Just How Bad Is Our Economy?

[Drunkagain]

It seems like everywhere I look these days all I see or hear is fear about recession and economic collapse. Are we really in such bad shape? Or is all the widespread panic about the sky falling just fear mongering?

[Midnight Son]

Try to buy a house with a NINJA loan and get back to me.

Cash is king. You need to get some and keep it close.

[Sarkus]

It seems like everywhere I look these days all I see or hear is fear about recession and economic collapse. Are we really in such bad shape? Or is all the widespread panic about the sky falling just fear mongering?

It remains to be seen just how "bad" it is but it seems likely we are heading into some sort of recession. A lot of the hype is because of the mortgage/credit crisis and the fact that the housing industry has largely kept the economy moving in recent years. So, if that sector of the economy tanks it could be a lot harder to deal with. Throw in the weak dollar, uncertainty about the outcome of the presidential election, the increasing cost of oil, and the huge national debt, and you get an easy "sky is falling" scenario for the talking heads and fringe folks to yell about.

[Midnight Son]

If the banks go under......... if the investment firms like Bear Stearns fail because of the liquidity crisis...... the ripple effect will be world wide.

Ask yourself: "Self, the Fed has been cutting rates yet banks are charging higher mortgage interest and squeezing credit card customers like crazy. Why is that?"

Margin calls, defaults, bankruptcies.....

[shift6]

It seems like everywhere I look these days all I see or hear is fear about recession and economic collapse. Are we really in such bad shape? Or is all the widespread panic about the sky falling just fear mongering?
It's largely editorial sensationalism on a solid foundation of truth; kind of like media coverage of Hillary's "victories" over Obama. The economic sky is falling largely because people had too many pies in the air and couldn't juggle it all. Yes, that's three metaphors in one sentence; thats 150% motherfucker!

Recessions suck but they aren't the end of the world. People spend alot of time worrying and fearing for their jobs, but there's no more reason to be concerned now than whenever. The exception are people in banking and mortgages, and really: fuck them, right? I view recessions as diets after holiday binges: you wouldn't need to lose five if you hadn't eaten the whole pumpkin pie, Chubbles!

Oil prices are high right now but the effect is largely mitigated for people who don't own gas guzzling cars (and I'm optimistic anyway as people hopefully start being less stupid). I mean yeah, the price of a bag of beans is up 50c over 3 years ago, but that's manageable. Cut your gasoline bill enough to pay for those beans by buying a less retarded car next time, jagoff!

The currency situation stinks but unless you buy alot of higher-priced imports you're probably OK. Many consumer level shit which comes from overseas should have rising prices, but then overseas labor and processes are getting cheaper so there's a bit of an offset. If we start farming out Nike shoes to countries that use the Euro, then we've got problems. Forsythe Worthington costs much more per hour than Thien Nguyen. In the meantime, my food comes from California and I don't change out my entire wardrobe every season for the latest from Kathy Ireland's sweat shops, so that's just my perspective.

National debt sucks but the effects are delayed. In 10-15 years we'll start to really feel the full weight of that. This is something that nearly always grows though, with a few excellent exceptions. It's part of having an economy.

The stock market is having a challenging year so far, after a lackluster prior year. Meh. We have had something like 20 spectacular years in a row (with one bear-market exception from early 2000 to early 2002-ish), so I think this is just people with skewed expectations. Everyone got spoiled. Hell I read an article a couple months back that some prior Federal Bank types were bemoaning that they didn't let money market instruments slip to 99 cents this one day back in the 80s; just to remind everyone that no investment is totally safe.

The credit crisis is probably the only thing that concerns me, but I'm not running out and buying canned goods and gold bullion just yet. Much of the losses are being eaten by institutional and "qualified" investors who we are required by QT3 policy to hate anyway. I also don't scare easily though (God's got my back, fuck financial indicators) so take my thoughts with a grain of salt.

[Old Man Gravy]

Some of it's fear mongering, but some of it is for real.

The dumbfucks who run CNNMoney and its ilk, who need to call an investment bank for an explanation every time they have to talk about something really exotic like "purchasing a stock" or "a short sale", write hysterically about the markets and prognosticate about what declining security valuation means because it gets website hits (and also because they're idiots but I think I mentioned that). The newspapers take it and run, and they're probably even dumber.

The bit that's real is the credit crunch, and that's been fed by a natural rebound from a market extreme. The flipping craze caused home prices to become overheated by many many orders of magnitude above their intrinsic valuation as assets, and a sizeable portion of the populace went crazy trying to jump in and GET PAID; financial institutions allowed everyone to leverage all the way out regardless of their credit history because hey, the notes were covered by the homes, right?, and the asset values were growing at 30% per year.

Two things happened: the inevitable price correction came, and the banks found out that non-creditworthy people don't like to repay loans that are three times the value of the asset they're collateralized by. So they started tightening their lending policies, which caused the remaining flippers (and some normal people) to not be able to qualify for homes or refinance their crazy exotic mortgage, which greatly reduced the demand for homes, which reduced the market values, which shook out more buyers, etc etc. This is also the answer to Midnight Son's question.

Unless they have a good exit strategy, people who bet on assets whose values have irrationally outstripped their intrinsic worth always get hurt in the end, be it houses or tulip bulbs (or even gold - just wait for that correction).

Anyway, the economy itself is pretty sound: fairly robust growth in large capital item manufacturing and employment is strong. The overall growth rate contracted a bit last year, and will this year, but the rate will still be positive. The housing market is undergoing a huge correction, and that's hitting several super-overheated geographic regions.

