disinflation, asset price inflation, and increased consumer borrowing. Those factors now appear exhausted. Further disinflation will produce disruptive deflation. Asset prices (particularly real estate) seem above levels warranted by fundamentals, making for the danger of asset price deflation. And many consumers have exhausted their access to credit and now pose significant default risks.

3. Focus on monetary policy and liquidity and lack of attention to regulatory and structural reform. The credit crisis has been a massive indictment of financial deregulation. Yet the Fed remains a hostage of free market ideology and what Willlem Buiter calls "cognitive regulatory capture." The Fed is too close to banks and industry, and almost seems to lack belief in the importance of oversight.

A full year ago, a vocal minority recognized the role of structural failings and called for the Fed and other regulators to investigate and develop new approaches. The proponents included Henry Kaufman, Australia's former Reserve Bank Governor Ian Macfarlane, Steven Roach, and Jim Hamilton. Kaufman in particular has offered some sound analysis and proposals that have languished on op-ed pages (one example here); others over the past year have pondered the need for reform and made recommendations.

But what do we see instead? The Treasury launching a plan to make the Fed into an uber-regulator, with the Fed having no particular idea of what it would do with its new powers. This is the worst of all possible worlds. The current fragmented system allows an ambitious or progressive regulator to take ground, which forces the other to react to protect their turf (Eugene Ludwig, head of the Office of the Comptroller of the Currency in the Clinton Administration end ran the Fed more than once).

Now one can correctly argue the central bank lacks formal authority to do much in the way of regulatory reform. Yet first, Bernanke has been extraordinarily aggressive in going to the limits of, even beyond, the Fed's charter (it most assuredly did not have the authority to stick taxpayers with the losses that eventually result from the Bear bailout, but Congress failed even to slap the central bank on the wrist for overstepping its bounds). Second, there has been an intellectual vacuum about what to do about the mess. The Fed and other central banks could readily have framed the debate and taken the lead in proposing reforms. But that role instead seems to have been seized by the Treasury, which seems more interested in quick fixes and the appearance of being in charge rather than the harder job of trying to achieve lasting progress.

I'm sure there is plenty to add to the Fed's rap sheet, and I hope readers will provide input.

[Aug 22, 208] It's Not Just Food and Energy

Financial Armageddon

Over the past year or so, much has been said about the impact that rising food and energy prices have had on poor and working-class families. Yet one household expense that has been a constant source of worry for a growing number of Americans over a much longer period of time is health care.

Not only are people struggling to pay medical bills that have long risen at a faster pace than reported inflation, the numbers of those who are uninsured have also jumped to record highs. Is it any surprise that with the economy heading into the tank, we are seeing stories like the following, "79 Million Americans Struggle to Pay Medical Bills," from HealthDay News?

Working-age Americans are facing mounting problems when it comes to affording health care, a result of what analysts are calling a "perfect storm" of economic woes.

In 2007, 41 percent of working-age Americans -- 72 million people -- reported having medical bill problems or trouble paying off medical debts, up from 34 percent in 2005.

Another 7 million adults over 65 had similar problems, bringing the total to 79 million adults struggling to pay health-care bills, according to a new study from The Commonwealth Fund, Losing Ground: How the Loss of Adequate Health Insurance Is Burdening Working Families.

"These findings provide further evidence that the health system is falling short of where it needs to be to ensure health and economic security," Karen Davis, president of The Commonwealth Fund, said at a Tuesday teleconference. "We need a new administration to make universal and affordable health insurance available," she said.

Also unsettling is the fact that adults in more income groups are being affected.

"What is notable is how this is spreading up the income scale," said Commonwealth Fund assistant vice president Sara Collins.

The survey, based on telephone interviews conducted between June 6 and Oct. 24, 2007 with 3,501 adults aged 19 and older in the continental U.S, found problems across multiple fronts:

Americans were experiencing the burdens outlined in the survey during a time of relative economic levity, the researchers pointed out. "Even in 2007, when the economic slow-down hadn't really taken hold, you found that 29 percent of those with medical bill problems or accrued medical debt reported being unable to pay for basic necessities like food, heat, rent," Davis said.

For more on the findings, head to The Commonwealth Fund.

[Aug 20, 2008] Sunrise, Sunset by Jon Chait

The problems with economics were structural but remedies were monetary (excessive credit) which like steroids created additional problem we are experiencing now.
Economist's View

Jon Chait says the so-called Bush Boom didn't do much for most people:

George W. Bush's Economy: The Invisible Hand Slaps Conservatives Again, by Jonathan Chait, TNR: ...Ah,... the Bush Boom. It's a bygone era, ... cut short--by ... the Bush recession. Actually, the second Bush recession, to be precise.

Now, I don't really think it's fair to blame a president for having the ecome that any subsequent improvement was the result of his policies. Of course,... the economy ... goes through cycles. ... Bush was claiming his miracle fertilizer succeeded because his plants were taller at the end of the summer than at the beginning of spring.

So the justification for Bush's economic policies was that the economy was no longer in recession. Now they can't even claim that any more. It's as if Bush's plants suddenly wilted in August.

[Aug 19, 2008] More Evidence of Sharp Contraction in Money Supply (Not for the Fainthearted)

"Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market."

The Telegraph story that highlighted this development provided additional detail:

Paul Kasriel, chief economist at Northern Trust, says lending by US commercial banks contracted at an annual rate of 9.14pc in the 13 weeks to June 18, the most violent reversal since the data series began in 1973. M2 money fell at a rate of 0.37pc...

Leigh Skene from Lombard Street Research said the lending conderve gave up being interested in money supply in the early 1980s, when new banking products made the data behave differently. But that hardly seemed a reason to abandon a useful tool, at least not without trying to understand how the new instruments affected monetary aggregates. Instead, the Fed sets target interest rates in a not-terribly-scientific fashion.

Note that while the Fed still published M1 (narrow money, currency plus demand deposits) and M2 (M1 plus time deposits, savings accounts, and non-institutional money market funds), it stopped reporting M3 (M2 plus large time deposits, institutional money market accounts, and short-term repos) in March 2006. However, some economists and services provide estimates,

The Telegraph tells us today that those private calculations of M3, like the publicly available monetary aggregates, show a sudden contraction, a deflationary signal. From the Telegraph:

Data compiled by Lombard Street Research shows that the M3 ''broad money" aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959.

"Monthly data for July show that the broad money growth has almost collapsed," said Gabriel Stein, the group's leading monetary economist.

On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.

The growth in bank loans has turned negative to a halt since March.

"It's obviously worrying. People either can't borrow, or don't want to borrow even if they can," said Mr Stein.

Monetarists say it is the sharpness of the drop that is most disturbing, rather than the absolute level. Moves of this speed are extremely rare....

Monetarists insist that shifts in M3 are a lead indicator of asset prices moves, typically six months or so ahead. If so, the latest collapse points to a grim autumn for Wall Street and for the American property market. As a rule of thumb, the data gives a one-year advance signal on economic growth, and a two-year signal on future inflation.

"There are always short-term blips but over the long run M3 has repeatedly shown itself good leading indicator," said Mr Stein...

M3 surged after the onset of the credit crunch, but this was chiefly a distortion caused by the near total paralysis in parts of the American commercial paper market. Borrowers were forced to take out bank loans instead. The commercial paper market has yet to recover

[Aug 19, 2008] Paul Krugman It's the Economy Stupor

Economist's View

In his speech accepting the Democratic nomination in 1992, a year in which economic conditions somewhat resembled those today, Bill Clinton denounced his opponent as someone "caught in the grip of a failed economic theory."

Where Mr. Obama spoke cryptically in St. Petersburg about a "reckless few" who "game the system, as we've seen in this housing crisis" - I know what he meant, I think, but how many voters got it? - Mr. Clinton declared that "those who play by the rules and keep the faith have gotten the shaft, and those who cut corners and cut deals have been rewarded." That's the kind of hard-hitting populism that's been absent from the Obama campaign...

Of course, Mr. Obama hasn't given his own acceptance speech yet. Al Gore found a new populist fervor in August 2000, and surged in the polls. A comparable surge by Mr. Obama would give him a landslide victory...

Bruce Wilder says...

Krugman on politics is tiresome, indeed. If he has some evidence for his thesis that the American People long for a populist vision, he should bring it forward; otherwise, he should shut up. He doesn't know what would cause Obama to surge ahead in the polls, and should not be mind-reading the whole electorate, while pretending that he does.

Obama has managed to draw a clear contrast on income taxes, and is fighting to keep it from being completely obscured by our incompetent Media. Larry Bartels is pretty clear that Obama's tax plan, as simple as it might seem to this blog's readers, is just the kind of thing American voters get confused about, and the Media proves incapable of reporting on accurately. Populism is not as easy a campaign theme as Krugman imagines.

On a number of other populist themes -- the mortgage crisis, gas taxes, off-shore drilling -- Obama would run some serious risks of committing himself to bad policy, if he tries to out-demagogue McCain on these issues. Does Krugman have any ideas about how to stop "Drill Here, Drill Now"? I didn't think so.

Obama is ahead in the polls, which indicate -- surprise! -- that about a third of the electorate has not paid any attention, yet. A majority of voters in 2004 elected George W. Bush; those people and their bad judgment haven't gone away, and their numbers, though diminished, put a floor under McCain's support, and a ceiling on Obama's.

Clinton's economic populism may have been a lovely thing, but not nearly as lovely in terms of his electoral chances, as Ross Perot. Clinton never achieved an actual majority, but he didn't need to. Obama will have to have an actual majority to beat McCain, but he's well on track to achieve that.

NLS says...

Bruce Wilder is on point once again. Most folks still haven't begun to pay attention and haven't even entered the stadium. (For example, note the traction Jackass Corsi's slash and bash book grabs.) PK is no doubt a brilliant economist, but doesn't he understand that injecting doubt and offering hesitation only steepens the hill?

The object of the game is to beat McCain.

Cyrille says...

Bruce Wilder on Obamania is tiresome. Anyone who speaks his mind for anything but singing the praise of Obama is immediately rebuked.

Krugman asks to state demonstrable facts, Bruce Wilder calls that asking to out-demagogue McCain. Uh?

Obama's lead in the polls is considerably smaller than his party's, so surely he must be doing everything perfectly. Still, Krugman notes that Obama has not had his acceptance speech yet, and that it could create a surge, but that won't make him less tiresome since he's a miscreant, he does not blindly worship.

Republican economics should these days be called names that will get you censored if children might be watching (they should have for the past 30 years, but now the conclusions are so obvious and immediate as to be plain to all, even those who reckon that "in 3 years time" is too far to ever happen). Failure to do so is yet another worrying sign that Democrats have turned into Republican light.

They have stolen, looted, lied and ruined a country the size of a continent for the sole benefit of them and their cronies. It's not demagogue to hold them accountable. And it's crazy to not attack them on that when the horrible consequences of their acts are the main thing on everyone's mind (OK, Iraq should be as well, but now all the media reports are sterilised and very few people in the US will get first hand experience).

Bruce Wilder says...

str: "Did a dysfunctional primary system give us two mediocre candidates?"

The primary systems of the two parties are quite different, and they produced contrasting candidates. Obama is a an excellent, historic candidate, leading an extraordinarily capable campaign organization, and an enthusiastic, motivated Party.

McCain is a pretty typical Republican Presidential candidate: bereft of principles, callow, stupid, a serial liar, he's really old and he heads a campaign organization staffed from top-to-bottom with corrupt lobbyists.

But, it wasn't a dysfunctional primary process that produced McCain, anymore than it was a dysfunctional primary process that produced Richard Nixon, Spiro Agnew, Ronald Reagan, Dan Quayle, George W. Bush or Richard Bruce Cheney. The Republican Party is designed to produce liars and fools and crooks, in service to the plutocracy.

[Aug 19, 2008] Yen Rises as Fannie Mae, Freddie Mac Concern Damps Carry Trade By Stanley White and Kosuke Goto

"Crushed by ballooning debts, the regeneration by the banks' own efforts is becoming impossible ... I bet stocks will decline further and U.S. bonds will be downgraded." said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo

``Crushed by ballooning debts, the regeneration by the banks' own efforts is becoming impossible,'' said Tetsuhisa Hayashi, chief manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, a unit of Japan's largest lender by market value. ``I bet stocks will decline further and U.S. bonds will be downgraded. Risk aversion among investors will cause further yen-buying.''

The Japanese currency may rise to 100 per dollar by year- end, Hayashi said.

[Aug 18, 2008] Lehman Expected to Post Another Loss

For banks it's looking increasingly difficult to refinance their debt. Outside Fed oxygen lines are cut and for those of life support like Lehman, that was it.

Lehman is now expected to report a quarterly loss that analysts peg as high as $2.6 billion. Recall that last quarter's $2.8 billion loss was a stunner, nearly ten times the expected level, and a dramatic departure from the convention of preparing investors for earnings shortfalls.


S said...
Looking increasingly difficult to get oxygen. LEH reportedly having problems shopping its CMBS portfolio. You think? As the cost of debt rises (Amex 400 bps off treasury on Friday) the choke hold gets tighter. Bloomberg goes on to wonder what institutions are worth saving? Earnings season should be interesting. Clearly the companies are trying to get out in front with estimate cuts coming earlier by an inch. The upside surprise will be credit deterioration which will be accretive to earnings and help offset some of the charges (what a world!). The cruches are failing, wheelbarrows next.

[Aug 18, 2008] Commentary on questionable economic analysis

Discredited "free marketers" which got the country in the current mess try to counterattack using Wall street's "fifth column" of PPP journalists. Amity Shlaes, who is a nice example of the genre published apologetic Five Ways to Wreck a Recovery - which twists major facts about Great Depression. She does not have formal economic education (bachelor degree in English literature from Yale)

Moon of Alabama used this chart to chat about Schlaes.

GDP numbers according to the Bureau of Economic Analysis (bigger graph)

A. Smoot Hawley Tarrif Act In March 1932 the United States Senate Committee on Banking, Housing, and Urban Affairs established hearings to investigate the causes of the Wall Street Crash of 1929.

B. Democrats took over Congress in November 1932 and in early 1933 appointed Ferdinand Pecora as commission counselor. Pecora found many malpractices on Wall Street and his investigation led to the creation of the Securities and Exchange Commission. We can put these events at point B of the GDP chart

C. Hoover's tax decrease in 1929/30 was followed by four years of decreasing GDP. His "misstep" tax increase was enacted in 1932 and took effect only in 1933, point C in our graph. From there on GDP went up.

D. New Deal beginnings.

Shlaes, according to her Wikipedia entry "has no formal economic training." That certainly shows. She also seems to have zero training in history as she is unable to organize the sequence of events in a coherent way. Events and policies that obviously led to increases in GDP are attributed as having deepened the depression.

(reformatted by rdan for a quick take....the original is more detailed and much longer. I personally would not use wikipedia as an academic source, but liberties are taken and the articles linked looked reasonably accurate))

[Aug 18, 2008] US banks scramble to refinance debt

FT Alphaville

Battered US financial groups will have to refinance billions of dollars in maturing debt over coming months, a move likely to push banks' funding costs higher and curb their profitability, say bankers and analysts. The banks' push to raise capital to offset mounting credit-related losses is forcing them to pay higher interest rates to entice investors, which is likely to put pressure on earnings and could lead to higher lending rates. Last week, groups including Citigroup, JPMorgan and AIG borrowed almost $20bn in new long-term debt, paying some of the highest rates ever in order to lock in funding. The wave of refinancing is set to continue for several months as billions of dollars in bank debt come due.

