Wednesday, March 25, 2009
Boy that sure sounds like good times are set to roll in the housing markets once again, eh? Notice how little context Bloomberg bothers with (investors don't need no stinkin' context!). The annualized rate (i.e., take the actual estimate and multiply it times 12) for new home sales was the second lowest rate since at least 1963 according to records at US Census. The lowest rate of sales was just 1 month earlier, January 2009. Indeed, the number is substantially lower than all of 2008, a rather pathetic year for new home sales! One more thing, the peak month, according to US Census, was July 2005 with 1,389,000 new homes sold at an annualized rate. So, the morning good news is that the new homes market is only down about 75% from the peak! Wahoo! Let's go shopping!
Saturday, March 21, 2009
Three graphs for future reference.
(1) The changes in nominal GDP for the United States from 1929 to 1947. I was interested in these data because of a graph that has been going around that shows total credit market debt as a % of GDP back to the 1920's in the United States. The image seems to indicate a level of indebtedness skyrocketing during the great depression to about 260% of GDP, currently the overall debt to GDP ratio is about 350%. The reason I got concerned has to do with the collapse of GDP from 1929-1933 as this first image shows. This means that the ratio of debt to GDP had only increased marginally during the "roaring twenties" from about 150% to about 160% of GDP. The spike is the result of bout a 50% decline in GDP from 1929-1933. Not an increase in the total amount of debt. This means the the current era (1973-present) is unprecedented in terms of the debt to GDP ratio at the start of the current downturn.
(2) I was interested in changes in prices during the depression and now. The graph above shows that CPI was relatively flat )well, a little wavy before and after WWI. Prices did decline after 1929, but they didn't collapse either. The present period (1973-2008) is unprecedented in terms of price increases.
(3) How have real wages (on average) kept up with inflation? See for yourself:
Friday, March 20, 2009
So, what are these assumptions and how do they fit into Obama's policy response? Galbraith sums it up this way,
The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama’s economists lean left. Hence the priority they gave, in their first days, to the stimulus package.
But, there is more, how does current policy plan to return the economy to "normal." Here's more from Prof. Galbraith,
The chance of a return to normal depends, in turn, on the banking strategy. To Obama’s economists a "normal" economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions. For this reason the new team instinctively seeks to return the bankers to their normal position at the top of the economic hill. Secretary Geithner told CNBC, "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system."he chance of a return to normal depends, in turn, on the banking strategy. To Obama’s economists a "normal" economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions. For this reason the new team instinctively seeks to return the bankers to their normal position at the top of the economic hill. Secretary Geithner told CNBC, "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system."
But, is this a realistic hope? Is it even a possibility? The normal mechanics of a credit cycle do involve interludes when asset values crash and credit relations collapse. In 1981, Paul Volcker’s campaign against inflation caused such a crash. But, though they came close, the big banks did not fail then. (I learned recently from William Isaac, Ronald Reagan’s chair of the FDIC, that the government had contingency plans to nationalize the large banks in 1982, had Mexico, Argentina, or Brazil defaulted outright on their debts.) When monetary policy relaxed and the delayed tax cuts of 1981 kicked in, there was both pent-up demand for credit and the capacity to supply it. The final result was that the economy recovered quickly. Again in 1994, after a long period of credit crunch, banks and households were strong enough, even without a stimulus, to support a vast renewal of lending which propelled the economy forward for six years.
The Bush-era disasters guarantee that these happy patterns will not be repeated. For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash—protected by deposit insurance and now desperately being conserved—the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare—illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.
So, it is not likely that we can return to the "normal" of the last few recessions. Yet, this is precisely what is planned and hoped for in the current policy climate. Obviously, we have a very large disconnect here. A disconnect that I suspect will become more and more apparent to policy advocates and policy makers alike in the coming months. It is only unfortunate that in their rush to return the economy to a "normal" footing, so the usually party political agendas might resume in time for the 2010 elections, Team Obama has gotten it, partly, wrong -- specifically in their attempts to save insolvent banking behemoths in the most inefficient manner possible. Here's Galbraith
Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.Geithner is continuing Paulson's policy of intervening in the financial sector without (1) requiring any substantial changes in bank management (2) addressing the real reason the demand for credit has collapsed, households and businesses can not assume the risk associated with additional debt giving their deteriorating balance sheets. Unfortunately, we are already beginning to see the negative consequences in the bad behavior of financial firms that are currently being propped up with infusions of government money.
When a bank’s insolvency is ignored, the incentives for normal prudent banking collapse. Management has nothing to lose. It may take big new risks, in volatile markets like commodities, in the hope of salvation before the regulators close in. Or it may loot the institution—nomenklatura privatization, as the Russians would say—through unjustified bonuses, dividends, and options. It will never fully disclose the extent of insolvency on its own.
The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?
This point is quite serious, for it portends a period of financial recklessness as government backed actors, who are not held accountable in any appreciable way, seek financial returns for themselves in any way that they can, regardless of the long term consequences! So, one concern is that large banks and other insolvent financial actors will turn to complete financial recklessness as their "new normal." The consequences for the US Government that has guaranteed the losses from this reckless behavior is that the value of the treasuries that it issues to pay for the losses will come into serious doubt, as there is little long term investment going on and a lot of short sighted gambling in the economy.
