DataPoints -- Dismal Scientist

The Value of Forgiveness

Thu, 10 May 2012 15:03 GMT

The following appears in May 10 edition of The Washington Post.

Ed DeMarco could hasten end to foreclosure crisis by allowing debt forgiveness

By Mark Zandi

To forgive or not to forgive — that is the question. Everyone is waiting for Ed DeMarco — director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac in their government conservatorship — to rule one way or the other.

Whether DeMarco allows forgiveness of some mortgage debt owed by American homeowners won’t make or break the housing market. But answering yes would help end the foreclosure crisis more quickly and boost the economy.

DeMarco’s reluctance to say yes is understandable. This is a politically charged issue. The tea party was born out of the disgust many Americans felt early in the financial crisis upon learning that the federal government was even contemplating reducing the principal on some troubled mortgages.

Proponents of that idea argued that although it might cost the taxpayers something, it would ultimately be far cheaper than letting the housing market sink and drag down the U.S. economy. Detractors argued that forgiveness was unfair to the vast majority of homeowners who were diligently making their mortgage payments on time. Principal reduction would also create moral hazard, encouraging many homeowners to quit paying their mortgages in order to have their own loans reduced.

The Obama administration recently put the issue back on the policy agenda, when it tripled the monetary incentives under its loan modification program to Fannie and Freddie for principal reductions. For every dollar Fannie and Freddie take off a home mortgage, taxpayers will pay up to 63 cents, using money from the $700 billion TARP fund originally appropriated to help struggling financial institutions.

This makes it tougher for DeMarco to say no. With taxpayers taking on so much of the financial burden of principal reductions, Fannie and Freddie could end up making money. As conservator of the agencies, DeMarco has said his first responsibility is keeping them solvent with a minimum of help from the U.S. Treasury. Fannie and Freddie have already received almost $200 billion, by far the most costly taxpayer bailout of the recent financial crisis.

Yet despite the administration’s offer, DeMarco could still say no. He argues that principal forgiveness isn’t as effective as principal forbearance, something Fannie and Freddie have been doing for a long time. In a forbearance, the homeowner pays interest and principal on a smaller mortgage, at least for a time, but still owes the full amount. The lower monthly payment helps with affordability, giving stressed homeowners a break. But because they are still on the hook for the full mortgage, others are less likely to intentionally default to receive it.

Adding principal reduction to Fannie’s and Freddie’s loan mitigation efforts would also be costly to administer. Indeed, everything Fannie and Freddie do is difficult and expensive.

Perhaps there is a middle ground: forbearance that evolves into forgiveness if the homeowner earns it. In an “earned mortgage,” the homeowner receives forbearance and immediately pays on a smaller mortgage to help with affordability. He then earns forgiveness as the amount owed is reduced proportionately over time, as long as he stays current.

As an example, consider an underwater homeowner who owes $150,000 on a home worth $100,000. With a 5 percent mortgage rate, his monthly payment is just over $1,000. With an earned mortgage, the bank forebears on $25,000 of the mortgage amount, saving the homeowner more than $100 per month. The homeowner still owes $150,000, but this is reduced by $5,000 a year, or $25,000 over five years. If the homeowner goes delinquent for more than two months during those five years, he owes the entire $150,000. If the homeowner wants to move before five years, his mortgage would be reduced pro rata. Under most scenarios, he would still be underwater, and would go through a short sale. It is possible that the home could appreciate enough so that with the mortgage reduction he would pocket a gain. But this seems unlikely.

An earned mortgage seems well suited for homeowners who are deeply underwater but fighting hard to keep their homes. An estimated 6.5 million homeowners are underwater more than 30 percent, and most have never been more than two months late on their mortgage (see chart). This is a key threshold for default. Even a small financial reversal, such as a roof leak or a busted air-conditioning unit, could discourage these homeowners from holding on. Forbearance would provide them with some relief , but an earned mortgage would offer a real financial hook — making it possible to get back above water and avoid default.

Moral hazard is much less a problem with an earned mortgage. Because a homeowner must earn forgiveness, and even then is unlikely to be above water soon, the program is much less subject to abuse. Also worth noting is that banks have forgiven principal on mortgage loans they own for some time, with good success. Moral hazard has not increased and default rates are low compared with other types of mortgage modifications.

There are signs that the housing crash is almost over. Home sales and construction are rising and prices are more stable.

It is premature, however, to conclude that the problem is behind us. Millions of homes are stuck in foreclosure; as these go to foreclosure and short sales, the market’s fragile stability is threatened.

Policymakers don’t need to do a lot to prevent that, but they should take the opportunities they have to help. Forgiveness won’t come easy for the FHFA and its agencies, but if it helps even a few hundred thousand homeowners, it is the right thing to do. Say yes.

U.S. Job Growth: Disappointing, as Expected

Fri, 4 May 2012 09:21 GMT

Some of April's hiring happened in January and February. Revisions show a steady recovery. Mark Zandi discusses the data with CNBC.

Slowdown Worries Aussie Central Bank

Tue, 1 May 2012 09:29 GMT

Concerns about the global economy surface as the Reserve Bank of Australia cuts rates more than expected. Matt Circosta in Sydney analyzes the move for CNBC.

It's All About Confidence

Fri, 20 Apr 2012 16:51 GMT

Choppy financial markets reflect the uncertainties hanging over the recovery, Mark Zandi explains to CNBC.

April Forecast Assumptions

Thu, 19 Apr 2012 14:00 GMT

Monetary policy

The Federal Reserve continues to pursue an aggressively easy monetary policy in response to an economy that is operating well below its potential, low inflation, and unsettled global financial markets. Policymakers have all but promised to keep the federal funds rate target effectively at zero through late 2014. They also remain engaged in quantitative easing—selling short-term Treasury securities and using the proceeds to buy long-term securities—in an effort to keep long-term interest rates low.

Long-term interest rates are very low. The Fed is hoping that the rock-bottom interest rates will take some financial pressure off debtors and encourage investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers also recently changed their communication strategy, which had the effect of further reducing long-term rates. The Federal Open Market Committee now publishes forecasts of the federal funds rate. Though not a commitment, the forecast represents the expectations of FOMC members of the appropriate funds rate conditional on their growth and inflation outlook. The current forecast shows that policymakers do not expect the funds rate to rise until well into 2014, much further into the future than most investors had anticipated. The impact is to lower long-term interest rates.

The FOMC also is leaving the door open for another round of quantitative easing. The next round of QE would likely involve more mortgage securities purchases, increasing the Fed’s balance sheet from its already-swollen $2.9 trillion. While the odds for QE3 this year are high, it is not assumed in the current baseline outlook.

It will not be until late 2013 that the Fed begins tightening monetary policy and 2015 that it is able to normalize monetary policy. In a well-functioning economy that is operating near full employment, the federal funds rate target should be more than 4%.

Fiscal policy

The federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP, in fiscal 2011. Continued economic growth and the fading fiscal stimulus will shrink the deficit further in fiscal 2012. The decline will be limited by the extension of the 2% payroll tax holiday and emergency unemployment insurance programs through calendar year 2012, costing the Treasury some $150 billion.

By fiscal 2015, the deficit will settle in near the so-called structural budget deficit—the deficit consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, a deficit consistent with a stable debt-to-GDP ratio, which is estimated to be closer to 2% of GDP.

Policymakers will need to achieve more deficit reduction after the presidential election. Whether the focus is on generating additional tax revenue or more government spending cuts will depend on the outcome of the election. If President Obama is re-elected, the Bush era tax cuts will likely be allowed to expire for the top tax bracket. If a Republican wins the White House, then Medicare spending will likely be scaled back significantly. Regardless of which political party wins, there will be some tax reform—a scaling back of the deductions and credits in the tax code, particularly in the corporate tax code. The key assumption is that policymakers are able to come sufficiently to terms to achieve fiscal sustainability by the end of the decade.

U.S. dollar

The U.S. dollar is holding its own. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors to flock to in uncertain times. From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen and a bit overvalued against the British pound. The dollar will right itself against these currencies slowly over the next several years. The dollar is significantly overvalued against the Chinese renminbi and is expected to depreciate by some 5% per annum over the next four to five years.

On a trade-weighted basis, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves; this is unlikely to change much any time soon. There are no good alternatives.

Energy prices

Oil prices have strengthened as concerns over the Iranian oil embargo and that nation’s nuclear program have increased. Global oil prices are peaking for the year, on the assumption that tensions with Iran will not boil over into an overt conflict and that Saudi Arabia will increase its oil production. However, gasoline prices will continue to rise. The cost of a gallon of regular unleaded will peak at $4.20 by mid-May because of increased gasoline demand as a result of the summer driving season, more costly gasoline additives used during the summer, and the recent closing of some refinery capacity. Gasoline prices will end the year near $3.50. Longer run, oil and gasoline prices are expected to trend steadily higher, at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices will remain low, particularly compared with oil prices, during the next several years. A substantial glut of natural gas has developed as demand has not fully recovered and supply has increased substantially in response to the high prices that prevailed prior to the recession. Prices are expected to eventually gain traction later in the decade as the cheaper gas attracts alternative uses and LNG exports increase.

Threats to the U.S. Recovery

Thu, 19 Apr 2012 11:21 GMT

They exist, but aren't likely to stop the economy's path back to expansion, Mark Zandi tells CNBC.

Light at the End of the Housing Tunnel

Wed, 18 Apr 2012 07:54 GMT

A turnaround in housing could be underway this time next year, Mark Zandi tells Yahoo news.

Rethinking the Jobs Expansion

Mon, 9 Apr 2012 17:16 GMT

The labor market isn't growing as fast as it seemed in January, but not as slowly as in March, Mark Zandi tells Bloomberg News.

A Step Back on U.S. Employment?

Fri, 6 Apr 2012 09:25 GMT

U.S. job gains were below expectations for March, but the trend remains positive. Mark Zandi discusses with Chuck Todd of MSNBC.

Down-Under Update

Tue, 3 Apr 2012 10:25 GMT

From Sydney, Matt Circosta briefs Bloomberg News on the Reserve Bank of Australia's latest policy perspective.

Gasoline Prices and the Economy

Mon, 26 Mar 2012 08:56 GMT

The following was published in The Philadelphia Inquirer, Sunday, Mar. 25

Gas prices and the economy

by Mark Zandi

I love my local Wawa. Great coffee. Even better - at least for an economist - it sells gasoline at prices uncannily consistent with the national average. I don't need the Energy Department's website to tell me about the average American household's financial pain. At Wawa, regular unleaded currently goes for $3.83 per gallon, not far from the all-time high of $4.11 reached during the summer of 2008. That's a lot of pain.

Nothing is worse for our economy than rising energy prices. They act like a pernicious tax increase, forcing us to spend more filling up and leaving less for everything else. But unlike taxes, money spent on auto fuel doesn't pay teachers' salaries, pave roads, or lower the national debt. Indeed, much of it ends up in the Middle East.

Every penny increase in the cost of a gallon of gas costs American consumers $1.25 billion over the subsequent year. With gas prices up almost 60 cents per gallon since the end of 2011, U.S. pocketbooks are set to take a hit of approximately $75 billion this year. By comparison, the 2 percentage-point cut in payroll taxes that took effect in January 2011 is worth about $100 billion. If gasoline goes much higher, the payroll tax break will essentially cover the higher cost of fuel.

Gasoline is indeed likely to go higher, and will probably reach a record high by mid-May, even if crude oil stays roughly where it is. Gasoline prices always rise at this time of year, because demand picks up as people begin to travel more, and refiners blend in summer additives to protect the environment. This year, moreover, refining capacity is in shorter supply; refiners have been shutting plants, seeing slimmer profits down the road. Two large Philadelphia refineries are only the latest examples.

Prices may rise as well for crude oil, as tensions rise in the Middle East. Along with the region's long-running problems, concern about Iran's nuclear program and a tightening embargo on that nation's oil exports could easily cause events to boil over. Saudi Arabia has picked up the slack in production so far, but the world's largest oil producer doesn't have a lot of excess capacity left. Neither does any other nation, so if anything else goes wrong the world could see an oil shortage. The risks have built a premium into oil prices that could easily grow. It's not hard to construct some pretty dark scenarios.

It is also worth noting that most of the recessions since World War II have been preceded by a spike in oil prices. The 1973 Yom Kippur War between Israel and its Arab neighbors led to global stagflation. The Iranian revolution led to an even more debilitating downturn in 1980 to 1982. And Iraq's invasion of Kuwait resulted in the global recession of 1990-91. Even the recent Great Recession was clearly exacerbated by record oil prices in the summer of 2008.

There isn't a lot that policymakers can do to lower fuel costs near-term. Using the Strategic Petroleum Reserve might help for a short while, but the SPR should be used only in times of real emergency. Some states are talking about temporarily cutting gas taxes, but, given the states' financial problems, this tactic is unlikely to go very far.

In the long run, there are lots of things policymakers can and should do to make the nation more energy independent. Promoting the use of natural gas as transportation fuel seems like a slam dunk; natural gas is plentiful, cheap, and produced at home, including here in Pennsylvania. Natural gas isn't clean, but it is cleaner than oil. Policymakers should focus on facilitating the substantial investment needed in natural gas-powered vehicles and fueling stations.

Unlocking the shale oil produced in North Dakota and Canada also makes sense. Environmental concerns should be addressed, but, given its value, shale oil will be produced one way or another. Best to do it in an environmentally coherent way, beginning with a rational policy on the pipelines needed to move oil from producers to consumers.

I'm not a fan of the energy industry's many tax breaks, both for fossil fuel and for "green" producers. Solar, wind, and other alternative fuels may be in our future, but government isn't good at figuring out which technologies to subsidize. The government would do better to work on making its own massive energy consumption more efficient. This could lead the way for the private sector.

With some diplomacy and a bit of luck to keep our problems with Iran from disrupting global energy markets, gasoline prices at my local Wawa will recede later this year. The U.S. economic recovery will stay on track. But the cost of energy will remain a serious economic issue until the United States becomes more energy-independent. It is encouraging that higher gas prices are getting us to drive less and buy more fuel-efficient vehicles. Technological advances should also help. Energy independence will be within reach sooner if Washington takes a few positive steps.

March Forecast Assumptions

Mon, 19 Mar 2012 08:29 GMT

Monetary policy

The Federal Reserve continues to pursue an aggressively easy monetary policy in response to an economy that is operating well below its potential, low inflation, and unsettled global financial markets. Policymakers have all but promised to keep the federal funds rate target effectively at zero through late 2014. They also remain engaged in quantitative easing—selling short-term Treasury securities and using the proceeds to purchase long-term securities—in an effort to lower long-term interest rates.