This entry was posted by Gwen Robinson on Monday, August 18th, 2008 at 5:28 and is filed under Capital markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

[Aug 18, 2008] Core inflation

Middle-class and lower definitely lost a lot of buying power during the last two years. And with 3% CD and 5% inflation they are losing their savings in all accounts: taxable, Roth and 401K.

The Bureau of Labor Statistics reported yesterday that its primary consumer price index CPI-U rose 5.6% over the last year. That's the highest inflation rate in 17 years, the newspapers all call to our attention. Just how concerned should we be about these numbers?


sonia at August 15, 2008 06:35 PM

How shall we define stagflation? I suggest whenever unemployment is above 5% and when inflation is above 5% at the same time.

That's June and July 2008. Houston we have stagflation.

One Salient Oversight at August 15, 2008 08:34 PM

Those expecting diminishing inflation, please contemplate CD rates of 3% (on which the holder must pay income tax) when the reported CPI is 5.6%. What person would lend his savings in such a money-losing proposition? Is this the result of a free market or of a central bank lending out money that has never been saved but created out of thin air? MZM & M2 are growing a lot faster than GDP & have been for some time.

The central banks of China, Russia, India, Saudi Arabia, et al are behaving similarly. The global credit bubble, Bernanke's savings glut, will collapse in due course. But it seems to me we aren't there yet & therefore are beset by inflation.

Posted by: Anonymous at August 17, 2008 11:57 AM

Posted by: OER at August 15, 2008 10:49 PM

sjp wrote:

Inflation is about the price level moving up.

I am bringing this up because the true mechanics of inflation must be a combination of (among other things) the extension of money/credit that algernon refers to and the raising of prices that I posited. One can't just point the finger at money supply expansion as the root of inflation. It is clearly an important part, but not the complete picture.


I will pass on your incorrect definition of inflation as price increases to stay on topic.

Can you give me the mechanism where prices can increase with a constant money supply without reducing consumption? If you have an economy of $5 and 5 things how can the price of the each thing move to $1.10 and consumers still consume 5 things with a $5 money supply?

DickF at August 16, 2008 02:28 PM

DickF - they'd put it on their visas!

When economists talk about wage demands being muted, they don't seem to understand how much American households have gotten into the habit of taking their future wages out as borrowed money. If I have the ability to pay 1.10 with a credit card, I can overlook that shortfall in my real income. By using behavioral patterns which were true in the 70s but are not true today to connect commodity prices to wages, economists are overlooking a central feature of the economy they have wrought. In fact, dissolving limits on credit has been the only way that the "grand moderation" could be swallowed by the American public at large. If they had to live within their real incomes, the increases in the compensation of the wealthiest group - the CEOS, the hedge funders - would simply be politically impossible. As credit is squeezed and Americans have to live within their real incomes, look for inequality to become a much hotter issue. It is the credit squeeze more than inflation that is going to jumpstart pressure to raise wages.

my definition of inflation is a rise in the price level. The only point I'm making is to dispute algernon's point; I took algernon's point to be that inflation comes solely from money supply expansion. I say that's not true.

I believe that the problem subsequently raised with my thought experiment (0 growth, 0 money supply growth, price increases) is that it is non-equilibrium. What Anonymous suggested makes sense. On the other hand, the economy might realize that the price increases weren't warranted and drop the price back down -- this might be the outcome DickF sees for his scenario. I thought a non-equilibrium thought experiment might be worth considering, though, since the jumping off point for this post is that the oil price increases we saw in the summer have been followed by price decreases: we are talking about fluctuations about the equilibrium.

I am most interested in Justin's point, that these oil price fluctuations might inordinately affect consumers' inflation expectations. It makes me wonder if certain high-profile products are weighted highly in consumers' belief formation mechanisms. Have oil price shocks been associated with shocks to consumers' inflation expectations, and is this association stronger than the association with other commodities?

sjp at August 17, 2008 02:21 PM

DickF asks "Can you give me the mechanism where prices can increase with a constant money supply without reducing consumption?"

Simple, the rate of circulation of money can increase or decrease. Thus even if the supply of money remains the same prices can change.
And of course, there are many types of virtual money that can step into the gap, taking the place of money, debit accounts, credit accounts, loans of all descriptions etc.

bill j at August 18, 2008 03:54 AM


Your comment about Visas did make me laugh, but understand that credit works within an economy unless the government facilitates credit expansion with an increase in the money supply so credit in itself does not create inflation.


Inflation is a decline in the value of money. It may lead to a rise in the price level, but a rise in the price level is not inflation. This is a huge misconception in economic circles that leads to serious misunderstandings.

If you introduce other elements into your thought experiment such as consumption preferences then yes you can create a scenario where such price increase might be accomodated, but the thought process must be deeper than a fixed money supply with rising prices. That simply is not possible without external input meaning consumption preferences, saving preferences, etc.

This is important to understand because without the complicity of the monetary authorities an economy cannot experience inflation. Understand that a change in consumption preferences is not inflationary.

bill j,

A change in circulation of money does not exist in a vacuum. There must be other changes such as consumption preferences for this to happen. Dig deeper.

[Aug 16, 2008] Contrarian Indicators

So now we have magazine covers fretting over oil, pundits everywhere calling for $200 oil, and BusinessWeek articles "Bracing For Inflation" in spite of a slowing world economy. These are all contrarian indicators. And as goes oil, so goes the CPI. So unless there is a breakout of War in the Mideast, the oil bust may be deeper and longer lasting than anyone thinks.

[Aug 16, 2008] Foreign Investors Selling Freddie, Fannie Debt

While even moral hazard hawks generally agree that some sort of government intervention would be needed in the event of financial trouble at Fannie and Freddie, the most compelling reason was that the US, chronically dependent on foreign funding, would be ill advised to treat its money sources badly.

Of the GSEs' $5.2 trillion in debt (their own corporate bonds plus MBS), $1.3 trillion is in the hands of foreign investors and central banks. The speed with which the powers that be cobbled together a support program was seen in some circles as an admission of the importance of reassuring our friendly overseas credit suppliers.

If that was the motivation, it isn't working. As we and others noted, spreads on GSE debt have risen to 215 basis points over Treasuries, only a tad shy of the pre-Bear crisis level of 238 basis points. And remember, they have reached this stratospheric levels despite the Paulson rescue package, despite an alphabet soup of new Fed facilities that accept GSE paper as collateral (as the discount window did) now in place (although there were raspberries all around for the bailout bill, due to its failure to make any changes in the operation, management, or policies of the GSEs and its lack of specificity as to triggers and what mechanism would be used).

And the reason? A big factor is that foreign central banks are exiting GSE debt and have pulled back significantly from purchases of new paper. This vote of no confidence appears likely to force the Administration's hand and lead it to take more concrete measures to prop up Freddie's and Fannie's balance sheets. They are not about to risk a spike in mortgage rates and further trouble in the housing markets with elections approaching.

From Reuters:
An extraordinary Treasury capital infusion may be needed to restore faltering foreign demand for debt issued by Fannie Mae and Freddie Mac, the two top home funding sources that the government is willing to rescue to save the housing market.

The companies rely heavily on overseas investment, often up to two-thirds of each new multibillion-dollar note offering, to help pare funding costs and keep mortgage rates low.

But foreign central banks have dumped nearly $11 billion from their record holdings of this debt in four weeks, to $975 billion, and won't return in force before it's clear if -- and how -- the government will back Fannie and Freddie, some analysts say....

The bonds these companies issue in the $4.5 trillion agency MBS market are near or worse than the weakest levels, set in March before the government engineered the sale of failing Bear Stearns to JPMorgan.

... ... ...

Overseas investors took an atypical back seat in Fannie Mae's three-year note sale this week.

Central banks bought just 37 percent of the $3.5 billion issue, down from 56 percent in May's $4 billion offering of the same maturity. Asia accounts took just 22 percent of the notes, down from 42 percent in May....

Richard Kline said...
I can't think of a single reason why foreign CBs should throw their capital away buying GSE debt. Major losses on existing MBSs are locked in. Existing equity in these corps is going to get greased. Even if the Feds step in to guarantee the GSEs own paper its sure to trade at distressed levels for long to come even if it finishes in the money.

At some point it will be brought home to our public financial leadership that stiff upper lips, manful statements, and dry ice fog just do not constitute a PLAN let alone a solution. The recent hack job rush statue, the We [Heart} the GSEs Bill, does nothing to protect buyers of their debt from risk or loss. The crew in the District would love to kick this can down the road into the next Big Guy's yard, but that isn't going to happen.

August 17, 2008 6:20 AM

MrM said...
Russia, who has a large portfolio of the agency paper, not only has no reasons to buy more, but might be tempted to dump what it's got to show its displeasure with the White House around Georgia and Poland
Mara said...
If Russia, China, et al decide to stop buying GSE debt, Paulson will be auctioning off grandma's underpants, since there is precious little left of value. If foreign CBs decide to dump enough of their holdings to cause havoc just before the elections, who could stop that tide?

Anyone have an explanation as to why foreign CBs would even want this stuff? We've known that Freddie and Fannie have had financial irregs and bloated compensations most of this decade. Despite any "guarantee" it's too much money, no one could cover that bet. You don't even get good PR from, just seen as a "threatening foreigner" come to swoop in and buy America.

doc holiday said...
I think it's informative to go back and look at the compensation of the people that have done a heck of a job in contributing to this spectrum-wide systemic collusion relating to mortgage fraud:

These people should be in jail, but they serve as high priced reminders of how efficient The Patriot Act is, and The Pension Protection Act, The Gramm-Leach-Bliley Act, The Friends Of Angelo...

Anonymous said...
THe lesson we have learned is that it is dangerous to reach for yield.

If you are a central bank, why risk losing capital for 200 lousy basis points? If you really want to earn a higher rate of return over Treasuries, you can purchase legitimate triple AAA corporate bonds.

Why anyone would want to touch Agency debt is beyond me, other than just for pure, unadulterated GREED.

Dean said...
In response to Anonymous, the lesson we have learned is that in an environment of lower yields, we all undertook higher risks (in search of higher yields) which have backfired.

[Aug 16, 2008] Globalisation and the Costs of International Trade from 1870 to the Present

Looks like a weak article which generated interesting comments. The key question is whether peak oil will negatively influence international trade. It is clear that shipping distance now matters more.

Will the rising price of oil reduce international trade as some have suggested? According to this research, which uses a gravity model of international trade to answer the question, thpntries trade more on international markets today than ever before – both in absolute terms and as a proportion of their national output. How can we explain this phenomenal increase in international trade over the past few decades? Will the recent rise in oil prices reverse this trend of globalisation?

History provides us with a natural comparison. Beginning in the nineteenth century, the world saw a remarkable rise in international trade that came to a grinding halt during World War I and later on in the wake of the Great Depression. This "first wave of globalisation" from about 1870 until 1913 led to a degree of international integration – measured by trade-to-output ratios – that many countries only achieved again in the mid-1990s.

Taking a comparative perspective, we juxtapose the first wave of globalisation from 1870 to 1913 and the second wave after World War II. We also study the retreat of world trade during the interwar period from 1921 to 1939. We are interested in the driving forces behind these trade booms and trade busts. Was it changes in global output or changes in trade costs that explain the evolution of international trade?

Trance says...
"for example, consumers have managed oil prices at almost five times the going price before the 70s inflation."

but this is done at the cost of diminishing discretionary income (which is worse in Europe than US). This discretionary income would otherwise go elsewhere in the economy. This money now goes into only one pocket, the oil industry.

Bruce Wilder says...
"they find that there is little systematic evidence to suggest that the maritime transport revolution was a primary driver of the late nineteenth century global trade boom. Rather, the most powerful force driving the boom was the secular rise in incomes across countries."

"the key innovations in the shipping industry were induced technological responses to the heightened trading potential of the world."

I think one would have to have a much better model of international trade, to sort this out reliably. Talking rather generically and bloodlessly about "the secular rise in incomes" seems almost a distraction.

What drives trade, international and local, are the productivity gains from specialization. These gains from specialization can rest on a variety of quite different bases. By focusing on "international" trade in particular, we are focusing on goods, where the productivity gains from specialization are extreme. In common parlance, there might be a monopoly of technical knowledge, extreme economies of scale or external economies, or a gift of nature, which can be exploited in only rare places. Not very many people will find it worthwhile to go more than a few blocks to get a haircut, even though most people will go to a professional barber or hairstylist. On the other hand, prospecting for oil in one's backyard, or refining it one's self, is rarely worthwhile. Nor do people go to a local craftsman for a television or cellphone.

The period, 1870-1913, marks the Second Industrial Revolution, a misnamed third or fourth phase of industrial revolution that began in Britain in the 18th century. Steamships were rather famously a central part of this phase -- their ability to keep to a schedule as important as their speed and capacity, and the ability to adapt them to more efficient means of carrying specialized cargoes (oil tankers, refrigerated ships, etc)

In addition, the industrial revolution was widening its geographical scope in three important respects. First, the industrial revolution was spreading out, to the Low Countries, Switzerland, France, the U.S. and Germany. After 1820, the industrial revolution was no longer occurring in one country only, and it was accelerating. Moreover, after 1870, the industrial revolution was involving more and more industries, moving from textiles and steam engines and railroads, to steel, oil, chemicals, electricity, with leadership often passing to countries other than Britain.

And, thirdly, as the industrial revolution drove economic growth, it drove demand for the fruits of the earth, sucking up everything from guano and bananas to copper and petroleum from distant places.

The ability to wrest enormous factor productivity gains from specced by the extent of the market, then we shouldn't be surprised to see the rise of national consumer markets in response to transportation and communication innovations: this is the period in which J. Walter Thompson invented magazine advertising (1877), and brandnames emerge, Nabisco (1901) and Coca-Cola (1886) and Lucky Strike (1871, 1907), Colgate toothpaste (1872) and Palmolive soap (1898).

Somehow, for me, "the secular rise in incomes" doesn't quite cover it.

If one is not going to be serious about analyzing what drives trade, I don't see how empty statements projecting that trends can continue really mean anything.

The right thing is to think seriously about distinguishing between the factors driving trade in commodities and fruits of the earth, and what drives trade in manufactured goods, and, finally, what drives trade in services. Underlying all of this is what drives specialization.

Peak oil implies no further gross increases in trade in raw petroleum. Similar considerations apply to many raw mineral products, like copper and zinc, and other commodities. Industrial development and rising population in the Persian Gulf will also result in more trade in petroleum products, as the expense of raw petroleum.

Peak oil also implies rising relative cost of jet fuel -- air travel is going to get more expensive, and with vacation travel to exotic places. (Recreational and business travel is a significant part of international trade.)

The kind of intense specialization, which yields enormous factor productivity enhancement, typically involves a coordination and control, which entails communication. Communication advances were important complements to the increasing speed and falling cost of transporation in 1870-1913, as well as now.

