Recession or Not?

William Poole says it's only a flesh wound:

Fed's Poole Says 'Best Bet' Is Economy Will Avoid a Recession , by Vivien Lou Chen and Anthony Massucci, Bloomberg: Federal Reserve Bank of St. Louis President William Poole said that the U.S. will probably avert a recession and that the Fed's interest-rate policy is appropriate for the slowing economy.

''The best bet is that we will not have a recession,'' he said... ''My take on the current policy situation is that policy is at a good place for both the long-run concern and for cushioning the impact of financial disturbances.'' ...

While consumer spending is ''soft,'' that is ''completely different from crashing,'' Poole told reporters.. ''It's a very different story so far from some of the past recessions that I remember living through, when things really plummeted.'' ...

''Those companies and industries directly connected to housing are in somewhat of a retrenchment mode,'' Poole said. ''But they're not in a survival mode. They're worried about profitability. They're not worried about survival. There is a big difference.'' ...

Janet Yellen says it may be a bit more than a mere flesh wound, but hopefully the Fed can prevent any further damage:

Fed's Yellen sees weak growth, but no recession, Reuters: San Francisco Federal Reserve Bank President Janet Yellen said on Thursday that the United States faces several quarters of "anemic" economic growth but will probably not fall into an outright recession."

Still, risks to growth for the near term are skewed lower, and as a result a slowing economy could create greater caution by lenders, households and businesses, dragging growth down even more, Yellen said.

"An important objective of Fed policy is to mitigate the possibility that such a negative feedback loop could develop and take hold," Yellen said...

Yellen said the Fed's recent string of interest rate cuts had pushed the real, or inflation-adjusted, federal funds rate to about 1 percent, "an accommodative posture." ...

There are those, however, who believe the wounds are more severe:

Forbes Reporting on the Financial Meltdown Scenario, by Nouriel Roubini: The idea that I presented in a recent article that we face the risk of a "financial meltdown" is becoming more mainstream. Today Munchau in the FT discussed it by analyzing the risk of a Great Depression style of debt-deflation; he argued that such a scenario - or a Japanese style decade long stagnation - is unlikely.

I do agree that such a scenario of a protracted economic US stagnation is unlikely... But I believe that cannot rule out a severe short-term (as opposed to long-term) financial meltdown that will lead to a severe and painful US recession and global near recession. While the chances of ending up in a Great Depression or Japan decade long stagnation scenario are very low, the chances of a severe recession and a systemic financial crisis more severe than we have had since the 1980-82 recession are now high. And my view is that the ability of the Fed and policy makers to avoid such as systemic financial crisis is highly limited.

And here is ... an article from Forbes magazine reporting on my financial meltdown scenario:

Out Front Look Out Below, Robert Lenzner 02.25.08 Forbes magazine: If you   get depressed easily, don't read this story. Here's one sage's prediction of a   long, deep recession.

It may be time to christen a new Dr. Doom. The candidate: Nouriel Roubini...   He makes the old Dr. Doom, bond pessimist Henry Kaufman, look like Dr. Phil.   No mincer of words, Roubini thinks a full-blown panic will scorch the global   economy. He recently laid out his scenario for central bankers in Davos and   had them chewing it for hours.

He thinks the immediate spark will be the collapse of bond insurers...   Roubini says lower rates won't help. There are significant risks of   insolvency. Here's his prediction of how it'll play out:

Bond Insurers Lose the Triple-A... Contagion Spreads... A Protracted   Recession Ensues...

Roubini says the U.S. went into recession in December and will stay there   for at least a year. ...

I want to believe that this will only be a minor event, a mild slowdown perhaps but nothing to get too worried about, but that hope is getting harder to sustain.

Comments

[Barry]

Hasn't this always been the case, that the majority of economic forecasters (publicly, at least) predict a light recession?

[groucho]

Mark, For now, the money's gotta go on Nouriel. Central Bankers' have to talk their book. (look at the Cramer/Poole duel)

Nouriel didn't get the evolution of BW2 correct, but that's a far more complex issue than a US debt deflation recession call.

Anybody that loves the US had better hope there is a very hard landing that will change people's psychology about unsustainable ways of doing business.

If we take our medicine now, the future is bright. If not, a Japan outcome will start to look very good.

[ken]

What's up with Treasury Sect Paulson?