Policymakers also recently changed their communication strategy, which has had the effect of further reducing long-term rates. The Federal Open Market Committee is now releasing forecasts of the federal funds rate. Though not a commitment, the forecast represents the expectations of FOMC members of the appropriate funds rate conditional on their growth and inflation outlook. The current forecast shows that policymakers do not expect the funds rate to rise until well into 2014, much further into the future than most investors had anticipated. The impact of this is to reduce long-term interest rates.

Fiscal policy

The federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP, in fiscal 2011. Continued growth and the fading fiscal stimulus will shrink the deficit further in fiscal 2012. The decline will be limited by the extension of the 2% payroll tax holiday and emergency unemployment insurance programs through calendar year 2012, costing the Treasury some $175 billion.

By fiscal 2015, the deficit will settle in near the so-called structural budget deficit—the deficit consistent with an economy operating near its potential— of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, a deficit consistent with a stable debt-to-GDP ratio, which is estimated to be closer to 2% of GDP.

Policymakers will need to achieve more deficit reduction after the presidential election. Whether the focus is on generating additional tax revenue or more government spending cuts will depend on the outcome of the election. If President Obama is re-elected, the Bush-era tax cuts will likely be allowed to expire for the top tax bracket. If a Republican wins the White House, then Medicare spending will likely be scaled back significantly. Regardless of which political party wins, there will be some tax reform—a scaling back of the deductions and credits in the tax code, particularly in the corporate tax code. The key assumption is that policymakers are able to come sufficiently to terms to achieve fiscal sustainability by the end of the decade.

U.S. dollar

On a trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves; this is unlikely to change much anytime soon. There are no good alternatives.

Energy prices

Oil prices have strengthened as global recession risks have faded and concerns over the Iranian oil embargo and that nation’s nuclear program have increased.

Global oil prices will be peaking for the year, on the assumption that tensions with Iran will not boil over into an overt conflict and that Saudi Arabia will increase its oil production. However, gasoline prices will continue to rise. The cost of a gallon of regular unleaded will peak at $4.25 by mid-May because of increased gasoline demand as the summer driving season kicks in, more costly gasoline additives used during the summer, and the recent closing of some refinery capacity. Gasoline prices will end the year near $3.50. Longer run, oil and gasoline prices are expected to trend steadily higher, at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices will remain low and will have trouble keeping up with oil prices during the next several years. A substantial glut of natural gas has developed as demand has not fully recovered and supply has increased substantially in response to the high prices that prevailed prior to the recession. Prices are expected to eventually gain traction as the cheaper gas attracts alternative uses and LNG exports increase.

The Meaning of February's Job Growth

Mon, 12 Mar 2012 10:30 GMT

The U.S. employment recovery looks like it's for real this time. Mark Zandi discusses with the CNBC crew.

Does Florida Matter?

Thu, 1 Mar 2012 08:28 GMT

Florida tunes in to the Moody's Analytics election model.

Carry Dismal on Your iPad

Tue, 28 Feb 2012 15:45 GMT

It's not quite as jazzy as Garage Band, and it won't play videos from the Oscars. But the new Dismal Scientist iPad app—available now, and free—will help you stay on top of the global economy. Get live, real-time updates for more than 300 economic indicators from all over the globe. Check it out now at the iTunes store:

Why We Bailed Out Detroit

Mon, 27 Feb 2012 14:43 GMT

The following appeared in Sunday's Philadelphia Inquirer:

Bailing Out Detroit

by Mark Zandi

The government bailout of the U.S. auto industry was a success.

Without financial help from Uncle Sam, General Motors and Chrysler likely would not exist today. The American auto industry would be a shadow of its former self. And the U.S. economic recovery would be even more drawn out and frustrating than it has been.

Saving the automakers was distasteful, but necessary.

Rehashing this bit of history is timely on the eve of the Republican primary in Michigan, where the economy has long been tethered to the auto industry. The potential GOP nominees have all spoken out against the bailout, which the Obama administration helped engineer. Yet it is worth remembering that when the bailout was being debated three years ago, in the teeth of the Great Recession, it had bipartisan support. And it was the Bush administration that provided the first substantial chunk of financial aid to the industry.

Detroit's need for government assistance was partly its own fault. For years, the automakers had been using deep price discounts and cheap financing to support sales, instead of making the tough choices necessary for them to stay viable in the long run.

But the industry's predicament was not entirely of its own making. The broader U.S. economy was in free fall, demand for cars was weak, and the banking system's near-collapse made car loans scarce.

Federal financing helped GM and Chrysler use bankruptcy to restructure without shutting down. Companies in bankruptcy need credit to pay workers and suppliers while they reorganize. In normal times, such credit - called "debtor-in-possession financing" - is available at premium interest rates from banks and other private lenders. But in 2009, the financial system was on life support; no such credit was available, even to the best of borrowers. If GM and Chrysler had entered bankruptcy without government support, they may never have come out.

While Ford was in better shape, it shares many suppliers with GM and Chrysler. Their liquidation would have dragged many of those suppliers under, pulling Ford into bankruptcy as well. So it's no surprise that Ford strongly supported the government bailout of its competitors.

The Big Three U.S. automakers employed about 250,000 workers at the time, but their deep connections throughout the rest of the economy meant closer to 2.5 million jobs were at risk. A bankruptcy without government support could have cost as many as a million jobs at a time when we were already losing millions. The economy would have been shattered in Michigan and in other parts of the Midwest and South that rely heavily on vehicle manufacturing. And given the likely loss of auto dealerships across the country, it's not hyperbole to say that nearly every community in America could have been harmed.

Because the government acted to save the auto industry during the recession, the current economic recovery has been stronger than it would have been otherwise. The automakers themselves are doing very well, profitably selling cars at a rate of 14 million a year. Before the recession, they were losing money on annual sales of about 16 million.

After using bankruptcy to restructure and lower their costs, GM and Chrysler have been able to ramp up production and hiring. Nearly a fifth of the growth in the nation's output since the recession ended has been related to the auto industry's revival. While the industry still employs far fewer workers than it did before the recession, it was among the first to resume hiring, and it has been adding aggressively to its payrolls ever since. Michigan and the rest of the Midwest have seen one of the strongest regional recoveries in the nation. It's hard to see how that would be happening if not for the bailout.

Bailing out the automakers had some downsides. While taxpayers will get most of their money back, the government will likely sell its remaining GM stock before taxpayers are made completely whole.

The bankruptcy process was painful all around, but the government cushioned the financial blow to the unions at the expense of the automakers' bondholders, partly for political reasons. True, many bondholders were speculators looking to make quick profits, but changing the rules during the game isn't good policy. One reason U.S. households and businesses can borrow cheaply is that creditors feel confident that loan terms won't be changed. The way creditors were treated during the auto bailout arguably weakened that sense of safety.

Such concerns are valid, but they wouldn't have justified letting the automakers go under. Some bailout critics claim the automakers could have survived bankruptcy without government help. Maybe, but would it have been worth taking the chance? The American economy was in crisis. Only aggressive government action could set it right.

February Forecast Assumptions

Wed, 22 Feb 2012 07:54 GMT

Monetary policy

The Federal Reserve continues to maintain an aggressively easy monetary policy in response to unsettled global financial markets, low inflation, and an economy that is operating well below its potential. Policymakers have all but promised to keep the federal funds rate target effectively at zero through late 2014. They have coordinated with other central banks to reduce funding costs for foreign banks and are now selling short-term Treasury securities and using the proceeds to purchase long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response. The Fed is hoping that the rock-bottom interest rates will take some financial pressure off debtors and encourage investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers recently made changes to their communication strategy that has had the effect of further easing policy. The Federal Open Market Committee is now releasing forecasts of the federal funds rate. Though not a commitment, the forecast represents the expectations of FOMC members of the appropriate funds rate conditional on their growth and inflation outlook. The current forecast shows that policymakers do not expect the funds rate to rise until well into 2014, much further into the future than most investors had anticipated. The impact of this is to reduce long-term interest rates.

The FOMC also is leaving the door open for a third round of quantitative easing. The next round of QE will likely involve more mortgage securities purchases, increasing the Fed’s balance sheet from its already-swollen $2.9 trillion. While the odds for QE3 this year are high, particularly if fiscal policymakers fail to extend the payroll tax holiday and emergency unemployment insurance programs through year’s end, it is not assumed in the current baseline outlook.

Fiscal policy

The federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP, in fiscal 2011. Continued growth and fading fiscal stimulus will shrink the deficit further in fiscal 2012. The decline will be limited by the assumption that the 2% payroll tax holiday and emergency unemployment insurance programs will be extended through calendar year 2012, costing the Treasury some $175 billion.

By fiscal 2015, the deficit will settle in near the so-called structural budget deficit— the deficit consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit—a deficit consistent with a stable debt-to-GDP ratio— which is estimated to be closer to 2% of GDP.

Policymakers still need to raise tax revenues to achieve success, but that is likely as the expiration of the Bush tax cuts nears late next year. Under current law, tax rates will rise for everyone in 2013, but if policymakers simply agree to allow those tax cuts to expire for those in the top two income brackets, they will have done what they need to do.

U.S. dollar

The U.S. dollar continues to hold its own. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors to flock to in uncertain times, and they are thus more or less staying put. From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, the Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% per annum over the next five to six years. U.S. policymakers would like this revaluation to occur more quickly, but the Chinese are unlikely to comply.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. Oil prices have been highly volatile in recent years, ranging from $40 per barrel during the depths of the Great Recession to a record of almost $150 per barrel in summer 2008.

Given recent events and the likely damage this is doing to global growth and oil demand, WTI is expected to remain near $100 per barrel through 2012. The willingness of sovereigns to use their strategic petroleum reserves to oil supply disruptions limits any upside to prices. However, barring a full-blown global recession, it will be difficult for prices to go much lower for any length of time given the potential for further unrest in the Middle East; this has added a risk premium of close to $10 per barrel. Longer run, oil prices are expected to trend steadily higher, at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices at less than $4 per million BTUs and will have trouble keeping up with oil prices during the next several years. A substantial glut of natural gas has developed and will weigh on natural gas prices this year and into next. Prices are expected to eventually gain traction as the cheaper gas attracts alternative uses.

The End Game for Greece?

Wed, 15 Feb 2012 13:56 GMT

The euro zone's dilemma-- bail out its weakest member or let it default—grew more acute this week. Petr Zemcik updates listeners to Boston's WRKO.

Regulation and Recovery

Tue, 14 Feb 2012 17:36 GMT

Will the government's new financial regulations get in the economy's way? Mark Zandi discusses on Bloomberg.

Video streaming by Ustream

The January Jobs Jolt

Fri, 3 Feb 2012 08:58 GMT

Employment gains blew past the most optimistic forecasts. Has the recovery turned the corner? Mark Zandi parses the numbers on CNBC and MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

Fingering Fan and Fred

Tue, 24 Jan 2012 10:04 GMT

The two failed housing finance agencies made plenty of blunders, but they aren't to blame for the housing bubble, Mark Zandi writes in today's Washington Post:

The biggest culprits in the housing fiasco came from the private sector, and more specifically from a mortgage industry that was out of control. These included lenders who originated home loans, investment bankers who packaged them into securities, rating agencies that misjudged these securities, and global investors who bought them without much, if any, study.

In other words, America’s mortgage securitization machine was fundamentally broken. It created millions of mortgage loans that, even under reasonable economic assumptions, stood little chance of being repaid — and were not. As a result, hundreds of billions of dollars were lost as defaults and write-downs brought the financial system, and the wider economy, to the brink, requiring a massive government bailout...

Getting history right for this dark economic period is critical if we are to design a better mortgage finance system for the future. If Fannie Mae and Freddie Mac are responsible for the debacle, then perhaps government’s role in a future mortgage finance system should be minimal. But if private lenders deserve most of the blame, the case grows for giving government an important role in backstopping and overseeing the system.

Read the whole thing.

January Forecast Assumptions

Tue, 17 Jan 2012 14:58 GMT

Monetary policy

The Federal Reserve aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013. They have coordinated with other central banks to reduce funding costs for foreign banks and are now selling short-term Treasury securities and using the proceeds to purchase long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with 10-year Treasury yields near 2% and fixed mortgage rates falling to a record low of below 4%. The Fed is hoping this will take some financial pressure off debtors and encourage investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers also announced plans to change their communication strategy, which will have the effect of further easing policy. Each quarter, the FOMC will release forecasts of the federal funds rate. Though not a commitment, the forecast will present FOMC expectations of the appropriate funds rate conditional on its growth and inflation outlook. The forecast will likely show that the funds rate will not rise until well into 2014, much further into the future than most investors currently expect. This will influence market expectations and result in lower long-term interest rates.

The FOMC is also leaving open the possibility of a third round of quantitative easing. The next round of QE will likely involve more mortgage securities purchases and sharply expand the Fed’s balance sheet from its already-swollen $2.9 trillion. While the odds for QE3 this year are high, particularly if fiscal policymakers fail to extend the payroll tax holiday and emergency unemployment insurance programs through year’s end, it is not assumed in the current baseline outlook.

Fiscal policy

The fiscal 2011 federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP. Tax revenues are increasing, and government spending is slowly declining. Continued growth and fading fiscal stimulus will lower the deficit in fiscal 2012. The narrowing will be limited by the assumption that policymakers will extend the 2% payroll tax holiday and emergency unemployment insurance programs through calendar year 2012. By fiscal 2015, the deficit will approach the so-called structural budget deficit—consistent with an economy operating near its potential—of around 5% of GDP. This is still well above the so-called sustainable budget deficit—a deficit consistent with a stable debt-to-GDP ratio—which is estimated to be closer to 2% of GDP.

U.S. dollar

The U.S. dollar has firmed during the current financial market turmoil. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors so they are staying put. From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, the Canadian dollar, and the Japanese yen and overvalued against the British pound. The dollar will gradually right itself against these currencies over the next several years.

On a trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change any time soon since there are no good alternatives.

Energy prices

Given recent events and the likely damage this is doing to global growth and oil demand, WTI is expected to hover near $100 per barrel through 2012. The willingness of sovereigns to use their strategic petroleum reserves to meet oil supply disruptions limits any upside to prices. However, barring a full-blown global recession, it will be difficult for prices to go much lower for any length of time given the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel. Longer run, oil prices are expected to trend higher, increasing at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at less than $4 per million BTUs, and will have trouble keeping up with oil prices during the next several years. A substantial glut of natural gas has developed and will weigh on natural gas prices this year and into next. Prices will eventually gain traction as the cheaper gas attracts alternative uses.

December Forecast Assumptions

Mon, 9 Jan 2012 14:11 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013 and are now selling short-term Treasury securities and purchasing long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of nearly 4%. The Fed is hoping that this will take some financial pressure off debtors and prompt investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, with better than even odds of a third round. More QE has significant downsides, but it is the Fed’s most effective remaining policy step. The next round of QE will likely involve more mortgage securities purchases. The Fed’s balance sheet is expected to expand from $2.8 trillion currently to nearly $3.5 trillion by the end of 2012.

