DataPoints -- Dismal Scientist

The Great Debate

Thu, 19 Nov 2009 11:15 GMT

Economists will be arguing over this for years, so we might as well get started now. Have Obama's economic policies helped? (We could detour at this point into a Clintonesque discussion of what "help" means, but let's not for now.) The issue was joined up at New York University the other night, in a formal debate among six eminences divided into three-person teams. Among those arguing the affirmative was Mark Z., whose opinions on the subject are extensively documented.

Eventually, I gather, we'll be able to view the entire session. For now there's this clip from Elliot Spitzer's argument for the negative:

And also this (non-embedded) clip of Zandi & Spitzer previewing the match on Bloomberg. (Warning: balky website. How come only the ads work?)

Who won? Depends on who you ask, of course. By the debate organizers' rules, it was the pro team; audience polls before and after found a larger number switching to their side than to the antis'. But the blogosphere will be heard: Reuters' Felix Salmon and Nicole Gelinas of City Journal say it was the antis' night. (And report what sounds like the biggest applause line, from Alan Meltzer: “Capitalism without failure is like religion without sin...” )

Family Violence and Football

Tue, 17 Nov 2009 15:46 GMT

Nothing gets an economist's adrenalin flowing like a correlation. These folks appear to have found a juicy one, and I suspect we'll be hearing more about it soon.

Family Violence and Football: The Effect of Unexpected Emotional Cues on Violent Behavior

...We test this hypothesis using data on police reports of family violence on Sundays during the professional football season. Controlling for location and time fixed effects, weather factors, the pre-game point spread, and the size of the local viewing audience, we find that upset losses by the home team (losses in games that the home team was predicted to win by more than 3 points) lead to an 8 percent increase in police reports of at-home male-on-female intimate partner violence. There is no corresponding effect on female-on-male violence. Consistent with the behavioral prediction that losses matter more than gains, upset victories by the home team have (at most) a small dampening effect on family violence. We also find that unexpected losses in highly salient or frustrating games have a 50% to 100% larger impact on rates of family violence...

When Will Housing Rise Again?

Mon, 16 Nov 2009 17:19 GMT

Everyone, it seems, wants to know when housing will come back. Those who attended the Moody's Economy.com Fall Outlook Conference earlier this month received a preview from analyst Andres Carbacho-Burgos. Even if you weren't there, however, you can view Andres' presentation by clicking here or in the multimedia box on the Dismal home page. (What, you didn't know there was as multimedia box on Dismal's home page? Tsk tsk... as my late mother in law would say, "Eyes have they but they see not...")

Where Were You When the Wall Came Down?

Mon, 9 Nov 2009 12:49 GMT

It was 20 years ago today, and it's hard to recall a more optimistic moment. Germans have much to celebrate; for all the bumps and bruises, reunification was a success. And yet, some researchers have found sobering evidence that it takes more than a bulldozer to bring down economic barriers.

Why do borders still matter for economic activity? The reunification of Germany in 1990 provides a unique natural experiment for examining the effect of political borders on trade both in the cross-section and over time. With the fall of the Berlin Wall and the rapid formation of a political and economic union, strong and strictly enforced administrative barriers to trade between East Germany and West Germany were eliminated completely within a very short period of time. The evolution of intra-German trade flows after reunification then provides new insights for both the globalization and border effects literatures. Our estimation results show a remarkable persistence in intra-German trade patterns along the former East-West border; political integration is not rapidly followed by economic integration. Instead, we estimate that it takes at least one generation (between 33 and 40 years or more) to remove the impact of political borders on trade. This finding strongly suggests that border effects are neither statistical artefacts nor mainly driven by administrative or "red tape" barriers to trade, but arise from economic fundamentals.

A Jobseeker's Road Atlas

Thu, 5 Nov 2009 17:04 GMT

With our help, BusinessWeek offers a travel guide for those seeking to launch or continue careers. Nicely illustrated, too.

The recession might be technically over, but unemployment is rising month after month even in most of the nation's strongest job markets.

A full-fledged job recovery seems to be a long way away. But some metros are poised for significant job growth by the first quarter of next year. BusinessWeek.com teamed up with Moody's Economy.com to identify America's 25 next recovering job markets. These metros were ranked based on Economy.com's projected job growth in the first three months of 2010.

The Housing Market Also Rises

Thu, 5 Nov 2009 11:40 GMT

FollowingMark Z., outlines the future of the beleaguered U.S. housing market at the client conference.

From the Great Recession to the New Normal

Thu, 5 Nov 2009 09:19 GMT

Mark Z. is giving his semi-annual presentation to clients this morning at the Penn State Great Valley center. Some of his key slides:

The Bronx Awaits

Wed, 4 Nov 2009 15:54 GMT

I wasn't going to bring this up again, but it seems to be on a lot of minds already. The most-emailed article at the WSJ's online site, in fact:

Yankees World Series Victories Boost Economic Growth

If the Yankees win the World Series the economy will have a nice bounce back in 2010 but if the Phillies prevail it will be a long slog to recovery, according to a Real Time Economics analysis of gross domestic product following Yankees and Phillies World Series victories since 1930 (which is as far back as the Commerce Department’s GDP numbers go). Okay, so it’s a stupid calculation, but just for fun let’s take a look at the numbers.*

The Phillies’ connection to economic turmoil has been documented, but the Yankees ties to robust growth is less well known. Since 1930, the Yankees — who would clinch their 27th World Series trophy with a win tonight — have been a harbinger of an average of 5% GDP growth in years following a series victory, healthy by any measure. In years in which the Yankees didn’t win the World Series (either they lost or didn’t make it) U.S. output expanded at an unspectacular 2.9%.

So what does this say about we diehard fans of the Fightin' Phils? Are we being exuberantly irrational? Au contraire. Rooting for the Phillies is the logical—nay, the only—way to hedge against simultaneous moral and economic collapse.

Small Business and the Baby Boomers

Wed, 4 Nov 2009 15:20 GMT

As Mark Z. wrote in the New York Times the other day, small businesses could be the key to reviving job growth in the U.S. Now Mike Zielenziger reports from the field that there's hope in the air:

Rockford, an automotive and manufacturing center in northern Illinois, is typical of the many communities around the country that have been hard hit. Unemployment tops 15 percent, and the larger firms that once were the economic bedrock have been undermined by global competition. Despite a diversified base of agribusiness and machine tool manufacturers, very few large companies are hiring.

As in other parts of America, bankers and economic development officials in this city of about 157,000 are hoping that a revival of small business can boost the region’s employment and economic prospects.

So a proposal announced by the Obama administration last week to boost the capital available to make small-business loans and to raise the maximum loan ceiling is being warmly welcomed by bankers and employment counselors here...

Note the angle here for the AARP: A favorable climate for small-business is important for folks over 50, since many of them(us) will be starting or joining small firms as they(we) phase out of Corporate America. Interesting...

The administration endorsed legislation that would in part:

• Expand from $2 million to $5 million the maximum size of 7(a) loans, which help businesses invest in machinery, equipment, land and buildings.

• Increase the maximum loan for building expansion or modernization—a 504 loan—from $2 million to $5 million for most borrowers, and from $4 million to $5.5 million for manufacturers.

• Offer more funds, at lower rates, to community banks with less than $1 billion in assets. Funds would be offered to the banks at 3 percent, rather than the current 5 percent.

The funds would come from the $700 billion Troubled Asset Relief Program. TARP was originally intended to assist the nation’s largest banks. Small businesses shed 2.4 million jobs from the middle of 2007 through the end of 2008.

Waiting Again for the FOMC

Tue, 3 Nov 2009 16:31 GMT

While Joe Brusuelas waits for Wednesday's FOMC statement, he talks to Bloomberg about the Fed's dilemma.

A Hand for the Little Guy

Tue, 3 Nov 2009 09:01 GMT

On today's New York Times op-ed page, Mark Z. argues that helping small business is vital to the recovery.

...Small businesses are especially vital to job growth. Establishments with fewer than 20 employees account for 25 percent of all jobs, but these same-sized companies generated 40 percent of the job growth in the last economic expansion, from 2003 to 2007. In their recent efforts to recharge the economy, policy makers have all but forgotten small business, finding it both easier and more visible to help large multinational firms. Unfortunately, though, big business can’t provide the jobs needed to power the economy forward...

Small firms are now struggling to obtain credit; their principal lenders, small banks, are under intense pressure, and hundreds more are set to be taken over by the Federal Deposit Insurance Corporation. Credit card lenders, another key source of loans to small business, have aggressively raised their underwriting standards. Policy makers could offer quick relief by empowering the Small Business Administration to provide more credit.

The Small Business Administration guarantees bank loans to small businesses, but banks aren’t making very many because the loan’s interest rates are capped at less than 6 percent — not enough to compensate for their risks at a time when business bankruptcies are high and rising. Creditworthy small firms would gladly pay somewhat higher rates to obtain credit. Increasing the maximum size of an S.B.A. loan and temporarily raising the percentage of the loan guarantees to as high as 97.5 percent, from 90 percent, would also prompt much more lending.

To help small companies with cash flow, policy makers should also extend provisions in the current stimulus bill that allow money-losing firms to receive refunds of taxes paid on profits earned in previous years. (In return, they agree to pay higher taxes in the future.) Rules permitting such refunds are scheduled to expire at the end of this year; an extension through next year would provide quick cash for many firms that might otherwise be forced to close. Given the tens of thousands of bankruptcies in the works by businesses of all sizes, expanding this tax benefit to bigger firms than are now permitted in the stimulus package would be a plus. Allowing companies with as many as 250 employees to take advantage of the benefit could potentially help well more than a quarter-million firms.

Finally, the government could help minimize the number of new job losses by promoting work-share programs. Nothing damages morale at a company more than layoffs; the experience not only is crushing for those who lose their jobs, but also weighs on those who remain, including managers. Layoffs are also costly, given severance expenses and the costs of rehiring or training new employees when business picks up again. Seventeen states offer effective work-share programs. Under these arrangements, employers cut workers’ hours — not their jobs — and states make up a portion of workers’ lost wages with unemployment insurance payments. Congress should provide financing to expand such programs nationwide.

Read the whole thing...

GMAC, Stimulus and More

Thu, 29 Oct 2009 10:28 GMT

Nightly Business Report quizzes Mark Z. on the costs and benefits for taxpayers. (Player opens in new window.)

But wait, there's more: Marketplace taps Mark for a comment on the GDP estimate:

Player Goes Here

Irrational Exuberance Redux

Thu, 29 Oct 2009 08:30 GMT

Last year we noted tongue-in-cheekily that, based on the painfully limited evidence of their rare past appearances in the Fall Classic, the Philadelphia Phillies appeared to be something of a contrary indicator. A Philadelphia victory in the World Series in 1980 had preceded a serious economic downturn, while the Phillies' loss in the 1983 championship came just as the U.S. entered recovery.

Such evidence, we reasoned, might justify rooting for the Phillies' to lose—which, as it happened, they did not. And that historic victory over the Tampa Bay Rays, as it also happened, preceded a couple of the bleakest quarters for U.S. economic output since World War II.

So are we convinced yet? Have we decided to hope this year that the Phillies flame out against the New York Yankees?

Nope. As Bloomberg reports:

On a macro-economic level, a Phillies victory in the World Series could presage a downturn, according to analyses by Ryan Sweet, senior economist at Moody’s Economy.com in suburban Philadelphia’s West Chester, Pennsylvania. The Philadelphia Athletics, who since moved to Kansas City and then to Oakland, were the last Philadelphia baseball team to win back-to-back championships. They did it in 1929 and 1930.

“We all know what happened then,” Sweet said.

What happened then has since been named the Great Depression. Sweet produced a study on the eve of last year’s World Series that showed whenever a Philadelphia team won the World Series the economy soured badly, a pattern that held true in 2008.

A Boston Red Sox supporter, Sweet still encourages Phillies fans and Yankee-haters like himself to pull for Philadelphia, regardless of the economic implications.

Go Phillies!

Healthcare and Market Share

Mon, 26 Oct 2009 16:26 GMT

The cost of health insurance is not unrelated to the industry's level of market concentration. For that matter, industry consolidation is arguably not unrelated to the amount of resistance facing healthcare reformers. Mike Helmar discusses:

In addition to extending health insurance coverage to all Americans, holding down cost is a central goal of the healthcare reform proposals being debated in Congress. Adopting best practices and new information systems are seen as means to increase efficiency and lower costs for providers that will ultimately be passed along to patients. A new exchange that includes insurance co-ops and perhaps publicly operated plans are supposed to enhance bargaining power by spreading risk over larger pools of consumers. Reformers also hope these larger pools will attract more insurers, thereby increasing competition within the industry and forcing prices down. The structure of the insurance industry suggests this will be only partly successful.

Consolidation in life and health insurance has increased revenue concentration among larger firms. The Hirschman-Herfindahl index, a measure of industry concentration, indicates that from 1999 through 2006, industry concentration was largely stable, albeit at levels reflecting limited competition. In 2007 and 2008, consolidation raised the index considerably. According to the American Medical Association, some firms enjoy near-monopolies in some regions because of state regulations and other barriers to entry, with market share exceeding 50%. In a sixth of U.S. metropolitan areas, a single health insurer holds market share of 70% or better. Moody's Economy.com estimates that life and health insurance was the second most concentrated of all U.S. industries in 2008, behind only general merchandise retail.

And Mike's got company. From the NBER:

Paying a Premium on Your Premium? Consolidation in the U.S. Health Insurance Industry

We examine whether and to what extent consolidation in the U.S. health insurance industry is leading to higher employer-sponsored insurance premiums. We make use of a proprietary, panel dataset of employer-sponsored healthplans enrolling over 10 million Americans annually between 1998 and 2006 to explore the relationship between premium growth and changes in market concentration. We exploit the differential impact of a large national merger of two insurance firms across local markets to estimate the causal effect of concentration on market-level premiums. We estimate real premiums increased by 2 percentage points (in a typical market) due to the rise in concentration during our study period. We also find evidence that consolidation facilitates the exercise of monopsonistic power vis a vis physicians, whose absolute employment and relative earnings decline in its wake.

Kiwi Talk

Wed, 21 Oct 2009 10:23 GMT

Matt Robinson explains why the kiwi dollar is becoming a carry-trade favorite in this interview with Radio New Zealand.

Earlier, Alaistair Chan explained the connection between the carry trade and New Zealand's currency here and here.

Shadowing the Fed

Tue, 20 Oct 2009 16:55 GMT

From Bloomberg:

Bernanke Makes Case Policy Is Working: Video

Aug. 21—Joseph Brusuelas, director at Moody's Economy.com, talks with Bloomberg's Margaret Brennan about Federal Reserve Chairman Ben S. Bernanke speech on the global economy and Fed policy at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.

Brusuelas also discusses data showing sales of existing U.S. homes jumped in July to the highest level in almost two years and the outlook for the economy. Running time 05:21

The Agony of the Skyscraper

Thu, 15 Oct 2009 23:05 GMT

So you're American Public Media's Marketplace show, and you read in the WSJ and the NYT that there's a big mess brewing in commercial real estate. How do you follow up and add value by airtime? You call an expert:

Chris Cornell is a commercial real estate expert at Moody's Economy.com. He says the nightmare scenario is that a spike in commercial loan defaults could send the banks into another financial crisis.

He says that's exactly what happened last month, when Corus Bank in Illinois was seized by the federal government.

CORNELL: We fear that sort of phenomenon is going to play out in bank after bank throughout the country.

Now, when economists talk about the other shoe dropping, they're talking about the renegotiation of commercial loans. Many of these loans mature after just five years. During the boom, banks had no problem extending the loans because the price of real estate was going up. Not anymore, Cornell says.

CORNELL: The worst of the bubble in this market was '05, '06 and '07. Adding five years, that means the trouble is expected in 2010, 11 and 12.

In other words, that shoe is dropping pretty slowly and giving banks time to shore up their finances and prepare for losses.

Listen to the full interview here:

[Audio Goes Here]

Recovery, Block by Block

Thu, 15 Oct 2009 07:33 GMT

Our friends at MSNBC are broadcasting our latest forecast, which calls an end to recession in a number of U.S. states and metros. Read all about it here, or get it straight from the source (that would be Steve Cochrane's latest Regional Outlook on Dismal Scientist) here.

Expand or Expire?

Wed, 14 Oct 2009 14:55 GMT

The housing tax credit is (a) a vital relief; (b) a wasteful distortion; (c) neither of the above. CNN sorts it out:

Congress is considering proposals to greatly expand a soon-to-expire $8,000 tax credit for first-time homebuyers—potentially applying it to all but the wealthiest homebuyers.

Supporters say doing so would further boost home sales, stabilize housing prices and generate jobs. Opponents say extending and expanding the credit would be a waste of money and only temporarily stave off further price declines...

Mark Zandi, chief economist of Moody's Economy.com, favors extending the current credit until June 1, 2010, and making it available to all home buyers regardless of income or at least to everyone except those at the highest end of the income scale. He estimates the cost of doing so wouldn't exceed $30 billion over 10 years.

Zandi's reasoning: Foreclosures are expected to rise next year because of rising unemployment, and that will drag home prices down further. Extending and expanding the credit will help mute that decline. And by June, there's a chance the job market will have stabilized.

"The most fundamental argument for the credit is that nothing works in the economy if housing is falling—it hurts household wealth and credit becomes tight," Zandi said. "[The credit] is a good insurance policy. It's vital to stem the housing price declines."

To kick start economic activity, Zandi believes lawmakers should set aside an amount of money for an extended credit and tell potential home buyers "first come first served."

Mark's full case is here. The Boston Globe's real estate blog takes up the discussion here.

Squaring off on TBTF

Tue, 13 Oct 2009 16:44 GMT

The debate over too-big-to-fail heats up: Diana Farrell, Deputy Director of the National Economic Council (and former Dismal Scientist contributor) weighs in on the side of regulation:

We have created them [TBTF banks], and we're sort of past that point, and I think that in some sense, the genie's out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we're unlikely to ever come back to or want to come back to.

I.e., she agrees with Cris deRitis:

While egalitarians and libertarians alike may chafe at the notion of TBTF, it is a fact of life; smart regulation will at least ensure that such institutions are around to keep credit flowing when the economy needs it most.

But Simon Johnson demurs:

Perhaps there is a reason that today’s nonfinancial companies need a financial sector that is more concentrated and more powerful politically than ever seen in living memory... But my conversations with people who run companies or who work closely with nonfinancial executives suggest quite the opposite—they see our current financial system as dangerous, with the likely costs of big banks (e.g., future bailouts) greatly outweighing any benefits.

What say you? Is TBTF a fact of life or a danger to the Republic? Inevitable or intolerable? The floor is open.

The Stimulus Success Story

Sat, 10 Oct 2009 08:00 GMT

The following is to appear in Sunday's Philadelphia Inquirer:

The Stimulus is Working

By Mark Zandi

The federal fiscal stimulus is working. It is no coincidence that the Great Recession has ended just when the stimulus is providing its maximum boost to the economy. The stimulus is doing what it was supposed to: short-circuit the negative cycle of recession and provide a catalyst for recovery.

Criticism that only $170 billion of the $787 billion stimulus plan has been distributed through tax cuts and increased government spending is misplaced. What matters for economic growth is the pace of stimulus spending, which has surged from nothing at the beginning of the year to about $80 billion in the current quarter. That's a big change in a short period and is why the economy is growing again for the first time in more than a year.

The part of the stimulus program providing the biggest bang for the buck—the most economic activity per dollar of federal spending—is the extension of unemployment insurance for workers who have lost jobs in the deteriorating economy. Without such help, these workers and their families would be slashing their own household spending, contributing to the loss of even more jobs. Help to strapped state and local governments also provides significant economic benefits, tempering the need to slash public programs and jobs and/or hike taxes and fees.

Critics also claim the tax cuts in the stimulus program aren't supporting consumer spending. This is incorrect. While spending has not rebounded sharply, without the stimulus it would still be declining. The collapse in stock and house prices forced families to increase their saving to fund college or retirement plans, while the severe credit crunch made it all but impossible for many households to borrow. Without the stimulus' support to household incomes, consumers would still be cutting back. Instead, spending has stabilized and the recession has ended.

There is valid criticism that infrastructure spending in the stimulus plan has been slow to get started. But this is due in part to the program's precautions against launching unproductive or politically-driven projects. Safeguards necessary to prevent such mistakes are slowing everything down. Nonetheless, infrastructure projects are now gearing up and will be particularly useful next year, when the economy will still need help.

Although the recession is over in the sense that gross domestic production is no longer declining, the economy continues to struggle. Job losses have slowed significantly since the beginning of the year, but payrolls are still shrinking and unemployment is still rising. The nation's jobless rate will top 10% in coming months—higher than the Obama Administration forecast when it was trying to get the stimulus passed early in the year. That fact, however, says nothing about the program's efficacy. If anything, it suggests the $787 billion stimulus was too small. Administration economists, like most private forecasters (including me), underestimated how hard the financial shock would hit the U.S. job market.

Note that the question of how much the fiscal stimulus has helped cannot be settled through an accounting exercise. Washington's bean counters cannot canvas the country and pick out which jobs have been created or saved by the stimulus and which have not. The best tools available involve statistical analysis that is subject to a range of uncertainties. But while the exact number of additional jobs that would have been lost without the fiscal stimulus will never be known for sure, it is clear that number is significant. Based on my research and that of others, I'm confident that if not for the stimulus, a million fewer jobs would exist today and the unemployment rate would already have risen well into double digits.

Such estimates are not just a game for academics. They will become particularly critical if the economic recovery does not take root, or worse if the U.S. slides back into recession. While such a double-dip downturn is unlikely, it remains a plausible scenario given the foreclosure crisis, mounting commercial mortgage defaults and a financial system that is still far from healthy.

My fear is that despite the unprecedented policies put in place over the past year, Washington will fail to muster the political will to maintain these policies until the economy is fully back on track. The Federal Reserve must not raise interest rates too soon. Congress may even have to ante up more to help unemployed workers exhausting their benefits, state governments unable to balance their budgets, and homebuyers and businesses looking to buy homes and invest.

All this help comes at significant cost. While the fiscal stimulus has been vital to ending the recession, it has helped produce a $1.6 trillion budget deficit this fiscal year and will lead to another $1 trillion-plus deficit next year. Yet the cost to taxpayers would have been measurably greater if policymakers had not acted aggressively. The recession would still be in full swing, undermining tax revenues and driving up government spending on Medicaid, welfare and other income support programs for distressed families.

It is a tragedy that we have been forced to devote so much of our nation's resources to quell the financial crisis and bring an end to the Great Recession. Yet it has been money well spent. The fiscal stimulus is working to ensure that our recent dark economic times will soon be relegated to the history books.

The Big Apple Is Still Humming

Fri, 9 Oct 2009 17:12 GMT

Pushing the technological envelope again, we offer the first Dismal Scientist economic commentary you can hum along to: Marisa DiNatale took a detailed look at why metro New York City has (so far) seen fewer job losses than forecast. And of course we're partial to seasonal adjustment, so the headline suggested itself:

A Recessionary Autumn in New York

The recent U.S. recession was arguably more widespread than any seen since the Great Depression. Virtually no state or metro area was spared, although the severity of the contraction varied across regions. Since the downturn was sparked by a financial crisis, it was reasonable to assume that the nation's financial centers would be disproportionately hurt. This has not turned out to be the case, at least so far.

It was also logical to believe that New York City, the epicenter of global capital markets, would be hit extraordinarily hard, with tens of thousands of financial services layoffs triggering many more job losses in other industries. This, too, has not yet been borne out...

Read the whole thing here. And enjoy some appropriate background music by clicking below:

	Billie Holiday - Autumn In New York

	Found at bee mp3 search engine

Credit When It's Due

Thu, 8 Oct 2009 14:26 GMT

Credit data provided by Equifax and Moody's Economy.com is a unique tool that provides detailed information on household credit conditions. Users are able to examine, segment and stratify credit risk and economic data across states, metropolitan areas, and non-metro areas of states. Credit trend data are available for bankcards, retail and consumer finance, unsecured personal, auto finance and auto bank finance, and first and second mortgage loans.

That's how Dismal Scientist describes the Creditforcast.com report, a rundown on U.S. household credit conditions that formerly appeared on the website once every quarter. As of this week, however, CF.com, as it's affectionately known around here, goes monthly. Same detailed data and analysis, just more often.

Why? Partly because we can: More frequent data recently became available, and we're eager to share it. But also because it's so timely. As the WSJ points out in a page-one story today, U.S. consumers' access to credit—and their shifting propensity to use it—are two of the most important factors determining the strength and speed of the current recovery.