He seems to have flipped and is now endorsing Senator Clintons proposal to have a moratorium of foreclosures and to freeze ARM rates for five years. He doesn't put it that way but that is what he seems to be doing, as far as I can tell. Or did someone else propose these actions before Hillary Clinton made it acceptable to discuss these solutions as realistic posibilities?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aLXdYzNqBxTw&refer=home

And was Paulson really so out to lunch before that he did not realize just how damaging the mortgage mess actually was to our economy?

[save_the_rustbelt]

The center of the country has been in or near recession for several years.

We have reached the tipping point. This is a recession, no matter how much the quants and pinheads play with the numbers.

[kharris]

Buffet (not Jimmy) has announced that he will take over the muni-insurance liabilities of two bond insurers. That will mean a return to (more or less real) AAA status for about $800 bln in debt. It will seperate the problems of the derivatives market from the muni market. That link that only existed because the bond insurers decided to screw their traditional clients by using the cash flow they generated to take on risk they didn't understand in order to make more money. This is a small thing, relative to the mortgage market, but it helps fight the asset deflation mentioned above. Treasuries don't like it. Right now, most things that Treasuries don't like are liekly to be good things.

[Jay]

"Anybody that loves the US had better hope there is a very hard landing that will change people's psychology about unsustainable ways of doing business."

Might I add that we need to change people's psychology with regards to consumption patterns as well.

[Icarus]

Perhaps those in the "center of the country" need to re-skill, and move to the east, south, or west. The growth industries reside elsewhere, and labour needs to adapt. What sound policy should do, is facilitate that adaptive quality and capacity.

We don't live in Henry Ford's america anymore. No jobs for life, no single paycheck family of 4 in a tree lined street with high school educations, no chocolate malt at the drive in listening to elvis. That day is over, and we should let it fade into a nostalgic past. We need to get people in Michigan and Ohio to move to other cities, tactically, and systematically. It requires a lot of shuffling, no doubt...but, it must happen. If they don't 'migrate', they essentially provide a headstart for population groups who will, regardless of national origin.

This is a demographic and geographic migratory battle, of sorts. And, once a group of people locate in a given area (aka the Iranians in Los Angeles), they develop social and cultural capital. This force can be used to exclude others, forming barriers to entry.

This is a natural part of economic activity, and involves forming networks of trust. Why do Gujurati's dominate the motel market, or certain Korean families in the small grocer business in LA? One finds such clusters in any place.
Networks of trust, in an ever-alienating world. This is the existential battle which groups play in, and the ever evolving 'individual' has to nagivate through this, towards a life of security and hopefully wealth. This is capitalist social property relations. We literally interact through market activities officially, and anything beyond is in a realm of free civil society to form. You can form enclaves, or clans, or extended family structures, or even imagined communities. You can even start a church. The realm of 'freedom'.

But, 'freedom' has costs. People are generally 'free' to be disinterested in your life, and a perpetual psychological vascillation between depression and jouissance is hence common. Lonliness in a world connected by packets of digital information at real time. We're both connected and disconnected in modernity, at the same time, in any given space we seem to occupy.

So, this "midwest"...they may have to move. And, we need to build in that expectation as we raise and socialize people living there. You have no inherent right to eventually live where you happened to have been born. This is the obverse of that perverse statistic claiming that most people die within 15 miles of where they were born.
We must encourage separation, and re-connection via other means. Menas that are more productive than loitering incessantly.

So, relocation has to be built into the expectation of how much people need to have saved at any given point. As does re-training. And, the act of bearing children has to take these costs, the risk of divorce, and everything else 'rational', in mind. It may be a goal we don't reach...but, our policies have to move us towards that end...an end of self reliance, and prudence. If our social policies don't, as is often the case with the logic of welfare states, and people can have irresponsibility rewarded, certain groups will devolve into further wealthlessness. Wealth acquisition has rules, fortunately or unfortunately. We have to better socialize those rules and rewards.

It would work...the "suburbs" are often proof of it. You can take a melange of any group of ethnicities and races, and mix them together in a planned, affluent structure, and they all love it and obey the rules happily. All the differences don't seem to matter so much when everyone is eating well. Kids play together, parks are clean and filled with people taking walks, and children grow up discliplined. There's a tactic across all groups in this...we need to better teach it.

[ken melvin]

Isn't the question, "how far down the road did we kick the can"?