Given recent events, it will not be until late 2013 that the Federal Reserve begins tightening monetary policy and 2015 that it is able to normalize monetary policy. In a well-functioning economy that is operating near full employment, the federal funds rate target should be around 4.5%.

Fiscal policy

The federal budget deficit came in close to $1.3 trillion, approximately 8.5% of GDP, in just-ended fiscal 2011. Tax revenues are increasing, and government spending is declining. While still extraordinarily large, this is meaningfully below the record $1.4 trillion fiscal 2009 deficit.

Continued economic growth and a fading fiscal stimulus will lower the deficit in fiscal 2012. The narrowing will be limited by the assumption that policymakers will extend the 2% payroll tax holiday through calendar year 2012. This will cost the Treasury about an additional $120 billion. Nonetheless, the fiscal 2012 deficit is expected to come in close to $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near the so-called structural budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, this is well above the so-called sustainable budget deficit—a deficit consistent with a stable debt-to-GDP ratio—which is estimated to be closer to 2% of GDP. The deal struck over the debt-ceiling standoff did not achieve fiscal sustainability but was a step in the right direction. The deal cuts $2.1 trillion in government spending over the next decade, more than half the $4 trillion in deficit reduction everyone agrees is the appropriate goal.

Policymakers still need to raise taxes to achieve success, but that is likely. Under current law, tax rates will rise for everyone in 2013, but if policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000 annually, they will have done what they need to do.

U.S. dollar

From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this given their view that this would be a problem for their export-oriented manufacturers.

On a broad trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change any time soon since there are no viable alternatives.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. A barrel of West Texas Intermediate is going for nearly $100 per barrel, up from a recent low of less than $80. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel during the depths of the Great Recession to a record of almost $150 in the summer of 2008.

Given recent events and the likely damage this is doing to global economic growth and thus oil demand, WTI is expected to remain near $100 per barrel through 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel to oil prices.

Longer run, oil prices are expected to trend steadily higher, increasing at a pace that is above the overall rate of inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at less than $4 per million per BTUs, and will have trouble keeping up with oil prices during the next several years, as a very substantial glut of natural gas has developed.

Progress on U.S. Jobs

Fri, 6 Jan 2012 09:33 GMT

December's data showed employment slowly increasing, while the jobless rate ticked down. A solid trend? Mark Zandi and the CNBC crew discuss.

Parsing the Outlook for 2012

Fri, 6 Jan 2012 08:23 GMT

The economy's woes hang over yet another new year. What are the chances for real improvement? Mark Zandi looks at the data on CBS' Early Show.

The Price of Gridlock

Wed, 21 Dec 2011 10:20 GMT

Washington's inability to extend current payroll tax rates and jobless benefits could knock the U.S. economy off track in 2012, Mark Zandi tells Bloomberg News.

What About that Falling Jobless Rate?

Fri, 2 Dec 2011 10:05 GMT

November's employment data generates some head-scratching. Mark Zandi puzzles it out with the CNBC crew.

After the Super Committee, What?

Tue, 22 Nov 2011 09:35 GMT

The congressional panel's failure to agree sets up a potential showdown for the economy. Mark Zandi discusses with Bloomberg TV.

November Forecast Assumptions

Mon, 21 Nov 2011 14:30 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to maintain the federal funds rate target effectively at zero through mid-2013, and they are now selling short-term Treasury securities and purchasing long-term securities, in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of almost 4%. The Fed is hoping that this will take some financial pressure off debtors and prompt investors and creditors to take more risk, supporting stock prices and lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, with better than even odds of a third round. More QE has significant downsides and is likely losing some of its effectiveness, but is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from the current $2.8 trillion to almost $3.5 trillion by the end of 2012.

Given recent events, the Federal Reserve will not begin to tighten monetary policy until late 2013, and to normalize policy until 2015. In a well-functioning economy that is operating near full employment, the federal funds rate target should be near 4.5%.

Fiscal policy

The federal budget deficit came in at $1.3 trillion, or 8.7% of GDP, in the just-ended fiscal 2011. Tax revenues are increasing and government spending is declining. While still extraordinarily large, this deficit is meaningfully below the $1.4 trillion in fiscal 2009. These mammoth deficits reflect both the Great Recession and the government’s response to it.

Continued economic growth and fading fiscal stimulus measures will result in more improvement in the deficit in fiscal 2012. However, the assumption that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar 2012 will somewhat limit the narrowing. Nonetheless, the fiscal 2012 deficit is expected to come in around $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near the so-called structural budget deficit—consistent with an economy operating at its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit—that consistent with a stable debt-to-GDP ratio—of closer to 2% of GDP. The deal over the debt-ceiling standoff did not achieve fiscal sustainability, but was a step in the right direction. The deal cuts $2.1 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal. The mechanisms to achieve these cuts appear reasonably durable, including the congressional super commission to report out by late November.

Policymakers will still need to raise taxes to achieve success, but that is likely. Under current law, tax rates will rise for everyone at the beginning of 2013, but if policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000, they will have done what they need to do.

U.S. dollar

The U.S. dollar has firmed during the current financial market turmoil. Despite the fiscal problems of the U.S., there is no obvious alternative currency for investors in uncertain times, and they are more or less staying put. From a long-run perspective, the U.S. dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by about 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this given their view that it would be a problem for their export-oriented manufacturers.

Over the long run, on a broad trade-weighted basis across all currencies, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation are overdone.

Energy prices

Oil prices have strengthened a bit as global recession risks have faded somewhat in recent weeks. A barrel of West Texas Intermediate crude is going for close to $100, up from a recent low of less than $80. Oil prices have been extraordinarily volatile in recent years, ranging from $40 during the depths of the Great Recession, to a record of almost $150 in the summer of 2008.

Given recent events and the likely damage this is doing to global economic growth and oil demand, WTI is expected to remain below $100 per barrel through 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for further unrest in the Middle East, which has added a risk premium of close to $10 per barrel to oil prices.

Over the longer run, oil prices are expected to trend steadily higher, increasing at a pace above overall inflation. Driving this outlook is the difficulty the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at well below $4 per million BTU, and will have trouble keeping up with oil prices during the next several years, as a very substantial glut of natural gas has developed.

Deal or No Deal?

Mon, 21 Nov 2011 09:13 GMT

Deal or no deal? Mark Zandi handicaps the chances of a deficit agreement, and discusses the consequences of the super committee's failure.

U.S. Employment Crawls Forward

Fri, 4 Nov 2011 09:48 GMT

October's numbers weren't a disaster, but progress is achingly slow. Mark Zandi discusses the data on CNBC.

October Forecast Assumptions

Fri, 28 Oct 2011 08:10 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at zero through mid-2013, and are now selling short-term Treasury securities and using the proceeds to purchase long-term securities in an effort to lower long-term interest rates.

Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low of less than 4%. The Fed is hoping that this will take some financial pressure off debtors—refinancing activity has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and greater lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing, in which the Fed creates money to expand its balance sheet. A third round of QE is likely; although there are significant downsides, it is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from $2.8 trillion now to near $3.5 trillion by the end of 2012.

The Federal Reserve will not begin to tighten monetary policy until late 2013. Monetary policy will not normalize, with a fed funds rate near its long-run level of 4.5%, until 2015.

Fiscal policy

The federal budget deficit for the just-ended fiscal 2011 was $1.3 trillion, approximately 8% of GDP. While still extraordinarily large, this was meaningfully below the $1.4 trillion fiscal 2009 deficit. Continued growth and fading fiscal stimulus measures will result in a smaller deficit in fiscal 2012. However, the assumption that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar 2012 will limit the narrowing; this will cost the Treasury almost $175 billion. Nonetheless, the fiscal 2012 deficit is expected to come in close to $1.2 trillion.

By fiscal 2015, the deficit is expected to settle in near its “structural” level—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the “sustainable” budget deficit—that consistent with a stable debt-to-GDP ratio—of closer to 2% of GDP.

The deal struck between the president and Congress to end the debt-ceiling standoff did not achieve fiscal sustainability but was a major step in the right direction. The deal cuts $2.4 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal.

Policymakers still need to raise revenues to achieve success, but that is likely as the expiration of the Bush personal income tax cuts nears. Under current law, tax rates will rise for everyone in 2013, but if policymakers allow those tax cuts to expire for only those making more than $250,000, they will have done what they need to do. The baseline assumes that policymakers achieve fiscal sustainability by 2013.

U.S. dollar

From a long-run perspective, the U.S. dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will slowly right itself against these currencies over the next several years as these economies normalize.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate about 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the U.S. trade deficit with China, but the Chinese are unlikely to go along, given their view that this would be a problem for their exporters. The yuan has appreciated more quickly during the recent financial market turmoil, which may signal some increased flexibility by the Chinese.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. A barrel of West Texas Intermediate crude oil is going for close to $85; this compares with a recent peak in early May of almost $115 per barrel. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009, to a record of almost $150 per barrel in the summer of 2008.

Given recent events and likely damage to the global economy and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time because of the potential for more unrest in the Middle East.

Over the long run, oil prices are expected to trend steadily higher, increasing faster than overall inflation. Driving this outlook is the difficulty that the supply side of the global oil market will have keeping pace with increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low—particularly compared with oil prices—at close to $4 per million BTUs and will have trouble keeping up with oil prices during the next several years. A very substantial glut of natural gas has developed as demand has not fully recovered from the recession and supply has increased substantially in response to the very high prices that prevailed prior to the recession.

A Debate on Obama's Jobs Plan

Thu, 27 Oct 2011 11:30 GMT

The pros and cons of the president's latest economic initiative were aired this week at NYU. Who won? Slate recounts the evening's ups and downs.

Don't have time to sit through the video? Fox business news sums up the arguments. And The Economist dives into the deeper implications of the debate.

Supported by Beijing

Mon, 24 Oct 2011 09:25 GMT

Is the global economy resting on China's shoulders? Mark Zandi discusses with Nouriel Roubini.

Call it a "Growth Recession"

Tue, 18 Oct 2011 17:45 GMT

What are the chances for a double-dip downturn in the U.S.? Mark Zandi and Nouriel Roubini discuss.

Which Way for the Euro Zone?

Fri, 14 Oct 2011 15:41 GMT

Which way for the euro zone? Mark Zandi joins Nuriel Roubini to look at the painful options facing Europe.

September Forecast Assumptions

Wed, 12 Oct 2011 13:34 GMT

Monetary policy

The Federal Reserve has aggressively eased monetary policy in response to the turmoil in financial markets and the weaker economy. Policymakers have all but promised to keep the federal funds rate target effectively at 0% through mid-2013. Long-term interest rates have fallen significantly in response, with fixed mortgage rates declining to a record low. The Fed is hoping that rock-bottom interest rates will take some financial pressure off debtors—refinancing has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and more lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing. It is now more likely than not that the Fed will undertake a third round of QE. This has significant downsides, and QE is likely losing some of its effectiveness, but given the damage recent events have done to the economy, this is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from $2.8 trillion currently to near $3.8 trillion by the end of 2012.

Given recent events, the Federal Reserve will not begin tightening monetary policy until late 2013 and will not normalize policy until 2015, with a federal funds rate target near 4.5%.

Fiscal policy

The federal budget deficit is on track to come in close to $1.25 trillion, approximately 8% of GDP, in the current fiscal year, which ends this month. Tax revenues are increasing and government spending growth is slowing. While still extraordinarily large, this is meaningfully below the record $1.4 trillion fiscal 2009 deficit.

Continued economic growth and fading fiscal stimulus will result in more improvement in the deficit in fiscal 2012. However, it is assumed that policymakers will adopt the president’s proposal to extend and expand the current payroll tax holiday through calendar year 2012, costing the Treasury an additional $175 billion. Thus, the fiscal 2012 deficit will come in close to $1.2 trillion.

The deal struck between the president and Congress to end the debt-ceiling standoff did not achieve fiscal sustainability but was a substantive step in the right direction. The deal cuts $2.4 trillion in government spending over the next decade, more than one-half of the $4 trillion in deficit reduction everyone agrees is the appropriate goal. The mechanisms to achieve these cuts appear durable.

Policymakers still need to raise revenues to achieve success, but that is likely as the expiration of the Bush personal income tax cuts nears at the end of next year. Under current law, tax rates will rise for everyone in 2013, but if policymakers allow those tax cuts to expire for only those making more than $250,000, they will have done what they need to do. The baseline outlook assumes that policymakers achieve fiscal sustainability by early 2013.

U.S. dollar

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate some 5% annually over the next five to six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to go along, given their view that this would be a problem for their export-oriented manufacturers.

On a broad, trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change much any time soon.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. West Texas Intermediate crude oil is going for around $90 per barrel; this compares to the recent peak in early May of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009, during the depths of the Great Recession, to a record of almost $150 per barrel in the summer of 2008.

Given recent events and likely damage to the global economy and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. However, barring a full-blown global recession, which is not anticipated, it will be difficult for prices to go much lower for any length of time given the potential for more unrest in the Middle East.

Checking out the Challengers

Mon, 10 Oct 2011 15:43 GMT

The GOP's presidential hopefuls are expected to confront the jobs question when they debate this week. Mark Zandi frames the issue with Bloomberg.

When Politics and Economics Collide

Mon, 10 Oct 2011 11:22 GMT

Can Washington help stave off recession and still deal with the long-term deficit? And what about the housing market? Mark Zandi discusses with CNN.

Relief on Jobs

Mon, 10 Oct 2011 09:50 GMT

The U.S. isn't in recession, but has a long way to go before we can breathe easy. Mark Zandi discusses the latest data with Bloomberg TV.

Overcoming Europe's Policy Paralysis

Fri, 7 Oct 2011 12:31 GMT

Coming up, a free web conference on the European outlook.

Overcoming Policy Paralysis
October 13, 2011 • 10AM EST / 2PM GMT
Speakers: Enam Ahmed, Melanie Bowler & Zach Witton
Join Moody’s Analytics top economists as they discuss the updates to the European economic outlook.
» The western European economy is in recession.
» To avoid a severe recession, European policymakers need to act aggressively.
» The bailout fund must be expanded, and the banking system recapitalized.
» Pressure on the ECB to do more will intensify.
» Greece will restructure debt by next summer.
» The threat of more policy errors is high.

No charge to listen in: Click here to register.

A Small Sigh of Relief on Jobs

Fri, 7 Oct 2011 12:20 GMT

September's U.S. employment report shows tepid growth and no change in the unemployment rate. Mark Zandi comments on CNBC.

