From Sydney, our colleague Alaistair Chan writes:
Dark times loom for Thailand. Fourth quarter GDP numbers suggest the country is in the running for the label of ‘worst hit in Asia’. Output contracted an incredible 22.3% in the fourth quarter on an annualised basis. A number of factors worsened conditions in the fourth quarter.
The end of 2008 was marked by political instability. Protesters took over airports in Bangkok and helped topple the previous government. Tourist bookings were cancelled, and consumer and business confidence fell. Households reined in spending, and businesses cut investment. Political uncertainty also caused foreign investors to stay away.
And yet, the nation that formed the epicenter of the 1997 "Asian contagion" has apparently learned some lessons that might help it bounce back once the global storm subsides. Alaistair continues:
A key difference between the current situation and the one Thailand faced in 1997 is that the financial sector is much more stable now. After the 1997 crisis, the government regulated the sector heavily. Banking and insurance companies face stringent rules regarding foreign assets they can own. Hence, there was little investment in U.S. subprime mortgages or related securities. Banks’ capital adequacy ratios are nearly double the 8.5% mandated by the Bank of International Settlements, and their ratio of nonperforming loans to total loans is relatively low. Foreign insurance companies also face restrictions regarding their ability to repatriate capital.
Lessons the rest of the world might want to study, in other words.
From the NYTimes: A transcript from President Obama's fiscal responsibility summit:
MR. BIDEN -- Our first speaker today will be Dr. Mark Zandi. Dr. Zandi is the chief economist and co-founder of Moody's Economic -- excuse me, Moody's Economy.com -- where he directs the company's research and consulting activities. He's one of the best big picture guys in the business. His most recent book, "Financial Shock," was widely praised for its lucid explanation of the housing bust. What's less well known about Mark is that he donated the royalties from that book to a fund to invest in low-wealth neighborhoods. He's also an economic adviser to John McCain's campaign. And I'm glad he's -- he's here with us today.
...
(APPLAUSE)
MR. ZANDI: Thank you for that very kind introduction. It was greatly appreciated, and the opportunity to speak this afternoon at this important meeting, to address the nation's daunting long-term fiscal challenges.
I'll make two broad points in my remarks.
First, the Obama administration has inherited the worst fiscal situation in the nation's modern economic history.
In the year ending this January, the federal budget deficit was approaching $1 trillion, equal to nearly 7 percent of the nation's GDP. This is the largest budget deficit since in the midst of World War II.
Our fiscal problems reflect in significant part the rapidly eroding economy. The current economic downturn is on track to be the longest, most severe, and broadest-based recession since the Great Depression of the 1930s.
Read the whole thing ...
The WSJ is reporting:
Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.
While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.
Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.
What's this mean? David Kotok at Cumberland Advisers speculates:
This leads us to believe that the story circulating about Citigroup is a way for the idea of nationalization to get vetted. Once markets realize that conversion means that the preferred shares become tangible common equity, the debt markets will see this as a positive force and may narrow credit spreads. Equity market prices in the shares of the banks that are the subject of these stories (like Citigroup) will not like it because of the possible dilution of the existing shares. But overall reaction in stock markets may be better than some expect.
The reason simply is that markets have been on edge due to uncertainty. Clarity in a plan and action which is measurable will calm markets. With clarity, agents in markets will be able to make their own estimates of value. Right now they have great difficulty doing so. And they feel the rules are constantly changing so they wait.
Tomorrow may clarify. Our Ed Friedman offered perspective:
No one knows if, when, how, or for how long any of the ailing major U.S. banking institutions might be taken over by the federal government. Some things are clear, however: First, despite deep concerns about the decisions and performance of the banks in recent years, no one in authority is talking about having the government become the industry's permanent owner and manager. Even in the 1930s, when far more dire overall economic conditions around the world put real impetus behind a call for socialism and when the nation's banks had to be bailed out by the Roosevelt administration, the result was not permanent government intervention but rather the creation of institutions such as the FDIC and Fannie Mae.
Second, as it has been for more than a year, the key in this crisis remains the large volume of nonperforming, complicated, mostly mortgage-related assets on the balance sheets of banks that are too big too fail without severely damaging the financial system. When debt markets worsen, accounting rules require banks to write these assets down, which pushes the level of their capital below regulatory minimums.
Third, the FDIC is bound by regulation to take over insolvent banking institutions. When scores of small thrifts failed in the S&L crisis of the early 1990s, the government simply assumed responsibility for their balance sheets and sold their assets and liabilities to stronger institutions. But that approach is not possible this time, when the banks in trouble are among the nation's largest.