Here, for example, is what Scott Hoyt had to say in this months' CF.com release:

Overall household credit conditions remain very bad and, with default rates still rising in aggregate, cannot be said to have peaked. However, there is increasing evidence that such a peak is near. The aggregate delinquency rate in September posted only its third decline since the middle of 2006. Further, the decline was the largest on record and spanned most major credit segments. The only exception was in mortgages, where the pool of loans at risk of entering foreclosure is rising. Even on the default side, there were signs of improvement, as the increase in the aggregate default rate over August and September was the smallest two-month increase since November.

It is difficult to attribute any of the improvement in early-stage delinquencies to the disbursement of the government stimulus, as few incremental funds have been distributed since May. Most of the improvement is likely a result of bad accounts being cleansed from portfolios through the default process and being replaced by a smaller number of higher-quality accounts. Although tight lending standards have reduced origination volumes dramatically, the quality of the new originations has been exceptional.

Forward, into the Past

Tue, 6 Oct 2009 10:55 GMT

"Ils n‘ont rien appris, ni rien oublié." * -- Talleyrand**

From The Conference Board:

NEW YORK Oct. 6, 2009…Despite the economic recession and tumults in the stock market, The Conference Board revealed today that all major categories of institutional investors (including pension funds, mutual funds, insurance companies, savings institutions and foundations) have remained fundamentally committed to the same investment policies they were adopting prior to the credit crunch...

“For decades, institutional investors had been shifting their allocation preferences from fixed-income securities into equity,” said Matteo Tonello, associate director of corporate governance at The Conference Board and co-author of the publication. “Then last year came, and it had a devastating effect on institutions’ expanded equity portfolios.” By the end of 2008, institutions had only 36.6 percent of their assets in equities, down from 47.2 percent at the end of 2007. “And yet these revisions appear to have been driven by market declines rather than by changes in investment policies,” Tonello concluded.

*"They have forgotten nothing, and learned nothing."

**French diplomat under Louis XVI and Napoleon, referring to the emigré aristocrats who returned to France after the restoration of the Bourbon monarchy in 1814.

The Boomers' Dilemma

Mon, 5 Oct 2009 16:31 GMT

The logic is impeccable: Boomers will work longer to make up for their busted real estate and 401k values. And boomers will retire earlier rather than compete with younger, cheaper workers in a time of rising unemployment.

Which is it? These folks take a stab at the question:

Recent dramatic declines in U.S. stock and housing markets have led to widespread speculation that shrinking retirement accounts and falling home equity will lead workers to delay retirement. Yet the weakness in the labor market and its impact on retirement is often overlooked. If older job seekers have difficulty finding work, they may retire earlier than expected. The net effect of the current economic crisis on retirement is thus far from clear. In this paper, we use 30 years of data from the March Current Population Survey to estimate models relating retirement decisions to fluctuations in equity, housing, and labor markets. We find that workers age 62 to 69 are responsive to the unemployment rate and to long-run fluctuations in stock market returns. Less-educated workers are more sensitive to labor market conditions and more-educated workers are more sensitive to stock market conditions. We find no evidence that workers age 55 to 61 respond to these fluctuations or that workers at any age respond to fluctuating housing markets. On net, we predict that the increase in retirement attributable to the rising unemployment rate will be almost 50 percent larger than the decrease in retirement brought about by the stock market crash.

Market Wu Speaks

Mon, 5 Oct 2009 16:13 GMT

The Times ran a fascinating profile the other day of the 79-year-old Chinese economist nicknamed "Market Wu." Wu Jinglian survived the Revolution, the Five-Year Plan, the Great Leap Forward and the Cultural Revolution, to become one of the main guides of the economic giant China has become.

You'd think that would make him a national hero, but far from it:

Last year, China’s state-controlled media slapped him with a new moniker: spy.

Mr. Wu has not been interrogated, charged or imprisoned. But the fact that a state newspaper, The People’s Daily, among others, was allowed to publish Internet rumors alleging that he had been detained on suspicions of being a spy for the United States hints that he is annoying some very important people in the government.

Anyone who annoys the Politburo is worth reading, and you can read Wu's own take on China's 60th anniversary at the equally feisty Caijing magazine:

China's modern history began six decades ago with a grand experiment aimed at realizing national development through a planned economic system based on public ownership. It was an experiment destined to fail. When an entire society eliminates the rights and freedoms of individuals to experiment and innovate, and only an elite few lead an entire nation toward a future filled with uncertainty, more often than not, things go astray. Even attempts to correct mistakes can be rigid and ineffective. Coming to realize that a mistake was made may involve only a small elite class, but fixing it requires concerted action by an entire society. And since a society's actions are not always right, a perpetual cycle of trial-and-error may result, forcing everyone to pay an unnecessarily high price that's difficult to measure.

China at 60: Growing Strong?

Thu, 1 Oct 2009 09:21 GMT

Sherman Chan gives CNBC-Asia the lowdown on China's growth numbers.

Megalopolitan Roundup

Wed, 30 Sep 2009 08:16 GMT

Good news for Beantown:

“The housing crash is over in Boston,’’ said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pa. “Sales, construction, and pricing have all passed their bottoms. It’s not going to come back quickly, but it’s on the mend.’’

And a warning for D.C.:

The 2008 election touched off a youthful pilgrimage to the capital that most panelists say won't end soon...[but] Not all see the current federal hiring binge continuing. "Right now Washington is a magnet. It has become the new New York," says Steven Cochrane, managing director of Moody's Economy.com. But the ballooning federal deficit suggests that "by next year, the government is going to be looking seriously at making cuts."

(By the way, we are shocked, shocked! not to see our hometown of Philly listed among the WSJ's "next hot youth magnets." Whatsamatta, youse don't like the Iggles?)

The Long View

Tue, 29 Sep 2009 08:40 GMT

Steve Cochrane walks C-Span through the U.S. housing recovery. (~30-minute video).

Decline and Rise

Thu, 24 Sep 2009 17:08 GMT

Pittsburgh is all over the media today, thanks to the outbreak of summitry there by leaders of the G-20. While we've discussed the global significance of all this, we're also mindful that what Tip O'Neill said about all politics being local also applies to economics. That's why we asked Ryan Sweet, who covers the region for Moody's Economy.com, to recap its current condition. The result is here.

At the same time I got in touch with an old friend—regional economist Chris Briem of the University of Pittsburgh—to ask how things looked from out there. He replied with the following:

The Decline and Rise of Pittsburgh

By Christopher Briem

When President Obama announced that Pittsburgh would host the G-20 summit, brief laughter passed through the White House press corps. Yet it was not a joke. While world leaders and finance ministers address the many problems on their agenda, the world will be introduced, or re-introduced, to Pittsburgh. The city has been forced to reinvent itself in the wake of past economic crises and has emerged stronger as a result. Pittsburgh’s lessons may be as important to the world leaders as the macroeconomic policies they will focus on while here.

A quarter century ago Pittsburgh faced a bleak future. A national recession was magnified in the manufacturing-dominated Pittsburgh economy. Yet most firms and workers viewed the malaise as just another trough in the recurrent business cycle; a dip that would end as it had many times before. The reality, in those years of the early 1980s, was that the region faced economic disaster.

While Pittsburgh’s competitive advantage in the production of steel had faded over preceding decades, the region had fought a holding action against the forces of change. The result was compounded job destruction affecting nearly every area firm and worker. Over 120,000 manufacturing jobs would disappear forever from the regional economy. Officially, unemployment would peak above 18%, though discouraged and underemployed workers would be forever hidden from those statistics. For a time it was reasonable to wonder if Pittsburgh would continue to exist as a major metropolitan region. That it would host world leaders, let alone be touted as a model of economic transformation, would have been inconceivable at the time.

There are lessons to be drawn from Pittsburgh’s history, but they are neither easy nor obvious. Fifty years ago a team of local economists with funding from the Ford Foundation completed an extensive economic study of the Pittsburgh region. Their four volumes of conclusions were clear that the competitiveness of heavy industry in Pittsburgh had been declining and would continue to decline. In the past, Pittsburgh prospered because it exploited a geographic advantage in the production of metals unsurpassed elsewhere in a growing nation. Those advantages would be the region’s undoing when most steel jobs disappeared. The prognosis was that without diversification away from steel and from manufacturing generally, the region would face further decline. Their forecast would prove prophetic and remarkably accurate.

Such a message was hard for Pittsburgh to hear in the early 1960’s, and harder still to heed. Steel production and related industries had defined Pittsburgh for more than a century. Generations of workers would follow their parents into the same jobs in the same mills. That the future could be different bordered on the inconceivable. As the region entered the 1980’s, therefore, very little had changed from a century earlier. Heavy industry would still define Pittsburgh as it had for over a century.

The assault on Pittsburgh’s economy came from several fronts at once. The expansion of electric arc mini-mills in steel production obviated most of Pittsburgh’s competitive advantage as a place to make steel. A severe recession and expansion of global steel capacity all came together to make Pittsburgh change in a way it had delayed for far too long.

The loss of jobs would not be the worst Pittsburgh had to endure. With economic prospects bleak, the hyper-mobile U.S. workforce looked for opportunities elsewhere. Net migration from the region would involve more than 50,000 people a year as unemployment peaked. As bad as the total numbers were, their demographic composition was what left an indelible mark on the region. The youngest workers were the likeliest to leave, taking their families and their future families as well. Those workers who were the most adaptable, the best prospects for new industries, were precisely those the region would have to survive without for most of a generation. The loss of workers and their skills, of young families and the future growth they represented, was the real cost of economic upheaval.

Change in Pittsburgh would not come from any one source. Local and state officials would struggle to maintain stability, let alone encourage growth. The traditional tools of economic development proved the least useful; efforts to attract and retain large manufacturing plants would be derided as smokestack-chasing. New tools were needed, yet few had ever been tested under such circumstances.

The United States had never had anything that could meaningfully be described as a structural adjustment policy. There were marginal programs to help severely depressed regions, but industrial bailouts such as those seen recently were never considered. Firms, workers and the Pittsburgh region were left to change on their own. As a result, new thinking emerged about what economic development meant. Rather than focusing on large, site-specific plants or firms, state and local governments began to broadly encourage entrepreneurial activity, and to support small and medium sized businesses. Technology-based development policies emerged, along with a greater emphasis on worker training and retraining.

Recession returned to Pittsburgh a quarter century later, yet it had a very different impact. While real estate markets nationally have seen historic drops, Pittsburgh’s housing market has remained remarkably stable. Predatory lending and subprime problems pale in comparison with elsewhere. The regional unemployment rate has remained consistently below national averages for almost 3 years, a fact even most Pittsburghers find hard to believe. Recent decades have seen employment growth in education and health services, which provide an economic stability the region never had in its past. Banking and finance have emerged as generators of jobs, as has energy services. Emerging biotechnology, advanced manufacturing and robotics firms are all substantial seeds for future regional growth.

Pittsburgh's success thus far comes from accepting the need for diversification. While some may dream of an industry to "replace steel" this is a mythical and counterproductive goal. The pace of technological change means no one industry will stay in place, or even exist, for as long as steel defined Pittsburgh. With the growth sectors of the future unknowable, a region's prosperity depends on its ability to continually adapt and change.

Pittsburgh is in the media this week mostly because of old perceptions that have fallen behind the times. When the region was last in the global spotlight, it defined the economic decline of the American Rust Belt. Survival alone would make the Pittsburgh story noteworthy. That it has emerged with a new stability and as a respectable host for world leaders may offer hope to other regions navigating severe economic times.

Repo Man

Wed, 23 Sep 2009 09:30 GMT

From the department of you-read-it-here-first. Bloomberg reports today...

The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

what Joe Brusuelas said on Monday:

The Fed recently met with the 19 primary dealers—banks or brokers who trade directly with the central bank—to discuss its exit strategy. The focal point was the use of reverse repurchase agreements to remove liquidity from financial markets. In a reverse repo, the Fed temporarily sells securities in exchange for reserves. Holdings of MBS and agency debt account for more than 38% of the Fed's balance sheet. The share will rise as demand for temporary liquidity declines and the central bank completes its purchase of government securities. Thus, the focus over the next several FOMC meetings will be on how the Fed intends to liquidate the assets on its balance sheet.

Mapping the U.S. Recovery

Thu, 17 Sep 2009 12:58 GMT

What is it that makes maps so fascinating? I'm not sure, but it certainly seems that a 30,000-foot view can help when it comes to following broad economic trends. Our Global Recession Status map has been enormously popular, drawing attention from global publications such as The Economist, and websites in France and Spain.

And now, bowing to popular demand, we bring you the U.S. Recovery Status map—an interactive way to follow the developing business cycle across states and metropolitan areas.

Each month, Moody's Economy.com's regional analysts take the temperature of the 50 states and more than 380 U.S. metro areas—monitoring employment, construction, house prices and industrial production. The data produce an index that is summarized on the Recovery Status Map. States' conditions are color-coded; click on the map to see how each state's major population centers are faring. Those states and metros where the indicators are dropping are labeled In Recession. Those where declines have slowed are said to be Moderating. Areas where the indicators have begun rising again are Recovering. Places that have advanced past their previous growth peaks are labeled Expanding.

As with all features on Dismal Scientist, we welcome your questions and suggestions. Leave a comment here, or email help@economy.com.

Thinking Like an Economist

Wed, 16 Sep 2009 11:44 GMT

If you lay 325 economists end to end, will they reach a conclusion? Maybe on some bedrock principles (though the recent unpleasantness certainly has called into question a lot of what used to be thought of as consensus). Econ Journal Watch—a publication of the American Institute for Economic Research—recently polled members of the American Economic Association on a variety of current issues.

This isn't the first time someone has suggested that economists think differently, of course. But it's an interesting update on just how thinking like an economist makes you stand out from the crowd. From the abstract:

The questions treat issues such as trade restrictions, social insurance for those put out of work by international competition, genetically modified foods, curbside recycling, health insurance (several questions), medical malpractice, barriers to entering the medical profession, organ donations, unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart, casinos, ethanol subsidies, and inflation targeting. Additional questions treat the relationship between economic growth, happiness, and well-being, whether the typical American consumes too much, works too much, saves too little, and live in a house that is too large.

The results show disagreement on many issues but evidence of considerable agreement on others, including a consensus that the benefits of Wal-Mart stores typically outweigh their costs, that Americans save too little and that economic growth in developed countries increases well being. The survey finds a consensus in favor of eliminating trade barriers, eliminating or cutting ethanol subsidies, allowing payments to organ donors, and against requiring employers to provide health insurance.

Stimulus Followup

Thu, 10 Sep 2009 16:34 GMT

Did the government's stimulus keep the Great Recession from becoming something worse? The arguments will go on until long after these words have turned to pixel-dust. The White House, not surprisingly, makes the case that the stimulus worked—or more specifically, had a "substantial positive impact on the growth of real gross domestic product (GDP) and on employment in the second and third quarters of 2009."

The report is here. Some excerpts:

Following implementation of the [American Recovery and Reinvestment Act] the trajectory of the economy changed materially toward moderating output decline and job loss. The decomposition of the GDP and employment change by components or sector suggests that the ARRA has played a key role in this change of trajectory.

...

It is well understood among experts that policy evaluation is difficult. Estimating the impact of countercyclical macroeconomic policy is particularly difficult because we do not observe what would have happened to the economy in the absence of policy. As the prominent economic forecaster Mark Zandi has put it, "It is important to note that estimating the economic impacts of the fiscal stimulus is not an accounting exercise …. It is not feasible to identify and count each job that results from the stimulus."

...

Figure 4 shows the change in payroll employment over the recession. A key indicator of the severity of this recession is the fact that in the first quarter of this year, we lost nearly 700,000 jobs per month. In the second quarter, we lost an average of 428,000 jobs per month. Statistics released on September 4 show that job loss was 276,000 in July and 216,000 in August, for a two-month average loss so far this quarter of 246,000. These job losses are obviously unacceptable. But the change does suggest that we are on the right trajectory.

Award Winners

Thu, 10 Sep 2009 08:52 GMT

Ahem. From Market Watch this morning:

The economy still faces major challenges, said Joseph Brusuelas, a top economist for Moody's Economy.com, whose team won the August Forecaster of the Month award from MarketWatch for their accurate predictions on 10 major indicators...

"Is the private sector actually ready to pick it up once public support is scaled back?" Brusuelas said. He has his doubts, and expects a "U-shaped" recovery. "We won't see robust growth until 2011."

"The consumer is hunkering down, building up a savings cushion," said economist Ryan Sweet, a member of the award-winning team that also includes economist Aaron Smith...

In the August contest, Brusuelas' team bested 44 other forecasters. They had the most accurate forecasts on two indicators (the consumer price index and retail sales) and were among the 10 most accurate on four others (the trade gap, housing starts, new home sales and durable-goods orders)...

"It's a team effort," said Smith of Economy.com's efforts. The three forecasters get together as a group to hash over their forecasts, spot anomalies, and fine-tune their models.

Baltimore Calling

Thu, 20 Aug 2009 10:11 GMT

Live today: Our Celia Chen answers housing questions from readers of the Baltimore Sun:

Sic Transit Fortune 500

Tue, 18 Aug 2009 08:22 GMT

Turnover at the top of the heap. The BBC reports:

Oil giant Royal Dutch Shell has replaced US retail group Wal-Mart as the world's largest company, the latest annual survey by Fortune magazine says.

There are also fewer U.S. corporations in the list of the 500 biggest firms than at any time since the publication started keeping records in 1995...

For the first time in 10 years, the biggest firm is not from the U.S...

Forbes said Shell's annual revenues were $458 billion, roughly the same as the national income of Saudi Arabia. Exxon's profits however are greater than Shell's, at $45.2 billion compared with $26.2 billion.

FORTUNE TOP 5 (REVENUES)

Royal Dutch Shell: $458bn

Exxon Mobil: $442bn

Wal-Mart Stores: $406bn

BP $367bn

Chevron: $263bn

Gross Domestic What?

Sun, 16 Aug 2009 18:16 GMT

For at least a decade or so, environmental types and others have been trying to make a case against GDP; blasting it as a biased gauge of national well-being that overvalues material achievement and undervalues just about everything else, from clean air to childrearing. The latest version of this appeared here.

I've never found these arguments very compelling. Not that I don't agree that GDP is a limited metric—rather that I don't yet see a viable more comprehensive alternative.

On the other hand, Business Week's Michael Mandel may have some better reasons to rethink GDP—or at the very least, to better understand what it is and is not:

...there are few things that frost me more than hearing “consumer spending is 70% of gross domestic product,” because it perpetuates two very large and very misleading untruths.

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for “gross domestic product”—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

So we have grown used to thinking of “spending” as “production”—after all, that’s the way it is presented. (I’m not blaming the BEA, by the way. This is the way that GDP was designed from the beginning, 70 years ago).

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.

Looking Back at Lehman

Wed, 12 Aug 2009 11:40 GMT

As the anniversary of the Lehman Bros. bankruptcy approaches, expect a flood of punditry, much of it skippable. This, however, from Ken Rogoff, seems right on point:

The overwhelming consensus in the policy community is that if only the government had bailed out Lehman, the whole thing would have been a hiccup and not a heart attack... Unfortunately, the conventional post-mortem on Lehman is wishful thinking. It basically says that no matter how huge the housing bubble, how deep a credit hole the United States (and many other countries) had dug, and how convoluted the global financial system, we could have just grown our way out of trouble. Patch up Lehman, move on, keep drafting off of China’s energy, and nothing bad ever need have happened.

The fact is global imbalances in debt and asset prices had been building up to a crescendo for years, and had reached the point where there was no easy way out. The United States was showing all the warning signs of a deep financial crisis long in advance of Lehman...Housing prices had doubled in a short period, spurring American consumers to drop any thought of saving money. Policymakers, including the US Federal Reserve, had simply let the 2000s growth party go on for too long... The system had reached a point where it had to be bailed out and restructured. And there is no realistic political or legal scenario where such a bailout could have been executed without some blood on the streets.

Scarred for Life by Recession?

Tue, 11 Aug 2009 17:50 GMT

The most disturbing paragraph I've read today:

Do generations growing up during recessions have different socio-economic beliefs than generations growing up in good times? We study the relationship between recessions and beliefs by matching macroeconomic shocks during early adulthood with self-reported answers from the General Social Survey. Using time and regional variations in macroeconomic conditions to identify the effect of recessions on beliefs, we show that individuals growing up during recessions tend to believe that success in life depends more on luck than on effort, support more government redistribution, but are less confident in public institutions. Moreover, we find that recessions have a long-lasting effect on individuals’ beliefs.

The full abstract is here.

The Housing Imperative

Fri, 7 Aug 2009 15:24 GMT

The Voice of America learns why a stable residential real estate market is essential to a broader economic recovery. (View the video in Windows Media Player):

Mark Zandi, the chief economist atMoody's Economy.com says a healthy housing market is one of the leading indicators for an economic recovery. "I think it's a necessary condition. I don't think the financial system stabilizes nor does the economy gain traction unless the housing downturn comes to an end. And I think it is coming to an end," he said.

But a rebound in sales is just part of a larger equation. Although attractive mortgage rates and tax incentives for first time homebuyers have helped kick start sales, Zandi says U.S. house prices are still falling.

More Like Us

Thu, 6 Aug 2009 13:31 GMT

Of course, we've known this for years around here. Now the NYTimes confirms it:

“I keep saying that the sexy job in the next 10 years will be statisticians,” said Hal Varian, chief economist at Google. “And I’m not kidding.”

The rising stature of statisticians, who can earn $125,000 at top companies in their first year after getting a doctorate, is a byproduct of the recent explosion of digital data. In field after field, computing and the Web are creating new realms of data to explore — sensor signals, surveillance tapes, social network chatter, public records and more. And the digital data surge only promises to accelerate, rising fivefold by 2012, according to a projection by IDC, a research firm.

Yet data is merely the raw material of knowledge. “We’re rapidly entering a world where everything can be monitored and measured,” said Erik Brynjolfsson, an economist and director of the Massachusetts Institute of Technology’s Center for Digital Business. “But the big problem is going to be the ability of humans to use, analyze and make sense of the data.”

Playing Catchup

Mon, 3 Aug 2009 16:43 GMT

So the government has now caught up on the last five years of production and consumption data, and served it all up in a set of revisions that tell us—surprise—that the recession has been even worse than it looked on paper. Ryan Sweet reports:

The latest revisions paint a grimmer picture of the economy in 2008, with real GDP being revised lower in three of the four quarters. Real GDP in the first quarter is now seen falling 0.7% at an annual rate, in sharp contrast with the 0.9% growth previously reported. For the third quarter, GDP was revised down by more than 2 percentage points, to an annualized 2.7% decline in output. Weaker consumer spending was to blame for the majority of the downward revision to 2008 real GDP.

The U.S. economy grew 1.5% at an annual rate in the second quarter of 2008. Growth in that period likely was lifted by the Economic Stimulus Act of 2008, which totaled $170 billion and included a sizeable tax rebate. Without such a stimulus, growth in the April-June period of 2008 would have been much weaker and the contraction in the second half even more severe.

Real GDP in the first quarter of 2009 was revised to show a 6.4% annualized decline, worse than the previously reported drop of 5.5%. Overall, the revisions now show real GDP has fallen 3.9% from its peak in the second quarter of 2008.

Speaking of catching up, here's how Mark Z. interpreted the latest GDP numbers for Maria Bartiromo last week:

Race to Recovery

Mon, 3 Aug 2009 08:39 GMT

The recovery race is on: Sherman Chan tells Asian CNBC who's jogging and who's sprinting:

Sherman's complete rundown of the Asian recovery picture is here.

Map Quest

Wed, 29 Jul 2009 14:34 GMT

I think I know how the designer of the Campbell Soup can felt after Andy Warhol got famous. Flattered, sort of, but still ...

The Economist takes note of—and gussies up a bit—our Global Recession Status map.

I note, by the way, that some commenters on the Economist page are wondering how we decide if a country is in recession, at risk, or expanding. My colleague Bodhi Ganguli explained it all in a recent issue of Moody's Economy.com's Regional Financial Review:

How does Moody's Economy.com define recession for the world's economies?

The popular press gives the impression that two successive quarters of decline in gross domestic product are enough reason to call a recession. In actuality, the process of deciding when an economic cycle has turned is more complex. In the U.S. , the Business Cycle Dating Committee of the National Bureau of Economic Research dates the peaks and troughs of the economy's growth. Thanks to a long tradition of conducting this exercise, it has become the de facto arbiter of recession. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months." The Euro Area Business Cycle Dating Committee of the Centre for Economic Policy Research has a similar definition for recession in the euro zone. There is, however, no single quasi-official or academic body that keeps track of turning points in economic activity for the global economy as a whole.

Consequently, Moody's Economy.com country analysts must rely on their own judgment to determine the recession status of their respective countries. Moody’s Economy.com defines recession as a consistent, broad-based decline in economic activity. In the absence of timely high-frequency GDP data, analysts look for four to six months or two quarters of contractions in various data series to ascertain that such declines are consistent with cyclical activity rather than seasonal variations. Sudden upticks in one or more indicators of activity are not viewed as signals of recovery unless the analyst firmly believes that the upward trend will persist.

