Kevin Drum is pondering the economy:
A few days ago, in passing, I remarked that I was impressed (surprised?) by the ability of our economy to absorb so much catastrophe in such a short time without things being even worse than they are. What accounts for this?
He goes on to quote part of a proposed answer (“foreign capital,” basically), which Brad DeLong has in more detail. Other versions of the same basic question have popped up a few other places, as well.
My personal guess at an answer is pretty much in line with my recent reading: the good times were never all that good for the population as a whole, so it’s not terribly surprising to me that the bad times haven’t been that bad, yet. To a large degree, I think that the standard measures people use when talking about “the economy” have become decoupled from the actual economy of people in stores buying things.
I mean, we have a system for measuring unemployment that shows a decrease in the unemployment rate when people get discouraged and stop looking for work, we have a stock market that goes up on bad news, and we’ve had several years of strong economic growth in which real wages have been constant or declined slightly.
These do not give me a great deal of confidence that whatever they’re talking about in economic news stories has any useful relation to reality. Or at least, it doesn’t have any relation to the reality experience by people not in the target demographic of the Wall Street Journal.
I started thinking this way something like ten years ago, when people kept marvelling that the dotcom boom wasn’t producing any inflation. The explanation seemed pretty obvious to me– the wealth generated by the bubble was largely in the form of stocks and the like, which ordinary people do not use to buy bread and milk, but wealthier people use as collateral to buy houses and cars and boats, whose prices were shooting up dramatically It got “explained” as some sort of arcane result of Greenspan’s brilliance, or some such, though, and I haven’t really seen any economic explanations of things since then that made any more sense.
So, my take on the current lack of complete catastrophe is this: the recent economic growth has mostly been confined to a fairly narrow segment of the population, that happens to be the segment who write, buy, and read articles and books about the economy. As a result, the extent of general prosperity was grossly overstated, and assumed to be general.
The current collapse has also hit that segment really hard, leading to overstated doomsaying. Things haven’t actually gotten much worse for people outside the WSJ demographic, though, mostly because they had never gotten all that good in the first place.
Now, there are factors in the current crises that may end up affecting the general public to a much greater degree– rising fuel prices chief among them. And if the idiocy of the financial classes really does manage to start taking down major banks on a large scale, things could get bad in a general sense.
But those are still in the future. The current round of “catastrophe” has been a catastrophe for a relatively small number of people whose influence over the general economy is vastly overstated. And over-measured, using current economic tools.
Until someone starts coming up with some better measures of what’s really going on, though, this will continue to appear mysterious.
Well said, Chad. You echo thoughts I’ve been having for several years myself.
I do think that a fairly large chunk of the general population has been hurt seriously by the mortgage fiasco that was engineered by Wall Street.
I also think that the general public would be helped by a new class of investment instruments that would be largely immune to the daily whims of market speculators — maybe a class of stocks that had to be held for a minimum of six months or a year before they were traded again.
Likewise, some sort of control on the futures markets could probably have prevented much of the recent spike in oil/gas prices.
When Nixon allowed the cut in the NASA budget after “the most historic phone call ever made” 39 years ago today, my Mars Rover job dried up at JPL.
When the Aerospace Bust threw half of the 380,000 southern California aerospace workers out of jobs, I was one of those, despite 11 years experience in the industry, albeit exacerbated because management feared that I’d blow the whistle on Space Shuttle fatal flaws I’d analyzed.
When the Dotcom Bubble burst, the bad news was that the $200,000 in stock that I’d been whittled down to from $450,000 in a Nasdaq takeover of the dotcom where I was VP of R&D, plunged from the strike price of $53 a share to under $1. The good news was that I did not lose my home.
All this comes to mind as, last week, I kept driving past Pasadena HQ’d IndyMac to gawk at the long lines kept in check by police. Front page photos every day in the local Pasadena Star-News (google for them). The high point for some IndyMac customers was when some were given snacks, while waiting on line, from the Trader Joes a few blocks away.
The best analysis that I know of Boom and Bust is that at the Santa Fe Institute, using Intelligent Agents, but that’s another story.
And yes, Chad, the Wall Street Journal has a core constituency. But so does Physics Today. Either can be accured by non-core readers of being out of touch. That’s relative.
In this economy, failure is an option.
Investors are pushing institutions to the limits to assess risk.
By Peter G. Gosselin, Los Angeles Times Staff Writer
July 20, 2008
WASHINGTON — The U.S. economy appears to be caught in a cycle of recurrent panic attacks. So many things have gone wrong, and so much anxiety has accumulated in the financial system, that nothing seems safe.