A useful analytical exercise might focus on whether falling communication costs, increasing capability imply more or less physical trade in goods. McDonald's, Toyota, IKEA, Lenovo -- are the limits to economies of scale of physical product in one place such that, say, all the corkscrews in the world should be made in one place?

Or, does falling costs of communication and control imply more widely distributed physical production of manufactured goods and less physical transport?

If we could leverage computers to design a washing machine plant, to flexibly build several different models or designs of washing machines, would we care to import washing machines from Sweden or Italy or China, and would they want to import washing machines from Benton Harbor, Michigan?

How does the financial interact with trade? If a country fails to invest in the production capacity to make and export goods and services in sectors where the gains in total factor productivity are greatest, how does that affect the terms of trade? Median incomes? If not "protectionism", what is an organizing principle for a national strategy? (Is there nothing more convincing that pieties about education, and taxcuts for plutocrats?)

robertdfeinman says...
Perhaps the analysis is backwards. The rise of highly efficient production produced an excess of manufactured goods (or at least the capacity to make them). This then led firms to seek markets elsewhere. Because of the efficiency trade costs were not enough to deter this trend.

As trade increased the efficiency of trade also improved and its costs dropped as well. The depression caused a loss of markets and trade dropped. The "protectionism" was a political attempt to fix something which was misguided effort, just like offshore drilling is the wrong fix now. The lack of markets caused a drop off in innovation so trade costs stopped dropping, then the wars intervened and destroyed productive capacity and markets.

In the latest round, the cycle has repeated, this time there has been a new set of innovations in IT and supply chain management and a corresponding rise in efficiency with containerization and high speed ships. Both these improvements have now stalled so other factors have started to become more important.

The response to this has been yet another set of political nostrums designed for their ear appeal to the public, rather than for their efficacy.

Just a conjecture...

roger says...
Huh, is this economics of numerology:

"To answer that question we set up a gravity model of international trade. This model borrows Isaac Newton's insight that the gravitational force between two planets in space is inversely related to their physical distance. Instead of planets, we consider countries whose "gravitational force" is the amount of their bilateral exports and imports. Instead of physical distance, bilateral trade is impeded by trade costs such as transportation costs, tariffs and language barriers."

Wow, and this is considered serious economics! Why not borrow their model from, say, Revelations, where the antichrist - protectionists - put a bar code on their followers heads, with the bar code being legislation designed to discourage trade. It would make the same amount of sense.

This doesn't even achieve a low level of chicanery.

dissent says...
"overall, history gives us little reason to expect a sharp and fundamental reaction of international trade in response to changes in transportation costs."

The problem with this argument is that all prior history took place prior to peak oil. Transportation costs will be impacted by peak oil in a historically anomalous fashion.

[Aug 15, 2008 Paul Krugman The Great Illusion

Krugnam understanding of politics is definitely limited, but the observation that there will be more intense struggle for limited natural resources rings true...
Economist's View

Is the "second great age of globalization" about to end?:

The Great Illusion, by Paul Krugman, Commentary, NY Times: I was reading the latest bad news, I found myself wondering whether this war is an omen - a sign that the second great age of globalization may share the fate of the first

... ... ...

But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together.

So, can things fall apart again? Yes, they can.

Consider ... the current food crisis. For years we were told that self-sufficiency was ... outmoded..., that it was safe to rely on world markets for food supplies. But when the prices of wheat, rice and corn soared, Keynes's "projects and politics" of "restrictions and exclusion" made a comeback: many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits.

... ... ...

Angell was right to describe the belief that conquest pays as a great illusion. But the belief that economic rationality always prevents war is an equally great illusion. And today's high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.

Lee A. Arnold says...

The illusion? Keynes' Londoner had no inkling that the reason he could telephone products from around the world was because of the British Empire's militarism and imperialism? This seems a bit disingenuous on JMK's part. Or maybe sarcastic? Then the very next thing: Your history quiz: Where were the first British troops sent when Archduke Ferdinand was shot? Answer: To Basra -- because the German and British navies had both just converted from coal to oil, and Germany was going to extend the Orient Express past Constantinople to take all the petroleum in the area out by rail. When Ferdinand was shot, everything went up into the air... Starting the ninety-year (so far) resource war. Now the U.S. is run by climate-denying gasoholics and the American public apparently hasn't guessed the possibility that their leaders have handed Iraq to Iran's best friends and the Shi'ites are merely standing-down and smiling until the Americans leave. So it looks like Bush and Cheney must change the regime in Iran, in order to exit Iraq. No wonder David Kilcullen, Petraeus' counterinsurgency consultant, called the invasion "fucking stupid." (Later changed to an "extremely serious strategic error.") With which the entire foreign policy community (except for the numbnuts neocons) and all the military analysts heartily agree. The U.S. could be tied-down there for generations. But but but Victory looms large, baby! So the Russians take a piece, while the right-wing howls it's totally unjustified. Well of course it is, you dumbasses. And the Russians might have done it anyway. But you throw things up in the air, all sorts of people start grabbing.

Alex Tolley says...

But the belief that economic rationality always prevents war is an equally great illusion. And today's high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine.

Anyone with the slightest sense of history does not have these illusions. All the knowledge gained in the last 100 years that could be used to understand how best to manage human affairs is overridden by base human nature. In our (US) own milieu, we have at least half the population that is effectively anti-science and prefers to make emotional decisions and votes for political candidates that do the same thing. The US congress routinely votes on emotional or ideological lines only. I see no evidence that the rest of the world is any less irrational.

[Aug 15, 2008] The Project Gutenberg eBook of The Economic Consequences of the Peace, by John Maynard Keynes

A very important book now available for free..

[Aug 15, 2008] Stage two of the gold bull market is just beginning by Ambrose Evans-Pritchard

Yet gold crashes. It has failed to deliver on its core promises as a safe-haven and inflation hedge, at least for now. Why?

Four possible answers:

1) Nobody seriously believes that Russia will over-play its hand. The world could not care less about Georgia anyway. Ergo, this is a bogus geopolitical crisis.

2) The inflation story is vastly exaggerated in the OECD core of countries that still make up 60pc of the global economy. The price of gold is already looking beyond the oil and food spike of early to mid 2008 (a lagging indicator of loose money two to three years ago) to the much more serious matter of debt-deflation that lies ahead.

3) The seven-year slide of the dollar is over as investors at last wake up to the reality that the global economy is falling off a cliff. Indeed, the US is the only G7 country that is not yet in or on the cusp recession. (It soon will be, but by then others will be prostrate). As an anti-dollar play, gold is finished for this cycle.

4) The entire commodity boom has hit the buffers. Looming world recession (growth below 3pc on the IMF definition) trumps the supercycle for the time being.

Gold has fallen from $1030 an ounce in February to $807 today in London trading. It has collapsed through key layers of technical support, triggering automatic stop-loss sales. The Goldman Sachs short-position that I have been observing with some curiosity has paid off.

For gold bugs, the unthinkable has now happened. The metal has fallen through its 50-week moving average, the key support line that has held solid through the seven-year bull market. This week is not over yet, of course. If gold recovers enough in coming days, it could still close above the line.

Courtesy of my old colleague Peter Brimelow - whose columns on gold are a must-read - note that Australia's Privateer point and figure chart has also broken its upward line for the first time since 2002. This is serious technical damage.

So have we reached the moment when gold bugs must start questioning their deepest assumptions. Have they bought too deeply into the "dollar-collapse/M3 monetary bubble" tale, ignoring all the other moving parts in the complex global system? Nobody wants to be left holding the bag all the way down to the bottom of the slide, long after the hedge funds have sold out.

Well, my own view is that gold bugs should start looking very closely at something else: the implosion of Europe. (Japan is in recession too)

Germany's economy shrank by 1pc in Q2. Italy shrank by 0.3pc. Spain is sliding into a crisis that looks all too like the early stages of Argentina's debacle in 2001. The head of the Spanish banking federation today pleaded with the European Central Bank for rescue measures to end the credit crisis.

The slow-burn damage of the over-valued euro is becoming apparent in every corner of the eurozone. The ECB misjudged the severity of the downturn, as executive board member Lorenzo Bini-Smaghi admitted today in the Italian press. By raising interest rates into the teeth of the storm last month, Frankfurt has made it that much more likely that parts of Europe's credit system will seize up as defaults snowball next year.

As readers know, I do not believe the eurozone is a fully workable currency union over the long run. There was a momentary "convergence" when the currencies were fixed in perpetuity, mostly in 1995. They have diverged ever since. The rift between North and South was not enough to fracture the system in the first post-EMU downturn, the dotcom bust. We have moved a long way since then. The Club Med bloc is now massively dependent on capital inflows from North Europe to plug their current account gaps: Spain (10pc), Portugal (10pc), Greece (14pc). UBS warned that these flows are no longer forthcoming.

The central banks of Asia, the Mid-East, and Russia have been parking a chunk of their $6 trillion reserves in European bonds on the assumption that the euro can serve as a twin pillar of the global monetary system alongside the dollar. But the euro is nothing like the dollar. It has no European government, tax, or social security system to back it up. Each member country is sovereign, each fiercely proud, answering to its own ancient rythms.

It lacks the mechanism of "fiscal transfers" to switch money to depressed regions. The Babel of languages keeps workers pinned down in their own country. The escape valve of labour mobility is half-blocked. We are about to find out whether EMU really has the levels of political solidarity of a nation, the kind that holds America's currency union together through storms.

My guess is that political protest will mark the next phase of this drama. Almost half a million people have lost their jobs in Spain alone over the last year. At some point, the feeling of national impotence in the face of monetary rule from Frankfurt will erupt into popular fury. The ECB will swallow its pride and opt for a weak euro policy, or face its own destruction.

What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports, or indeed simply because they have to cut rates frantically to stave off the consequences of debt-deleveraging and the risk of an outright Slump.

When that happens - if it is not already happening - it will become clear that the both pillars of the global monetary system are unstable, infested with the dry rot of excess debt.

The Fed has already invoked Article 13 (3) - the "unusual and exigent circumstances" clause last used in the Great Depression - to rescue Bear Stearns. The US Treasury has since had to shore up Fannie and Freddie, the world's two biggest financial institutions.

Europe's turn will come next. We will discover that Europe cannot conduct such rescues. There is no lender of last resort in the system. The ECB is prohibited by the Maastricht Treaty from carrying out direct bail-outs. There is no EU treasury. So the answer will be drift and paralysis.

When EU Single Market Commissioner Charlie McCreevy was asked at a dinner what Brussels would have done if the eurozone faced a crisis like Bear Stearns, he rolled his eyes and thanked the Heavens that so such crisis had yet happened.

It will.

Gold bugs, you ain't seen nothing yet. Gold at $800 looks like a bargain in the new world currency disorder.

[Aug 14, 2008] Making Markets Work for Everyone

This is an important post that shows how free market retoric was abused to enrich few at the expence of many...
Greg Anrig via Brad DeLong:

Greg Anrig on the GOP, by Brad DeLong: He smells a wind from out of the west:

McCain's Problem Isn't His Tactics. It's GOP Ideas.: At long last, the conservative juggernaut is cracking up. From the Reagan era until late 2005 or so, conservatives crushed progressives like me in debates as reliably as the Harlem Globetrotters owned the Washington Generals. The right would eloquently praise the virtues of free markets and the magic of the invisible hand. We would respond by stammering about the importance of regulation and a mixed economy, knowing even as the words came out that our audience was becoming bored.

Conservatives would get knowing laughs by mocking bureaucrats. We would drone on about how everyone can benefit from the experience and expertise of able civil servants. ... They offered tax cuts. We talked amorphously about taxes as the price of a civilized society. ...

But now, seemingly all of a sudden, conservatives are the ones who are tongue-tied, as demonstrated by Sen. John McCain's limping, message-free presidential campaign. McCain's ongoing difficulties in exciting voters aren't just a tactical problem; his woes stem largely from his long-standing adherence to a set of ideas that simply haven't worked in practice. The belief system and finely crafted policy pitches that enabled the right to dominate the war of ideas for the past 30 years have produced a relentless succession of governing failures, from Iraq to Katrina to the economy to the environment.

Largely as a consequence, the public's attitude toward government -- Ronald Reagan's bête noire -- has shifted. A recent Wall Street Journal/NBC News poll found that, by a 53-to-42 percent margin, Americans want government to "do more to solve problems"; a dozen years ago, respondents opposed government action by 2 to 1. Meanwhile, Republican constituency groups' long-standing determination to put aside their often significant differences and band together to support GOP candidates is fracturing: The libertarian darling Ron Paul and the evangelical Christian leader James C. Dobson are among the Republican bigwigs who haven't so far endorsed McCain. ...

As I listen to leading voices and thinkers on the right pondering the condition of their ideology, it is increasingly clear to me that they face a fundamental dilemma -- one that cannot be resolved anytime soon and that might well leave the conservative movement out to pasture for as long as we progressives have been powerlessly chewing grass. That choice is whether to stick with rhetoric and policies wedded to free markets, limited government and bellicose unilateralism, or to endorse a more robust role for the public sector at home while relying more on diplomacy and international institutions abroad. Either way, conservative Republicans seem destined to have a much harder time winning elections for the foreseeable future. Just ask McCain how much fun he's having.

The single theme that most animated the modern conservative movement was the conviction that government was the problem and market forces the solution. It was a simple, elegant, politically attractive idea, and the right applied it to virtually every major domestic challenge -- retirement security, health care, education, jobs, the environment and so on. Whatever the issue, conservatives proposed substituting market forces for government -- pushing the bureaucrats aside and letting private-sector competition work to everyone's benefit.

So they advocated creating health savings accounts, handing out school vouchers, privatizing Social Security, shifting government functions to private contractors, and curtailing regulations on public health, safety, the environment and more. And, of course, they pushed to cut taxes to further weaken the public sector by "starving the beast." President Bush has followed this playbook more closely than any previous president, including Reagan, notwithstanding today's desperate efforts by the right to distance itself from the deeply unpopular chief executive.

But in practice, those ideas have all failed to deliver...

Conservatives will contest that "President Bush has followed this playbook more closely than ... Reagan." They'll try to argue that the problem is the Bush administration, not conservative ideas. In fact, liberals make this argument too:

[T]he free-market, supply-side crowd... had behind them the authority of a vast academic establishment, ranging from Friedrich von Hayek to Milton Friedman to such contemporaries as Gary Becker and Robert Mundell... The academic economics of the 1970s lined up behind the right-wing politics of the 1980s for a reason. Reaganomics had a logic. ... Deregulation, above all, would substitute the invisible hand of the "efficient market" for the dead hand of bureaucracy.

The judicial coup of December 2000 that installed Bush and Cheney brought back some of Reagan's men and his most extreme policies - tax cuts for the wealthy, big increases in military spending, aggressive deregulation. But it didn't bring back the ideas. Instead, it became clear that Bush and Cheney had no real ideas, no larger public justification. They cut taxes to enrich their supporters. ... They were willing to have the government spend like a drunken sailor in 2003/4 to boost the economy before the election. ...

