Saturday, March 15, 2008

No one could have predicted greed was bad policy

By Libby

The economic meltdown is beginning to sound like a bad rewrite of the Iraq occupation. The experts are staring in disbelief.
Former Treasury Secretary Robert Rubin was at a session at the Brookings Institution this morning at which said that "few, if any" people anticipated the sort of meltdown that we are seeing in the credit markets at present.
I've been predicting the Bushenomic house of cards was going to crash for at least three years now. Of course no one listens to me. I'm not a well credentialed policy wonk. I'm just a cranky old lady who has has an unimpeded view of the street from here in my bargain basement. Unfortunately it turned out I had clearer sightline than those so safely ensconced in their ivory towers.

Now everybody sees it. Blogging from one side of the spectrum, Dale Franks is now saying the economy is in the shitter and we're all going to be facing a world of crap in the near future. Blogging from the other side, Paul Craig Roberts says the same.

Meanwhile, I'll get no credit for being right all along and will take no comfort from having predicted correctly.

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45 Comments:

Blogger ECOPHOTOS said...

Libby, are you trying to say "I told you so?"

5:46:00 PM  
Blogger Libby Spencer said...

No, just wishing people had listened to me when it might have made a difference.

6:17:00 PM  
Blogger Dale Franks said...

Huh. And this has what, exactly to do with "Bushenomics"?

I remember president Bush pushing through some tax cuts. But, oddly enough, I don't remember him setting up structural credit problems in the housing market, leading to problems in housing price declines, and increased foreclosures.

You know, sometimes--just very occasionally--the economy does things that really have nothing at all to do with what the president does.

I know. I was just shocked when I learned that. I think I was in the tenth grade at the time.

6:17:00 PM  
Blogger Libby Spencer said...

Oh, silly me. Here I thought high level presidential appointees who dictate policy, the wholesale evisceration of regulatory controls that would have prevented deceitful lending practices and the invention of convoluted investment instruments and the president's repeated assurances that the economy was just really great and everyone should keep on shopping might have had something to do with it.

7:00:00 PM  
Blogger ECOPHOTOS said...

Mr. Franks, successive conservative governments starting with Reagan have demonstrated an antipathy towards any kind of government regulation, and this antipathy is based more on ideology than sound economic policy.

The savings and loan crisis during the Reagan years, for example. Deregulating the S&Ls started a speculative bubble resulting in a total collapse ... and a $600+ billion bailout borne by American taxpayers. Reagan lobbied for the total repeal of the Glass-Steagal Act.

With respect to structural credit issues, the Bush administration, like all conservatives before him, categorically rejected any/all attempts reign in predatory lending. Funny how conservative now blame borrowers but make a bucket of excuses for lenders.

The middle classs was totally absent from the economic table during the Bush years as the lion's share of tax cuts went to the upper 1%. Warren Buffet now pays a 15% tax rate on his $50+ million income while his secretary pays 33% ... but I guess this disparity (and the profound injustice) doesn't seem to impress you. The subprime crisis is also a byproduct of the weaking of the middle class. Had the middle claqss faired better under the Bush years, they would also have enjoyed better liguidity.

And who will pay back the massive public debt accumulated during the Bush presidency on account of these failed economic policies?

I hope you do, Mr. Franks, since Bush seems to be your boy.

7:17:00 PM  
Blogger Dale Franks said...

*sigh*

Bear Stearns is an investment bank. Always has been. So, even if Glass-Steagal hadn't been repealed--a repeal signed into law by ultra-conservative president Bill Clinton in 1999--it would have nod no effect whatsoever on the current problem.

Indeed, as far as regulation goes, the majority of the subprime loans originated from firms that are not, and never have been, subject to Federal regulatory scrutiny. In 2005, 52% of subprime mortgages were issued by firms who are not subject to any federal regulation at all. Another 25% were issued by firms with only an indirect regulatory relationship with the fed. As Fed Governor Susan Bies said, "What is really frustrating about this is [federal regulators] don't have enforcement authority to do anything with these state-licensed, stand-alone mortgage lenders."

You see, those mortgage brokers are regulated by the states. Not the Federal government.

So, it doesn't matter who the "presidential appointees" are, or what the federal regulatory environment is, when that regulatory environment doesn't apply to the mortgage brokerage.

In addition, "invention of convoluted investment instruments" simply wasn't covered by the regulations either, since no regulatory scheme can cover entirely new innovations that pop up in the derivatives market, and weren't even envisioned when the regulations were promulgated.

Moreover, many of the problems that are clear now, were simply masked by rising home prices. For instance, the FDIC--while not perfect--does tend to jump in when consumers complains about predatory lending. The trouble in this case was that...no one was complaining because as long as the homeowner had an asset whose value was appreciating, they could always sell the house, make a ton of money on the sale, and clear the mortgage. Once housing values started to decline...well, it was too late to look into the problem.

Moreover, if you're gonna require that much tougher regulation be imposed for loan standards, well, that's fine, but then no fair coming along later and complaining that low-income families can't get a mortgage, because you've implemented a regulatory regime that in effect dries up their access to credit.

It seems to me that the problem isn't that Bush is my guy, but rather that he's so not your guy that you are straining to blame Bush for things that he literally has very little to do with.

