Well, they couldn’t see the housing bubble in 2007, why should they be able to see it today? It’s sort of like reporting on the rain in North Carolina without mentioning Hurricane Florence. I guess the stories about the problems in getting qualified workers are accurate.
Well, they couldn’t see the housing bubble in 2007, why should they be able to see it today? It’s sort of like reporting on the rain in North Carolina without mentioning Hurricane Florence. I guess the stories about the problems in getting qualified workers are accurate.
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This NYT piece is so confused it is difficult to know where to begin. It starts with student debt. Student debt is a serious burden for many recent grads and even more so for people who did not graduate. But how does it lead to a financial crisis? As the piece notes, most of the debt is owed to the government. Also, defaults won’t lead to the value of the underlying asset (earnings) spiraling downward.
Then we get corporate debt. Yes, this is high, but debt service as a share of corporate profits is low. That is the relevant variable. Yes, this can rise as interest rates rise, but not very rapidly. Many companies took advantage of extraordinarily low interest rates to borrow long-term. Also, even when companies find themselves in trouble meeting their obligations, they can sell off stock or assets. It’s rare that investors take a complete bath on corporate debt.
Then we have junk bonds. Yes, investors are probably underpricing risk. Will this lead to a financial crisis? See the previous paragraph.
The piece then goes to emerging market debt. Here also investors likely underpriced risk. Could be bad news for many investors and people living in places like Turkey and Argentina. It’s not a financial crisis.
Finally, we get to the growing share of mortgages being issued by non-bank institutions. This should raise concerns about lending behavior and possible abusive practices by less-regulated lenders. Absent a bubble, it is not the basis for a financial crisis.
I talk about these issues briefly in my paper on the 10th anniversary of the collapse of Lehman.
This NYT piece is so confused it is difficult to know where to begin. It starts with student debt. Student debt is a serious burden for many recent grads and even more so for people who did not graduate. But how does it lead to a financial crisis? As the piece notes, most of the debt is owed to the government. Also, defaults won’t lead to the value of the underlying asset (earnings) spiraling downward.
Then we get corporate debt. Yes, this is high, but debt service as a share of corporate profits is low. That is the relevant variable. Yes, this can rise as interest rates rise, but not very rapidly. Many companies took advantage of extraordinarily low interest rates to borrow long-term. Also, even when companies find themselves in trouble meeting their obligations, they can sell off stock or assets. It’s rare that investors take a complete bath on corporate debt.
Then we have junk bonds. Yes, investors are probably underpricing risk. Will this lead to a financial crisis? See the previous paragraph.
The piece then goes to emerging market debt. Here also investors likely underpriced risk. Could be bad news for many investors and people living in places like Turkey and Argentina. It’s not a financial crisis.
Finally, we get to the growing share of mortgages being issued by non-bank institutions. This should raise concerns about lending behavior and possible abusive practices by less-regulated lenders. Absent a bubble, it is not the basis for a financial crisis.
I talk about these issues briefly in my paper on the 10th anniversary of the collapse of Lehman.
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Actually the Post didn’t tell readers this, it instead told them that the tax cut would, “add an additional $3.2 trillion to the federal deficit over a decade,” according to a projection from the Tax Policy Center. Since next to no one reading the Post has any idea of how much money $3.2 trillion between 2028 and 2037 is, it might have been useful to put this number in some context. As it is, the paper just told them that the cost of the tax cut would be really big.
Actually the Post didn’t tell readers this, it instead told them that the tax cut would, “add an additional $3.2 trillion to the federal deficit over a decade,” according to a projection from the Tax Policy Center. Since next to no one reading the Post has any idea of how much money $3.2 trillion between 2028 and 2037 is, it might have been useful to put this number in some context. As it is, the paper just told them that the cost of the tax cut would be really big.