It was very interesting to me that some of the first to sense this loss of public purpose were the very conservatives who had swept in with Reagan. The nemeses of my youth, people like Bruce Bartlett, Paul Craig Roberts, the late Jude Wanniski, went over into hard opposition..., at the core they felt that Bush had no conservative convictions.

The free market rhetoric still has power even when it offers false hopes. In previous campaigns we heard how tax cuts would pay for themselves. Cut taxes and get the government out of the way, the argument goes, and output will grow so much that taxes will actually rise. That, of course, didn't happen. This campaign, it's offshore drilling. Offshore drilling won't lower oil prices, that's a false hope, yet the cry that government imposed environmental restrictions are causing higher prices has had some success. Let the market work, we hear, and it will solve the problem. There are other of signs that politicians are not yet ready to abandon the free-market message. When it comes to health care reform, the Obama campaign fears the word mandates for a reason, and prefers to push a plan that has "many private health insurance options." Talk of raising taxes and increasing the size of government is avoided, and Democrats step very lightly around free trade. The idea that the market works still has resonance.

So my instinct is different. Markets do what we expect them to do - they allocate resources efficiently - when they operate under the proper conditions. Those conditions include lack of market power among market participants, the lack of political influence, having the proper regulatory structure in place, and so on. Using anti-government ideology, conservatives have undermined rather than supported the market system, and that's the important message. Take deregulation as an example. There were certainly places where government overreached, and removing regulations in those cases was needed, but thoughtlessly stripping away any rule or regulation pertaining to business that you encounter is not the way to create a market system that functions optimally.

I want Democrats to make it clear that we aren't opposed to markets, not at all, and to say it forcefully. In fact, we like markets so much we want to fix the ones that are broken from so many years of neglect by Republican administrations. We want to make markets work for everyone, not just a few at the very top who are able to work the system to their advantage. We have a pretty good idea of what it takes for markets to function well, and it requires active government involvement to create the conditions and supporting institutions for markets to flourish. That type of government oversight has been absent under Republican administrations - see the financial meltdown - and it's up to Democrats to step up and fill the void.

The confusion here is simple, I think. Free markets - where free simply means minimal government involvement - are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets - lifting all government restrictions - will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure or that impose accounting standards help to prevent asymmetric information and improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming "too large to fail") which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn't move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.

I don't think it's necessary to give up on the idea of the market system as the best means of allocating resources in most cases. But markets can and do fail and it's up to the government to provide the foundation markets need to perform well (or, in cases where market failures are substantial such as in health care and social security, to step in and take a more active role). That's what has been missing under Republican leadership, the understanding of how to provide the foundation needed for markets to work for everyone. Democrats need to stress how that will change under their leadership, how they will improve the ability of the economy to function in a way that serves the interests of all participants in the economy rather than favoring some groups over others.

[Aug 14, 2008] The Heart of the Economic Mess

The Federal Reserve Board's "beige book" for June and July offers a clear explanation for why the economy has slowed to a crawl. It shows American consumers cutting way back on their purchases of everything from food to cars to appliances to name-brand products. As they do so, employers inevitably are cutting back on the hours they need people to work for them, thereby contributing to a downward spiral.

The normal remedies for economic downturns are necessary. But even an adequate stimulus package will offer only temporary relief this time, because this isn't a normal downturn. The problem lies deeper. Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.

The heart of the matter isn't the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon but it has finally caught up with the pocketbooks of average people. If you look at the earnings of non-government workers, especially the hourly workers who comprise 80 percent of the workforce, you'll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They've gone largely to the top.

Inequality on this scale is bad for many reasons but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they're rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.

This underlying earnings problem has been masked for years as middle- and lower-income Americans found means to live beyond their paychecks. But they have now run out of such coping mechanisms. As I've noted elsewhere, the first coping mechanism was to send more women into paid work. Most women streamed into the work force in the 1970s less because new professional opportunities opened up to them than because they had to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 - to more than 70 percent. But there's a limit to how many mothers can maintain paying jobs.

So Americans turned to a second way of spending beyond their hourly wages. They worked more hours. The typical American now works more each year than he or she did three decades ago. Americans became veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

But there's also a limit to how many hours Americans can put into work, so Americans turned to a third coping mechanism. They began to borrow. With housing prices rising briskly through the 1990s and even faster from 2002 to 2006, they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans. But this third strategy also had a built-in limit. And now, with the bursting of the housing bubble, the piggy banks are closing. Americans are reaching the end of their ability to borrow and lenders have reached the end of their capacity to lend. Credit-card debt, meanwhile, has reached dangerous proportions. Banks are now pulling back.

As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there's not enough purhasing power in the economy to buy all the goods and services it's producing. We're finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle and lower-middle class Americans. The answer is not to protect jobs through trade protection. That would only drive up the prices of everything purchased from abroad. Most routine jobs are being automated anyway. Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We've tried that and it hasn't worked. Nothing has trickled down.

Rather, the long-term answer is for us to invest in the productivity of our working people -- enabling families to afford health insurance and have access to good schools and higher education, while also rebuilding our infrastructure and investing in the clean energy technologies of the future. We must also adopt progressive taxes at the federal, state, and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.

[Aug 12, 2008] The Almost Daily 2¢ - The Next Three Shoes

"I believe that there is a good chance that the S&P 500 will re-test and drop below the lows set after the collapse of the dot-com era." What will happens with poor "all stock" 401K investors if the author is right ?
August 08, 2008

Here's my crack at Nostradamusian macroeconomic analysis.

In my estimation the next three systemic shocks will come in the form of job loss, the foreclosure driven and fiscally irresponsible government bailout of Fannie and Freddie and a prolonged secular bear market meltdown of the stock market.

All of these events, if fully materialized, would likely combine to present the most significant test of Americans' faith and confidence in their institutions and way of life seen in many generations.

First, although it has been generally the consensus opinion that the job market will hold up better during this recession as a result of the weak job growth seen during the last expansion (i.e. less jobs gained = less jobs to lose), I beg to differ.

My model (simple extrapolation of 90s recession with some tweaks) puts the unemployment rate at roughly 7% by next March and where we go from there will depend largely on the other two shoes.

I believe the real job loss from the 90s-era consumption boom and bust was simply postponed by the 2000s-era credit-debt boom.

Having no other alternative, Americans will now have to face the reality and own up to their personal fiscal irresponsibility and tighten belts causing business confidence to erode and inevitably leading to substantial job loss.

Next, in what has to be the worst fiscal policy blunder in our history, the federal government has now positioned itself directly in the line of fire of the largest financial meltdown of modern times.

Fannie and Freddie are insolvent and, having operated as an essentially absurd and fraudulent arbitrage scam in conjunction with sham co-conspirator mortgage originators like Countrywide Financial for over a decade, are essentially dead guarantors walking.

Foreclosures are on the verge of explosive growth as near-prime and prime underwater households relent to the weight of the current economic crisis.

Treasury Secretary Paulson's promise of bailout of the GSEs will carry a tremendously high cost for taxpayers and further exacerbating the economic malaise and erosion of Americans' confidence and sense of social fairness.

Finally, I believe that there is a good chance that the S&P 500 will re-test and drop below the lows set after the collapse of the dot-com era.

This would represent a logical, yet truly significant, failure of the private sector as the expansion of the 2000s fully gives way, blending into the dot-com meltdown forming a secular bear market trend the likes of which we have not ever seen.

This would, in a sense, be a GM-ization (NYSE:GM) of the broader stock market and result in a blaring spotlight being shined on the ludicrousness of constructing a multi-decade economic expansion based almost entirely on discretionary consumption and technological hysteria.


[Aug 12, 2008] McCain's nuclear plan Doable but risky

Aug. 7, 2008 |

John McCain's call for a big push into nuclear power can certainly be met - if the country is willing to pay more for power and tolerate the safety risks.

Earlier this week McCain, the presumptive Republican nominee for president, said he wants to build 45 more nuclear power plants to make the country more energy independent. That would add significantly to the nation's current fleet of 104 active plants, which produce about 20% of the nation's power.

The advantages to nuclear power are primarily two-fold: It doesn't emit greenhouse gases, and it is a reliable form of electricity produced from uranium - a fairly abundant domestic resource.

McCain and others have been touting nuclear energy as a possible replacement for foreign oil, if and when the country shifted to electric cars.

The utility industry is behind the construction of more nuclear plants.

"We have been saying for years that we have to not only preserve our current fleet [of nuclear plants], but enlarge it significantly," said Jim Owen, a spokesman for the Edison Electric Institute.

[Aug 12, 2008] Most firms pay no income taxes - Congress

Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday.

The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes - despite having a combined $2.5 trillion in revenue.

The study showed that 28% of foreign companies and 25% of U.S. corporations with more than $250 million in assets or $50 million in sales paid no federal income taxes in 2005. Those companies totaled a combined $372 billion in sales for the largest foreign companies and $1.1 trillion in revenue for the biggest U.S. companies.

The GAO report, which did not name any specific companies, said that some corporations reported zero income before deducting expenses while others said they had zero net income after deducting expenses. Either way, those companies reported no tax liability, the GAO said.

... ... ...

The study was requested by Sens. Byron Dorgan, D-N.D, and Carl Levin, D-Mich., in an attempt to determine if corporations are abusing so-called transfer prices.

Transfer prices are charges on transactions between subsidiary companies within a larger corporate group. Companies may try to lessen their U.S. tax hit by improperly transferring income to foreign subsidiaries in countries with lower rates.

The GAO study did not attempt to determine if companies were abusing transfer prices, but it said that potential abuse of transfers could reduce the amount of taxes companies pay in the United States.

"The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes," Dorgan said in a statement.

[Aug 12, 2008] Poll - 41258

How confident are you in the stock market?
Very 25%
Somewhat 48%
I've pulled out all my money 27%

[Aug 12, 2008] paper-money.blogspot.comThe Almost Daily 2¢ - The Next Three Shoes

"I believe that there is a good chance that the S&P 500 will re-test and drop below the lows set after the collapse of the dot-com era." What will happens with poor "all stock" 401K investors if the author is right ?
August 08, 2008

Here's my crack at Nostradamusian macroeconomic analysis.

In my estimation the next three systemic shocks will come in the form of job loss, the foreclosure driven and fiscally irresponsible government bailout of Fannie and Freddie and a prolonged secular bear market meltdown of the stock market.

All of these events, if fully materialized, would likely combine to present the most significant test of Americans' faith and confidence in their institutions and way of life seen in many generations.

First, although it has been generally the consensus opinion that the job market will hold up better during this recession as a result of the weak job growth seen during the last expansion (i.e. less jobs gained = less jobs to lose), I beg to differ.

My model (simple extrapolation of 90s recession with some tweaks) puts the unemployment rate at roughly 7% by next March and where we go from there will depend largely on the other two shoes.

I believe the real job loss from the 90s-era consumption boom and bust was simply postponed by the 2000s-era credit-debt boom.

Having no other alternative, Americans will now have to face the reality and own up to their personal fiscal irresponsibility and tighten belts causing business confidence to erode and inevitably leading to substantial job loss.

Next, in what has to be the worst fiscal policy blunder in our history, the federal government has now positioned itself directly in the line of fire of the largest financial meltdown of modern times.

Fannie and Freddie are insolvent and, having operated as an essentially absurd and fraudulent arbitrage scam in conjunction with sham co-conspirator mortgage originators like Countrywide Financial for over a decade, are essentially dead guarantors walking.

Foreclosures are on the verge of explosive growth as near-prime and prime underwater households relent to the weight of the current economic crisis.

Treasury Secretary Paulson's promise of bailout of the GSEs will carry a tremendously high cost for taxpayers and further exacerbating the economic malaise and erosion of Americans' confidence and sense of social fairness.

Finally, I believe that there is a good chance that the S&P 500 will re-test and drop below the lows set after the collapse of the dot-com era.

This would represent a logical, yet truly significant, failure of the private sector as the expansion of the 2000s fully gives way, blending into the dot-com meltdown forming a secular bear market trend the likes of which we have not ever seen.

This would, in a sense, be a GM-ization (NYSE:GM) of the broader stock market and result in a blaring spotlight being shined on the ludicrousness of constructing a multi-decade economic expansion based almost entirely on discretionary consumption and technological hysteria.

[Aug 11, 2008] Greenspan's `Age of Froth' Is Over for Decade: John F. Wasik

"Reid says banks may lose a total of $1.2 trillion when the books are closed on the Age of Froth". As the Age of Froth unwound, inflation became an even greater ravager of personal wealth.
Aug. 11 (Bloomberg) -- One of the most humbling challenges we scribes face is to attach a meaningful name to an era.

How do you describe a time of obscenely easy credit; stock and housing bubbles; stratospheric Wall Street profits, outlandish banker salaries and general prosperity?

Now that the post-bubble age is prompting painful bailouts as the world economy reels from a credit crunch and writes down bad debts, it's time to consider what I call the Age of Froth.

Not only will the aftermath of this epoch be ripe with bankruptcies, foreclosures and bailouts, it will be a time of great reckoning. Building equity and saving will be vital.

I derive the concept of froth from former Federal Reserve Chairman Alan Greenspan, who told Congress on July 20, 2005, that ``the apparent froth in the housing markets appears to have interacted with evolving practices in mortgage markets.''

Greenspan's remarks coincided with the peak of the bubble, when U.S. median home prices hit $230,200 that July. We may not see house values reach that level for another decade or so.

More disturbing about Greenspan's observation is his acknowledgement that interest-only adjustable mortgages that were used ``to purchase homes that would otherwise be unaffordable'' may leave ``some mortgagors vulnerable to adverse events.''

As it stands now, that was the financial understatement of this young century. Greenspan and the Fed -- with the exception of former Governor Edward Gramlich, who wrote a prescient book about mortgage abuses -- did nothing to curb these ``exotic'' mortgages, hence the current crisis.

Profit Froth

Of course, since the housing frenzy was immensely profitable for the real-estate/construction industry as well as mortgage, investment and savings banks, Greenspan and his fellow regulators became notably sheepish, if not cowardly.

To the U.S. financial industry, the froth translated into ``$1.2 trillion in excess profits over the last decade relative to nominal gross domestic product growth,'' said Jim Reid, a credit strategist for Deutsche Bank AG in London. Reid says banks may lose a total of $1.2 trillion when the books are closed on the Age of Froth.

For homeowners, froth came in the form of home equity. As it was seen as easy ``money on the house,'' this bubble-inflated bonanza was mostly cashed out. Now millions are tapped out in their credit and savings kitties.

Greenspan Knew

Greenspan, who wrote a 2007 report with economist James Kennedy on home-equity extraction for the Fed, found that American homeowners pulled more than $800 billion out of their properties, most of them going into even more debt to tap the bubble profits.

Now that the foam of a saucier time has gone flat, some serious debt reduction and saving are necessary. Better to go from crema to credit control.

One positive development after the Age of Froth is that lenders have become conservative and are now requiring sizable home down payments again.

Putting 20 percent down on a home purchase in most places gives you instant equity. Provided you're not in an area where prices will continue to fall, that represents a chunk of savings. You also still have the option of building equity through paying down mortgage principal to reduce debt and overall interest.

Money lost in home investments, though, will have to be replaced by other vehicles. As the Age of Froth unwound, inflation became an even greater ravager of personal wealth.