The president really isn't some economic czar, who can benevolently guide the economy by fiat.

9:44:00 PM  
Blogger Libby Spencer said...

Give me a break Dale. Don't pretend I'm blaming everything on Bush specifically. Bushenomics implies a systemic and deliberate incompetence that encouraged short term greed to the benefit of relative few over long terms gains that would benefit the many. Of course Bush is not personally responsible and I'm aware that economic trends build over units of time that span beyond single administrations, but to say that Bush and those he put in charge of the show had little to no effect sounds more like denial than neutral analysis to me.

After eight years, I think we can safely attribute some responsibility to his policies. This bubble didn't build in a vacuum. And as long as you're educating me, perhaps you could explain why the feds should be bailing out a non-banking institution like Bear with our money. As somebody I read put it so succinctly today, this is just another case where profits are privatized and losses are socialized.

This administration has taken corporate welfare to a whole new level. Are you telling me that has had no effect on the current meltdown?

10:11:00 PM  
Blogger Dale Franks said...

-----...to say that Bush and those he put in charge of the show had little to no effect sounds more like denial than neutral analysis to me.-----

Well, again, mortgage brokers aren't federally regulated. If you want to make the argument that this still points to some Bush policy or other, then, good luck with that.

-----After eight years, I think we can safely attribute some responsibility to his policies.-----

OK. Then make that argument. Which policies specifically? What were their effects? You've tossed about generalities that I'm just supposed to accept.

Connect the dots.

In the real world, this appears to me to have been a case where rising home prices provided 1) an incentive for both mortgage lenders to aggressively seek out customers, thinking that even in case of default they could get a foreclosure price later on that was higher than the loan value, and 2) an incentive for consumers to get unaffordable loans thinking they could bail out and sell the house for a profit if they couldn't swing the payments.

I don't have to call up the specter of the government bogeyman to, either. I just point out that people respond to incentives.

-----And as long as you're educating me, perhaps you could explain why the feds should be bailing out a non-banking institution like Bear with our money.-----

Well, since this is not a taxpayer-funded bailout, the whole premise of your question is incorrect. The actual money is coming from JPMorgan Chase. The Fed is guaranteeing JPMC's loans for 28 days, but none of the actual money is coming from taxpayer dollars, and won't unless for some odd reason, JPMC becomes insolvent, and guarantees are invoked.

In general, I don't believe in corporate welfare at all, so I don't really have anything to explain to you.

On the other hand, I don't think you can really sit by while BS folds overnight, unless you're willing to risk a domino effect that just blasts every investment bank in the country.

Moreover, BS doesn't just do stock market investment accounts. It provides lines of credit to an enormous number of businesses, without which, their businesses come grounding to a halt.

Are you seriously arguing that the government should stand by and do nothing while the country is plunged into a 2nd Great Depression through a combination of loss of confidence in investment banks, in addition to seriously adding to the unavailability of operating credit for business?

Really? Are you sure you've thought this through

As it happens, the government in this case prevented the overnight collapse of BS, by guaranteeing the temporary credit that JPMC extended. That keeps BS afloat with JPMC's money--NOT the taxpayers--or at least, it will until JPMC completes it's $2 a share purchase of BS.

Again, I don't hold any brief for the Bush Administration. I've spent the last seven years criticizing the Administrations fiscal and economic policies.

But, in the main, what happened over the last fifteen years would've happened anyway, no matter who was president.

Let's not forget that this inflation of home values started during the Clinton Administration. it wasn't Bill's fault either.

The plain and simple fact is that Federal regulation just doesn't apply to, or applies only indirectly to, the mortgage industry.

But, again, if you can connect the dots with specifics, then be my guest.

12:59:00 AM  
Blogger Libby Spencer said...

Dale, I appreciate you engaging on this and I want to take one more round because I want to understand it better. Obviously you're more schooled on these matters than I am. Unfortunately, I have to work today and won't be able to respond until this evening. I hope you have time to check back tomorrow and answer one last round of Q's.

9:55:00 AM  
Blogger lester said...

libby with all due respect yuo didn't predict the sub prime crisis and I doubt you opposed poor peole getting loans for homes. the fact that you believe it was "greed" that caused it shows you don't understand it which isn't surprising, as you have admitted you have no interst in the science of economics, only socioliogical platitudes.

the cause of the subprime crisis was: after 9/11 alan greenspan wanted to prop up the economy. real estate had historicaly always only gone up in value. So he lowered the interest rates (that is, he printed up more money) which, as always, spawned malinvestment, in this case the market was loans to people with bad credit. this was all in the name of patriotism or something.

it was not the fault of "greed". it was not hte fault of the lenders or the borrowers, it was alan greenspans fault and he was doing what his job essentially implied. this is why the fed must be abolished.

10:34:00 AM  
Blogger ECOPHOTOS said...

Dale Franks: Let's not forget that this inflation of home values started during the Clinton Administration.

Oh, really? Are you suggesting that Fed rates following 9/11 had nothing to do with the current crisis? When mortgage interest rates tumbled to a level not seen since the 1950s? How can you possibly think the latest bubble is no different from all other bubbles? As if REGRESSIVE tax policies played no aprt? As if stagnant wages for the middle class played no part? As if there were no sovereign debt crisis on top of massive budget deficits? Yet, the President continues to assert that economic fundamentals are sound. What fundamentals?