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Yep, Catherine Rampell is touting the heroics of the bailout gang in saving us from a second Great Depression in her Washington Post column. She notes the anger directed against this gang on both the left and right and that people suspect their motives. (For those keeping score, the initial trio was Ben Bernanke, who is getting well over $1 million a year in consulting contracts with financial firms, Timothy Geithner, who is likely getting multiple millions as a top exec at a PE company, and Henry Paulson who pocketed hundreds of millions as CEO of Goldman Sachs in the bubble years.)
Anyhow, Rampell never tells us how letting the markets work their magic on the Wall Street bank would have prevented us from passing a really big stimulus in 2009 (or 2010, or 2011 etc.), but I suppose the aluminum foil hat set takes this as an article of faith. Her one piece of evidence is the comparison with Europe, which we are told was meaner to the banks.
I’m not sure that Europe was necessarily meaner to the banks (after all, Deutsche Bank is still in business), but it clearly did have more contractionary fiscal and monetary policy. The European Central Bank raised rates in 2010 to head off the risk of inflation (seriously) and kept Italy, Spain, and Greece in perpetual crisis until it got new leadership at the end of 2011. The European Commission demanded austerity from the crisis countries and even non-crisis countries like France.
The predicted and actual result of these policies was extremely weak growth. It is not clear how the story would be any different if the Europeans had been nicer to the bankers.
Yep, Catherine Rampell is touting the heroics of the bailout gang in saving us from a second Great Depression in her Washington Post column. She notes the anger directed against this gang on both the left and right and that people suspect their motives. (For those keeping score, the initial trio was Ben Bernanke, who is getting well over $1 million a year in consulting contracts with financial firms, Timothy Geithner, who is likely getting multiple millions as a top exec at a PE company, and Henry Paulson who pocketed hundreds of millions as CEO of Goldman Sachs in the bubble years.)
Anyhow, Rampell never tells us how letting the markets work their magic on the Wall Street bank would have prevented us from passing a really big stimulus in 2009 (or 2010, or 2011 etc.), but I suppose the aluminum foil hat set takes this as an article of faith. Her one piece of evidence is the comparison with Europe, which we are told was meaner to the banks.
I’m not sure that Europe was necessarily meaner to the banks (after all, Deutsche Bank is still in business), but it clearly did have more contractionary fiscal and monetary policy. The European Central Bank raised rates in 2010 to head off the risk of inflation (seriously) and kept Italy, Spain, and Greece in perpetual crisis until it got new leadership at the end of 2011. The European Commission demanded austerity from the crisis countries and even non-crisis countries like France.
The predicted and actual result of these policies was extremely weak growth. It is not clear how the story would be any different if the Europeans had been nicer to the bankers.
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Yes, we must thank The Washington Post for running Robert Samuelson. He can always be counted on to get almost everything wrong. He shows this talent yet again in his column on the financial crisis.
He gives us three lessons, with number 1 being the most important, that we could have another great worldwide Great Depression. Yes, this is true, but not because of some mysterious force descending on the world economy.
If we have another Great Depression it will be because governments and central banks refuse to act aggressively to get us out of the Great Depression. Keynes taught us the secret of getting out of a depression. It’s called “spending money.”
The problem is that people with political power, and the news outlets they own (e.g. The Washington Post), often don’t care about tens of millions of people being out of work and losing their homes. (They do care about saving the banks — see Samuelson’s lesson #3.) Therefore, they will rant about budget deficits and government debt, and the burdens we are putting on our kids, even when the most obvious burden we are putting on our kids is keeping their parents from having jobs. Samuelson, of course, is a main promulgator of this line.
We will also hear nonsense about inflation, even as the biggest concern will be an inflation rate that is too low due to the depression. We saw this most clearly with the European Central Bank where outgoing president Jean Claude Trichet patted himself on the back when he retired in 2011. Even though the euro was in crisis at that point (with several countries facing possible defaults) Trichet was proud that he had kept the inflation rate below his 2.0 percent target.
So, Samuelson is correct that we could see another worldwide Great Depression, but not because of anything inherent to the world economy. If we see one, it will be due to an incredibly incompetent and corrupt elite.