Recessionary Politics

Mon, 26 Sep 2011 08:36 GMT

Washington gridlock nudges up the odds of a new downturn, Mark Zandi tells CBS' "Face the Nation."

Where's Unemployment Going?

Fri, 16 Sep 2011 13:53 GMT

Even with a plan, the jobless rate may not fall below 9% in 2012, Mark Zandi tells Bloomberg.

Redefining Optimism

Tue, 6 Sep 2011 14:00 GMT

After a string of bleak numbers, the outlook is looking dimmer but not hopeless. Mark Zandi discusses with CNBC.

Another Jobs Disappointment

Fri, 2 Sep 2011 09:30 GMT

U.S. payrolls were flat in August, and the unemployment rate stayed at 9.1%. Mark Zandi discusses the numbers with CNBC.

The Fed Lowers Expectations

Wed, 31 Aug 2011 09:00 GMT

The latest FOMC minutes show the central bank trimming its view of U.S. potential growth, Mark Zandi tells CNBC.

Asia Begins to Feel the Slowdown

Wed, 31 Aug 2011 08:36 GMT

Export-dependent economies such as the Philippines are vulnerable to external shocks, Katrina Ell tells Bloomberg News.

Assessing Irene

Tue, 30 Aug 2011 09:06 GMT

How did Hurricane Irene affect the U.S. economic landscape? Ryan Sweet examines the impact on PBS' Nightly Business Report (starts at 6:00 minutes).

Watch the full episode. See more Nightly Business Report.

The Fed's Future Course

Mon, 29 Aug 2011 14:37 GMT

Policymakers can and likely will do more to support the economy, Mark Zandi tells Bloomberg News.

No Magic Bullets

Mon, 22 Aug 2011 09:51 GMT

The risks are rising, but skilled policy can keep the U.S. out of recession, Mark Zandi tells CBS News

More Market Misery

Thu, 18 Aug 2011 17:46 GMT

As the economy teeters, what role is there for policy? Mark Zandi discusses the latest developments with Ezra Klein and Jared Bernstein on MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

August Forecast Assumptions

Thu, 18 Aug 2011 07:45 GMT

Monetary policy

Long-term interest rates have fallen significantly in response, with fixed mortgage rates closing in on record lows. The Fed hopes that low interest rates will take some financial pressure off debtors—refinancing activity has already picked up—and prompt investors and creditors to take more risk, thus supporting stock prices and lending.

Policymakers have also significantly lowered the hurdle for more quantitative easing. Another round of QE is now more likely. Although QE is likely losing some of its effectiveness, it is the Fed’s most effective remaining policy step. The Fed’s balance sheet is expected to expand from the current $2.8 trillion to nearly $4 trillion by next spring. Given recent events, the Fed will not start to tighten monetary policy until 2013, and will not normalize monetary policy until 2015, with the federal funds rate target near 4.5%.

Fiscal policy

The federal budget deficit is on track to come in close to $1.25 trillion, approximately 8% of GDP, in the current fiscal year. Tax revenues are increasing and government spending is declining. While still extraordinarily large, this is well below the record $1.4 trillion fiscal 2009 deficit.

The unprecedented deficits reflect the Great Recession and the costs of the government’s multifaceted response to it. The total direct costs of stabilization policies are expected to reach almost $1.6 trillion. Of this, $1.3 trillion is the cost of the various fiscal stimulus efforts. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is projected to top $2.35 trillion, more than 15% of GDP. For historical comparison, the savings and loan crisis of the early 1990s cost some $350 billion in today's dollars, $275 billion in direct costs plus $75 billion due to the associated recession, equal to almost 6% of GDP.

Continued economic growth and the fading fiscal stimulus will result in more improvement in the deficit in fiscal 2012. The assumption that policymakers will extend the current payroll tax holiday through calendar year 2012 will limit the narrowing, however, costing the Treasury around $110 billion. The fiscal 2012 deficit is expected to come in close to $1.1 trillion. By fiscal 2014, with the economy operating near its potential, the deficit is expected to be close to 5% of GDP. This structural deficit will still exceed the sustainable level of 2% of GDP consistent with a stable debt-to-GDP ratio over time.

The deal between the president and Congress to end the debt-ceiling standoff cuts $2.4 trillion in government spending over the next decade, more than half the desired $4 trillion in deficit reduction. Policymakers still need to raise tax revenues to achieve success, but that is likely given the upcoming expiration of the Bush income tax cuts late next year. If policymakers simply agree to allow those tax cuts to expire only for those making more than $250,000 annually, they will have raised enough revenue to achieve a sustainable deficit. The baseline assumes that policymakers are able to achieve fiscal sustainability by early 2013.

U.S. dollar

The U.S. dollar has held up well in the current market turmoil and global foreign exchange markets have been relatively stable. With no obvious alternative to the dollar, investors are largely staying put.

From a long-run perspective, the U.S. dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar will right itself against these currencies slowly over the next several years as those economies normalize.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by about 5% annually over the next five to six years. U.S. policymakers would like a quicker revaluation, but the Chinese are unlikely to accommodate this given their concern for their export-oriented manufacturers.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly, but concerns over a rapid broad-based depreciation are overdone. The dollar accounts for nearly two-thirds of global reserves, and this is unlikely to change much soon. The U.S. remains far and away the global economy's largest and most stable economy and the predominant player in global trade.

Energy prices

Oil prices have fallen sharply in the financial market turmoil. A barrel of West Texas Intermediate is going for $85; this compares to the recent peak in early May of almost $115. Given recent events and the likely damage this is doing to global economic growth and thus oil demand, WTI is expected to remain below $100 per barrel through early 2012. Also limiting any upside to prices is the demonstrated willingness of governments to use their strategic petroleum reserves to meet any disruption to oil supplies. However, it will be difficult for prices to go much lower given the potential for more unrest in the Middle East. A risk premium of close to $10 per barrel is built into oil prices.

Longer run, oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation. Higher demand from faster-growing, less energy-efficient emerging economies drives this outlook.

Natural gas prices remain low, at nearly $4 per million per BTU, and will have trouble keeping up with oil over the next several years because of the substantial glut that has developed as demand has not fully recovered from the recession and supply has increased in response to the high prices that prevailed prior to the recession. Prices are expected to eventually gain traction as less expensive gas attracts alternative uses.

Message of the Markets

Mon, 15 Aug 2011 17:21 GMT

Stocks went south last week, then came back. What does that mean for the economy? Mark Zandi discusses with CNBC.

Stay Calm, Watch the Fundamentals

Tue, 9 Aug 2011 09:39 GMT

The economy's path depends to a large extent on how Main Street reacts to Wall Street's roller-coaster, Mark Zandi tells CBS.

What to Do About Jobs

Mon, 8 Aug 2011 14:35 GMT

Washington is not out of tools to help get Americans back to work, Mark Zandi tells CNN.

A Crisis of Confidence

Mon, 8 Aug 2011 10:46 GMT

The Standard & Poor's credit downgrade is just the latest blow to a delicate collective psyche. Mark Zandi discusses the implications with Bloomberg.

A Glimmer of Hope on Jobs?

Fri, 5 Aug 2011 09:29 GMT

The July employment report was, if not exactly good, at least better than expected. Mark Zandi discusses with the CNBC crew.

Update: Gus Faucher explains the numbers for Fox Business news.

After the Debt Drama

Wed, 3 Aug 2011 09:51 GMT

Now that the threat of default has been removed, what can policymakers do to spur the economy? Mark Zandi discusses the next step with MSNBC.

Visit msnbc.com for breaking news, world news, and news about the economy

Markets Signaling Slowdown?

Wed, 3 Aug 2011 08:57 GMT

The debt crisis is past, but confidence still seems lacking. Mark Zandi discusses the market reaction with CNBC.

Tighter Money Down Under

Wed, 3 Aug 2011 08:30 GMT

From Sydney, Matt Circosta tells Bloomberg News that recent data are likely to push Australia's central bank toward more tightening.

Hope for a Debt Deal

Sun, 31 Jul 2011 13:17 GMT

Weekend negotiations raised hopes for an eleventh-hour fiscal compromise. Mark Zandi tells CNN that "the economy hangs in the balance."

Running Out of Headroom

Wed, 27 Jul 2011 09:36 GMT

What happens to mortgage and other interest rates if the U.S. doesn't raise the ceiling? Mark Zandi talks with ABC News.

Mark also talks with CBS

Nearing the Cliff

Tue, 19 Jul 2011 10:16 GMT

Will Congress get it together in time? Yes, Mark Zandi tells Bloomberg—because the alternative is so dark.

July Forecast Assumptions

Mon, 18 Jul 2011 07:48 GMT

Monetary policy

The Federal Reserve ended its quantitative easing effort on schedule in June. The Fed’s balance sheet is thus peaking at close to $2.8 trillion, about $2 trillion greater than it would be in more normal circumstances. Although the Fed is not expected to engage in another round of QE, it is expected to maintain its current balance sheet at least through the end of the year by purchasing enough Treasury securities to offset those that are maturing.

The end of QE should have little immediate impact on long-term interest rates. The link between QE and long-term rates is the proportion of the stock of Treasury debt owned by the Fed, not the proportion of Treasury bond issuance. The Fed has ended its purchases of Treasury issuance, but its share of the stock of Treasuries outstanding will not change, at least not for awhile. Indeed, 10-year Treasury yields in early July remain very low, at close to 3%.

Despite the end of quantitative easing, the Fed is not expected to raise rates until mid-2012. Key benchmarks necessary for the Fed to raise rates will be an unemployment rate that is firmly below 9% and falling steadily, and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves and not the federal funds rate is likely to become the key target rate until the Fed has successfully drained the large amount of excess reserves it supplied to the banking system. The interest rate on reserves is expected to end 2012 at 1% and will not normalize, to just over 4%, until 2014.

Fiscal policy

The federal budget deficit is on track to come in near $1.35 trillion, approximately 9% of GDP, in the current fiscal year. This is about the same deficit as in fiscal 2010, and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and the fading of fiscal stimulus will result in a quickly shrinking deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near its structural level—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit, which is closer to 2% of GDP.

Policymakers are expected to resolve the current debate over raising the federal debt limit in a reasonably graceful way. Without an increase in the ceiling by early August, the Treasury would be forced to stop paying some of the government’s bills, and the spending cuts would be substantial. The economy would devolve back into recession under the weight of severe budget cutting, the stock market would swoon, and interest rates would rise.

It is increasingly likely that something good will come out of this process, perhaps an agreement on the magnitude of future deficit reduction and a budget mechanism to help achieve this goal. Policymakers have appropriately coalesced around $4 trillion in deficit reduction over the next decade, likely to come from both spending restraint and tax increases. If achieved this would result in a sustainable budget deficit by early in the next decade. The task of more precisely defining how to achieve these deficit reduction targets will be left to early in the next presidential term.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. From a long-run perspective, the dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound. The dollar is significantly overvalued against the yuan and is expected to depreciate by some 5% annually against the Chinese currency over the next five to six years. U.S. policymakers would like this revaluation to occur more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to go along given their view that this would be a problem for their export-oriented manufacturers.

The dollar is expected to depreciate modestly on a long-run, broad, trade-weighted basis. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far-and-away the global economy's largest and most stable economy and predominant player in global trade. There are also no good alternatives.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has fallen in recent weeks back to around $95. Prices are still above the less than $90 at the start of the year before social unrest in the Middle East boiled over, but are well below the early-May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009 during the depths of the recession, to a record of almost $150 per barrel in the summer of 2008.

The price of a barrel of WTI is expected to average near $100 this year. It will be difficult for prices to go much lower for any length of time given the potential for more problems in the Middle East, which is adding a risk premium of about $10 per barrel to oil prices. Oil prices are not expected to go over $100 for any length of time given weaker oil demand growth from slower-growing emerging economies and the willingness of sovereigns to use strategic petroleum reserves to meet any disruption of oil supplies.

In the long run, oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation given increasing demand from faster-growing, less energy-efficient emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at above $4 per million per BTU, and will have trouble keeping up with oil prices during the next several years.

Debt Drumbeat II

Fri, 15 Jul 2011 11:40 GMT

The following appeared Friday, July 15 in the Washington Post:

Moody’s economist Mark Zandi: How to cut the deficit — and the trouble if we don’t

The Obama administration and Congress must raise the federal debt ceiling by Aug 2. That is all there is to it. In a post-default world, financial markets would unravel and the U.S. and global economy would enter another severe recession. The nation’s already daunting fiscal problems would spiral out of control as tax revenue plunged and demand surged for unemployment insurance, food stamps, Medicaid and other programs supporting vulnerable Americans.

Yes, it would be wonderful if politicians could agree to rein in future budget deficits as part of a debt-limit deal. But that isn’t necessary right now. Simply raising the debt ceiling enough to last through next year’s elections would appease global investors and sustain the economic recovery. The 2012 vote will be a referendum on how to address our fiscal problems: The winner sets the agenda, and tough decisions can be made after the next president and Congress take office.

It is laudable that lawmakers have attempted to do more now, hoping that the pressure surrounding the debt ceiling would force big changes in fiscal policy. And it is encouraging that they are coalescing around the same budget math: President Obama has called for about $4 trillion in deficit reduction over the next decade; so did Republican Rep. Paul Ryan (Wis.), chairman of the House Budget Committee, in his budget proposal; and so did the Simpson-Bowles fiscal commission. About $4 trillion over 10 years is the amount of deficit reduction needed to make the government’s fiscal situation sustainable, keep interest rates low and strengthen our economy in the long run.

There are significant disagreements over the composition of the deficit reduction, but these can be overcome, if we agree to achieve the entire $4 trillion reduction through cuts in government spending — and that includes tax expenditures.

Here’s how that can work. Approximately $2 trillion in cuts would affect discretionary non-defense spending, defense outlays and entitlement programs. (After all, there is no way to address our budget problems without meaningfully changing Social Security, Medicare and Medicaid.) Another $1 trillion would come through cuts in tax expenditures — the exclusions, exemptions, deductions and credits that riddle the tax code, costing the government more than $1 trillion each year. The mortgage interest deduction alone is worth some $1.4 trillion over the next decade. But there are hundreds more, indirectly funding student expenses, health insurance, child-care costs, local property taxes and on and on.

Tax expenditures are more properly thought of as government spending than as tax cuts. A deduction for local property taxes, for example, is equivalent to the federal government sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax expenditures — tax breaks targeted for specific purposes — is analogous to eliminating congressional earmarks.

Most tax expenditures are also inefficient and regressive. The mortgage interest deduction, for example, does nothing to improve housing affordability, its ostensible goal. Any tax benefit is simply capitalized into house prices, which rise as the deduction fuels demand. And the benefits go to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.