This is the government of "Great job, Brownie" when nothing was done to rebuild a destroyed city after hurricane Katrina.

What you don't seem to understand, Mr. Franks, it that economic policies are set, not necessarily in terms of specific programs, but also in terms of a generalized and callous laissez faire attitude that says "tough luck" and "fuck you" to its own people.

10:35:00 AM  
Blogger lester said...

and mr franks are you familiar with the presidents working group? they certainly had something to do with this. not to mention all the senators from both sides who constantly begged greenspan and now bernanke to cut rates so they could get re elected.

10:37:00 AM  
Blogger Dale Franks said...

------Oh, really? Are you suggesting that Fed rates following 9/11 had nothing to do with the current crisis? When mortgage interest rates tumbled to a level not seen since the 1950s? How can you possibly think the latest bubble is no different from all other bubbles? As if REGRESSIVE tax policies played no aprt? As if stagnant wages for the middle class played no part? As if there were no sovereign debt crisis on top of massive budget deficits? Yet, the President continues to assert that economic fundamentals are sound. What fundamentals?------

OH, so you want to go back to 2001, do you? OK. Why don't we go back even further, to 2000.

That was the year, you may remember, when the dotcom bubble exploded, and the S&P began the slide that led to the loss of 40% of it's value.

On top of that, the 9/11 attacks subtracted billions of lost GDP for the year. At that time, the very real worry was that we were going into a cycle of deflation where losses in stock asset prices would lead to a general decline in asset prices in general.

What, precisely, would you have had the Fed do? Increase interest rates and bring on an even deeper recession by removing cash from the economy at the very time the economy was already struggling?

Let's not forget that prior to this, as far back as 1999, The Economist had noted, in a cover article, that it as only rising housing prices that was keeping the economies in much of the developed world afloat.

Now, your argument seems to be that, rather than responding to the deflationary fears of 8 years ago, what the fed should have done was predicted that 8 years down the road, the fed should have known the problem of a housing bubble would appear, and they should've been fighting that problem, rather than the one they were faced with at the time.

That is simply nonsense on stilts. Once the "new economy" bubble collapsed, deflation was a serious worry, and remained so for several months. I wrote about that repeatedly at the time, in posts such as this one in 2002, where I wrote:

If you lower interest rates to try to head off deflation, then people borrow more than they should, and end up with too much debt to keep economic growth going. If you don't lower interest rates, however, you could force the economy into a deflationary path, causing a recession that might be even harder to recover from. All other things being equal, the better of those two choices is to lower interest rates, so you can head off a deflation and full-scale recession. That doesn't come without a price, though. In doing so, you ease credit, and put a lot of easy money on the market, which tends to have the effect of increasing debt loads. The ultimate effect of that is to allow consumers to postpone clearing their balance sheets, which means that their purchasing power is constrained. That may not lead to a recession, but it will mean that economic growth will be slowed to an anemic rate for years as consumers slowly pay off their pile of debt.

So, let's not pretend that a) no one knew what the options were at the time, and b) no one could predict the current situation we're in now.

The world is an imperfect place, and you deal with the options you have at the time, not the options you suspect you'll have a decade hence.

The rest of your comment is similarly uninformed.

Our regressive tax policies, for instance. According to the Congressional Budget office, the real effective tax rates, by income quintile are:

INDIVIDUAL INCOME TAX
Bottom Quintile: -6.2%
Second Quintile: -0.9%
Middle Quintile: 3.0%
Fourth Quintile: 5.9%
Top Quintile: 13.9%

ALL FEDERAL TAXES
Bottom Quintile: 4.3%
Second Quintile: 9.9%
Middle Quintile: 14.1%
Fourth Quintile: 17.3%
Top Quintile: 25.2%

But then, perhaps I misunderstand by what you mean by "regressive", since you are apparently using a definition of which I am unaware.

Finally, lets talk about stagnating middle class incomes.

The income data we have comes from the Census Bureau. They track household income. So, when you look at households, income does appear to have stagnated per household.

The trouble is, the "household" keeps changing. In 1971, 71% of households were 2-parent households. In 2006, that had fallen to 51%. Meanwhile, the number of "housholds" that have one single person have increased from 17% to 27%. So, more than a quarter of "households" now have only one person. Overall, the average number of persons in a "household" has dropped by 18%, from 3.14 to 2.57 persons.

The latter figure alone implies that income in real terms has increased substantially.

Moreover, since 1971, real GDP has tripled. So, while the share of income going to the people in the lowest quintile has declined from 4.1% of of income to 3.4% The overall increase in income means that the lowest quintile have seen real rises in income of 36% over that period.

Time prevents me from addressing the rest of your comment, but I think you see where this is going, don't you?

12:22:00 PM  
Blogger ECOPHOTOS said...

Time prevents me from addressing the rest of your comment, but I think you see where this is going, don't you?