[hammerhead]

A recession could be a walk in the park compared to what may be comming. Yep, it's the "D" word. Mish makes a strong case for it:

http://globaleconomicanalysis.blogspot.com/2008/02/credit-default-swap-tsunami-approaches.html

[kharris]

Icarus,

I mean this question not to gode you, but in all sincerity. Do you live in the US? (You spelling of "labour" suggests you may not.) I ask this because I think you may be preaching to the choir. Of all the major developed economies, the US has traditionally had the most mobile labor force. I'm not sure about Michigan, but I think you'll find, if you check population data, that Ohio has been losing population, just as you recommend. The US has also, in recent decades, seen organized labor's share of the work force drop steadily to levels that are quite low among major developed economies. We could, of course, move further in the direction we have already been going, but to do so, we have to surrender further the virtues of close family ties and community. Our economic life cannot be the only thing we tend to.

I would also note that, outside the Northeast, most of the regions that have been on the gaining end of internal migration and rapid devepment in the US are finding themselves short of water. The old industrial regions of the Midwest have the tributaries of the Mississippi and the great lakes. No overall water shortage there. Florida has wetlands in dire shape and sinkholes that swallow houses. Atlanta is in a fight for water that in the end nobody can win. California has long been in such a fight, and now the neighbors to Southern California are all suffering. California's farms and urban areas are fighting over water imported from regions that can no longer afford to give it up. You are asking us to move away from regions that can sustain their populations, to regions that are having a hard time sustaining what they have now. We have lived as if the natural environment could be shaped to our will. I think we are coming to a time when we will be forced to adapt our economic choices to the natural environment.

[kharris]

Icarus,

And my spelling of "goad" suggests I live under a bridge.

[paine]

groucho

"If we take our medicine now, the future is bright.
If not, a Japan outcome will start to look very good."

for my benefit define
"we "

[paine]

the ic-ster
"This is capitalist social property relations "

social property relations
as opposed to what other sort

btw
is it capitalism or the deepening mediation of social activity by markets the source of the anomie alienation and serialization
if not cerialization of contempo geepery

[paine]

ic
god love you
but i see your
avatar's head in a basket

[paine]

kharris

ic wants us to de unionize go to the sun belt lose our next job to a chicano
get thirtsty and move back to michigan
after all we left the south
and ended up in detroit
because of the WWII war boom
why not move again ...twice back and forth
like a shuttle cock

btw
is there a part whole
type waste mechanism
busily at work where ??

interlocational migrational rationality
intertemporal migrational irrationality

[bullbust]

http://commentisfree.guardian.co.uk/thomas_palley/2008/02/the_debt_delusion.html

The debt delusion
Thomas Palley

The US economy relies upon asset price inflation and rising indebtedness to fuel growth - and this contradiction has global implications
February 8, 2008 10:30 PM

A second big American interest-rate cut in a fortnight, alongside an economic stimulus plan that united Republicans and Democrats, demonstrates that US policymakers are keen to head off a recession that looks like the consequence of rising mortgage defaults and falling home prices. But there is a deeper problem that has been overlooked: the US economy relies upon asset price inflation and rising indebtedness to fuel growth.

Therein lies a profound contradiction. On one hand, policy must fuel asset bubbles to keep the economy growing. On the other hand, such bubbles inevitably create financial crises when they eventually implode.

This is a contradiction with global implications. Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. If America's bubble economy is now tapped out, global growth will slow sharply. It is not clear that other countries have the will or capacity to develop alternative engines of growth.

America's economic contradictions are part of a new business cycle that has emerged since 1980. The business cycles of presidents Ronald Reagan, George Bush Sr, Bill Clinton, and George Bush share strong similarities and are different from pre-1980 cycles. The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios, and detachment of wages from productivity growth.

The new cycle rests on financial booms and cheap imports. Financial booms provide collateral that supports debt-financed spending. Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. Cheap imports ameliorate the effects of wage stagnation.

This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. Wage growth, rather than borrowing and financial booms, fuelled demand growth. That encouraged investment spending, which in turn drove productivity gains and output growth.

The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. Since 1980, trade deficits have been dismissed as the outcome of free-market choices. Moreover, the Federal Reserve has viewed trade deficits as a helpful brake on inflation, while politicians now view them as a way to buy off consumers afflicted by wage stagnation.

The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labour markets to preserve employment and wages, it now tacitly puts a floor under asset prices. This is not a matter of the Fed bailing out investors. Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.

All these features have been present in the current economic expansion. Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. Manufacturing has lost 1.8m jobs. Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level. Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.