[Nick Walter]

The only economic indicator I've seen that worries me is that farmers around here are ecstatic because the prices of wheat and corn are skyrocketing. Like 600%+ jumps in the last few years. The weak dollar doesn't just hurt imports, it hurts our ability to buy domestic commodities as well because exporting becomes more attractive. The corn spike is blamed on biofuels but the wheat spike is blamed squarely on a big big surge in American wheat exports.

I worry about inflation in the prices of basic food because that's a bit of inflation that isn't avoidable by anyone and hits the poorest people the hardest.

[MikeJ]

Like 600%+ jumps in the last few years. The weak dollar doesn't just hurt imports, it hurts our ability to buy domestic commodities as well because exporting becomes more attractive. The corn spike is blamed on biofuels but the wheat spike is blamed squarely on a big big surge in American wheat exports.

Basic food prices have been going up pretty quickly all over the world, but 600% sounds unrealistically high to me. As China and India gear up, more people want more food and more expensive food such as meat. The last few years, we (humanity) have consumed more than we've grown.

[WarrenM]

The word "recession" is driving blog traffic right now so therefore you'll see it everywhere.

[SlyFrog]

The only economic indicator I've seen that worries me is that farmers around here are ecstatic because the prices of wheat and corn are skyrocketing. Like 600%+ jumps in the last few years. The weak dollar doesn't just hurt imports, it hurts our ability to buy domestic commodities as well because exporting becomes more attractive. The corn spike is blamed on biofuels but the wheat spike is blamed squarely on a big big surge in American wheat exports.

Well, that and the weird fucking system of protections, subsidies, and goofiness that have made understanding the economics of the agricultural market damn near impossible.

[Rightbug]

I have 11 years of experience at my job and I'm really starting to feel the squeeze as my cost of living expenses rise considerably faster than my wages. Four years ago I was comfortable but the rising costs of gas, home heating, groceries and benefits have been eating away at me to where I'm just barely running a balanced budget. I've been tightening my belt over the last year primarily by eliminating non-essential purchases. Soon I'll start dropping services like emusic, Netflix and eventually cable.

That's anecdotal but I think this sort of stagflation is becoming a general issue in our country. I'm fortunate in that I don't have a lot of debt. Most middle class Americans do have significant debt. Further, as housing values plummet, many of these families are losing their primary source of equity. Just recently it was announced that home equity has dropped below 50% for the first time since World War II.

[Andrew Mayer]

Cash is king. You need to get some and keep it close.

Watch its value dwindle as rising inflation eats away at it.

Things are pretty bad, they're going to get worse.

The biggest issue is that essentially no one knows where the bottom is. That's mostly because the financial institutions created so many instruments that they don't really have any way of figuring out where all the bad paper is. It's a pretty good bet that some of the major banks are already insolvent and they're either a) not admitting it, or b) don't know it yet.

My guess is that we'll lose at least one major bank in all this before it's all over.

[WarrenM]

Watch it's value dwindle as rising inflation eats away at it.
I think he meant close as in a money market account or something. Yeah, you do have to at least attempt to keep cash abreast of inflation.

[Rollory]

Try to buy a house with a NINJA loan and get back to me.

Cash is king. You need to get some and keep it close.

Except that they're going to try to inflate their way out of this recession, so anybody who saves money gets screwed.

ed: Mayer beat me to it

[Nick Walter]

My guess is that we'll lose at least one major bank in all this before it's all over.

I think we'll lose a few minor ones but the majors will pull through albeit with a lot of pain. But that's a hunch, so I'm not gonna argue the point too hard.

Regardless of the assurances the banks are giving their actions are speaking loudly that they are scared shitless. Thing like the fact that Visa is suddenly for sale (well IPO) say that the banks are willing to part with even their crown jewel assets to raise cash. Not a good sign.

On the flipside, I think we've learned enough since the depression to not let things get that bad again, so I think everyone (govt, private firms) is going to be willing to pitch in to stabilize the wobbly banks as much as possible to avoid a chain reaction of failures.

[Rollory]

Actually this is a good thread to bring up this article, from last fall:

http://www.atimes.com/atimes/Global_Economy/IK03Dj03.html

Goldman Sachs has disclosed its Level 3 assets, two quarters before it would be compelled to do so in the period ending February 29, 2008. Their total was $72 billion, which at first sight looks reasonable because it is only 8% of total assets. However the problem becomes more serious when you realize that $72 billion is twice Goldman's capital of $36 billion. In an extreme situation therefore, Goldman's entire existence rests on the value of its Level 3 assets.

Level 3 assets, apparently, are assets where the value is whatever the hell the bank wants to label it as, and nobody can really check how close that is to reality.

[VegasRobb]

Can't be too bad ... median housing prices still dwarf median income. The worst housing markets are seeing prices drop by a whole 10%-15%. That's just not going to get it done.

[Robert Sharp]

Define get it done? You mean the correction needs to happen quicker?

[Fooey]

We're almost certainly in a recession right now. And it could get really bad given the meltdowns going on in various financial markets (this has spread way beyond just a housing problem) and the impact on credit availability and pricing.

[VegasRobb]

Define get it done? You mean the correction needs to happen quicker?

Robert, will a correction be enough? I think home ownership would go a long way to getting things back on the right path and right now buying a home is very very difficult.