Indeed. You present your data sets while ignoring mine ... that age-old error of ommission trick. But while we are the subject of going back to 2001, and then 2000, why don't we go back even further when Greenspan starting raising rates at a time when base inflation was low and productivity rates were at an all-time high, thereby punishing a high performing economy for its productivity gains. Now, that was pretty damn stupid, don't you think!

I too have time constraints, and this argument grows more tedious with each successive comment. Have a nice day.

12:55:00 PM  
Blogger Dale Franks said...

...why don't we go back even further when Greenspan starting raising rates at a time when base inflation was low and productivity rates were at an all-time high, thereby punishing a high performing economy for its productivity gains.

uh, because it's irrelevant to the subject at hand.

You present your data sets while ignoring mine

You didn't present any data sets. You presented assertions, which i then rebutted by responding to them directly.

Now, apparently having no countervailing data, you declare victory and then leave.

Nice.

1:26:00 PM  
Blogger ECOPHOTOS said...

Now, apparently having no countervailing data, you declare victory and then leave.

My posts of 4:17 pm and 7:35 am. You did not address any of my assertions although you continued to press your own. Have it your way: One non sequitur deserves another. That is my point.

3:32:00 PM  
Blogger Bithead said...

Well, tell ya what, Libby...
How about we look at the current loan problems in relationship to passing out loans to people who couldn't afford it... going out of our way to do so, in fact, on the basis of EEO goals?

I'll tell you I was attached to the HE busienss for a while... About 9 years... and I'll tell you right at the off taht's the issue. The Federal government and the courts have caused a situation where loans went to peoplewho couldn't afford them, based on racial quotas, as much as anything. And we're now paying the price on this mistake... because we forgot to answer the question of them being able to afford these loans.

3:34:00 PM  
Blogger Capt. Fogg said...

Dale,

Actually I enjoy your blog, but I don't want to argue with you. I'm not an economist, although I do lunch with many of them in various countries. Many of them seem less convinced of the inconsequential nature of Bush's actions relative to economic stability than you are. I'm understating that almost to the point of facetiousness.

Don't you think the debt we have incurred from Bush's war has had any effect on credit markets and hence on our current state of affairs?

Sometimes, you know, the economy reflects what the President is doing in the world. No I didn't learn that in school, but then I did learn to make a lot of money predicting markets anyway. Hey - maybe I'm just lucky.

"the lowest quintile have seen real rises in income of 36% over that period."

Really? when you say real rises do you account for inflation? Many of the figures I've seen from other sources that purport to show how well things are going under lower taxes seem to ignore it.

3:42:00 PM  
Blogger ECOPHOTOS said...

BITHEAD: This segment from BBC News presents a somewhat different picture than the one you describe:

In the leveraging era, the world's banks and other great lenders lent far too much - to businesses, to various financial speculators, such as hedge funds and private-equity investors, to homeowners, to shoppers, and even to each other.

Furthermore, innovations in leveraging instruments meant that whole boatloads of debt were sold off, and “bad” loans could no longer be identified and separated from “goods” loans, thus sinking the entire boat.

Why must you insist on blaming minorities, racial quotas, and equal opportunity programs for a credit crisis that appears to go far beyond whatever it is that you are blaming them for? Nice try, but no cigar.

4:43:00 PM  
Blogger lester said...

"On top of that, the 9/11 attacks subtracted billions of lost GDP for the year. At that time, the very real worry was that we were going into a cycle of deflation where losses in stock asset prices would lead to a general decline in asset prices in general.

What, precisely, would you have had the Fed do? Increase interest rates and bring on an even deeper recession by removing cash from the economy at the very time the economy was already struggling?

Let's not forget that prior to this, as far back as 1999, The Economist had noted, in a cover article, that it as only rising housing prices that was keeping the economies in much of the developed world afloat."

lol. there you go ladies and gentlemen, the exact mentality that led to this fiasco which mr franks is JUSTIFYING!! this is like saying we had no choice but to invade iraq. lay off the kool aid sir.

ecophotos- would you agree the solution is to abolish the federal reserve?

and would you also agree that alan greenspan is an asshole who caused this mess and is now in the middle east telling people to drop their dollars?

5:02:00 PM  
Blogger Richie Rich said...

Well, as they say in the financial world, "10 of the last 5 recessions were accurately predicted."

Did Clinton cause the stock market to drop 60% when the Internet bubble burst, or the associated loss of 2 million jobs? Bush doesn't micromanage every bank's willingness to take risks or lend money. Keep to what you know...everyone and his brother knew that housing prices would eventually fall, but to say that it is Bush's fault shows your ignorance.

5:09:00 PM  
Blogger ECOPHOTOS said...

Lester: ecophotos- would you agree the solution is to abolish the federal reserve? and would you also agree that alan greenspan is an asshole who caused this mess and is now in the middle east telling people to drop their dollars?

Lester, I agree with you about Alan Greenspan being an a-h, but he was not the sole cause of the mess. About the Fed, actually we need it within the context of Keynesian economic theory. Problem is, we need to appoint true Keynesian economists to manage it with the intended purpose in mind.