Further, to verify that the economic contraction is broad-based and not confined to a few sectors, a wide range of indicators are considered. The most frequently looked at indicators include measures of employment, industrial production and retail sales—high-frequency indicators that seek to capture the breadth of economic activity. The importance assigned by the analyst to each of these variables in the decision-making process depends on the specific characteristics of the economy in question. The goal is to extract as much information as possible to track movements in GDP from both the expenditure and product sides. Depending on the individual macro structure of an economy, analysts may also examine additional indicators such as export and import values, external debt burdens, and even the performance of the agricultural sector in countries where it accounts for a significant share of GDP.

A country can be declared to be in recession retrospectively. In other words, as new data become available, an analyst may decide in May 2009 that country X had entered recession in March 2009. In addition, as movements in coincident and leading indicators are continuously monitored, it is quite common for an analyst to estimate the duration and end-point of a country's recession.

Given that official GDP data are usually quarterly and released with a lag for most countries, analysts almost always precede official announcements in declaring that a country is in recession. In determining the recession status of a country, the analyst seeks to locate its position in the business cycle. If the analyst concludes that a country is not in recession, it is classified as either "expanding" or "at risk" of slipping into a recession. Thus, while following the basic guidelines of the NBER, the Moody’s Economy.com definition adds an extra layer of detail about the trajectory of the country's economy.

Update: Since The Economist's screen-shot version appeared, we've expanded our coverage on the Global Recession Status map again. Now included: Bolivia, Papua New Guinea, Kazakhstan, Uzbekistan, North Korea, Iran , Kuwait, Oman, Yemen and Mongolia. More to come...

Digging Deeper

Tue, 28 Jul 2009 15:47 GMT

More on the improvement in consumer delinquencies. Mark Z. sends along these graphics, showing how much and where...

Digging Out of Plastic Gulch

Mon, 27 Jul 2009 11:23 GMT

Personally, I would regard this sort of thing as more encouraging than an uptick in spending. From the WSJ:

Fewer American households appear to be falling behind on their debt payments, according to a new study, but some economists question whether the data reflect a meaningful easing of consumer-credit problems.

"I feel very confident we are at a turning point," said Mark Zandi, chief economist of Moody's Economy.com. "Household credit conditions are set to improve significantly by this time next year," he said. Mr. Zandi attributed the turn to tightening lending standards.

Mr. Zandi's outlook is based largely on his analysis of 7.5 million credit files supplied by Equifax Inc., the credit-reporting titan based in Atlanta. The files analyzed represent 5% of U.S. consumers. The analysis showed that the number of mortgage, credit-card and other consumer loan payments that were 30 and 60 days past due fell by nearly 1.1 million to 13.9 million at the end of June, on a seasonally adjusted basis, from three months earlier. Nearly two-thirds of the decline came from falling credit-card delinquencies.

Scott Hoyt has more over on Consumer Flow:

There was significant good news in the second quarter data, however, as early-stage delinquency rates declined both in aggregate and for all major segments excluding autos. With the decline in outstanding balances affecting the denominator of the rate calculation, the decline in rates is a signal that quality is starting to improve, with fewer new loans becoming delinquent. Sixty-day delinquency rates declined in aggregate and across many segments as well, further bolstering the claim that credit markets are finally starting to turn around. Auto loans were the one major group not showing declines, but the sharp plunge in outstanding balances masked improvement in this sector as well.

Some of the improvement in early-stage delinquencies may be due to the disbursement of the government stimulus, which resulted in rapid growth in real disposable income during the first five months of this year. However, most of the improvement is likely a result of bad accounts being cleansed from portfolios through the default process and being replaced by new, high-quality accounts. While tight lending standards have reduced origination volumes dramatically, the quality of the new originations has been exceptional.

Mind Over Mortgage?

Fri, 24 Jul 2009 12:41 GMT

This just in :

On July 29 at 11:30 a.m. ET, the National Science Foundation hosts a live webcast with three top economists who will answer unusual questions about the housing market that every investor should know.

The webcast, titled 'Til Mortgage Do Us Part: The Science, puts in context the sometimes seemingly irrational economic decisions that mark the nation's mortgage crisis.

What happened physiologically in the brain when some owners stopped paying their mortgages after hearing about possible federal home bailouts?

How will the mortgage crisis change the psychology of future home buyer and investor decisions?

How does a constant barrage of bad economic news affect investor confidence in future economic decisions and what will it mean for the market?

Why are foreclosures in some areas sparking new bidding wars so soon after the recent market crash?

The panelists include famous bubble-burster Robert Shiller , along with Caltech behavioral economist Colin Camerer and National Science Foundation economist Nancy Lutz. No apparent Freudians in the bunch. I wonder how'll they'll come down on the essential question: Do you have to be crazy to buy a house these days?

Down So Long It Looks Like Up

Mon, 20 Jul 2009 11:04 GMT

Our friends at MSNBC are highlighting our latest Recession Status survey of U.S. states and metros:

Although not a single metro area in the nation was "in recovery," 23 out of 381 showed a "moderating" recession, meaning their economies were not contracting as severely as six months earlier. The list:

California: Hanford-Corcoran

Colorado (2): Boulder, Denver-Aurora-Broomfield

Connecticut (2): Hartford-W. Hartford-E. Hartford, Norwich-New London

Florida: Bradenton-Sarasota-Venice

Georgia: Savannah

Illinois and Wisconsin: Lake County, Ill.-Kenosha County, Wis.

Louisiana: Baton Rouge

Maine: Portland-S. Portland-Biddeford

Massachusetts (2): Cambridge-Newton-Framingham, Peabody

Mississippi: Pascagoula

Nevada: Carson City

Tennessee and Kentucky: Clarksville, Tenn.-Ky.

Texas (7): Austin-Round Rock, Fort Worth-Arlington, Houston-Sugar Land-Baytown, McAllen-Edinburg-Mission, San Angelo, San Antonio, Wichita Falls

Utah: Provo-Orem

Although these areas may be first to come in for a landing, that does not mean that they necessarily will be the first to take off again.

"I don't think I would categorically say that these are the places pulling out of recession first, because it may not follow an even path toward recovery," said economist Andrew Gledhill of Moody's Economy.com. "Many that fall into this category may end up staying at this level of 'moderating recession' for quite a while."

The Foreclosure Trap

Thu, 16 Jul 2009 08:23 GMT

More bad news on housing: Will the cycle be unbroken? From AP:

The number of U.S. households on the verge of losing their homes soared by nearly 15 percent in the first half of the year as more people lost their jobs and were unable to pay their monthly mortgage bills.

The mushrooming foreclosure crisis affected more than 1.5 million homes in the first six months of the year, according to a report released Thursday by foreclosure listing service RealtyTrac Inc.

The data show that, despite the Obama administration's plan to encourage the lending industry to prevent foreclosures by handing out $50 billion in subsidies, the nation's housing woes continue to spread. Experts don't expect foreclosures to peak until the middle of next year.

Experts such as Celia Chen, who wrote last week on Dismal Scientist:

While the end of many foreclosure moratoriums in March may partly explain the increase in foreclosures, sinking equity and rising job losses are now causing pain for many households with good credit. About 15 million homeowners, or 30% of those with a first mortgage, are under water—they owe more on their loans than their homes are worth at current market prices. While many of these homeowners have a longer-term view and will continue meeting their mortgage payments, those without jobs and income may find walking away an attractive option...

The continued rise in foreclosures points to further declines in house prices, despite the recent firming in gauges such as the FHFA index, median prices, and the S&P/Case-Shiller 20-city index. Falling home prices in turn push more homeowners under water. Greater negative equity increases the risk that a household will fall into foreclosure and decreases the likelihood that a loan will be successfully modified, thus perpetuating a downward spiral...

Declaration of Independence

Wed, 15 Jul 2009 13:21 GMT

This just in. More than 175 (mostly academic) economists appear to have signed. David Wessel has the story.

Open Letter to Congress and the Executive Branch

Amidst the debate over systemic regulation, the independence of U.S. monetary policy is at risk. We urge Congress and the Executive Branch to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability. There are three specific risks that must be contained.

First, central bank independence has been shown to be essential for controlling inflation. Sooner or later, the Fed will have to scale back its current unprecedented monetary accommodation. When the Federal Reserve judges it time to begin tightening monetary conditions, it must be allowed to do so without interference. Second, lender of last resort decisions should not be politicized.

Finally, calls to alter the structure or personnel selection of the Federal Reserve System easily could backfire by raising inflation expectations and borrowing costs and dimming prospects for recovery. The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.

If the Federal Reserve is given new responsibilities every effort must be made to avoid compromising its ability to manage monetary policy as it sees fit.

Talkin' Bout My Generation

Wed, 15 Jul 2009 09:33 GMT

Sigh. I've been afraid of this. From the AARP Bulletin:

If the value of his house and his stock portfolio weren’t so shaky, Orville Teising, 67, wouldn’t be out looking for work.

Having retired after a career in sales but with a nest egg shrinking significantly, “my wife, Rochelle, and I don’t have enough money to stay in our house indefinitely,” says Teising, who lives in Mill Valley, Calif. “Those savings, which we were planning to live on in our 80s, declined by 30 percent last year, so my wife’s now back to work as a psychotherapist, and me, I’m out looking. But it’s not that easy.”

In fact, the unemployment rate for Americans over 55 is at a record level. Thousands of older Americans are losing their jobs, and many others want to either keep working or get back in the job market as their financial insecurity soars.

Sara Rix, a policy analyst for AARP, said the organization’s recent research shows that workers are pushing back their expected retirement because of market losses. Many who once expected to retire at 62 now expect to work until at least 65.

Stim und Drang

Thu, 9 Jul 2009 16:07 GMT

More stimulus? The debate continues. Here was Mark Z. on PBS' NewsHour Wednesday:

The Inflation Variations

Thu, 9 Jul 2009 13:36 GMT

Economic forecasts are notoriously inaccurate. That isn't a statement about the ability of forecasters, but rather a statement about the complexity of the economy. If you're looking for a humbling experience, I recommend you give it a try.

That's David Altig at the Atlanta Fed's Macroblog, who notes that,within the economics fraternity. rarely have so many disagreed about so much. As proof, check this chart, which tracks the variance among Blue Chip forecasters' views on inflation:

Altig writes:

Disharmony in the panel's inflation outlook doesn't so much suggest that those expecting inflation now see greater inflationary risks—at 3.2 percent the medium-term inflation prediction of the highest 10 inflation forecasts isn't materially different from where it has been since the late 1990s. Instead, the larger variance in the inflation outlook is coming from those at the bottom of the panel's forecast distribution that are anticipating even more downward price pressure than in previous years.

An alternative approach, favored by my colleagues hereabouts, involves setting out a range of possibilities, and assigning each possibility a probability (which sounds like the beginning of a Gilbert & Sullivan ditty.) As Mark Z. outlines in his latest U.S. Macro: (now also available in podcast!):

Given all this, the near-term outlook will be characterized at best by a U-shaped cycle. After declining 2.7% this year, real GDP will expand a disappointing 1.3% in 2010. Growth is expected to accelerate strongly in 2011-2012, but much has to happen between now and then, and the risks remain skewed to the downside. The U-shaped outlook represents about 50% of the distribution of possible economic outcomes, but there is a 30% probability that the outlook will be measurably worse than the baseline and only a 20% probability that it will be better.

Another Round?

Tue, 7 Jul 2009 15:53 GMT

Should Washington dip the bucket again, or is the economic pump sufficiently primed? The debate begins. From Bloomberg:

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama.

House Majority Leader Steny Hoyer said today “we need to be open to whether or not we need additional action” on an economic stimulus. Speaking in Washington, he cautioned, though, that it is “too early” to assess whether the current stimulus plan is succeeding.

And from Bruce Bartlett in the FT:

Another stimulus would be a grave mistake. The first one was justified by extraordinary circumstances. But it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future...

[I]t is foolish to think that any sort of stimulus that is enacted now will have an impact on the economy any time soon. We just have to wait for the medicine we have already taken to work. Pushing ahead with another stimulus will only make it harder to tighten fiscal policy down the road to keep inflation in check.

Mark Z., by the way, also says wait, at least for now. From the latest (just posted!) U.S. Macro Outlook on Dismal:

Those who see the recession continuing and conclude that the stimulus is a failure are mistaken. The stimulus is performing close to expectations, at least so far. If it continues as expected, U.S. employment will shrink by approximately 750,000 jobs in the third quarter and by 400,000 in the fourth quarter, but the job losses will abate by the spring of 2010. Unemployment will rise as high as 10.5% next summer, but without the stimulus, unemployment would peak near 12.5% in early 2011.

It is, however, premature to conclude that the economy requires a third round of stimulus (following the first in 2008 and the current one). That can’t be reasonably determined until later this year, after the current program has had an opportunity to work. If by then the economy is not performing as anticipated, then another dose of temporary stimulus in 2010 may be warranted.

Graphical Grabbers

Tue, 7 Jul 2009 09:16 GMT

Television was developed during the Depression of the 1930s. The Internet was incubating during the late-80s financial crisis. Maybe it's a stretch, but you could make a case that the current environment is helping kick financial information graphics to a new level.

Two recent examples: The Wall Streeet Journal's latest interactive guide to the Fed's balance sheet,

and the New York Times' wild ride around the business cycle.

The Quantity of Justice

Tue, 30 Jun 2009 10:31 GMT

Am I the only one who sees at least symmetry, if not justice, in Bernie Madoff's prison sentence?

At his age, after all, 150 years is an entirely symbolic number—chosen not because it represents any quantitative reality, but rather to induce warm feelings of statisfaction among Madoff's former investors and the general public.

Just like the numbers on the returns Bernie claimed all those years he was in business.

Stimulus Countdown

Mon, 29 Jun 2009 11:22 GMT

We have consensus: The lift from Washington's fiscal stimulus booster should be felt very soon now. From today's Financial Times:

The US economy will feel a substantial boost from the Obama administration’s emergency spending package over the next few months, says Christina Romer, a senior White House official, who has warned against tightening monetary and fiscal policy before recovery is well established.

And from last week's Dismal Scientist:

The moment of truth is at hand for the U.S. fiscal stimulus plan. The stimulus that became law in February should reach its point of maximum economic benefit this summer. If the plan is working, retailing will improve soon, and businesses should respond by curtailing layoffs measurably. Early results suggest the stimulus is performing close to expectations, but policymakers should be prepared to provide more help to the economy if things don't work as expected in coming months.

Looking Up Down Under

Fri, 26 Jun 2009 08:16 GMT

Why is Australia's economy leading the OECD nations? Our Matt Robinson explains it to Radio Australia:

Crisis Poster

Thu, 25 Jun 2009 14:43 GMT

How do you organize a meltdown? The New York Fed tries to lay out the events of the past couple years in an interactive timeline, suitable for framing on your wall.

If you're more into tables, we've got our own versions on Dismal Scientist: the Global Crisis Response Monitor shows who's spending what to combat the worldwide financial crisis, while the U.S. Crisis Response page parses actions of the Fed and Treasury.

Stats-alooza

Thu, 25 Jun 2009 13:48 GMT

Who says data geeks don't know how to have fun? It's the Bureau of Labor Statistics' 125th birthday (word geeks would ask what's halfway between a centennial and a sesquicentennial, but we're talkin' numbers here, baby) and the BLS is throwing itself a party. Charts and charts and charts; also nice explanations of what exactly they do at the BLS and why you should care.

Contrarian Corner

Wed, 24 Jun 2009 14:17 GMT

Reader Tom Ford suggests we widen the range of views expressed here, and we're happy to accede. Herewith, a soapbox for anyone who thinks we've missed the forest for the trees, or are otherwise confused about things general or specific. Writes Tom:

I was just reading about GE saying that they don’t see any “green shoots” and then I thought about the economy and the Dismal Scientist. Thus this note.

When we talked, I said that economists were trained to talk out of both sides of their mouth but only provide one point of view. I would like to suggest that the Dismal Scientist provide an article (or series) that addresses the downside, [as witness]:

Uncompetitive labor cost to compete in a world market

IOUSA trillions.

Consumers in debt far beyond responsible financial budgets.

Baby boomers with no retirement.

10% unemployment for years.

All level of government broke.

Banks with trillions in bad loans.

Japanese type of recession for 10+ years.

Depreciation of the dollar.

And the list goes on

I would love for someone to tell me how the numbers work so I wouldn’t have to worry anymore. I don’t see any clothes on the political and financial market “leaders”. All I see is a bubble that is going to cost two generations a much lower standard of living than I had.

Look up the “Decline of the Roman Empire” in Wikipedia. First sentence: “The decline of the Roman Empire refers to both the gradual disintegration of the economy of Rome and the barbarian invasions that were its final doom.”

Replace "gradual disintegration" with "mass communications, mass transportation, mass markets" and replace "barbarian invasions" with "emerging markets’ cheap labor."

Tom

Jingle Bells in June

Tue, 23 Jun 2009 12:40 GMT

With summer solstice passed, it must be time to worry about winter holiday shopping. At least it is if you're Scott Hoyt, who writes:

Six months before the holiday season, there are a number of things that could change that could have an impact on holiday spending. There is great uncertainty surrounding the path of energy prices in general and gasoline prices in particular. Much of the recent increases are seasonally normal. However, if they were to be sustained though the fall and into the winter, the drag on consumer cash flow and confidence would push spending below expectations.

That's over on Consumer Flow, our companion site (sub req'd). For Dismal Scientist users, Scott conveys his thoughts in podcast form.

India Nutshell

Tue, 23 Jun 2009 12:29 GMT

Mark Z. gives India's Economic Times a quick Q and A on the forecast:

"...if the recession is coming to an end by December, then what are your expectations for growth in the US economy for the next year? Is the U.S. economy likely to record GDP expansion?

I will just give you some context. I expect the recession to end this year and then in 2010, we’ll see some growth, not a recession. But it will be a modest kind of growth. We’ll be uncomfortable with it and rising through the first half of the year. It won’t be until 2011/2012 before we start to see meaningful growth. The key reason for that is that there are large parts of our economy that are struggling. While the banking industry is better, it’s not really providing the kind of credit. So I think we’ll get just as much growth to get out of recession, but not more than that.

More, in podcast form, for Dismal subscribers here.

The View from Harvard

Mon, 22 Jun 2009 09:48 GMT

In the worst housing construction cycle since the 1940s depressed demand is making it difficult for the market to work off excess vacant units. Restoring demand to more normal levels will take time since so many owners are in financial distress or trapped in homes worth less than their mortgages. The recession has also dampened both immigration and new household formation. But once new home sales rebound and the economy begins to pick up, the aging of the echo boomers—the largest generation to reach adulthood in the nation’s history—should reinvigorate the housing market.

That's from a new study by Harvard University's Joint Center for Housing Studies. The study touches a lot of bases: demography, energy policy, social justice ... and seems to conclude that we'll get through this more or less intact. The data, not surprisingly, includes a lot of our own analysis:

LIFO or FIFO?

Thu, 18 Jun 2009 08:53 GMT

You can argue all day about when the recession will end—we do—but it's indisputable that not everyone will recover at the same time. So who's on first? Our Mark McMullen says it's good to have oil, or technology:

Labor markets will likely improve first in energy- and commodity-producing states such as Texas, which also are experiencing only modest housing downturns. Improvement in demand for tech-producing industries and transport and distribution will help the Pacific Northwest and the Southeast. The industrial Midwest and the Northeast will emerge later in 2010 after the weights of auto and finance restructuring lift. Housing markets in California and the Southwest, along with Florida, may begin to improve this year, but these areas have a deep hole to climb out of, and considerable cutbacks in state government employment may offset other gains this year and into next.

Meanwhile, the Brookings Institution has its own view of how the recovery might roll out. Spotlighting the health of America's 100 largest metro areas—with data from, ahem, Moody's Economy.com among other sources—the Washington thinktank has produced something called MetroMonitor. Early findings:

"A few metropolitan areas are beginning to showing signs of economic recovery, although none has completely recovered. McAllen is the only metropolitan area that saw growth in both employment and output during the first quarter of 2009. Employment also rose in New Haven and Baton Rouge, while output also increased in Seattle, Austin, Virginia Beach, Washington, Richmond, San Jose, and Riverside. Still, none of these metro areas has yet returned to its pre-recession levels of employment or output."

Down So Long It Looks Like Up?

Mon, 15 Jun 2009 09:13 GMT

The Washington Post checks in for an update on housing:

With housing prices falling and mortgage interest rates rising, it's hard to say the housing market has bottomed out.

And, yet, there are some reasons for a more optimistic housing forecast, according to Mark Zandi, chief economist for Moody's Economy.com and author of "Financial Shock." The bottom is coming into view, he said in a recent interview.

"The home sales data suggests that demand is stabilizing," he said. "Since last year, new- and existing-home sales have stabilized. It's not going up, but it's not going down either. About half of the existing sales are distressed foreclosure or short sales, and that's part of finding a bottom. I view that as therapeutic."

Read the whole thing.

The Long View

Mon, 15 Jun 2009 08:52 GMT

Whether the U.S. starts to recover in October, November, or sometime in early 2010 is a question—but maybe not the most important question in the long run. A rotten year or two is one thing: a decade or more of sub-par growth in productivity, growth and therefore opportunity is something else. Is that what we're facing? Our Ed Friedman says it looks that way:

The unprecedented size, scope and duration of the financial crisis and recession have caused us to alter our long-term macroeconomic outlook for the U.S. economy. In short, the tremendous increase in perceived financial and economic volatility will mean a higher cost of capital and a lower profile for borrowing and investment over a protracted period.

Ed's also summarized his analysis in a slide show. Check it out.

Tables of Content

Thu, 11 Jun 2009 13:42 GMT

If you'd prefer fewer words and more numbers, a new feature on Dismal Scientist is for you. Forecast Center puts all our macro, regional, industry and international tables in one convenient location, which you can access from this handy link on the home page drop-down menu.

The tables themselves are the same ones we've long included with our regular weekly Business Outlook articles—although subscribers to the Europe, Asia-Pacific and Latin America editions of Dismal will notice some improvements, and the coverage of more countries and regions. What is new is a convenient abbreviation and currency key, easier navigation among tables (just click on the Select Forecast drop-down) and a cleaner, more consistent presentation. Please check it out, and do let us know what you think.

Kiwi Alert

Thu, 11 Jun 2009 09:45 GMT

Matt Robinson says New Zealand's economy is weathering some rough times. Here he recaps for Bloomberg TV his recent Asia Spotlight report:

"The official prognosis for the New Zealand economy is for the recession to persist until the final quarter of 2009, according to the Treasury’s forecasts in last month’s government budget. GDP growth is expected to remain below potential for at least the next two years, while the unemployment rate is expected to surge from its current six-year high of 5% to nearly 8% by late 2010.

Against that backdrop, further monetary policy easing by the Reserve Bank of New Zealand might be necessary to stimulate economic activity and secure a self-sustaining recovery. However, the central bank also has to contend with the notoriously slow transmission mechanism of monetary policy in New Zealand."

Graphic Novelty

Tue, 9 Jun 2009 16:29 GMT

My pet media peeve, in case you forgot, is the failure to distinguish between net and gross job flows. Finally, however, it looks like they're starting to get it. The N.Y. Times on Sunday published this way cool graphic:

As you can see from the excerpt here, this is no one-blink wonder; you have to study to grasp their point. But that is the point: the labor market itself is way too large and complex to be understood in any real sense from the numbers reported monthly off the BLS employment survey.

The Times graphics gnomes, bless their grey hearts, are trying to go further, and to capture in a visual way the kind of depth that our own Sophia Koropeckyj and Sara Kline brought to the subject in their writeups today on Dismal Scientist.

As Sara writes:

"Although the number of hires rose slightly in April, workers are still increasingly reluctant to leave jobs voluntarily, and firms remain hesitant to expand their payrolls. The former is illustrated by the falling level and rate of quits, while the latter is evidenced by falling job openings. In April, 1.8 million workers quit jobs, equal to 1.3% of all those employed; that was down from 1.9 million, or 1.4%, in March. The lack of labor market mobility makes it hard for workers to move up to better jobs. The number of job openings receded to 2.5 million, the lowest since these data began to be collected in 2001. The job openings rate held at 1.9%, also a series low. A slowdown in layoffs is necessary for the labor market to heal, but so is an increase in hiring. Firms' reluctance to hire could extend the recession and delay recovery."

Trade Watchdogs

Mon, 8 Jun 2009 09:16 GMT

If you're worried about rising political resistance to open global trade—and if you aren't, you should be—a new internet service can help you stay on top of events. The Centre for Economic Policy Research (Europe's version of the U.S. NBER) has launched what they're calling Global Trade Alert. From the site's mission statement:

Even though the world has not seen a return to the across-the-board tariff increases of the early 1930s, today governments have resorted to massive stimulus packages, bailouts, and subsidies, many of which include nationalistic provisions that effectively harm trading partners' exporters, investors, and workers...