[Robert Sharp]

I don't know, Robb. I was just trying to understand your point a bit better. For example, you say buying a home is very very difficult, but that depends on the person and location of the home, as well as what TYPE of home you intend to buy. I plan to buy a home in a couple of months myself, and I don't anticipate any problems (except maybe finding the right one). I'll be selling my current home over that period as well, and again I don't anticipate any big problems. Of course, we'll see. Maybe I'll run into difficulties on both ends. Just because I don't foresee problems doesn't mean they won't occur.

But what do you think would fix this problem of buying being so difficult? Aside from a price correction, I mean.

[jerri blank]

Try to buy a house with a NINJA loan and get back to me.

No one should have ever been able to get a NINJA loan. The fact that you can't get one now is less a sign of economic turmoil and more about the fact that lenders who had been doing stupid shit finally wised up.

[Woolen Horde]

Basic food prices have been going up pretty quickly all over the world, but 600% sounds unrealistically high to me. As China and India gear up, more people want more food and more expensive food such as meat. The last few years, we (humanity) have consumed more than we've grown.

The Economist had a cover story a couple months ago about the end of cheap food. India and China are certainly surging in demand. They're getting richer, and richer people like to eat more. Not only that, they like to eat more meat, which can take a ton of grain to produce (grain that is fed to cattle, chickens, etc.)

The other big problem is the insane ethanol subsidies in the United States. More and more of the corn crop is being diverted to ethanol use. Farmers are also ditching wheat and other lesser cash crops to plant more corn. The price of beer is skyrocketing because hardly anyone is growing hops anymore; a lot of them have switched to corn.

The irony is that corn is such a completely horrible crop for ethanol. The ethanol energy derived from corn isn't all that much more than the petroleum invested to plant and harvest it. Sugar cane is a much more efficient crop. It generates more fuel than an equivalent amount of corn. There's even a huge sugar cane refinery in Brazil that generates the electricty it requries by burning the parts of the cane that it can't turn to ethanol.

[Fooey]

I don't know, Robb. I was just trying to understand your point a bit better. For example, you say buying a home is very very difficult, but that depends on the person and location of the home, as well as what TYPE of home you intend to buy. I plan to buy a home in a couple of months myself, and I don't anticipate any problems (except maybe finding the right one). I'll be selling my current home over that period as well, and again I don't anticipate any big problems. Of course, we'll see. Maybe I'll run into difficulties on both ends. Just because I don't foresee problems doesn't mean they won't occur.

But what do you think would fix this problem of buying being so difficult? Aside from a price correction, I mean.

The National Association of Realtor's website lists 1,206 single family homes for sale in Huntsville, Alabama. That seems like a lot of unsold homes for a city that size.

[Robert Sharp]

There are over 350k people here. That doesn't seem irregular to me at all. But at any rate, I meant that homes are moving and haven't dropped in price. There have been pleny of articles in the local paper about it, which cite stats and interview people and all that.

EDIT: Also, you can't look at how many homes are listed and call them 'unsold'. They are listed. And unsold home would need to be on the market for a while. How fast do they sell? That's the key; not the number listed.

[Nick Walter]

Ran across
this (http://www.marketwatch.com/news/story/paulsons-lament-deregulation-has-been/story.aspx?guid=%7B4AEF15AC%2D3966%2D4656%2D8108%2 DC96712A88D68%7D) today, thought it was an interesting read. You know things got out of control when a Bush-appointed Republican Treasury Secretary is saying that lack of government regulation is one of the failures that led to the current predicament.

[Shadarr]

EDIT: Also, you can't look at how many homes are listed and call them 'unsold'. They are listed. And unsold home would need to be on the market for a while. How fast do they sell? That's the key; not the number listed.
Yeah, months of inventory is a much better metric than total listings. It not only accounts for the size of the market but also any other factors that are affecting demand.

[Jason Cross]

It seems like everywhere I look these days all I see or hear is fear about recession and economic collapse. Are we really in such bad shape? Or is all the widespread panic about the sky falling just fear mongering?

Here's the DOW over the last six months:
http://finance.yahoo.com/q/bc?s=^DJI&t=6m&l=on&z=m&q=l&c=

Here's the similar Nasdaq slide:
http://finance.yahoo.com/q/bc?s=^IXIC&t=6m

Dollar vs. the Euro over 1 year (they have no 6-month chart):
http://finance.yahoo.com/q/bc?s=USDEUR=X&t=1y&l=on&z=m&q=l&c=

Dollar vs. Yen over 1 year:
http://finance.yahoo.com/q/bc?s=USDJPY=X&t=1y

[Dirt]

Well, at least fewer companies will be sending jobs overseas.

[Midnight Son]

It's a recession alright. It's probably gonna be worse than the last several ones.

As far as cash being king even in an inflationary environment, where are you going to put your liquid assets while preserving the capital? The stock market doesn't make a damn bit of sense right now, bonds are teetering, even treasuries are doing weird shit. Inflation is going to get worse, but unless we get hyper inflation like Germany did after WW1, we should be able to get through it.

About housing, of course all conditions are local. Houses that cost $200,000 here in Virginia go for $750,000 in Cali! That would buy you a mansion out here yet cashiers are "buying" (were "buying") them in California. Insanity.

[Aeon221]

Ran across
this (http://www.marketwatch.com/news/story/paulsons-lament-deregulation-has-been/story.aspx?guid=%7B4AEF15AC%2D3966%2D4656%2D8108%2 DC96712A88D68%7D) today, thought it was an interesting read. You know things got out of control when a Bush-appointed Republican Treasury Secretary is saying that lack of government regulation is one of the failures that led to the current predicament.