Here is a story worth reading:

Sub-prime mortgages skyrocketed in popularity - with the volume of sub-prime-backed securities soaring from $13 billion in 1995 to $594 billion in 2005 and $521 billion in 2006 … As Wall Street grew more comfortable, it demanded less of the review process. Early in the decade, a securities firm might have asked Clayton to review 25% to 40% of the sub-prime loans in a pool, compared with typically 10% in 2006 … By contrast, loan buyers who kept the mortgages as an investment instead of packaging them into securities would have 50% to 100% of the loans examined …

What we really need is to discredit "supply side" (i.e. trickle down) economic policy once and for all. Even Gregory Mankiw, Bush’s former economic policy advisor, no longer subscribes to this mumbo jumbo.

Richie Rich: but to say that it is Bush's fault shows your ignorance

It seems, Mr. Rich, you have just demonstrated yours.

5:29:00 PM  
Blogger lester said...

ecophotos- none of that stuff would have been possible without greenspans rate slashing. you would rather regulate the entire economy than relinquish the power of central banks? who have done nothing historiclly except inflate our currency to start wars?

the entire purpose of greenspans actions were to spwn the type of malinvestment that occured. they were betting the farm on real estate always going up. you are aiming for the puppets not the puppeteer.

"we need to appoint true Keynesian economists to manage it with the intended purpose in mind."

that's never ever going to happen, nor should it. I have to admit bro, the idea that you would trust our economy to the same entity that gave us iraq and katrina is a little frightening.


gold standard.

6:05:00 PM  
Blogger ECOPHOTOS said...

Lester, let us pause from this comment thread for a Brechtian moment:

The history of the human condition is one of chicanery and corruption.

This is why, in my opinion, we need regulations and the Fed.

10:12:00 PM  
Blogger Dale Franks said...

I'm not an economist, although I do lunch with many of them in various countries. Many of them seem less convinced of the inconsequential nature of Bush's actions relative to economic stability than you are.

I've been similarly critical of the administration's policies in many economic areas.

But we're talking about a specific thing here, and you guys are dragging in irrelvancies like tax rates, and the like, and failing to address the key point, which is that mortgage brokers--who were the key players in creating this fiasco--are essentially unregulated at the federal level.

I don't know how to make it any simpler for you.

Don't you think the debt we have incurred from Bush's war has had any effect on credit markets and hence on our current state of affairs?

Well, that's a very complicated question.

First, the US national debt is about $9 trillion, of which, about $4 trillion is treasury notes held by US government agencies. The public debt of the US, i.e., bonds held by non-governmental institutions and individuals, is about $5 trillion. With a GDP of $13 trillion, that means that the public debt is about 37% of GDP. This makes the US the 65th highest ranking nation in terms of public debt to GDP.

For instance other advanced nations have debt ratios like:

Norway 39.1% of GDP
UK 43.3% of GDP
Austria 61% of GDP
Canada 64% of GDP
Germany 65.3% of GDP
France 66.6% of GDP
Belgium 86.1% of GDP
Italy 105.6% of GDP
Japan 182.4% of GDP

So, I think you have to ask, if our debt level is crowding out private debt with public debt, is that also happening in these other countries.

With the exception of Japan, it doesn't appear to be.

Logically, there must be some level of public debt at which private debt s crowded out of the debt market by the easy availability of government-backed instruments, but no one really has any idea what that level is, and despite massively increasing debt since the 1970s, the crowding out doesn't appear to have started here, or in most OECD countries.

Moreover, when we look at the basis of this crisis, which is in home mortgages, there's not too much of a direct relationship between the two markets. You can't, after all, live in a 7 3/4% 30-year Treasury Bond.

To the extent the two markets are related, it's that the market in treasuries can be an even stronger driver of interest rates--including mortgage rates--than the Fed is.

Treasuries can, I think, compete more directly with business bonds than they do with home mortgages--after all, people do need a place to live, but investments in treasuries or commercial paper tend to be made for the purpose of capturing a steady income.

The short answer is, "I don't know", but if a crowding out effect was occurring, I'd expect to see it first in yields for commercial paper rising, in order to attract investors away from treasuries, not on mortgage interest rates of availability.

However, let's be very clear on the cost of "Bush's War". Since 2003, we've spent a cumulative total of $584 billion for the Iraq War. At the same time, the US has generated over $63 Trillion in GDP. So, over the past five years, the amount we've spent in Iraq makes up 0.09% of GDP.

I guess the effect that 0.09% can always be debated, but that's really a drop in the bucket compared to federal spending on, say Medicare or Medicaid.

Sometimes, you know, the economy reflects what the President is doing in the world.

Sometimes it does. But in a very real sense, the president's economic policies are pretty limited in their effect on the actual economy. The president has no power to spend federal money--or even to choose not to spend it--without the explicit permission of Congress. And the president really has no way of controlling monetary policy, unless the Fed agrees. The president just isn't the key player in either fiscal or monetary policy. To the extent a president can change fiscal policy, such as by lowering or raising tax rates, those structural changes have to be passed into law by Congress.

Moreover, the economy tends to respond only to real structural changes. Tossing out a one-time rebate of $600 per taxpayer is not a policy that will have any lasting effect. Only long-term, structural fiscal changes, about which people and firms can plan their finances, have any noticeable effect on the economy.

As far as the president's other activities...well, if the Presidewnt announced we were invading Saudi Arabia to take all their oil and use it for US domestic consumption, I'm sure that's have quite an effect on the world's economy as well. But that wouldn't, properly speaking, be a result of economic policy.