Global Trade Alert complements and goes beyond the WTO and World Bank's monitoring initiatives by identifying those trading partners likely to be harmed by state measures. Its website allows policy-makers, exporters, the media, and analysts to search the posted government measures by implementing country, by trading partners harmed, and by sector. Third parties will be able to report suspicious state measures and governments will be given the right to reply to any of their measures listed on the website.

The G20 leaders, at their meeting in London on 2 April 2009, pledged "We will not repeat the historic mistakes of protectionism of previous eras". The up-to-date information and informed commentary provided by Global Trade Alert will help ensure that the G20 pledge is met, by maintaining confidence in the world trading system, detering beggar-thy-neighbour acts, and preserving the contribution that exports could play in the future recovery of the world economy.

Going Green

Thu, 4 Jun 2009 11:37 GMT

For the first time in months, our interactive recession-status map shows signs of global economic recovery. We're not breaking out the champagne or planning a hip-hop version of "Happy Days Are Here Again" (although I bet some clever garage-band wiz is thinking about that).

But as Ruth Stroppiana explains in this month's Global Outlook , it's now possible to at least envision the downturn's end:

Among the major economies, China is currently on the most stable footing and looks set to be the first to recover. While Asia’s giant growth locomotive came close to derailment late last year amid factory closures and surging unemployment, the Chinese government's massive fiscal stimulus, one of the world's largest, has helped put its economy back on track...

A number of Asian countries—with the notable exception of Japan—have either reached or are approaching the bottom of their current cycle. The U.S. will follow Asia out of the recessionary abyss in the closing months of the year. Most major economies in Latin America—with the exception of Mexico— will also start expanding by the end of the year. Firmer commodity prices will also provide an additional stimulus for some Latin American countries.

Plastic Memory Lane

Wed, 3 Jun 2009 10:50 GMT

Slate's "Big Money " spinoff has a nifty slideshow look at plastic through the ages—back to when it wasn't even made of plastic. Makes you nostalgic for those Bankamericards of yesteryear. Wonder how many folks can actually still recall using Diner's Club?

Fun fact to know and tell:

"By 1986, the average outstanding balance of cardholders with revolving accounts was $1,472, up from $649 in 1970."

And as Cris DeRitis explains , we could well be starting yet another chapter in credit-card history right now...

Time for Plan B

Mon, 1 Jun 2009 12:24 GMT

Without a more aggressive plan to reduce foreclosures, the Obama administration's recovery efforts could founder, writes Mark Z.

If something doesn't change soon, mortgage loan defaults - the first step in the foreclosure process - are on track to total an astonishing 4 million this year, representing nearly one in 12 first mortgages. Foreclosures are certain to soar higher this summer, because foreclosure moratoriums imposed late last year by various states, Fannie Mae and Freddie Mac, and mortgage servicers have now expired...

The administration's plan to short-circuit this self-reinforcing negative foreclosure cycle is off to a painfully slow start. The plan cleverly provides a plethora of incentives to get homeowners, mortgage servicers and mortgage owners to modify loans and reduce monthly payments. But it is also incredibly complex. It is taking much too long for all parties to figure out what it means for them and thus to act.

Read it here on Dismal, or in the New York Daily News.

Hands Across the Straits

Mon, 1 Jun 2009 05:40 GMT

In a live ABC Radio Australia interview, Sherman Chan talks about the improving ties between mainland China and Taiwan, and how it seems to be paying dividends. Notably, last week a delegation from China comprising of government and business representatives were keen to buy or invest in Taiwan. Cross strait trade is expected to expand further.

The Bankruptcy Game

Fri, 29 May 2009 14:13 GMT

For all of the dire warnings last year about what a GM bankruptcy would do to the company, the auto industry and the wider economy, now that Chapter 11 seems around the corner the dominant sense seems one of relief. Sean Maher writes that most of the parties are falling into line:

A revised offer to GM's bondholders could remove a potential stumbling block for the company's restructuring. The bondholders rejected GM's initial offer of a 10% equity stake in the new company in exchange for retiring $27 billion debt, and they seemed likely to oppose the restructuring in court. However, the government and GM sweetened the offer with warrants that could eventually increase the bondholders' stake to 20%. They have until 5 pm Saturday, May 30 to agree to these new terms, which they are expected to do. Otherwise, bondholders might recover little to nothing after the case enters bankruptcy court. Indeed, GM stockholders are expected to be wiped out by the bankruptcy. As a result, the company's shares have plunged nearly 30% so far today to an all-time low of about $0.80

GM is much closer to finalizing terms with its two other major stakeholders: the federal government and the United Autoworkers union. Washington is expected to provide another $30 billion in financing to get GM through the bankruptcy process, on top of the $20 billion it has already committed. The Canadian government is also expected to contribute $9 billion. In return, the two governments would control 72.5% of the new company. The UAW's retiree healthcare trust fund would own the remainder of the company, receiving a 17.5% stake. This share, along with a $2.5 billion note and $6.5 billion in preferred stock will fulfill GM's $20 billion obligation to the workers' fund.

Not that it's all a drive in the country from here on out, of course:

The recent breakthrough with bondholders supports the Obama administration's hopes that GM could emerge from bankruptcy within two to three months. However, the risks are firmly weighted to the downside. GM's bankruptcy case would be the largest and most complex in U.S. history, and a good number of the nation's top bankruptcy lawyers are still working on the Chrysler case. Further, it is still unclear how GM would negotiate the planned closure of about 2,500 dealerships and liquidate unwanted assets such as its Saturn, Hummer, and Saab brands.

Meanwhile, Daniel Gross at Slate reminds us that for some folks, bankruptcy is the source from whence all blessings flow:

The bankruptcy of Enron generated fees of about $750 million. Lehman Bros., which filed for Chapter 11 protection last September, is proving to be a similarly expensive failure. In the first four months of Lehman's sojourn in bankruptcy protection, a host of firms requested about $100 million in fees...

In the early 1990s, when I covered bankruptcy court, I enjoyed scouring through the applications for bankruptcy fees. The best were those produced by the most anal-retentive of the professionals, the accountants. They meticulously counted the precise number of minutes each worked on the matter—and then calculated the precise number of minutes it took them to count the precise number of minutes each professional worked on the matter. I remember a line item, more than $10,000, that was the bill for preparing the bill.

A Banking Reformation?

Thu, 28 May 2009 10:49 GMT

Anyone who's followed U.S. banking over the last two decades knows that what some call the "regulatory framework" is actually closer to regulatory goulash, with multiple overlapping agencies and standards that have more to do with history and politics than with logic or philosophy.

Now, with the pieces of that frame in splinters, the Obama administration is apparently moving to put the whole mishmash under a new, single structure:

(MarketWatch) -- Top Obama administration officials are close to recommending that Congress create a single regulator to oversee the entire banking sector, according to a report in The Wall Street Journal...

The new agency would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision, the report said.

It would also strip some supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp., but would give those authorities new responsibilities, including charging the Fed with overseeing systemic risk and giving the FDIC the power to take large financial companies that aren't banks into receivership, the Journal said.

Hard to know what to make of this just yet, but it will certainly be interesting to watch unfold. An early comment from my colleague Cris DeRitis:

Consolidating power and creating a new agency is easy. More difficult is how to construct a structure and incentive that insures that the agency actually uses its power. For example, the Fed had/has the power to regulate mortgage products but did not exercise this power during the housing boom -- perhaps due to industry/govt pressure.

The East is Rising, Maybe

Sun, 24 May 2009 13:54 GMT

In a live ABC Business Today interview in Sydney, our colleage Sherman Chan talks about the outlook for Japan and whether China plays an instrumental role in the global economic recovery. (Clicking the heading - "Has Japan's economy reached the bottom?"

Seasons Turning

Thu, 21 May 2009 13:33 GMT

Elaborating on his comments to our own spring outlook conference last week, Mark Z. tells a Boston audience to set their recovery alarm clocks for late this year.

The battered economy will begin a slow upward climb after the recession bottoms out in the fourth quarter of 2009, predicted Mark Zandi, senior economist at Moody’s Economy.com...

“The economy won’t come roaring back,” he said. “The sectors that generally lead us out of a recession—housing and vehicles—are flat on their back and won’t revive rapidly. The economy will kick into high gear in 2011 and 2012.”

Unemployment is expected to reach a peak of 10% by the spring of 2010. And it will not be until 2013 or 2014 that the country returns to full employment—estimated at 5.5%, Mr. Zandi said.

Death (Political) and Taxes (Carbon)

Tue, 19 May 2009 08:04 GMT

Jeffrey Frankel notes, as have many others, that what makes a simple carbon (or energy) tax so attractive to economists also makes it repulsive to politicians. But is there any way around this? Maybe. Frankel writes:

Discussion of energy taxes has always been political suicide. But here are several twists that could potentially increase the ability of the electorate to swallow them politically:

1) The energy taxes would not go into effect until the economy fully recovers from the current recession, thereby avoiding an abortion of the recovery. But the plan would be announced in the near future (thereby sending desirable allocational signals to firms building power plants or pursuing renewable energy research).

2) Such measures could be on stand-by, to be enacted in the event of a major unfortunate geopolitical setback in the Middle East or a tragic terrorist event, which would galvanize public opinion to do something sensible for the first time about the extent of US dependence on oil imports.

3) A tax on, e.g, gasoline could be designed to put a floor under the current price. The status quo always generates less political resistance than a tax that raises the price.

4) The revenue from the first penny per gallon could be earmarked to fund the deficit in social security benefits of those retiring in 2027, for example. They were born in 1962, and know who they are. The revenue from the second penny could be used to finance the benefits of those retiring in 2028, and so on...

Update: Sean Maher details the Obama administration's plans to accelerate fuel-economy standards for automakers, and points out that there are better ways to go:

The new fuel economy standards will produce dramatic changes in the supply of new vehicles, but it is uncertain how consumer demand will respond. The price of gasoline will increase as the economy emerges from recession, but we expect it to average just under $3 per gallon through 2025. At this level, consumer demand for highly fuel-efficient vehicles will be relatively tame. Total new vehicle sales may suffer as more drivers may keep their current vehicles longer. Some automakers may also opt to pay the fines associated with falling short of CAFE standards in order to sell more vehicles.

A better way to cut oil consumption and greenhouse gas emissions would be to stimulate consumer demand for more efficient vehicles. Increasing the gasoline tax would be the most effective way to accomplish this. To avoid undue hardship, the tax could be designed to set a floor under gasoline prices and scaled back as they rose. The government could also follow the model of some countries by taxing vehicles based on engine displacement, horsepower, or overall weight. Consumers willing to pay for larger vehicles could still have them, while others would opt for smaller, more efficient autos.

Bogle Blogging

Mon, 18 May 2009 13:31 GMT

Of course it will take federal government action to foster the creation of this new fiduciary society that I envision. Above all else, it must be unmistakable that government intends, and is capable of enforcing, standards of trusteeship and fiduciary duty under which money managers operate with the sole purpose and in the exclusive benefit of the interests of their beneficiaries—largely the owners of mutual fund shares and the beneficiaries of our pension plans. If, as corporate reformer Robert Monks accurately points out, “capitalism without owners will fail,” it’s high time we began the task of reform.

That was Vanguard founder John C. Bogle, speaking at the National Constitution Center in Philadelphia last week. I found this (via the Inky's Mike Armstrong) on Bogle's blog. If the idea of Jack Bogle blogging seems anachronistic—about two jumps removed from Ben Franklin riding a skateboard, I'd say—it remains true that he's always worth listening to, in whatever format.

Save the Date

Thu, 14 May 2009 09:59 GMT

Live from the Moody's Economy.com Spring Outlook Conference at the Penn State / Great Valley Conference center:

Mark Zandi just said the recession will end on Oct. 9, 2009.

(Subject to revision.)

Contemplate the Counterfactual

Tue, 12 May 2009 13:51 GMT

Moving on is hard to do. Fox News wonders how a President McCain would be dealing with the recession.

This clearly isn’t how things turned out in November. But what if it had happened? How effective would McCain’s economic policies have been at fixing the broken economy?

...“I think the recovery would have been more difficult with McCain’s economic policies than with Obama’s policies. I think the economy has benefited from that more activist approach given the depth of the recession that we’re in,” said Gus Faucher, director of macroeconomics at Moody’s Economy.com.

Dan Greenhaus, equity analyst at Miller Tabak, also believes McCain would have skewed more free-market than Obama, who has been attacked by some for taking a socialist approach.

“I’m of the belief that less interventionist policies would have brought this market lower,” said Greenhaus...

It also seems as though Obama and McCain would have differed in handling the rescue of the Big Three auto makers.

“Chrysler would be gone. Michigan didn’t vote for him. I doubt he would have saved GM,” said Greenhaus.

But Faucher said McCain’s advisers would have likely implored him to ensure an orderly restructuring or liquidation of these companies so as not to exacerbate the recession. “No matter what, Chrysler wasn’t long for this world,” he said.

Birth, Death, etc.

Tue, 12 May 2009 10:12 GMT

Following the release of April's employment numbers, reader Tom Keithley comments:

I did not see any mention of the BLS Birth/Death adjustment in the April unemployment release. It seems that this adjustment was a huge net positive to the final estimate of job loss. Given the tendency for negative revisions to recent months and the large size of the adjustment in April (225K new jobs) Shouldn't we expect a hefty negative revision to April a few months hence?

And Sophia Koropeckyj, who covers the monthly BLS employment releases for Dismal Scientist, replies:

The large positive birth/death adjustment cannot be correlated with the revisions that occur to employment data one and two months following their first release. These revisions are tied to the receipt of more responses to the monthly payroll survey from establishments in the months following the preliminary release. Although it's true there have been negative revisions to the payroll data in recent months, there is no a priori reason to expect negative adjustments to continue just because they have recently been seen. The large birth/death adjustment also does not imply revisions will be large. The large April adjustment was due to seasonal factors; the birth/death adjustment is not seasonally adjusted. Months with generally strong seasonal increases such as April, May and June generally have large positive birth/death adjustments. Comparing the model amounts to seasonally adjusted estimates generally results in an overstatement of the model-based component's contribution to over-the-month employment change. The Apil 2009 birth/death adjustment of 226,000 was in line with historical April adjustments, although it is higher than the adjustment calculated for April 2008 (176,000). The adjustment will be not revised until the next benchmark revision.

Bull Call

Tue, 12 May 2009 08:15 GMT

Bravely venturing into the market minefield, Mark Z. tells Forbes that stocks are pointing higher.

Forbes: The S&P is up about 30% or more since March's lows is this truly the beginning of a bull run?

Mark Zandi: Yeah, in a sense that I think if you look out 3, 5, 10 years from now, the market will be up measurably from where it is today. You know it's not going to be straight up and we've come a long way in a very short period of time over the last 6-8 weeks, so I wouldn't be surprised if there was a pull back. But, yeah I'm optimistic that when we look back a number of years from now at this period we'll be able to draw a line through the March/April time frame and that will be the bottom in the equity markets.

The video is here. And Mark's latest Nightly Business Report commentary is here. For the complete forecast, of course, see the U.S. Macro Outlook on Dismal Scientist.

Following the Wave

Thu, 7 May 2009 16:08 GMT

Just like those old flip books used to turn a bunch of static images into a moving picture, you can take our monthly snapshots of U.S. local economies and construct a wave-like view of the recession's progress. Andrew Gledhill explains how:

Every month, Moody's Economy.com takes the temperature of regional economies around the U.S., using available current data. Although there can be endless local variations on an economic cycle, we find it adds useful detail to the national picture to classify states and metropolitan areas according to their current stage of development. We label these: expansion, at risk, recession and recovery.

The classifications are based on coincident indicators—data highlighting current economic conditions. These have grown in sophistication over time; where we formerly used two variables—employment and estimated industrial production—we now incorporate house prices and estimated housing starts. This broader look at regional economies is particularly relevant given the role of housing in the current downturn.

But my favorite part comes when you put it all together and ... get out the fingerpaints!

Poor Mexico

Wed, 6 May 2009 12:53 GMT

Alfredo Coutino's recent diagnosis of Mexico's economic ills was picked up by a Norwegian newspaper, which illustrated it with this image of a European tourist returning home:

Sadly, it's not untypical of the misfortunes that seem to pile up for Mexico. As Alfredo put it:

"All problems come in packages of three" says a popular expression, but Mexico's latest batch of woes includes not only a recession, drug-related violence, and the flu, but even an earthquake. The economy has been in a deep downturn since the end of last year, mainly as a spillover from the U.S. recession, but also because of a weak domestic market and a lack of timely stimulus by official policy. The economy looks likely to record a contraction even deeper than that expected in the U.S. this year. This is a major disappointment: Mexico's better macroeconomic situation over the past few years was expected to help it mitigate the external shock, but the government's limited and gradualist policy response now does not seem to be enough to prevent a steep contraction.

Out of the Net

Wed, 6 May 2009 08:52 GMT

The NYTimes finally notices that all those horrendous job numbers are net losses; even in the depths of The Worst Since, people are getting hired. Lots of 'em... Like I was saying:

Everyone knows the grim news — unemployment in the United States has jumped to 8.5 percent, a 25-year high, and is racing toward double digits. Since November, the nation has lost more than three million jobs.

But not everyone knows the brighter side to the equation: deep in the maw of the deepest recession since the Great Depression, millions are still being hired.

So, while 4.8 million workers were laid off or chose to leave their jobs in February, employers across the country hired 4.3 million workers that month, according to the Bureau of Labor Statistics.

For more on this, see Sara Kline's most recent writeup on the government's job-turnover survey (sub req).

Say What?

Tue, 5 May 2009 10:49 GMT

In Sacramento, the New York Times reports, house prices have fallen almost 50%—enough, evidently, to stimulate demand.

Investors and first-time buyers, the traditional harbingers of a housing rebound, are out in force here, competing for bargain-price foreclosures. With sales up 45 percent from last year, the vast backlog of inventory has diminished. Even prices, which have plummeted to levels not seen since the beginning of the decade, show evidence of stabilizing.

Hey, isn't that sort of what Say's Law says—people will generally buy stuff when it gets cheap enough?

Just asking...

Hitting Bottom?

Mon, 4 May 2009 12:25 GMT

Northwestern's Robert Gordon writes on VoxEU that he sees good evidence in the initial jobless claims data for believing the U.S. downturn will hit bottom this month or next. Agree or disagree with his methodology, the fact that he's a member of the National Bureau of Economic Research's recession-dating committee does lend this some gravitas:

Recently I have discovered a surprisingly tight historical relationship in past US recessions between the cyclical peak in new claims for unemployment insurance (measured as a four-week moving average) and the subsequent NBER trough...

It is always too early to make definitive conclusions, but the recent 2009 peak in new claims looks sufficiently similar to previous recession peaks to allow a conclusion that it is highly probable that the new claims peak has now occurred...

My reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters.

Cramdown Lowdown

Fri, 1 May 2009 15:01 GMT

It's not often that you can trace a clear line from Capitol Hill to the real world. But Cris deRitis sees a fairly direct cause-and-effect from the Senate's recent thumbs-down on plan to allow mortgage "cramdowns" by judges in personal bankruptcy cases:

Moody's Economy.com had earlier forecast that 3.4 million mortgages would go into default this year and that 2.1 million homes would be subject to foreclosure or short sales. This was based on an assumption that both the [Home Affordable Modification Program] and bankruptcy reform bill would be implemented, however. We had projected that 2 million mortgages would be voluntarily modified under the HAMP and that another 1.25 million modifications would result from bankruptcy court cramdowns.

Without the incentives provided by the reform bill, we now estimate that 475,000 fewer voluntary modifications will occur, and with judicial modifications we project an additional 1.725 million foreclosures this year. This will significantly increase the inventory of unsold homes and place additional downward pressure on already-weak house prices. Equity values will erode further, leading to more defaults and placing greater pressure on prices, thereby prolonging both the depth and duration of the housing market correction.

Meanwhile, The New Republic peeks into the Washington back rooms where this deal was, or rather was not, made:

Investors hated the cramdown idea because they worried judges would force them to accept, say, lower interest payments for the sake of distressed borrowers. The big banks had similar worries for the mortgages they keep. Many also hold on to second liens (basically, second mortgages) after they sell off the first and worried judges would wipe those out entirely. And both groups generally feared the arbitrary ways judges might wield their power.

But a funny thing happened while the big banks and investors were uniting against the cram-down push: The banks cut their own deal...

Noble Praise

Thu, 30 Apr 2009 09:30 GMT

In case you were wondering: yes, economists do pay attention to other economists. Time Magazine lets Mark Z. size up Paul K.:

While Krugman isn't currently making policy, his imprint on it is undeniable. His cogently articulated views shape the public opinion to which policymakers are ultimately beholden. The Administration's bank-rescue plan, which involves taxpayers teaming up with private investors to purchase the banks' toxic assets, is a good case in point.

Krugman not only dislikes the plan; he also worries it increases the odds that the already severe downturn will unravel into something much worse. The President may not adopt his solutions, but he'd best answer his concerns, lest the rescue plan not get off the ground.

And on a personal level, Krugman certainly shapes opinions in my household. I'm an avid reader of his work, but my wife likes to make sure, so twice a week she places a cutout of his Times column next to my bedside. On those two days at least, I read and discuss Paul Krugman's view of things before going to sleep. I am a much better economist for it.

Raising the Temperature

Wed, 29 Apr 2009 17:18 GMT

Things are heating up. The WHO raised the pandemic-alert level a notch to 5, as more cases were reported in more places.

Nobody knows what this will mean to the economy, of course, but that shouldn't stop us from thinking out loud, just to keep things in perspective. Our Ed Friedman did so on Dismal Scientist:

Previous episodes of worldwide flu outbreaks have run the gamut. The most dire was the 1918-1920 Spanish flu pandemic; death toll estimates range from 20 million to 50 million. At the time, none of the modern tools to confront such diseases were available. There were no antiviral drugs like Tamiflu and Relenza, no antibiotics to treat secondary bacterial infections like pneumonia, and no mechanical ventilators to help people breathe.

At the other extreme was a February 1976 swine flu case at Fort Dix involving the death of just one soldier. Worried public health officials in the U.S. pushed for the development of a vaccine, which was ultimately distributed to nearly one-fourth of the U.S. population, and whose side effects may have caused more deaths than the flu.

And Jay Bryson of Wachovia sketched out some scenarios as well:

How bad could it get? We are not virologists, so we will not speculate on the possibility of a 1918 redux. However, in a recent paper three economists estimated the effects on global GDP from three different scenarios.1 The "mild" case was modeled on the 1968-69 Hong Kong flu that killed about one million people. A scenario resembling the 1957 Asian flu, which is blamed for two million deaths worldwide, was their "moderate" case. The "severe" scenario was a repeat of the 1918 pandemic that is blamed for millions of deaths worldwide.

Under the "mild" scenario global GDP would be reduced by 0.7 percent (about $400 billion). The "moderate scenario would result in a loss of 2 percent of world GDP (roughly $1.2 trillion). The "severe" scenario leads to a reduction in global GDP of nearly 5 percent (about $3 trillion). By their reckoning, about 60 percent of the losses occur via demand side effects (e.g., disruption of travel, curtailment of non-essential retail shopping, etc.). Nearly 30 percent come from temporary supply side effects like illness and absenteeism. The remainder comes from mortality.

Therefore, if the current swine flu epidemic ends up infecting millions of people, then global GDP could be adversely affected at a time when the global economy is already in its worst recession in decades. If, however, the current epidemic ends up being about as virulent as the SARS outbreak of 2003, then Mexico will likely suffer a short-term economic setback but the overall effect on global GDP is likely to be rather small.

View from the Top

Wed, 29 Apr 2009 13:44 GMT

David Leonhardt interviews the President on how he sees the U.S. changing after the Great Recession^TM.

I'm struck by the simple novelty of hearing words such as "the nonbanking sector" emerge from the mouth of a Commander in Chief.

THE PRESIDENT: Well, first of all, I think that we should distinguish between finance as the lifeblood of our economy and finance as a significant industry where we have a comparative advantage — right? So in terms of just growing our economy, we’ve got to have enough credit out there to fund businesses, large and small, to allow consumers the flexibility to make long-term purchases like cars or homes. So that’s not going to change. And I would be concerned if our credit market shrunk in ways that did not allow for the financing of long-term growth.

What that means is not only do we have to have a healthy banking sector, but we’re going to have to figure out what we do with the nonbanking sector that was providing almost half of our credit out there. And we’re going to have to determine whether or not as a consequence of some of the steps that the Fed has been taking, the Treasury has been taking, that we see the market for securitized products restored.