You're surprised that a former CEO of Goldman Sachs is a tad pissed about the lack of management expertise in our government, and is willing to speak out about it? This guy isn't exactly your standard political toady -- he's got plenty of money and great career prospects even if he does tick off the Republican establishment, so he might as well call for reform.

[Aeon221]

It's a recession alright. It's probably gonna be worse than the last several ones.

As far as cash being king even in an inflationary environment, where are you going to put your liquid assets while preserving the capital? The stock market doesn't make a damn bit of sense right now, bonds are teetering, even treasuries are doing weird shit. Inflation is going to get worse, but unless we get hyper inflation like Germany did after WW1, we should be able to get through it.

About housing, of course all conditions are local. Houses that cost $200,000 here in Virginia go for $750,000 in Cali! That would buy you a mansion out here yet cashiers are "buying" (were "buying") them in California. Insanity.

Has a lot more in common with the 70s right here than the 20s in Germany. I'm pretty sure all we need is an OPEC embargo and a wee bit more anger from Russia to be in almost the exact place we were 40 years ago.

[Qenan]

It seems like everywhere I look these days all I see or hear is fear about recession and economic collapse. Are we really in such bad shape? Or is all the widespread panic about the sky falling just fear mongering?

There are some big problems. Looked at the trade deficit lately? How soon and how severely the various problems will come to roost is conjecture. My guess is there will be some kind of recession, but I'm hoping I'm wrong. The fortune we're spending on Bush's adventures in Iraq and Afghanistan aren't helping.

[jfletch]

As of right now there is too much bad money, too many bullshit loans, too many worthless financial instruments. It all has to be cleaned out, flushed out, but the problem is that nobody knows how bad the problem is. Nobody really knows how much of this bad shit is floating around, the only thing anyone knows is the numbers keep getting higher and higher.

Carlyle Capital got taken down today and there's a lot more where that came from.

The Fed is trying to pump cash into the banks through loans but that won't help if foreclosures and delinquencies keep going up and they will keep going up. More and more of these things will be worthless and the guys that have a lot of it will see all their money disappear. Giving every American $600 to spend isn't going to do a whole hell of a lot either, especially if they just end up spending it on imported goods or food/gas (it will help if they actually send it to credit card companies and the like, pumping up those company's cash totals, but previous rebates have been spent mostly). Plus, the employment numbers have just been ghastly and last year's fourth quarter GDP growth was significantly lower than the third quarter. I do not expect this trend to reverse.

The fortune we're spending on Bush's adventures in Iraq and Afghanistan aren't helping.

To be sure, the "defense" industry is doing very well. Though every dollar spent on those wars is borrowed so, yea, it's not helping us overall.

[jfletch]

Has a lot more in common with the 70s right here than the 20s in Germany. I'm pretty sure all we need is an OPEC embargo and a wee bit more anger from Russia to be in almost the exact place we were 40 years ago.

Article (http://www.slate.com/id/2185919/) from Daniel Gross on stagflation's comeback.

[Nick Walter]

You're surprised that a former CEO of Goldman Sachs is a tad pissed about the lack of management expertise in our government, and is willing to speak out about it? This guy isn't exactly your standard political toady -- he's got plenty of money and great career prospects even if he does tick off the Republican establishment, so he might as well call for reform.

Management expertise? Huh? Lost me there.

He was talking about regulation, and republicans have been staunchly for deregulating everything for years. So it's interesting that he went out and basically said "Hey, lack of regulation is one of the things seriously wrong here." He has to know that is not what republicans in general, or the Bush administration in specific, want him to say. So he has to feel it's such a solid point that he's utterly safe from criticism over saying it, which I think is surprising and interesting.

[shift6]

The only economic indicator I've seen that worries me is that farmers around here are ecstatic because the prices of wheat and corn are skyrocketing. Like 600%+ jumps in the last few years. The weak dollar doesn't just hurt imports, it hurts our ability to buy domestic commodities as well because exporting becomes more attractive. The corn spike is blamed on biofuels but the wheat spike is blamed squarely on a big big surge in American wheat exports.

I worry about inflation in the prices of basic food because that's a bit of inflation that isn't avoidable by anyone and hits the poorest people the hardest.
Corn hasn't gone up that much. Eyeballing the price of corn on Jan 2 every day from 1999 to 2008 on this page (http://www.agriculture.state.ia.us/historic.html), it looks to really only be up about 100%. Now I grant you that I'm simplifying the aggregate to one day per year in only one state, and double is still alot, but it's much less than your guess if the simplification holds.

Just as a further check, I found some articles confirming an approximate doubling of corn prices (obviously there are short term fluctuations higher and lower as well), but hell even 3X higher ain't 600% ;)

http://money.cnn.com/2007/01/30/news/economy/corn_ethanol/index.htm
http://www.usatoday.com/money/industries/food/2007-01-24-corn_x.htm
http://www.washingtonpost.com/wp-dyn/content/article/2007/06/14/AR2007061402008.html
http://www.nytimes.com/2008/03/05/washington/05cnd-energy.html

I admit I didn't do any legwork on wheat.

Gas prices have been fucked since 2003. The dollar's valuation against world currencies has been fucked for a year or more. The subprime crisis was getting play all over the place for nearly a year now, and many of the initial write-downs have already taken place (although there will be more). Home prices have been falling for months and even then, the serious problem soccurred mostly in only four states (see previous Subprime threads). So I think that a large chunk of the economic indicators have already been worked in to the system. This isn't to say that they can't cause problems now (in fact, they do!) but we did weather the initial onslaught.