"the lowest quintile have seen real rises in income of 36% over that period."

Really? when you say real rises do you account for inflation?


Of course, I do. making comparisons in nominal terms is essentially worthless.

In 1970, nominal GDP, i.e., GDP in 1970 dollars, was a bit north of $1 trillion. In 2006, it was $13.3 trillion. In real terms, however, 1970 GDP was around $3.8 trillion. So the lowest quintile is getting a smaller share of a vastly larger pie.

12:44:00 AM  
Blogger Libby Spencer said...

Well this has turned out to be an unexpectedly interesting thread and again, thanks Dale for sticking with it. I appreciate your input even though I think you're at least partly wrong and you misinterpreted my post. But, thanks for the link and I'm sorry to hear that you're not feeling well.

That being said, again my invented shorthand word, Bushenomics, doesn't mean I am blaming Bush solely for the meltdown and we both know I'm way out of my league in discussing specifics with you. I'm not interested in the mathematical aspects of the wonkery. My only interest in ecomonics is in that it reflects greater sociological trends that do interest me.

To answer you briefly, since I'm just sneaking in a couple of minutes at work and will likely be off line again for most of the day, the meltdown may be driven partly by the subprime crisis, but I don't think it can solely attributed to it. To the extent that Bush is personally responsible for the economic mess, he fueled it by creating an environment that encouraged consumerism and greed with an aggregate of his overall policies.

For example, and far from all inclusive, unilaterally starting an enormously expensive military action coupled with a huge tax cut for the economic class that would benefit the most from military expenditures, to corporate tax amnesty for offshore money that was supposed to create jobs but didn't carry any requirement that the money be used for that purpose, so it wasn't, to eliminating the tax disadvantage for that fancy IRA whose name escapes me at the moment, that only the enormously wealthy benefited from. The point being that all the policies favored income inequality and if there is no regulation that prevents the CEO of Countrywide from walking away from the mess he created with half a billion dollars while gullible homeowners are losing their homes, then there should be. These guys were supposed to be making the big bucks because they take the big risks but that's meaningless if they suffer no penalty for being so very wrong. I call that an incentive for greed.

As for the increased income of the middle class, you can cook the books any way you want, but there's no money in the bank and there never was. The growth was financed on credit cards, not real money. You tell me the administration is not at fault because there weren't any regulatory controls in place but that's because they actively opposed enacting any to do so. It's telling that the TreasSec is out there proposing doing just that -- now -- but too late to prevent the crash.

But to bring the discussion back to my orignal point, I HAVE been predicting this crash for a very long time and I'm still astounded that "the experts" are so surprised. You don't have to be a policy wonk to figure out that the metoric rise of real estate was unnatural and couldn't last forever and that there are simply not enough people making a sufficient income to afford the houses they were allowed to buy or the lavish lifestyles they financed by being allowed to drain the potential equity out of them.

9:24:00 AM  
Blogger lester said...

eco- "This is why, in my opinion, we need regulations and the Fed"

we HAVE regulations and the fed. and look where we are. we had regulations and the fed in 1929. what you keynesians want is for us to live onagrarian communes. they passed you sarbannes oxley bill and now big companies are splitting for london and bermuda. it's the same with the unions. our economy is now 9% manufacturing.

seriously, is this what you want?

when robinson crusoe washed up on the island did he createcommittees and regulations for himself?

mr franks- "However, let's be very clear on the cost of "Bush's War". Since 2003, we've spent a cumulative total of $584 billion for the Iraq War. At the same time, the US has generated over $63 Trillion in GDP. So, over the past five years, the amount we've spent in Iraq makes up 0.09% of GDP."

that's a massive massive amount of money. and you aren't factopring in oppurtunity costs. imagine if you were to put 584 billion dollars into the economy today. your postivist chicago school spin is well beyond expiration.

anyone who knows broken windows fallacy knows that war is an economy killer. and any conservative knows it's the health of the state and that's why we are supposed to oppose it unless it is essential for our very survival.

9:45:00 AM  
Blogger lester said...

agrarian communes

9:48:00 AM  
Blogger lester said...

jim rogers:

"They are really giving up on the dollar, they are driving the dollar down, they are printing money as fast as they can. Look, the Federal Reserve has just in the last week spent 230 billion dollars taking on loans, house loans, mortgages, out of the system. This man Bernanke was never elected by anybody, I don't know where he gets the audacity to spend 230 billion dollars of our money to bail out a few friends on Wall St. This is totally outrageous.

He is next going to be in his helicopter going around the world collecting rent payments from people. Who gave him the authority to do that? To destroy the dollar, to destroy our currency, to essentially destroy the American economy? And, no one ever voted for the man. It is just mind boggling to me.

And then he gives more money to Bears Stearns so these guys can continue to drive around in their Maserati's."

9:51:00 AM  
Blogger Capt. Fogg said...