The essential role of asset inflation has been especially visible as a result of the housing bubble, which also highlights the role of monetary policy. Despite the massive tax cuts of 2001 and the increase in military and security spending, the US experienced a prolonged jobless recovery. That compelled the Fed to keep interest rates at historic lows for an extended period, and rates were raised only gradually because of fears about the recovery's fragility.

Low interest rates eventually jump-started the expansion through a house price bubble that supported a debt-financed consumer-spending binge and triggered a construction boom. Meanwhile, prolonged low interest rates contributed to a "chase for yield" in the financial sector that resulted in disregard of credit risk.

In this way, the Fed contributed to creating the sub-prime crisis. However, in the Fed's defence, low interest rates were needed to maintain the expansion. In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions.

So, even if the Fed and US treasury now manage to stave off recession, what will fuel future growth? With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.

It is not enough to deal only with the crisis of the day. Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.

[groucho]

"I think we are coming to a time when we will be forced to adapt our economic choices to the natural environment."

kharris, are you following the peak oil debate? While alternative energy for electrical generation is moving along nicely, liquid fuels for transport are in dire shape.

Mexico's Cantrell field is dying and Saudi's Gawahr super field appears to be maxed. North sea is also quickly reaching the end.

Much higher transport fuel costs will radically change the global economy. Where we live, cost of travel and how we transport goods is soon going to change our lifestyles.

[Stable]

A financial system that depends upon increasing housing costs well beyond what the median income person can afford is not stable.

We change direction, or we hit the iceberg. It is not yet apparent whether the bridge crew will steer a more sensible course or not.

[groucho]

"In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions."

Mark, any chance you can do a piece on the "financial accelerator" as per Bernanke's model of one of the primary monetary transmission mechanisms?

I'm not sure that people truly understand that the current policymakers at the FED are trying(maybe exceeding all too well) to drive the economy through balance sheet expansion of the finance, corporate and household sectors.

Once people realize that this is a deliberate policy; when failure happens(household failure currently), the policymakers can/will be held accountable for their serious mistakes. Policymakers' claims of "market failure", must be rebutted.

[groucho]

"for my benefit define
"we "

paine, mainly US, but also other "over-consumption countries", including UK.

[ECONOMISTA NON GRATA]

kharris said:

"Buffet (not Jimmy) has announced that he will take over the muni-insurance liabilities of two bond insurers. That will mean a return to (more or less real) AAA status for about $800 bln in debt."

Buffet (not Jimmy) is no fool. He is letting himself be used to inspire confidence, guess what, it worked, for today..... When the smoke clears, I'm quite sure that you'll see some counter-party guarantees from the US Treasury stamped in stone. I can't see Buffet committing financial suicide, and without a guaranteed counter party, that's exactly what it would be. That is unless, he's just skimming the cream off the top and selectively buying municipal counter party obligations at a great discount to provide capital to the desperate.

You know the guy, need I say more....?

Econolicious

[paine]

bullbust nice citation

tp's summary
bares repeating

"Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth. "

even from a union mouth piece
this blows
solid rally notes
for we the jobbled masses

[Callahan]

It is now, and it has been for some time, with no short term relief in sight, a bad recession in Michigan.

Hope that it does not come to your door.

[paine]

"over-consumption countries",
groucho read the bully bust citation

since the reagan recovery of the mid 80's
wagelings have had to borrow
back what they earned and used to be paid

besides the hideous lot bubble scam
that has victims where you may see culprits
look higher for your "we "

and look corporate too

as to the debt service share of household spending
we are in new territory
if i'm not mistaken
and it acts like a tax on consumption spending

these higher debt loads among the weebles
have lessons to teach our hi fi masters
short run
are they sustainable or
do they lead to signifigantly higher defaults

if non sustainable
will the hi fis have created
a much expanded "walk away " sub culture

ahh
yet another blow ..

ohh for the good ole days
of calvinistic hegemony in amerika

[Gerard MacDonell]

Roubini always says we entered recession and will stay there at least a year. Poole is probably too complacent, being a Fed official and all, but his record has been better than Roubini's. I swear the posters here think we are in a liquidity trap and that prospective output growth is largely demand determined. Fairly rookie stuff I think.

[paine]

"cost of travel and how we transport goods is soon going to change our lifestyles"

indeed this will effect
relative prices based on fuel expended
to get product mobilized and built and to final market

how much this will force movement
of production closer to end markets ???

involves lots of different
cost elasticities of location

but as a start
today ... what share of end market price
is total fuel charge related
transportation costs
pretty small

i for sure don't know exactly
but isn't it the place to start
if dire results from fuel scarcity
are your expectation

are you suggesting the transport costs
wil re isolate regional economies ????

may be a fairy tale
as billyb job might say

[paine]

"Fairly rookie stuff I think"
where as herr mcnoodle here ...