I’m optimistic that ultimately we’re going to be able to get that part of the financial sector going again, but it could take some time to regain confidence and trust.

What I think will change, what I think was an aberration, was a situation where corporate profits in the financial sector were such a heavy part of our overall profitability over the last decade. That I think will change. And so part of that has to do with the effects of regulation that will inhibit some of the massive leveraging and the massive risk-taking that had become so common.

Now, in some ways, I think it’s important to understand that some of that wealth was illusory in the first place.

Heat Stroke

Tue, 28 Apr 2009 15:43 GMT

On slow days back in the newsroom we played at oxymorons—coming up with self-contradictory labels like "jumbo shrimp" or "military justice." Cynics would toss out candidates such as "government efficiency" "business ethics", or even "working press".

But nobody, to my knowledge, ever thought of 'hot economist."

Social Security Check

Tue, 28 Apr 2009 15:20 GMT

In retrospect, it's odd that the most passionate arguments about Social Security took place at a time when it Americans arguably worried less about it, since their other investments were growing so much more robustly than now. Given all that's happened since, you'd think that reports like this one would be grabbing more headlines today. From CBO director Doug Elmendorf:

Projections of the Income and Spending of the Social Security Trust Funds

...Over the 10-year period from 2009 through 2018, projected income and outlays have both declined significantly from our projections of a year ago—income is down by about $1.2 trillion (about 11 percent) and outlays are down by about $250 billion (about 3 percent) for that 10-year period (see Chart 1). Nearly all of the adjustments stem from changes in CBO’s economic forecast: our projections for inflation, real GDP, and interest rates have all declined relative to those underlying our March 2008 baseline. Lower inflation affects both revenues and outlays through lower payroll taxes and smaller cost-of-living adjustments (COLAs). Similarly, lower real GDP would imply lower real wages—and therefore less revenue from payroll taxes and, over time, a lower initial benefit amount for new beneficiaries...

The projected balance in the OASI trust fund continues to grow throughout the 10-year period, albeit at a slower rate than CBO projected a year ago, reaching $3.9 trillion by 2019 (see Chart 4). In contrast, we expect that the DI trust fund balance will decline each year. CBO now anticipates that the DI trust fund will be exhausted in 2019, with available funds falling $29 billion below projected expenditures. At that time, absent a change in law, Social Security could not pay DI beneficiaries the full benefits to which they are entitled under the Social Security Act.

Flu Shot

Mon, 27 Apr 2009 11:28 GMT

Anything you say about a fast-developing story like the Mexican swine-flu outbreak runs a risk of being obsolete the next day. But that doesn't mean there aren't lessons worth reviewing; indeed, in the past half-dozen years the world has had experience with several world-wide pandemic scares.

Sherman Chan and Tine Olsen took a quick look back as the initial news reports were trickling in over the weekend. Among their observations: Despite the serious disruptions caused by SARS to daily life, the main economic impacts were on retail sales and personal consumption in the areas most affected. Even Hong Kong, near the epicenter of the SARS scare, didn't see a noticeable drop in its trade shipments over that period.

Here's more:

For industrialised economies such as the Asian tigers, weak confidence may be a bigger threat than the disease itself. Travel was restricted during the SARS outbreak, and consumers stayed indoors to avoid the virus. Private consumption suffered across the region, and growth was hindered by the outbreak. The economic effects of consumers and travelers staying at home will most likely be larger than the costs of fighting the virus.

More background reading: In 2005, Tu Packard wrote about the economic and social costs of the avian flu. In 2003, we assessed the impact of SARS on global trade. And Virendra Singh reminded us that while epidemics are scary, war is worse for economies and other growing things.

Early Warning

Sun, 26 Apr 2009 22:29 GMT

As far as I can tell, Megan McArdle is the first to point out that the developing flu story is of serious economic concern, as well.

At first glance, though, this one seems to have gotten pretty good at passing from human to human. A few days after we first hear of it, it's in New Zealand, Hong Kong, Spain, the US. To be sure, we don't have large troop movements from the area of infection, thoughtfully bringing it home with them. Nonetheless, with modern travel, if it is transmissable, it will be nearly impossible to stop. Hong Kong is implementing strong quarrantine measures--but Hong Kong is a small island.

The bright side is that mortality here seems to be a lot lower--nonexistant so far. People living in poorer countries tend to have weaker immune systems for the obvious reasons. And the strain that's arrived here may just not be as deadly as the one still in Mexico.

Still, this seems more worrying than SARS was, and SARS was pretty worrying. And if it gets much bigger, it will deal a heavy blow to an already struggling world economy, because this will have deep impacts on global trade flows.

Didn't take long for the trade impact to materialize, either: The WSJ reports:

Russia banned meat imports from Mexico and several U.S. states, although World Health Organization officials said there is no sign the flu spreads by contact with meat.

Flood Tide Ebbing

Fri, 24 Apr 2009 15:38 GMT

Is the economic tide turning? In true Clintonesque fashion, I would answer: It depends on what the meaning of "tide" is.

If the metaphor is meant to describe a broad, sweeping change of fortune, I would say, no. We have not switched from recession to expansion; the ranks of unemployed have not begun to thin; builders have not stopped wringing their hands in front of wind-whipped "For Sale" signs and begun revving up the backhoes to lay out new subdivisions. Banks have not resumed lending to recent parolees or mass-mailing credit cards to labradoodles.

That kind of tide-turning we haven't seen. And yet ...

If you live in the data jungle, you eventually grow sensitive to changes that ordinary creatures miss. We call them "second-derivatives"—numbers that describe changes in other numbers. Output may still be falling -- but if it's falling less fast than it fell last month, that's a change. Or here:

Capital goods orders are still in negative territory, just less negative than they were last month.

Maybe not a tidal change, but still an important one, because before the tide can actually turn, it first has to slow down.

Follow the Money

Tue, 21 Apr 2009 16:14 GMT

Barry Eichengreen, Ashoka Mody, Milan Nedeljkovic and Lucio Sarno trace the ripples of the subprime shock across the globe:

How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? ... We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels – but now they more clearly reflected heightened funding and counterparty risk. After Lehman's failure, the prospect of global recession became imminent, auguring the further deterioration of banks' loan portfolios. At this point the entire global financial system had become infected.

They Still Don't Get It

Tue, 21 Apr 2009 12:46 GMT

The Pulitzer Prizes were awarded yesterday, recognizing the best journalism of 2008. There were prizes for coverage of sex scandals, war, wildfires and much more—but none for coverage of the economy.

You may not have noticed, or much care, but some of us think that is odd.

How Big Was It?

Tue, 21 Apr 2009 12:32 GMT

How much has the recession cost so far? For banks, the tab is $4.1 trillion and climbing, says the IMF

WASHINGTON — With the global economic downturn deepening and confidence in the financial system still elusive, the International Monetary Fund estimates that banks and other financial institutions face aggregate losses of $4.1 trillion in the value of their holdings as a result of the crisis.

In its global financial stability report, released Tuesday, the fund estimated that financial institutions would have to write down an estimated $2.7 trillion in loans and securities originating in the United States from 2007 to 2010. That estimate is up from $2.2 trillion in the fund’s report in January, and $1.4 trillion last October.

The financial crisis “is likely to be deep and long lasting,” the report said, noting that global financial stability has deteriorated further since its October report, especially in emerging markets, particularly in Europe, where banks face more write-downs and may require fresh equity, even as businesses seek to refinance debt.

Auto Pilot

Wed, 15 Apr 2009 09:27 GMT

What a difference a few months can make. Last fall Mark Z. warned that bankruptcy for a major U.S. auto maker would be more than the economy could bear. Now, he tells Canada's Financial Post, the economy can bear it—which is a good thing, since said bankruptcy appears inevitable.

Here's an excerpt:

Q. When you testified on Capitol Hill in December, you said in your written brief that: "It's not that [the Big Three] haven't made strides in lowering labor and material costs and improving productivity. But what is required for the automakers to become viable in the longer run is too draconian for them to do outside the bankruptcy process." At this point, do you think a creditor protection filing for GM and Chrysler is inevitable?

A. It's highly likely... For the bondholders, it's not one monolithic investor. It's a lot of different investors with a lot of different interests. For the UAW, it's a lot of political constraints. I think it's going to be very difficult for everyone to come to terms quickly enough to avoid that bankruptcy. There's just too many moving parts to get it all in place without the help of the bankruptcy process. And at this point, from a broad macro-economic perspective, I don't think a bankruptcy would be catastrophic like I did back in December. At that time, if there was a bankruptcy, I think it would have been a major economic problem because no one was prepared for it. But now I think policymakers are quickly preparing for that possibility...

Q. And so what is the economic fallout of these companies entering bankruptcy protection?

A. At this point, I'm not sure it's measurably different than if they didn't go into bankruptcy. They are being rationalized and restructured one way or the other. It's happening very rapidly.

Q. What do these companies look like a few months from now?

A. Chrysler probably won't be with us any longer. Parts of it will be subsumed in other companies or just shut down. GM will be with us, but it will be a shadow of what it was. It won't employ nearly as many workers and it just won't have the same important role in the economy that it did prior to all this... There are going to be two major U.S. automakers after this, I think. And their share will be one third of the market, at best. Ford is still a solid company and has nameplates that people want to buy. I think they'll be fine. GM will be measurably smaller.

What Drove the Oil Spike?

Tue, 14 Apr 2009 09:58 GMT

Although it's faded from the headlines, the big spike in oil prices that ended late last year remains an economic puzzle. What drove crude above $140? Many blame financial speculation, but a pair of Michigan researchers, Bruce Hicks and Lutz Kilian, argue for a more down-to-earth explanation: As markets reckoned with surprisingly strong global growth—particularly in Asia—demand calculations for energy use went up and up. And up.

We show that recent forecast surprises were associated primarily with unexpected growth in emerging economies (and to a lesser extent in Japan), that markets were repeatedly surprised by the strength of this growth, that these surprises were associated with a hump-shaped response of the real price of oil that reaches its peak after 12 to 16 months, and that news about global growth predict much of the surge in the real price of oil from mid-2003 until mid-2008 and much of its subsequent decline.

Crawl Before You Walk

Tue, 14 Apr 2009 09:47 GMT

Walk on, walk on with hope in your heart. Or something like that. Ben Bernanke says the economy is leveling out:

"...we have seen tentative signs that the sharp decline in economic activity may be slowing, for example, in data on home sales, homebuilding, and consumer spending, including sales of new motor vehicles. A leveling out of economic activity is the first step toward recovery. To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets. We are making progress on that front as well ... I am fundamentally optimistic about our economy."

Time's Chic Geek?

Thu, 9 Apr 2009 16:37 GMT

Not sure whether to consider this a triumph or a bad-luck omen. Isn't there some old saw about appearances in newsmagazines coming before a fall? Anyway, here it is:

He's the recession's ascendant wonk and most improbable celebrity, as likely to pop up in the newspaper or on television as behind Nancy Pelosi during a press conference — sort of a post-housing-bubble Zelig...

He does it all with an almost unnerving sense of calm. He can explain collateralized debt obligations, the obscure minutiae of the housing market and big-picture economic forces in a way that's clear and practically idiot-proof, and he's very good at concealing his political agenda, if he has one. Those last two qualities have made him an especially useful figure in Washington, where he's consulted and quoted by Democrats and Republicans alike. "What he says, people listen to," says GOP Senator Bob Corker, who cited Zandi's testimony on the second auto bailout as particularly helpful. Zandi worked as an economic adviser to John McCain during his presidential campaign. His book Financial Shock , published in July 2008, could be seen tucked under the arm of Massachusetts Democrat Barney Frank during the height of the banking meltdown last fall. "He really has the ability to put aside any pre-existing agenda and just talk facts to almost everybody," Frank says. When asked whether he and Zandi disagree about anything, Frank replies, "Not really."

By the way, if you've got speakers and a subscription to Dismal (or take the free trial!) you can hear the man himself with his latest rap about the outlook in mp3 format here .

Peering Into the Recession

Tue, 7 Apr 2009 16:09 GMT

Promotion alert: Today, msnbc.com went live with something they call The Elkhart Project. That's Elkhart as in Indiana, a community that's been hit particularly hard by the recent downturn. But you needn't be a Hoosier, or even be particularly concerned with that part of the country to find a visit to the msnbc.com site worthwhile. Elkhart is just the starting point for an in-depth production pairing data (ours) and reporting (theirs) to offer a unique look at the depth and breadth of the downturn.

Here's msnbc.com's Bill Dedman :

What ails the economy does not afflict every community equally, but the recession has reached nearly every corner of the nation. A new index of economic health shows the recession spreading to 93 percent of the metro areas in the U.S., and 44 of the 50 states, by the end of January.

The new measure, the Adversity Index, is produced by Moody's Economy.com and msnbc.com. Each month, the index will take the economic temperature of every metro area and every state. Each one will be judged to be either expanding, at risk of recession, in recession or recovering. The index uses federal data and Moody's estimates on employment, industrial production, housing starts and house prices to track changes in jobs, industrial output, investment and wealth.

The recession has hit hardest in Elkhart, Ind., a struggling Midwestern city that msnbc.com is focusing on, as part of a special project to tell the story of the nation's economic suffering. By January 2009, employment in the Elkhart metro area had fallen 9.4 percent from a year earlier, the worst decline in the nation. Industrial production fell 21.9 percent, also the worst.

They've got interactive maps, blogs, timelines, videos and much more. Check it out.

Funny Money II

Mon, 6 Apr 2009 16:26 GMT

I'll say this for financial crises: they're great learning opportunities. It's hard to imagine that, absent the sense that we're all about to go over the falls in a barrel, there'd be this much media attention on something as normally obscure as central-bank reserve currencies. Yet there was NPR last week, trying gamely to explain the IMF's SDRs to its listeners.

Again, we're fortunate to have Alaistair Chan on the case. Here he continues last week's lesson:

There are inherent difficulties in establishing a reserve currency. Chief among them is that a currency must be widely used as a medium of exchange, requiring a large supply. This is a major reason why the dollar was able to become a reserve currency; supply was plentiful around the world as the U.S. was willing and able to run large current account deficits. By contrast, despite Japan becoming the world’s second-largest economy, the yen did not gain traction as a reserve, because it was needed to pay Japanese exporters, leaving little to accumulate in central bank vaults.

Partly for this reason, the Chinese yuan is unlikely to become a reserve currency any time soon. The yuan faces an additional obstacle in that it is not fully convertible. But use of the yuan internationally is likely to increase. Although China runs a bilateral current account surplus against the U.S., it runs deficits with many countries from whom it imports commodities and components for export, especially in Asia. This could see the yuan become a minor reserve currency, similar to the role of the euro in Eastern Europe.

China recently signed a 70 billion yuan bilateral currency swap with Argentina, similar to agreements with Malaysia, Korea and Indonesia, allowing them to pay for imports with yuan.

A plausible scenario for the future is that, while the dollar will remain the world’s main reserve currency and the pricing medium currency for globally traded commodities, countries will seek to diversify their holdings. This is partly because the U.S. will run smaller current account deficits in the future and could even begin to run surpluses.

What G-20 Means

Fri, 3 Apr 2009 05:37 GMT

Not the hot-air gabfest many were expecting, that G-20 summit in London this week. If the communique can be believed, some matters of real substance were decided. From Sydney, our Matt Robinson offers the local news a morning-after. (Listen via Windows Media Player.)

Rumbling Tumbrels

Wed, 1 Apr 2009 16:21 GMT

Most of us find the financial crisis a puzzle. The remaining unpuzzled appear to fall roughly into two camps. One holds that all will be well when sufficient cash is shoveled into the craters left by Wall Street's implosion. The other—which increasingly unites ivory-tower Ph.D's with cable-TV screamers—hopes for salvation through decapitation.

From Simon Johnson in The Atlantic :

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

And from (of all people!) Elliot Spitzer:

Instead of creating new regulations and laws that don't really address the root causes of the crisis, we should look to a simpler but more fundamental way to limit systemic financial risk and simultaneously create a healthier financial marketplace: If it is too big to fail, break it up. We should not let any private institution become so big and central to the financial system that taxpayers become its guarantor. The problem is that this model doesn't fit into the secret grand bargain. On the contrary, the entire premise of the grand bargain is that the companies that were already too big to fail have been allowed to get even bigger. Socializing risk while privatizing gain—which is what having more and bigger "too big to fail" institutions guarantees for the future—doesn't work in the long run. Too big to fail, quite simply, is too big.

Douse That Light!

Tue, 31 Mar 2009 13:00 GMT

Aaron Smith sees reasons for hope:

Incoming data hint at a moderation in the recession's downward force. The most important development has been the recent firming in consumer spending. Back-to-back gains in retail sales excluding autos, gasoline and building materials—so-called core retail sales—signal that spending may be stabilizing. After rising in January, personal spending was close to steady in real terms in February, putting it on track for an outright gain in the first quarter. Durable goods orders for February rebounded 3.4%, the biggest rise since December 2007. The good run of February housing data continued, with new and existing home sales each rising by more than 5%. Finally, new jobless claims may be leveling off, and business surveys have moved off their lows.

But Paul Krugman warns against insufficient pessimism:

I’m detecting a trend in commentary that I find slightly ominous. Some of the economic news lately has been slightly better than expected, which was bound to happen at some point (on average, after all, half the news should be better than expected). Mostly this is in the form of things getting worse more slowly, but it wouldn’t be surprising if we see, say, an uptick in industrial production in a few months, as the inventory cycle runs its course.

If so, that doesn’t mean the worst is over. There was a pause in the plunge in early 1931, and many people started to breathe easier. They were wrong.

So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.

Stimulate My Ride

Tue, 31 Mar 2009 10:36 GMT

Even as the White House moves to put Detroit (a) back on track or (b) out of its misery, a debate is growing about what some call the "cash for clunkers" stimulus model. (Sean Maher has details.)

Alan Blinder thinks it's a nifty idea:

Cash for Clunkers is a generic name for a variety of programs under which the government buys up some of the oldest, most polluting vehicles and scraps them. If done successfully, it holds the promise of performing a remarkable public policy trifecta — stimulating the economy, improving the environment and reducing income inequality all at the same time.

Not surprisingly, people who service clunkers disagree. From the Automotive Aftermarket Industry Association:

AAIA strongly opposes the use of "Cash for Clunkers" programs, which threaten jobs in the independent aftermarket industry by removing repair opportunities for vehicles and raising the cost of used cars and parts.

"It seems arrogant to destroy perfectly good vehicles with many more years of useful life just to entice consumers to purchase a car that they might not be able to afford," said Kathleen Schmatz, AAIA president and CEO. "This is hauntingly reminiscent to the home mortgage debacle when consumers purchased homes they could not afford."

Some economists aren't thrilled either. Willem Buiter, for example:

This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again. It’s like being paid to burn down your house to encourage the residential construction industry...

Even if the new cars that are subsidised were just the most environment-friendly ones (hybrids, 80 miles per gallon marvels etc.) - which is not always the case—the production of these new vehicles is, when you put it through the appropriate global input-output matrix, an environmentally damaging affair, requiring lots of metals, plastics and energy. You have to weigh the environmental benefits from running a new car (a lower flow production of greenhouse gases, say) against the one-off environmental cost of a higher volume of car production.

The Least Worst Option

Mon, 30 Mar 2009 17:08 GMT

Kenneth Rogoff acknowledges the U.S. financial system is the worst—except for all the others.

The stakes in the debate over international financial reform are huge. The dollar's role at the center of the global financial system gives the U.S. the ability to raise vast sums of capital without unduly perturbing its economy...

More fundamentally, the U.S. role at the center of the global financial system gives tremendous power to U.S. courts, regulators, and politicians over global investment throughout the world. That is why ongoing dysfunction in the U.S. financial system has helped to fuel such a deep global recession.

On the other hand, what is the alternative to Geithner's vision? Is there another paradigm for the global financial system?

China's approach represents a huge disguised tax on savers, who are paid only a pittance in interest on their deposits. This allows state-controlled banks to lend at subsidized interest rates to favored firms and sectors.

In India, financial repression is used as a means to marshal captive savings to help finance massive government debts at far lower interest rates than would prevail in a liberalized market.

A big part of Russia's current problems stems from its ill-functioning banking system. Many borrowers, unable to get funding on reasonable terms domestically, were forced to take hard-currency loans from abroad, creating disastrous burdens when the ruble collapsed.

Europe wants to preserve its universal banking model, with banks that serve a broad range of functions, ranging from taking deposits to making small commercial loans to high-level investment-banking activities.

The U.S. proposals, on the other hand, would make universal banking far harder, in part because they aim to ring-fence depository institutions that pose a ``systemic risk" to the financial system...

Aside from its implications for different national systems, the future shape of banking is critical to the broader financial system, including venture capital, private equity, and hedge funds.

The Geithner proposal aims to reign in all of them to some degree. Fear of crises is understandable, yet without these new, creative approaches to financing, Silicon Valley might never have been born. Where does the balance between risk and creativity lie?

More Stimulus Effects

Mon, 30 Mar 2009 09:05 GMT

If you voted for Obama hoping that his administration would (1) bring about a new era of government activism to solve the nation's problems; and (2) change the culture of Washington, reducing the influence of lobbyists over our national life ... sorry. You have to pick one or the other.

From the WashPost:

The $787 billion stimulus package—along with an ambitious new federal budget, bank bailouts and the beginning of a regulatory overhaul—has succeeded in stimulating the economy along Washington's avenue of influence. In the months since the November election, more than 2,000 cities, companies and associations have hired lobbyists to help them push their agendas on Capitol Hill and at the White House, easily outpacing such numbers after the previous two elections, according to disclosure records...

"We decided we needed eyes and ears in Washington," said Ed Tinker, city manager of Glenpool, Okla., population 10,000. The city hired Capitol Hill Consulting Group, which employs former Oklahoma Rep. Bill Brewster (D), for $10,000 a month to help it win grants for education and infrastructure improvements. "There are dollars up there that could come to our community that we weren't aware of," Tinker said. "It's worked out real fine for us. Having that guy on the ground in Washington is going to keep us in the loop."

Funny Money

Fri, 27 Mar 2009 08:20 GMT

Were you as confused by the Chinese central banker's call this week for a new global currency to sit in nations' reserve vaults alongside the dollar, euro and yen? So was I. So was Tim Geithner, apparently.

Fortunately, we have Tu Packard and Alaistair Chan on hand to explain it all to us. Here's Alaistair:

The proposal by PBoC Governor Zhou Xiaochuan included a call for the IMF to increase the global allocation of SDRs. This would amount to a global increase in the money supply and would be akin to a coordinated global monetary easing. Another proposal would be to create a settlement system for SDRs, from which it would be a small step towards using them as a medium of exchange.

A SDR is a potential claim to a basket of sovereign currencies—the dollar, euro, yen and pound—and its value is entirely dependant on the value of those currencies. It is periodically reweighted to reflect the relative importance of certain currencies. However it is not equivalent to an actual currency; countries holding SDRs must ‘redeem’ them for currencies through bilateral swap agreements with other countries, or through the IMF arranging a swap between countries with weak and strong external positions.

Increasing the allocation and utility of SDRs would be a welcome step and could help reduce the risk of capital flight and currency crashes, especially for emerging markets. And ignoring the technical difficulties in getting a global consensus for the task, it has the potential to solve one side of the imbalances in the world—the U.S. would not need to run large external deficits to supply the world with dollars, because emerging markets would not need to hoard dollars to avoid crises. However the other side of the equation would still be there. Countries such as China would presumably want to keep their currency relatively undervalued to promote exports. If, say, China pegged the yuan to an SDR basket instead of the dollar and continued to run trade surpluses, it would still end up accumulating dollars as trade is conducted in dollars. Hence the governor’s proposal to also allow SDRs to be used as a medium of exchange, including for international transactions. But this would simply shift China from accumulating dollars to accumulating SDRs.

Real change will only come when imbalances caused by misaligned currencies are corrected. In particular the promotion of exports at the expense of consumption in Asia would likely need to be curtailed. Making that decision does not require the creation of a super-sovereign currency.

Fruitful Multipliers

Mon, 23 Mar 2009 17:30 GMT

Nothing like a good worldwide recession to revive academic debate about the nature of fiscal stimulus. As one new study has it:

We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small just when needed most, and GDP and employment effects are only one-sixth as large, with private sector employment impacts likely to be even smaller.

While another sees it quite differently:

Global fiscal stimulus is essential now to support aggregate demand and restore economic growth. The International Monetary Fund has called for fiscal stimulus in as many countries as possible, including emerging market and advanced economies. This paper uses simulations with a multi-country structural model to show that worldwide expansionary fiscal policy combined with accommodative monetary policy can have significant multiplier effects on the world economy.

Meanwhile, our Tine Olsen surveys the stimuli in process across the Asia Pacific region, and finds a number of interesting variations on a theme.

