mattobrien

Can you refute the point that we can't have positive job growth and negative real GDP? Then how is overall inflation more than 2-3%?

The Fed has tools like interest on reserves, reverse repos and term deposit facilities to make sure that all of the excess reserves on bank balance sheets don't turn into actual price increases.

Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.

Because if Europe had the right institutions, it would be worth saving. The cost of breakup is so high.

Unfortunately, the things they need to do to save the euro economically make it less politically likely that they'll be able to get the institutions they need.

(Yes, I'm the author).

GDP is a flow. So is personal income. GDP is the dollar value of the stuff we sell. The flip side of that is that this is how much income we earned. You can dispute this, but it's what it means. http://bit.ly/HYokZe

Your example is flawed for the reasons I mentioned. You have to include the opportunity cost.

Spain has real structural problems in its labor markets. But those kind of generous policies aren't unique to Spain within Europe. And other European countries have far, far, far lower unemployment. Why?

The answer is that employment policy does not have more to do with unemployment than any other metric. This is a story about a huge housing bubble and an awful currency union.

I don't think that proves what you think it proves. You're missing what he would do with that $25k if he marries his maid. Maybe he would spend it on something else. Maybe he saves it and the bank loans it to someone else. In either case, it does matter what happens, because it gives us a clue into the velocity of money.

GDP measures the value of all the stuff and services we produce. Which shows how much income we earned. So, you're wrong.

Marie Antoinette would approve of that sentiment. Let them eat Big Macs?

There's something called the Bill of Rights. It's to protect the minority from the tyranny of the majority. Just because the majority wants something doesn't mean it's legal.

Fannie and Freddie actually lost market share as the bubble really got going. They were prohibited from getting into most subprime, and tried to get around their regulations.

Wall Street was the driver in buying up these shitty mortgages to put into MBS/CDOs -- and quite a few big banks bought mortage originators so they could get bigger margin on these deals. Unfortunately for them Wall Street couldn't find buyers for all of this toxic crap and/or were too dumb to realize how bad some of this stuff was (ie Citigroup). That's why you had a bank run on Bear Stearns, once people realized the collateral they were using in the repo market was effectively worthless.

There was a run on investment banks after Lehman's failure. Merrill Lynch was on the edge of the abyss before Ken Lewis made the deal of the century - for John Thain. Morgan Stanley was next. Their CEO John Mack successfully lobbied the government to institute a ban on short selling, much good that did. Goldman was next. Without the government backstop, Goldman would not exist today.

And if Goldman was entirely populated by "geniuses", why did they need $13 billion from AIG? They made all the same bad bets as everyone else, but they "hedged" them with a counterparty unable to pay out. And once AIG was downgraded to AA in 2005, everyone should have known that they'd be unable to pay out the ridiculous CDS contracts they guaranteed on subprime bonds. It'd be like buying volcano insurance from a homeless guy - and you live next to a volcano. Goldman isn't run by geniuses; its run by people who control the government.

You're afraid health care will become too bureaucratic? Are you familiar with health insurance companies? There's already a bureaucrat between you and your doctor - the fact that he's from the private sector doesn't change that fact.

And private sector bureaucrats have an incentive to deny coverage, purge rolls, etc. - it means greater profits. In the last twenty years, health insurance companies have gone from spending 95 cents of every premium dollar on health care to roughly 80 cents today. Where did that extra money go? Greater overhead and profits. Under a universal system, public bureaucrats wouldn't have the same incentives to deny care.

Just a friendly reminder that before you start spouting cliches about "bureaucrats ruining things" you should ask whether they already have - just not from the government.

I agree that this is not a tenuous connection, but you failed to mention in your first post that the wage freeze was during the Second World War. Oil was rationed. Factories converted for war production. The entire economy was mobilized behind the war effort. This is most definitely a case of unintended consequences as relating to health care, but your original post implied that the government just willy nilly intervened with health benefits, when the truth is that it was the side effect of mobilizing the economy for national survival.

Amen.

Anyone who talks about future deficits and doesn't talk about healthcare costs isn't serious. Social Security will be more or less fine with some combination of tax increases and/or benefit reduction (i.e. raising retirement age). But this New Yorker piece makes clear that healthcare costs are skyrocketing - not because of Medicare or private insurance, but because doctors are going out of control, without any noticeable increase in quality of care: http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_...