[groucho]

"are you suggesting the transport costs
wil re isolate regional economies ????"

paine, haven't thought through the ramifications of peak oil/transport fuel shortage. Guess I'm still waiting for "proof" that we're running out before I start to really think through the possible outcomes.

What's your take on the peak oil debate?

[donna]

Mild one now, big one next. It's a double dip.

The problem is they'll do everything they can to bail this one out, which is actually a mistake. By doing so they'll set us up for the next one.

Trying to prevent the economy from resetting is just going to make it even worse.

[calmo]

Warming up to kharris humor (this B more of that preachin to the choir...a body known for its receptivity to humor) [Who could face the grim outcome of bein mistaken for a contrarian?] and roastin my toes on the usual paine flames...the choir sounds wonderful to me this morning, you?
Ok, you think that's just so adjudicationally lite?
What of Poole's ''My take on the current policy situation is that policy is at a good place for both the long-run concern and for cushioning the impact of financial disturbances.'' So nervous he can't detail what exactly "current policy situation" means, right? (Prolly no interest rate increases in the near future...eva) And Yellen much of the same flavor: Chamberlainesque.
There is that tragic aspect embedded in the appeal to authority that it continues long after the respect for that authority has peaked, plateaued, and declined --sometimes to derision.
Which is why we're here, right? Hand to hand Finger to finger combat against decaying and decadent authority figures who have no respect fo us rebels, you know?

[dd]

"Paulson Unveils 'Lifeline' Plan"
http://online.wsj.com/public/us?refresh=on

The PR-speak trajectory from Multi-Liquidity Enhancement Conduit to Hope Alliance Now to Project Lifeline indicates recession. Fairly rookie stuff this Paulson PR but rookie is the new genius.

[Bruce Webb]

Roubini "But I believe that cannot rule out a severe short-term (as opposed to long-term) financial meltdown that will lead to a severe and painful US recession and global near recession."

Is there a single month in the last three or four years or so that Roubini wasn't predicting a "severe short-term" meltdown of one type or another? Even the Boy Who Called Wolf was right in the end, the wolf did come and eat him up but the villagers weren't listening anymore, being right too early after a while blends with being wrong, people who claim that they saw the housing bubble coming and got out in ended up leaving a lot of money on the table, people who timed out of the market in October 2005 by and large made a killing. Who was the smart one here? They guy who saw it coming and got out early or the guy who may or may not have seen it coming but got out right at the top?

Financial investing is not all black and white, right and wrong. You can take a policy of buy and hold which is boring but if you made reasonably rational initial choices not a bad way to go long term. Or you can take the bolder course of trying to time the market. Roubini's customers by and large have been told for years that they should exit the market, that the time to do so was NOW because tomorrow might be too late. Well it is the nature of things that tomorrow will at some point arrive, but the recent track record of the 'Dow 36,000' and the 'severe short-term meltdown' people alike has been pretty shaky, you might as well give credit to the guy with the tattered 'The End of the World is Nigh' sign.

Roubini may at long last be right. On the other hand a satellite may smack your house next month (because one is falling right now) and validate Henny Penny and 'The Sky is Falling', which doesn't mean giving her the American Astrophysicist Scientist of the Year Award. "He thinks the immediate spark will be the collapse of bond insurers..." As if this wasn't the last in a giant series of immediate sparks he has used as predictors over the last months and years.

I can see the black clouds as well as anyone. Which doesn't mean giving inordinate credit to a guy that saw them when everything was blue skies.

[Bruce Wilder]

Paul Krugman's suggestion the other day that this housing-driven recession is not likely to see a rapid recovery in employment, seems highly plausible to me.

More generally, although I don't like the "take our medicine" moralistic rhetoric, I do think this recession (and the last one, and probably the next one) call for significant restructuring of the American economy away from no-saving, high-consumption certainly, and away from cheap-imported-gasoline suburban/exurban paradise-is-a-parking-lot.

We are used to a recession pattern, where a Fed-induced inversion of the yield curve triggered a recession, but the economy bounced back as soon as the Fed went back to normal short rates. In the present case, the yield curve inverted, with the Fed standing passively by, and the recession came, but not before the rot in the banking system was revealed.

