“Business Cycle” or “Gotterdammerung?”

Platt-KirovRing1H "The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007.

Case-Shiller's index of 20 major metropolitan areas fell 18.5%, also a record.

"The broad downturn in the residential real estate market continues," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement. "There are very few, if any, pockets of turnaround that one can see in the data."

All 20 metro areas in the 20-city index recorded declines, with home prices falling more than 20% in eight of those cities. National home prices have dropped 26.7% since they peaked during the second quarter of 2006.

The decline does not seem to be slowing – just the opposite. The average home price dropped 2.52% between November and December in the 20 top metro areas. That was a larger increase than the 2.25% drop a month earlier."  CNN.com


Ironically, the real estate market in Washington seems the least affected by all this.  We sit near the trough.

I wish to propose here an economic question for which I will, at least rhetorically, not admit of having an answer of my own.

Whether for crass political reasons or for genuine difference of opinion, the two American political parties are projecting diametrically opposed views of the nature of the present economic crisis and its probable outcome.

The Democrats state that the present depressed state of the economy is different both in quality and depth from any recession that we have seen since WW2.  They seem to believe that, if left to its fate, the economy of the United States and therefore probably of the world will spiral downward into a dark abyss from which it might well not climb for a long, long time.  In that pit would be; very high unemployment rates, deflation, low levels of investment, etc., We have not seen doctors and lawyers paid for their services with baskets of eggs and dead chickens for a long time, but that seems to be what the Democrats seem to think possible.

On the other hand the Republicans seem to think, or at least to say, that what is going on is really just the trough inherent in an exceptionally deep business cycle.  They seem to believe that if left alone the economy will "right" itself like a swamped boat, shrug off the water and rise to the surface.  Having that view, they say that all the money being appropriated and disbursed for "recovery" is just unnecessary and a surreptitious means to enactment of the Democrats' desired socialist re-structuring of the United States.  The belief in the "business cycle" theory of the crisis appears to be largely ideological, but subject to test by events, but the "socialist conspiracy" theory is, to some extent, supported by some of the items that the House Democrats chose to fund under the "stimulus" bill.  The Democrats would argue of course that all expenditures are stimulative.

I am curious to hear the arguments on both sides.  pl

PS  Watch your language.


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56 Responses to “Business Cycle” or “Gotterdammerung?”

  1. dilbert dogbert says:

    Hoover’s Sec Treasury seemed to be on the side of let the rotteness be flushed from the system. Voters didn’t agree in 1932.
    Conservatives should not be on the side of letting chaos loose. History doesn’t support chaos as a good thing.

  2. rjh says:

    For a perspective on housing prices see: http://www.calculatedriskblog.com/2009/02/house-prices-real-prices-price-to-rent.html
    It deals with both rental and housing sales. Take a look at the Schiller housing index towards the end. Over the past century (starting with 1890) housing holds at about 100. There is still more to fall.
    Fighting this will be futile and likely self destructive. Housing was grossly overpriced. It needs to fall back to normal levels. The goal should be to accomplish this fall without major associated damage. That will be hard. Neither Republican nor Democrat appear willing to accept this as the goal.

  3. wcw says:

    I don’t think smart Republicans believe what they’re saying. The only macroeconomists who are not part of the zero-bound consensus are the Chicago and Austrian schools, neither of whom may admit the truth, since the truth tends to destroy the foundations of each school’s thought. This pattern repeats itself with the GOP. It has come to the entirely correct conclusion that to admit the truth of what’s going on is political suicide. If it backs stimulus, it undercuts the foundations of its current overall message. Moreover, if stimulus works, the Democrats get the credit anyway. You have to pretend stimulus is not necessary if you cannot imagine changing your party and if you want your party to have a chance in the next couple decades. Apparently the Republicans in power now cannot imagine a conservative party that admits sometimes large fiscal stimulus is necessary.
    Similarly, I think smart Democrats will admit that the stimulus bill has more than its share of crass politics. They entirely correctly would point to the tax cuts (much less-effective than spending, much more-palatable to the GOP) as the largest such line item therein, of course. They have much less of an issue here, since a large aggressive stimulus plays to the foundations of their party message and its history as the party of the New Deal and the Great Society. The real test will come when things eventually normalize (for an object lesson of how that goes without government action, see 1873) and the party needs to cut back.

  4. Leanderthal says:

    It’s for crass political reasons. Hell hath no fury save a GOPher scorned.
    Fox News(Pravda West) and Limbaugh are propaganda machines for GOPhers.
    I’m wondering how the folks in SC and LA are going to treat their respective governors if the latter refuse stimulus funds which include help for the unemployed.
    Republicans talk about self discipline and boot strap morals. That’s fine when you’re on top. Obama is all about safety nets for real people, not boot straps for imaginary Horatio Algers.
    We’re all conservative in the abstract until a bad can of tuna shows up at the market, we lose everything in the market and have no job.
    GOPher ideologues are truly a cynical bunch. They redefine hypocrisy.

  5. Duncan Kinder says:

    The use of “Gotterdammerung” is useful here because, actually, Wagner’s Ring Cycle is instructive here.
    In the Ring Cycle, Wotan enters into an incredibly bad real estate deal – to build Valhalla – with some giants.
    Seeking to evade the consequences of this deal, he tries to worm his way out. Each solution gives rise to further problems, however, until finally, in Gotterdammerung the whole edifice burns up.

  6. J says:

    I think we should go back to the original design — The American Credit System, and jettison the ‘old’ European Banking System which we now so wonderfully enjoy, that makes serfs of us all.

  7. Opinions–Krugman says house prices will fall another 20% in recent article. Fact–K-12 education which is usually 60-85% of local government expenditures is primarily based on local property taxes. Public safety-Police and fire is usually 5-19% of local budgets, including HAZMATS and EMT and Public Health. Basically the property tax in most of the 60-90,000 local govenmental units is because STATES and Local governments either choose to or cannot by law impose a progressive income tax on their citizens. This failure (IMO) is going to result in long term damage to the future of the US if Krugman is accurate in his prognosis. Now that oil/gas prices are headed back up (note PL’s past posts this subject) it looks like $2.00/gal minimum for a long while. Transportation, education, and public safety are pretty much analyzed sinews of the economy short and long term so to me looks like economic muscle is gone, sinews are going, and bones will soon be broken (stress fractures already). Again the banking system is dead and despite articles saying some banks are sound, we should start a wholly new system.