As a result, no sooner has one crisis seemed to recede than another has popped up, to be followed by another and still another.
* Nations with vast oil wealth gaining clout
* It costs what?! Calculating the CPI requires a lot of shopping around
* Americans may be losing faith in free markets
“We’ve gotten to that classic point in a financial crisis where it’s gone on for long enough we know there are losses. We just don’t know where they are,” said Joseph R. Mason, a financial economist at Louisiana State University in Baton Rouge.
“The only way to find out is for investors to push every institution toward failure and see which ones keep operating,” Mason said.
About the sunniest assessment that analysts will offer is that if the current crisis holds to historical patterns, it could end as unexpectedly as it began.
“Most panics are like summer storms,” said David A. Moss, an economic historian at Harvard University. “They come up abruptly, are erratically intense, then suddenly dissipate.”
The cycle started last summer with the near collapse of two Bear Stearns Cos. hedge funds specializing in exotic mortgage-backed securities. What followed was a succession of panics that went so far that even the mainstays of the U.S. mortgage market — Fannie Mae and Freddie Mac — had to be propped up by the Federal Reserve.
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Dude, vast numbers of people are now underwater on their grossly over-mortgaged homes. This is really bad shit happening to “regular” people. What you are observing right now is the calm before the storm.
You really need to read “Divine Right of Capital” by Marjorie Kelly as she explains exactly how the official economic indicators are divorced from what economy is really doing.
re: #3. Yes, vast numbers– but still a minor percentage of the whole. What these people did essentially, is make way-over leveraged investments. Some foolishly (and dishonestly, if you count the many mortgages made with close to zero documentation). Those with adequate credit will be able to make a deal with the banks, some will lose their investment. The market will eventually clear the inventory and their will be boom times again.
I read Kelly’s book. Very interesting, but very muddled take on captital markets and corporations. I guess if you are a progressive you might want to drink the kook aid she’s selling, but it’s not for me. Look elsewhere for something more anchored in reality…
I have to seriously disagree with a few of the posters here. Here is what has happened to me in the past year. I was on a plan with my oil company (one of the largest in Maine) that made it so my home heating bill was the same each month (easier to budget). Last year I paid $299 per month. In June I received a letter from the company informing me my bill for the coming year would go up to $644 per month. I simply cannot afford that increase. So I sought to obtain financing to convert my heating system to a combination of wood pellet furnace (not stove) and solar thermal (which would bring our monthly costs down to between $175 and $200 per month – less than even last year’s cost).
While my wife and I are in the right salary bracket to apply for one of the state’s low-interest loans, our student loan debt prevented us from qualifying, at least until my annual raise kicks in. So we then sought a home equity loan from the firm that we have our current mortgage through. The present mortgage crisis, unfortunately, had two effects: the first was that our lender has reduced the percentage of a property’s worth that it is willing to loan out (because of our very high credit ratings and years of on-time payments they were willing to bump it a tad) and the second was that, even with their willingness to cut us a bit of a break on how much we could finance, our house had lost so much of its worth in the past year that we couldn’t get enough money out of a home equity to pay for the new system. So now we’re waiting to try the state’s loan again once my salary goes up. Otherwise I’m in trouble.
Good friends of ours had to declare bankruptcy partially due to a problem on their property that the EPA had to clean up (left my a previous owner). They were out of their house for awhile while things were haggled over and during that time someone broke in and literally cut out and stole all the copper piping (because the price of copper has skyrocketed).
Yes, read Kelly’s book critically, but it will make you “think differently” which is important. It really changes your world in a “why didn’t I think of this?” way. You can end up completely disagreeing with her, but you will still look at economics very differently afterwards. It’s a book that gives you a jolt.
“The economy” is hardly monolithic. Yes, the Wall Street Journal’s target demographic has seen a significant reversal of fortune in the past twelve months, and yes, times were never that good for ordinary folks. But that doesn’t mean that there aren’t any fat cats who are still getting fatter, and it doesn’t mean that nothing bad is happening to ordinary folks.
I’m in New Hampshire, and like Ian I am looking at a major hit to my budget to keep my house heated this coming winter (I can’t afford to replace my oil furnace this year because I’m dealing with the roof before it develops major leaks). I’m one of the lucky ones, in that I have enough cushion in my budget to take it for now. (I am making the dubious assumption that the D. C. war hawks will be prevented from starting a self-evidently stupid war in the Middle East–yes, I know the observations are opposed to this assumption.) But many people have been living close to, or even over, the edge, and now they don’t have credit available to cover temporary (or not so temporary) shortfalls.