Nouriel Roubini's horror story is about the implications of the rot in the banking system.

Krugman's story is about the implications of the housing collapse.

Both stories are, indirectly, about the political need to respond to the recession with Relief, Restructuring, Stimulus We are getting some piss-poor "relief" labeled as fiscal stimulus, but the restructuring is being left to take care of itself without political leadership or intervention. Actual stimulus will wait for a new Administration.

Roubini loves to tell a horror story. But, I can not credit his suggestion that the bond insurers' losing their AAA is going to have some accelerating effect toward "collapse". Losing their AAA puts them out of business, but it does not make them or any other institution actually insolvent.

The most serious hit will be to holders of unrated municipals. Funds that cannot hold anything but AAA municipals, will have to shed bonds, some of which will have no underlying rating at all, and, therefore, cannot be marketed. Ugly? Absolutely. Symptomatic of economic collapse? No.

Provocative of political intervention? Now this is what they really fear at Davos, I suspect. Nouriel is speaking to a collection of noble Dr. Jeckylls, who don't want the unwashed politicos rising up and hunting down their Mr. Hydes.

If even a few monolines go out of business, the cost of public entities and community projects raising capital goes up, significantly. By definition, this is poking a stick in the eye of people with political power. It may be local political power, but all politics is local.

If, as the decline in housing prices continues, local community leaders are brought to understand that the Big Banks have screwed local communities, by selling them worthless securities and, by raising the cost of selling revenue bonds to finance the various projects local business leaders love, add in Bank of America doubling people's credit card interest rates, then it is torches and pitchforks time.

The leadership of the Fed and the SEC may be so morally bankrupt that they do not see their own complicity in failing to police the boom in fraudulent banking practice. For those people, the enemy is honest accounting. The big threat from re-rating of bond insurers is that it adds one more reason that Big Bank balance sheets will have to be re-published with honest numbers, unless Fed and SEC regulators can extend their negligence with further foolish rationalization.

But, piss off the little people out there in the heartland, and who knows what might happen. Probably nothing. But, maybe.

[Gerard MacDonell]

Check out Mankiw's attack on Knzn's claim that high marginal tax rates don't affect effort much. Rather than address the issue empirically, Mankiw dreams up a little hypothetical example that conveniently assumes away any income effect! So we have a guy on the right being seemingly-intentionally stupid to preserve and ideological point. And there is what I read on the liberal blogs. Anybody around interested in getting basic stuff right?

PS: I really like how Mankiw claims he is conservative because his technical insights lead him that way. LOL. The causation certainly runs the other way, for liberals too.

[billy]

Is there a single month in the last three or four years or so that Roubini wasn't predicting a "severe short-term" meltdown of one type or another?

I don't think that was what he was doing. He was predicting that the idiotic policies being followed would lead to this exact mess, and he has been right.

Why, the Fed, the govt, the MSM, economists in general used to brag about allocating risk, pricing risk perfectly, there is no housing bubble and what not. He has been arguing all along that all those Goldilocks arguments were a pile of bull.

Financial investing is not all black and white, right and wrong. You can take a policy of buy and hold which is boring but if you made reasonably rational initial choices not a bad way to go long term. Or you can take the bolder course of trying to time the market.

Well, that's the point, isn't it? The people who control the Ponzi get to choose their entry and exit points. A few of the riff-raff also get lucky - in the right place at the right time - , and start thumping their chest about timing the market. The vast majority have no choice. The accident of birth determines when they start working, when they save, when they retire, when they spend.

Warren Buffet gets to park money and sit out the Ponzi game, not the riff-raff. They are forced to play.

[ddt]

Bill Poole is a SHAME! He's SHAMEFUL!

sorry.. couldn't resist. Out of the 3, I'm with Roubini.

[paine]

"What's your take on the peak oil debate?"

only the big time oilers know for sure

says...

cassandra :

"The problem is they'll do everything they can to bail this one out, which is actually a mistake. By doing so they'll set us up for the next one.

Trying to prevent the economy from resetting is just going to make it even worse."

are u suggesting financial asset values
---whatever in hell that circularity might mean----
need to correct deeply ???

and until the asset values drops
back into a sustainable alignment
with the values churned out
by the globe's production economy
we will experience
these job killing spasms

and each spasm will be bigger then the last ??