  8. Charles I says:

    The economy has never been “left alone” as the Republicans claim, since the days of sliced bread at least. To say that Republican governments are free marketeers and Democrats power crazed interventionists flies in the face of the historical and legislative record.
    The Republican campaign against government and regulation were not campaigns against government and regulation but against differing versions of the same that would direct the costs and fruits thereof from one class of beneficiaries rather than to another.
    “Trickle down economics” was not the unfettered working of the market. How much a pound do the rich go for nowadays anyway?
    It was the jiggering of the tax rates to subsidize the few growing rich with the lolly(and future tax burdens) extracted from the many growing poor.
    Clean coal, ad hoc steel tariffs, weapons procurement and the glaring absence of universal health-care in the U.S. are just a few of many many instances of policy intervention in the economy with the blunt instrument of the legislature to favour particular private interests.
    For heaven’s sake, the introduction of Pharmacare was attended with a promise not to seek the natural market advantages of a huge purchaser, but a promise to protect new profits on the taxpayer’s dime. THIS is what they mean by “market forces” – private interests promoted by legislative fiat.
    That’s the exact opposite of how the illegal drug market works, although the War On Drugs and the huge Apparat that prosecutes and jails hundreds of thousands of mainly black Americans are in fact, intervention in that market by the government for very specific purposes by very costly and specific means.
    If Drugs are such a public health threat that a War on them at such social costs is sellable, why not make a different policy choice, and intervene in the market by legalizing drugs, remove the vast clandestine untaxed profit and invest it in health care?
    Because there are vested economic and political interests that value that War and its attendant corruption and profit more than they value the health of the citizenry, society or the victims of drug-cash armed militias around the globe. Or ANY free market.
    Under either an illegal or legal drug regime, consumption remains stable, human nature being what it is. Only the costs and beneficiaries change. A private weakness for the Creator’s gifts of flora, fauna and science is converted into an industrial complex.
    That is how “the market” is conducted.
    The rich are almost always the largest absolute and usually the most relative beneficiaries of the never ending call for lower taxes, notwithstanding that every economist knows that the most stimulative effect comes from getting income into the bottom half, who have no choice but to spend on necessities rather than savings, investments or luxury.
    The EU has recently announced that it will be regulating hedge funds as part of the cleanup, so we know where it stands on free markets today.
    At least there is a business cycle. For the poor, the oppressed, the addicted, it is always business as usual, prosecuted with a bit more ferocity and less discretion since the advent of the GWOT.
    I am confident that however great the present dislocations, once ALL the various and sundry bailouts and free cash injections have been dispersed, there will eventually be a resumption of economic activity.
    This time around, anyway.
    The goose has a few golden eggs in it yet, and they must be extracted by The Market before the goose is finally pronounced “Cooked” and ready for ultimate consumption.

  9. graywolf says:

    George Bush, with his inane “compassionate conservatism”, NCLB, Medicare Part D, and so forth opened the door, wide open, to a socialist direction.
    Then the financial tsunami hit.
    The electorate threw a tantrum and elected the left and far left -not really knowing what they were doing. They just wanted be rid of Bush and the Republicans.
    The democrats would be fools to let this chance escape. this is their big chance to turn America into France.
    That joke of a “porkulus” bill proves the point.
    Obama provides “leadership” by preaching fear – about an economy of which he knows nothing.
    Would McCain be doing better?
    It’s a coin toss.
    The governing class is dishonest,ignorant, self-satisfied and grossly incompetent.
    The Secretary of the Treasury is a tax-cheat.
    Somebody needs to take a blowtorch to everything inside the beltway.
    Now, Iran is on the verge of a nuclear weapon.
    What happened to the fabled NIE (produced by the governing class) that said Iran was NOT on it’s way to a nuclear weapon?
    More incompetence and dishonesty
    And the beat goes on…..

  10. Eric Dönges says:

    Keep in mind that I’m located in Germany, not the U.S., so things might be different on your side of the pond – but from what I’ve been reading in the financial news, your economy is tanking just as badly as ours. Isn’t globalization wonderful ?
    Anyway, I work for a small company selling software to machine tool manufacturers, mostly for the automotive and semiconductor markets. While we actually managed to moderately grow our sales to Europe and the U.S., the Asian market has completely collapsed, costing us 50% of our total sales in January. Since the Japanese fiscal year ends in January and is thus traditionally the best month business-wise, the situation is unlikely to improve any time soon.
    And it’s not just us. Our customers have their order books filled until March/April, but nobody is getting much in the way of new orders. Companies are reacting by cutting benefits, reducing working hours and/or layoffs on a scale unprecedented since the 30s. This means lots of people will have a lot less disposable income, so other industries are going to be hit as well. 2009 is going to be a complete write-off, and it’s not clear if 2010 is going to be any better.
    So from my personal outlook, I’d have to say the Republicans are deluding themselves. This is not a normal downturn – it’s global, and it’s hitting multiple industries simultaneously, so there is nothing to absorb the impact.
    The cynic in me believes that the Republicans’ opposition to the stimulus package is just for show – they know it will pass without their approval, so if it fails they can say they where against it from the start, and if it works they can count on voter amnesia or argue that the economy would have recovered without any help. If they are sincere in their opposition, they can refuse to accept any of the stimulus money for their districts and states.
    That being said, I’m skeptical if the stimulus packages being enacted around the world are actually going to work, since the root cause of the crisis – total irresponsibility by our so-called financial “elites” – is not being addressed anywhere.