Since these institutions will not be allowed to fail, what would the government seek to accomplish during its temporary ownership, and how? The answer to the second question is unknown, but the first is not. The goal would be to remove troubled mortgage-related assets from the ailing banks' balance sheets once and for all. Once the economy began to revive, the banks would have clean balance sheets and be ready to lend again. The government would put the bad assets in a so-called bad bank, and taxpayers would be responsible for losses beyond those that have already occurred. Taxpayers angered by the prospect of taking on these obligations need to weigh the alternative: a collapsed banking system that drives the economy even deeper into recession.
Stay tuned.
Alan Auerbach of Berkeley and William Gale of Brookings survey the very bumpy road ahead:
In 2009, the federal deficit will be larger as a share of the economy than at any time since World War II. The current deficit is due in part to economic weakness and the stimulus, and in part to policy choices made in the past. What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years.
The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.
But hey, so what? Deficits don't matter, Reagan proved that. Right? Wrong:
Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past. While it is difficult to know exactly how to interpret these results, it is clear that – although fiscal policy problems are usually described as medium- and long-term issues – the future may be upon us much sooner than previously expected.
Are we in for another Great Depression? Harvard's Jeff Frankel says "[e]conomists can offer a variety of reassurances, but each of them is quite circumscribed..."
[H]ow do we know that the recession that began in December 2007 will not turn out to be analogous to the downturn that began in 1929: the beginning of what could turn out to be a very severe loss of income and a decade of high unemployment? There are plenty of analogies between now and then:
(i) a crisis in the US financial sector that had its roots in long excessive booms in real estate and the stock market;
(ii) the spreading of the crisis from the financial sector to the real economy and throughout the world; and even
(iii) popular American disillusionment with a Republican president perceived as too passive and too beholden to the rich, which then helps elect a charismatic and activist new Democrat.
Frankel lays out four reasons we shouldn't have to relive the nightmare of the 1930s. 1) The Fed won't make the mistake of constricting the money supply; 2) Institutions invented back then, such as deposit insurance and the SEC, are in place; 3) There is less hestancy to use fiscal policy; and 4) the world is aware of the dangers of Smoot-Hawley-style trade protectionism.
And yet ... each of these reassurances comes with a big, hairy asterisk. To skip to my personal favorite, Frankel writes:
The Buy America provisions in the original House version of the current stimulus bill risked a repetition of the mistake of Smoot-Hawley. These provisions have received far more attention in the media in every foreign country than inside the United States. President Obama insisted that the legislation abide by our international treaty commitments. It would have been better if this statement had come earlier, but it was music to the ears of us free traders. The final stimulus bill that the President signed this week was somewhat better from a trade perspective than the original. In his short time in office, Obama is already doing a better job of respecting international commitments than did his predecessor, who imposed WTO-illegal steel tariffs in 2002.
We are assured that:
(i) the government will apply the remaining Buy America provisions in a judicious manner (we are only talking about government procurement here, not interference with private-sector imports); that
(ii) in particular, the legal commitments to open markets vis-à-vis Canada and Mexico will continue, and that
(iii) the import content to the stimulus package would have been low in any case (just some iron and steel in bridges).
I still worry. The part of the Smoot-Hawley lesson that even a mercantilist can appreciate is foreign retaliation: the initial reduction in imports is more than offset by a reduction in exports. If the Buy America provision was heard internationally as the firing of a starting gun in a new race toward protectionism, then the preceding three reassurances are not very reassuring.
Business Week reports:
 As the nation's most populous metro area feels Wall Street's pain, the fourth-largest—Washington—is barely sensing the recession. In fact, Moody's Economy.com estimates that metro Washington's economy will actually grow 2.5% from mid-2008 through mid-2010. New York's economy is expected to shrink 4.2%...
This time Washington is getting a boost from government spending to fight the recession and fix the financial system, as well as the ongoing expenses of fighting wars in Iraq and Afghanistan and promoting homeland security. While President Barack Obama pointedly left Washington for Denver to sign the $787 billion stimulus package on Feb. 17, locals expect the metro area to garner a big share of the dollars.
