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The Economy, Stupid, and Other Saturday Rants

Splendid week last week at Ashland teaching in the summer MAHG program, but that left little no time for blogging.  Now to catch up. 

The Friday jobs number sucked.  Does it mean we're heading for a double-dip?  I don't know.  But John Hussman thinks so, and the dense account at the link seems pretty persuasive, even if it is hard to follow in a few places.  (I had lunch with Hussman once many years ago in New York, were he walked me through a pile of charts demonstrating complete command of the economic scene.)

Meanwhile, this jobs chart presents a much simpler picture of why this recession is worse than than even the Reagan recession of 1982, the previous champ.  The almost-always sensible liberal Bill Galston notes in The New Republic yesterday numerous below-the-headline reasons why things are so bad, including this telling note: "Today, 46 percent of all unemployed workers have been out of work for more than six months, versus 26 percent at the height of the Reagan recession."  

Driving back to DC yesterday on the back roads of Ohio and Pennsylvania and West Virginia I saw lots of signs of stagnation and decay, which contrasts sharply with the view that one sees as one approaches the Beltway: lots of gleaming new office buildings, and many more expensive cars on the road.  No wonder the DC establishment doesn't get it.  Or maybe it does: Washington prospers now because, like imperial capitals of old, it sucks the wealth of the periphery to itself.

Oh yeah, one last rant.  It was not lost on me that I transited West Virginia yesterday on the same day as Robert Byrd's funeral.  One line from President Obama's eulogy jumps out for its unintentional indictment of Byrd: "Making life better here was his only agenda."  How nice for West Virginia.  What about the rest of the nation?  I thought senators (and House members) were supposed to have some notion of the national interest in mind at some point, and not just view their jobs as maximizing their raids on the federal treasury to bribe voters back home.

P.S.  Oh yeah--I see the state of Illinois has stopped paying its bills, and California has started paying state workers minimum wage (which might be what most of them are worth).  But at least the once-Golden State is still charging ahead to build high speed rail.  Yeah, that's the ticket out of the rut.
Categories > Economy

Discussions - 12 Comments

Once Jerry "Governor MoonBeam" Brown is elected the next governor of California by the dumb people of California, I give CA about six months and it will be toast.

The Illinois and California situations are a big head's-up for the rest of the country: Protect your lootable resources. It is the nature of the progressive/liberal beast to exhaust its own resources and then move on to gullible/vulnerable producers elsewhere. Eventually, only the seats of government have any prosperity, and the rest of us serfs have to go hat-in-hand to ask the lords for sustenance.

The Founders would be ashamed of us. We have managed to erase most of their revolution.

John Hussman leaves the impression that Fannie Mae and Freddie Mac are the holders of 3/4 of the outstanding mortgage debt. These statistics here:

indicate that the correct figure is 35%.

He also regards it as irresponsible for the Federal Reserve to have purchased Fannie Mae and Freddie Mac issues. The trouble is, there was a large and abrupt increase in the demand for real balances while the fall in the interest rate on Treasury issues made them almost equivalent to cash. An economist of my acquaintance explained in to me thus in the fall of 2008: "we are IN a liquidity trap right now". What the Fed did was what the libertarian economist Arnold Kling suggested: buy the issues of Fannie Mae and Freddie Mac, which retain a positive interest rate. The result is that we have had price stability over the last 21 months, rather than the severe deflation which occurred during the period running from Oct. 1929 to March 1933. This is 'irresponsible'?????

Both of your links refer to the same article on the situation in California.

To be precise, the share of outstanding mortgage loans (by value) owned by federal agencies, owned by Fannie Mae or Freddie Mac, or in mortgage pools securitized by federal agencies or these two enterprises, stood at 33% four years ago and has risen to 43%. He also states that $1.5 tn in mortgage backed securities have been added to the Federal Reserve's consolidated assets. The correct figure is $1.1 tn.

Some perspective:

There have been since 1947 10 notable intervals during which the rate at which goods and services were being produced in the economy declined in real terms. The sizes of the declines are as follows:

1948q4 - 1949q4: 1.55%
1953q2 - 1954q1: 2.65%
1957q3 - 1958q1: 3.73%
1960q1 - 1960q4: 1.58%
1969q3 - 1970q4: 0.63%
1973q4 - 1975q1: 3.19%
1980q1 - 1980q3: 2.23%
1981q3 - 1982q4: 2.72%
1991q1 - 1990q2: 1.36%
2008q2 - 2009q2: 3.83%

The decline registered in 1929-33 was 27%.