Debt-Ceiling Drumbeat

Thu, 14 Jul 2011 11:38 GMT

Tensions are rising as the deadline nears to raise the U.S. debt ceiling. Mark Zandi discusses the latest development with NPR's The Takeaway.

Defining Default

Tue, 12 Jul 2011 14:54 GMT

Mark Zandi explains to Andrea Mitchell what will happen if the U.S. debt ceiling isn't raised.

Visit msnbc.com for breaking news, world news, and news about the economy

Another Disappointing Jobs Report

Fri, 8 Jul 2011 09:08 GMT

Hopes for better news on the U.S. jobs front were dashed as payrolls scarcely grew. Mark Zandi discussed the report with the CNBC crew:

Looking Up Down Under

Thu, 7 Jul 2011 08:05 GMT

Matt Circosta talks with Bloomberg about the robust Australian economy.

Dismal Scientist: Europe Edition Upgraded

Wed, 6 Jul 2011 17:19 GMT

We are pleased to announce that Dismal Scientist Europe Edition has been upgraded to better serve the needs of our international business subscribers.

Beginning this month, you’ll see substantially deeper real-time coverage and analysis of Europe’s major economies, including the euro zone as a single region. Our reporting now includes more than 100 of the region’s most important economic indicators, plus historical and forecast data for Germany, France, Italy, Spain, Russia , the U.K., and the Euro Zone.

Ensure you are getting the maximum benefit from these amazing features:

New Visitors: Start a Free Two Week Trial
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View our Expanded Coverage:

Country	Indicator
Euro Zone	Balance of Payments
Euro Zone	Business and Consumer Sentiment
Euro Zone	Conference Board Leading Indicators
Euro Zone	Consumer Price Index
Euro Zone	Credit Conditions
Euro Zone	ECB Monetary Development/Aggregates
Euro Zone	ECRI Future Inflation Gauge-Europe
Euro Zone	External Trade
Euro Zone	GDP
Euro Zone	Industrial Orders
Euro Zone	Industrial Producer Prices
Euro Zone	Industrial Production
Euro Zone	Manpower Employment Outlook Survey
Euro Zone	Monetary Policy
Euro Zone	Preliminary Consumer Price Index
Euro Zone	Provisional GDP
Euro Zone	Retail Trade
Euro Zone	Unemployment Rate
Euro Zone	ZEW Indicator of Economic Sentiment
France	Business Survey
France	Consumer Confidence
France	Consumer Price Index
France	Employment Situation
France	Fiscal balance
France	GDP
France	Household Consumption Survey
France	Industrial orders
France	Industrial Production
France	Jobseekers
France	Nonfarm Payrolls
France	Producer Price Index
France	Property prices
France	Trade balance
Germany	Consumer Price Index
Germany	Employment Situation
Germany	Foreign Trade
Germany	GDP
Germany	House Price Index
Germany	Ifo Business Climate Index
Germany	Industrial Production
Germany	Lending by Banks
Germany	Manufacturing Turnover and Orders Received
Germany	Preliminary GDP
Germany	Producer Price Index
Germany	Retail Sales
Germany	Vehicle Registration
Germany	ZEW Indicator of Economic Sentiment
Italy	Balance of Payments
Italy	Bank Lending Survey
Italy	Business Confidence
Italy	Consumer Confidence
Italy	Consumer Prices Index - Final
Italy	Employment
Italy	Employment Status Estimates
Italy	Foreign Trade
Italy	GDP
Italy	Government Finance
Italy	Industrial New Orders
Italy	Industrial Production
Italy	Preliminary GDP
Italy	Producer Price Index
Italy	Retail Sales
Russia	Business Confidence
Russia	Consumer Price Index
Russia	Foreign Trade
Russia	GDP
Russia	Government Finance
Russia	House Prices
Russia	Industrial Production
Russia	Monetary Policy
Russia	Reserve Fund
Russia	Retail Sales
Russia	Unemployment
Spain	Business Confidence
Spain	Consumer Confidence
Spain	Consumer Price Index
Spain	Foreign Trade
Spain	GDP
Spain	Government Finance
Spain	House Prices
Spain	Industrial Orders
Spain	Industrial Production
Spain	Lending by Banks
Spain	Producer Price Index
Spain	Retail Sales
Spain	Unemployment
U.K	Bank of England Minutes
U.K	BoE Lending to Individuals
U.K	Consumer Confidence
U.K	Consumer Price Index
U.K	ECRI Future Inflation Gauge-Europe
U.K	Employment Situation
U.K	Foreign Trade
U.K	GDP
U.K	GDP Final Estimate
U.K	Halifax Housing Price Index
U.K	Industrial Production
U.K	Manpower Employment Outlook Survey
U.K	Monetary Policy
U.K	Moody's Analytics Debt Service Ratio
U.K	Nationwide Housing Price Index
U.K	Producer Price Index
U.K	Public Finance
U.K	Retail Sales
OECD	Composite Leading Indicators
World	Moody's Analytics Survey of Business Confidence

More improvements are in the works. Look to Dismal Scientist for timely analysis and in-depth commentary on key economic issues from industrial production to consumer confidence to fiscal and monetary policy. And if you have any suggestions or questions, please contact us through help@economy.com.

Treasury Tea Leaves

Tue, 5 Jul 2011 10:47 GMT

Some early speculation about potential leadership changes at the U.S. Treasury Department.

And an update on the state of the debt-ceiling negotiations.

Time's Nearly Up: Raise the Ceiling

Mon, 27 Jun 2011 14:41 GMT

The following appeared in Sunday's Philadelphia Inquirer:

Moment of truth is at hand: Raise the debt ceiling limit

By Mark Zandi

Most times, the questions I'm asked as an economist are as wide-ranging as the groups I speak to. But these days, everyone asks the same questions: When will we get more jobs? Why aren't businesses hiring more? Where are the jobs going to come from? Can policymakers do anything to help?

Beneath these questions, of course, is the fear that more jobs aren't coming, ever. This is understandable. The recovery is two years old and the U.S. economy has added back fewer than 2 million of the almost 9 million jobs lost in the Great Recession. Even more worrisome, the number of people working today is about where it was in the late 1990s, though the working-age population and labor force have grown.

The result is painfully high unemployment and underemployment. The jobless rate is down from its double-digit peak, but it remains above 9 percent. The underemployment rate, which includes those who aren't working as much as they want to, is stuck at 16 percent. This represents an astounding 24 million Americans.

Nervousness about the job market runs even deeper than that. Among those who have jobs, more and more are unhappy with their employment situation but are afraid to act to change it. In a good labor market, lots of people quit jobs in hopes of finding a better one. That's not happening now. And of course, few who have jobs are seeing their pay grow very fast.

It may be difficult therefore to see how the job market will gain traction in the foreseeable future. Yet it will, most fundamentally because U.S. companies are in great financial shape. To be sure, big and midsize companies are doing a lot better than smaller ones, but as a group firms are profitable and have little debt. There is no longer a question that businesses can expand their operations and hire more, only a question of confidence.

The lack of confidence is in part a hangover from the Great Recession, which brought our biggest banks and businesses literally to their knees. The only salve for that nightmare is time.

The other weight on the collective psyche comes from the government's fiscal challenges. While Washington's response to the Great Recession saved us from a much worse fate, there is no such thing as a free lunch. Unless policymakers make major changes to government spending and tax policy soon, another major financial crisis is inevitable.

This is the crux of the matter. Given our seemingly dysfunctional political process, business executives can't see how the Obama administration and House Republicans will come to terms. Businesses won't cut workers because they don't know how this is going to play out, but they also won't hire more until the picture clears. Breaking the budget impasse is thus key to getting more jobs.

The moment of truth is at hand. Some form of budget agreement must be achieved to raise the debt ceiling by late July, or financial markets will unravel and take the economy with them. While some policymakers may not believe this, most do, and odds are we will get an agreement and the debt ceiling will be increased. Policymakers will only outline a route to fiscal sustainability, but that should be enough, at least until after the presidential election.

I expect this will prompt businesses to hire more soon, and that confidence will start to improve soon thereafter, but I could be wrong. We will know more by the fall; if the economy does not pick up, policymakers should consider doing more.

Most important, and doable politically, Washington can extend the current payroll tax holiday another year. This tax cut likely saved us from a double-dip recession this spring when gasoline prices spiked to near $4 a gallon. Extending the payroll tax cut through 2012 won't be cheap, but it will be a big help, particularly to hard-pressed working lower-income households.

Washington should also cut state governments a break on their busted unemployment insurance funds. States have borrowed from the feds to pay their share of UI benefits; unless they see some relief, they will have no choice but to raise taxes on businesses to pay Washington back. This burden will fall most heavily on firms that went through serious layoffs and are probably the most shaky.

Providing a bit more financial help to state and local governments would also help curtail their severe job cutting. Well over half a million teachers, firefighters, police, and other public employees have lost jobs over the last three years; without help another quarter-million will lose jobs over the coming year. Ending this job loss would go a long way to lifting the job market.

My expectations about our economic future are based on our historical experience. Our history strongly argues that when push comes to shove, we always find a way to do the right thing. I see no reason to expect otherwise now, as we debate the debt ceiling and how to create more jobs.

MORE: Mark chats online about the economy:

How To Spend the Peace Dividend

Thu, 23 Jun 2011 15:14 GMT

If the U.S. realizes a 'peace dividend' after withdrawing from Afghanistan and Iraq, where should the money go, and what will it accomplish? Mark Zandi comments in the New York Times on the lessons from the 1990's.

The U.S. economy would benefit enormously from a reduction of defense forces in Iraq and Afghanistan. The more than $1.2 trillion spent in those two countries over the past decade has exacerbated our fiscal problems and significantly impeded growth in jobs and output.

Simply cutting spending by half in Iraq and Afghanistan over the next decade would go a long way to reining in the U.S. deficit. .Freeing up these resources, especially now, would go a long way to reining in future deficits. For context, there is general agreement that the federal budget deficit must be reduced by some $4 trillion over 10 years to make the government’s fiscal situation sustainable. Simply cutting spending by half in Iraq and Afghanistan over the next decade would go a long way to achieving that goal, making other changes to government spending and taxes measurably easier.

When Will Things Get Better?

Wed, 22 Jun 2011 14:34 GMT

When will the economy improve? NPR's Planet Money boils down the case for a sort-of optimistic outlook.

Here Comes Ben

Wed, 22 Jun 2011 09:48 GMT

Markets await Chairman Bernanke's latest outlook, and any hints about the Fed's next move. Mark Zandi discusses on CNBC.

June Forecast Assumptions

Wed, 22 Jun 2011 08:39 GMT

Monetary policy

The Federal Reserve will wind down its quantitative easing efforts this month. The Fed’s balance sheet is thus peaking at close to $2.8 trillion, about $2 trillion greater than under more normal circumstances. While the Fed is not expected to engage in another round of QE, it will maintain its current balance sheet at least through the end of the year by purchasing enough Treasury securities to offset those that are maturing.

The end of QE should have little imme-diate impact on long-term interest rates. The link between QE and long-term rates is the proportion of the stock of Treasury debt that the Fed owns, not the proportion of Treasury bond issuance. When QE ends, the Fed will stop its purchases of Treasury issuance, but its share of the stock of Treasuries outstand-ing will not change, at least not for a while. Even though financial markets fully anticipate the end of QE this month, 10-year Treasury yields remain very low at close to 3%.

Despite the end of quantitative easing this summer, the Fed is not expected to raise rates until mid-2012. Key benchmarks necessary for the Fed to raise rates will be an unemployment rate that is firmly below 9% and falling steadily and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, is likely to become the key target rate until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 1% and will not normalize, to just over 4%, until early 2014.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; it will come in near $1.35 trillion in fiscal 2011, or 9% of GDP. This is about the same deficit as in fiscal 2010 and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and the fading of the fiscal stimulus will result in a quickly declining deficit beginning in fiscal 2012. By fiscal 2014, it is expected to settle in near the so-called structural budget deficit—one consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the sustainable budget deficit, which is closer to 2% of GDP.

Policymakers are not expected to make significant progress reducing this structural deficit during the remainder of President Obama’s term. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit. This will include both spending restraint and tax increases, primarily through elimination of deductions and credits.

Policymakers will have to find a way of increasing the federal government’s debt ceiling before early August. Without an increase, the Treasury will be forced to stop paying some of the government’s bills, and the needed spending cuts would be substantial. The economy would devolve back into recession under the weight of severe budget cutting, the stock market would swoon, and interest rates would rise. Given this scenario, it is ex-pected that policymakers will raise the ceiling after a period of brinksmanship.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. From a long-run perspective, the dollar is modestly undervalued against the euro, Canadian dollar and Japanese yen and a bit overvalued against the British pound. The dollar is significantly overvalued against the yuan and is expected to depreciate by some 5% annually against the Chinese currency over the next five to six years. U.S. policymakers would like this to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this considering their view that this would be a problem for their export-oriented manufacturers.

On a long-run, broad trade-weighted basis, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far and away the global economy's largest and most stable economy and the predominant player in global trade; there is also no good alternative.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has fallen back in recent weeks to near $100. Prices are still well above the less than $90 at the start of the year, before social unrest in the Middle East boiled over, but are well below the early-May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 per barrel at the start of 2009 during the depths of the recession to almost $150 per barrel in the summer of 2008.

The price of a barrel of WTI is now ex-pected to average closer to $100 per barrel this year, a significant change from the $90 previously assumed. Despite ample global supplies, there is a risk premium of about $10 per barrel built into oil prices that will take much of the year to fade away. This increase in assumed oil prices shaves almost 20 basis points off expected 2011 real GDP growth. The risk is for even higher oil prices, given the potential for unrest to spread to major producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, oil prices are expected to settle back down below $100 per barrel by next year, closer to fundamental global demand and supply. Longer-run oil prices are expected to trend steadily higher given increasing demand from emerging economies.

Natural gas prices remain low, particularly compared with oil prices, at just above $4 per million BTUs, and will have trouble keeping up with oil prices over the next several years.

May Forecast Assumptions

Tue, 21 Jun 2011 14:57 GMT

Monetary policy

The Federal Reserve is expected to follow through on its commitment to engage in quantitative easing through June 2011. The Fed has stated its intention to purchase $600 billion in Treasury securities in addition to the $300 billion needed to offset those securities that will run off the Fed’s balance sheet during this period.

Additional quantitative easing will not be necessary, as the job market continues to steadily gain and underlying inflationary pressures, while modest, are beginning to build. The end of QE should have little immediate impact on long-term interest rates. The link between QE and long-term rates is the proportion of Treasury debt that the Fed owns, not the proportion of Treasury bond issuance. When QE stops the Fed will end its purchases of Treasury issuance, but its share of the stock of Treasuries outstanding will not change, at least not for a while. Indeed, even though financial markets fully anticipate the end of QE in June, 10-year Treasury yields remain very low at close to 3.25%.