So I'm definitely not as doom-and-gloom about a recession as most. 4Q07 saw GDP growth of about 0.6 so, while it was a tad slow, it was positive. Therefore for us to be in the middle of a recession, it would have to have started in January or late December in a simplified sense.

Article (http://www.slate.com/id/2185919/) from Daniel Gross on stagflation's comeback.
Good article, thanks. I found some points interesting:

"This case of stagflation may be mild by historical standards. But since we haven't experienced anything like it in decades, our coping mechanisms are weak."

As I said in my first reply above, many of the "problems" now are simply peoples' expectations being deflated. For some, that means real loss (e.g. mortgage-application-liars looking for a quick flip, etc); in many other cases, it means nothing but the "feeling" that things are bad. Hey consumer confidence is important, but let's tone it down a bit journalists.

Incidently, as an only vaguely related LOL, here's a money quote on why the random walk hypothesis doesn't hold:

"In his smart new book in the behavioral-economics genre, Predictably Irrational, Dan Ariely writes about the importance of context: People routinely make business decisions and judgments by comparing them to recent events rather than to the distant past."

But that's for another thread. ;)

[Dave Markell]

An actual recession--instead of panic that leads to premature interest rate cuts and a Fed that floods the money supply--is the best way to prevent stagflation. A spike in unemployment helps keep wages down and also lowers consumer demand, putting a brake on prices as well. Tightening credit has the same effect. Recessions are thus a necessary part of the business cycle, and trying to avoid them at any cost (which Bush, Bernanke, and Congress all seem determined to do) can cause long term harm. But then, what politician cares about the long run when elections are looming?

[Jason McCullough]

Recessions are thus a necessary part of the business cycle.....

Oh, you Austrians.

[Dave Markell]

Oh, you Austrians.

Try reading something written post-1930, Jason. Keynes is wildly out of date.

[Fooey]

The "recessions are good for you" mode of thinking is far more outdated than Keynes. Didn't work out too well for Mellon, Hoover's Treasury Secretary, who thought the Depression would be a useful correction of past excesses.

[WarrenM]

The stock market doesn't make a damn bit of sense right now,
Everything is on sale. Buy.

[drewl]

Call me paranoid, but I think it's alot worse now than the 70's due to the fact that we probably import alot more common goods than 30yrs ago, so that money goes right out of circulation, coupled with the fact that too many good jobs are going overseas and the replacement service jobs can't sustain a family, you can't just work your way out of debt by busting your ass and working two jobs like 30yrs ago.

[Dave Markell]

The "recessions are good for you" mode of thinking is far more outdated than Keynes. Didn't work out too well for Mellon, Hoover's Treasury Secretary, who thought the Depression would be a useful correction of past excesses.

Like I said, try reading some post-Keynsians. Nobel laureate Friedman, for example, blames the Fed for turning an ordinary recession into the Depression through monetary policy. In fact, that's one of the cornerstones of the work that won him the prize. The stagflation of the 1970's (and that we're starting to see now) are also undesirable consequences of the Keynsian approach. The fact is that you can find prominent, contemporary econonomists on both sides of this debate, and pointing to the Great Depression as "proof" of your point of view doesn't work--I can just as easily point to it as proof of mine, and cite a more recent laureate who agrees.

[Jason McCullough]

Friedman is often an ideological hack.

[noun]

Call me paranoid, but I think it's alot worse now than the 70's due to the fact that we probably import alot more common goods than 30yrs ago, so that money goes right out of circulation, coupled with the fact that too many good jobs are going overseas and the replacement service jobs can't sustain a family, you can't just work your way out of debt by busting your ass and working two jobs like 30yrs ago.

My gut tells me this recession will be worse than the 70s as well for multiple reasons. Our economy is entirely driven by people buying useless shit they don't need with credit they can't pay back. Our employers are sending jobs overseas but expecting US consumers to buy the finished products. And the reason you can't get ahead working two jobs is because the cost of fricking everything has skyrocketed in comparison to the actual value of the dollar. Plus, we're blowing billions of dollars in Iraq and have no means to replace that money.

I don't think we'll end up bartering bottlecaps for firearms, but hard times are indeed coming.

[Dave Markell]

Friedman is often an ideological hack.

Keynes is always an ideological hack. There. I win.

[Fooey]

Like I said, try reading some post-Keynsians. Nobel laureate Friedman, for example, blames the Fed for turning an ordinary recession into the Depression through monetary policy. In fact, that's one of the cornerstones of the work that won him the prize. The stagflation of the 1970's (and that we're starting to see now) are also undesirable consequences of the Keynsian approach. The fact is that you can find prominent, contemporary econonomists on both sides of this debate, and pointing to the Great Depression as "proof" of your point of view doesn't work--I can just as easily point to it as proof of mine, and cite a more recent laureate who agrees.

Friedman won the Nobel Prize for the permanent income theory of consumption. A Monetary History of the United States is still a classic, but it had nothing to do with the technical economic advances that won him the prize. As Friedman also famously conceded in the the late 1980's -- "We're all Keyensians now." And don't confuse Friedman the pundit with Friedman the economist. Even the likes of Paul Krugman would consider Friedman a giant in the field of pure economics.

[Fooey]

If you haven't heard about it yet, the Fed today saved the major brokerage firm Bear Stearns from an imminent failure with a big liquidity injection. This is getting really ugly.

[Dave Markell]

Friedman won the Nobel prize "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy" (see this (http://nobelprize.org/nobel_prizes/economics/laureates/1976/) link). I'd say monetary history had more than "nothing" to do with it.