But there's nothing in it for Wall Street if we constrain healthcare costs, so Peterson will go back to shilling for Social Security privatization.

He was one of the top guys at Blackstone. They are a private equity group. Their stock has gone down 80% since they IPOed. He was lucky that he cashed out when he did. Getting rich buying companies with borrowed money, and then unloading them on somebody else was the ultimate bubble business. Now that the credit bubble has burst, existing private equity has died. They're left with companies with enormous debt burdens that no one wants - think Sam Zeller and the Chicago Tribune company. I don't think Blackstone has sold a company since 2007. I'm not sure there are any lessons to extrapolate from this.

If we pretend the emperor has clothes does that mean he's not naked? This author seems to think so. This is very foolish. Unfortunately, Roubini is likely correct: there probably won't be a turnaround until 2010, and even that will be weak. Contrary to the "green shoots" this author cites, economic conditions are continuing to deteriorate. Housing prices are still falling. Foreclosures continue. Unemployment is rising. Aggregate demand is still well below capacity. And banks are still more or less insolvent, requiring billions, if not trillions, more capital. That some of these indicators might - might! - be declining slower than they have for the last six months does not necessarily mean we're close to recovery. We could bottom out and then stagnate in an L-shaped recession. That's certainly not a given, but it's still a possibility. Even the market rally of the last two months has been suspect: analysts have dubbed it a "crap rally" since it's been led by poor stocks. Quant funds have been hammered and pulled out of the markets, reducing liquidity. Insiders have sold off at the highest levels since October 2007, before the markets began to crash. This seems like a bear market rally that could quickly reverse itself and test the lows, perhaps breaking them. (http://www.businessinsider.com/insiders-selling-like-crazy-2...)

Forgive me if I still put more credence in the analysis of someone who has nailed this crisis, rather than someone who seems like Kevin Hassett's long lost brother.

This is most likely not fantastic news. This is most likely terribly misleading news. As noted, suspending aspects of mark-to-market undoubtedly helped their bottom line. And who knows how much of these "profits" were the result of one-time payments from the government via AIG. There is so much opacity with all banks' financial statements that trusting them seems unwise. Wells Fargo claimed they had record profits in Q1, and just today an analyst estimated that Wells actually needs at least another $50 billion. Who do you trust - people effectively talking up their own books, or independent observers who still see huge problems ahead?

Two things. Developing economies generally have higher rates of growth than more advanced ones, so the fact that Russia had higher rates of growth than the seven most advanced economies in the world is fairly meaningless. In fact, there was debate at the time about whether the G7 should expand to include Russia, since Russia's profile didn't match the others'.

And second, how much of the cumulative growth from 1999-2007 was due to astronomical energy prices? I don't think it's absurd to point out that for half of the period you mention, energy prices made Russia's economy appear much stronger than it was in reality. The same happened in the late 1970s and the early 1980s with the USSR. Many attribute the USSR's implosion in large part to the collapse in energy prices in the late 1980s/early 1990s, since the failings of their centrally planned economy couldn't be concealed any longer.

Much of this growth came from spiking commodity prices, particularly oil and natural gas. That's not long-term sustainable. High energy prices masked the structural problems Russia faces. Now that's over.

There is a lot of parroting of talking points to unpack here. First, you assume that drawing down our nuclear program is a priori bad. This is clearly not so. Consider that the greatest threat of terrorists gaining access to nuclear weapons comes from so-called looses nukes in ex-Soviet states. If eliminating some of our weapons will induce them to do the same, this would seem to lessen the chance that apocalyptic weapons will fall into the hands of people who would use them. We could eliminate 9000 nukes and still have more than enough to kill all life on the planet several times over. If the Russians and other ex-Soviet states eliminate a commensurate number of weapons, I think that'd be a good trade.

As for $3.55 trillion for 2010 - unfortunately, I think it's probably necessary. Global manufacturing and trade are falling at rates faster than any seen during the Great Depression. Debt levels are higher now than back then. Deleveraging will take quite awhile. And while some have claimed Japan's deficit spending during its lost decade failed, since growth petered out at 1%, Richard Koo of Nomura makes a fairly convincing case that this was actually a success: they averted a full-scale depression, after all. (http://paul.kedrosky.com/archives/2009/04/richard_koo_on.htm...)