The Fed is not expected to raise rates until spring 2012. Key benchmarks for the Fed to raise rates will be an unemployment rate firmly below 9% and falling steadily, and core inflation that is above 1% and definitively accelerating. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, will likely be the key target until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; the deficit appears set to come in near $1.35 trillion in fiscal 2011, around 9% of GDP. This is about the same deficit as last year, and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

The better economy and fading of fiscal stimulus measures will result in a quickly shrinking deficit beginning in fiscal 2012. By fiscal 2014 the deficit will settle in near the so-called structural budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, which is closer to 2% of GDP.

Policymakers will not make significant progress reducing this structural gap during the remainder of President Obama’s term. This will leave dealing with the nation’s daunting long-term fiscal challenges to the next president, whoever that might be, and Congress. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit, including cuts to discretionary spending and entitlement programs and tax increases.

Policymakers will have to find a way of increasing the federal government’s debt ceiling before early August. Without an increase by then, the Treasury will be forced to make substantial spending cuts. The economy would devolve back into recession under the weight of severe budget cuts, a stock market decline, and higher interest rates. Given this, it is expected that policymakers will raise the ceiling after a period of brinksmanship.

U.S. dollar

The U.S. dollar is trading at the low end of the range that has prevailed since the financial panic hit three years ago. Temporary ups and downs notwithstanding, from a long-run perspective the dollar is currently modestly undervalued against the euro, Canadian dollar and Japanese yen, and a bit overvalued against the British pound.

The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate by some 5% annually over the next five or six years. U.S. policymakers would like this revaluation to occur much more quickly given the very wide U.S. trade deficit with China, but the Chinese are unlikely to accommodate this because of their view that it would be a problem for their export-oriented manufacturers.

On a broad, trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation are overdone. The dollar accounts for nearly two-thirds of global reserves, and the U.S. remains far and away the global economy’s largest and most stable economy and the predominant player in global trade.

Energy prices

Oil prices have fallen back in recent weeks to near $100 for a barrel of West Texas Intermediate crude. Prices are still well above the less than $90 that prevailed at the start of the year before the turmoil in the Middle East, but are well below the early May peak of almost $115. Oil prices have been extraordinarily volatile in recent years, ranging from $40 a barrel at the start of 2009 during the depths of the recession, to a record of almost $150 in the summer of 2008.

The price of WTI is expected to average closer to $100 per barrel this year. This is a significant change from the $90 average assumed earlier this year. While global oil supplies are still ample, a risk premium of approximately $10 per barrel has been built into prices, and it will take much of the year to fade away. These higher assumed oil prices will shave almost 20 basis points off expected 2011 real GDP growth, and the risk to the outlook is for even higher prices.

Natural gas prices remain low, particularly compared with oil prices, at near $4 per million per BTUs, and will have trouble keeping up with oil prices during the next several years.

Live from New York

Mon, 20 Jun 2011 09:59 GMT

On Monday, June 20, Mark Zandi and other experts dissected the outlook in a panel discussion at the New York Forum.

Watch live streaming video from nyforum at livestream.com

Midyear Reassessment

Thu, 16 Jun 2011 08:52 GMT

Given the recent spate of disappointing data, are there any reasons for optimism? Mark Zandi discusses with CNBC.

Parsing the Pause in Growth

Mon, 13 Jun 2011 14:42 GMT

Is the slowdown transitory? Mark talks with Bloomberg News about confidence and the recovery.

Buy or Rent?

Wed, 8 Jun 2011 08:29 GMT

As U.S. housing appears to be nearing the bottom of its long slide, it may be time to reconsider the math of ownership. Mark Zandi talks with NPR.

Digging Out Takes Time

Fri, 3 Jun 2011 12:35 GMT

After the release of May's U.S. employment numbers Friday, Mark Zandi spoke with CNN's "In the Arena" :

Friday morning, the Department of labor released May’s employment report and the news isn’t great. The economy gained a mere 54,000 jobs in the month, a significant slowdown from 232,000 jobs added to payrolls in April. What‘s happening?

The sharp slowing in job growth this spring is largely due to the impact of the surge in gasoline and food prices, fallout from the Japanese catastrophe on U.S. manufacturers, and the resumption of house price declines resulting from the ongoing foreclosure crisis. The impact of these factors on jobs is being magnified by the very fragile collective psyche. Everyone has been through a lot in recent years and it doesn’t take much to push us over the proverbial edge.

President Obama, members of Congress, declared candidates for the 2012 election relentlessly talk about the need for more jobs. Unless the government creates more jobs—unlikely in this time of budget cutting—where will hundreds of thousands of jobs so desperately needed come from?

I expect job growth will reaccelerate later this fall. U.S.companies are very profitable and their balance sheets are about as strong as they have ever been; it is not a question of whether businesses can hire more it is a question of their willingness.

Assuming oil prices don’t spike higher again and policymakers don’t misstep with regard to raising the debt ceiling limit, then I think businesses will slowly get their groove back and pick-up their hiring. The job gains will be broad-based across industries, including manufacturing, transportation and distribution, professional services, healthcare, retailing and leisure and hospitality.

Republicans in Congress are demanding deep spending cuts in return for raising the $14.3 trillion U.S. debt ceiling, something the administration says must happen by early August. From your point of view, how important is this battle to Americans who are worried about their mortgages, their jobs and sending their kids to college? Do you think the debt limit should be raised?

It is absolutely vital for Congress and the Administration to come to terms and to raise the debt limit in the next few weeks. If they don’t do this by late July, then stock and bond markets will weaken, and if they don’t by early August, the economy will be thrown into another recession. Our fiscal problems will quickly become even worse. I am hopeful policymakers will be able to work this out soon, but with each passing day I grow more worried that I am wrong.

And I’m not the only one. Investors and the rating agencies are signaling their growing angst over the process.

May's Jobs Breakdown

Fri, 3 Jun 2011 10:00 GMT

U.S. employment faltered last month. Gasoline prices and supply-chain issues were part of the problem, but what else is wrong? Mark Zandi discusses with the CNBC crew.

Where is Housing Headed?

Tue, 24 May 2011 13:05 GMT

Home sales remain weak, and prices have farther to fall. There's light at the end of the tunnel, but it's a long tunnel. Mark Zandi explains why to Bloomberg.

UPDATE: Mark has posted a policy paper on the need to help U.S. housing get out of its slump

Reasons for Optimism�and Caution

Fri, 13 May 2011 08:56 GMT

Pete Davis blogs on Mark Zandi's talk before the National Economists Club. An excerpt:

He expects 3% real GDP growth this year, like last year, and 4% next year. "There won't be a lot of progress on the unemployment rate this year [currently 9.0%] because of labor force growth from people returning to the job market"...

...In the Q&A, Zandi estimated state and local fiscal travails would put a 0.4% drag on the economy this year. Normally, it adds 0.25% to the economy. This year, state and local governments will cut about 500,000 jobs, and they are expected to cut another 250,000 jobs going forward.

Before the recession, the non-accelerating inflation rate of unemployment (NAIRU) was about 5%. It is somewhere between 5.5% and 6% now with increased numbers of long-term unemployed.

UPDATE: An audio excerpt of Mark's talk at the NEC is here.

Is Another Housing Crash Coming?

Wed, 11 May 2011 11:00 GMT

Mark Zandi talks with the New York Times' David Leonhardt about the U.S. housing market's current woes:

Q. I’m struck at how much higher the rent ratio still is in many places, relative to its average from 1990 to 2010. It’s about 18 in Washington (relative to a 1990-2010 average of 13), about 17 in Boston (relative to 15) and 15 across all metropolitan areas (relative to 11). Is there any reason to think the ratio should remain higher in the future than it was in the not-too-distant past? Or should we expect the ratio to continue falling in coming years, either through further house-price declines or through rent increases?

A: I expect the house-price-to-rent ratio to continue falling at least through the remainder of this year and next. National house prices are set to decline by 5 percent this year, and apartment rents are on track to rise by about 5 percent. I do expect house prices to stabilize in 2012, but rents will continue to rise strongly.

Supporting the strong rent growth is declining apartment vacancy rates. Apartment demand is healthy given the better job market and accelerating household formation, particularly among younger households that generally rent, and the ongoing foreclosure crisis which is forcing families from home ownership into renting. Apartment construction is also especially low by historical standards. If this script roughly holds, the house-price-to-rent ratio will be back close to its long-run average in most areas of the country by 2013.

Forecast Assumptions

Mon, 9 May 2011 08:49 GMT

Monetary policy

The Federal Reserve is expected to follow through on its commitment to engage in quantitative easing through June. The Fed will complete its purchase of $600 billion in Treasury securities, in addition to the $300 billion needed to offset those securities that will run off the Fed’s balance sheet during this period. Despite the recent firming in core inflation and the decline in the unemployment rate, policymakers are also expected to maintain their current zero interest rate policy until early 2012.

However, additional quantitative easing will not be necessary, as the job market is steadily improving and underlying inflationary pressures are beginning to build. This will be a relief to Fed policymakers given the withering criticism they have received from global central banks fearful of the economic implications of their appreciating currencies, fixed income investors worried about accelerating inflation, and Congressional Republicans concerned that the Fed is overstepping its mandate and conducting a form of fiscal policy.

While the criticisms are largely overdone, QE does complicate the Fed’s eventual exit strategy from its highly stimulatory monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at more than $2.5 trillion, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult for the Fed to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

Despite the economy’s better prospects, the Fed is not expected to raise rates until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, not the federal funds rate, will likely be the key target rate until the Fed successfully drains the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy

There will be little progress in reducing the budget deficit in the current fiscal year; the deficit appears set to come in near $1.3 trillion in fiscal 2011, equal to 9% of GDP. This is about the same deficit as in fiscal 2010 and is only a bit less than the record $1.4 trillion deficit, or 11% of GDP, in fiscal 2009.

Adding to this year’s deficit is the tax cut deal the Obama administration reached with Republican congressional leaders late last year. While fiscal policy will still not add to economic growth this year, especially after recent spending cuts, at least it will not be much of a drag. By delaying any fiscal drag, the deal helps ensure that the fragile economic recovery will soon evolve into a sturdy expansion.

A much better economy and the fading of the fiscal stimulus will result in a quickly improving deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the so-called structural budget deficit—the deficit consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the so-called sustainable budget deficit, which is closer to 2.5% of GDP.

Given the divided government, it is assumed that policymakers will not meaningfully address this gap during the remaining two years of President Obama’s term. It is assumed that policymakers will find the political will early in the next presidential term to set out a credible path to a sustainable deficit. This will include both spending cuts and tax increases.

U.S. dollar

The U.S. dollar is trading in the fairly tight range that has prevailed since the financial panic hit almost three years ago. From a long-run perspective, the dollar is roughly appropriately valued against the euro, somewhat overvalued against the British pound, and a bit undervalued against the Japanese yen and Canadian dollar.

On a broad, trade-weighted basis across all currencies and over the long run, the dollar is expected to depreciate modestly. Concerns that the dollar will experience a rapid broad-based depreciation at some point are overdone given that the dollar accounts for nearly two-thirds of global reserves, and that the U.S. remains far-and-away the global economy’s largest and most stable economy.

Energy prices

Oil prices have surged recently because of the mounting turmoil in the Middle East. West Texas Intermediate crude oil is trading well over $100 per barrel, and Brent is trading closer to $120 per barrel. WTI is expected to average close to $100 per barrel this year, a significant change from the $90 per barrel average assumed earlier in 2011. While the unrest has not yet had a significant impact on global oil supplies and is not expected to, a risk premium of approximately $10 per barrel has been built into oil prices; it will take most of the year for this to fade away.

The risk to the oil price outlook is weighted toward even higher prices. It is impossible to gauge whether the civil unrest will spread to major oil producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, a barrel of WTI is expected to settle back down below $100 by next year. Longer run, oil prices are expected to trend steadily higher, at a pace above overall inflation.

Natural gas prices remain low, particularly compared with oil prices, at near $4 per million BTUs, and will have trouble keeping up with oil prices over the next several years.

U.S. Jobs: Did Somebody Flip a Switch?

Fri, 6 May 2011 09:30 GMT

Mark Zandi and the CNBC crew analyze the big April surprise in U.S. job growth.

Visit msnbc.com for breaking news, world news, and news about the economy

Bin Laden's Toll

Tue, 3 May 2011 12:05 GMT

Washington Post columnist Ezra Klein has some sobering thoughts about what Bin Laden did to the U.S. -- or rather, caused us to do to ourselves.

For bin Laden... success was not to be measured in body counts. It was to be measured in deficits, in borrowing costs, in investments we weren’t able to make in our country’s continued economic strength. And by those measures, bin Laden landed a lot of blows.

To which Mark Zandi adds:

It is an excellent point. 9/11 set off a chain of events that is costly at least $250 billion a year ($150 billion in Iraq and Afghanistan) and another $100 billion on homeland security by government and businesses. That's pretty close to what policymakers say our spending cut goal should be over the next decade.

Dealing With the Deficit

Fri, 29 Apr 2011 10:41 GMT

Will Washington manage a graceful resolution? Mark Zandi discusses with Bloomberg News.

Bernanke's Press Conference

Wed, 27 Apr 2011 14:14 GMT

More Pain at the Pump

Tue, 26 Apr 2011 08:42 GMT

Gasoline prices are again becoming a preoccupation of consumers and forecasters. Mark Zandi talks with Fox Business News.

Rent or Buy?

Mon, 18 Apr 2011 12:22 GMT

NPR's Planet Money team came around last week looking for some data that can help guide the choice of renting versus owning. We provided some, which they've put into a helpful format on their blog. Excerpt:

How much do houses cost relative to income?

This is called the price-to-income ratio. It's the median home price divided by median household income.

During the boom, this ratio shot way up, as home prices rose faster than incomes. Now, it varies from place to place: In some cities it's higher than historical norms, suggesting home prices have further to fall. In others, it's lower, suggesting houses are a good buy...

Budget Sanity

Sun, 17 Apr 2011 21:51 GMT

Princeton University economist Alan Kreuger, who is slated to appear as a guest speaker at next month's Moody's Analytics Economic Outlook Conference, penned an op-ed for The New York Times this past weekend. An excerpt:

A Shot at a Sane Budget

PRESIDENT OBAMA has been criticized as too slow to engage in major debates and too timid to make difficult decisions.

Some have argued that his budget speech last week fit that narrative. He waited to deliver his speech until five months after his own fiscal commission proposed steep cuts to spending and tax deductions to bring the deficit under control, and a week after Representative Paul D. Ryan, the Wisconsin Republican who leads the House Budget Committee, proposed to replace Medicare with a voucher-like program for those now under age 55.

