Dear Readers: Like many of you, I read with complete skepticism that the Recession of 2007 is over. In my quest for more information, I went to Professor Athena for answers. I was jazzed to learn she had prepared an important essay on this very subject, which is below.
I can stress how ESSENTIAL to read and share this piece. It is not like any of the America’s leading economic pundits have a great history of successful predictions. In fact, one article asks: What Kind of Science Should Economics Be When It Grows Up?In this article, Prof. Athena notes that today’s economics look only at hard data and information that has been documented — so much of the financial history of this county is not included. For example, one aspect of economics reviewed is affordable housing, which has only been a part of Americana post-WWII. IN a nutshell: Modern economists don’t have the data to measure a DEPRESSION, having only known recessions.
Interestingly, I am in the middle of reading Amity Shales’ “The Forgotten Man“, and I am struck at how much Obama’s actions have mimicked President Hoover’s. In response to the comparison, W.C. Varones writes: Well, he certainly sucks like one.
- The U.S. Economy and the Panic Button
The recent pronouncement by the National Bureau of Economic Research is that the recession in the U.S. (and which they now deem began in usual perfect 20/20 hindsight in December 2007) is “over”. This assessment has been met by seeming confusion at all levels. With employment not improving (or more specifically, unemployment), the economy clearly not growing, and without recouping more than about 2.9% recovery of the loss of over 4% of GDP during the recession that began in 2007, how can economists declare it “over” as-of June 2009?
The stock market has yet to recover its high preceding the collapse of Lehman Bros. Households continue to increase their cash holdings and pay down debt (otherwise known as ‘deleveraging’, but retailers would term it “not spending”). Not surprisingly, banks are “not lending”, an accusation hurled in disparaging tones by politicians, who cannot seem to grasp that because of deleveraging and sluggish growth in the economy, there is not a lot of loan demand. Businesses have in fact surplus cash, but are unsure of pending impact of things like ObamaCare and capital gains (either 15% or 40%, but who cares about a little thing like that?!), and of course new EPA compliance (new taxes thinly disguised as fines on certain types of businesses). Mostly they are nervous about real growth in orders. When business owners are nervous, financial markets are nervous.
And then there is residential real estate. It is here that we have a deafening silence as to what is wrong on part of the administration and even some economists. We’ve tried the loan modification route (HAMP), first-time buyer home credits, stimulus slush funds termed “energy efficiency home improvement credits”. We’ve even dropped money from government helicopters. O.K., maybe not that exactly, but there were checks in the mail for a lot of people who had never paid a dime of federal income tax. Why hasn’t it worked, and why are so many so frustrated? The answer may lie in what really happened, and what it says about our modern reliance on government as the answer to shaping larger macroeconomic trends. This begs the question of the more scholarly among us, “Why should the government expect to reverse a macrotrend in an economy with microtrend tactics”?
It might do to discuss something rather old-fashioned. Let me bring to your attention the Panic of 1873. I understand we are really blowing the attic dust off on this one, but bear with me. In the run-up to the industrial revolution and the invention of mechanized farming, lending had expanded to finance railroads and America’s growing exports. As debt grew far too rapidly, what began as a small change in demand for American agricultural products in Europe meant railroads could not pay their bills, the banking firm of Jay Cooke went under, and a stock market crash in Austria ensued as a “ripple effect”.
Soon Europe was in financial disarray. A little thing called the Chicago fire put the U.S. insurance industry in a tailspin. What resulted was a depression that lasted five years, and where 3 million Americans were out-of-work. The press blamed corruption in government and in the banking industry, and the people angrily demanded answers and accountability.
As you may read from the New York Times story I reference, I am not the first person to think of this comparison. But in view of the newly-released NBER report, let’s change the events slightly. In the run-up to the information age in America, income growth expanded so rapidly that it ignited a run-up of debt in the residential real estate market. The liquidity that drove the speculative bubble was in no small part facilitated by giant government GSE’s FNMA and FHLMC (i.e. Fannie Mae and Freddie Mac), whose loan guarantor program was expanded to allow non-standard loans (lower underwriting standards) to be originated and held on their balance sheets and ultimately with the “implied” backing of the American taxpayer.
What began as a small change in housing prices, first in places like Florida and California, and then across the country spread to a sharp nationwide decline in home prices and an increase in mortgage defaults in what had previously been a very stable (and statistically estimable) cash flow. Lenders such as Countrywide and Washington Mutual led the way in folding their subprime lending operations. Bear Stearns was acquired. Then, in 2008, Lehman Brothers collapsed in default. The “ripple effects” were a frozen finance system in America and in Europe. Stock markets across the continent collapsed. Following huge losses in property and casualty divisions of major insurers due to 2005’s Hurricane Katrina and Hurricane Rita, large insurer AIG appeared to have taken huge losses on some type of contract (CDS) insuring the cash flows on mortgages backing something called CDO’s. Soon over 11 million Americans were out-of-work. In an uncanny mirror of events, the press blamed corruption in government and in the banking sector, and the people angrily demanded answers and accountability.
In further discussing this comparison, we would do well to take note of the fact that modern economists don’t generally analyze what they cannot measure. In other words, modern measurements do not go back even to the end of WWII, much less prior to the turn of the 20th century. I could make the case here that the collapse of Wall Street in 1929 was also a panic, in that it was set up by a massive over-leveraging of debt (too much borrowing). What followed was an acknowledged DE-pression (as opposed to the more benign-sounding “recession” we often hear used by modern economists). Anyone who is categorically honest will explain that the policies of the Roosevelt administration prolonged the effects of the Great Depression due to their social engineering and most particularly their trade-protectionist, pro-union legislation. The Obama administration, who has voiced admiration for FDR and his policies, seems intent to emulate their mistakes. The economic data show the fallacy of their policies while they stump on extending unemployment benefits for two years and failing to ratify free trade agreements in the midst of “creating jobs” and “expanding exports”. Talk about your lack of understanding of cause-and-effect! It has always interested me that both my parents, who actually lived through the Great Depression as children, told me that the one thing that ended the Depression and put Americans back-to-work was WWII. The expanding war in Europe put our manufacturing skills back in hot demand.
Unless and until demand for American products returns, both domestically and globally, we will remain in a prolonged resultant depression to the Panic of 2007. Three years into what had by all measures been an enormous speculative bubble in domestic real estate, we would do well to take measure of where we are by the standard of history. Everything the federal government does to implement “change” through increased regulations to the financial industry (which were already over-regulated but under-enforced), social engineering (health care, cap-and-trade), and in form of increased taxes and restrictions on American businesses is fatally flawed to continue what is already a painful economic depression that has ensued from a bona-fide old-fashioned economic panic. It may indeed be far too early to call the recession over, because it was never a recession in the first place.
(Note: A professor of History also concurs that the Panic of 1873 Model is the one to use, too).
MUT News and Notes:
Tim Daniel, better known as Left Coast Rebel, linked my Mad Men Passion Index post in his new Pajamas Media column — for which I would like to thank him deeply. I LOVE it when my graphic efforts are appreciated. Please read his take on the current election news in California in a round-up report: The Battle for America 2010: Campaigns State-by-State, Six Weeks To Go
I noted one of my favorite econo-pundits, Thomas Blumer, also had a piece in Pajamas Media today: All We Are Saying Is Give Tea a Chance. I love his graphic:
Also: alpha males are a thing of beauty.