Ah, but lest you think it's all skittles and beer inside the Beltway, our Glenn Wingard offers the following from his latest analysis for Precis Metro:
Washington , D.C. is one of the few areas in the nation that has not fallen into recession, but several constraints to expansion are intensifying. Federal government hiring is driving growth in numerous industries, including business and professional and information services. However, negative trends that have been afflicting the area are worsening, thereby diminishing the federal government's positive influence. Limited credit availability and the slumping global economy are burdening local manufacturers. Worse yet, the area's housing market is entering its third year of correction, forcing further job cuts in construction and driving down residents' wealth.
Megan McArdle gives voice to my inner empiricist:
Once again, I am driven to quote the immortal Charles Murtaugh: the universe is not here to please you. Fiscal stimulus will make the economy grow faster, or it will not make the economy grow faster, without regard to whether taxation is theft or universal healthcare is an immediate moral imperative. I doubt I'm the only one who is wearied by the way so many of the participants in the debate seem to already know the answer they want, and are merely looking for a set of questions that will get them there most expeditiously. Was there ever a time when people didn't think that tricky economic conundrums could, or should, be used to "prove" that their personal values about the level of taxation and spending are a scientific fact? Probably not. Still, given how important this question is, I wish more people would treat this as a problem to be solved, a question to be answered, rather than a battle to be won.
If you're just tuning in, you may have noticed that the Dismal Scientist looks ... different. Did it lose weight? Shave its mustache? Can't put your finger on it?
We could get all hyper and say it's New! Improved! But I think it's more accurate to say Dismal's been refreshed. Same basic package, with all the old features in pretty much all the same places. But a new, cleaner look, along with some tweaks to make the site easier to navigate and use. Also a couple of new ways to present data and analysis in ways we hope readers will find useful.
Examples: You can now scroll through today's economic indicators on the home page; pick a forecast table from a drop-down box and use the Editor's Picks to find recent content. Inside pages feature prominent links to related articles and other content. And we've created a Spotlight box to highlight the most current data we're watching.
Of course, nothing on the internet is ever truly finished. We plan to make continuous improvements to Dismal, refining features and adding new ones to keep up with the times and the technology.
If you're a subscriber, look it over and send us your feedback. (Use the button at the top of the homepage or email help@economy.com ). And if you're just discovering Dismal Scientist, check us out. We're eager to know what you think.
Beneath the current crisis lies an issue that hasn't gone away: The global financial imbalance between producing and consuming countries. Our Sydney-based colleague Alaistair Chan provides an excellent reminder, as well as a wonderfully clear primer on the subject, in this piece from Dismal/Asia-Pacific. Excerpt:
At the heart of the imbalance is China’s desire to keep the value of the yuan stable against the dollar. Usually, a rising trade surplus leads to a rising value of the currency. A rising currency would make exports more expensive, imports less so, and push the trade surplus towards balance. China circumvents the process by intervening in exchange markets and keeping the value of the yuan depressed.
China’s export revenues (in U.S. dollars) held at local banks are purchased by the PBoC with freshly created yuan. To prevent this from being inflationary, bonds are issued to take an equivalent amount of yuan out of the economy. Most of the foreign exchange was passed on to the State Administration of Foreign Exchange. On every trading day of the year people at SAFE will take a sum of U.S. dollars and work out where to invest. In some months of 2008, it was trying to allocate nearly $2 billion a day. By 2008 China had overtaken Japan to become the world’s biggest holder of U.S. Treasury securities. At an estimated $900 billion by the end of 2008, it makes up only half of China’s approximately $2.5 trillion in current foreign exchange holdings—around $2 billion is held by SAFE with the remainder being shared between the central bank and the country's sovereign wealth funds. The rest is stored in agency and corporate bonds, other currencies, and stocks.
Read the whole thing .
Gregory Clark asks what Pascal would think of the Obama plan:
I think Obama is right to try a fiscal stimulus from the following simple chain of argument:
(1) There is no logical reason why a stimulus cannot work -- it is a matter of empirics whether it will work or not, depending on the reactions of various economic actors.
(2) Because of the absence of controlled experiments over the last 80 years we do not know whether a stimulus will actually increase output (though Christina and David Romer have some decent evidence from the U.S. that it will).
(3) Even if the stimulus package does not produce one extra job, the social cost of the stimulus is a fraction of the $789 billion being spent, since the tax reductions, unemployment benefits, aid to states and educational and health investments all have some value. The true social cost, absent any output gains, is likely $100 billion or less.
(4) The potential gains are huge. If the multiplier really is as high as the 1.9 sometimes found in Econ 1 texts such as Greg Mankiw's, then the social gain from the $100 billion expense could be as much as $1,400 billion. It is a risk, for sure, but those seem like attractive odds at which to gamble.