Inflation Protectors

Right now, there are only a few investments that will meagerly compensate you if inflation accelerates: U.S. Treasury inflation-protected securities (TIPS and I-Bonds) and mutual funds that invest in commodities.

Still, there should be more tools at your disposal because taxes also eat up returns beyond retirement accounts. A new generation of tax-free annuities and universal savings vehicles is needed.

It's simply not fair that interest from money-market funds, bonds and savings certificates is taxed at the highest marginal federal rates while capital gains are levied at 15 percent. Ordinary savers are cursed.

Although the Age of Froth has passed, that doesn't mean our debt problems are behind us. Far from it.

Unless the federal government curbs its spending, interest on Uncle Sam's debt will be ``the single largest expenditure in the federal budget'' in about 25 years, according to the Peterson Foundation, a New York-based non-profit organization founded by Blackstone Group billionaire founder Pete Peterson.

Baby Boomers Retire

Keep in mind that 77 million baby boomers retiring and demanding Medicare will make this one of the thorniest fiscal-political debates in U.S. history.

On a personal level, there's much you can do. Set up a health savings account and fund it with pretax dollars. Consider a Roth individual retirement account or 401(k). Those are funded with after-tax dollars, but are tax-free on retirement. Build a cash reserve for short-term expenses and emergencies.

Maybe we'll remember the Age of Froth as a wild-eyed era of financial excess akin to the 1920s. Then again, it may lead to a great awakening in which saving trumps spending. Happy days may be here again, but it will take years.

(John F. Wasik, co-author of ``iMoney,'' is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: John F. Wasik in Chicago at

[Aug 10, 2008] Lessons From 2007: A Baker's Dozen by Barry Ritholtz

In the beginning of the year, a column I wrote for Real Money discussed some lessons of the past year. It never was moved over to the free site, so here is my belated update.

It is a mix of fundamental, economic, technical and even philosophical lessons that those savvy CEOs, fund managers and individual investors who were paying attention picked up in the recent turmoil.

1) Ignore market rumors: It seemed every time some firm was in trouble, the same gossip was floated that Warren Buffett was about to buy them. Time and again, these tales proved to be unfounded money-losers. This year's most egregious example was Berkshire's imminent purchase of Bear Stearns (BSC).

That The New York Times Dealbook got suckered into printing this just shows you how pernicious these rumors are. The stock was as high as $123 the day of the rumor.

Anyone who bought homebuilders or Bear Stearns stock on the basis of either of these rumors -- or nearly any other stock that had similar rumors floated throughout the year -- lost boatloads of money.

2) Buy sector strength (and avoid sector weakness): It's a truism of real estate: It's better to own a lousy house in a great neighborhood than a great house in a lousy one. And the same is true for stock sectors: Buying mediocre companies in great sectors generated positive results, while great companies in poor sectors struggled.

The losers are obvious: The homebuilders, financials, monoline insurers and retailers all struggled this year. The winners? Anything related to agriculture, solar energy, oil servicing, industrials, software, exporters, infrastructure plays -- even asset-gatherers thrived.

3) Never blindly follow the "big money": Why? Because professionals make dumb mistakes too. Many people chased the so-called smart money into these trades. Unfortunately, all of these trades have proven to be jumbo losers.

4) Day-to-day stock action is mostly noise: This is blasphemy to some people, but it's true: Markets eventually get pricing right. But the key to understanding this is the word "eventually." Over the shorter term, markets frequently under- or overprice a stock before settling into the right approximation of value. This process typically occurs over broad lengths of time.

... ... ...

6) Ignore deteriorating fundamentals at your peril: One would think this doesn't need to be said, and yet it does: When the fundamentals of a given market, sector or consumer group are decaying, profit gains are sure to slow.

7) Nothing is more costly than chasing yield: For fixed-income investors, what matters most is not the return on your money, it's the return of your money. Reaching down the risk curve for a few bips of additional yield is one of the dumbest things an investor can ever do.

8) Know what you own: This very basic issue was mostly forgotten in recent years, and it was forgotten by pros and individuals.

Investment banks like Bear Stearns, Morgan Stanley (MS) and Merrill Lynch (MER) , big banks like Citigroup (C) and Washington Mutual (WM) , and GSEs like Fannie Mae (FNM) and Freddie Mac (FRE) were scooping up assets apparently without doing their homework. The complexity of these pools of mortgages almost guarantees that no one truly knows what's in them (see the next rule). If you don't know what you own, how can you properly manage risk?

9) Simple is better than complex: Start with a few million mortgages of varying credit-worthiness and create a series of residential mortgage-backed securities (RMBS) from them. Then take the RMBS and stratify them. Then leverage them up into collateral debt obligations (CDOs). Once that bundling is complete, make complex bets on which layers might default, via credit default swaps (CDS).

Gee, how could anything possibly go wrong with that?!

10) Stick to your core competency:

E*Trade (ETFC) is an online broker; what was it doing writing subprime mortgages?

Why was Bear Stearns running two hedge funds?

Isn't H&R Block a tax preparer? It was making mortgage loans -- why?

And exactly what was GM's expertise in underwriting mortgages? (The snarkier among you might be wondering exactly what business GM's expertise is in.)

Had these companies stuck to what they did best (or least bad), they wouldn't be in as much trouble today.

11) Fess up! Whenever a company runs into trouble, they seem to take a page from the same PR playbook: First, they say nothing. Second, they deny. Finally, they make a begrudging, pitifully small admission. Eventually, the full truth falls out, and the stock tanks with it.

12) Never forget risk management: Consider what could possibly go wrong, and have a plan in place in the event that unlikely possibility comes to pass. If there is to be upside, then there must also be a corresponding and proportional downside.

13) The trend is your friend: ...this market cliché was proven true once again...

Looks even truer 8 months later!

Source:, 1/2/2008 6:54 AM EST

[Aug 9, 2008] Population paradox Europe's time bomb

The Independent

Save the world! Stop having children! Such was the rather drastic solution to the problem of climate change proposed in an editorial in the prestigious British Medical Journal, no less, the other day. And since one of its authors was a distinguished academic – Dr John Guillebaud, emeritus professor of family planning and reproductive health at University College, London – we should consider the notion seriously.

His argument was straightforward. The mushrooming population of the world is putting extreme pressure on the planet's resources and increasing the output of greenhouse gases. Every single month there are nearly seven million extra mouths to feed. And because a child born today in the UK will be responsible for 150 times more greenhouse gas emissions than a child born in Ethiopia the obvious place to start cutting back is here rather than there.

Dr Malthus, thou shouldst be living at this hour. But, actually, this goes one better. When Thomas Malthus first published his gloomy Essay on the Principle of Population in 1798 he had others than himself in his sights. His argument sounded academically neutral. Human populations grow exponentially whereas food reproduction expands in a linear fashion (it's the difference in maths between multiplication and addition) so disaster always looms, in the shape of disease, war or famine, to balance the population out. But he wasn't looking to himself for the solution; those he had in his moral scrutiny were the lumpen poor, breeding mindlessly, careless of the demographic implications of their lusty loins.

[Aug 08, 2008] The crisis: a tale of two monetary policies by Martin Feldstein

It might be that the fact that Reagan crushed the union movement and started dismantling post Great Depression safeguards in financials brought us the spiral of greed and incompetence which culminated in the current crisis.
Economist's View (from FT )

Martin Feldstein says there are good reasons for the difference in monetary policy between the Fed and the ECB, the most important being that unions are stronger in Europe than the US. This means there is a greater chance of a wage-price spiral developing in Europe forcing the ECB to adopt a tougher stance on inflation:

The crisis: a tale of two monetary policies, by Martin Feldstein, Commentary, Financial Times: The European Central Bank and the Federal Reserve are facing similar problems but pursuing different policies. The ECB has been raising interest rates while the Fed has been cutting them. ... Which central bank is doing the right thing? Or could they both be?

Inflation is a significant problem in both the eurozone and the US... Both economies are also facing declining economic activity with falling employment... The sharp rise in the prices of energy and food ... will undoubtedly spill over into higher prices... The primary challenge for both central banks is to limit this inflationary shock to a one-time pass through, avoiding the ... wage-price spiral that drove inflation rates in the 1970s to double-digit levels. Preventing a repetition of that requires convincing the public that today's high inflation rate will soon decline.

Despite the similar problems faced by the two central banks, there are important differences that justify their separate strategies. The contrast between the ECB's mandate to achieve price stability and the Fed's "dual mandate" to balance the goals of price stability and employment is ... a reflection of fundamental differences between the two economies. Those differences make it more difficult to tame inflation expectations in Europe and therefore require the ECB's tougher policy.

The role of trade unions is the most important difference. Only 7.5 per cent of US private sector employees are union members... In contrast, more than 25 per cent of employees in the European Union are members of trade unions and in some EU countries the wages set in union contracts are automatically extended to other companies in the same industry.

Because of this union power, the ECB must persuade union members and their leaders that it is determined to bring inflation down to its target level... The ECB's tough stance and exclusive emphasis on price stability is crucial to shifting inflation expectations and persuading unions to accept the rise in food and energy prices without pressing for offsetting wage gains.

There's another hypothesis that says the reason the ECB is able to focus more on inflation is because of the stronger social safety net that is in place in Europe relative to the US. With a stronger social safety net, variations in employment are less costly and that allows more focus on inflation.


Bill C says...

I think the interaction between unions and inflation is U-shaped (I vaguely remember reading a paper that made this point, but the citation eludes me): weak unions can't push up wages, but also if you have very strong unions with centralized wage bargaining, they take into account the economy-wide externalities when they negotiate national agreements. It may be that the intermediate degrees of union power that are more problematic in this regard (and maybe Europe as a whole falls into that intermediate category).

[Aug 7, 2008] U.S. Consumer Credit Increases $14.3 Billion in June (Update2) By Shobhana Chandra

Aug. 7 |

U.S. consumers borrowed more than twice as much as economists forecast in June as a decline in home equity forced Americans to fund purchases with credit cards and other loans.

Consumer credit rose by $14.3 billion, the most since November, to $2.59 trillion, the Federal Reserve said today in Washington. In May, credit rose by $8.1 billion, previously reported as an increase of $7.8 billion. The Fed's report doesn't cover borrowing secured by real estate.

American Express Co., the biggest U.S. credit-card company by purchases, in July withdrew its 2008 earnings forecast after second-quarter profit fell 37 percent on worse-than-expected consumer defaults. Yesterday, Chief Executive Officer Kenneth Chenault said the company will probably take a charge in the fourth quarter as it cuts jobs and trims expenses.

``Rising fuel prices, rising unemployment, record low consumer confidence and most critically, housing declines have made this economic cycle unlike any other,'' Chenault told analysts on Aug. 6 at the company's New York headquarters.

[Aug 07, 2008] US is in recession Merrill Lynchs David Rosenberg by James Quinn, Wall Street Correspondent


The United States remains firmly in an economic recession in spite of economic growth figures to the contrary, a leading economist has warned.

Merrill Lynch's David Rosenberg, the first economist from a major bank to declare a US recession was underway back in early January, argues that recent unemployment figures show yet more evidence that the US economy is a deep recession.

Pointing to last week's news that employment has now declined for six months in a row, Mr Rosenberg, Merrill's chief North American economist, says that "at no time in the past 50 years has this happened without the economy being in an official recession."

The typical definition of a recession is two consecutive quarters of negative gross domestic product (GDP) growth, something which the US has yet to have.

However he argues that this is only a matter of time, given that all four recession determinants "have peaked and rolled over."

He points to widespread decline in economic activity, noting that real sales in manufacturing and retail, employment, industrial production, and real personal income – the four determinants – are all way below their peaks.

The Merrill Lynch economist estimates that monthly GDP "peaked in January and has declined at a 2.2pc annual rate since that time," noting that he believes that the recession started between October and February.

"We expect the real GDP data are going to undergo massive revisions, and in fact, that we are going to be on the receiving end of what could be a significant revision on July 31," Mr Rosenberg argues, suggesting that these revisions will point to the onset of recession.

[Aug 7, 2008] The left can offer higher growth and social justice by Joseph Stiglitz
Both the left and the right say they stand for economic growth. So should voters trying to decide between the two simply look at it as a matter of choosing alternative management teams?

If only matters were so easy! Part of the problem concerns the role of luck. America's economy was blessed in the 1990s with low energy prices, a high pace of innovation, and a China increasingly offering high-quality goods at decreasing prices, all of which combined to produce low inflation and rapid growth.

President Clinton and then-chairman of the US Federal Reserve, Alan Greenspan, deserve little credit for this – though, to be sure, bad policies could have messed things up. By contrast, the problems faced today – high energy and food prices and a crumbling financial system – have, to a large extent, been brought about by bad policies.

There are, indeed, big differences in growth strategies, which make different outcomes highly likely. The first difference concerns how growth itself is conceived. Growth ... must be sustainable: growth based on environmental degradation, a debt-financed consumption binge, or the exploitation of scarce natural resources, without reinvesting the proceeds, is not sustainable.

Growth also must be inclusive; at least a majority of citizens must benefit. Trickle-down economics does not work... America's recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today than they were seven years ago.

But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. ... So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all.

A modern economy also requires risk-taking. Individuals are more willing to take risks if there is a good safety net. If not, citizens may demand protection from foreign competition. Social protection is more efficient than protectionism.

Failures to promote social solidarity can have other costs... [For example, the] cost of incarcerating two million Americans – one of the highest per capita rates (pdf) in the world – should be viewed as a subtraction from GDP, yet it is added on.

A second major difference between left and right concerns the role of the state in promoting development. The left understands that the government's role in providing infrastructure and education, developing technology, and even acting as an entrepreneur is vital. ...[examples]

The final difference may seem odd: the left now understands markets... The right, especially in America, does not. The new right, typified by the Bush-Cheney administration, is really old corporatism in a new guise.

These are not libertarians. They believe in a strong state with robust executive powers, but one used in defense of established interests, with little attention to market principles. The list of examples is long, but it includes...

By contrast, the new left is trying to make markets work. Unfettered markets do not operate well on their own... Defenders of markets sometimes admit that they do fail, even disastrously, but they claim that markets are "self-correcting." ...

Markets are not self-correcting in the relevant time frame. No government can sit idly by as a country goes into recession or depression, even when caused by the excessive greed of bankers or misjudgment of risks by security markets and rating agencies. But if governments are going to pay the economy's hospital bills, they must ... make it less likely that hospitalisation will be needed. The right's deregulation mantra was simply wrong, and ... the price tag – in terms of lost output – will be high, perhaps more than $1.5trn in the US alone.

The right often traces its intellectual parentage to Adam Smith, but ... Smith recognised the ... need for strong anti-trust laws.

It is easy to host a party. For the moment, everyone can feel good. Promoting sustainable growth is much harder. Today, in contrast to the right, the left has a coherent agenda, one that offers not only higher growth, but also social justice. For voters, the choice should be easy.

[Aug 6, 2008] The Fed's Next Move is Down

Euro Pacific Capital

As a student of the Great Depression, Fed Chairman Bernanke has correctly, in my view, sensed that whereas inflation does the greatest long-term economic damage, it is recession that his political masters most fear. He is also aware that it was the raising of interest rates that turned the 1930 recession into the Great Depression of 1933, which lasted until World War II.