[Nick Walter]

If you haven't heard about it yet, the Fed today saved the major brokerage firm Bear Stearns from an imminent failure with a big liquidity injection. This is getting really ugly.

I saw that. It gave me the willies because of the statements from Bear Sterns about suddenly having liquidity problems in just the last 24 hours. Is this what a 21st century bank run is going to look like?

[Fooey]

The permanent income theory of consumption won him the Nobel Prize. Without that theory he doesn't win it, period.

"From the purely scientific point of view, Friedman's other achievements are of greater interest than his monetary analysis. Of primary importance here is his re-fashioning of the theory of consumption based on the hypothesis that "the permanent income" and not year-to-year income is the determining factor when assessing total consumption outlay. He makes the extremely valuable distinction between the temporary and more permanent incomes of households; Friedman has demonstrated that a much greater proportion of the former type of income is saved than the latter."

http://nobelprize.org/nobel_prizes/economics/laureates/1976/press.html

[Dave Markell]

The permanent income theory of consumption won him the Nobel Prize. Without that theory he doesn't win it, period.

Maybe, maybe not. The whole first paragraph of that release focused on the importance of his monetary policy; I'd hardly say it's irrelevant. We're going to disagree here. Without interviewing the committee for 1976 and asking them if he would have won without ANY of the listed items, no resolution is possible.

[Jason McCullough]

Ok, how about "economists don't think, in general, that the federal reserve caused the great depression, or that recessions are necessary?" That seems straightforward enough.

[bigdruid]

My gut tells me this recession will be worse than the 70s as well for multiple reasons.
Really? In the 70s the US economy was undergoing a sea change, from a manufacturing economy to a service-based one. This was a huge upheaval requiring retraining of workers, shutting down of factories, etc.

I just don't see anything like this being the case today. Undoubtedly there'll be some difficult times ahead (sending $500B to Iraq doesn't help) but the US job market is actually much stronger now than in the 70s.

[drewl]

Really?
the US job market is actually much stronger now than in the 70s.

I hope you're right but I just don't see it, I've said it before, in the 70's you could get a menial factory job of some sort and support a family while retraining or looking for work, you can't sustain yourself at Walmart and there's very few factories to work at in today's America.

[Dave Markell]

Ok, how about "economists don't think, in general, that the federal reserve caused the great depression, or that recessions are necessary?" That seems straightforward enough.

Sure, if you're a Keynsian. I'm not; most economists aren't either--they've moved on to various post-Keynsian positions, some of which see recessions as a necessary part of the business cycle and some of which do not.

[Jim Hoffman]

As far as cash being king even in an inflationary environment, where are you going to put your liquid assets while preserving the capital?

Gold?

[Jim Hoffman]

Just watched this video the other day, related to the nature of modern money.
Be warned, it's 45 minutes in length.
Love to hear your thoughts. Almost started another thread, but thought this topic is pretty much directly related.
http://video.google.co.uk/videoplay?docid=-9050474362583451279

[Qenan]

Sure, if you're a Keynsian. I'm not; most economists aren't either--they've moved on to various post-Keynsian positions, some of which see recessions as a necessary part of the business cycle and some of which do not.

I know you are, but what am I?

This is second-grader logic masquerading as discussion.

[Dave Markell]

I know you are, but what am I?

This is second-grader logic masquerading as discussion.

Jason's comment was that "economists don't think, in general, that recessions are necessary." Well, I don't think that's true. There are schools of thought that do, and schools of thought that don't. Consensus doesn't exist, so "in general" is false.

If you find that to be second grader logic, oh well.

[Janster]

Cut down military stuff a bit and you could frigging gold plate the country.

It will not be bad until the oil starts selling in Euro.

Janster

[Qenan]

If you find that to be second grader logic, oh well.

My point was that both of you are just making bald-faced assertions with little argument or real discussion. I have no stake in either side, but I'm not finding it very illuminating.

[Jason McCullough]

Jason's comment was that "economists don't think, in general, that recessions are necessary." Well, I don't think that's true. There are schools of thought that do, and schools of thought that don't. Consensus doesn't exist, so "in general" is false.

Uh, I'm not actually an expert here, but the only branch of economics I know of that actually thinks recessions are necessary is the tiny faction of Austrians, who are treated as cranks by the rest of the profession. Rational choice has produced a lot of hilarious views IMHO but I don't think they've gone that far.

I suppose the actual economists on here could weigh in.....

Edit: fixed grammar you communist bastard

[Raife]

I suppose the actual economists on here could way in.....

I was having trouble parsing that until I realized that you meant weigh.

[Dave Markell]

Uh, I'm not actually an expert here, but the only branch of economics I know of that actually thinks recessions are necessary is the tiny faction of Austrians, who are treated as cranks by the rest of the profession. Rational choice has produced a lot of hilarious views IMHO but I don't think they've gone that far.

I suppose the actual economists on here could way in.....

Well, try looking up new classical macroeconomics and real business cycle theory. Since both got their start after Keynes died and are a product of the Chicago School movement, I won't be surprised when you dismiss the economists of that movement as "cranks" even though they won more Nobels in economics than any other institution in history. Lucas, Friedman, Stigler, et. al. don't agree with you, so they must be insane fringe elements.

[Jason McCullough]

They aren't cranks, no, I thought you were referring to the Austrians.

I can't find anything by casual searches on Lucas, Friedman, or Stigler talking about how recessions are necessary, just differing explanations of casual factors.