(1) - (4) amount to a version of Pascal's Wager -- on why the prudent person should believe in God -- but applied to more mundane economic concerns.
Richard Florida thinks New York will be just fine, thank you:
Sadly and unjustly, the places likely to suffer most from the crash—especially in the long run—are the ones least associated with high finance. While the crisis may have begun in New York, it will likely find its fullest bloom in the interior of the country—in older, manufacturing regions whose heydays are long past and in newer, shallow-rooted Sun Belt communities whose recent booms have been fueled in part by real-estate speculation, overdevelopment, and fictitious housing wealth. These typically less affluent places are likely to become less wealthy still in the coming years, and will continue to struggle long after the mega-regional hubs and creative cities have put the crisis behind them.
So what else is new? The rich places will get richer, the poor and bedraggled more so. Not much solace there for the folks trying to revive Utica or Kankakee.
David Brooks piles on, saying it's not just the economy; culturally, Americans are predisposed to wide open space (and 3-car garages filled with outdoor gear):
If you jumble together the five most popular American metro areas — Denver, San Diego, Seattle, Orlando and Tampa — you get an image of the American Dream circa 2009. These are places where you can imagine yourself with a stuffed garage — filled with skis, kayaks, soccer equipment, hiking boots and boating equipment. These are places you can imagine yourself leading an active outdoor lifestyle.
These are places (except for Orlando) where spectacular natural scenery is visible from medium-density residential neighborhoods, where the boundary between suburb and city is hard to detect. These are places with loose social structures and relative social equality, without the Ivy League status system of the Northeast or the star structure of L.A. These places are car-dependent and spread out, but they also have strong cultural identities and pedestrian meeting places. They offer at least the promise of friendlier neighborhoods, slower lifestyles and service-sector employment. They are neither traditional urban centers nor atomized suburban sprawl. They are not, except for Seattle, especially ideological, blue or red.
More immediately, our state and local recession status gauge shows the misery is pretty ubiquitous.
Here's a transcript from Fox News Sunday, with Mark Z. and Google CEO Eric Schmidt.
From Sunday's Philadelphia Inquirer:
Imperfect stimulus plan is still the best answer
Mark Zandi is chief economist at Moody's Economy.com
I have been a professional economist for nearly a quarter-century, and I've never seen anything like the unraveling of our economy over the last year.
Even if everything breaks our way, the current downturn will easily be the longest, most severe, and broadest - crossing occupations, industries, and regions - since the Great Depression. The only way to avoid another depression is through very aggressive action by the Federal Reserve, Congress, and the administration.
The fiscal-stimulus plan that will soon become law, though far from perfect, is an important part of the policy response needed to shore up our sliding economy.
The plan includes tax cuts and government spending worth nearly $800 billion, including about $300 billion in tax cuts for individuals and businesses; $250 billion in aid to fiscally strapped state and local governments; $150 billion in various kinds of infrastructure spending; and $100 billion in income support for workers who lose jobs. By my calculations, the plan will add more than two million jobs by the end of 2010 to the number that would exist without a stimulus, and the unemployment rate will be more than a full percentage point lower.
Income support and aid to state and local governments will provide quick help to the economy. Without this relief, workers losing jobs have little choice but to immediately slash spending, costing the economy even more jobs. State and local governments struggling with falling tax revenues must in most cases balance their budgets by cutting payrolls and programs and raising taxes, adding to the economy's burdens. Federal help for the unemployed and for state and local governments will thus prevent even worse job losses.
Tax cuts stimulate job creation as individuals spend and businesses invest some of their added cash. But the near-term economic benefits of individual tax cuts are diluted, as some is saved and some used to repay debt. These are not bad things in themselves, but they do not help the economy as much as spending the money quickly.
The stimulus plan also helps the troubled housing and auto industries with tax breaks, including a nonrefundable tax credit worth up to $8,000 for first-time home buyers who purchase in the next year, and a write-off of state sales taxes and interest on loans to buy new vehicles.
The home-purchase tax credit will help some families with a down payment. Though the credit won't forestall further declines in home prices, it could break the housing market's current deflationary psychology, with many potential buyers waiting for prices to fall further. The tax break for a new vehicle purchase will provide less of a sales boost, but it won't hurt.
The economic benefits of infrastructure spending are generally not quick - it takes time to get these projects under way - but they will be significant, particularly for the depressed construction and manufacturing industries.