Illinois link fixed! Thanks for the heads-up. (The NLT bloggingware was behaving very strange today. None of the links worked at first.)

I'll respond to Art Deco's posts by saying that I think the "irresponsible" part of the current scene is not the Fed's actions (which I agree have been certainly correct), but the huge debt of the stimulus. TARP (though a harder call), and the health care bill (on top of Bush's deficits and future unsustainable commitments). The Fed can withdraw its liquidity measures in a variety of ays; the government debt cannot be removed in a similar way.

Happy fourth of July.

I am still pondering Rick Santelli and his strong gold + Fed accomplishing nothing with low interest rates+should raise interest rates. Rick Santelli says easing is stupid and that on a sugar high and that everything is fictional, what the question is what return you get from the money...looking at all the banks 1T (great arbitrage with treasuries) and corporations 1.5 T with free cash on reserve he says that raising rates would actually incourage them to put the capital to work. Government policy and low interest rates are actually encourageing holding back.

But double dip talk keeps the fed from easing interest rates.

I would tend to listen to economists rather than business reporters.

That aside, what does 'accomplishing nothing' mean to you or Mr. Santelli?

I would refer you to the writings of Barry Eichengreen. The economic shock the advanced economies suffered in the last quarters of 2008 and the first of 2009 was not as severe as that suffered by the United States during the period running from Oct. 1929 to April 1930. It was, however, about as bad as the median of a sample of the most affluent economies of that time. (The economic contraction in North America during the years running from 1929 to 1933 was far more violent than that Europe suffered).

You do recall that the decline in prices registered in November 2008 was consistent with deflation at a rate of 17% per annum? Or that a 10% peak-to-trough economic contraction (as predicted by Nouriel Roubini) was the weighted average for the peripheral Far East during the 1997-98 crisis?

What we have had is a 4% economic contraction followed by some modest economic growth; the partial nationalization of Citigroup; no deflation; and stabilization of prices in the housing market and a plateau in the deterioration of commercial bank loan portfolios.

The challenges we have are bad enough and we are being led by an empty suit and the crooked hacks who dominate the U.S. Congress. The public sector deficit, the mass of commercial real estate underwater, and the wreckage inflicted on the domestic labor market are daunting as is. (What sort of fool raises the minimum wage during a recession like this? The fools in the Democratic Congressional caucus, that's who). We should not make ourselves stupid paying much attention to the medicine shows of various people on retainer for the business press, et al.

That's exactly right, AD. This didn't (and still doesn't) have to be a depression, but much like FDR we are pursuing all the wrong policies, which will ultimately lengthen the economic downturn.

And you know what, so long as they can manage to get reelected, the Democrats don't care. Crisis is good for what they want to accomplish.

Must dissent. Roosevelt's administration had agreeable and disagreeable aspects.

The economy grew quite rapidly from the spring of 1933 to the beginning of 1937, contracted from the beginning of 1937 to the middle of 1938, and expanded quite rapidly from the middle of 1938 to the fall of 1945. By 1941, per capita income was higher than it had been in 1929. IIRC, the mean growth in per capita income over the period running from 1929 to 1941 was about 1.4%, near the mean of the period running from 1978 to the present.

Mr. Roosevelt &c. undertook rapid and effective action to heal the financial system and prime the economy. These included an end to the gold standard, expansion of the money supply, and the erection of institutions to bring about a rapid resolution of bank failures and contain public panic and to provide workouts for home mortgages in arrears or default. All of this architecture was in place in a matter of months after Roosevelt's inauguration. The comparative performance of the Congress and Administration in our own time is a scandal.

He undertook some other policies that one might argue were right for those specific circumstances which have been applied repeatedly since in circumstances where they were ineffective or worse (e.g. fiscal stimulus through public employment, large public sector deficits). The Works Progress Administration and so forth were flawed but good programs; Lyndon Johnson sticking the pedal to the metal in 1965 was not.

Other policies served some good ends but were ill-timed and have had downstream consequences which require repair (Social Security, promotion of industrial unionism).

And other policies were plain bad in just about anyone's estimation (the attempt to set up sectoral cartels through the National Recovery Administration, farm subsidies and production controls, laws prescribing a high minimum wage, &c).

Public works like the city water are now being given to banks to pay off debts. the banks triple the cost all in the name of paying off the debt that we the people had zero say in.

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