[Dave Markell]

They aren't cranks, no, I thought you were referring to the Austrians.

I can't find anything by casual searches on Lucas, Friedman, or Stigler talking about how recessions are necessary, just differing explanations of casual factors.

I've never once referenced the Austrians, Jason. You're the one who keeps bringing them up. But, to give you an example, Lucas (along with fellow laureates Kydland and Prescott) is the founder of real business cycle theory. I'll quote wiki since I'm lazy tonight:

Unlike other leading theories of the business cycle, it sees recessions and periods of economic growth as the efficient response of output to exogenous variables. That is, RBC theorists argue that at any point in time, the level of national output necessarily maximizes utility, and government should therefore not intervene through fiscal or monetary policy designed to offset the effects of a recession or cool down a rapidly growing economy. According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear, but rather reflect the most efficient possible operation of the economy. It differs in this way from other theories of the business cycle, like Keynesian economics and Monetarism, which see recessions as the failure of some market to clear.

In RBC theory, recessions are thus part of the "most efficient possible operation of the economy" and have tangible benefits, such as the ones I listed a page or two back.

[SlyFrog]

I've never once referenced the Austrians, Jason. You're the one who keeps bringing them up. But, to give you an example, Lucas (along with fellow laureates Kydland and Prescott) is the founder of real business cycle theory. I'll quote wiki since I'm lazy tonight:



In RBC theory, recessions are thus part of the "most efficient possible operation of the economy" and have tangible benefits, such as the ones I listed a page or two back.

The hell you say! Crank!

Look, this is the internet. I'm afraid I'm going to have to knowingly dismiss you as an ignorant Libertarian.

I'll be right back with some Googled articles that help me pretend that I have studied the subject deeply, and thus my knowing refutations are incredibly stinging.

[Jason McCullough]

I've never once referenced the Austrians, Jason. You're the one who keeps bringing them up.

....which was because they're the only people I knew of that held that position. I've fond libertarians online tend to veer off into Austrian theory in a hurry, so maybe you can understand that's why I thought you were referring to. I stand corrected; I wasn't aware the rational expectations offshoots had gotten that idiotic.

That still leaves "the federal reserve caused the great depression" needing support as a mainstream economics position. I thought that was just rump monetarists.

[Tom McNamara]

The hundreds of billions that the Fed is pumping straight into Wall Street isn't coming out of thin air. It's coming hot of the printing press, thus devaluing the dollar even further. That weakens our domestic purchasing power, and abroad the EU now has a higher GDP than the United States. The USD fell below the Swiss Franc, an historic first, it runs parallel to the CAD, and it's playing tug-of-war with the Japanese yen for the first time in 13 years. Gold futures have already crossed the $1k, another first.

It's starting to look like the best-case scenario is a recession.

I'd really like to think otherwise, and I'm no economist, but I just don't see how one can put a positive long-term spin on this.

[Dave Markell]

I stand corrected; I wasn't aware the rational expectations offshoots had gotten that idiotic.

I don't agree with much of Keynes' work, but I'd never call it idiotic. Some of his mistakes may have subconsciously embodied his ideological biases, but even the errors were brilliant. When you make your acceptance speech in Sweden, I'll put credence in your calling the work of three other laureates "idiotic". Until then, no.

[Dave Markell]

The hundreds of billions that the Fed is pumping straight into Wall Street isn't coming out of thin air. It's coming hot of the printing press, thus devaluing the dollar even further. That weakens our domestic purchasing power, and abroad the EU now has a higher GDP than the United States. The USD fell below the Swiss Franc, an historic first, it runs parallel to the CAD, and it's playing tug-of-war with the Japanese yen for the first time in 13 years. Gold futures have already crossed the $1k, another first.

It's starting to look like the best-case scenario is a recession.

I fear this too, for the reasons I've been stating. Shouting "Oh noes! Recession!" while waving one's arms wildly about and running the presses is an antiquated and foolish way to react to a needed correction. Stagflation, here we come.

[Sarkus]

Charlie Rose had a financial writer from the NYTimes on tonight who talked about the issue. He pointed out that this situation is different than what we've see in the past, so as a result there is a wide variation in what the experts think. However, they did spend a lot of time discussing whether this has the possibility of being the worst recession/downturn since the end of WW2, replacing the 1973-75 downturn.

He did point out that Bear Sterns wasn't really as bad as it looked. Essentially, there is some evidence that Bear Sterns is still in decent shape, in terms of what is owns being worth more than what it owes. The problem was that rumors meant some of Bear Sterns debt holders became nervous and began demanding collateral, which Bear Sterns, which can't directly borrow money from the Fed because of the type of financial institution it is, couldn't provide. Other banks are in a different position.

[Aeon221]

The hundreds of billions that the Fed is pumping straight into Wall Street isn't coming out of thin air. It's coming hot of the printing press, thus devaluing the dollar even further. That weakens our domestic purchasing power, and abroad the EU now has a higher GDP than the United States. The USD fell below the Swiss Franc, an historic first, it runs parallel to the CAD, and it's playing tug-of-war with the Japanese yen for the first time in 13 years. Gold futures have already crossed the $1k, another first.

It's starting to look like the best-case scenario is a recession.

I'd really like to think otherwise, and I'm no economist, but I just don't see how one can put a positive long-term spin on this.