Last year I paid $2.50/gal. for my heating oil. As of a few weeks ago when I filled up the tank, the price was over $4.50/gal.–and keep in mind that this is during what is normally the seasonal low period for heating oil prices. I’ve already done the easy things: I’ve set my thermostat to 65F during heating season for years, I open and close curtains to take advantage of passive solar heating and insulation. Last year I replaced siding and windows, which improved my insulation slightly. Further improvements will not be easy.
Since I walk to work, high gas prices aren’t hitting me nearly as hard as many other people. If you are outside the job center towns in New Hampshire, you often have to do quite a bit of driving, not just commuting but for everyday errands as well.
And yes, the real estate crash is starting to hit hard, even here in University Town. There are two houses on my street that are currently empty and on the market: the one bought in 2005 by the parents of a student who graduated this spring (they are probably upside down on the mortgage as they bought at the peak), and my former next-door neighbors who were the heirs of the original owner. The latter presumably don’t have to worry about a mortgage, but the former are likely stuck with an asking price they cannot afford to lower but are unlikely to be offered. Other towns in the area will be worse off, since much of Boston’s “drive till you qualify” crowd ended up in New Hampshire.
So my take is basically that for most ordinary folks around here, things have gone from mediocre to moderately bad, but it won’t take much for things to get a whole lot worse.
Yes, things are bad now all around. However, I’d like to make a point here, which is that if you study history you’ll notice that America has had three major economic hits in its history (depressions); they were in the 1870s, the 1930s and 1980s (I’m counting the Reagan recession as a depression under the technical definition). We are now seeing another major economic blast. Luckily the global economy is strong enough to continue without our engine powering it and the American economy is resilient enough that we’ll bounce back.
However, the question must be asked “what do these three periods have in common?” And the answer is conservative economic policies. And by “conservative” I’m not referring to policies which actually “conserve,” but rather to the policies which are most readily associated with the “conservative party” at that time, be them Democrat or Republican.
During every single period of heavy borrowing and low taxation there is high-flying good times, followed immediately by an enormous crash. That’s what happened in the 1870s, during the Great Depression (so named to demarcate it from the previous depressions), during Reagan’s tenure and now during Bush’s economic shitpile.
Conservative economic policy is an epic, epic fail and has been for nearly 150 years (probably more, but that’s only as far back as I’ve studied). However, Americans hear “lower taxes” and think “yay!” even though those very same lowered taxes are going to bankrupt the country and eventually require much, much more massive financial sacrifices to recover.
I guess the old adage really is true, those who don’t learn economic history are doomed to repeat it.
Times will get better, hopefully soon, and hopefully Americans will finally smell the manure whenever a “conservative” speaks on the economy. Because the track record shows: conservatives cannot run the economy worth a lick.
So my take is basically that for most ordinary folks around here, things have gone from mediocre to moderately bad, but it won’t take much for things to get a whole lot worse.
Amen to that. Luckily I have a credit rating in the proverbial stratosphere, but even that’s not much help at the moment. Since I work in Manchester, NH (locally referred to as ManchVegas) I am also saddled with an 81 mile commute. That, however, is a problem of my own making. Nonetheless, when I got my current position, housing costs in ManchVegas were so much higher than where I live that, despite the commute, I chose not to move. With my kids presently in school and having developed roots I have no desire to move. I have managed to pare down the number of days I work, luckily, but it’s tough.
The thing is that I don’t ever remember a time since I graduated college that I didn’t struggle. The ’90s boom missed me because I had no money to buy in to begin with and wasn’t lucky enough to have one of those ‘eureka!’ moments that people like Larry and Sergei had. My wife and I did try to start a company, but we aren’t very good business people (hence my move to academia). In other words, the middle class is rapidly shrinking (has been for decades) and the gulf between the rich and those who struggle is getting so wide it’s becoming increasingly more difficult to make the jump. Plus, some of us really don’t care about being rich, we just want to be able to get by and maybe save a little.
As for conservative economic policies, the problem with both Reagan and Bush is that they combined tax cuts (usually for the wealthy) with increased spending!! That’s neither conservative nor liberal. It’s just plain stupid! In theory, the government could probably accomplish quite a bit more than it does now with less money. Unfortunately it is a bloated bureaucracy (believe me, I know since I used to work for it).
I have come to the conclusion after many years of thinking about it that government is more efficient when it is smaller. Here in Maine, where we have a fairly small population, things are far more efficient than places like Massachusetts and New York (e.g. Maine added a lane to both directions of forty miles of its turnpike faster than anticipated and for less money than was budgeted – there are many other examples I could cite). While Maine’s universal health care initiative has had a few rough patches, I think it’s at least ahead of the curve in many respects.