[paine]

"Finger to finger combat against decaying and decadent authority figures who have no respect for us... "

calmo and his vicaros ride again

yeeeehaaaaaw

[paine]

"Is there a single month in the last three or four years or so that Roubini wasn't predicting a "severe short-term" meltdown of one type or another"

ya the stopped clock is right twice a day

[paine]

bruce wild one
"I do think this recession (and the last one, and probably the next one) call for significant restructuring of the American economy away from no-saving, high-consumption certainly, and away from cheap-imported-gasoline suburban/exurban paradise-is-a-parking-lot"

i read you
and get geared up

after an unfortunate open
about how in the end
households must change
belt tighten
they've lived too large
for their wage streams
and they'll need to put
stream and dream back in harness together ....

you roar on
to point out
not the old tale
of how "we"
got up there
teetering atop house debt mountain
thru these hi fi institutions (your purview eh ??)
and their loyal dog fed
taking us up there on
the royal jelly credit finicular

but rather a newer tale
meanwhile
the pricks were shiting
on chicken little's head
and most of the rest of us
not just directly
thru our sky hooked house lots
but thru our local gubs investings and
borrowings as well
---talk about geetin em at both ends -----
by throwing good in ahead of bad
and bad on top of good
all along
calling risk its own reward
and themselves now running for cover
under uncle's right arm
indeed

"If, as the decline in housing prices continues, local community leaders are brought to understand that the Big Banks have screwed local communities, by selling them worthless securities and, by raising the cost of selling revenue bonds to finance the various projects local business leaders love, add in Bank of America doubling people's credit card interest rates, then it is torches and pitchforks time"

[anne]

http://krugman.blogs.nytimes.com/2008/02/12/one-to-the-left/

February 12, 2008

One To the Left
By Paul Krugman

It’s good to see stories like this, * saying that it’s more than just subprime. But I don’t think the essential simplicity of the problem is coming across, even now.

Here’s what happened: in the irrational exuberance of the housing bubble, many people were allowed/encouraged/suckered into buying houses with very little money down, at prices much higher than justified by fundamental. Now the prices are coming back to earth, and many of these people find themselves owning houses worth considerably less than their mortgages.

This leads to both involuntary and voluntary foreclosure. Involuntary foreclosure comes when people who thought they could deal with unaffordable mortgage payments by refinancing find that you can’t refinance when your home is worth less than you owe.

Voluntary foreclosure comes when people simply walk away, either because the mortgage is “nonrecourse” — the bank can seize the house, but no more — or because they figure, probably correctly, that the bank won’t really try to pursue them.

Hal Varian (Berkeley prof and now chief economist at Google) puts it simply, and in somewhat exaggerated form, by saying that everyone will just default on their existing mortgage and move one house to the left, buying a new house for less than they save by walking away from the mortgage they have. Things don’t work that smoothly, but that gets the principle right.

And what that means is that a substantial portion of the decline in housing values that’s now in progress will eventually show up as losses, not to homeowners, but to investors. We’re talking about some significant fraction of, say, $6 trillion (a 30% decline in home values from their peak). A trillion dollars in investor losses sounds quite reasonable to me.

* http://www.nytimes.com/2008/02/12/business/12credit.html

[anne]

Whether there is a recession or not is of fairly little consequence from here, especially so because we will not even know whether there was a recession for several quarters. What is important is that we are likely to have a slow growth period extending beyond quarters. With no significant long-lasting stimulus, I do not expect a return to reasonable growth within a year.

[paine]

mcnoodle
not a con ??
not a lib ???

a what then ???

a lonely honest
non self scaming
man of hard logic
sound models
and cop....i....ous raw data

behold fellow rookies
his reassuring thump

as he paces
the quarter deck above us
ever vigilant
walking back and forth
over the oaken boards
of rude empiricks
eagle eye to the glass

[paine]

billy
playing underbrush cutter
for no-no roubini
is a thankless task
and sir brude of webb
has a mind to regard
but
"The vast majority have no choice. The accident of birth determines when they start working, when they save, when they retire, when they spend"

rings in my ears like a silver bell

[anne]

http://krugman.blogs.nytimes.com/2008/02/11/just-remember-the-financial-problems-are-contained/

February 11, 2008

Just Remember, the Financial Problems Are Contained
By Paul Krugman

To Planet Earth, that is — though I wouldn't be surprised if all this eventually affects the International Space Station, too.

The Wall Street Journal has a new "cliff-diving" chart, this time for a whole other type of asset we didn't know we had to worry about:

Leveraged loans pricing [Chart]

And Business Week * tells us that there's a new squeeze on credit cards.