Depression, especially in a highly leveraged world that is accustomed to prosperity, would likely result in serious civil strife. Politically, it must be avoided no matter what the economic or financial costs. Despite 'spin-talk' to the effect that the Fed is pursuing a dual mandate to both fight inflation and promote growth, in reality they are simply trying to promote growth pure and simple. This is the reality that few market analysts or journalists dare to mention.

With 5 million American homes vacant, the "Big 3" auto giants heading towards bankruptcy and some $4 trillion already wiped off of American home values, things look bad for American consumer demand. With consumer spending accounting for 72 percent of GDP, this should ensure recession. To try to change this outcome, the Fed stands ready to implement the most inflationary monetary policy in its history.
... ... ...
Investors should expect falling worldwide interest rates. Short-term government bonds in inherently strong currencies, like Swiss Francs, remain attractive. As hyper-stagflation and acute financial stress becomes manifest, gold will likely rise significantly.

Synergies of the unpleasant kind recessions, credit crunches and housing busts

"such credit contraction (crunch) and house price decline (bust) episodes on average lasted 6 (10) and 8 (18) quarters, respectively. " 10 quarters are 2.5 years. 18 quarters are 4.5 years... "the de-leveraging of US financial institutions would lead to a reduction of credit to US non-levered entities by about USD1 trillion (4.4% of the total assets of the US financial sector) and shave about 1.3 percentage points off GDP growth over the year following the negative credit shock (in addition to the effects from other transmission channels)." and this slow deterioration of the situation with some sector rotation might not last long and change to a rapid slide with the dollar as a catalist

I think that institutionalists right now are the top school which helps to understand the event as they unfold and the crazy world of semi-bankrupt banks and bankrupt but on life support hedge fonds like Freddy and Fannie and all powerful but little ammunition left Fed.

From the abstract of a new paper by Stijn Claessens, M. Ayhan Kose and Marco E. Terrones, entitled "What Happens During Recessions, Crunches and Busts?" (paper now online here):

We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the 1960-2007 period. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period.

With respect to ongoing events in the United States, they write:

These comparisons suggest that, while the current slowdown may share some features with the onsets of typical U.S. and OECD recession, it is worse in some dimensions, particularly in terms of speed of credit contraction, drop in residential investment and decline in house prices. We therefore also compare the developments in credit and housing markets in the United States to date to those in the past episodes of credit contractions and house price declines. Tables 2B and 3B showed that such credit contraction (crunch) and house price decline (bust) episodes on average lasted 6 (10) and 8 (18) quarters, respectively. If these statistics, based on a large number of episodes, provide any guidance, they suggest that the adjustments of credit and housing markets in the United States are only in the early stages relative to historical norms and might still take a long time. The earlier episodes suggest that the process of adjustment in the United States might persist in the coming months with further difficulties in credit markets and drops in house prices. This could bode consequently poor for the path of overall output, which, as we showed, falls more in recessions associated with credit crunches and house price busts than in recessions without such events.


Menzie Chinn at August 6, 2008 02:50 PM

It really makes one wonder what the catalyst for recovery would be. With much of the world economy reduced by 1.5% through 2011 and the dollar hitting limits for borrowing, there are painful adjustments ahead.

Charles at August 6, 2008 03:12 PM

The charts and article extracts above don't mention the labor market. Maybe the full article does.

The recent rapid rise in unemployment, has only been seen in recessions. A useful chart on this phenomena is at

Mike Laird at August 6, 2008 05:44 PM

The other shoe has yet to drop on housing. Within a year or 2, Asian & Petro-state central banks will be forced to quit buying US debt because of burgeoning inflation in their respective countries. The rate on the 10 yr Tres & hence on mortgages will increase substantially.

I suspect Calculated Risk has the housing recovery about right at 2013.

algernon at August 6, 2008 08:58 PM

Charles- The catalysts for recovery are all around us... Repair or replacement of transportation infrastructure, build-out of renewable energy infastructure, rebuilding of city-center residential housing.

All these projects require capitalization, which will not occur until the excess leverage is purged out of the banking system and "players" take their losses. Algernon's comment regarding 2013 seems like a reasonable estimate for US housing recovery and credit market stabilization to begin.

James E at August 7, 2008 01:21 PM

Concerning "The catalysts for recovery are all around us... ", the existence of unmet human needs is constant & isn't therefore critical to the creation of wealth. Resources have been grossly misallocated. The existence of problems to be solved does not erase that fact.

Menzie Chinn at August 8, 2008 11:31 AM

For myself I've never understood the attraction of the Austrians, they assert that the value of a good is based on its ability to satisfy a need, or utility.

Yet for a capitalist the only use of a good is its ability to yield a value above the cost of the inputs that were required to produce it. In other words its exchange value, not its use value.

They don't actually use the goods they produce. Hence if the utility of a good is irrelevent to the seller - if only the price matters to them - clearly its utility cannot determine its price.

Logic huh?!

In fact from my reading of Marshall and Jevons (admittedly English not Austrians) they conceded that in fact the price of production determined value not utility. Which rather makes you wonder why they bothered in the first place.

Sorry for the digression.

[Aug 6, 2008] Big Freeze part 4 A US recovery by Larry Summers

How long will the economy stay weak on the current policy path?

The best available estimates suggest that the American economy is operating between 2 and 2.5 per cent below its sustainable potential level. This translates into more than $300bn, or $4,000 for the average family of four, in lost output. Even if, as I think unlikely, recession is avoided, growth is almost certain to be so slow that the gap between actual and potential output comes close to doubling over the next year or so. Given that unemployment peaked nearly two years after the end of the last recession, output and employment are likely to remain below their potential levels for several years in the best of circumstances.

Given the combined impact of rising commodity prices, falling house prices, reduced availability of credit and rising uncertainty, it is surprising that the economy has shown as much strength as it has in recent months. While it is possible that this speaks in some way to its enormous resilience, the preponderant probability is that, as the effects of tax rebates wear off and those of tighter credit conditions feed through, the economy will take another downwards turn.

Just as the bottom was called early a number of times in Japan in the early 1990s and in the US in the early 1930s, we have seen and no doubt will see moments of sunlight that create hope that the worst is past. Yet it bears emphasis that in the current context there can be no confident reliance on the equilibrating powers of the market.

[Aug 6, 2008] The principles of sound regulation By Henry Kaufman

There is a danger of excessive regulation (Brezhnev's socialism, command economy, excessive central planning) and there is a danger of lack of regulation (voodoo economics, gilded age, crony capitalism). The real economic mastery is to find the right balance between excesses of regulation (which kill innovation) and excesses of reregulation which lead to crony capitalism (private profits, public losses).

August 5 2008 |

At least eight precepts of sound financial regulation should be considered.

  1. First, we should recognize the deregulation illusion.
  2. A second and related precept is that comprehensive financial deregulation is impractical as well as politically and socially intolerable.
  3. Third, a new regulatory regime should strive to encourage the highest standards of business conduct.
  4. Fourth, in formulating sound financial and regulatory supervision, market participants will push risk-taking to the marginal edge unless constrained.
  5. Fifth, regulation lags behind shifts in markets and technologies.
  6. Sixth, deregulation is making the job of the US Federal Reserve more challenging.
  7. Seventh, a new system of financial regulation should pay less attention to minor matters and more to broad, systemic weaknesses.
  8. Finally, in crafting new approaches to financial regulation we must acknowledge the international dimension of leading institutions and markets

The writer is president of Henry Kaufman & Company, an economic and financial consulting firm, and author of 'On Money and Markets: A Wall Street Memoir' (McGraw-Hill, 2001)

[Aug 6, 2008] Buiter Welcome to a world of diminished expectations by Willem Buiter

We should not overestimate the severity of the current crisis: "So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided."
August 5 2008 |

From a cyclical perspective, things look bad for Europe, the US and most of the global economy. My contribution to summer cheer is to note that longer-term local and global economic prospects are likely to be worse than expected. So welcome to boom and bust. Welcome to subdued long-term growth prospects.

The ancient Greeks knew hubris to be one sin the gods will punish. When Gordon Brown, the British prime minister, announced "the end of boom and bust", Jove must have checked his thunderbolts. Capitalist market econ­omies are inherently cyclical. The private credit system is intrinsically prone to alternating bouts of irrational euphoria and unwarranted depression. Busts play an essential role. They clean up the mess created during the boom by inflated expectations, overoptimistic plans and unrealistic ventures. These become embodied in unsustainable household debt, productive capacity with no foreseeable use, excessive corporate and financial sector leverage and enterprises whose only asset is hope. The correction is painful, even brutal: unemployment rises, as do defaults, repossessions and bank­ruptcies. We entered such a cathartic phase around the turn of the year in both the US and the UK. Continental Europe is not far behind.

... In the balkanised regulation and supervision regime of the US, no one was in charge; few were even aware of the dysfunctional developments that were taking place.

The result, in both the UK and the US, was overexpansion of the banking sectors, house-price bubbles, unsustainable construction booms and excessively indebted household sectors. It will take two or three years to work off these excesses.

The global increase in the price of commodities relative to core goods and services represents a redistribution of real income from net commodity importers to net exporters. The EU and the US are at the wrong end of this terms-of-trade shock, which also lowers potential output and is inflationary. The terms-of-trade shock took the form of a jump in the headline price level. All this limited the capacity of central banks to act to support demand. For the non-food-producing poor, this terms-of-trade shock is disastrous. In the poorest countries it threatens to undermine much of the reduction in extreme poverty achieved by high growth in China and India.

What relief there has recently been on energy prices is largely the result of a monetary policy-engineered slowdown in emerging markets. Across these markets, strong underlying growth potential was outstripped by excessive demand growth, fuelled by cheap credit and frequently by undervalued real exchange rates. Even in Brazil – the most controlled of the Brics (Brazil, Russia, India and China) – real interest rates are negative and further monetary tightening is required. India is making determined efforts to regain control over inflation, Russia is toying with the idea and China blows hot and cold – but will have to raise rates, appreciate its currency faster or ration credit a lot more tightly if double-digit inflation is to be avoided. The global cyclical slowdown benefits the advanced industrial countries through lower commodity and energy prices, at the cost of more subdued growth of external demand.

Once the cyclical correction in emerging markets has run its course, I expect growth in those countries to resume at rates that are high but no longer stratospheric. The reason is the environmental constraints on growth in these markets. I am not referring to the (massive) contribution of China and others to global warming, but to the local and regional environmental fall-out from unsustainable industrial and agricultural development: increasing scarcity and rising costs of clean fresh water, clean air and soil that is fit for humans. When the last athlete hobbles out of the polluted Olympic Games of Beijing, black-lunged and gasping for oxygen, there is likely to be a reassessment of what is sustainable growth in China. Even totalitarian regimes require, if not the consent, at least the acquiescence of the populace. Double-digit rates of growth are a thing of the past.

One way to boost long-term global prospects is further trade liberalisation. But the World Trade Organisation's Doha round of negotiations is suspended and on life support. The Old Protectionists – Europe, Japan and the US – have been joined by the New Protectionists – advanced emerging markets wishing to shelter their agricultural and financial sectors and anything else deemed strategic. Of the four Brics, all but Russia (which is not a WTO member) took a leading part in running the Doha round on to the sandbanks.

So how bad will things get? After the slowdown/recession has corrected the excesses of the past decade, prospects for the overdeveloped part of the world are quite reasonable, as long as material aspirations moderate in line with modest prospects for sustained growth in standards of living. For emerging and developing countries at the right end of the commodity boom, the potential for prosperity is there, as long as the resource curse is avoided. For poorer countries at the wrong end of the commodity boom, the combination of the terms-of-trade shock and acute environmental challenge will make life very difficult.

The writer is professor of European political economy at the London School of Economics

[Aug 6, 2008] Export Land Model

OPEC internal oil consumption is increasing at 8% a year and in ten years will match Saudi Arabian production. Since they cannot sell what they use at home, world net exports will fall 20% from their 2005 peak. That oil fell on world markets today tells us about the time horizon of world markets.

[Aug 6, 2008] Techonomics

naked capitalism
When people ask what I do for a living I tell them I do wealth preservation. If they ask how I do that, I say I do three things:
  1. read the direction of inevitable changes in the world,
  2. discover and value investment possibilities in the context of those changes, and
  3. allocate risk capital among those possibilities.

Part of what I therefore do from day to day is to cover the intersection of technology, economics and finance; and I publish most of the general interest content to my blog as a sort of public filing cabinet that I can search for myself as well as refer people to. While Yves' blog is not concerned with technology per se, and much of what I post is industry specific, I thought I'd cross post a brief selection of recent technology news items which I think do have wider economic implications...

... ... ...

An essay in the New York Times called "OPEC 2.0" points out that communications is just as vital and expensive as gasoline; and just as monopolized although, as in the early days of oil, by domestic monopolies.

AMERICANS today spend almost as much on bandwidth - the capacity to move information - as we do on energy. A family of four likely spends several hundred dollars a month on cellphones, cable television and Internet connections, which is about what we spend on gas and heating oil... That's why, as with energy, we need to develop alternative sources of bandwidth...

An oil standard

naked capitalism

Ok. Oil. Exxon Mobil reported a second-quarter profit of nearly $12 billion -- a number that works out (as many did) to about $39 for every man, woman and child in America; $90,000 a minute etc.

Mark Thoma has a think about the future price of gasoline for us. The punch line:

If past global expansions are a guide, global demand will recede only gradually. This is a direct implication of the model underlying this analysis. This suggests that US gasoline prices will remain high for the time being. Barring a major economic collapse in emerging Asia, prices will stabilise only as the world economy learns to economise on the use of oil and gasoline and as the supply of crude oil expands. Both corrective forces will take time to gain momentum.

As an investor however I believe that there is a definite skew in the probability distribution. Who ever heard of an extra 5 million barrels per day unexpectedly hitting the market? Yet, there is a distinct possibility of that much being unexpectedly withdrawn. Better to own the upper tail than the lower.

Brad Setser revisits the Gulf-inflation story -- single digit interest rates, double digit inflation.

I'd like to see more game theory applied to the oil price analysis. If they did peg their currencies to price, the Gulf could be the world's ultimate monetary authority. They can open the spigots whenever world growth flags below a targeted rate, and pull back when things are running a little hot... I'd rather own a currency based on oil than one based on gold.

Alternatively, they could pull back whenever there is talk of carbon caps, open up when it looks like alternative energy is getting too much interest and investment...

If I were advising them, here's my spin: Gulf states announce that they are voluntarily limiting the production and export of petroleum in order to contain global warming; and coincidentally conserving global oil resources for future generations... Home run.