In one important respect, however, Mr. Obama’s deficit speech disproves the caricature, and contains a bold, serious and timely proposal...

What I have in mind is his endorsement of a trigger that would automatically kick in to reduce spending and tax expenditures if Congress and the administration fail to bring the debt under control...

In essence, Mr. Obama proposed a rule that will enable us to get ahead of the long-run budget problem, and provide predictability and certainty to the federal budget.

The Uses of Brinksmanship

Sun, 17 Apr 2011 21:38 GMT

The following was published in The Philadelphia Inquirer, Sunday April 17.

by Mark Zandi

It is easy to be gloomy about our nation's fiscal problems. The federal government narrowly averted a shutdown over the 2011 budget and it looks as if lawmakers plan to play chicken over the fast-approaching national debt ceiling. These same lawmakers must soon reach agreement on long-term government spending and tax policy, or the nation will suffer fiscal and economic ruin. Yet I'm optimistic.

Lifting the debt ceiling by July 4 is absolutely vital; otherwise the Treasury will be unable to borrow and be forced to slash spending. As it happens, the gap between federal revenue and expenses reaches its deepest point of the year in mid-July, nearly $6 billion per day. The Treasury will pay its bills until nothing is left, then simply stop.

No government function will be spared. Never mind keeping national parks open or funding Planned Parenthood; in question will be payment for our soldiers, Social Security and Medicare checks, food stamps, and unemployment insurance. There is even debate about whether the government will miss interest and principal payments on its debt. Such a default would send global financial markets into turmoil, drive interest rates skyward, and cause stock and house prices to crash.

The scenario is so scary as to be unimaginable, and thus is not possible, in my view. More likely, something positive will emerge from all the brinksmanship. In late 1995 and early 1996, when the government last shut down, policymakers averted calamity by making significant reforms to Social Security.

This time, policymakers could agree to change the budget process. President Obama last week called for automatic spending cuts and tax increases if the federal deficit hasn't narrowed sufficiently by the middle of this decade. Even Republicans might find this appealing.

But changing only the budget process won't come close to adequately addressing our long-term fiscal problems. That requires fundamental changes to spending and tax policy.

The good news is that a political consensus is forming between the rational right and rational left. Two bipartisan commissions have now concluded that both spending cuts and tax increases are necessary, and that the biggest part of deficit reduction should come from less spending. Historical experience suggests that countries that tackle their fiscal problems by spending less see their economies perform better in the long run.

Besides freezing discretionary spending, Congress must put entitlement programs on solid financial ground, permanently. Indexing the Social Security retirement age to longevity, means-testing benefits, and tying them more accurately to inflation are all ways to do this. The changes should not affect those nearing retirement, who counted on the current system in their planning. But younger workers have decades to make the necessary adjustments.

Tax reform, meanwhile, should focus on reducing tax expenditures - those exclusions, exemptions, deductions, and credits that currently cost the federal government close to $1.2 trillion per year. The mortgage-interest deduction is among the largest of these, but hundreds of other loopholes indirectly pay for tuition, health insurance, child care, local property taxes, and so on. From an economic perspective, there is no difference between eliminating tax loopholes and cutting government spending; the result is the same.

Limiting tax expenditures could raise enough revenue to allow lower marginal tax rates for individuals and corporations. This might help end the decade-old political war over tax rates for those making more than $250,000 a year. It would also make U.S. firms more globally competitive and likely to invest and hire at home.

I'm not saying any of this will be easy; policymakers will almost surely need a push from markets. Interest rates are still low, suggesting the global investors who buy U.S. government debt don't mind our fiscal mess. But their patience stems largely from the lack of alternatives. Europe and Japan have fiscal problems worse than ours and emerging economies are too small to absorb all the available global cash. This won't last. Indeed it may take higher interest rates to convince Americans and their representatives that there is no alternative to solving the nation's fiscal problems.

Even then, it will take political courage to get the job done. Whoever is in charge after the next election will need to show a clear willingness to both raise taxes on the middle class and impose cuts on the future growth of Social Security and Medicare. Supporters will rebel, as did supporters of President George H.W. Bush when he backtracked on his "read my lips" pledge. Bush didn't get a second term, but his brave move led to a federal budget surplus a decade later.

No leader can really change anything without being willing to give up everything. Our nation has overcome many daunting challenges, mostly because we had leaders who put the nation's future ahead of their own. It is time for our current leaders to do the same, and I'm optimistic they will.

The Booming 1930s

Tue, 12 Apr 2011 12:29 GMT

The New York Times' David Leonhardt interviews Alexander J. Field, an economist at Santa Clara University and author of “A Great Leap Forward,” which argues that the Great Depression actually set the stage for the post-World War II boom.

Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance. As I said in the title of my 2003 American Economic Review article, the 1930s were indeed the most technologically progressive decade of the century...

A number of products available in the 1920s moved from low-penetration boutique goods to mass-produced commodities. Case in point: mechanical refrigerators. Less than 3 percent of U.S. households had them in 1929, and they were expensive and unreliable, requiring extensive after-market service. In 1941, 44 percent of households had mechanical refrigeration, including 56 percent of urban households....

An Encouraging U.S. Jobs Report

Fri, 1 Apr 2011 16:38 GMT

At long last, the monthly payroll count is beginning to reflect recovery. Mark Zandi joined the CBNC crew to discuss.

Before the Senate

Tue, 29 Mar 2011 15:09 GMT

Testimony on the future of housing and mortgage finance before the Senate Banking Committee.

The video is here. (Mark Zandi's testimony begins about 30 minutes in.)

Calendar Note: Housing Finance on Deck

Wed, 23 Mar 2011 12:11 GMT

This just in from Housing Wire:

Senate set to hear proposals for housing finance future

The Senate Banking Committee will hear proposals March 29 for replacing Fannie Mae and Freddie Mac in a new housing finance system... [The committee] will hear testimony from three influential policy shapers.

The first will be Mortgage Bankers Association Chairman Michael Berman, who supported the white paper when it was released. The MBA's own proposal, released more than one year ago, includes a return of private capital, while the government would continue to explicitly guarantee lower-risk mortgage-backed securities.

Janneke Ratcliffe, a senior fellow for the Center for American Progress, also will testify. In January, the group released its own proposal, as well, that would set up chartered mortgage institutions guaranteeing principal and interest payments on MBS. These CMIs would outnumber the previous GSEs and would be private institutions.

Finally, Moody's Analytics Chief Economist Mark Zandi will offer his proposal to the senators. Just before the Treasury white paper came out, Zandi released one of his own. In Zandi's hybrid housing system, the private sector would fund most of the mortgages in the country, but the market would be guaranteed against catastrophe by the government.

Aftershocks and the U.S. Economy

Tue, 22 Mar 2011 10:16 GMT

The following appeared in Sunday's Philadelphia Inquirer

by Mark Zandi

The U.S. economy can’t seem to catch a break. Just as the recovery was set to hit its stride, new threats emerged: Unrest in the Middle East has caused oil prices to surge, and Japan’s unfolding natural disaster has hung a cloud of uncertainty over financial markets. While the economy has enough going for it to weather these problems reasonably well, it could suffer a significant setback if anything else goes wrong.

Few things are worse for the U.S. economy than high energy prices. As more consumer cash is spent on gasoline, less is available for everything else. High energy prices act as a tax increase, and a particularly pernicious one at that: While your tax dollars pay for useful services such as education and roads, money spent on gasoline goes primarily to foreign oil producers, doing little economic good at home.

The increase in the gasoline “tax” to date has been substantial. Even if prices don’t rise beyond their current level — around $3.50 a gallon — U.S. consumers will spend an extra $60 billion on gas this year. This is equivalent to about half the savings from this year’s temporary reduction in the payroll tax, which was passed when lawmakers agreed to extend the Bush-era tax cuts last year.

Higher gasoline prices are particularly hard on low- and middle-income households, which spend a relatively large share of their budgets on energy.

Policymakers have no effective response to higher energy prices. The Federal Reserve faces a dilemma: Should it try to shore up the weakened economy by lowering interest rates as energy costs rise, or should it respond to the added inflation pressure by raising interest rates? Because neither option is clearly preferable, the central bank will likely do nothing.

The unpredictability of events in the Middle East, and therefore of energy prices, is even more disconcerting. Unrest in either Iran or Saudi Arabia — which are among the world’s largest oil producers — would send prices further skyward. If gasoline rose above $4 a gallon for more than a couple of months, it would likely be too much for the economy to bear, bringing on another recession.

It’s also impossible to know how the disaster in Japan will play out. The earthquake and tsunami were a huge blow to that country, but if history is a guide, the resilient Japanese will rebuild quickly. It took Japan’s economy no more than a year to recover from the 1995 earthquake in Kobe.

Japan will probably need more U.S. agricultural goods, food products, and pharmaceuticals after the disaster, which would boost the American economy. In the same vein, Japanese auto, semiconductor, and computer manufacturers can fairly quickly shift production to the United States, where they still have excess capacity.

There has been some hand-wringing in the financial markets over the possibility that Japanese institutions could sell their substantial holdings of U.S. Treasury bonds, sending interest rates here higher. But this concern is overblown. The amounts involved are modest, and both the Federal Reserve and the Bank of Japan are committed to buying lots of U.S. bonds.

Of course, it is easy to envision darker scenarios if Japan’s unfolding nuclear problem becomes catastrophic. Just contemplating this possibility has sent global stock prices down sharply. And it is already clear that the events in Japan will seriously alter the global energy landscape. This is a major setback for the nuclear power industry, and fossil fuels will have to fill the void for the foreseeable future. That means even more upward pressure on oil prices.

Assuming that the unrest in the Middle East has peaked and that the Japanese nuclear crisis ends without a major radiation disaster, the U.S. economy will continue to gain traction and recover. U.S. companies as a group are very profitable, and their balance sheets are strong. Whether they can invest and hire more is no longer in doubt; the issue is their willingness to do so. With the Great Recession fading from memory, and uncertainty abating after last year’s epic debates over health care, financial regulation, and tax policy, businesses should grow bolder and expand more aggressively.

But that’s provided nothing else goes wrong. Confidence remains fragile among business managers, and it won’t take much to push them back into their shells.

Congress and the Obama administration can’t risk a misstep. Given the improved economy and our daunting fiscal challenges, policymakers are rightly moving from fiscal stimulus to fiscal restraint. But government spending can’t be cut too deeply or too soon. As recent events show, the economic coast is not clear.

The Wave from Japan

Thu, 17 Mar 2011 15:50 GMT

Unless Japan's nuclear power mishap worsens severely, there's little reason to fear an economic spillover in the U.S., Mark Zandi tells CNBC.

MZ: "...The U.S. and global economies will not be materially impacted by the Japanese disaster, assuming of course that the nuclear crisis abates without any significant spillage of radioactive material.

The principal linkages between Japan and the U.S. global economies are trade, financial markets, and commodity markets. The U.S. trade balance with Japan will not be significantly impacted. U.S. exports to Japan will suffer somewhat, but mitigating the impact is that the U.S. exports things the Japanese will need more of including agricultural and food products and pharmaceuticals. Moreover, U.S. imports from Japan will also weaken as Japanese producers will shift some production of vehicles, semiconductors and computers to the U.S. where Japanese companies have excess capacity.

Interest rates will not be materially impacted as the Bank of Japan is upping its quantitative easing and the Federal Reserve is now much more likely to complete QE2. The Japanese disaster will take the edge off of oil and other commodity prices, at least temporarily, as Japanese demand for commodities will be weaker with the weaker economy..."

More ...

Did the Stimulus Work?

Wed, 9 Mar 2011 08:41 GMT

The federal stimulus program passed early in 2009 has become a favorite target for opponents of the Obama administration's economic policies. A frequent assertion on Sunday talk shows and elsewhere is that the stimulus failed to prevent the U.S. unemployment rate from rising. But such talk blurs the facts. There were indeed some forecasts that misjudged the trajectory of U.S. joblessness—one in particular that the White House Council of Economic Advisers came to regret.

But not all predictions of the stimulus' impact were as far off the mark. In January of 2009, Mark Zandi testified that if the then-pending stimulus legislation were passed:

"...there will be 3 million more jobs and the jobless rate will be more than 1.5 percentage points lower by the end of 2010 than without any fiscal stimulus. Without a stimulus, unemployment will rise well into the double digits by this time next year, and the economy will not return to full employment until 2014."

That testimony included the following projections:

Note the forecast was based on a proposal for some $825 billion in stimulus spending; the final bill was around $780 billion. As the table shows, unemployment was projected to average 9.51% in 2010. As it happened, according to the Bureau of Labor Statistics, unemployment in 2010 averaged 9.63%.

How High for Oil?

Mon, 7 Mar 2011 12:46 GMT

Geopolitical unrest raises the risks of another spike, which could mean some unpleasant consequences for the economy. CNBC asked Chris Lafakis to elaborate.

Oil continues to climb as fighting in Libya intensifies, how high do you think it will go?

CL: WTI crude oil futures have risen from $86.20 to $104.72 while we have lost less than 1% of global crude oil production. Since economic analysis suggests that oil prices should rise by a lot less than 21.5 percent given a 1 percent reduction in oil supply (that has since been filled by Saudi by the way), we can be sure that there is a significant supply uncertainty premium currently embedded in the price of oil. It is difficult to predict when this premium will evaporate, but rest assured it will at some point. A supply uncertainty premium of this magnitude is unsustainable. I would be very surprised if WTI prices pierced $110.

Heating oil is going up as well as gasoline, what kind of impact will this have on the economy as consumers get squeezed?

CL: Rising heating oil and diesel prices do about 44 percent as much damage as rising gasoline prices. The $18.50 increase in oil prices that we’ve experienced over the past couple weeks will, if sustained over the course of a year, cost consumers $20.4 billion just in higher home heating oil and diesel costs. It will costs consumers $46.3 billion in higher gasoline costs if sustained over a year. That’s equivalent to more than a third of the $120 stimulus that we got from the payroll tax reduction in the tax compromise last December.

Employment: Behind the Headlines

Sun, 6 Mar 2011 10:59 GMT

Behind the top-line jobs report: Mark Zandi explores the numbers for Bloomberg.

Better News on Employment

Fri, 4 Mar 2011 09:59 GMT

U.S. payrolls made up ground in February, giving hope for faster job growth ahead. Mark Zandi helped CNBC parse the data.

When to Cut the Budget

Wed, 2 Mar 2011 14:50 GMT

Mark Zandi explains to Bloomberg why it makes sense to delay government budget cuts until the economy is stronger.

Jobs and Budget Cuts: How Big an Impact?

Wed, 2 Mar 2011 11:43 GMT

Debate is raging today both on and off Capitol Hill about the economic impact of proposed federal budget cuts. Even NPR, not normally a fount of in-depth economic reporting, gives the issue a pretty good airing.