By the way, note that no one is acknowledging the role of the housing bubble, and the failure of policy people and economists to see it, in the crisis.
Yes, we must thank The Washington Post for running Robert Samuelson. He can always be counted on to get almost everything wrong. He shows this talent yet again in his column on the financial crisis.
He gives us three lessons, with number 1 being the most important, that we could have another great worldwide Great Depression. Yes, this is true, but not because of some mysterious force descending on the world economy.
If we have another Great Depression it will be because governments and central banks refuse to act aggressively to get us out of the Great Depression. Keynes taught us the secret of getting out of a depression. It’s called “spending money.”
The problem is that people with political power, and the news outlets they own (e.g. The Washington Post), often don’t care about tens of millions of people being out of work and losing their homes. (They do care about saving the banks — see Samuelson’s lesson #3.) Therefore, they will rant about budget deficits and government debt, and the burdens we are putting on our kids, even when the most obvious burden we are putting on our kids is keeping their parents from having jobs. Samuelson, of course, is a main promulgator of this line.
We will also hear nonsense about inflation, even as the biggest concern will be an inflation rate that is too low due to the depression. We saw this most clearly with the European Central Bank where outgoing president Jean Claude Trichet patted himself on the back when he retired in 2011. Even though the euro was in crisis at that point (with several countries facing possible defaults) Trichet was proud that he had kept the inflation rate below his 2.0 percent target.
So, Samuelson is correct that we could see another worldwide Great Depression, but not because of anything inherent to the world economy. If we see one, it will be due to an incredibly incompetent and corrupt elite.
By the way, note that no one is acknowledging the role of the housing bubble, and the failure of policy people and economists to see it, in the crisis.
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The NYT has a strange piece which treats the idea of a four day work week as a sort of alien concept that perhaps we will see in the 22nd century. It is bizarre because there has been a consistent shortening of the length of work years for well over a century. In Germany, France, and other northern European countries the average work year is between 1400 and 1500 hours. This is due to the fact that workers are now guaranteed 5 to 6 weeks a year of vacation, in addition to paid sick days and paid family leave. The United States has been to a large extent an outlier in that it has seen relatively little reduction in work time over the last four decades.
Presumably, this long trend towards shorter work years will continue. While it may not take the form of a four day work week, workers in many countries have already seen an equivalent reduction in work hours. It is also worth noting that if it really turns out that robots will eliminate many of the jobs that now exist (the productivity data point in the opposite direction) then shorter work years is an obvious way to keep people employed.
The NYT has a strange piece which treats the idea of a four day work week as a sort of alien concept that perhaps we will see in the 22nd century. It is bizarre because there has been a consistent shortening of the length of work years for well over a century. In Germany, France, and other northern European countries the average work year is between 1400 and 1500 hours. This is due to the fact that workers are now guaranteed 5 to 6 weeks a year of vacation, in addition to paid sick days and paid family leave. The United States has been to a large extent an outlier in that it has seen relatively little reduction in work time over the last four decades.
Presumably, this long trend towards shorter work years will continue. While it may not take the form of a four day work week, workers in many countries have already seen an equivalent reduction in work hours. It is also worth noting that if it really turns out that robots will eliminate many of the jobs that now exist (the productivity data point in the opposite direction) then shorter work years is an obvious way to keep people employed.
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Last week Joe Stiglitz wrote a piece that included criticisms of the Obama administration for having an inadequate stimulus in response to the Great Recession. Larry Summers, who had been head of Obama’s National Economic Council responded by defending the administration. Stiglitz had a follow-up response to Summers.
Both Stiglitz and Summers are very capable of speaking for themselves so I won’t try to summarize their arguments, but I do want to take issue with one point in Summers’ piece. In his response to Stiglitz, at one point Summers comments:
“He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of $300–$400 billion — less than half of what the Obama administration proposed. So matters were less clear in prospect than in retrospect.”