[Aug 5, 2008] Inflation conundrum

naked capitalism
James Hamilton at EconBrowser further explains the difference between "inflation" - which only describes what is produced locally - and let's call it "purchasing power" - which includes the imported things I also buy - in a way that even I can understand it, ie. with coconuts and oil.
In 2007, Islandia produced 500 coconuts, which residents sold to themselves for $1 each, and imported 1 barrel of oil, which cost $100... Nominal GDP in Islandia for 2007 was $500. If you wanted to describe that in real terms, you'd call it 500 coconuts. You don't count the oil in either nominal or real GDP because Islandia didn't produce any oil...
Here are the numbers for 2008. We grew 510 coconuts, sold them for $1.01 each, and still imported 1 barrel of oil, paying $125 for it. So nominal GDP was $515.10 (a 3% increase) and real GDP was 510 coconuts (a 2% increase). The change in the implicit GDP deflator would be the change in the ratio of nominal GDP to real GDP, namely, +1%...
But wait a minute, Islandia's pundits decry. How can your crummy accounting claim that inflation was only 1%? Last year we bought 500 coconuts and 1 barrel of oil for $600, but this year if we tried to buy the same thing it would cost us $630. The inflation rate, they tell you, is obviously 5%, not 1%.
Now I understand. But since I buy at least some imports every year my purchasing power is not even meant to be described by the "inflation" number. So TIPS aren't really going to do me any good are they. What I need is a "purchasing power" protected bond. Likewise, if I want to know if my wealth is growing in "real" terms it does me no good to compare it to inflation - a production basket which only includes part of what I need to buy.

[Aug 5, 2008] A Modest Proposal for Ending Socialized Capitalism

Robert Reich's Blog

Socialized capitalism of the sort the Fed and the Treasury are now practicing, consisting of private gains and public losses, is untenable. On the other hand, it's also true that giant Wall Street investments banks as well as Fannie Mae and Freddie Mac are too big to fail. How to reconcile these conflicting principles?

Here's a modest proposal: When taxpayers insure a giant entity against loss -- as we now are with Freddie, Fannie, and Wall Street investment banks -- those entities must agree that:

(1) for the duration of the bailout, their top executives cannot receive total annual compensation higher than that received by the President of the United States, and

(2) the government gets five percent of their current valuation as shares of stock (roughly representing the benefit to their shareholders of the federal insurance) -- so that if and when the entities become profitable again, taxpayers are compensated for the risk they've taken on.

[Aug 4, 2008] Book Review - 'Bad Money,' by Kevin Phillips

According to Phillips the root an increasing dependence on trading and speculation (a phenomenon he calls "financialization") was that "Elements of the U.S. government decided, back in the late 1980s, that finance, not manufacturing or even high technology, had to be the sector on which Washington would place its strategic chips"

The problems besetting America today are ones Phillips has identified before: an increasing dependence on trading and speculation (a phenomenon he calls "financialization"), the Bush family's friendliness to oil producers, and the bond between evangelical Christians and the Republican Party. Today, these factors - along with the weak dollar and a financial sector in shambles - have created a toxic mix that he calls "bad money."

The ascendancy of finance in national efforts is no accident. "Elements of the U.S. government decided, back in the late 1980s, that finance, not manufacturing or even high technology, had to be the sector on which Washington would place its strategic chips," he writes. And so the Reagan supply-side go-go years begat the Clinton Rubinomics go-go years, with both presidents deferring to bond markets and deregulating the financial system. Increasingly, Phillips says, credit has been used less to finance virtuous commercial activity and more to make bets on financial outcomes. After 9/11 and the dot-com bust, the powers that be decreed that "real estate assets and home prices had to be the follow-up strategy."

[Aug 4, 2008] US lawmakers discuss retirement poverty By Whitney Kvasager

Aug 3, 2008 |

US lawmakers last month began efforts to revitalise corporate defined benefit plans, amid worries that Americans are not saving enough for retirement. The effort comes as numerous companies are closingDB pensions and offering new employees defined contribution plans, which provide much less in retirement.

A joint economic committee hearing on the issue in early July followed two years after the Pension Protection Act was introduced to ensure companies' pension plans had enough money to pay retirees - a law many say has backfired and helped fuel DB scheme closures. The act took effect this year and, among other things, requires companies to maintain a higher funded status to cover their liabilities.

Lawmakers and the experts they interviewed at the hearing said those closures could undermine the economy.

Defined benefit plans offer a guaranteed payout throughout retirement and are typically managed by professional investors who benefit from economies of scale. Defined contribution plans leave the onus on individuals to save and manage their own assets.

But some doubt lawmakers will be able to make DB plans anywhere near as robust in the corporate sector as in the public sector, where defined benefit is the primary structure and not considered to be in danger of extinction.

... ... ...

Senator Bob Casey, a Democrat from Pennsylvania and member of the Joint Economic Committee, convened the hearing because he said US workers were on edge amid the market downturn and worried about retirement stability.

Numerous DB plans have been closed to new employees in recent years, especially in such beleaguered sectors as the airline and automotive industries. A new report by the Government Accountability Office says half of plan sponsors of all sizes have frozen their defined benefit plans.

Company officials often say they closed their DB plan because they wanted to decrease volatility. Defined benefit plans invest about 60 per cent of their assets in the equity markets but are federally required to maintain a consistent funding level.

They also have to make up any deficit within seven years - more quickly than before. And under new accounting rules, they must value assets on a mark-to-market basis, adding more volatility to the balance sheet.

"The uncertainty is that you don't know what your contribution is going to be," says Bob Collie, Russell Investments' director of research and strategy. "So the corporate statement and the cash contributions are both more volatile. The impact of market uncertainty is felt much more than it used to be."

Companies that close their DB plan usually offer new employees a defined contribution plan, also called a 401(k) plan.

That tactic is mired in problems, lawmakers said. First, DC plans do not build up enough money. After 30 years in a 401(k) plan, the average worker retiring in her 60s would have about $193,700 in 2006, according to the most recent Employee Benefit Research Institute data - about $6,450 a year if she lives until she is 90.

Comparatively, every $100 invested in a DB plan earns about $200 more over the same 30 years than the same amount invested in a DC plan, according to CEM Bench­marking.

The extinction of defined benefit plans would also mean wiping out an important source of capital for fuelling entrepreneurship in the economy. Defined contribution plans do not invest in venture capital, for example. Sherrill Neff, partner at the venture capital firm Quaker BioVenture, says the loss of venture capital assets from DB plans could cripple the industry and eliminate new jobs.

Earl Pomeroy, North Dakota Democratic representative, forcefully told the committee Congress had "made all the wrong moves" in trying to strengthen retirement savings.

In an interview following the hearing, Mr Pomeroy said Congress must try to get companies to revamp their retirement offerings.

He suggested a solution might be "hybrid" plans, using target-date funds for example, that require worker contributions but have better supervision so enough money is saved. Mr Pomeroy also suggested tax incentives.

William Quinn, chairman of American Beacon Advisors, which manages American Airlines' $20bn (£10bn, €12.8bn) in pension assets, suggests Congress could write legislation allowing pensions to take a longer view on assets andliabilities to remove short-term volatility, such as averaging interest rates over severalyears.

**** Shiller, R. The Subprime Solution How Today's Global Financial Crisis Happened, and What to Do about It

Corruption of the society by "free marketers" has profound consequences. Second round of enthusiasm after dot-com bubble -- now in real estate corresponded to the desire of power to be to inflate the bubble. There is an important historical distinction between Versailles Treaty and Marshall plan. Keynes resigned from British delegation in protest against too harsh treating Germany by victors and wrote the economic consequences of peace. And it really generated tremendous resentment. After World War II the brilliant move was to establish Marshall plan. Shiller sees strong parallels with the subprime crisis and argues that we should deal with the problem in the style of Marshall plan. He calles for A New "New Deal"...
Compare with Bad Money- Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism

Moody's- Delinquencies Rise Slightly for CRE Loans

Calculated Risk

There are two parts to the CRE bust: 1) less investment in non-residential structures, especially hotels, offices, and malls, and 2) rising delinquency rates for existing CRE. The first leads to less employment, the second to more write downs for lenders (and more bank failures since many small to mid-sized institutions are overexposed to CRE).

[Aug 04, 2008] Housing Lenders Fear Bigger Wave of Loan Defaults by VIKAS BAJAJ

... ... ...

Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time...

While it is difficult to draw precise parallels among various segments of the mortgage market, the arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, analysts said.

Defaults are likely to accelerate because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks tighten their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are "alt-A" loans, many of which were made to people with good credit scores without proof of their income or assets.

[Aug 03, 2008] Seven Forehead-Slapping Stock Blunders by Glenn Curtis

  1. Ignoring Catalysts
  2. Catching the Falling Knife
  3. Failing to Consider Macroeconomic Variables
  4. Forgetting About Dilution
  5. Not Recognizing Seasonal Fluctuations
  6. Missing Sector Trends
  7. Avoiding Technical Trends

Nassim Nicholas Taleb: the prophet of boom and doom Bryan Appleyard

Jun 1, 2008 | The Sunday Times

Taleb's top life tips

1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.

2. Go to parties. You can't even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.

3. It's not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.

4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act - if you can't control outcomes, you can control the elegance of your behaviour. You will always have the last word.

5. Don't disturb complicated systems that have been around for a very long time. We don't understand their logic. Don't pollute the planet. Leave it the way we found it, regardless of scientific 'evidence'.

6. Learn to fail with pride - and do so fast and cleanly. Maximise trial and error - by mastering the error part.

7. Avoid losers. If you hear someone use the words 'impossible', 'never', 'too difficult' too often, drop him or her from your social network. Never take 'no' for an answer (conversely, take most 'yeses' as 'most probably').

8. Don't read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.

9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.

10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.

WSJ.Com Was Cramer Right

naked capitalism

If anyone needs any any evidence that the Wall Street Journal is a mere prenteder in comparison to Pearson's Financial Times, they need look no farther than Dancing The Freakout - Was Jim Cramer Right?. Of course one piece doesn't make a newspaper, but attributing early call of The Arrival of The Big One to Mr Cramer - a mere housetop weatherwane - albeit a Tourette's-affected one - is absurd, though perhaps not an unexpected one for The Journal.

The primary difference begins with both media organizations obviously need to serve their respective audiences. The quality of the output initially reflects this. But why should the FT feel compelled to constantly scratch under the skin of capitalism (and prevailing politics) whilst the WSJ cheerleads, rarely ruffles feathers, and maintains the narrowest (and most dogmatic) of political lines - the former evidenced again in this piece by asking the most fatuous of questions, rather entertaining pre-emptive thoughts about how "the market" might be wrong?

I believe that it is a function of "class", eschewed as the term may be in America, and most American analyses. For in Britain, the City readers of the FT knew their class inherently. Mobility was poor, and along with one's class, one's political interests were implicitly understood. And so a far more factual, unintermediated approach evolved, with opinion segregated and flagged. The readers of the Wall St. Journal being aspirational, were far amorphous and without solid class affiliations and attendant interests, far more politically malleable. And so the Journal editors took it upon themselves to shape and mold the opinion of numerous fence-sitters into the dubious but doctrinaire fold of the inviolable primacy of the free market, with all its political baggage. In perfect markets, this may be tolerable, but in a modernity where business interests have captured the flag, investment in rent-seeking is often more attractive than capital investment, oligopoly's are rife, the potential for the mouthpiece of the market to morph into something not dissimilar from Radio Pyangyang is a clear and present danger.

It is precisely the FTs confidence that gives it the freedom to critical analyse anything and everything pursue systemic faults objectively. For despite their role as protaganist for capitalism, there are no sacred cows that threaten their, and their reader's position. It is understood implicitly that ironing out the kinks in the market and the system, however inimical to one special interest or another enhances the their positions. It is this same confidence that allows it to comfortably inject collegiate humour, satire and parody - as seen in Lex, or FT Alphaville - something completely absent from the strident, over-earnest, near-paranoid dogmatism one witnesses in the Journal.

So one year on, asking whether Cramer is "Da' Man" for his syphilitic rant really misses the point, which should be: Where was he (and this refers to all Cramers and their mindless ilk) during the prior four years? Why wasn't he ranting about the sheer stupidity of Americans withdrawing equity from their homes en masse at increasingly inflated prices? Why, pray tell was he not doing angry cartwheels in regards to the PBoCs absurd accumulation of USD reserves to prevent a classical BW correction of the USD relative to the RMB? Why was he not flagging the Bush tax cuts and lack of US energy policy as massively shortsighted endeavors with imminent and meaningful negative consequences for the entire nation (and perhaps the financial system of the entire world)?? Where was the outcry when AGs fed sat at nearZIRP, woefully behind the curve? And one can go on, but I've already beaten it to death.

There is a reason I eschew The Journal except when I am stranded without my own material and find a copy laying about upon the airline seat next me, which is rarely if ever...

Pity the US consumer

naked capitalism
The Wizard of Oz was originally written around the turn of the century (last one) as a populist allegory railing against the banks and railroads and Yip Harburg, the lyricist for the 1939 movie, specifically stuck to that intention. I believe the tin man was the factory worker, the straw man the farmer, the cowardly lion was William Jennings Bryan, the fake wizard was Wall Street (as today) and the witches the monopoly trusts. The munchkins were the "little people". Dorothy was you and me.

Plus ca change...

GDP for Q407 was revised to a negative 0.25%, Q108 to 0.9%, but Q208 was reported at 1.9%. The big story in the data was net exports. Dean Baker (via DeLong):

Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter...

Jobs are weak.

Nonfarm payrolls fell for the seventh straight month in July, while the nation's unemployment jumped to 5.7%, a four-year high, according to the Labor Department. Underemployment, a more comprehensive measure of the extent of labor market weakness, rose to 10.3%, its highest level since 2003 and two points above its July 2007 level. Since December, 463,000 jobs have been lost, the strongest signal yet that the economy is in a recession.

Tourism is not responding as strongly as one would hope to the weak dollar.

The world's long-haul international travelers have jumped by 35 million since 2000, yet America has been largely overlooked by those new travelers, despite favorable exchange rates resulting from a weak dollar and attractions like Disney World and the Grand Canyon. In fact, the annual number of foreign visitors to the US is about 2 million lower than in 2000, leading travel-industry experts to figure that from 2000 to 2007, the US economy took a hit of about $150 billion... Foreign visitors to Orlando, Fla., dropped by one-third from 2000 to 2006; by nearly 40 percent over the same period to Anaheim, Calif. (read Disneyland); and by 22 percent to Las Vegas, a frequent entry point for foreigners to the Southwest... in all 50 states, travel and tourism figure somewhere among the top four industries by economic impact.

New York may go broke (again).

Costs are rising and revenues are falling fast. In June 2007 the 16 banks that pay the most taxes on their profits remitted $173m to the state treasury. Last month this dropped to $5m, a 97% decrease. This is a frightening fall given how much the state's coffers rely on Wall Street taxes: 20% of all state revenues come from financial companies... Wall Street lost 4,300 jobs during the month of June alone... In less than 90 days, the projected deficit over the next three years has jumped 22% to $26.2 billion.

Peter Bernstein has added his voice to the chorus, waxing apocalyptic.

In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher... the most unusual feature of our current problems: the primary impact of all of them has been on consumers, not on businesses... Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly... To sit back and let nature take its course is to risk the end of a civil society.

Too many developed economies got addicted to asset inflation - the increasing valuations were the only source of yield to service the debt incurred in their purchase - a Ponzi scheme in the Minsky sense. Now that bubble has burst. Houses are a non-productive asset, a consumption good. Values have to fall to where they can be serviced from current incomes - whether via a mortgage payment or rent - or incomes have got to rise via wage inflation. I still don't see any other way out. The first decimates (many) banks, the second decimates the dollar.