The larger private consumption's share of total GDP, the larger the overall effect will be from boosting private consumption. Efforts to stimulate growth through consumer spending should therefore be more effective in the Philippines, Indonesia, New Zealand and India, than they will be in the export-heavy economies of China, Singapore and South Korea. This could explain the focus on tax breaks and social insurance in the Philippines, compared with the strong focus on infrastructure spending in China.

Open economies lose some of their fiscal stimulus impact to other economies through consumer and business spending on imports. The small, open economies of Hong Kong and Singapore are extreme cases, where imports are well above total GDP because of the very high level of re-exports.

In the larger economies of Japan, Australia and India, imports make up a relatively low share of GDP. In these countries, stimulus measures aimed at private consumption should be effective, with larger multipliers. Australia and Japan are among those countries that have transferred cash to citizens, which may not be such a bad policy after all.

Geithner's Plan

Mon, 23 Mar 2009 08:45 GMT

Brad DeLong cuts to the chase on the latest Treasury plan:

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.

Q: What if markets never recover, the assets are not fundamentally undervalued, and even when held to maturity the government doesn't make back its money?

A: Then we have worse things to worry about than government losses on TARP-program money--for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

UPDATE: The Treasury's own FAQ is here and here . (HT Calculated Risk)

Bonus Question

Fri, 20 Mar 2009 14:15 GMT

Bonus marchers, 1932:

Bonus marchers, 2009:

Compare and contrast.

Rewiring the Fed

Thu, 19 Mar 2009 10:00 GMT

Just when I thought I was beginning to understand how the new monetary policy works, Nick Rowe comes along to boggle my entire mind.

The ~~Bank of England~~ Federal Reserve has switched to quantitative easing. It is buying ~~gilts~~ Treasuries. What would count as a signal of success? We could argue that falling yields would signal success, because it is trying to reduce long interest rates to stimulate investment. But we could equally argue that rising yields would signal success, because higher expected growth in real output and inflation would increase long interest rates.

And that's the easy part. Rowe continues:

Suppose we could wave a magic wand, and restore confidence. Investment demand rises, consumption demand rises, expected inflation rises (people stop expecting deflation). The central bank would need to raise the overnight rate in response, and would be expected to keep it raised. Bond prices would fall, and yields would rise.

Now suppose the central bank bought bonds secretly, and at the same time someone waved the magic wand. What would happen to bond yields? The secret purchase might lower bond yields, but the magic wand would raise them. If the magic wand had a bigger effect than the secret bond purchase, the new demand for bonds by the central bank would be met by an even bigger supply of bonds, and the price of bonds would fall, and yields would rise.

Sure hope somebody at the FOMC has thought this through...

How Sweden Did It

Thu, 19 Mar 2009 08:45 GMT

A while ago Cris DeRitis looked at how the Swedes pulled themselves out of financial crisis in the 1990s.

A key to Sweden's response involved the government taking large equity positions in banks in exchange for their bad debt. This strategy allowed Swedish taxpayers to benefit not only from the recovery of assets whose values had fallen because of market illiquidity, but also from any increases in bank values once the banks were recapitalized and returned to profitability. Something similar is being considered as part of the U.S. Treasury's $700 billion Troubled Asset Relief Program, although the TARP's original emphasis was to stimulate interbank lending by establishing prices for illiquid assets.

Now Kent Cherny and Emre Ergungor from the Cleveland Fed follow up on VoxEU:

Most of the criticisms that can be levelled at the Swedish crisis resolution are easy to make in hindsight. Overall, Sweden’s financial crisis containment and resolution strategy largely avoided mistakes that would skew uninsured investors’ incentives going forward. Its policies were enacted transparently, insured political independence, and attempted to restore credit flows in the broader economy. The Swedish case illustrates the trade-offs and considerations of market discipline that crisis managers must address if they are to minimise taxpayer losses and speed the return to a rebalanced, growing economy.

Easing Quantitatively

Thu, 19 Mar 2009 08:30 GMT

I noticed the NYTimes this morning managed to write nearly 2,000 words on the Fed's latest move without once using the term "quantitative easing." Isn't it easier just to call it "printing money" anyway?

And while we're on the subject, Alex Tabarrok sums up the move this way:

It's about time. Shows how peculiar it is to define a liquidity trap in terms of short-term rates. The fact that the Fed usually buys short-term bonds is a minor issue as far as monetary theory is concerned, like the fact that the Fed usually prints $1 bills but not $2 bills.

And since they've gotten into pushing positive images of the Chairman, When will the Fed's PR mavens give us a photo of Bernanke waving from a helicopter?

The Chairman's Jacket

Sun, 15 Mar 2009 21:15 GMT

That was some stellar performance by Ben Bernanke on 60 Minutes tonight. I mean it. The Chairman was as candid and forthright as any central banker could possibly be, without shredding the veil of mystery that somehow seems necessary to keep global markets from having fits or fainting outright.

And did you love the man-from-Main-Street bit on the bench in Dillon, S.C? Great stuff, even if it clearly required a setup from CBS that couldn't have been scripted better if the Fed's own PR staff had written it out. (Hmmm.... do ya think?)

But for me, the just-like-us deal was sealed with this image, flashed on the screen as Gentle Ben was recounting his leap from small-town Carolina kid to Harvard man. A leap he made, as did all of us Ivy League wannabes in those years ... wearing a madras sport jacket.

You young folks probably can't imagine wearing a madras sport jacket. Neither can anybody older than about 65, who would have come of age when sartorial standards were still Eisenhowerian.

Nonetheless, and however improbable it may seem by all the laws of fashion and common sense, I will bear witness that in the late 60s and early 70s, when you went to a college interview—particularly if you were the first generation your immigrant family to apply to a big-time Ivy League college—what you wore was a madras sport jacket.

Maybe they'll come back in style with the Bernanke recovery.

Question of the Week

Sun, 15 Mar 2009 19:45 GMT

Is any institution reall too big to fail? And what happens if one of them fails? Megan McArdle digs in:

[W]hen credit markets contract, the time horizon of our trading also shrinks. We start taking economic activity like Bill W. said--one day at a time. Credit markets are already contracting because people have realized that they are not nearly as good at predicting the future as they thought they were, and had therefore better neither a borrower nor a lender be.

A major bank failure accelerates this process. It's the difference between rolling slowly into your garage, and hurtling into it with the pedal to the metal.

First, their credit disappears from the market, which shrinks the economic pie by making it more difficult to trade goods and services between our current and future selves. The economic pie shrinks.

Second, the shrinkage of the current economic pie changes peoples' estimation of the future. Much of economic forecasting is, after all, trend extrapolation. To make matters worse, we are basically hard-wired to over-weight recent events when predicting what will happen next.

Third, the changed expectations shrink even further the amount of future trade that people are willing to do between current and future selves. No one wants to defer consumption now and lend some business the money on the wan hope that Snozzleberry soda is the Next Big Thing. The economic pie shrinks further.

This is all somewhat airy-fairy; perhaps you want to know exactly what will happen if Citibank and America will fail. Will CDS markets blow up? Insurance companies in receivership? Bank runs across the land?

But as the Lehman bankruptcy illustrates, we have no idea exactly what will happen. The Fed anticipated what might go wrong as best as it could, and actually did a pretty good job preventing those problems from getting out of hand. But they didn't foresee that the bankruptcy would cause the failure of a smallish money-market fund, or that this would, in turn, cause the entire commercial paper market to lock up. Where the credit contraction will occur is much harder to predict than the near-certainty that it will happen.

Apple or Cherry?

Sat, 14 Mar 2009 17:00 GMT

Happy Pi Day. If you're practically innumerate like me, check out Matrix's cool graphical explanation.

And of course, be extra wary tomorrow.

What, They're Worried?

Fri, 13 Mar 2009 12:30 GMT

I think this was what Benjamin Franklin had in mind when he warned against excessive debt. No matter who you are, sooner or later your creditors begin addressing you like this:

Speaking ahead of a meeting of finance ministers and bankers this weekend in London to lay the groundwork for next month’s G20 summit, Mr. Wen said he was “worried” about China’s holdings of United States Treasury bonds and other debt, and that China was watching economic developments in the United States closely.

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

He called on the United States to “maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

About that 2nd Stimulus

Thu, 12 Mar 2009 21:30 GMT

A trial balloon? Second thoughts? A tactical retreat? You be the judge. The WashPost reports:

Speaker Nancy Pelosi (D-Calif.) said yesterday that a second economic stimulus package is not "in the cards" in the short term, disappointing those seeking another quick infusion of federal dollars into the struggling economy....

Pelosi herself helped nudge the idea of another stimulus Tuesday when she said that Congress should "keep the door open" to the possibility. And House Appropriations Chairman David Obey (D-Wis.) this week said he would begin "preparing options" for a second stimulus.

Some prominent economists have suggested that a second stimulus, costing several hundred billion dollars, might well be needed. Mark Zandi, the chief economist at Moody's Economy.com who has become a key adviser to House Democrats, said this week that "policymakers need to do more. I don't think we're done. . . . I think another stimulus package is a reasonable probability, given the way things are going."

The Wall Street Journal's most recent forecasting survey, a poll of 49 economists, found that more than 40 percent of respondents thought a second large stimulus package remains necessary to jump-start the economy.

But several key Democrats have said they do not like the idea of another package so soon, and congressional Republicans -- who almost unanimously opposed the first stimulus -- have even less appetite for a second. "I think the fact that they are already talking about stimulus two indicates they already think stimulus one has failed," suggested House Republican Conference Chairman Mike Pence (Ind.).

Recession in the Pew

Thu, 12 Mar 2009 17:45 GMT

Does losing half their wealth make Americans more religious? Maybe, but if so, it's not taking the form of increased attendance at church, report the folks at (not in) the Pew Forum.

A Second Stimulus?

Tue, 10 Mar 2009 14:30 GMT

This just in from CQ in Washington:

Speaker Nancy Pelosi opened the door to the possibility of another stimulus plan — or bank rescue — following a Tuesday meeting with dozens of Democratic members that was attended by a panel of four prominent economists.

Mark Zandi, the chief economist for Moody’s Economy.com, told reporters after the meeting that the $787 billion stimulus package signed into law in February might not be the last move by Congress to deploy taxpayer money to save the economy.

“Another stimulus package is a reasonable possibility,” said Zandi, a key consultant for Democrats on the economic stimulus packaged (PL 111-5), cleared by the Senate Feb. 15. And, he added, “more money for the banking system is likely, very likely.”

Asked by a reporter if she agreed with Zandi’s assessment, Pelosi said: “I do.”

The overarching message members were given at the meeting on the economic situation, Pelosi said, was that initial actions of the 111th Congress have been effective.

“I think it’s important not to lose sight that the policy response to date has been very good and very aggressive,” Zandi told reporters.

The East Is Red
(So Is the West)

Mon, 9 Mar 2009 14:45 GMT

Red doesn't mean quite what it used to, of course. On our interactive Global Recession Status map, the west is more crimson still, with only a few parts of what the Germans used to call Mitteleuropa still perched on the brink of, rather than in, recession.

Among those holdouts are the latest two countries to be colored in by Moody's Economy.com analysts: Slovenia and Slovakia. Located just south and east of Austria, respectively, both are feeling Western Europe's current doldrums, with exports and foreign investment taking a slide. Kim Forkes in our London office has more on both Slovenia and Slovakia.

Update, March 10: Johnathan Miller at the Matrix blog looks at our map and decides the northern hemisphere is now the Tropic of Recession. Good one.

Update, March 11: The recession map's been further updated, clarifying the status of some countries and adding others. (Central America fans, this one's for you.)

Deconstructing Homeownership

Sun, 8 Mar 2009 18:15 GMT

Cris DeRitis does a splendid job of explaining the problem with homeownership this weekend. In his piece on the Dismal site, Cris points out that, along with all its social benefits, high rates of homeownership also carry social costs. Meanwhile, over on Dismal's Europe site, Melanie Bowler weighs in with a walk-through of property markets from Spain to the Baltics. It's not pretty, but one interesting insight that emerges from the carnage is this:

Those markets with lower homeownership rates are less at risk from a sharp downturn in property prices.

We're not the first ones to note a dark side to high homeownership rates. As long ago as 1999, a British economist named Andrew Oswald was documenting a correlation between unemployment and homeownership across countries in Europe and elsewhere. I interviewed Oswald back then and wrote:

In the 1950s, most European countries had very low rates of homeownership and also low unemployment . Today, some of those countries have dramatically increased the number of people who own their homes - and unemployment has gone up in those countries as well.

The two most dramatic examples are Spain, where 80 percent of the residents own their homes, and Switzerland, where only 28 percent do. Spain's jobless rate is 18 percent, while Switzerland's is only 3 percent, Oswald reports...Unemployment in Europe doesn't match the pattern of welfare benefits in different countries; nor is it higher in areas with strong labor unions, he says.

``This American conception that the European countries are ossified because of the welfare state being so generous just isn't true,'' he told me.

The missing piece is homeownership, Oswald insists, in part for the reasons Jones mentions above. People who own houses are less mobile; therefore they tend to go jobless longer rather than uproot themselves.

But there's more. Subsidies and tax breaks that encourage homeownership—such as the deduction Americans take for home-mortgage interest—weaken the market for rental housing, Oswald believes. With fewer available apartments, younger people tend to live at home longer rather than move where the jobs are...

Oswald also notes that high homeownership areas tend to put roadblocks in front of entrepreneurs, with zoning and other rules that make it hard for the economy to grow and change.

This won't affect unemployment when times are good...But during a downturn, he warns, areas without an active and flexible rental market may find it's much harder to get the economic engine rolling again.

Oswald isn't saying there's anything wrong with owning a home; he owns one himself. The question is whether countries, or regions, are smart to be promoting homeownership, or treating it as an unalloyed social blessing.

``Of course, people want to be homeowners if they possibly can,'' he told me. But "when you achieve a world full of homeowners, you ossify the labor market''—making it that much harder to guarantee prosperity for your children and grandchildren.

Foreclosure, the Sequel

Sun, 8 Mar 2009 17:30 GMT

About six months ago I got a call from Alex Kotlowitz, a writer acquaintance from Chicago. The New York Times Sunday magazine had asked him to find the epicenter of the foreclosure crisis. What areas were being most hard hit, he wanted to know. Pulling our in-house data series, I suggested some metros in California and Florida, where the popping of the bubble was producing some of the most alarming default and delinquency rates.

But Alex had other ideas. Deeply involved in chronicling the social woes of the Rust Belt (his previous major books include "There are No Children Here" about Chicago's public housing ghettos and "The Other Side of the River" about racial tensions in a small Michigan community), he chose instead to study how the foreclosure crisis has devastated large swaths of inner-city Cleveland. And this weekend his article, "All Boarded Up " was the cover piece in the Times' Magazine. Excerpt:

Vacant houses are not a new phenomenon to the city. Ravaged by the closing of American steel mills, Cleveland has long been in decline. With fewer manufacturing jobs to attract workers, it has lost half its population since 1960. Its poverty rate is one of the highest in the nation. But in all those years, nothing has approached the current scale of ruin.

And in December, just when local officials thought things couldn’t get worse, Cuyahoga County, which includes Cleveland, posted a record number of foreclosure filings. The number of empty houses is so staggeringly high that no one has an accurate count. The city estimates that 10,000 houses, or 1 in 13, are vacant. The county treasurer says it’s more likely 15,000. Most of the vacant houses are owned by lenders who foreclosed on the properties and by the wholesalers who are now sweeping in to pick up houses in bulk, as if they were trading in baseball cards.

What's striking about Alex's piece is that it isn't mainly about foreclosures at all. Yes, many Cleveland families were persuaded during the housing boom to take out mortgage loans that later untenable, and many have been displaced as well as dealt a crushing financial setback. But what's happening here isn't so much the popping of a bubble—did Cleveland's Slavic Village ever even have a bubble?—as the acceleration of the city's decline. In Cleveland, houses that get foreclosed aren't just empty; they're quickly stripped, by either the former owners or by freelance scavengers, often left as unrepairable shells. Nobody wants those: not the former residents, not the mortgage owners, not even the out-of-town wholesalers once they discover the cost of rehabbing or demolishing the structures.

The task is achingly slow; each house its own battle. On one street I visited, in a ward near Brancatelli’s, a third of the houses were abandoned. One resident, Anita Gardner, told me about the young family who moved in down the street a few years before. They spruced up the house with new windows, a fireplace, wood kitchen cabinets, track lighting and a Jacuzzi. When they lost the house to foreclosure, they left nothing for the scavengers. They stripped their own dwelling, piling toilets, metal screen doors, kitchen cabinets, the furnace and copper pipes into a moving van. “They said, ‘Why should someone else get it?’ ” Gardner told me. “So they took it themselves.” In December, Gardner’s neighbor watched a man strain to push a cart filled with thin slabs of concrete down the street. It explained why so many of the abandoned homes in the city are without front steps, as if their legs had been knocked out from under them. Perhaps such pillage is part of the natural momentum of a city being torn apart. If you can’t hold onto something of real value, at least get your hands on something.

This strikes me as a whole new phase of the crisis, that's only starting to be explored. As Kotlowitz writes, blighted urban neighborhoods aren't new; I remember in the early 90s some diligent newspaper reporters in Detroit went around counting up the number of abandoned and rotting properties in that city, finding roughly twice the city's official total. Philadelphia's last mayor made a campaign promise to demolish some 26,000 abandoned buildings, and would point with pride to vacant, leveled lots the way some mayors brag about new skyscrapers.

The point is, we've devoted a lot of time and attention to two aspects of the housing crisis: household displacement and the financial hit to mortgage lenders. But there's a very big third aspect that needs attention, and it's highlighted in Kotlowitz's article: What happens to the thousands (or hundreds of thousands) of physical structures that nobody now wants?

Update: Here's an interview with Alex.

Live On Line

Fri, 6 Mar 2009 13:00 GMT

At this very moment, my colleague Joe Brusuelas is chatting, live, with readers of the Washington Post. Join the discussion here.

Market Timing

Thu, 5 Mar 2009 14:30 GMT

Waiting for the Wall Street rebound? Don't hold your breath, Mark Z tells the Christian Science Monitor:

How long will it take the stock market to recover? “It could be a decade,” Zandi said. “If I were an individual thinking about the size of my nest egg, and what I would need for retirement, I think the appropriate assumption is that I am going to get 5 percent annualized returns on my assets.” Many investors enjoyed much faster growth before the stock market collapsed.

For the US economy, things are getting “measurably worse,” Zandi said. He predicted 2009 would be a “very difficult year — washout,” with the economy contracting 2.5 percent. That is twice as big a decline in economic activity as the Obama Administration predicts in its budget.

As for 2010, “I don’t think we go anywhere — basically a flat year,” Zandi says. He added, “I think we get growth in 2011.”

Through a Different Lens

Wed, 4 Mar 2009 16:45 GMT

From our Moody's colleagues up the road, a new way of measuring the precariousness of the situation:

Credit risk, measured by Moody’s Gap Dispersion Index (GDI), intensified in February, as spreads retreated and equity volatility rose, giving up some of their gains over the past three months. The GDI increased to 4.1 in February from 3.8 in January, breaking January’s record as the highest level for the index since Moody’s began tracking it in 2002.

I won't attempt to explain how a Gap Dispersion Index works, but assuming it does, it seems to show we're in for the financial equivalent of Punxatawney Phil's six more weeks of winter—that is, at least a few more quarters of hard times.

February’s increase in the GDI indicates that credit spreads, equity volatility, rating downgrades and defaults will all likely continue to rise over at least the next two quarters. There may be, as we saw between November 2008 and February 2009, bear market rallies in credit, but we believe that until the GDI experiences a sharp and/or sustained decrease that such rallies will be brief and transient.

Read the whole thing. (sub required).

Stimulus Effects

Tue, 3 Mar 2009 09:15 GMT

Depending on whom you talk to, the recently passed stimulus bill is either way too big or not big enough. Or something in between. Now the Congressional Budget Office has weighed in:

By CBO’s estimation, in the short run ARRA will raise GDP and increase employment by adding to aggregate demand and thereby boosting the utilization of labor and capital that would otherwise be unused because the economy is in recession. Most of the budgetary effects of the legislation are estimated to occur over the next few years, and as those effects diminish, the short-run impact on the economy will fade...

In contrast to its positive near-term macroeconomic effects, the legislation will reduce output slightly in the long run, CBO estimates. The principal channel for that effect, which would also arise from other proposals to provide short-term economic stimulus by increasing government spending or reducing revenues, is that the law will result in an increase in government debt...

source: CBO

Taking all of the short- and long-run effects into account, CBO estimates that the legislation implies an increase in GDP relative to the agency’s baseline forecast of between 1.4 percent and 3.8 percent by the fourth quarter of 2009, between 1.1 percent and 3.4 percent by the fourth quarter of 2010, between 0.4 percent and 1.2 percent by the fourth quarter of 2011, and declining amounts in later years (see Table 3). Beyond 2015, the legislation is estimated to reduce GDP by between zero and 0.2 percent.

Market Defense

Mon, 2 Mar 2009 14:00 GMT

William Easterly digs into the underlying ideological debate on his blog devoted to aid and development. Excerpt:

[H]asn’t the current crisis discredited “free markets”?

The history of markets is one of periodic crises (especially financial crises) and recoveries, including major episodes of creative destruction, but with steady positive long run growth despite severe fluctuations around the trend. The huge fallibility of human actors makes the case for markets stronger, not weaker. The market itself triggers the corrective actions by both public and private actors when these actors do stupid things, like give too many mortgages to people who were not creditworthy and then try to cover it up with fancy securitization. The collapse of financial markets was a severe wake up call to change this stupid behavior; creative destruction is wiping out firms that made huge mistakes (despite some well-publicized cases of individual CEOs getting bonuses despite their stupid actions). New firms or restructured firms will not make the same mistakes (even if they find new mistakes to cause some new crisis). Since we recovered from all the previous crises of capitalism, it seems likely we will recover from this one. A knee-jerk rejection of markets (especially in poor countries) will likely postpone rather than accelerate the recovery...

The Latte Recession

Mon, 2 Mar 2009 09:30 GMT

Carlin Romano traces the recession's impact on consumer caffeination:

Sangeeta Jaiswal, manager of the Dunkin' Donuts at 16th and Sansom - it's all takeout, with no seating area - says, "Some customers come with Starbucks mugs, but they want our coffee. They say that if they don't drink Dunkin' Donuts coffee, they are not happy."

Cafe denizens across the area also report seeing more peers bringing personal travel mugs to coffee shops, which gets you anywhere from a 10 percent discount at Starbucks to huge savings - coffeewise - elsewhere.

This fits with my hypothesis regarding the impact of aggressive price-discrimination over the last couple of decades on the real consumer impact of the recession. Still waiting for some Ph.D. to run this up the academic flagpole ...

Ransom Note or Reality Check?

Mon, 2 Mar 2009 08:15 GMT

This research report was making the media rounds last week. It makes the difficult point that, whether the banks are overtly bailed out or not, U.S. taxpayers will be stuck with the bill. One economist/blogger calls it a "ransom note" and the hosts of this podcast say it accurately describes the U.S. government's dilemma: If we all don't pay up, we'll all ... pay up.

It all further illustrates the degree to which everyone, from Bernanke and Geithner on down, is floundering for a solution to this mess. Tyler Cowen's NYTimes column Sunday made that point well, but it sure doesn't leave you feeling confident.

Book Talk

Sun, 1 Mar 2009 08:45 GMT

The Boston Globe reviews some useful background reading:

A couple of weeks ago, President Obama committed nearly $1 trillion to pull the US economy from its downward spiral, signing a nearly $800 billion stimulus plan, then pledging up to $275 billion to support the housing market.

Few followed these developments as closely as business economists. Day by day, indicator by indicator, these analysts have watched a housing correction morph into what will likely be the worst downturn since the Great Depression.

Now, Mark Zandi, Ethan Harris, and Nariman Behravesh, three business economists, have stepped back to offer perspective on what the heck happened. Together their books provide a first take on the crisis, its causes, and the policies that might fix it.

Assessing Obama

Thu, 26 Feb 2009 06:45 GMT

Our Joe Brusuelas talks to Yahoo Finance about the President's speech to Congress:

"... if Obama truly wants to reduce the nation's deficit by 50% as he has pledged to do, Brusuelas says he’ll face more pressure from the left wing of his own party vs. partisan opposition from the Republicans.

"Looking beyond politics and purely at the economics of a growing budget deficit and huge unfunded mandates, Brusuelas offers a grim bottom line: We're all facing a future of fewer government services and higher taxes – and not just for those making $250,000 or more."

Thai Lessons

Wed, 25 Feb 2009 09:30 GMT

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 Summit

Mon, 23 Feb 2009 23:00 GMT

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 ...

From Here to Nationalization?