Because the economy will struggle well into 2011, this spending will be particularly welcome as the impact of other stimulus efforts fades. The stimulus plan has drawn criticism for its mixed bag of infrastructure targets, from roads and bridges to the electric grid and the Internet backbone. But given the uncertain returns on such projects, diversification is probably a plus. Moreover, the Japanese experience during their "lost decade" of the 1990s showed there are diminishing returns to infrastructure spending. Investing only in bridges, for example, ultimately produces bridges to nowhere.
There are concerns that the stimulus plan's $789 billion price tag is too large. To pay for it we will have to borrow the money, adding significantly to the government's debt load. But without a stimulus, the depression would undermine tax revenue and fuel more government spending, producing even larger deficits and debt burdens.
It is fortunate that we are still the global economy's triple-A credit; even though this calamity began in the United States, global investors still prefer the safety of U.S. Treasury bonds. We will thus be able to borrow the money at record-low interest rates.
Indeed, my most significant criticism of the current stimulus plan is that it is too small.
Our struggling economy will produce nearly $1 trillion less than it is capable of this year and will underperform again by at least as much in 2010. The $789 billion in spending and tax cuts to be distributed over those two years is not going to fill this expected hole in the economy. I would thus not be surprised if policymakers are forced to consider a second stimulus plan soon.
Nonetheless, when combined with other aggressive policy steps, including efforts to shore up the financial system and stem foreclosures, this fiscal-stimulus plan will go a long way toward relieving the current economic crisis.
This ought to be engraved somewhere:
"A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract. When channeled into profit-maximizing, competitive and innovative behavior under the auspices of sound laws and regulations, greed can act as the engine of innovation and economic growth. But when unchecked by the appropriate institutions and regulations, it will degenerate into rent-seeking, corruption and crime."
It's from an essay by Daron Acemoglu of MIT, entitled "The Crisis of 2008: Structural Lessons for and from Economics." Highly recommended. And here is Acemoglu in a podcast.
I mentioned the other day that we shouldn't forget about the multitude of private sector stimulus efforts underway all over the economy. Here's another one:
Toll Brothers Inc. on Wednesday estimated its fiscal first-quarter home-building revenue was cut in half by the ongoing housing downturn as the company rolled out 4% fixed-rate mortgages to attract nervous buyers...
"January was somewhat better than November and December, perhaps influenced by our 3.99%, 0-point, 30-year fixed-rate mortgage promotion, which complemented the typical post-holiday seasonal bounce," said Toll, the CEO.
This prompted a question: Which is more likely to attract a homebuyer, a cut-rate mortgage (4% fixed! That's what my old man got for our Long Island split-level in 1954!) or a $15,000 tax credit?
Cris deRitis, whose article on this subject posted on Dismal yesterday, chimes in with an answer:
It depends. --For borrowers with no or little tax liability, a 4% rate is a better deal. --On a $200,000 balance the monthly savings between a 4% rate and a 5.25% rate is $150. It would take over 8 years to reach $15000. Given that tenure is usually shorter than 8 years, the tax credit would be the better deal. --The larger the balance, the shorter the amount of time needed to reach $15k. For the luxury homes Toll Brothers sells, it may take only 2-4 years to accumulate a $15k benefit so the rate would typically be the better deal. Other factors affect the calcuation such as tax bracket, standard or itemized deduction on a case by case basis.
Finally, Cris asks:
If the private sector is willing to provide cheap financing, does government need to intervene? At a minimum, the credits should be more targeted.
Mark Z. explains to the Associated Press how—and why—the numbers work.
President Barack Obama and congressional Democrats say it nearly every day: Their huge economic stimulus package must be rushed to passage because it will create or save 3 million to 4 million jobs.
In fact, those figures are uncertain enough that even some economists who produced them are basically saying: We gave it our best shot.
"The models are based on historic experience," said Mark Zandi, referring to formulas he and other economists use to predict economic behavior. "And we're outside anything we've experienced historically. We're completely in a world we don't understand and know."
...
"Yes, there's a high level of uncertainty," said Zandi, a Democrat who advised Republican presidential candidate John McCain last year. "But my estimates are as good as you're going to get, and they're good enough to be useful in trying to evaluate whether we should do this or not."
Back at the Philadelphia Inquirer (which isn't dead yet), my buddy Mike Armstrong reminds us that policy has a domestic side:
After his speech unveiling the Financial Stability Plan and testifying before the Senate Budget Committee on Tuesday, Treasury Secretary Timothy Geithner returns home to face new questions.