  11. VietnamVet says:

    The economy is tanking so fast and hard that the only Bear Market it tracks now is the Great Depression. Despite the recent happy talk about bouncing back to normal in 2010, four changes assure that America is much poorer and will not recover any time soon:
    1) The American economy has been hallowed out. Production has moved overseas, shipped to the USA in ships larger than aircraft carriers. 70% of the US economy is the service industry. When we stopped buying, the US economy collapsed.
    2) Big business is either a multinational like Boeing or is owned by foreign multinationals. InBev, a large Belgian brewer, bought Anheuser Bush. If you want to spend money on an American beer, you have to purchase a micro-brew. Boeing has yet to fly its new carbon fiber 787, years late.
    3) Politicians are in the debt to big business to get elected. Both the Democrats and the GOP enabled the housing bubble and deregulation. Middle Class housing, stock and pension value were looted. Electricity and Medical costs skyrocketed.
    4) The era of cheap energy that built America is over.

  12. Dave of Maryland says:

    Husbands & wives can bicker all they want. At some point the children flee.
    Watch what cities & states do.

  13. ads says:

    Opinions–Krugman says house prices will fall another 20% in recent article. [K-12 education and Public safety-Police and fire, which make up 65-94% of local government expenditures, are primarily based on local property taxes.] This is going to result in long term damage to the future of the US if Krugman is accurate in his prognosis.
    It may take awhile if reduced appraisals have to be fought for on a case-by-case basis as is the custom here in Baltimore. They don’t even automatically provide owner-occupied tax credits limited annual increases to 10% anymore, you had to apply for one by Sept 30th of last year.
    Eventually there will be no one left living here except people on public assistance, the homeless, the ones who can’t afford to move, and those who have to live close to work (Hopkins and UMAB med students, Federal Hill financial industry professionals, etc.)
    (I appreciate your not banning me, Col. Lang. I must have tripped the profanity filter last week.)

  14. steve says:

    Really two issues here. Is it a different kind of recession (depression) and then what do we do about it.
    As to the first question, there are people of good will on both sides of this issue. For me, the determining factor is the international scope of this financial crash. During the dot com crash and the S&L crash there were other strong economies. We cannot buy other’s exports and other countries cannot buy ours.
    As to the second question, there is no correct answer. Macroeconomics is not a fine enough science. Too much like predicting weather. The best we can do is look at the past and try to extrapolate to the present, realizing the parallels are inexact. Finally, all solutions are written up by politicians, not economists. One suspects that Summers,Romer and Furman would have written a much different stimulus bill. I suspect they also believe that fixing the banks is more important than the stimulus bill too.

  15. b says:

    The world has a global (first time ever) case of what Irving Fisher diagnosed as serious Debt deflation.
    The Keynesian remedy against that is “stimulus”.
    But is not what the Dems are providing. They have spend MUCH more money to prevent the inevitable bank bankruptcies than they spend on public investment that builds the base of a new rise for all.
    House prices in the U.S. will not return to their means but will drop much lower than necessary because of so many foreclosures.
    There are ways to prevent that.
    – Allow judges to adjust mortgages to real value of house.
    – In extreme cases /areas allow destruction of supply, i.e. dismantle overbuild houses.
    It will take four years of an ever sinking economy until The Powers That Be will catch up with the real problem and finally get to the right solution.
    2014/15 may be a good year to bet on better market prices.

  16. JTCornpone says:

    This didn’t start like the usual business cycle recession and it has worsened much faster. Intervention is definitely in order as evidenced by the fact that it was the Bush administration which started it with the TARP (which passed without Republican filibuster threats). If the insiders could get Bush to intervene in the private economy they must have convinced him he was looking at Hooverdom. Every time he talked up the TARP you could tell he hated it.
    Here’s a pretty well reasoned argument in favor of stimulus and why the government can afford it:
    Roughly summarizing, there are ways for this to get totally out of hand and government debt as a percent of gdp has hardly changed in 30 years. Financial and Private debt has exploded.
    I’m still optimistic we will avoid all-out armageddon. There is a significant number of people out there on social security (like me) and military pensions and the like with a secure base of income to spend. My 401K is now a 301K and I’m being careful but I’m still buying the basics every day and I think the sum of that type of activity will provide some kind of floor under the economy which wasn’t there in the 30s. Social Security and Medicare put just under a Trillion$ in the economy in 2007:
    Total personal income was a little under 12Trillion$ in 2007:
    so social security and medicare are not insignificant.
    For those who have to have a job to survive and keep their house these are going to be very tense times and that’s why stimulus is necessary. Good luck to us all.

  17. frank durkee says:

    Adam Smiths comment about companies and their leaders is relevant here: “Whenever twor or more are gathered together they immediately begin to plot against the common good”. It is important to remember that Smith was both a moralist and a realist.

  18. zanzibar says:

    I think if we look at the reality we could conclude that neither are the Democrats “socialists” nor Republicans “free market capitalists”. In fact there is really no difference between the parties since they are both inflicted with “crony-itis” – meaning its capitalism for a favored few when the going is good and socialism for the same group when the going is not so good. Its a version of heads I win and tails you lose. The party that gets screwed in every instance is the average American working stiff and their progeny. All one needs to look at is a graph of real wages for the bottom 95% over the past quarter century.
    With regards to residential real estate – it is still relatively high compared to historical norms on the basis of rents and affordability (price to income). What many people may not realize is that around 50% of residential property in the US is owned free & clear. As the Case-Shiller price chart you pointed out shows we had a huge (several standard deviation) move up due to the credit bubble.
    IMO, the best frame to understand the current downturn and the role of politics is the debt/GDP cycle. The only times in the recent past where we have had a collapse of the banking stocks while the central bank has had a monetary policy of ZIRP with an exploding balance sheet are the 30s, 90s Japan and some cases in Latin America.
    For context we need to remember that in the 30s collapse the US was a creditor nation with trade surpluses (much like China today). Also our nominal GDP contracted by 50% then. So for those using Great Depression as the moniker of the moment are they forecasting our GDP will be down to $6.5 trillion over the next couple years when it is currently declining at a 4% annualized rate? Another favorite point is that what got us out of the Great Depression was WWII. But if we look at it in the debt/GDP frame what we see is that private sector debt came down throughout the early 30s while the national debt expanded. Households and businesses delevered and strengthened their balance sheet. They were ready to expand once again through increased spending by the time the WWII “stimulus” came through.
    Japan has built many a bridge to nowhere with their Stimulus I, II, III, etc. Their government debt/GDP has skyrocketed to around 180% yet their stock market and real estate trade around 75% below their peaks in 1989. Thank goodness for the complacent Japanese people their financial elites did not gorge on all the leveraged securitized paper that Wall Street and the City churned out over the past few years. They would have been pickled even further as their banks just recovering would have been re-zombified.
    I believe what we had was a perfect storm – Democrats & Republicans in cahoots with Wall Street using the messaging of “free markets” and the blunt hand of massive government intervention and policy focus around asset inflation that drove private sector debt to unsustainable levels. The Greenspan/Bernanke Fed and “the deficits don’t matter” DC combined with the raw crony capitalism of the elites came together in an orgy of debt that inflicted many a American with visions of easy money in asset inflation. We are now in the deleverage part of the cycle and there is absolutely no open and public debate about who is going to take the private sector losses that were magnified by leverage. Instead what we have is both parties by saying its Gotterdammerung, obfuscating their real action which is passing on the losses to taxpayers who will pay with increased taxes and a devalued currency. We have neither socialism nor capitalism – all we have is penury for working Americans.