This is a serious misrepresentation of the letter, which I had helped to draft and circulate. This letter was very clearly referring to a one-year stimulus. It urged leaders in Congress to quickly pass a stimulus:
“The potential severity of the downturn suggests that a boost to demand on the order of 2.0-3.0 percent of GDP ($300-$400 billion) would be appropriate, with the goal being to get this money spent quickly.”
Comparing the sums in a one-year stimulus to the multi-year stimulus request put forward by the Obama administration is comparing apples to oranges.
Furthermore, this letter had been drafted in early October, before we knew the full severity of the downturn following the collapse of the Lehman. At the time of the drafting, we were looking at a job loss of 159,000 reported for September. At the point where the Obama administration was crafting its stimulus package in January of 2009, it was looking at job losses of more than 1.5 million over the prior three months. And the September job loss figure had been revised upward to more than 400,000.
To misrepresent our letter to justify the size of the Obama administration’s stimulus request involves, at the least, an extremely sloppy reading of a one-page document.
Last week Joe Stiglitz wrote a piece that included criticisms of the Obama administration for having an inadequate stimulus in response to the Great Recession. Larry Summers, who had been head of Obama’s National Economic Council responded by defending the administration. Stiglitz had a follow-up response to Summers.
Both Stiglitz and Summers are very capable of speaking for themselves so I won’t try to summarize their arguments, but I do want to take issue with one point in Summers’ piece. In his response to Stiglitz, at one point Summers comments:
“He was a signatory to a November 19, 2008 letter also signed by noted progressives James K. Galbraith, Dean Baker, and Larry Mishel calling for a stimulus of $300–$400 billion — less than half of what the Obama administration proposed. So matters were less clear in prospect than in retrospect.”
This is a serious misrepresentation of the letter, which I had helped to draft and circulate. This letter was very clearly referring to a one-year stimulus. It urged leaders in Congress to quickly pass a stimulus:
“The potential severity of the downturn suggests that a boost to demand on the order of 2.0-3.0 percent of GDP ($300-$400 billion) would be appropriate, with the goal being to get this money spent quickly.”
Comparing the sums in a one-year stimulus to the multi-year stimulus request put forward by the Obama administration is comparing apples to oranges.
Furthermore, this letter had been drafted in early October, before we knew the full severity of the downturn following the collapse of the Lehman. At the time of the drafting, we were looking at a job loss of 159,000 reported for September. At the point where the Obama administration was crafting its stimulus package in January of 2009, it was looking at job losses of more than 1.5 million over the prior three months. And the September job loss figure had been revised upward to more than 400,000.
To misrepresent our letter to justify the size of the Obama administration’s stimulus request involves, at the least, an extremely sloppy reading of a one-page document.
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That was one of the items on the list of factors adding to inflationary pressures in China in this NYT article, but it doesn’t seem very plausible. China is on track to import a bit less than $140 billion worth of goods and services from the United States this year. This is less than 1.0 percent of China’s GDP measured at its exchange rate value. (Using a purchasing power parity measure this would be about 0.6 percent.)
Suppose that China’s trade war tariffs add 30 percent to the price of these imports (a very high assumption). This would push up the overall price level by 0.3 percentage points. However, we are continually reminded that much of China’s exports are primarily foreign value-added. Let’s assume that 40 percent of US exports to China end up as value-added in exports either to the US or third countries. This means that the 30 percent rise in price due to tariffs would add 0.18 percentage points to the price level. That is not exactly soaring inflation.
The fact that the yuan has fallen about 6.0 percent against the dollar over the last six months will almost certainly have more impact on China’s inflation rate. The decline in the value of the yuan was not mentioned in the piece.
That was one of the items on the list of factors adding to inflationary pressures in China in this NYT article, but it doesn’t seem very plausible. China is on track to import a bit less than $140 billion worth of goods and services from the United States this year. This is less than 1.0 percent of China’s GDP measured at its exchange rate value. (Using a purchasing power parity measure this would be about 0.6 percent.)