Tim Geithner's wife, Carole: "So what did you pick up for dinner?"
Tim: "I am committed to dinner and here's the framework I've come up with. First, an appetizer. Then, an entree that's been stress-tested along with side dishes that would complement the basic meal. Finally, a light dessert that would not disrupt the healthy decisions I've made."
Carole: "But what's for dinner?"
Tim: "In coming weeks, I'll be able to provide details."
Carole: "I'm hungry now."
Tim: "These are difficult decisions."
Carole: "Maybe the Bernankes are having potluck..."
Cris deRitis wonders if this means we've moved on to the next stage of the process:
Americans have finally come to terms with the housing crisis, according to Zillow’s Q4 Homeowner Confidence Survey, after surveys in recent months revealed an overwhelming majority of Americans were actually in denial over the state of the housing market.
More than half of America’s homeowners — 57 percent — believe their own home lost value during 2008, according to the survey. This is markedly more than the 38 percent who believed their home’s value was declining when asked during the second quarter of 2008.
In reality, 76 percent of all U.S. homes lost value in 2008, according to analysis of the Zillow Q4 Real Estate Market Reports. With these new findings, Zillow’s Home Value Misperception Index shrunk to 10 in the fourth quarter, from 16 in the third and 32 in the second quarter. An index of zero would mean homeowners’ perceptions were in line with actual values.
But maybe not ...
[H]omeowners’ optimism for the future doesn’t necessarily extend to their neighbors’ homes. While 70 percent of homeowners think their own homes’ values will increase or stay the same in the first half of 2009, only 52 percent believe home values in their local market will increase or stay the same during the same time period. 48 percent think values in their local market will decrease, but only 30 percent believe the same will happen to their own homes.
And as Cris reminds us, after denial comes anger.
Along with 8-track tapes, leisure suits and Commodore computers, what else from the 70s wouldn't you dream of using today? The Misery Index, that's what. Scott Hoyt explains over on Consumer Flow (sub required):
Those who remember those days probably remember the misery index. It was the sum of the unemployment rate and the top-line inflation rate. It soared to over 20 points in each of those two recessions, creating major problems for consumer finances.
This recession is probably more severe than those. It is going to be longer, with larger declines in employment and a sharp increase in the unemployment rate. However, the misery index has barely cracked double digits and was below 10 points in the fourth quarter. With the unemployment rate expected to rise throughout this year, the misery index will inch higher but it does not exceed 12 points in the Moody's Economy.com baseline forecast.
Further, consumers are at least as depressed as they were in those earlier severe recessions. Spending is falling slightly faster than it did in 1980 and nearly as fast as it did in 1974. According to the Conference Board, consumer confidence is lower than it was in those periods, although according to the University of Michigan index it is about as low, but not lower.
So maybe we need a new MI, one that takes into account not price inflation, but wealth deflation:
House prices are falling. Equity prices are falling. Commodity prices are falling. Inflation was eating into the value of cash assets. Consumers are moving farther from attaining their saving goals and are at a loss as to how to staunch the bleeding.
Brad DeLong brings up a useful analogy to at least some of the current stimulus debate:
I remember back in 1993 there were a bunch of people who claimed to be pro-NAFTA but campaigned under the slogan of not this NAFTA--but who were better characterized as being against any conceivable NAFTA that might actually pass the Congress.
I think that's fair—though it is also fair to say that there are principled and consistent voices for scrapping the idea of a big fiscal stimulus altogether.
But it's hard not to think, as Mark Z. does, that we need to do something.
All the attention is on Washington's plan to revive the economy —but meanwhile, other players in the economy are launching their own stimulus programs. Here begins a running tally of undirected, spontaneous responses to the downturn. (Feel free to add your own.)
Starbucks is discounting coffee.
The company said Monday that it's selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It's the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.
Movie theaters are branching out.
For theater owners and content distributors, it's a good way to fill seats at off-peak times. For ticket buyers, it's a step back toward a time when the local movie house was a center of the community, where everyone gathered for entertainment and to follow current events.
Amazon launches a new Kindle
Amazon.com Inc. is announcing a new version of its Kindle e-book reader on Monday. And, in a sign that the electronic book is gaining clout in the publishing world, Amazon is also expected to say it has acquired a new work by best-selling novelist Stephen King that will be available exclusively, at least for a time, on Kindle.