  19. condignaction says:

    The Republicans are simply espousing their anarcho-free-market ideology (i.e., Libertarianism and it’s lipstick-variants the Chicago and Austrian schools). The problem with this ideology is that it is little more than sophomoric Utopianism and is overtly anti-intellectual. Why bother analyzing the economic situation in Japan during the 1990s to see how they handled a similar situation? In fact, why bother having Economics as a field of study at all? We already know the answer regardless of the question; “cut taxes and deregulate.” They believe on faith that an unregulated free-market system is the answer.
    It’s actually pointless to present facts, or analysis, or economic models, or historical similarities when discussing any economic situation with free-market utopianists. Thus, when ones writes; They seem to believe that if left alone the economy will “right” itself like a swamped boat, shrug off the water and rise to the surface. The operative word is believe, the way one believes in Jesus. They may be correct and the economy may right itself but the assertion certainly isn’t based on any facts or historical comparisons or analysis. Krugman might be wrong but he actually studied and analyzed the situation including comparing similar situations in other countries – he is presenting legitimate analysis.

  20. Sven Ortmann says:

    I believe neither the Democrat nor the Republican explanation that you mentioned.
    The Republicans are 100% wrong, the Democrats just miss the point.
    The US has lived beyond its means on a scope more dramatic than the mainstream yet accepts.
    I wrote about this in my blog, and a comment is the wrong place to lay out such a big thing, so please allow me to simply link to it.
    Let’s quote two key phrases (that apply only to the USA):
    “The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008.”
    “(…) we’re likely talking about a reduction of about ONE FIFTH in consumption (…)”

  21. Paul in NC says:

    There’s no way to know who’s right about the future. But we can look to see who was right in the past. And it wasn’t the Republicans.

  22. Abu Sinan says:

    The farther you get from DC the less true that is. Manassas, the last few years a new bedroom suburb for DC, as seen house price drop dramatically. NPR had a show that documented townhouses going for $300,000 two years ago now being sold by banks for $60,000.

  23. gacetillero says:

    I’d argue that they both have a point. If prices fall low enough, people will start to buy again, helping establish a floor to the downturn. The Republicans are not incorrect in that analysis. But the Democrats are right in that if prices fall low enough, the unemployment, low investment and the like will impose immense social costs. So the appropriate strategy should be to soften the social costs of the downturn while letting the process of winnowing cut some of the chaff out of the economy. The debate is really about trying to balance the two optimally, for all the hyperbole spouted by both parties.

  24. Propagandist says:

    To expand on your swamped boat metaphor, the Democrats care because the majority of their constituents are riding up front on the boat’s deck, packed in with the overflow crowd. A swamping would mean many will be lost (to unemployment). The Republicans on the other hand could care less about the crowd on the deck. Their constituents are seated safely inside the cabin in leather seats. Once the boat reemerges from the water, they’ll be just fine. Or so they think.
    In fact, I would suggest the bulk of the Republican constituency would approve of the decks being swept clean.

  25. jlcg says:

    Gotterdamerung ends happily. Wotan and the rest are burned away but the Rhine recovers the gold and the orchestra in the sublime ending suggests a new, greener, more beautiful world.
    Nations and systems are concepts and concepts come and go, the flesh and the mind remain. We could quote Brunhilde in her last scene,” why cry for spilled milk”. I am hopeful, the props will come crashing down but mankind will remain.

  26. Ed says:

    It was Robert Reich that said in his blog that he believes the Republicans are against this stimulus because real measurable results won’t show up until after the midterm elections.
    They can then run on how the stimulus didn’t work and when it starts to work after the midterms then they can claim it was due to them retaking the majority.
    Crazy enough to work?

  27. paraporker says:

    We have not seen doctors and lawyers paid for their services with baskets of eggs and dead chickens for a long time, but that seems to be what the Democrats seem to think possible.
    My father was an Arkansas doctor and he did get paid that way, you forgot the pies though, they were my personal favorite. His son, my big brother is also an Arkansas doctor who constantly rails about the evils of socialized medicine while partaking deeply of the state trough of dollars running a state clinic.
    Personally, I think it is criminal stupidity to send young families and poor people to grovel from county ERs for basic medical services when we could pay a fraction of that cost to send them to a normal clinic just like you and I do with a little more dignity. Decent health care in the industrialized world IS A RIGHT NOT A PRIVILEGE.
    As for the economy, brother we’re doing just fine out here in the howling wilderness of Northwest Arkansas. Sure, the real estate speculators who thought they could sell thousands of McMansions got smoked, but they bet big and lost.
    You all still need TP, flour, dog food, soda pop and beer. And we’ll sell it to you cheap.
    What is the future of our economy? I bet it is in something new.
    Mass manufacturing was great, we made lots of stuff, it all looked alike, drove alike, tasted alike and cost alike.
    Something new would be modular customized manufacturing that could quickly produce customized goods tuned for each consumer’s individual tastes and ability to purchase.
    Produced by skilled laborers who know how to do something besides perform some singularly monotonous task day in and day out.
    That’s where we’re going.
    Let the 3rd world produce mass produced crap for each other and the uncaring. I want to make a world where my friends down the street make me a custom hot rod or a stove just the way I want it with their automated machine tools.
    And that will happen sooner than you think.
    To be totally cliche, think outside your industrial box.