For households, one can envision a "new normal" as well. Essentially, households will learn to save for those needs beyond their basic day to day expenditures rather than rely on credit and future income to pay for present consumption as they have in the recent past. In the short term, this inevitably means a collapse in demand as households, even those not greatly effected by the current downturn, build up their savings. Once this adjustment has been made, I suspect that consumer spending will return. Of course, this depends on whether or not the overall economy can return to a more productive state. That would mean building up industries that offer higher wages in exchange for higher worker productivity and also industries that look forward to the needs of this century rather than the needs of the century past. Galbraith also suggests that we should be investing in human capital (i.e., education and knowledge production) and human health as well as basic infrastructure that moves us away from the 20th century model of energy profligacy and toward a 21st century model of energy efficiency. Galbraith makes a number of suggestions at the end of his article that might just do the trick. Of course, to see policy shift in the direction Galbraith suggests, Obama is going to have to sack his entire economic team. I would hope that he calls Galbraith up and ask for suggestions about who to bring in as their replacements! His article is definitely worth a read for all who are interested.
Wednesday, March 18, 2009
Anyone reading the policy pronouncements of the masters of the banker-verse will hear that the solution to the current economic crisis is to get "credit moving again." Alternatively, to make more credit available to consumers in the form of auto loans, consumer credit cards, etc. Yet, try as they might, all of the efforts in this direction over the past 18 months has not really worked. Credit continues to contract or stagnate as the graph above shows. And, as near as I can tell, this does not include credit created in the myriad off-books, off-shore vehicles that our financial wizards cooked up over the past few decades, so the decline in total credit may be much, much steeper than the image above implies.
Why isn't policy working? The reason, seems to me, to be that policy makers are playing with the standard recessionary handbook. An ordinary recession is described by Edward Harrison as
In this context, one can easily understand just what Helicopter Ben and Tiny Tim Geithner think they are up to. But, their efforts are certainly not being rewarded with any significant expansion of cheap consumer credit. So, what's up? The answer seems to be that they have misdiagnosed the problem. We are dealing with a depression process not an ordinary recession process. Harrison continues,
In a normal recession, credit becomes tight, but it is not central to the downturn. In fact, 80% of the decline in GDP is due to a de-stocking of inventory. Basically, businesses get ahead of themselves and forecast future demand that turns out not to exist. They are forced to ratchet back production and sell off inventories. In this case, policy makers can step in with fiscal and monetary stimulus and re-kindle domestic demand with a bit of a lag. Bing, presto, we are off to the races again. That's why recessions are over in 12-18 months tops.
That's not what happens in a depression - and this is a depression. In a depression, what happens is macro disequilibria build up so much and become so unsustainable that when the break in demand happens, there is no bing, presto from traditional policy responses. The leverage and debt in the system is just too large. The debt cannot be worked off without de-leveraging (See my post "De-leveraging").The failure by team fed to define the problem correctly will now doubt result in a massive waste of taxpayer resources. The failure to define the problem correctly means that attempts to stoke consumer demand is not going to work to end the current economic malaise. Until we begin to hear the shift in the view of what is going on, we cannot expect much from the president's men on the scene.
Harrison's post on Naked Capitalism is a must read.
Friday, March 13, 2009
"Mechanization means intellection, and as the intellect is primarily utilitarian there is no spiritual aestheticism or ethical spirituality in the machine. The reason that induced Chuang-tze's farmer not to be machine-minded lies here. The machine hurries one to finish the work and reach the objective for which the machine was made. The work or labor in itself has no value except as the means. That is to say, life here loses its creativity and turns into an instrument, man [sic] is now a goods producing mechanism. Philosophers talk about the significance of the person; as we see now in our highly industrialized and mechanized age the machine is everything and man is almost entirely reduced to thralldom. This is, I think, what Chuang-tze was afraid of. Of course, we cannot turn the wheel of industrialism back to the primitive handcraft age. But it is well for us to be mindful of the significance of the hands and also of the evils attendant on the mechanization of modern life, which emphasizes the intellect too much at the expense of life as a whole." (p. 8)
Wednesday, March 4, 2009
U.S. Treasury Announces Mortgage-Modification Program Details
We certainly don't want any debt slaves cheating and getting off the treadmill of home ownership on their own. No sir! only help to those who are already falling into the abyss to ... stay chained to the debt treadmill.
We gonna help 9 million home owners stay chained to the banks! No matter what, the American Mortgagee must stay on the plantation.
Change You CAN Believe In. Yes, We Can!!
Monday, March 2, 2009
Sunday, March 1, 2009
This general idea has a long history in modern European thought, and no wonder, Europe had been an incredibly violent place for much of the past millenium. Something about Feudalism and the competition of premodern land-owning groups over the power inherent in controlling productive land and those who labored on it for survival encouraged those in power to wage war with one another in a more of less continual fashion. The underlying logic of continual wars of expansion among land-owning elites seem to dominate right up to the end of the second world war.
But violence of this sort is not really the human norm, no matter the degree of supposed 'civilization.' Indeed, if one considers that humans are now approaching perhaps about 6 or 7 billion in number of souls present on this earth, and in spite of this incredible number, the relative numbers of brutal senseless attrocities committed on a monthly basis may number in the 10,000's world wide, we may be looking at a level of senseless, psychopathic violence of about 10 in 7 million, or a whopping 120 in 7 million annually globally. I am sorry folks, but that rate does not portend a species wide predilection for depravity. Quite the opposite, we as a species are paragons of peace and tranquility. Of course, for a city the size of Los Angeles to lose even 1 soul to the predations of the aberrant few is intolerable, much less 120! But, this is an issue for law enforcement, not for the total condemnation of our species!
So, this leads to another concern. Perhaps we need to let the oracles of senseless destruction go. Prior to the present economic crisis they served a valuable role as voices in the wilderness that helped to bring out attention to the mounting problems in the way we finance a consumption based society. But, they really don't have much to offer now that the crisis is here. With the economic horizon shifting so dramatically to a future of lower cost lifestyles, it is perhaps better to begin to really think about and work on what life on this new horizon might be like. It seems to me that this is a much more productive way forward than that proposed by the profits of senseless doom and destruction.