Infrastructure investment it ain't. But you know there has to be more to recovery than federal dollars, important as those may be.
Some weeks the phone just won't stop ringing.
Zandi on autos:
January sales reports released this week "highlight the risk that keeping the auto makers out of bankruptcy is going to be more costly than even I anticipated," Zandi said in an interview Wednesday with Dow Jones Newswires.
Zandi on the housing crisis:
"Most fundamentally, the housing crisis was the result of hubris, a breakdown in the process of financing mortgage loans, and a lack of regulatory oversight. Hubris in that homeowners, lenders, Wall Street, investors, regulators and policymakers thought that house prices would never fall, at least not significantly for very long in many parts of the country."
 Zandi on Treasuries:
“Investors are growing a little bit nervous about all the Treasury bonds they’re going to be asked to buy to finance the government’s response to the financial crisis,” said Mark Zandi, chief economist of Moody’s Economy.com.
Zandi on employment:
"The hiring rate has caved. That's why the job market is as bad as it is," said Mark Zandi, chief economist with Moody's Economy.com. "Given this low hiring rate, unemployment would still rise even if layoffs were falling."
Zandi on the unprecedented mess we find ourselves in:
"There has never been a time in modern economic history that so many regions have been in recession," said Zandi, who was the keynote speaker at today's Governing magazine luncheon. "...I've been a professional economist for 25 years and I've never seen anything like it. It's incredible to witness."
Reuters spreads the word:
NEW YORK (Reuters) - U.S. housing markets from Florida to California have suffered price drops of 50 percent or more from their peak, but now, at long last, a bottom is within sight, likely in the fourth quarter nationally, according to a report from Moody's Economy.com.
By the end of the housing downturn, nearly 62 percent of the nation's 381 metropolitan areas will have experienced double-digit-percent declines in house prices, peak-to-trough, says the report by chief economist Mark Zandi and a team that includes Celia Chen, senior director of housing economics.
Despite the gloomy data, the report, by an independent subsidiary of Moody's Corp, paints an improving picture of the housing market, which is in the midst of its worst downturn since the Great Depression and is both the source and a major casualty of the world credit crisis.
Interesting policy ideas are where you find them. I found some (thanks to Economics of Contempt) in a review by Harvard economist Ed Glaeser of a book by Robert Ellickson in the latest New Republic:
One current policy response to the housing debacle is to create lengthy foreclosure moratoria. Ellickson's analysis suggests that this is just about the worst of all possible policy responses. By drawing out the foreclosure process, these moratoria increase the time during which homes are no-man's-land. During such periods, homes and neighborhoods depreciate. A better policy would move the home quickly, either back into the hands of the owner with a new, more realistic mortgage, or into the hands of a new owner that can afford the house.
Why can't lenders and borrowers quickly come to arguments that would reduce the costs of foreclosure? Ellickson strongly emphasizes the problems inherent with the diffuse ownership of homes. The same logic applies to diffuse ownership of mortgages. The securitization process spreads property rights across hundreds of investors separated by oceans and continents. Mortgages are being handled by servicers, not by conventional banks, many of whom have little expertise at wisely handling delinquent loans. The servicers are scared of being sued by the security owners that they represent. For this reason, they follow rules of thumb that lead to evictions that could have been avoided.
This nicely extends the discussion begun on Dismal Scientist last fall by Cris deRitis :
The problem facing the U.S. housing market is not simply that too many mortgages were egregious; therefore the remedy is not simply to rewrite them on more favorable terms. In fact, quite the opposite was the case: Many borrowers received better rates than they deserved, because excess demand for mortgage debt in the capital markets drove spreads and terms to historical lows. Given the risk profiles of many borrowers who benefited from this situation, modifications of rate and term can only go so far to help them. Fundamentally, a large number of borrowers took out mortgages that would have worked only if home values continued to rise. Unless modifications include principal write-downs, they will affect foreclosure rates only minimally.
Department of we-told-you-so (but was anybody listening?)
Actually, David Leonhardt was. Today the NYTimes econoscribe writes in his Economix blog:
The conventional wisdom is that the tax rebate signed by President Bush last year failed to stimulate the economy. But there is now pretty good reason to question that wisdom.
The argument that the rebate didn’t work is based on the notion that it didn’t lift consumer spending very much. In the second quarter of 2008, when most of the rebate checks were sent out, consumer spending rose at an inflation-adjusted annual rate of 1.2 percent, not much above the 0.9 percent rise in the first quarter.