  28. greg0 says:

    Our property’s assessed market value spiked by 20% last year and yet it still had not reached the amount at which we wanted to sell. Now we are waiting to see what happens. Maybe the place will go on the market next year…
    Being semi-retired has its advantages in these times. At least Social Security did not get ‘privatized’! We’re glad that we’d pulled a lot of pension money out of the stock market, but the rest has to wait. Personal projects are just going slower.
    As far as a Gotterdammerung, we all have our metaphors for when the fat lady sings.

  29. jamzo says:

    the term business cycles gives financial crises says they are similar to weather, atoms, molecules, and other natural phenomena
    financial crises however are essentially problems of human nature
    they are better described as boom-and-bust cycles
    the financial market place discovers some way to manipulate some aspect of the financial market for a quick and easy gain, knowledge of the angle spreads it draws the attention of more and more people generating a boom that eventually collapses in a bust

  30. ISL says:

    I see nothing normal about this recession and much that is abnormal. I also see normal fiscal responses (interest rates are zero!!! what is normal about that?), which are attempting to preserve the wealth of those who made bad financial decisions with other peoples money (and their own) and who should according to the free market religion so reverently espoused – be impoverished and bankrupted, not bailed out.
    In that regards, the stimulus is a stop gap measure and a poor one at that. To stimulate the depression away and save the value of the shareholders and banks, would require a minimum (!) of 30 – 50 trillion dollars. I recently read in the independent quoting from a european bank analysis (whose name I forget) which estimated bad bank loans in Europe for current economic conditions were 15 trillion euros and the US is in far worse shape in the bad loan business.
    As the recession deepens, these bad loans only multiply.
    Unfortunately, Bernake seems to think the depression could have been avoided if the money supply had expanded dramatically in the US (a creditor nation at the time). However, that is exactly what Germany, a debtor nation at the time did.

  31. EL says:

    Look at the economic news out of Japan right now and then decide.

  32. adam says:

    How bad is it? Just one set of figures makes it clear. From August 1982 to 2008 we had the longest bull market in history on the Dow Jones, starting at 776 and reaching 14,198 in October 2007.
    Today we hit 7,300, with lows at 7,100. That is to say it took us less than 18 months to lose half of the value equal to twenty-five years work.
    Most people need at least a couple of lost weekends in Las Vegas to manage that.
    How much time, work, and economic development is that lost? Well to put it this way in 1982 the first commercial CD players had just appeared. Its that long ago.
    In the UK the FTSE is at 3,800, which is the value last seen post 9/11. We’re currently stress-testing the banks and insurance companies for a FTSE 2,000, which is around 50% below its lowest point in the past 2 decades.
    Your are right. The US was very lucky. Italy on the other hand privatised its pensions – it was a wipe out for the poor suckers (I mean whatever brave investors is in Italian).

  33. Cujo359 says:

    I agree with rjh that housing is overpriced. I tried to explain why here. For housing prices to come down, there has to be some contraction in the value of all those mortgages the banks have (had?). That much seems clear.
    So that’s part of the problem. Is there more to it? Almost certainly. This NYT graph shows a lot of potential loss in commercial real estate, which is a subject I don’t hear mentioned very much. There are also a lot of commercial and industrial loans that apparently aren’t worth very much any more.
    That’s a big problem for the banks, and the banks keep our money. I don’t really have much more idea than that why it’s a bad thing that they seem to be collapsing, but they do, and they will if something isn’t done. No banks means no loans. You either keep the banks going, or you replace them somehow if you want your economy to stay afloat.
    The extent to which the world’s governments manage to do that, and to keep the other important segments of their economies going is what will determine how bad things are going to be, I think.
    On that score, I’m not terribly optimistic. A great many economists have said that a complete takeover of the U.S. banks needs to happen now (the big ones that are failing, at least), and from what I read of Bernanke’s speech today, that’s not going to happen any time soon. For the moment, count me as one of those who think things are going to get a lot worse.

  34. Ian says:

    The problem with stimulus is that everybody wants to be a half-Keynesian. Deficit spending in the bad times can stimulate the economy. The flip side is that when times are good, the government should be running a massive surplus. That’s not just so you can pay for future stimuli, it’s actually supposed to be done to deliberately cool down the economy. When the next economic downturn hits, the economy has less far to fall. Unfortunately, it’s hard to convince voters that making the good times less good is a good idea.
    What is needed now is a time machine.

  35. mmeals says:

    It’s like Kedrosky says. The only left-right argument is how to repudiate the US debt. The left says do it through inflation/depreciation. The right says do it through liquidation and destruction of the public revenue base.

  36. Nightsticker says:

    Col Lang,
    Every economy needs an “engine”,something that drives it. The engine can be
    exports,colonialism,technological advantage, xxx [well, you get the idea]. Ours has been “consumer spending funded by debt”. That engine just broke down. I don’t anticipate anyone firing it up again. This means we have to find a new economic engine.I am not sure what it might be. But until it is created I do anticipate bad economic times.

  37. curious says:

    we are toast. A lot of those sub-prime lending has poor documentation and nearly impossible to value. And these are tied to CDO/etc.
    * many of the big banks are deeply insolvent due to severe credit losses
    * those big banks and Treasury don’t know how insolvent they are because they didn’t even have the loan files
    * a “stress test” can’t remedy the banks’ problem — they do not have the loan files
    One document uncovered shows the reply to a professional credit rater at Standard and Poor’s who actually wanted to investigate the mortgage loan files he was rating. A senior manager replied:
    Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don’t have it and can’t provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

  38. kao_hsien_chih says:

    Strictly speaking, I think both sides are actually very much right: this is indeed a very deep recession, at least in part brought about by business cycles (but with lots of help from banks and the government) but it can give birth to a catastrophe if it’s not treated properly. Republicans pretend as if recessions are painless–that’s BS. Recessions cost jobs and hurt people. Deep recessions cost many jobs and ruin lives of many people. The economy may recover–eventually–if nothing else changes, but to expect people whose lives are ruined to stick around doing nothing is absurd.
    The French Revolution started out as a fairly routine debt crisis, too. By the time it was over, the financial credit-worthiness of the French monarchy was not exactly the central question of the day.