(Paul Davis at Technology Investment Dot Info.

[Aug 3, 2008] Nova Scotia News

IT WAS the extreme greediness of privileged Americans that caused hundreds of thousands of their fellow citizens to lose their homes, undermined the economies of not only the U.S., but of nations around the world, and sabotaged the stock-market investments of heaven only knows how many million grey-haired pensioners like me.

Were it not for rotten governance in Washington, however, the greedsters could never have gotten away with their highway robbery.

In the case for the prosecution, let us present, as Exhibit A, two government-chartered, U.S. companies: Fannie Mae and Freddie Mac.

[Aug 3, 2008] Fed Fears Wage Spiral That Is Little in Evidence -

IMHO a very incoherent thinking as the main danger might be stagflation. First of all, the USA is not an isolated country and now if dollars will be thrown in the face (aka exchanged into euro or yen) can import inflation (like in too much money chasing too few goods). Whether commodities prices come down remain to be seen. That means that producer might have no alternatives but to raise prices.

"If American households are losing ground to inflation," said Adam S. Posen, deputy director of the Peterson Institute for International Economics in Washington, "and they can't resort to automatic cost-of-living adjustments or union power, they'll find some other way, through their demands on the political process and through their expectations."

Among the Fed's policy makers, the majority argue that the wage pressures that Mr. Fisher and a few others see as imminent are still well down the road. Dealing with a nonexistent problem by raising interest rates now, they say, could push a still growing economy into outright recession.

But those holding this majority view, among them Ben S. Bernanke, the Fed chairman, invariably add a significant caveat: They could be wrong. Wage pressures could somehow erupt, catching them off guard. Given that risk, they say, they would prefer to raise interest rates from their present very low level rather than do so too late.

... ... ...

We could be in a world," Mr. Sack said, "where workers will have limited ability to negotiate higher pay and companies will have limited ability to raise prices."

[Aug 3, 2008] Types of spirals - Paul Krugman

Nice illustration of the fact that Krugman sometimes is a sloppy mathematic (none of variables are defined) and is unconvincing as an economist (printing press speed, which in case of US might be just a repatriation of dollars, is a variable which affects inflation as Weimar republic experience demonstrates)
New York Times

Just about every economist believes that wage increases reflect both the state of the labor market - high unemployment suppresses wage demands - and expected future inflation. But expected future inflation in what? One school of thought, going back to Keynes, says that workers basically look at other workers as a reference point, so that wages reflect expected future wage changes:

(1) % change in wages = A - B*(unemployment rate) + expected rate of wage increase

The other, driven largely by the experience of the 1970s, says that it's the overall rate of consumer inflation that matters:

(2) % change in wages = A - B*(unemployment rate) + expected rate of increase in the CPI

Lou Uchitelle has a great piece in today's Times highlighting the extent to which the difference between (1) and (2) is driving disputes about monetary policy. If you believe (1), inflation is well under control: wages aren't taking off, the labor market is weak, and once oil and food price spikes end we'll be, if anything, in a deflationary environment. If you believe (2), oil and food will spill over into general inflation, and the Fed needs to raise rates despite the lousy economy to head inflation off at the pass.

Now here's the thing: all of the recent evidence points to (1). I'd argue that the logic of the situation does the same: without cost-of-living allowances in wage contracts (we've got an un-COLA economy), there's no reason either workers or employers should regard the price of gasoline as relevant to their bargaining. That, fundamentally, is why I'm a monetary policy dove right now: I don't think there's any fundamental inflation problem, just a one-time hit on food and energy.

I suspect that Ben Bernanke believes the same, but he has a problem - namely, that many people inside and outside the Fed believe in (2), even though there's no sign of it in the data. Any day now, they warn, inflation is going to break out all across the economy, and the Fed needs to take the punchbowl away NOW NOW NOW, never mind the weak economy.

Sometimes, it's not easy being Ben.

[Aug 2, 2008] Libertango - Krugman

An important concept of revolutionary power: "The distinguishing feature of a revolutionary power is not that it feels threatened...but that absolutely nothing can reassure it (Kissinger's emphasis). Only absolute security - the neutralization of the opponent - is considered a sufficient guarantee"..

Paul Krugman is currently on a tour promoting his new book, The Great Unraveling: Losing Our Way in the New Century. The book is basically a collection of Krugman's columns at the New York Times.

Kevin Drum of CalPundit ran a long quote from Krugman's introduction to the book. Here's the quote, because yes, I think it's that important:

Most people have been slow to realize just how awesome a sea change has taken place in the domestic political scene....The public still has little sense of how radical our leading politicians really are....Just before putting this book to bed, I discovered a volume that describes the situation almost old book by, of all people, Henry Kissinger....

In the first few pages, Kissinger describes the problems confronting a heretofore stable diplomatic system when it is faced with a "revolutionary power" - a power that does not accept that system's legitimacy....It seems clear to me that one should regard America's right-wing a revolutionary power in Kissinger's sense....

In fact, there's ample evidence that key elements of the coalition that now runs the country believe that some long-established American political and social institutions should not, in principle, exist....Consider, for example....New Deal programs like Social Security and unemployment insurance, Great Society programs like Medicare....Or consider foreign policy....separation of church and state....The goal would seem to be something like this: a country that basically has no social safety net at home, which relies mainly on military force to enforce its will abroad, in which schools don't teach evolution but do teach religion and - possibly - in which elections are only a formality....

Surely, says the conventional wisdom, we should discount this rhetoric: the goals of the right are more limited than this picture suggests. Or are they?

Back to Kissinger. His description of the baffled response of established powers in the face of a revolutionary challenge works equally well as an account of how the American political and media establishment has responded to the radicalism of the Bush administration over the past two years:...."they find it nearly impossible to take at face value the assertions of the revolutionary power that it means to smash the existing framework"....this passage sent chills down my spine....

There's a pattern...within the Bush administration....which should suggest that the administration itself has radical goals. But in each case the administration has reassured moderates by pretending otherwise - by offering rationales for its policy that don't seem all that radical. And in each case moderates have followed a strategy of appeasement....this is hard for journalists to deal with: they don't want to sound like crazy conspiracy theorists. But there's nothing crazy about ferreting out the real goals of the right wing; on the contrary, it's unrealistic to pretend that there isn't a sort of conspiracy here, albeit one whose organization and goals are pretty much out in the open....

Here's a bit more from Kissinger: "The distinguishing feature of a revolutionary power is not that it feels threatened...but that absolutely nothing can reassure it (Kissinger's emphasis). Only absolute security - the neutralization of the opponent - is considered a sufficient guarantee"....I don't know where the right's agenda stops, but I have learned never to assume that it can be appeased through limited concessions. Pundits who predict moderation on the part of the Bush administration, on any issue, have been consistently wrong....

I have a vision - maybe just a hope - of a great revulsion: a moment in which the American people look at what is happening, realize how their good will and patriotism have been abused, and put a stop to this drive to destroy much of what is best in our country. How and when this moment will come, I don't know. But one thing is clear: it cannot happen unless we all make an effort to see and report the truth about what is happening.

Now... With all that in mind, here's a link to Drum's interview with Krugman.

[Aug 2, 2008] L-ish Economic Prospects

With all due respect for his views this guy should really reread J.K.Galbright and apologize. Better late then never...
July 18, 2008 |

Home prices are in free fall. Unemployment is rising. Consumer confidence is plumbing depths not seen since 1980. When will it all end?

The answer is, probably not until 2010 or later. ....

...According to the widely used Case-Shiller index, average U.S. home prices fell 17 percent over the past year. Yet we're in the process of deflating a huge housing bubble, and housing prices probably still have a long way to fall.

Specifically, real home prices, that is, prices adjusted for inflation in the rest of the economy, went up more than 70 percent from 2000 to 2006. Since then they've come way down - but they're still more than 30 percent above the 2000 level.

Should we expect prices to fall all the way back? Well, in the late 1980s, Los Angeles experienced a large localized housing bubble: real home prices rose about 50 percent before the bubble popped. Home prices then proceeded to fall by a quarter, which combined with ongoing inflation brought real housing prices right back to their prebubble level.

And here's the thing: this process took more than five years - L.A. home prices didn't bottom out until the mid-1990s. If the current housing slump runs on the same schedule, we won't be seeing a recovery until 2011 or later.

What about the broader economy? You might be tempted to take comfort from the fact that the last two recessions, in 1990-1991 and 2001, were both quite short. But in each case, the official end of the recession was followed by a long period of sluggish economic growth and rising unemployment that felt to most Americans like a continued recession.

Thus, the 1990 recession officially ended in March 1991, but unemployment kept rising through much of 1992, allowing Bill Clinton to win the election on the basis of the economy, stupid. The next recession officially began in March 2001 and ended in November, but unemployment kept rising until June 2003.

These prolonged recession-like episodes probably reflect the changing nature of the business cycle. Earlier recessions were more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation. Modern slumps, by contrast, have been hangovers from bouts of irrational exuberance - the savings and loan free-for-all of the 1980s, the technology bubble of the 1990s and now the housing bubble.

Ending those old-fashioned recessions was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble.

The Fed, in particular, has a hard time getting traction in modern recessions. In 2002, there was a strong sense that the Fed was "pushing on a string": it kept cutting interest rates, but nobody wanted to borrow until the housing bubble took off. And now it's happening again. The Onion, as usual, hit the nail on the head with its recent headline: "Recession-plagued nation demands new bubble to invest in."

[Aug 1, 2008] Is Greenspan a Better Judge of the Housing Market Now Than When He Was Fed Chairman?


The reason for asking is that the Washington Post is reporting that Greenspan believes the housing market is nowhere near the bottom. While I strongly agree with this assessment, it is worth pointing out to readers that Greenspan spent his tenure as Fed Chairman avidly denying the existence of a bubble in the housing market.

Greenspan is certainly entitled to change his mind, but readers should realize that Greenspan has an abysmal record in assessing trends in the housing market, so they may want to weigh his views accordingly.

--Dean Baker

[Aug 1, 2008] Terrible Timing for a Hotel Boom
While new hotels open, occupancy rates are falling across much of the United States.

"We're really on the verge," said Charles Snyder of Smith Travel Research, a firm based in Hendersonville, Tenn. "It hasn't turned into a hotel recession just yet, but we're certainly keeping an eye on the economy."

... ... ...

Hotels, of course, are not the only victims of the softening in consumer spending. Restaurants that offer casual dining are suffering, too, as are midlevel department stores and retailers of discretionary goods, like Starbucks.

[Aug 1, 2008] Goldman: "Second Half Slowdown Ahead" by CalculatedRisk

G.M. and Ford also had expected economic conditions to improve in the second half of this year, but now are forecasting an even more dismal sales environment. GM bonds were trading on Friday at 48 cents on the dollar.

Goldman Sachs put out a research note late today lowering their projections for the second half.

"[W]e are on the cusp of a renewed deceleration in growth."


Anonymous writes:

Anyone have a collection of quotes promising recovery in 2H 2008?

Anonymous | 08.01.08 - 11:08 pm

Eng-101 writes:

Let's see if we can translate this phrase, this mangling of the language

"[W]e are on the cusp of a renewed deceleration in growth."

into proper English:

- The economy is about to fall of a cliff (cliche),
- You ain't seen nothin' yet (too vague and too colloquial),
- Hold on to your seats-- we're going down fast (too Hollywood)
- Assume crash positions (again Hollywoodish),
- It's wearing off man, I'm crashing (too 60's)
- ?
Eng-101 | 08.01.08 - 11:19 pm

The Grinch writes:

Consumers will be facing price hikes of up to 15 percent on holiday goods, from toys to European luxury handbags. Many retailers had resisted passing along higher prices to consumers, but escalating costs - fueled by rising energy prices, higher labor costs in China and a weak dollar - are forcing stores, from warehouse clubs to high-end merchants, to pass more of the burden to shoppers.
THE IMPACT: The price increases could make shoppers buy fewer holiday gifts to keep to a budget. That could mean a serious hit for the economy, since consumer spending accounts for two-thirds of all economic activity and for the holiday period, which accounts for about 40 percent of merchants' profits and 50 percent of sales.
The Grinch | Homepage | 08.01.08 - 11:23 pm

The Grinch writes:

"Americans are driving less, cutting into federal fuel taxes, which help pay for maintenance of highway and mass transit systems," said American Association of State Highway and Transportation Officials Executive Director John Horsley. "The cost of construction materials -- steel, concrete, asphalt -- is skyrocketing and at the same time that people are driving less, and that means less revenue. We're in a double whammy."

Others blame more than just a lack of money.

"Lack of vision, lack of leadership and lack of investment. Infrastructure is something that's been easy to ignore," said Urban Land Institute senior Resident Fellow for Sustainable Development Ed McMahon.

It's especially easy to ignore if you consider the latest estimates on how much it would cost to repair all 590,000 in America: $140 billion.

The Grinch | Homepage | 08.01.08 - 11:32 pm

[Mar 11, 2008] Real Time Economics Merrill Lynch Recession to Be Worst Since 1970s

2009 will be worse then 08.

Merrill Lynch economist David Rosenberg, one of the most bearish Wall Street economists, says to look past the 1990-91 recession as a guide to the current downturn. The key difference: the depth of home-price declines.

Mr. Rosenberg says in a note to clients that the current downturn is hitting more broadly than the credit crunch and real estate meltdown in the 1990-91 recession, which lasted eight months (as did the mild 2001 contraction). Home prices today are falling in 85% of the country vs. 40% during that period, he notes. When prices hit bottom in 1992, the inventory of new and existing homes for sale was at 7 months of supply. Now it's at 10 months' supply "with no improvement in sight," says Mr. Rosenberg, who was among the first economists to forecast a 2008 recession. He sees average prices nationwide dropping 20% to 30% more, on top of the 11% decline since the 2006 peak.

The mid-1970s recession "not only saw a sharp and sustained rise in food and energy prices, as is the case today, but also saw a very similar consumer balance sheet squeeze from a simultaneous deflation in residential real estate and equity assets, which never happened in the 2001 recession, the 1990-91 recession or the recessions of the early 1980s for that matter," he writes. "The last time we had more than one quarter of outright contraction in the value of both asset classes on the household balance sheet was in the 1973-75 recession." –Sudeep Reddy

David Rosenberg The Frugal Future

The Big Picture

Thought on the future of the economy, with David Rosenberg, Merrill Lynch North American economist

Peter | Aug 7, 2008 5:09:22 AM

It will be good for people to have to endure some frugality. The population has had it too easy for too long. Or at least putting their efforts into unproductive enterprise. They have become fat, lazy and out of touch. That is how civilizations collapse.

Market hedges Fed interest rate bets By Krishna Guha

August 6 2008 |

The futures market is at odds with Wall Street economists over the likelihood that the Federal Reserve will raise US interest rates this year.

An overwhelming majority of private sector economists thinks the Fed will not raise this year, in spite of its tough talk on inflation.

... ... ...

Most think the economy will be weak in the second half of this year as the effects of tax rebates wear off. They expect tight financial conditions, caused by the credit squeeze, will do the Fed's work for it – creating enough economic slack to mitigate the risk to prices.



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