Look closer, though, and the argument becomes flimsier.
For one thing, growth in consumer spending was falling throughout 2007 and 2008. In 2007, it fell sharply between the first and second quarters, was flat from the second to the third, fell from the third to the fourth and then fell again from the fourth quarter of 2007 to the first quarter of 2008. It then rose, albeit not by much, in the second quarter — before plummeting, with a decline of 3.8 percent, in the third quarter. Those numbers seem to suggest that spending would not have risen 1.2 percent in the second quarter without the rebate.
But Dismal Scientist readers already knew that. From our own Scott Hoyt, Jan. 6:
Debate is heating up around President-elect Obama's proposed economic stimulus plan, with lawmakers and economists arguing for and against various fiscal tools for combating the recession. One approach—putting money directly into consumers' hands via tax cuts or rebates—has long been considered quick and effective, on the theory that much of the money thus distributed is soon spent.
However, it is now being widely argued that the most recent use of this policy tool was a failure, because last year's tax rebates were mostly saved rather than spent. A similar or expanded tax rebate program this year would produce similarly disappointing results, opponents say.
We do not believe these arguments are correct. Rather, we believe the tax rebates made a significant positive difference in consumer spending last year; without them, spending would have fallen quite sharply in the spring of 2008.
Consumer spending last spring was laboring under a number of weights, particularly among middle- and upper-income households, whose spending accounts for a disproportionately large share of the national total. When these households—many of whom had incomes too large to qualify for the tax rebate program—pulled back, the effect on aggregate spending data was large enough to mask the impact of the rebates. This helps explain why some see little evidence in the data that the rebates worked as designed. Yet, when the decline in spending that would have occurred without the rebates is accounted for, the impact of the rebates proves to be large.
From Seeking Alpha, an optimistic view on the credit crisis, along with more charts than you can shake a stick at. The bottom line:
The credit market tide seems to be turning, although additional data are required to confirm that the banking system is on the mend. In short, progress has been made, but the thawing of the credit markets has a way to go before liquidity starts to move freely and confidence returns to the world’s financial system.
Harry Truman famously wanted a one-handed economist to give him some unequivocal advice. Here's some, from Dallas Fed President Richard Fisher:
"Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It's addictive and it leads to economic death," Fisher told C-Span television in an interview for its "Washington Journal" program.
Right on, brother. I know there are some in the profession who think this is a more complicated issue, and that there are conditions and situations under which protectionism is desirable. Even if they have a case, do you really want to hand an opening to the likes of Lou Dobbs and and the steel lobby? Not me.
Washington remains confused about many things, but at least they've clarified one point. From this morning's WashPost:
Holtz-Eakin called Zandi "a good economist" and "an articulate and thoughtful presenter." He said Zandi was not a McCain policymaker but rather a rapid responder who provided McCain with instant analysis of economic news. Holtz-Eakin joked that the relationship was "a greater tribute to McCain's bipartisanship" than to Zandi's, because of the risk of relying on a Democrat for campaign advice.
UPDATE: The WSJ piles on:
Mark Zandi has become the de facto chief economist to Congress in recent months as the fiscal stimulus package developed, participating in numerous hearings and conference calls....
A frequent expert witness at congressional hearings and omnipresent in news coverage, Mr. Zandi has become the most vocal economist arguing for a major fiscal stimulus package. The biggest risk today, he says, is “people not having clear sense of the severity of the recession.”
In Sunday's NYT, Tyler Cowen begins what should be a very productive discussion on the social effects of recession:
In any recession, the poor suffer the most pain. But in cultural influence, it may well be the rich who lose the most in the current crisis. This downturn is bringing a larger-than-usual decline in consumption by the wealthy.
Here's my uncredentialed and as-yet-unresearched hypothesis: Along with rising income inequality, the U.S. in the last 25 years or so has seen a vast increase in price discrimination, greatly expanding the range of discretionary consumption possibilities. You can buy your coffee at Starbucks or McDonalds; wear athletic-logo sneakers or discount knockoffs; pay up for location or move to a cookie-cutter suburb. The price differentials for what are arguably the same—or at least highly substitutable—goods and services are wider than ever, it seems to me.
If so, it should be possible for many people, particularly those higher up the income ladder, to cut spending without diminishing their living standards by a proportional amount. The sacrifice will be in intangibles: social cachet, marketing, perhaps some level of psychological satisfaction. But these are pretty slippery qualities, and adjustment can take many forms.
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