Suppose that China’s trade war tariffs add 30 percent to the price of these imports (a very high assumption). This would push up the overall price level by 0.3 percentage points. However, we are continually reminded that much of China’s exports are primarily foreign value-added. Let’s assume that 40 percent of US exports to China end up as value-added in exports either to the US or third countries. This means that the 30 percent rise in price due to tariffs would add 0.18 percentage points to the price level. That is not exactly soaring inflation.
The fact that the yuan has fallen about 6.0 percent against the dollar over the last six months will almost certainly have more impact on China’s inflation rate. The decline in the value of the yuan was not mentioned in the piece.
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Ten years ago we saw the culmination of a period of ungodly economic mismanagement with the collapse of Lehman Brothers and a full-fledged financial crisis. The folks who led us into this disaster rushed to do triage and tend to the most important problem: saving the bankrupt banks.
They also had to cover their tracks. They insisted that the financial crisis was some sort of fluke event — a lot of bad things went wrong simultaneously — and who could have predicted or prevented that? They had a lot of assistance in this coverup because almost all the people who did and wrote about economics at the time also missed the housing bubble and the harm that its inevitable collapse would cause.
The coverup continues to the present, largely because the same people who messed up in the years leading up to the crash are still in positions of authority. They are still the ones writing and talking about economics in major news outlets. So we can expect a lot of “who could have known?” drivel in the weeks ahead.
CEPR will be putting out a paper soon showing once again how the bubble was easy to recognize as was the fact that its collapse would be a disaster. Today I will just share one chart that shows much of the story.
The bubble led to an unprecedented run-up in house prices (with no accompanying rise in real rents), which in turn led to residential construction hitting 6.5 percent of GDP, more than two full percentage points above the long-term average. (But hey, who could have noticed that?)
In addition, the bubble-driven increase in housing wealth led to an unprecedented consumption boom as people spent based on their housing wealth. (This is called the “housing wealth effect” which was very old news by the time I was in graduate school in the 1980s.) This consumption boom could be seen in the plunge in the savings rate which is reported monthly by the Commerce Department. That fell to a low of 2.2 percent in 2005. That compares to an average in the years before the stock wealth effect drove down the savings rate in the 1990s of more than 7.0 percent. It is currently also hovering near 7.0 percent. (FWIW, savings data are subject to large revisions. At the time, the savings rate in 2005 was reported as -0.4 percent [Table 10]).
The question everyone should ask the “who could have known?” crowd is how could you miss the unprecedented run-up in house prices. Even more importantly, how did you miss the extent to which it was driving the economy through the construction and consumption boom? And finally, what on earth did you think would replace more than 5.0 percentage points of GDP worth of lost demand ($1,000 billion in today’s economy) when this housing bubble burst?
Those are pretty simple questions, but you won’t see people asking them in major news outlets. They have too much stake in maintaining the myth that people managing the economy really know what they are doing and the crash and financial crisis were fluke events that could not be foreseen. It ain’t so.
Ten years ago we saw the culmination of a period of ungodly economic mismanagement with the collapse of Lehman Brothers and a full-fledged financial crisis. The folks who led us into this disaster rushed to do triage and tend to the most important problem: saving the bankrupt banks.
They also had to cover their tracks. They insisted that the financial crisis was some sort of fluke event — a lot of bad things went wrong simultaneously — and who could have predicted or prevented that? They had a lot of assistance in this coverup because almost all the people who did and wrote about economics at the time also missed the housing bubble and the harm that its inevitable collapse would cause.
The coverup continues to the present, largely because the same people who messed up in the years leading up to the crash are still in positions of authority. They are still the ones writing and talking about economics in major news outlets. So we can expect a lot of “who could have known?” drivel in the weeks ahead.
CEPR will be putting out a paper soon showing once again how the bubble was easy to recognize as was the fact that its collapse would be a disaster. Today I will just share one chart that shows much of the story.