Sun, 22 Feb 2009 22:45 GMT

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.

What to Worry About

Sun, 22 Feb 2009 20:00 GMT

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.

Not to Worry...

Sun, 22 Feb 2009 19:00 GMT

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.

More Crash Geography

Thu, 19 Feb 2009 16:00 GMT

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.

Hear Hear

Thu, 19 Feb 2009 15:45 GMT

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.

Change We Need

Thu, 19 Feb 2009 09:30 GMT

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.

The Root of the Problem

Thu, 19 Feb 2009 08:30 GMT

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 .

Is There a God? Will Stimulus Work?

Tue, 17 Feb 2009 23:00 GMT

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.

Crash Geography

Tue, 17 Feb 2009 17:30 GMT

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.

Even More Condensed

Tue, 17 Feb 2009 08:45 GMT

Here's a transcript from Fox News Sunday, with Mark Z. and Google CEO Eric Schmidt.

Zandi on Stimulus (Condensed)

Sun, 15 Feb 2009 10:00 GMT

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.

Bargain Basements

Wed, 11 Feb 2009 17:30 GMT

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.

How We Do It

Wed, 11 Feb 2009 15:45 GMT

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."

Chez Geithner

Wed, 11 Feb 2009 15:00 GMT

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..."

Stages of Grief

Wed, 11 Feb 2009 14:15 GMT

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.

Immiseration Now

Tue, 10 Feb 2009 17:15 GMT

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.

Anti-Stimulus?

Tue, 10 Feb 2009 16:15 GMT

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.

The Other Stimulus

Mon, 9 Feb 2009 12:15 GMT

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.

New Guy

Fri, 6 Feb 2009 12:45 GMT

Dismal Scientist's newest contributor debuts today. Joseph Brusuelas comes to us from Merk Investments, where he was Chief Economist, and before that he held a similar post at IDEAglobal in Manhattan. Beginning with his commentary on the employment report this morning, Joe will be covering financial markets, the global economy, and pretty much everything in between.

Joe did doctoral work at the University of Southern California in Political Economy and Public Policy. He holds a BA and MA from San Diego State University in Political Science. When he's not knee deep in data he enjoys a fine glass of wine with his wife, Amanda and his St. Bernard, Jake. And outside of U.S. GDP, his favorite three-letter acronym is USC, home of the fightin' Trojans. His favorite philosophers are John Locke, Milton Friedman, William Faulkner and Bill Murray—not necessarily in that order.

Busy Guy

Thu, 5 Feb 2009 15:45 GMT

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."

A Light Ahead?

Thu, 5 Feb 2009 15:30 GMT

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.

Policy Hits Home

Thu, 5 Feb 2009 15:15 GMT

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.

Beating the Times

Wed, 4 Feb 2009 13:45 GMT

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.

Credit Crunching

Wed, 4 Feb 2009 08:30 GMT

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.

Plain Speaking

Tue, 3 Feb 2009 08:45 GMT

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.

For the Record

Tue, 3 Feb 2009 08:30 GMT

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.”

Recession and Society

Mon, 2 Feb 2009 09:45 GMT

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.

Expanding Horizons

Fri, 30 Jan 2009 18:00 GMT

* Congo's growth depends on exports of minerals and base metals. As such, tumbling copper and cobalt prices and diminished global economic activity are taking a heavy toll on export revenues.
* Sharp decline in oil revenue and foreign direct investment. Falling export revenues may lead to current account deficit. Government will boost spending in an attempt to stave off GDP decline.
* Deterioration of the European economies has reduced the country's agricultural exports. In addition, large budget shortfalls are threatening cutbacks in government investment.

These capsule summaries of conditions—in Congo, Saudia Arabia and Ghana, respectively—are part of the latest update to our Global Recession Status map, an interactive feature of the Dismal Scientist. My colleagues Samer Budeir and Mekael Teshome did the research. Check it out ... and check back frequently. We've still got more countries to add...

The Lines Get Longer

Fri, 30 Jan 2009 17:45 GMT

The data suggest that recent shocks to wealth and the rollback of household credit are affecting the labor supply of individuals. Should these changes persist, the countercyclical inflow of workers into the labor market could cause unemployment rates to exceed forecasts, since many entrants into the workforce might be unable to find jobs. We expect that these anomalous labor force participation patterns will persist until the underlying drivers, including depressed asset prices and impaired access to consumer credit, return to normal.

That's from the San Francisco Fed. Makes sense, and it means those days of double-digit joblessness might be closer than they appear.

Flying Down to Rio

Thu, 29 Jan 2009 14:00 GMT

Ok so maybe the Brazilians haven't gone completely bonkers. But there's no denying that chill in the air. When it comes to trade, nothing gets those protectionist juices flowing like a growing unemployment line. Add a hundred billions for the pols to play with and, well, this is what you can expect.

The stimulus bill passed by the House last night contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package.

A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas.

The Smoot-Hawley Samba?

Wed, 28 Jan 2009 23:00 GMT

Are we the only ones who think this is a big deal? Where are the headlines on AP, Bloomberg, the NYT?

Martin Soler Garcia reports:

In an unexpected move, Brazil's Ministry of Industry and Commerce said it will require import licenses for nearly all goods entering Latin America's largest market. The government said such licenses will better account for the quantity of goods entering the country. Yet the new policy appears to create a nontariff barrier and to be aimed at protecting Brazilian industry, which recently began to feel the effects of the global recession. With unemployment rising and industrial production falling, licenses are likely to hinder the flow of imports, giving local Brazilian competitors an advantage. Critics also call the policy a misguided attempt to narrow a widening trade deficit, which has grown to US$ 645 million so far this year.

Trade is already crashing all over the globe. If countries start putting up barriers as well, it's going to be a long, long recession...

UPDATE: Apparently cooler heads are prevailing

Same Birds, New Branch

Wed, 28 Jan 2009 22:45 GMT

This opened my eyes a bit:

Federal Reserve Bank of Richmond President Jeffrey Lacker, a proud dissenter in prior years, is back. He voted against today’s Fed decision, not for keeping rates steady but for only inching toward buying Treasury securities. The FOMC post-meeting statement said Mr. Lacker “preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.”

The rest of the FOMC said it’s “prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.” (Translation: We’ll see.)

...

Mr. Lacker, in his most recent speech, broke into a fairly clear discussion to distinguish between monetary policy and credit programs, signaling where he would fall today. Monetary policy means keeping prices stable, he said, while credit policy — also aimed at growth — “is more a form of fiscal policy in that it uses the public sector’s balance sheet to alter the allocation of resources.”

Note the new set of differences taking shape here: The Fed still has its hawks and doves, but they're now lining up on a different axis. Lacker is saying the Fed should avoid putting its toe on the scale to favor one sector over another (by choosing to buy one type of asset over another) and instead should stick to universal policies that affect everyone equally, at least in theory. Buying Treasuries doesn't help car dealers more than home builders or vice versa, presumably; it just raises the price/lowers the yield of risk-free baseline debt.

Aha.

What They Said

Wed, 28 Jan 2009 14:15 GMT

From the text of the FOMC statement today.

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time...

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level...

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Dennis P. Lockhart; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred to expand the monetary base at this time by purchasing U.S. Treasury securities rather than through targeted credit programs.

And from Gus Faucher's analysis of same (sub req):

Surprisingly, the Federal Open Market Committee announced no new steps in its latest monetary policy statement... Instead, the statement merely discussed previously announced steps, or potential moves that it mentioned in its last statement on December 16. In the former category is the Fed's decision to purchase GSE debt and mortgage-backed securities. Another previously announced step is the Term Asset-Backed Securities Loan Facility, which provides one-year loans to banks, using asset-backed securities based on auto, consumer, credit card, student and small business loans as collateral.

The FOMC discussed the possibility of purchasing Treasury securities, a move it also mentioned on December 16. But there is no indication that such a move is imminent. Interestingly, Richmond Fed President Lacker favored such a move, and in fact voted against the statement for that reason. If conditions do not start to turn around soon, pressure to purchase Treasuries will only grow. That will take the Fed further on the path of quantitative easing, using its power to print money to purchase assets and bring down long-term interest rates.

The statement also mentioned no specific moves to combat deflation. The minutes from the December 16 meeting indicate serious concern about deflation, although the word itself was never used. Similarly, the January 28 statement did not specifically refer to deflation, but the discussion surrounding inflation that is "below rates that best foster economic growth and price stability" is a clear reference to it. Still, the statement included no specific steps to combat deflation such as discussion of an explicit inflation target.

The FOMC will keep the fed funds rate target in its current range until economic conditions start to improve in about one year. Once the recession ends, the Fed will cut back on its quantitative easing in an attempt to dry up liquidity and prevent an acceleration in inflation. It will also quickly raise the fed funds rate target throughout 2010 and 2011.

Mad Man

Tue, 27 Jan 2009 17:30 GMT

No comment -- except that it's amazing this magazine still has its chops after 50+ years...

Grading the Stimulus

Tue, 27 Jan 2009 14:00 GMT

Now that there's a draft stimulus bill, the evaluations are coming thick and fast. From the Congressional Budget Office:

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

And from the Urban Brookings Tax Policy Center

Our grades reflect how well these measures would boost the economy in the short run per dollar of budget cost (sometimes called "bang for the buck"). For grading purposes, we assume that each provision will expire as scheduled and consider only the effects on aggregate demand (consumption or investment) or employment in the short-term. Each grade depends on both timeliness and targeting. To receive an A, a provision would have to begin quickly and go primarily to people who would most likely spend it or to businesses that would most likely use funds to retain workers or expand. We do not consider the long-term effects on the economy.

Equal Opportunity

Mon, 26 Jan 2009 08:45 GMT

Egalitarianism, or maybe schadenfreude: A new paper by Kenneth Rogoff and Carmen Reinhart finds the rich just as prone to banking crises as the poor:

The historical frequency of banking crises is quite similar in high- and middle-to-low-income countries, with quantitative and qualitative parallels in both the run-ups and the aftermath. We establish these regularities using a unique dataset spanning from Denmark's financial panic during the Napoleonic War to the ongoing global financial crisis sparked by subprime mortgage defaults in the United States. Banking crises dramatically weaken fiscal positions in both groups, with government revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. Thus the fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. Our new dataset includes housing price data for emerging markets; these allow us to show that the real estate price cycles around banking crises are similar in duration and amplitude to those in advanced economies, with the busts averaging four to six years. Corroborating earlier work, we find that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms, in rich and poor countries alike.

"R" and "D" Defined

Sun, 25 Jan 2009 20:00 GMT

One of the best new podcasts I've found is from the BBC, called "More or Less," which features Tim Harford getting up close and personal with statistics. This was transcribed from the latest installment:

Harford: Britain is "officially" in recession. Or is it? The definition isn’t qutite as clear-cut as you might think I spoke to Martin Weale, director of the National Institute for Economic and Social Research , and asked what economists mean when they use the “R” word.

Weale: Well, a recesison is a period when output recedes instead of growing. So the question is, how long you want a period of falling output to last before you’re convinced its not just caused by inaccuracy in the data, or a cold winter or something like that.

Harford : Now I often hear that a recession is two consecutive quarters of negative growth—horrible phrase, negative growth. Is that an official definition?

Weale: No I don’t think there is any official definition. [It depends on] which officials are you asking, which office is producing the definition. People find two quarters of negative growth a convenient defnition of recession because one quarter might just be a wobble in the numbers or something like that. So they’re looking for something which is a bit more sustained.

Harford: We used to worry about the "R" word, recession. Now there’s talk about the "D" word, depression. Is there an official definition of a depression? How would you define a depression?

Weale: I don’t think there is an official definition of a depression. It used to be the case that a depression was thought of as something that was shorter lived than a recession. Now people tend to see it the other way round. So a sustained recession they call a depression.

Harford : So there you are. No official definition...It’s only a depression if you want it to be.

Calling Smoot & Hawley

Fri, 23 Jan 2009 15:00 GMT

Was it Karl Marx who said history repeats itself, first as tragedy, then as farce?

This from Philadelphia's WHYY:

Congressman Bob Brady is head of the House Administration Committee, which oversees logistics at the Capitol, such as the gift shop. He says tourists shouldn’t take home trinkets that aren’t made in America.

Brady: “We told them right away that we don’t want anybody coming to our nation’s capital visiting our visitors center to come away with a gift of the Capitol dome, the White House, whatever it may be with something that says ‘made in China.’ I think that is absolutely ludicrous. I have tremendous support from my colleagues [who agree that] coming to Washington to get a trinket that is made in China makes absolutely, positively no sense.”

The congressman says replacement merchandise can be purchased from American merchants and the gift shop managers should have thought more before purchasing foreign made goods.

Brady: “That’s their mistake they should have got a decent price and let them sell things made in America from American factories that employ American people.”

About a hundred thousand dollars worth of foreign made goods is in storage. Congressman Brady has ordered the trinkets returned to the manufacturers for credit, and says replacement trinkets can be purchased from US manufacturers.

Currency Conundrum

Fri, 23 Jan 2009 08:15 GMT

Which is weirder—the U.S. complaining about China manipulating its currency? Or China... manipulating its currency?

Dean Baker calls attention to the former:

The complaint against China implies that Geithner wants a lower-valued dollar which is directly opposite to wanting a strong dollar. As a practical matter, this is about as embarrassing a contradiction on a key policy issue as a Treasury secretary designate can possibly make...

While our own Alistair Chan explains the latter:

There is a chance that, with falling exports and rising unemployment, governments in Asia will seek to weaken their currencies further. One closely watched currency will be the yuan. Unlike other Asian currencies it has not depreciated against the dollar, but many measures of the yuan’s value suggest it is still undervalued.

Although there are pressures within China—such as from business leaders and the Ministry of Commerce—to depreciate the currency, it does not seem likely that the government will take that step. Officials from the People’s Bank of China appear to acknowledge that, with weak demand in foreign markets, making exports cheaper by weakening the currency will have little impact.

Dollar Hooey

Thu, 22 Jan 2009 16:15 GMT

The Economist's Free Exchangers listen to Tim Geithner and cut right to the chase:

[E]ither America is very upset with China for doing something that's in America's national interest, or American officials are very much opposed to things which are in the national interest, or quite a bit of Treasury testimony and public statements generally consists of large loads of hooey. Naturally, it's the latter. On this score, at least, the new boss will be just the same as the old boss.

This is more worrisome than unpaid taxes, or even a flubbed oath...

Et Tu, Microsoft?

Thu, 22 Jan 2009 09:45 GMT

There have been so many of these recently that we've almost become numb to them. But this one really drives home the point that an era has ended:

Microsoft Corp. said Thursday it will cut as many as 5,000 jobs over the next 18 months as it reported an 11% drop in second-quarter profit.

The software giant said the moves were driven by deteriorating global economic conditions and lower client revenue, resulting from weakness in the PC market and a shift to lower-priced notebook models.

That 80s Show

Wed, 21 Jan 2009 15:15 GMT

Prodded by the NYT's David Leonhardt, the BLS takes a deeper look at unemployment in the early 1980s, and find it was a good bit worse than today's level. But that could change...

Nationwide, the unemployment rate rose above 10 percent in 1982, compared with 7.2 percent last month. But that rate has a couple of basic flaws [...] It counts people who have been forced to work part time, even though they want to work full time, as fully employed. It also considers people who have given up looking for work — so-called discouraged workers — to be no different from retirees or stay-at-home parents. They simply aren’t counted.

Years ago, the Labor Department responded to criticism about these issues by creating several broader measures of joblessness. Unfortunately, they don’t exist prior to 1994. But the department was doing similar work in earlier years, which allows the economists who work there to make estimates about how to compare the various survey categories over time. I took these estimates — and they are estimates, not official statistics — and created a measure of unemployment that goes back to 1970.

Including discouraged workers, the measure shows that the unemployment rate was 7.6 percent last month. Another 5.2 percent of the labor force was involuntarily working part time. These two groups bring the combined rate to 12.8 percent.

Even this is an understatement, because the Labor Department’s definition of discouraged workers is a little narrow. To be counted, somebody must have looked for a job in the last year. And there appear to be several hundred thousand people — mostly men — who stopped looking for work more than a year ago but would gladly take a good-paying job if one came along. They would lift the rate above 13 percent.

As bad as the number is, it is still not that close to its 1982 peak of 16.3 percent (or anywhere near its Depression levels, which were probably above 30 percent). The early ’80s really were that bad.

You could take this whole discussion a lot further, by trying to adjust for differences in the types of jobs (less manufacturing, more services); in the composition of the labor force (more women, minorities, migrants); and in the composition of households (fewer dependents per breadwinner? That's just a guess). Only then, I think, could you say with some conviction that 1981 was worse than 2008, or vice versa. I suspect the uncomfortable truth is that each recession, like each unhappy family, is miserable in its own particular way...

The Worst Since

Sun, 18 Jan 2009 23:45 GMT

The Urban Land Institute gets the word: (via GlobeSt)

NEW YORK CITY-An early morning crowd of real estate and financial experts was served yet another platter of gloomy news during the Urban Land Institute’s "Economic and Real Estate Outlook: 2009 and Beyond" breakfast on Thursday. The packed house heard economists Mark Zandi and Dr. Sam Chandan offer details, predictions and sermons warning of at least two more years of economic adjustments, challenges and hardship.

"We’re going to suffer the worst downturn since the great depression," said Zandi, chief economist at Moody’s Economy.com.

A year ago, Zandi, along with a few other noted economists, said the job market was operating at stall speed. In a wire report that appeared in the Dallas Morning News, Zandi forewarned ''either something is going to revive the economy quickly or we’re going to get into an unraveling, vicious cycle of declining spending and even weaker job growth."

Fast forward 12 months to the ULI breakfast in Midtown, where Zandi, marveling at how rapidly his earlier prediction came true, said that in his 25 years as an economist, "it’s about as bad as I’ve ever seen it."

Shrinking the Banks

Sun, 18 Jan 2009 22:15 GMT

Finance has to shrink. This has been clear outside of Wall Street for some time. Now it's apparently dawning on Manhattanites as well:

“This industry made a lot of money by taking a business line with 20 percent return on assets and levering it up 30 times,” Mr. Miller said. “But no more. Banks are going back to being the boring companies they should be, growing roughly in line with gross domestic product.”

Clearly this means that the rip-roaring performance of financial services companies and their stocks isn’t likely to return anytime soon. Because these companies’ earnings fed both the economy and the stock market in recent years, a more muted performance has considerable implications for investors, consumers and the economy.

FOR example, since 1995, according to Standard & Poor’s, earnings of financial concerns have accounted for 22 percent of profits, on average, among the S.& P. 500 companies. That performance is almost double that of the next largest contributor — the energy industry. In 2003, earnings among financial companies peaked at 30 percent of total profits generated by the S.& P. 500; back in 1995, financial company earnings accounted for 18.4 percent of the total.

Still unaddressed is the question of whether a smaller financial services industry will do a better or more sustainable job of allocating capital to its highest and best uses...

Oh. Canada.

Fri, 16 Jan 2009 13:00 GMT

As every Canadian knows, the U.S. gets a lot more attention from its neighbors than the neighbors get inside the U.S. We're as guilty of that as anyone, I'm afraid, but starting today we hope to right the balance just a bit. In the Today's Economy section, you'll find an item called "Canada Weekly " by our Montreal-bred colleague Jimmy Jean.

This week, Jimmy discusses the Canadian housing slump, which came later than its American cousin, but is being felt just as sharply in certain markets. Yet with some distinct differences:

"...The good news is that Canada's housing boom was shorter and more fundamentally based than the one in the U.S.; therefore, the impact is likely to be more limited. Canada's banking system has been called the world's most robust by the World Economic Forum; despite the tough macro-financial environment, Canadian banks are still lending money."

Read the whole thing. And look for future installments to take a look at Canadian trade, currency, resources, manufacturing and more.

The Real Recession Risk

Wed, 14 Jan 2009 14:00 GMT

Just when we were starting to question the imperative for policymakers to "just do something" in response to the global recession, this story reminds us that it's not really about output gaps and deficit spending at all. From the NYT:

Violent protests over political grievances and mounting economic woes shook the Latvian capital, Riga, late Tuesday, leaving around 25 people injured and leading to 106 arrests by the police...

Latvia has for years boasted of double-digit economic growth rates. But it has been shaken by the global economic downturn. Its central bank has spent a fifth of its reserves to guard against a steep devaluation in the lat, and experts expect a 5 percent contraction of the country’s gross domestic product in 2009. Salaries are expected to fall substantially, and unemployment to rise...

The violence follows days of clashes in Greece last month, over a number of issues including economic stagnation and rising poverty as well as widespread corruption and a troubled education system. In Bulgaria on Wednesday, separate riots broke out in the capital, Sofia, after more than 2,000 people — including students, farmers and green activists — demonstrated in front of Parliament over economic conditions, Reuters reported.

In this light, I wonder if having a debate over the stimulus program isn't really kind of a luxury.

Stimulus Symposium

Tue, 13 Jan 2009 17:30 GMT

Released over the weekend: the Obama Administration's first sketch of how it hopes to beat back the recession:

A key goal enunciated by the President-Elect concerning the American Recovery and Reinvestment Plan is that it should save or create at least 3 million jobs by the end of 2010. For this reason, we have undertaken a preliminary analysis of the jobs effects of some of the prototypical recovery packages being discussed. Our analysis will surely evolve as we and other economists work further on this topic.

"Other economists" ... such as this one:

To provide the largest bang for the buck, a well-designed stimulus plan should include a temporary increase in government spending. Spending increases benefit the economy as soon as the money is disbursed, and the economic benefit is less likely to be diluted by increased imports. The most efficacious spending includes extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to hard-pressed state and local governments. Increasing infrastructure spending would also greatly boost the economy, particularly in the current downturn, as the economy's problems are expected to last for an extended period and most of the money will be spent on hiring workers and on materials and equipment produced domestically.

Read it all at our one-stop stimulus shop, located (for now)here.

Liberals for Less Government

Tue, 13 Jan 2009 09:15 GMT

Ed Glaeser makes a case for a Third Way, a la Andrew Jackson:

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

Thought-provoking, to say the least.

The Complexity Culprit

Mon, 12 Jan 2009 12:15 GMT

Daron Acemoglu of MIT considers the lessons for economics in the current mess. One highlight:

While the data robustly show a marked decline in aggregate volatility since the 1950s, it is now clear that the end of the business cycle was a myth. Indeed, the policy and technologies that made the economy more robust against small shocks also made the economy more vulnerable to low-probability "tail" events. Diversification of idiosyncratic risks creates a multitude of counter-party relationships. This new and dense pattern of interconnections created potential domino effects among financial institutions, companies, and households.

This theme has been touched on—see here and here. But it deserves more prominence, both in the blogosphere and in policy circles.

How Bad Was It?

Mon, 12 Jan 2009 10:30 GMT

I don't think this is a quibble: All those "Worst Since 1945" headlines last week left out a critical caveat. Time's Curious Capitalist elucidates:

The headline everywhere this morning is that this was the Worst year for jobs since 1945, because the December-to-December job loss of 2.6 million was the biggest calendar year loss since 1945, when the country was demobilizing from World War II. But that's a misleading comparison, given that the population of the U.S. in 1945 was less than half what it is now. If you look at percentage job loss, 2008 was the worst year since 1982. Looking at calendar year losses is kind of misleading too, given that recessions usually aren't thoughtful enough to begin and end on New Year's Day, but you get the same result—worst since 1982—if you look at percentage job loss on a rolling 12-month basis. What really matters is job losses from the beginning to the end of the recession, but we don't know when this recession will end yet. Right now the pace of job losses is slightly worse than that at the worst of the 1981-1982 recession but still below that at the worst of the 1974-1975 recession. So while there are all sorts of reasons to believe that this will be the worst recession of the post-World War II era, the proof isn't there in the employment report just yet.

These kinds of details only get more important when we're being asked to commit the next two or three generations to paying off huge current stimulus, IMHO...

Update: Aaron Smith gives it a pass with a finer-toothed comb:

A population-adjusted number adds a distortion, because demographics cause the employment/population ratio to change over time. By looking at percentage changes we are able to take the size of the employment base out of the equation—I think this is the more accurate way to do it. If you do that, nonfarm employment fell 1.9% in 2008, versus a 2.3% drop in 1982. But the drop in private service employment (everything but manufacturing and government) was 1.5% in 2008, versus a 0.2% drop in 1982.

Recessions in the past have been characterized by severe job cuts in manufacturing and construction, and only modest layoffs in the service-producing industries. What is striking about the current downturn is the breadth of job losses across industries. The three-month percentage drop in private-service employment is the largest in 50 years by some distance. This makes this downturn particularly scary because it suggests that the negative multiplier is deeply entrenched. This calls into question the sustainability of recent improvement in consumer spending for example. Diffusion indices show that almost three-quarters of all private industries saw payrolls contract last month. In manufacturing, this ratio was eight out of nine.