  39. MRW. says:

    I’m far more simple-minded. I dont have an economist’s brains. I only know this:
    My ex-party, Republican, ruled Congress from Jan 1995 to Dec 1996, 11 years.
    * It dismantled the social contracts in place since 1933 to protect the banking system.
    * It reintroduced what allowed the Roaring 20s to roar until 1929.
    * It refused on Dec 15, 2000 to allow the Credit Default Swap (CDS) or derivative market to have any regulation; in fact, it passed a law forbidding it.
    * It gave anyone who took their business overseas an almost non-existent federal tax, so that foreign governments got our tax money.
    * It crushed any attempt to stop predatory lending, campaigned against it as well.
    House prices have plummeted.
    Foreclosures are at record highs in the history of the US.
    The US and global stock markets have lost 1/2 their value in one year.
    Credit markets have seized.
    Job losses are at 10% of the population.
    And these Einsteins want me to believe they have a plan to fix it, when they ruled over the body that created it? They dont even understand what they did, much less have any standing whatsoever to bring up the rear with the same songs they sang in ’95 to get us into this mess.
    To add insult to injury, now I’m not allowed to swear.

  40. zanzibar says:

    While we are distracted by the rhetorical battles around capitalism and socialism; deflation vs inflation; bailouts and bonuses – a very important economic point is being lost. It is best expressed by Steve Ballmer, Microsoft’s CEO:
    “In my view, what we now have will be a fundamental economic reset,” he said. “The economy is going to have to re-establish itself at a level of spending that reflects the real value of underlying assets before we can all start growing again at a healthy rate.”
    The point is that the increased growth rate of debt relative to our GDP growth meant that our economy was pushed to a level that is no longer sustainable and we have to now reset lower to bring our economy closer in line with our real incomes – the productivity of our capital and labor. Consumption will have to reset to a lower level. Private sector debt/GDP ratio will have to come down and household savings from income will have to rise. This balance sheet repair process in the household and non-financial sector is already underway. Household debt growth which was running at $350 billion/qtr in 2007 has reduced to the point that households only added $14 billion in new debt in the 3Q2008. We may even see that households will start to actually pay down debt in quarters ahead for the first time since 1975. When household and business balance sheets are sufficiently strengthened then growth will once again resume. A credible, fair and transparent plan of restructuring the private sector balance sheet is what needs to happen quickly. Additionally in order to re-establish trust in our system there must be a commitment to enforce the rule of law. That means malfeasance and fraud must be prosecuted wherever it may lead including our Capitol building.
    The Bernanke Fed and Tim Geithner’s Treasury Department are like generals fighting the last war. They are still applying the failed nostrums of asset reflations that were among the primary causes of this credit bubble. The actions to date from the Fed’s ZIRP and alphabet soup of lending facilities to the Treasury’s TARP and now CAP capital injections to insolvent Wall Street banks are all focused around the concept that many of the dodgy assets will recover their old glory values in the near future. At least that is what they tell us taxpayers whose future income streams these fine gentlemen are garnishing. In the mean time taxpayer capital infusions into Wall Street banks are running out the door to pay interest on the preferred stock held by not only our Treasury but also the governments of Singapore, China, Kuwait, Abu Dhabi and of course a prince in the deserts of Saudi Arabia. And not to mention to keep the managerial “talent” from jumping to greener pastures by providing them generous bonuses while they have driven their businesses into the ground. Michael Hudson’s insight into the Language of Looting is well worth a read.
    While our political and financial elites spend their time on how to stealthily pass the turd to us – the Chinese are busy acquiring long term access to natural resources at bargain basement prices. As this Stratfor report details the Chinese are getting a long term oil deal from a desperate Russia at $11.40/bbl. That’s real economic stratagery – converting their large collection of paper dollars to a tangible strategic resource. Economic historian Niall Ferguson in this interview provides a nice frame to think about the “Chimerica” metaphor.

  41. Cieran says:

    I’d suggest that both parties are correct, because this economic slowdown is composed of at least two separate problems, which gives each party something to argue about… and let’s face it: arguing instead of solving is what our current political system is all about.
    The housing mess is what the GOP likes to point at, and that problem represents something like a normal cyclic slowdown. Foreclosures are a serious problem, but those are primarily confined to California and Florida at the worst end of the mess, with plenty of damage elsewhere but nothing of a magnitude like we haven’t seen before. We know how to fix that, and the price tag for the cure doesn’t have to run into the multiple trillions of dollars range.
    The infinitely larger and more uncertain mess is the disaster caused by excess leverage and clueless risk-management on Wall Street. That’s the problem that the Obama administration is trying to fix, because it’s locked up the credit markets, and the engine of economic activity is seizing up as we watch. In a tightly-coupled global economy run via computers, this is unprecedented, so we’re not completely certain what to do next.
    The collateral damage from that bigger mess is fast spreading far and wide in the real economy, and there’s complete uncertainty about how bad this problem is (hence the upcoming “stress tests” for banks) and where it was show up next, so that half the electorate is now seriously worried about becoming unemployed. And that percentage will likely grow as unemployment rises and the stories of loss strike closer to home.
    I read this choice of “which of these messes are you talking about, anyway?” as a big political loser for the GOP, because once half the citizenry fears losing the ability to put food on the dinner table, responding to this concern with little more than political obstruction towards fixing either problem is just not a winning strategy.
    As in “don’t just stand there… do something!”
    Personally, I don’t think either party has quite figured out the feasible downside risk yet, but at least the new administration seems to be talking about it, instead of merely asserting (a la Bush and McCain and Gramm) that “the fundamentals of the economy are strong”.
    Acceptance of the existence of a problem is a necessary step towards its effective solution.