Anyway, my point ultimately is that I think there needs to be a complete rethinking of economics in general – a paradigm shift (to use an old cliché). I’m obviously not sure exactly what that is, but there need to be seriously bold attempts to change things coupled with the backbone to admit it and try something else if they turn out to be wrong.
I really like your analysis of the minor effect of the dot-com bust on the overall economy. They were paper profits and were concentrated in the top few % or so of the economy. (That NYTimes story you had in your bullet list a few weeks ago, about where class lines are drawn, really opened my eyes about that. Median income is nowhere near where most people think it is. Teaching at a CC makes that a bit more clear to me than it was in the past.)
I also think that about half of the oil bubble is speculation, but I won’t know until this coming week whether the change in trading rules by the SEC is the reason for the 40 cent drop in the spot price of gasoline in 4 days last week. If so, look for 3.60 real soon now.
I’m less sure if your analysis applies to the housing bust, but it might. Here are my two cents worth:
Cent 1: Many of the people involved, specifically the ones who walked away from entire neighborhoods, did not lose any money. They only lost the house. They didn’t have any money in the house. The impact on the rest of their money (if any, it might all be credit card debt) is unclear to me.
Side remark:
I hope the impact on the “white collar” criminals behind those mortgages is the same hard prison time that they would get for taking $100,000 from a bank at gunpoint. If the death penalty is supposed to be a deterrent, maybe part of the problem is that a few years in a country club prison isn’t a deterrent.
Cent 2: The devastation is currently concentrated in small regions of the country that were the sites of the largest boom in prices. Some of the huge drops in value take you all the way back to what it was worth in 2005. Where I live, those drops are small because the boom was small. The biggest problem is that loans are hard to get even if you qualify. (Liquidity problems.) It looks to me like the Fed et.al. are mainly working to keep the problem localized in places like Arizona, California, and South Florida.
Side remark:
I suspect that a personal loan to Ian Durham might have a much better return on investment than anything we have our money in right now.
CCP,
So you would argue that these people should be sent to “Federal pound me in the ass prison”?
So you would argue that these people should be sent to “Federal pound me in the ass prison”?
Don’t know about CCP, but I know I certainly would.
Or state prison. That is the sentence for grand theft in our state, unless you are rich. What is the difference between breaking into your house to steal your big TV and fraudulently taking your closing costs and you losing the house? You actually lose more in the second case.
Like I said, if a Republican banker thinks the death penalty deters murder or 20 years deters armed robbery, how can they object that 10 years in the state pen would not deter million dollar crimes by folks wearing suits?
I agree with CCP and Ian that a lot of people in the mortgage business should have the book thrown at them. Many (though not all) of them were engaged in predatory lending: making or brokering loans that they knew, or should have known, could never be repaid. At an absolute minimum, these people should be banned for life from any job in the financial industry, and certainly the more egregious offenders should be looking at hard time. And yes, I do mean the federal pen: though I would prefer that this be handled under relevant state laws, unfortunately Bush’s Office of the Comptroller of the Currency exempted most banks from said state laws (which was one of the things that let the bubble go on as long as it did: state regulators were already raising alarms about these toxic loans by 2003-2005).
Bush’s Office of the Comptroller of the Currency exempted most banks from said state laws
Wow, I hadn’t heard that. How is that even constitutional? I know Federal law supposedly trumps state law, but I didn’t think the Feds could simply exempt things from state laws. He’s such a @%$#.
It’s constitutional because the Supreme Court said so. The argument is that since there is a federal agency whose alleged purpose is to regulate the banks, there is no need for states to regulate these same banks. I know it sounds flimsy (and IANAL), but the Supremes bought it. Eliot Spitzer was complaining about this shortly before his prostitution scandal broke.
It’s constitutional because the Supreme Court said so. The argument is that since there is a federal agency whose alleged purpose is to regulate the banks, there is no need for states to regulate these same banks. I know it sounds flimsy (and IANAL), but the Supremes bought it. Eliot Spitzer was complaining about this shortly before his prostitution scandal broke.
I love how people bitch and moan about “activist judges” only when they disagree with the ruling. Otherwise judicial activism is simply “sound judgment.”
“I also think that the general public would be helped by a new class of investment instruments that would be largely immune to the daily whims of market speculators — maybe a class of stocks that had to be held for a minimum of six months or a year before they were traded again.”
This will be included in the stock price — they will be cheaper. Also, they will be less liquid. There will be fewer buyers for them. Which means that companies will not want to issue them.
Likewise, some sort of control on the futures markets could probably have prevented much of the recent spike in oil/gas prices. ”
I doubt this theory.