A Lost Decade

Sun, 11 Jan 2009 23:15 GMT

Now that the Bush years have ended, what did they leave us? Not much, the Washington Post reports:

"It's sad to say, but we really went nowhere for almost ten years, after you extract the boost provided by the housing and mortgage boom," said Mark Zandi, chief economist of Moody's Economy.com, and an informal adviser to McCain's campaign. "It's almost a lost economic decade."

Summoning Demons

Sun, 11 Jan 2009 22:45 GMT

This is what I've been afraid of:

A wave of protectionism is swelling around the world that could further damage struggling economies.

Industries are starting to line up in Beijing, Brussels and Washington for import protection. That has happened in past downturns, too, but this time the restrictions may bite harder because of the global nature of the problems.

During the 1980s, Japan could afford not to retaliate against U.S. quotas on steel and automobiles because Tokyo's economy was humming. There are no clear economic winners now, making it much harder for any government to turn the other cheek.

The global turn to stimulus spending also may come wrapped in protection, as each country tries to ensure that its industries benefit. In the U.S., congressional Democrats and their allies in steel, textile and organized labor are pushing to include strong "Buy America" provisions in a U.S. stimulus program that would limit spending to firms in the U.S. Already European officials are crying foul.

Maybe the most insidious part is the attempt to paint this kind of perversity as normal; you know, everybody does it ...

"There is no such thing as free trade," said Daniel DiMicco, the chief executive of steelmaker Nucor Corp., who is pushing for Buy America measures. "All trade is managed."

I would respond by noting that there's no such thing as a perfectly honest person, either. But that doesn't justify theft and mendacity as public policy.

Update: Dean Baker has a different objection .

Grammarian Smackdown

Sun, 11 Jan 2009 22:30 GMT

My last post drew a riposte from "BH" at a blog called MeatyReads:

Andrew Cassel at the Dismal Scientist’s blog, DataPoints, writes:

Here’s how the media can make you crazy. Today MarketWatch moved a story on the government’s employment report for December, with this as the second paragraph:

Some 524,000 people lost their jobs in December, closing out the worst year for job losses since the U.S. began demobilizing its wartime economy in 1945.

What’s the problem? It’s WRONG, that’s what. True, a large number of people did lose their jobs in the U.S. in December—but that number was not 524,000. In fact, it’s a dead certainty that the number was much, much larger—in excess of 4 million—because that’s how many people lost jobs in every month during 2008 for which we have records.

Month after month, the BLS reports that payrolls in America grew or shrank by X, with X representing the net change in a U.S. labor market that, never forget, includes something like 130 million workers and jobs.

Yet month after month, reporters from the non-specialized press take the Labor Department numbers and misrepresent them, reporting stuff like that “524,000 people lost their jobs in December.”

It’s true that the 524,000 number that is reported is a net number. He ends by saying that mistakes like this are dangerous and may lead to economic illiteracy. But what does the BLS actually report in its publications? Here’s the first paragraph:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

Emphasis added. Do you see the word net in there? I don’t. You won’t find it in this publication, or in others because everyone realizes it is a net number. So I can’t get too upset about a journalist reporting nearly verbatim what is in the publication itself. There are many things you can take journalists to task for, but his post just comes across as ~~a bitter rant~~ extremely annoyed.

The amended last line followed my re-riposte to BH:

There’s a subtle but critical difference between “annoyed” and “bitter” — just like there’s a subtle but critical difference between reporting that nationwide employment shrank by 524,000, vs. saying that 524,000 people lost their jobs. I’m not particularly concerned with whether the word “net” appears in a news report; I am annoyed about the misunderstanding that results from many news reports of how the U.S. labor market (and economy) works. From such misunderstandings spring the notion that a president or Congress can create private-sector jobs by fiat, or that protecting jobs from foreign competition is a simple and costless matter of will. It would be nice if agencies like the BLS were clearer in their own presentations, but it’s the media’s job to get this stuff right.

Anybody else want a piece of this, feel free....

The Economic Grammarian

Fri, 9 Jan 2009 17:45 GMT

Here's how the media can make you crazy. Today MarketWatch moved a story on the government's employment report for December, with this as the second paragraph:

Some 524,000 people lost their jobs in December, closing out the worst year for job losses since the U.S. began demobilizing its wartime economy in 1945.

What's the problem? It's WRONG, that's what. True, a large number of people did lose their jobs in the U.S. in December—but that number was not 524,000. In fact, it's a dead certainty that the number was much, much larger—in excess of 4 million—because that's how many people lost jobs in every month during 2008 for which we have records.

As you can see here (sub req) more than 4 million people lose jobs each month—and more than 4 million get jobs. How much more will vary, and that variance—the net difference between the number hired and the number who quit or are let go—is more or less what the Labor Department measures when it reports on the job situation each month.

Month after month, the BLS reports that payrolls in America grew or shrank by X, with X representing the net change in a U.S. labor market that, never forget, includes something like 130 million workers and jobs.

Yet month after month, reporters from the non-specialized press take the Labor Department numbers and misrepresent them, reporting stuff like that "524,000 people lost their jobs in December."

I know why reporters do this. (I used to be one.) Reporters do this because they are in a hurry, and because they don't really understand statistics, and mainly because they have learned that nobody wants to read about faceless numbers and so they should, as much as possible, try to "put a face on it"—that is, write in a way that focuses away from the numbers and on to the humanity (oh, the humanity!) behind the numbers.

Most of the time, that's good advice. But not here. And its especially not good advice if a reporter doesn't understand statistics enough to know that the net change in employment is many orders of magnitude smaller than the total change. Or to reverse it, that the U.S. job market is many orders of magnitude larger than the net monthly change about which so much fuss is made.

Don't get me wrong. A half-million jobs lost on net is far from trivial. But it's only not trivial if you compare it with the net change in a normal month. Without such a comparison... that is, presented as the simple fact that 524,000 people lost their jobs last month, it is trivial. And misleading. And frankly—in as much as it contributes to the economic illiteracy that plagues our national politics and policymaking—I think it's dangerous.

Remember Peak Oil?

Fri, 9 Jan 2009 16:30 GMT

We interrupt our job-related funk for something cheerier: Oil prices. Nik Bhattacharyya from Sydney takes this opportunity to look back at what seemed like a dead certainty only six months ago:

With oil production and proved reserves dropping in 2007, many speculated that we had reached the tipping point, where prices would begin to rise sharply matched by falling supply. Indeed, during the first half of 2008, peak oil theorists gained credence in the media as prices rose to record levels. Many blamed rising oil prices on a fundamental mismatch between oil supply and demand, blaming the rapid growth of consumption in developing nations for driving prices higher. But in retrospect oil prices were actually bubbling, driven higher in part by financial speculation as well as overestimation of the global economy, which is expected to contract in 2009. The experience of oil prices plummeting in the second half of last year has shown that global demand and financial speculation are important issues for oil prices, which peak oil theorists largely ignore.

But is the theory of peak oil prices dead or irrelevant now? The current shock throws a spanner in the works despite a pretty decent geological argument. However, the laws of economics and history show that when the price of a good rises—even the ones thought as irreplaceable—to prohibitive levels, substitutes that were previously unviable become plausible alternatives. Greater use of substitute goods spawns technological innovation and facilitates a movement away from goods that are highly priced. Already, there are products that can reduce society's oil dependence, but their viability is dependent on higher oil prices as well as technological innovation.

Read the whole thing (open access).

Don't Look Back

Fri, 9 Jan 2009 08:00 GMT

Here's the bad news:

Payroll employment declined by 524,000 jobs in December, slightly more than expected, while the two previous months were revised downward as well.

And the good news is ... wait, I'm thinking, it'll come to me.

If nothing else, at least keep it in perspective .

Time Marches On

Thu, 8 Jan 2009 17:30 GMT

Time magazine gets ahead of itself with our data:

New Data Says House Prices May Be Nearing a Bottom
...At TIME's request, Moody's Economy.com ran numbers on price-rent ratios for a few dozen markets... At first pass, the data suggests that we've largely come back to earth. The average price-rent ratio for the 54 metro areas Economy.com broke out was 19.8 for the three months through September, a couple of points higher than the 15-year average of 17.7, but significantly lower than where the ratio stood three years ago, 24.4.

Note the story actually plays it straight, appropriately hedging any inferences about how much more house prices are likely to sink and where.

How that translates into actual home price declines is a little tricky. After all, the price-rent ratio is based not just on home prices, but on the cost of rentals, too. So to figure out what will happen to home prices, you first have to make some assumptions about what will happen in the apartment market.

But the headline folks evidently weren't satisfied with squishy data; they wanted a grabber for the newsstands. (Hey, I fully understand how that works -- did it myself for years.) Let the readers argue about what "Nearing a Bottom" might actually mean after they've paid their $3.50 for a copy.

If you want the straight stuff, no fluff, go straight to the source: Our Celia Chen, who writes in the latest Moody's Economy.com Macro Precis:

Even with the government intervening further, the recession will keep the housing market from fully recovering until the second half of 2009. Even then, housing activity will remain tepid. Sales are likely at bottom, stabilized by foreclosure sales. Construction will stabilize by the middle of next year. From peak to trough, Moody’s Economy.com expects that total single-family home sales will decline by 36%, and housing starts will drop by 63%. Even with policymakers working hard to forestall at least some of the foreclosures, mortgage credit quality is expected to remain impaired well into next year. The record pace of mortgage foreclosures will keep inventories of homes on the market bloated, despite weakness in new construction, and will consequently keep house prices descending until the second half of 2009. From peak to trough, both the median existing house price and the Case-Shiller index are expected to decline by about 30%.

Cramdown Breakthrough

Thu, 8 Jan 2009 15:45 GMT

One of the toughest problems in the mortgage crisis could be getting solved. This from the WSJ::

WASHINGTON -- Citigroup Inc. signed on to a deal with top Democrats in the Senate to move forward with a measure that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court, senators involved said.

The accord on the Senate version of a bill allowing "cramdowns," when bankruptcy judges force lenders to modify mortgages, was negotiated by Sen. Dick Durbin, the Senate's second-ranking Democrat and the author of the Senate bill. Sen. Durbin, who has backed pro-consumer bankruptcy initiatives for years, has worked for more than a year on the cramdown bill.

The deal, Senate staffers said, is likely the first of several measures being crafted this year that propose to trim the principal owed by homeowners saddled with mortgages larger than the current value of their house. It marks a surprising change of direction by the financial-services industry. Banks have consistently fought such legislation, saying cramdowns, would raise borrowing costs for all home buyers and jam courts with homeowners who would not otherwise declare bankruptcy.

If you're following this at home, Mark Z. has been calling for such a reform since early 2008.

Australia Calling

Thu, 8 Jan 2009 08:30 GMT

Live from Sydney, our Matt Robinson tells Bloomberg where currency exchange and bank rates are headed.

How to Sell A House

Wed, 7 Jan 2009 14:15 GMT

New frontiers in real-estate marketing. This just showed up in the email:

Prediction: We'll know the bottom has arrived when they ask you to pay for the trip, and throw in the house for free.

The CBO View

Wed, 7 Jan 2009 13:45 GMT

The Congressional Budget Office agrees: This recession is one for the record books:

CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II. (The longest such recessions otherwise, the 1973–1974 and 1981–1982 recessions, both lasted 16 months. If the current recession were to continue beyond midyear, it would last at least 19 months.) It could also be the deepest recession during the postwar period: By CBO’s estimates, economic output over the next two years will average 6.8 percent below its potential—that is, the level of output that would be produced if the economy’s resources were fully employed (see Figure 1). This recession, however, may not result in the highest unemployment rate. That rate, in CBO’s forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 1981–1982 recession.

Stimulating Debate

Tue, 6 Jan 2009 15:45 GMT

The stimulus debate is summoning the economic demons from the closet. Normally sober, two-handed Ph.D.s are revealing their inner Keynes or inner Hayek, and baring fangs over whether and how to spend the economy back to health. Here, for example, are two takes on the Obama Administration's proposal, now wafting around Capitol Hill:

From Paul Krugman:

This really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.

I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

From Russ Roberts:

If the government cuts rates or just gives rebates but at the same time increases the size of government, taxes are not lower. They're larger. Government is taking a bigger share of the economic pie leaving less for the private sector to spend. The future burden of taxes is higher. As Milton Friedman used to argue, don't focus on how government is financed, whether it's out of current taxes or future taxes. Focus on the spending. If government grows as a percentage of the economy, then the burden on the private sector is bigger.

Less hyperbolically, our Scott Hoyt weighs in with a closer look at last summer's tax rebates.

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.

Talkin' Bout My Generation

Tue, 6 Jan 2009 08:30 GMT

Why are savings rates falling in many developed countries? The increasingly self-interested choices made by older folks, say Loretti I. Dobrescu, Laurence J. Kotlikoff and Alberto F. Motta:

National saving rates differ enormously across developed countries. But these differences obscure a common trend, namely a dramatic decline over time. France and Italy, for example, saved over 17 percent of national income in 1970, but less than 7 percent in 2006. Japan saved 30 percent in 1970, but only 8 percent in 2006. And the U.S. saved 9 percent in 1970, but only 2 percent in 2006. What explains these international and intertemporal differences? Is it demographics, government spending, productivity growth or preferences? Our answer is preferences. Developed societies are placing increasing weight on the welfare of those currently alive, particularly contemporaneous older generations. This conclusion emerges from estimating two models in which society makes consumption and labor supply decisions in light of uncertainty over future government spending, productivity, and social preferences. The two models differ in terms of the nature of preference uncertainty and the extent to which current society can control future societies' spending and labor supply decisions.

Is Risk Measurable?

Mon, 5 Jan 2009 09:45 GMT

On VoxEU today, The Myth of the Riskometer (catchy title), by Jon Danielsson. Interesting througout; excerpt:

In physics, complexity is a virtue. It enables us to create supercomputers and iPods. In finance, complexity used to be a virtue. The more complex the instruments are, the more opaque they are, and the more money you make. So long as the underlying risk assumptions are correct, the complex product is sound. In finance, complexity has become a vice.
We can create the most sophisticated financial models, but immediately when they are put to use, the financial system changes. Outcomes in the financial system aggregate intelligent human behaviour. Therefore attempting to forecast prices or risk using past observations is generally impossible.

Whaddya think -- is he right?

How to Spend It

Mon, 5 Jan 2009 09:30 GMT

Paul Krugman of Princeton...

Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.

...meet Ed Glaeser of Harvard:

The country needs to invest steadily and wisely on infrastructure, not rush hundreds of billions of dollars out the door. Really expensive projects, like [Boston's] Big Dig, can take many years to plan, permit, and build. Our roads require ongoing maintenance, not a big push. Moreover, fairness and economic efficiency dictate that infrastructure should generally be paid for by users, not general tax revenue. It is appropriate that gas taxes pay for federal highway aid. Using general revenues to build highways means more subsidies for carbon-emitting cars. The country should take infrastructure investment seriously, but infrastructure spending is unlikely to be sound stimulus.

Greed and Gravity

Sun, 4 Jan 2009 22:15 GMT

My favorite quote from a very quotable article:

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

An even better variation on this theme goes something like this: Blaming greed for financial crises is akin to blaming gravity for plane crashes.

Stimulus Consensus

Sun, 4 Jan 2009 22:00 GMT

From Sunday's Meet the Press:

MR. GREGORY: Is this a trillion-dollar stimulus, do you expect?

SEN. REID: It's whatever it takes to bring this country back on a fiscal footing that is decent.

You know, we don't want to do a little bit and say, "Well, we should have done more. Let's come back and do it again." We want to do it right the first time. If we do it right the first time--as, as reported in The New York Times yesterday, a group of economists, blue ribbon they're called, they said, "If they do a very strong stimulus package, the economy will start recovering in July." And that's what Paul Krugman says, who's a Democrat; that's what Mark Zandi, who was one of, one of John McCain's advisers, said. We need to spend some money. And we have to make sure it's spent wisely, that we watch that money, how it's spent, there is oversight, there is transparency. And I hope--and we--I expect that we can do that.

And if that's not enough for you, here's San Francisco Fed president Janet Yellen:

If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.

Yet what passes for consensus on the Sunday talks may be only skin-deep. From MarketWatch:

A pickup sometime after June is still the Federal Reserve's quasi-official forecast. And leading institutional forecasters surveyed by the Blue Chip Economic Indicators are optimistic.
But that forecast seemed woefully out of touch to many experts who spoke at the annual meeting of the American Economics Association... "We don't know what to do. It's really a throw-the-kitchen-sink-at-the-problem strategy. It is hard to argue with it in the middle of the crisis, but you can bet everyone will 10 years from now," said Kenneth Rogoff, a former chief economist at the International Monetary Fund.

A New Year

Wed, 24 Dec 2008 13:15 GMT

Rarely is a year rung out with as little nostalgia as 2008's impending exit will evoke. Is there anyone, financial journalists excluded, who will miss the past 12 months? You might think this would be easy for a place wth "dismal" in its name, but just finding the vocabulary to describe it all has been a real challenge: Dreadful, dire, dour, sour, plunging, plummeting, crashing... you pick the indicator, it's been bad.

But seasons turn, and now that we're past the winter solstice even Druids have something to look forward to. Not that 2009 is likely to be a romp in the woods—the trough of the global recession may still be ahead of us, and for many families and firms, the next 12 months will include some painful readjustments.

Yet we begin the year in hope, as always. We understand some things that weren't clear 12 months ago—about the financial system, about global linkages, even about human frailty—and these we can build on as we grope, uncertainly, towards recovery.

Peaceful holidays.

Summing Up

Wed, 24 Dec 2008 10:45 GMT

Brad Setser crams in a year's worth of misery:

– The US experienced its worst financial crisis since the Depression. The Fed dramatically expanded its balance sheet, becoming the world’s lender of last resort and the United States’ lender of almost every resort.
– Capital flows to the emerging world reversed. Inflows turned to outflows
– High carry currencies tumbled. So did the pound. The dollar rallied even as the US financial system teetered on the edge of collapse, then slid as the Fed cut rates to zero.
– Global trade, and I would guess global economic activity, started to contract. Just look at fall in Japan’s exports in November …
– Oil prices fell. A lot. Several oil-exporters that were on top of the world with oil at $145 are now looking at serious financial trouble.

Shocking Condition

Wed, 24 Dec 2008 07:00 GMT

Now he's a syndrome...

From the NYT:

"The book is very much a first draft of history. It doesn’t attempt historical sweep or dramatic narrative. But it is an impressively lucid guide to the big issues — akin to a slim encyclopedia."

Mortgage Mods Again

Mon, 22 Dec 2008 13:30 GMT

Fresh indications that efforts to mortgage-modify aren't cutting it. From the WSJ:

Despite an increase in loan modifications and a drop in foreclosure starts during the third quarter, delinquencies and foreclosures currently in process continued to rise amid fresh signs that mortgage servicers were struggling with efforts to keep people in their homes.

Loan modifications increased 16% and foreclosure starts fell 2.6% during the quarter, according to a joint report released by the Office of the Comptroller of the Currency and the Office of Thrift Supervision Monday.

Yet the number of foreclosures in process rose to 617,642 at the end of September, an 11% increase from the end of June. And in a troubling sign, 37% of loans modified during the first quarter had slipped back to being 30 or more days delinquent after three months, while more than half were at least 30 days past due after six months.

So maybe it's time for a new plan...

Pick Your Poison

Mon, 22 Dec 2008 12:00 GMT

The New York Times sees a trend toward greater labor flexibility in hard times:

A growing number of employers, hoping to avoid or limit layoffs, are introducing four-day workweeks, unpaid vacations and voluntary or enforced furloughs, along with wage freezes, pension cuts and flexible work schedules. These employers are still cutting labor costs, but hanging onto the labor.

This sounds laudable; it's clearly not optimal for any form of cost-cutting to be off the table on social or legal grounds. Firms should be free to make the best choice for their particular situation, whether that involves cutbacks in staff, pay reductions or whatever. But that still raises the question of what's the best macroeconomic choice: Do layoffs (or pay cuts) contribute more to the chance of near-term economic recovery?

Arnold Kling says layoffs are better because information is asymmetric:

"...[K]eeping the same work force and cutting wages is typically not an option. The choice is between cutting the work force directly or having your work force decline in response to a wage cut. You probably are better off making direct cuts. Most of the time, cutting wages is a bad policy...

There are occasions where, from a macroeconomic perspective, a cut in wages, in either a large sector or across the board, would help to avert a surge in unemployment. However, there is no credible way for any firm to tell its employees, "You are getting a wage cut, but don't worry. It's just for macroeconomic reasons."

If this view is correct, then in times of high unemployment macroeconomic policy should aim to boost prices, presumably by expanding the money supply. Printing money should help to avert a general deflation. With sectoral imbalances, printing money should cause prices to rise in high-demand sectors, effectively reducing real wages in low-demand sectors and maintaining full employment in the latter.

This is certainly not a discussion that would have had much traction a year or two ago. But now ...

TARP Under the Tree

Thu, 18 Dec 2008 14:00 GMT

What next—Santa in the bank lobby, giving CDO's to good little boys & girls? Ho ho ho! From the WSJ:

Credit Suisse to Use Illiquid Instruments to Pay Bonuses

ZURICH -- Credit Suisse Group said Thursday it will use up to $5 billion of its own illiquid assets such as mortgage securities to pay senior staff year-end bonuses at its investment bank, a move meant to spread risk more evenly between the bank and its employees.

The Zurich-based bank plans to pool commercial mortgage-backed securities and leveraged loans it can't sell because demand has seized up, then dole out units in the entity to managing directors and directors as part of this year's pay, according to a memo made available by a spokesman.

"Employees receiving partner-asset facility units will participate in the potential gains from these assets over time if they are liquidated at prices above current market values and also bear risk of loss depending on the liquidation proceeds," the memo said...

Employees will hold an equity stake of roughly 13% in the fund, which is composed of 60% of buyout loans and 40% CMBS, a person familiar with the situation.

Update: Bloomberg quotes Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein:

“It’s monstrously clever...“[f]rom a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”

And I thought I was slick re-gifting that pen & pencil set last year...

How Big a Jolt?

Wed, 17 Dec 2008 21:30 GMT

From the AP: Obama looking at $850 billion jolt to the economy

...

Obama aides also pointed to recommendations by Mark Zandi, the lead economist at Moody's Economy.com and an informal McCain adviser who has been proposing a $600 billion plan.

"I would err on the side of making it larger than making it smaller," Zandi said in an interview. "The size of the plan depends on the forecast - the economic outlook - and that is darkening by the day."

"Even a trillion is not inconceivable," he said.

Dig We Must

Wed, 17 Dec 2008 17:15 GMT

Road to Recovery or a Bridge to Nowhere? Find out before committing billions to a stimulus program built on infrastructure spending, suggests David Altig of the Atlanta Fed:

Does how much public capital you have matter? Does how you finance public capital matter? and, Does how you use public capital matter? The empirical results presented in this article allow affirmative answers to each of these questions. Specifically, 10% increases in either the quantity or the efficiency of public capital are estimated to increase output per capita by 2.9% over 2 decades while a 10% increase in external public debt is estimated to decrease output per capita by 1.7% over the same time frame… The main lesson to be drawn from these findings is that in formulating economic development policies, countries are well advised to pay as much attention to how public capital is financed and used as to how much public capital is accumulated.”

The quote is from David Aschauer of Bates College. But Altig (whose Macroblog is one of the best) concludes:

More than most of the currently popular stimulus ideas, the benefits of increased infrastructure spending really do seem to depend critically on the specifics. Best to think about those specifics sooner rather than later.

Whose Shovel is Ready?

Wed, 17 Dec 2008 09:45 GMT

Mark McMullen raises a troubling question for those who think the U.S. can dig itself out of recession...literally:

Although state infrastructure needs are dire, subsidizing infrastructure projects will likely be a less effective form of fiscal stimulus than boosting healthcare and income-maintenance programs. To address the sometimes long planning process for heavy construction projects, federal policymakers have discussed targeting aid to “shovel ready” projects. However, if the projects that have been earmarked under the current five-year highway bill are an indication of where the federal dollars will go, the fiscal stimulus may be poorly targeted.

Under the highway bill, states with low population densities tend to receive the largest per capita aid. Meanwhile, some of the states hit hardest by the recession receive well below the $81 per capita national average. Arizona, Florida, New York, Michigan, Indiana and California all have relatively few earmarked projects. Conversely, rural states, many of which have benefited from booming resource industries, gain the most from federal highway spending. In the most extreme and well-publicized case, planned spending on earmarked highway projects per person in Alaska is 17 times the national average under the current highway bill...

Mark's latest U.S. Regional Outlook has just posted on Dismal. (sub req). If this isn't already an issue on Capitol Hill, it will be soon, I betcha.