  42. JerseyJeffersonian says:

    Thanks for your comments and links, particularly the one to Michael Hudson’s post at Counterpunch. It’s a good reminder of the value placed upon disinformation by our elites.

  43. Arun says:

    From the library, I read an article from 2006, analyzing the structure of the subprime mortgage backed Collateralized Debt Obligation (CDO). The summary is that the CDO investor would lose money if housing prices did not appreciate by more than 4% in two years; and would be mostly wiped out if housing prices stagnated or fell.
    Why I trust that analysis is that it was published in 2006 and is not therefore, 20/20 hindsight.
    I simply do not see how the government or Congressman Barney Frank or Ben Bernanke or anyone else could induce anyone to take such risks with their own money. The information about the risks was out there; investors, financial firms all chose not to see it.
    If the market cannot price risk correctly, then that wipes out any reason to be a free market fundamentalist. It is reasonable to be skeptical about the market’s ability to straighten itself out in timespans short compared to our lifetimes.
    As long as the stimulus consists of spending that will sunset, it cannot do us any permanent harm, and might even do us some good. Things like tax cuts which may not automatically sunset, and which also not very good as stimulus will do us no permanent damage either. (It is probably easier to raise taxes than it is to curb spending once a long-term commmitment has been made.)

  44. curious says:

    “Business Cycle” or “Gotterdammerung?”
    From global economy point of view, I think we are now in different era. We are not in “post WWII” economy anymore.
    Of course everybody will recover, but what is the pecking order after the dust settle?
    If one look at GDP, and label WWII style us vs. them. We are definitely back to pre WWII order. Japan, Germany, China, (Russia is growing fast) are more or less the same world top economies at the eve of WWII.
    The post WWII world order is changing fast. The global geopolitics is about to get very complicated. Flow of goods, wealth, people and knowledge will change.
    It’ll be interesting to see Nobel prize list, olympic medals, large scale construction, biggest banks, 2 decades from now.

  45. Pat,
    In answer to your question, I kind of split the difference between the two camps (being a libertarian sort). I do think that the downturn this time around is fundamentally more severe than most we’ve seen since the Great Depression. In many ways, the dislocations and unreality that led up to this collapse are possibly even more severe than the stupidity that went into the GD. So, I definitely do agree with those on the left that if nothing is done, this is going to be a messy several years.
    Where I part ways with them is that I don’t think there is anything the government can do to avoid that. Especially repeating the vary policies that got us into this mess (encouraging people to spend beyond their means, encouraging banks to loan to people who shouldn’t be getting loans, trying to prop up the housing market and prevent the market from bringing houses back down to their real value), and then slopping a massive concentration of new government programs on top of everything. Quite frankly, I expect that the attempt to “save the village” that Obama’s team is making is going to end up destroying it…or at least dragging out the recovery much longer than needed.
    So, while I agree that doing nothing will likely mean a severe several year recession/depression as all the economic stupidity unravels itself, I think that’s likely the *best* result we can expect. You can’t undo the damage of 20-30 years of economic stupidity (bipartisan) by piling on even more of the same. But you can make things a lot worse in the attempt.

  46. optimax says:

    The FBI warned of massive mortgage fraud in Sept, 2004. Huffington Post:
    Bush knew, did nothing, in fact, underfunded the FBI.
    I remember Greenspan at one time saying we were in a housing bubble. The White House got him to recant. Anyone familiar with “Atlas Shrugged” should understand the dangers of crony-capitalism.
    Paulson and Sumners were warned early that the derivatives market needed to be regulated and wanted permission to do so in her department that regulated commodities. P and S told her she didn’t know what she was talking about.
    I read an article by a Princeton grad who went to work at Goldman Sachs as an investment banker at the beginning of the bubble. Said he didn’t know anything about investment banking but soon realized the sub-prime loans they were bundling and he was instructed to sell were dynamite. Eventually his boss told him to start shorting the sub-prime market while they were still bundling sub=primes and selling them to clients.
    Goldman Sachs and the company Greenspan now works for made a bundle shorting the sub-prime market. Plenty of bankers who helped inflate the housing market and bundled the sub-primes into toxic paper, knew what they were doing and will in a likelyhood end up big winners in what some describe as economic warfare.
    Also, Eliot Spitzer tried to stop predatory lending in NY when he was AG and Bush’s Justice Department blocked him. We know what happened to him.
    What happened is criminal and any AG who isn’t a coward should have enough evidence to go after these people. But then he’s the same guy who oked the pardon of Mark Rich.

  47. curious says:

    The santelli case is hot across the political blogs.
    And the coordination is now expanding to business interests that are opposed to Obama’s programs:
    Industries from health care to agribusiness to mining that stand to lose under President Barack Obama’s policy agenda are ramping up lobbying campaigns to derail or modify his plans.
    The day after Mr. Obama formally laid out his policy goals in his first address to Congress, the former chief executive of HCA Inc. unveiled a $20 million campaign to pressure Democrats to enact health-care legislation based on free-market principles.

  48. curious says:

    As banks stop lending amid the global financial crisis, the likes of Mauro are increasingly becoming the face of Italian finance. The Mafia and its loan sharks, nearly everyone agrees, smell blood in the troubled waters.
    “It’s a fantastic time for the Mafia. They have the cash,” said Antonio Roccuzzo, the author of several books on organized crime. “The Mafia has enormous liquidity. It may be the only Italian ‘company’ without any cash problem.”
    At a time when businesses most need loans as they struggle with falling sales, rising debt and impending bankruptcy, banks have tightened their lending to them.
    Many experts say organized crime is already the biggest business in Italy. Now, Fara said, the untaxed underground economy is growing even larger. “Certainly I am worried,” he said. “The banking system doesn’t work, and the private one that is operating is often managed by organized crime.”
    The consequences for Italy and its 58 million people are huge, Fara said: “Stronger organized crime means a weaker state.”