The bubble led to an unprecedented run-up in house prices (with no accompanying rise in real rents), which in turn led to residential construction hitting 6.5 percent of GDP, more than two full percentage points above the long-term average. (But hey, who could have noticed that?)
In addition, the bubble-driven increase in housing wealth led to an unprecedented consumption boom as people spent based on their housing wealth. (This is called the “housing wealth effect” which was very old news by the time I was in graduate school in the 1980s.) This consumption boom could be seen in the plunge in the savings rate which is reported monthly by the Commerce Department. That fell to a low of 2.2 percent in 2005. That compares to an average in the years before the stock wealth effect drove down the savings rate in the 1990s of more than 7.0 percent. It is currently also hovering near 7.0 percent. (FWIW, savings data are subject to large revisions. At the time, the savings rate in 2005 was reported as -0.4 percent [Table 10]).
The question everyone should ask the “who could have known?” crowd is how could you miss the unprecedented run-up in house prices. Even more importantly, how did you miss the extent to which it was driving the economy through the construction and consumption boom? And finally, what on earth did you think would replace more than 5.0 percentage points of GDP worth of lost demand ($1,000 billion in today’s economy) when this housing bubble burst?
Those are pretty simple questions, but you won’t see people asking them in major news outlets. They have too much stake in maintaining the myth that people managing the economy really know what they are doing and the crash and financial crisis were fluke events that could not be foreseen. It ain’t so.
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In an NYT piece assessing the state of the labor market after Friday jobs report, Neil Irwin notes that the employment rate for prime age workers (ages 25 to 54) stood at 79.3 percent in August. That is the same as the 79.3 percent rate in February, indicating that there had been no increase over a six-month period.
However, this may be less compelling as an argument that the labor force is hitting its limits than it initially seems. In August of 2017, the employment rate (EPOP) for prime-age workers stood at 78.4 percent, which also turns out to be the same rate as in February of 2017. In August of 2016, it stood at 77.8 percent, which was also its level in February of 2016. And, in August of 2015, it stood at 77.2 percent. The EPOP for prime-age workers in February of 2015 was also 77.2 percent.
Here’s the picture for the last four years.
Prime Age Employment to Population Ratio
Source: Bureau of Labor Statistics
The data are seasonally adjusted, so the fact that EPOPs have a habit of being the same in August as February can’t be blamed on seasonal factors. It is simply a weird coincidence. But, this should be a warning against putting much stock in the view that the economy is hitting its limits based on the August employment data.
As the good book says, the household data are highly erratic. When you see a weird movement in one month’s data, it is most likely a fluke. You should want to see two or three months before believing it is actually telling us something about the world.
In an NYT piece assessing the state of the labor market after Friday jobs report, Neil Irwin notes that the employment rate for prime age workers (ages 25 to 54) stood at 79.3 percent in August. That is the same as the 79.3 percent rate in February, indicating that there had been no increase over a six-month period.
However, this may be less compelling as an argument that the labor force is hitting its limits than it initially seems. In August of 2017, the employment rate (EPOP) for prime-age workers stood at 78.4 percent, which also turns out to be the same rate as in February of 2017. In August of 2016, it stood at 77.8 percent, which was also its level in February of 2016. And, in August of 2015, it stood at 77.2 percent. The EPOP for prime-age workers in February of 2015 was also 77.2 percent.
Here’s the picture for the last four years.
Prime Age Employment to Population Ratio
Source: Bureau of Labor Statistics
The data are seasonally adjusted, so the fact that EPOPs have a habit of being the same in August as February can’t be blamed on seasonal factors. It is simply a weird coincidence. But, this should be a warning against putting much stock in the view that the economy is hitting its limits based on the August employment data.
As the good book says, the household data are highly erratic. When you see a weird movement in one month’s data, it is most likely a fluke. You should want to see two or three months before believing it is actually telling us something about the world.
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