Dale,

"So, I think you have to ask, if our debt level is crowding out private debt with public debt"

I was asking that and your answer differs from the one I get from some rather credentialed people - not that I put undue emphasis on credentials. I think the war has a much higher cost than the half trillion you mention, and of course so do others, but there's no point in going into it. There is however, I think, a difference between pouring even a meager 5 or 6 hundred billion into smoke and noise and pumping it into our own economy and I share the opinion of others that doing just that in Viet Nam helped hatch the stagflation that followed much more than anything Gerald Ford or Jimmuh Carter did or didn't do. Remember the WIN buttons?

I did want to point out that when you say "you guys" you're assuming that I'm someone else.

"The president has no power to spend federal money--or even to choose not to spend it--without the explicit permission of Congress."

And that would be absolutely meaningful in a country where the congress hadn't been a chorus of yes men (and a few women)for so long.

9:51:00 AM  
Blogger Capt. Fogg said...

Oh and about about that increasing income you mention. I have a hard time with the interpretation.

"While the median household income has increased 44% since 1990 it has increased only slightly when considering inflation. In 1990, the median household income was determined to be $30,056; $44,603 in 2003 dollars. While personal income has remained relatively stagnant over the past few decades, household income has risen due to the rising percentage of households with two or more income earners. Between 1999 and 2004 household income stagnated showing a slight increase since 2004"

that's a quote that reflects what I usually read and I read it to say that the perceived increase is substantially due to two people now working to achieve a few percent more than one worker used to provide. I look at that, I look at all the people being forced to move away from my area because of rising costs against stagnating incomes and I look at the 8 million dollar houses with the 200 foot mega-yachts parked behind them that are taking their place, I have to ask about whether my perception of a runaway income disparity means anything.

But then again - what do I know? Just what the economists who work for me tell me.

10:04:00 AM  
Blogger Capt. Fogg said...

Lester,

Are you telling me that recessions occur more often and for longer now that we have the Fed?
Figures for the 19th century are hard to come by, but there were many recessions and panics.
We had a two year recession starting in 1902, another for 13 months in '07, another two year recession in 1910 and another again in 1913.

In the last 25 years recessions have been fewer and shorter in duration for the most part. Coincidence? good luck? or has the Fed got better?

Economics carries a great weight of impressive jargon, but the jargon carries no weight at all. They call it an imprecise science and to call that understatement colossal is a colossal understatement in itself. That argues, in my opinion, for a bit more tolerance for contrary opinions because anything one says about it is colored more by subjectivity than science.

Sam Goldwyn once said "nobody knows anything" and I think that applies more to economics than to anything else.

Let's calm down.

10:30:00 AM  
Blogger lester said...

the panics were also based on monetary mischief by the government. when they introduced bimetallism and tried to declare that sliver was worth the same as gold people said yeah right and bad drove out the good. they ended up having to borrow a ton of gold and end bimetallism.

there is no natural boom and bust cycle, it is the creation of such intervetnionism and is eliminated by a gold standard. creating one to more porperly manage it is absurd

11:10:00 AM  
Blogger lester said...

eco- giving people coercive power and then hoping they do the right thing has not historically had positive results

11:21:00 AM  
Blogger RickC said...

Capt Fogg

I have a problem with median income as being much of an indicator of anything. First, we have a lot of people coming in at the bottom. Then we have retirees taking an income hit when they leave the workplace, but necessarily a standard of living hit. it would be much better, but a lot harder, to track incomes over a 30 or 40 year period. For example, in 1968, my salary was about $8k. But, by 1998, it was $107K. Then, I retired and it was cut in half, but since I had few debts and investment income, the reduction is nowhere near what it seems at first blush.

The point is that median income is so influenced by people entering and leaving the workplace, it should pretty much reflect inflation rather than being an indicator of a static standard of living.

11:51:00 AM  
Blogger ECOPHOTOS said...

This comment has been removed by the author.

1:56:00 PM  
Blogger rockync said...