  49. Cieran says:

    Thanks for the info re: the Santelli hoax. And about this:
    the former chief executive of HCA Inc. unveiled a $20 million campaign to pressure Democrats to enact health-care legislation based on free-market principles.
    That’s pretty funny — the last thing that the plutocrats in the health care industry want is anything resembling “free-market principles”.
    Such principles would include economies of scale (rendered illegal in Bush’s Medicare D plan), and the breakup of oligopolies such as, well, HCA!

  50. zanzibar says:

    Disinformation and propaganda is how the plutocrats and their political acolytes in DC ensure that the working American transfer their hard earned money to the wealthy. If and when the people understand how they are being systematically looted we will have a lot of folks very upset.
    The Santelli rant seemed rather contrived considering that he was ranting about $250 million in mortgage support while no such rants for the trillions in support for investors in Fannie, Freddie, AIG and the Wall Street banks. Anti-trust enforcement or for that matter enforcement of the regulations that we have to ensure a fair and transparent “free market” was lost under the altar of patronage and the revolving door. The recent repeated taxpayer bailouts – each at worse terms for the taxpayer – of private investors and failed managements in AIG & Citi make a mockery of any notions of “free markets”. This is the paradox of the Obama administration – their overt coddling of large financial interests at the expense of many generations of working Americans while they seem to want some reform of health care and energy. We’ll have to wait and see what reforms are actually implemented.
    Some of the CDO issues that I have seen also were predicated on increased home prices. Additionally, many of the even more leveraged structures like issues of CDO Squared and CDO Cubed had no chance to return principal to even the senior tranche holders since they were priced so aggressively. Meaning the assumed risk was so low. Wall Street snowed many institutional investors who did no due diligence of their own and bought into the greed of the herd. A consequence of the market downturn is a looming pension and retirement disaster. It is not much discussed in the corporate media. Take for example CalPERs – the California state retirement fund which is “officially” down by around 45%. And that does not include the current value of land that they purchased at the peak of the real estate bubble. Now here you have a state retirement fund that went against every known prudent investment precedent and engaged in pure land speculation in areas like Phoenix that were expected to mushroom forever. Similarly, our Federal government holds many large liabilities including social security and medicare off balance sheet. If the government financial statements were done on an accrual basis like any normal business annual deficits would already be north of $3-4 trillion.
    I am not as sanguine with the massive projected near term growth in our national debt. Over the last 19 months our government has pledged over $11 trillion on behalf of taxpayers. To understand the scale of government debt growth required as they try and backstop investors in Wall Street banks, AIG and Fannie/Freddie, let alone stimulate the economy through employment support one has to come to terms with the stupendous growth of private sector debt over the past 15 years.
    From 1995 to 2007, our GDP grew by 85% but credit growth was 170% to around $50 trillion. Financial sector borrowings grew 300% in the same period to around $17 trillion and provided the “liquidity” that made many Americans feel “wealthy” and consequently drove consumer spending to significant levels. To provide some context – in 1995 mortgage debt growth was $185 billion. In 2005 $1.4 trillion of new mortgage debt was added. The ABS market grew by $125 billion in 1995. In 2006 it grew by an eye-popping $800 billion. Every category of private sector debt grew at astonishing rates.
    In the 8 years of George W. Bush – our national debt doubled to $10 trillion. Obama’s recent budget projected a $1.7 trillion deficit and that has many assumptions for revenues that are rather optimistic.
    I am afraid in our policymakers intent to try and bolster failed asset markets and investors in insolvent financial institutions they are risking the credit worthiness of our sovereign debt. If the Obama economic team and the Bernanke Fed continue on this trajectory I worry that not only will we have to contend with an economic downturn that was precipitated by the bursting of the credit bubble and that is now negatively impacting the financial sector balance sheet even further – that we will also be faced with a future funding crisis. This would further impoverish working Americans whose real wages have stagnated for years. Of course that does not mean we will not see periodic rallies in equity and debt markets.

  51. curious says:

    next budget is here.
    President Barack Obama gambled big Thursday when he unveiled his first budget. He treated taxpayers like grown-ups. His extraordinary candor about what Washington spends, and what he thinks it will cost to get the economy out of the tank and on course for a sound future, is refreshing.
    The figures are huge – $3.6 trillion to be spent in 2010, with almost $1.2 trillion of it to be borrowed. And the spending plan signals a sharp, maybe even historic, change of direction on taxes and the role of government. By baldly laying his cards on the table, Obama is betting that the public can handle the truth. It needs to.
    The economy is in a tailspin. It contracted at a 6.2 percent pace in the last three months of 2008, the Commerce Department reported Friday – its worst performance in decades. The White House announced the same day that it will take a 36-percent stake in Citigroup. Those are ominous reminders that the nation has critical decisions to make in order to turn things around. Obama’s truth in budgeting will help to make them informed ones.

  52. optimax says:

    I see Rush made a speech the news is talking about. I didn’t pay attention to it but wonder if it’s connected to this right-wing attack on Obama’s stimulus. The timing makes it seem coordinated. I think the American people are feeling too much pain to fall for it. I hope so.
    Now that housing prices are falling they can put them back into the CPI, reducing any future pay increases for American workers. That’s how it works, at least since Reagan, isn’t it?

  53. optimax says:

    Stephen Roach from Morgan Stanley certainly understood the weakness of our economy in an article he wrote in 2005. Explaining why the American consumer will suffer the most damage in a market correction: ” Usually, it’s the least-experienced borrower or lender that suffers the greatest damage in a market correction. In my mind, that puts the income-short, saving-short, overly indebted, asset-dependent American consumer at the top of the watch list. As always, we won’t know where the rocks are until the tide goes out.”
    The rest of what he wrote is here. It’s the first article:
    Hearing rumblings of getting rid of the income tax. What are these people thinking?

  54. Keith says:

    from a UVa study:

    National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.
    Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that “66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines.”

  55. Gary McGowan says:

    In the interest of watching my language, I shall let a calmer and firmly documented report speak for me:
    What we are actually facing if the nation continues to follow the current trajectory:
    America’s Fiscal Collapse

    by Michel Chossudovsky
    Global Research, March 2, 2009

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