Saying that Obama has increased marginal tax rates to the highest level since Clinton is a cheap rhetorical trick. I don't think top rates going from 36% to 39.6% represents the tipping point between capitalism and socialism. And lower top marginal tax rates under Bush certainly didn't create a booming economy. This is the worst economy in 80 years. Also, remember that under Eisenhower, top rates were as high as 90%. However, those top rates only applied to individuals with incomes around $75 million in today's dollars. I think there's a convincing argument to be made for introducing more brackets at the top of the tax bracket - lumping in people making 300k with people raking in several million a year makes little sense. Nate Silver made this case a few weeks ago. (http://www.fivethirtyeight.com/2009/03/missing-1000000-tax-b...)

Forgive me if I'm not scared about Obama firing CEOs of bailed out firms. Like it or not, certain companies are judged to be too economically, socially, and politically important to fail. If we're going to bail out these firms, getting rid of the incompetents who brought them onto the dole seems like the obvious first step. I wish Obama would get rid of Ken Lewis and the other banking geniuses who played such a large role in bringing on this collapse.

Letting North Korea "get away with firing a missile over Japan." This is disingenuous on so many levels. First, it was a dud, not a missile. Second, it's not as if George W. Bush or Clinton was able to deter North Korea either. Kim Jong Il is determined to starve his people to develop weapons. Short of going to war - which would devastate Seoul and kill millions - there are no good options aside from pressing the Chinese to press North Korea more forcefully.

And finally, you are aware that ballistic missile defense does not actually exist, and likely won't exist in the near future, right? It's something Reagan made up and threw untold billions of dollars into to scare the Soviets. What's the point of pouring money into a nonexistent technology - especially when we are going bankrupt? Ballistic missile defense might be a bigger scam than Bernie Madoff.

Just because the bubble lasted longer than "perpetual bears" thought it would, does that mean their analysis was wrong? For instance, Andy Beal, the banker Forbes profiled (that was at the top of HN), saw the crazy deals being made in 2004 and got out of the market. If for the last 4-5 years you'd heard him argue that the fundamentals did not justify the credit bubble, would you call him a perpetual bear? The same happened with George Soros in 1997. He recognized that the stock market had become an enormous bubble, and he began shorting it. He lost a huge sum of money because the bubble went on for three more years. Was his analysis incorrect?

No one likes to hear that the party is over, or that things won't go back to the way they were in our lifetimes. During the bubble, people try to marginalize those opinions by calling them "perpetual bears". But we're finding out that they were right. It will probably take years for banks and households to fix the holes in their balance sheets. Even if GDP stops contracting, a "recovery" will likely be so anemic that it will feel like a recession. And job losses will continue to pile up. I'm afraid we haven't hit bottom yet - and maybe aren't even particularly close.

Fair enough on TF. But plenty of smart people also thought housing prices would never go down...

You are wrong. Everyone's standard of living is not increasing. Quite the opposite. Adjusted for inflation, median incomes have stagnated or declined in the last 30 years. Household debt has skyrocketed oftentimes as people have simply tried to keep up. Yes, some people have lived ostentatiously beyond their means, but many others are just trying to stay afloat, and deal with the rising costs of everything as their paychecks stay the same. Conservatives told people that incomes did not matter because their investments (stocks and houses) were rising in value. This fallacy has been utterly exposed.

The gains in GDP have more or less gone entirely to the top 10%, and in particular, the top 1% of the population. This makes everyone else feel like the pie isn't growing - because it isn't for them. Now that their stocks and homes are worth substantially less, and their credit is drying up, people have to spend less. And this fall in aggregate demand has disastrous consequences - not just here, but abroad as well, for all the countries that depended on exporting things to US consumers (Germany, Japan, and China).

Income inequality is of course not in itself a bad thing; it is the consequence of an economy where risk and work are rewarded. The question is extreme income inequality. Obviously this is a subjective matter. You may not think we have extreme inequality now, but when it's at the highest level it's been in 80 years, I'd venture that it is extreme. And extreme inequality often leads to falling aggregate demand and debt deflation. In short, a depression. If you think income inequality means nothing, you know nothing.

The banks are insolvent. Mortgages and auto loans and credit cards are all going bust. There is nothing panic driven about the depressed value of those assets. Studies they've done on CDOs show that they are worth even less than what the pessimists projected (30 cents on the dollar for super senior tranches and 5 cents for mezzanine).