I guess I should mention a point that's come up in some discussions: hasn't the quantity of bank loans gone up? And doesn't this conflict with the notion that there's a credit crunch?

Well, here's what I'm told by people who know these markets better than I do: the increase in bank lending is basically a statistical illusion — in fact, it's in large part a consequence of the credit crunch.

One example of how this might be happening is the now-famous "liquidity put".

Suppose that a bank has created a SIV (special investment vehicle) with an agreement to provide a credit line to pay off investors if they want out and new investors can't be found. That obligation doesn't show on the bank's balance sheet — but when investors cut and run, and the line of credit is called on, the bank is obliged to pony up — and hey presto, it looks as if bank credit has expanded.

A subtler example would involve a firm that has good credit, but finds that security markets have dried up — so it goes back to old-fashioned borrowing from banks, instead. Again, it looks like a credit expansion, but it's really a sign of tight credit.
Bottom line: yes, there is a credit crunch, and it's not contained.

* http://www.businessweek.com/magazine/content/08_07/b4071034382063.htm

[paine]

"everyone will just default on their existing mortgage and move one house to the left, "

ya but
they'll be renting the house to the left
not owning it

[paine]

Just Remember, the Financial Problems Are Contained
To Planet Earth, that is — though I wouldn't be surprised if all this eventually affects the International Space Station, too.

nice paul hook line

[Bruce Wilder]

"the essential simplicity of the problem"

Krugman loves the essential simplicity of a problem.

There are several intersecting, essentially simple problems, here. The intersection, though, is not simple.

Housing price deflation is a driver for the other problems. That part is simple. The rest, not necessarily.

[Bruce Wilder]

paine: "ya but
they'll be renting the house to the left
not owning it"

Thank you.

The home mortgage has been transformed into a payday loan for the middle class.

Bankers are going to go to Congress with reform proposals to address the problem of "ruthless default" -- the terrible problem of people with incomes, who are not willing to keep up payments on a house, no part of which they own.

[hammerhead]

Here is a great writer's take on peak oil. Read it and move somewhere other than to the house next door. This guy makes Roubini sound bullish.

http://www.kunstler.com/mags_localism.html

[ddt]

paine says:

"mcnoodle
not a con ??
not a lib ???

a what then ???"

google and ye shall find:

http://www.newsmeat.com/fec/bystate_detail.php?zip=06880&last=MACDONELL&first=GERARD

[groucho]

""ya but
they'll be renting the house to the left
not owning it"

paine, nothin' new there. US "homeowners" have been "renting" from the FHA, the GSE's and recently wall st for a long, long time.

That's why FED uses owners equivalent rent. At least in this instance, they're being honest.

BTW, local govt, also became landlords through the property tax rent a long time ago as well. Now with home prices dropping, I hear California is thinking about dropping prop 13. Gov't doesn't want their rent cut!!

[kthomas]

Prop 13 has been a problem for a very long time. More than anything else, it has caused some very serious economic stratification between generations. Older generations delight in it. Younger generations foot the bills. Basically, another case of people wanting to live in a civil society, but not wanting to pay much taxes to maintain it. In California, we spend more on prisoners than we do on students, and I am so very ashamed to admit this.

[anne]

What Warren Buffett has done is offer to take over the insurance of fine quality municipal bonds from hard pressed insurers who are forced to give over the contracts at a significant discount. Berkshire Hathaway is among the few financial companies with an asset base large enough to take over the municipal bond insurance from several of the pressed companies. Berkshire Hathaway's offer does little to ease credit market problems beyond cutting credit costs for municipal bond issurers, however.

Similarly Societe Generale is being forced to sell stock shares at an important discount to bolster its asset base.

[ken h]

Think about all the speculators. The relief act does not include them. The Federal Government has just figured out a work around to the thirteenth ammendment.

[hammerhead]

Here's the "D" word again:

Depression risk might force U.S. to buy assets

By John Parry

NEW YORK (Reuters) - Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

[dd]

How could it be a "minor event" as this fraud is on a far more massive scale than the dot com bust, involves every financial institution unlike the S&L meltdown and has scammed far more individuals up and down the food chain than even the most notorious pyramiding ponzi scheme?

[johnchx]

How quickly we forget: Mark T linked to this this just two weeks ago. Remember: the best forecast is always "GDP growth will revert to trend."

[reason]

johnchx...
Yes of course on average he is correct. But not everybody thinks this is an average situation.