Betcha five dollars you don't know the half of why the stuff with the yen is scary. See, because of the hyper low interest rates in Japan, the yen is the bottom bin of the carry trade -- people borrow in yen and then buy other currencies, because the costs of borrowing in Japan are so mind bogglingly low. This forces the yen to remain artificially low, because lots of people want to borrow in it and sell it and nobody wants to buy it because the returns are worse than crap.

If the dollar starts moving with the yen, it'll enter that same nightmare position in the carry trade. This could, and I say this without even a little bit of sarcasm, seriously screw up our economy. Unlike Japan, we have an incredibly powerful financial sector. If our money becomes worthless, it'll trigger selloffs of the vast Eurodollar holdings around the world, nuking the returns to financial assets held in dollars, and pretty much eliminating Wall Street as a destination of foreign investment. Not only would this pretty much ruin the entire financial industry, it would also smash a lot of businesses too, since floating equity for capital would be pretty much pointless.

Yay!

[Janster]

Seriously, Russia is now debt free from the cold war.

How about US?

Janster

[Mordrak]

Wow, we are fucked. I have no money, but we are fucked.

[SlyFrog]

Wow, we are fucked. I have no money, but we are fucked.

*Grabs shotgun, shells, begins digging bunker*

(If the apocalypse comes, and economic inspired Mad Max world comes to the U.S., Qt3ers are welcome to what help I can give them from the bunker. The password will be "Supertaster.")

P.S. Though I recommend finding Aaron Soafer instead, who will within 2 weeks have acquired all the knowledge in our nation's defunct libraries, Braniac-style, and will have built a nuclear reactor out of coconuts to provide power for his recently created pleasure den full of admiring women who have flocked to him as the region's mega-Alphamale.

P.P.S. Or maybe Cleve, who already has the bunker. If you are not white, however, and therefore can not get into Cleve's bunker, you are still welcome in mine.

[Fooey]

I've never once referenced the Austrians, Jason. You're the one who keeps bringing them up. But, to give you an example, Lucas (along with fellow laureates Kydland and Prescott) is the founder of real business cycle theory. I'll quote wiki since I'm lazy tonight:



In RBC theory, recessions are thus part of the "most efficient possible operation of the economy" and have tangible benefits, such as the ones I listed a page or two back.

One of the basic assumptions of RBC theory is that there's no such thing as involuntary unemployment. Anyone without a job is always assumed to be making a choice to enjoy more leisure. Yes, it really is that silly.

[Fooey]

Charlie Rose had a financial writer from the NYTimes on tonight who talked about the issue. He pointed out that this situation is different than what we've see in the past, so as a result there is a wide variation in what the experts think. However, they did spend a lot of time discussing whether this has the possibility of being the worst recession/downturn since the end of WW2, replacing the 1973-75 downturn.

He did point out that Bear Sterns wasn't really as bad as it looked. Essentially, there is some evidence that Bear Sterns is still in decent shape, in terms of what is owns being worth more than what it owes. The problem was that rumors meant some of Bear Sterns debt holders became nervous and began demanding collateral, which Bear Sterns, which can't directly borrow money from the Fed because of the type of financial institution it is, couldn't provide. Other banks are in a different position.

Bear is finished. Anyone claiming otherwise is ignorant of what's really going on. Best case scenario is that they find someone very quickly to buy out the remnants of the company cheap. Every day that goes by there's less and less left worth trying to salvage.

[Tankero]

If I ever happen to be in Seattle, or other regions where QT3rs roam (Like Tegucigalpa!), I'm going to start confronting people, look at them straight in the eye and deliver the password.

"Supertaster!"

I'll either get institutionalized, or a beer out of it.

[Fooey]

....which was because they're the only people I knew of that held that position. I've fond libertarians online tend to veer off into Austrian theory in a hurry, so maybe you can understand that's why I thought you were referring to. I stand corrected; I wasn't aware the rational expectations offshoots had gotten that idiotic.

That still leaves "the federal reserve caused the great depression" needing support as a mainstream economics position. I thought that was just rump monetarists.

The Fed didn't cause the Great Depression, but they made it much worse than it needed to be, both through direct actions that made matters much worse (hiking reserve requirements and the discount rate when the banking system was collapsing) and in failing to do what they should have done. The money supply fell by a third during the Great Depression. Monetary policy theory was pretty crude in those days, but there were prominent, smart people watching this happen and trying to get the Fed to stop it, and they didn't listen.

[Linoleum]

Bear is finished. Anyone claiming otherwise is ignorant of what's really going on. Best case scenario is that they find someone very quickly to buy out the remnants of the company cheap. Every day that goes by there's less and less left worth trying to salvage.

Already done, and yeah, it's a total clusterfuck.

[Jason McCullough]

I don't agree with much of Keynes' work, but I'd never call it idiotic. Some of his mistakes may have subconsciously embodied his ideological biases, but even the errors were brilliant. When you make your acceptance speech in Sweden, I'll put credence in your calling the work of three other laureates "idiotic". Until then, no.

I think lots of monetarism is wrong, but it's an interesting and plausible theory. Rational expectations is fascinating and seems like an obviously useful tool, but a lot of the conclusions seem rather overblown when they take it too far.

By contrast, Austrian and RBC business cycle theories seems so comically out of touch with the actual history of business cycles and what we know about personal economic behavior that I don't know what to call them but idiotic. If you assume people act in a completely different manner than they actually do and ignore everything that actually happens in a recession, sure, great theory.

The Fed didn't cause the Great Depression, but they made it much worse than it needed to be

Well, yeah. I was just arguing against the strong form.

[Janster]

nonsense. The real problems lie elsewhere. Try looking at a certain military budget. Janster