If this were a matter of illiquidity, the massive liquidity the Fed has injected into the system in the last six months would have ended the crisis.

here's more: http://hedgedbet.blogspot.com/2009/03/friedman-toxic-assets-...

Supply side economics does not really increase supply. That's just the moniker. Supply side economics means tax cuts for the well to do, who will supposedly then create the jobs that will grow the economy. But this rests on the middle class stagnating - something that has in fact happened in the last 30 years. The top 1% control 22% of wealth (as of 2006), compared to 8% in 1980. For comparison's sake, the last time this percentage was this high was 1928. If you don't think there's a high correlation between income inequality and levels of debt, then you are fooling yourself.

There's a point at which the middle class being too poor puts the entire economy at risk. We are there now. Being an acolyte of supply side economics today is like being a communist in 1989 - you can keep believing in the true faith, but it's been refuted in the real world.

Here's the thing: everyone else is doing the exact same things. And we're starting from a better place than most everyone else (lower government debt-to-GDP ratio). All currencies will likely lose value against real assets. But as far as currencies go, the dollar will probably do the best.

The euro??? The euro has a much, much better chance of ceasing to exist than it does of replacing the dollar as the reserve currency. Countries like Spain and Italy that are near depression will have huge incentives to leave the euro so they can conduct their own monetary policy. If Eastern Europe is not bailed out before it goes bust, then more Western European banks will go bankrupt - and many countries in Europe are too small to bail out their banks. There will be immense pressure on the eurozone countries to leave the monetary union.

In the land of the blind, the one-eyed man is king. The dollar does not look good, but compared to the euro or the yen, it looks great. We don't have to worry about losing reserve currency status anytime soon. We just need to figure out what to do with insolvent banks.

Supply side economics has a fundamental flaw: it lowers aggregate demand. The middle class has been able to make up for this over the last 30 years in two ways - by having women join the workforce, and by taking on more and more debt. Debt can be piled on for quite a long time, but when the credit bubble pops, you get what we are going through now. And when consumers find out that debt is not income, and they retrench in their spending, then there is no market for the goods all the saintly business owners are making. This is the worst case scenario.

Small point: Dubai is finished. It is bankrupt. It was a classic boomtown. All of the building was done on debt. Foreigners are leaving their cars at the airport, flying out, so that they do not end up in debtor's prison (yes, Dubai has debtor's prison). Not exactly friendly to entrepreneurs - take a risk, take on some debt, and land in jail.

Every major country is going to have to spend to stop from falling into complete depression. Taxes will be higher everywhere. And the US will likely get through this crisis better than anywhere else. Having the reserve currency has its benefits after all. I really do not think going somewhere else to avoid higher taxes will make sense in the future.

The current situation is much worse than Japan's "lost decade." Unfortunately, the crisis today is global in scope. When Japan went through its "lost decade," it was eventually able to export its way back to growth. That option does not exist today. Europe - particularly Eastern Europe - is contracting faster than the US; Japan is falling off a cliff; China is most likely already technically in recession. Trade and industrial production are actually contracting at faster rates than they did at any point during the Great Depression. It's not at all clear where global growth will come from at this point.

Obviously, we will have growth at some point in the future - maybe even in a year or so if we fix the financial system. But it might be five years from now. It might be ten. It might be longer. But there are social factors at work here complicating the picture. There is most likely going to be substantial social unrest around the world in the next few years. Eastern Europe and China are probably the most immediately vulnerable areas. It's impossible to predict what the consequences of potential social unrest or governments collapsing (like Latvia last week) would be, but they need to be considered in assessing how bad this current crisis could become.

This is not to say that we're all going to start living in a Steinbeck novel, or that shanty towns will start propping up everywhere. Our standard of living will go down, but we'll still live better than we did thirty or forty years ago. But we are going through an economic reset. This will be much worse than the mild recessions we've become accustomed to.

Obama talking about the economy did not make Lehman brothers fail. It did not make Bear Stearns fail. It did not make our entire financial sector load up on risky loans. It did not make mortgage originators and bankers give out mortgages and loans to people who shouldn't have gotten them. There are real structural problems in our economy. People are worried for good reason. This is not merely in people's heads.