I guess I'm late to the party on this one, but after reading the comments, I thought I'd throw out a few of my own.
I don't think we've had a government with the least little concern for the people in 100 years. The federal government has become an entity unto itself. Every politician out there is a self-serving crook with no regard for their constituients. Is it any wonder we all feel so disenfranchised?
That said, every administration has had the power to try to enact changes and regulations that would have prevented the mortgage crisis morass, but failed to do so. Even though lending practices vary state to state, they ALL must comply with federal regulations.
As Mr Franks points out,"For instance, the FDIC--while not perfect--does tend to jump in when consumers complains about predatory lending. The trouble in this case was that...no one was complaining because as long as the homeowner had an asset whose value was appreciating, they could always sell the house, make a ton of money on the sale, and clear the mortgage. Once housing values started to decline...well, it was too late to look into the problem."
But I think he's also missing the point; first "no one" was complaining - that would be the banks who were making record amounts of money off of non-savvy consumers who did not realize until too late that they had been taken by predatory lending practices. The banks made these practices ever easier by offering 100% loans. So then anyone with $500 and even marginal credit could go get a property. Problem was many of these people ended up with ARMs and ballon type loans that ensured the homeowner would be in over their heads within a very short period of time. So no, they weren't complaining at the time - they didn't know they had anything to complain about.
All markets, but especially the so called bubble markets, didn't have a normal,progressive property appreciation; the market values were appreciating at wildly inflated prices because of the lack of supply vs demand CAUSED BY THESE SAME LENDING PRACTICES! Once these borrowers with the outrageous interest rates or maturing balloons could no longer hold on and began losing their homes in record numbers, well the housing prices did just what any moderately informed person (that should have been anyone in the banking industry) should have known they would do; the value dropped like a rock!
I'm a real estate broker in a fairly stable market, and I also handle foreclosure properties. Even we have been affected, though. Early on in this process, when I had to do price opinions on foreclosure properties I had people jumping up and down because just 2 years earlier the value was so much higher. But, it wasn't a true value; it had been artificially inflated by the unprecedented numbers of home loans being generated.
Perhaps, as Mr Franks points out, regulations of banks on a federal level may impede some people from becoming homeowners, but better they get financial counselling, learn to budget and save money so that when they do get that house, they'll be able to keep it.
But that's not all that is creating a negative effect on the economy; now we have these same predatory practices in another virtually unregulated arena- credit cards (mostly bank sponsored,surprise,surprise)! Anybody can get one or three or eight. Be late with one payment and your interest rates will go through the roof! Even if your are a responsible card holder, your rates are skyrocketing so the banks can recoup on all the bad cards out there now. Those same people who lost their homes each had cards maxed out, some to the tune of tens of thousands of dollars.
Get this; I have several cards, most of which I don't use much and don't keep balances on. I received a notice just the other day that one of my cards has been cancelled because I didn't use it enough. Go figure,huh?
Then we had people declaring bankruptcy in record numbers, so what DOES the government FINALLY DO!? Why they protect the card companies (banks) from being included in a bankruptcy. So what happens to people who have lost their homes and are now hopelessly in debt? They add hundreds of thousands of bodies to that area below the poverty line.
It is glaringly ovious that the banks aren't going to behave in a fiscally responsible manner, so our only choice is to regulate some of the worst practices on a federal level so all states will have to comply. I'm no proponent of government interference, in fact I loathe to suggest such measures, but the industry simply won't correct itself. Of course, this is never going to happen because the feds are in bed with the financiers.
Another economic negative;
manufacturing has left our shores,so we produce no sustainable product to employ and enrich us. I've heard the argument that we produce information systems and technology, but how many of those jobs are now offshore in other countries?
And there's enough blame to go around for everyone so get your work gloves on and wipe the smug looks off your faces because we are headed for a bad time. I saw the cracks in the wall a long time ago and was very concerned about the health of this country's economy, so I can't imagine that those "experts" that should have seen this coming didn't.
What will happen now is the divide between the "haves" and the "have nots" will continue to widen at an alarming rate and swallow the middle class whole. We will have the rich and the poor.

2:14:00 PM  
Blogger Capt. Fogg said...

Rickc

It all depends on whose axe is being ground - or ox gored if you like cliche metaphors. The public perception is that people are working harder for less than was true a decade or so ago, but I hear arguments on both sides. I have no idea how much of a factor retirees are, but I do know many who lost most of their portfolios over the last few years and they are hurting. I grew up when working mothers were a rarity - or seemed so - and yet everything seemed to be getting better, year by year. Now ma, pa and the kids have jobs. Sure we have more toys, but it would take a lot to convince me that our standard of living is on the increase.

3:16:00 PM  
Blogger Capt. Fogg said...

Lester,

Tell me was the tulip crash of 1593 a problem with the gold standard too? The South Sea Company crash of 1711?

I don't think pieces of gold can interfere with irrational exuberance as much as you do. You're starting to remind me of this guy I know who insists these crises can only be averted by doing away with money and substituting "energy Credits" He's pretty much of a one solution guy too and just as convinced as you are.

3:22:00 PM  
Blogger lester said...

there is no way to stop corrections, but that's what theya re, corrections. you live and learn. you don't try to prevent them because they teach us something valuable.

yuo minimize them by not inflating the currency to get behind one your experts think is a particularly good one that is immune to all the rules. the gold standard isn't a solution to that, it just makes sure that the risk is privatized instead of socialized.

3:48:00 PM  
Blogger lester said...

eco- google "broken windows fallacy"

it's a very instructive principle

3:50:00 PM  
Blogger ECOPHOTOS said...

eco- google "broken windows fallacy"

Lester, my apologies for not taking a more active role in this thread. I am in the process of moving to new digs (my humble contribution to aggregate demand, I might add) and just do not have the time for research and writing at this time. Hopefully, Libby will give this subject another run for your money, and if not, you can always send me your money. Meanwhile, please leave the kid alone.

4:59:00 PM  
Blogger ECOPHOTOS said...

What will happen now is the divide between the "haves" and the "have nots" will continue to widen at an alarming rate and swallow the middle class whole. We will have the rich and the poor.

Rockync, I always look forward to reading your thoughtful comments. As my friend Echidne says (along the same lines):

The middle class is the only thing that keeps America from turning into a banana republic.

8:07:00 PM  
Blogger rockync said...

Thank you, ECO. I always love cruise the bloggerhood and read what people across America are thinking. I try to see from their perspective and try to understand their views. Don't always agree with them, but I still like to give every view credence.

8:34:00 PM  
Blogger lester said...

"economics is for donkies"- Ayatollah khomenie

10:53:00 AM  

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