GOP Budget Cuts: Job Killer Or Necessary Step?

by Liz Halloran

The debate over whether deep federal spending cuts would slow the nation's economic recovery intensified this week.

One side says job losses will grow as government spending shrinks, while the other insists private jobs will flourish only when government retreats.

Supporters from each side cranked up the volume after Mark Zandi, chief economist at Moody's Analytics, released a report that predicts GOP spending cuts would lead to job losses of up to 700,000 through 2012.

Zandi's assessment came on the heels of a new Goldman Sachs analysis suggesting that the GOP deficit reduction plan would shave 2 percentage points from the gross domestic product, a measure of the value, including government spending, of all goods and services produced in the country. Most economists predict GDP will grow about 3 percent this year, a reasonably healthy pace. If the figure were to fall to 1 percent, the labor market would suffer.

Some conservative economists argue that potential job losses are being overstated and that a credible plan to begin paring down the nation's historic deficit would help job growth. It could do that by reducing market uncertainty and encouraging private investment.

To define the arguments of both sides — and to get an idea of common ground on which deficit hawks and doves could come together — we put questions to two prominent economists...

Read the whole thing.

Forecast Assumptions

Tue, 1 Mar 2011 12:26 GMT

Monetary policy. Monetary policy is expected to remain highly stimulatory throughout 2011. The Federal Reserve’s current zero interest rate policy will stay in place into 2012, and the Fed will complete its stated intention to purchase $600 billion in Treasury securities by June; this is in addition to the $300 billion that will be needed to offset those securities that will run off the Fed’s balance sheet during this period. A stubborn nearly double-digit unemployment rate and core inflation that is firmly below 1% are behind policymakers’ aggressive stance.

However, additional quantitative easing will not be necessary, as the unemployment rate will be moving definitively lower by this summer and core inflation has already begun to stabilize. This will be a relief to policymakers, given the withering criticism they have received from other central banks over currency concerns, fixed income investors fearful of accelerating inflation, and congressional Republicans who say that the Fed is overstepping its mandate.

While these criticisms are largely overdone, QE does complicate the Fed’s eventually exit strategy from its highly stimulatory monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at more than $2.5 trillion, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

The Fed is not expected to raise rates until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, is likely to become the target rate. The interest rate on reserves is expected to end 2012 at 2% and will not normalize to just over 4% until late 2013.

Fiscal policy. There will be little progress in reducing the budget deficit in the current fiscal year; it appears set to come in above $1.3 trillion in fiscal 2011, 9% of GDP. This is about the same as in fiscal 2010 and only a bit smaller than the record $1.4 trillion fiscal 2009 deficit.

Adding to this year’s deficit is the late 2010 budget deal between the Obama administration and Republican congressional leaders. The major provisions include the extension of current personal income tax rates for two more years, the extension of the emergency unemployment insurance program through the end of this year, a sizable payroll tax cut, and the expensing of any business investment. The size of the deal was a surprise, and while fiscal policy will still not add to economic growth this year, at least it will not be much of a drag; thus the fragile economic recovery will soon evolve into a sturdy expansion.

A much better economy and the fading of fiscal stimulus measures will result in a quickly narrowing deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the “structural” budget deficit—that consistent with an economy operating near its potential—of close to 5% of GDP. However, this is still well above the long-run sustainable deficit of around 2.5% of GDP. Given the current divided government, it is assumed that policymakers will not meaningfully address this budget gap until 2013.

U.S. dollar. The U.S. dollar continues to trade in the fairly tight range that has prevailed since the financial panic hit almost three years ago. Notwithstanding the temporary ups and downs, from a long-run perspective the dollar is roughly appropriately valued against the euro, somewhat overvalued against the British pound, and a bit undervalued against the Japanese yen and Canadian dollar.
The dollar is significantly overvalued against the Chinese yuan and is expected to depreciate 5% annually over the next five or six years. U.S. policymakers would like this to occur much more quickly given the very wide trade deficit with China, but the Chinese are unlikely to accommodate this, fearing it would be a problem for their export-oriented manufacturers. With the dollar overvalued against the yuan by some 30%, the risk of protectionist sentiment boiling over is uncomfortably high.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns that the dollar will experience a rapid broad-based depreciation are overdone.

Energy prices. Oil prices have surged in recent weeks with the turmoil in the Middle East. A barrel of West Texas Intermediate crude is trading well above $100. Over the past two years prices have ranged from $40 at the start of 2009 during the depths of the recession to a record of almost $150 in the summer of 2008.

The price of oil is now expected to average closer to $100 this year, a significant change from the previously assumed $90. While the unrest has not significantly restricted global oil supplies, and is not expected to, a risk premium of about $10 per barrel has been built into prices, which will take much of the year to fade away. This increase in assumed oil prices shaves almost 20 basis points off expected 2011 real GDP growth. The current risk to the outlook is for even higher prices, based on the potential for civil unrest to spread to major oil producers such as Iran and Saudi Arabia.

Assuming that the worst of the unrest is at hand, oil prices are expected to settle back down below $100 per barrel by next year. Longer-run oil prices are expected to trend steadily higher, increasing at a pace above the overall rate of inflation.

Natural gas prices remain low, particularly compared with oil prices, at nearly $4 per million BTUs, and they will have trouble keeping up with oil prices over the next several years. A very substantial glut of natural gas has developed as demand has not fully recovered from the recession, and supply has increased in response to the very high prices of 2008. Prices are expected to eventually gain traction as cheaper gas attracts alternative uses.

Washington's Budget Battle

Tue, 1 Mar 2011 08:18 GMT

Mark Zandi tells CNBC's Kudlow & Co. why shrinking the federal deficit is good for the economy, but a rush to slash spending isn't.

Behind the Spike in Oil Prices

Sun, 27 Feb 2011 17:37 GMT

Mark Zandi helps CNN understand how unrest in the Middle East hits U.S. consumers and businesses.

New Zealand's Earthquake: Counting the Cost

Fri, 25 Feb 2011 15:36 GMT

Matt Robinson helps assess the economic damage of New Zealand's latest natural disaster for the Australia Network.

How High for Oil?

Thu, 24 Feb 2011 08:17 GMT

Chris Lafakis helps CNBC gauge the impact of Middle Eastern unrest on U.S. pocketbooks.

Oil, Austerity and the U.S. Recovery

Wed, 23 Feb 2011 12:39 GMT

On Bloomberg, Mark Zandi connects the dots from Mideast oil to Midwest budget battles to the pace of U.S. recovery.

And on NPR's Marketplace, Mark discusses the state of budget negotiations in Washington.

More About Obama's Budget

Tue, 22 Feb 2011 08:24 GMT

The following appeared in the New York Daily News, Saturday Feb. 19:

It won't be easy, but President Obama must address the federal deficit sooner, not later

By Mark Zandi

As economists like to say, there's no such thing as a free lunch. Policymakers had no choice but to respond to the financial panic and the Great Recession with the Troubled Asset Relief Program (TARP), a massive fiscal stimulus and easy money. If they hadn't, the economy would be in a much worse place today and the cost to taxpayers even greater. But it has cost us big time, as the nation's budget deficit and debt load are out of control.

Unfortunately, President Obama's recently released 10-year budget plan doesn't engender much confidence that our fiscal problems will be resolved anytime soon. Obama has put forth a budget that isn't sustainable even on paper. Even with a freeze on discretionary government spending - the President's principal response to the fiscal outlook - projected deficits are too large to stem an unmanageable rise in the nation's debt.

It's easy to be pessimistic about the prospects for getting our fiscal act together in a reasonably graceful way, but - even after delivering what might seem like a grim diagnosis of this budget - I'm optimistic. Why? While our fiscal problems may appear overwhelming, they actually aren't. The economy is gaining traction and the deficits will narrow as the fiscal stimulus fades and tax revenues rise. Even if this President and Congress didn't do much of anything, the deficit would be nearly halved between this year and early on in the next President's term (whether that be Obama or his Republican challenger).

Of course, this is far from good enough. Even when the economy is in full swing, the deficit will still be unsustainably large. Interest payments on the debt will continue to mount, and unless policymakers make some hard choices on government spending and tax policy, the cost will ultimately swamp us.

The good news is that an intellectual consensus is forming between the rational right and the rational left of the political spectrum on what choices to make. Two bipartisan fiscal commissions recently came to the same conclusion that both government spending cuts and tax increases are necessary to address our fiscal problems, and that most of the onus should be on reducing spending. Based on historical experience with fiscal austerity here and overseas, economies of countries that tackle their budget problems primarily through spending cuts perform better in the long run.

In addition to freezing discretionary spending, the focus should be on putting Social Security on solid financial ground, forever. This can be accomplished by indexing the retirement age to longevity, reducing benefits for very high income households and increasing future benefits on a more accurate measure of inflation. These changes should not apply to those nearing retirement - they have done their financial planning based on the current system - but to younger workers who have decades to make the necessary adjustments to their saving.

As far as taxes are concerned, the focus should be on reducing exclusions, exemptions, deductions and credits that riddle the tax code and cost the federal government more than $1 trillion each year. The mortgage interest deduction is one of the largest and most popular, but there are hundreds more, indirectly funding student expenses, health insurance, childcare costs, local property taxes and on and on. Limiting tax expenditures can raise so much revenue that policymakers could even lower marginal tax rates for individuals and corporations, making such a change more politically palatable.

While all of this is doable, it won't be easy, and policymakers will almost surely need a push from global investors. With interest rates remaining very low, investors who are buying our debt have been incredibly patient with us. However, this is largely because in these tough times, they don't know where else to put their money. Europe's and Japan's fiscal problems are worse than ours - the European debt fiasco is the most recent case in point - and emerging economies are too small to absorb all that global cash seeking a home. But this won't last; in fact, it may take a period of much higher interest rates to convince the American electorate (and thus policymakers) that there is no alternative to solving the nation's fiscal problems.

Even then, to get all of this done will take political courage. Whoever is in charge after the next election will need to take a potentially career-ending political risk and show a clear willingness to both raise taxes on the middle class and impose cuts on the future growth of Social Security. Supporters will rebel, as did supporters of the first President Bush when he backtracked on his "read my lips" no-tax pledge. Bush didn't get a second term, but this brave move was the political catalyst that ultimately produced a federal budget surplus a decade later.

No leader can really change anything without being willing to give up everything. Our nation has overcome many daunting challenges, mostly because we had leaders who put the nation's future ahead of their own. It is time for our leaders to do the same, and I'm optimistic that they will.

What's Wrong With the Budget

Tue, 15 Feb 2011 08:54 GMT

Gus Faucher explains both the politics and the accounting in Obama's 2012 budget, here on Dismal Scientist, and here on NPR's Takeaway.

A Word from the White House

Mon, 14 Feb 2011 15:19 GMT

With the new Obama budget released today, the director of OMB offers this handy capsule version.

Reforming Fan & Fred

Fri, 11 Feb 2011 10:28 GMT

Mark Zandi discusses mortgage finance reform with CNBC.

What to Do with Fannie & Freddie

Tue, 8 Feb 2011 08:16 GMT

From WSJ.com:

Moody's Zandi: Replace Fannie, Freddie With Public-Private Hybrid

Mortgage rates could be one percentage point higher and house prices 10% lower if the U.S. mortgage market were fully privatized, according to a paper to be released Tuesday by Mark Zandi, chief economist at Moody's Analytics.

The calculations help build Mr. Zandi's case for replacing Fannie Mae and Freddie Mac with new entities constituting a public-private hybrid system for financing home loans.

The proposal is the latest in a growing list of white papers by economists and academics looking to influence the debate over how to reinvent the nation's mortgage market. The Obama administration is set to issue its own recommendations as soon as this week.

Read the whole thing

UPDATE: The Obama Administration has released its own plan for reforming Fannie & Freddie.

January Jobs: A Weather Story?

Mon, 7 Feb 2011 10:33 GMT

Catching up on the January jobs debate:

Four Reasons to Worry

Tue, 1 Feb 2011 15:39 GMT

Mark Zandi gives NPR's Planet Money four reasons to worry about the economy:

Housing
Europe
China
State and local governments

From Here to the Nile

Tue, 1 Feb 2011 07:55 GMT

The Nightly Business Report asks Mark Zandi about U.S. housing and the impact of unrest in Egypt. (Segment starts about 4:20.)

Watch the full episode. See more Nightly Business Report.

Prepping for State

Mon, 24 Jan 2011 10:32 GMT

ABC News gets a quick economic briefing to prepare for the President's big speech.

Fixing Fannie and Freddie

Mon, 24 Jan 2011 08:51 GMT

The following appeared in The Philadelphia Inquirer, Jan. 23, 2011:

Healing the Mortgage Ills

By Mark Zandi

Washington is gearing up for its next epic policy debate: what to do about Fannie Mae and Freddie Mac.

Fannie and Freddie are the two mortgage behemoths that the federal government created decades ago, and then took over as the financial system unraveled in 2008. What policymakers decide will determine how high mortgage rates go in the future, how easy it will be to obtain a home loan, and whether the popular 30-year fixed-rate mortgage continues to exist.

No one wants to return to the situation that existed just before the financial crisis. Fannie and Freddie had evolved into odd combinations of public and private: profit-maximizing, shareholder-owned companies with unique charters and implicit - but never clearly spelled out - federal backing. Each could thus borrow more cheaply than other financial institutions could, and both used that advantage to earn rich profits investing in higher-yielding mortgages. Fannie and Freddie were also allowed to operate with very thin capital cushions to protect them if their investments went bad.

There was a political quid pro quo for these advantages: Fannie and Freddie had to give a significant share of their mortgage loans to lower-income homeowners and members of disadvantaged groups. It wasn't a bad goal, although it was probably taken too far, and the nation clearly paid a high price for it. Of all the federal government's bailouts during the financial panic, those of Fannie and Freddie will cost taxpayers the most - almost $150 billion. Rescuing Detroit's automakers cost about $15 billion, while the bank bailouts resulted in a net gain for taxpayers.

One solution to the Fannie and Freddie problem is to formally and permanently make them part of the federal government. The chief benefit: a guaranteed steady flow of credit, at reasonable rates, in good and bad economic times.

But nationalizing Fannie and Freddie would saddle the government with significant new risks, as well as with the institutions' debts, which would add to an already-mountainous federal debt load. In the long run, such a system could also stifle innovation, while tempting lawmakers to subsidize mortgages for favored constituents, distorting a huge part of the U.S. economy.

Another solution is the opposite approach: full privatization. Allow no government backstop for the mortgage market, implicit or explicit. Government might retain a small role, but Fannie and Freddie would be spun out to the private market.

A privatized system would give all parties more incentive to be prudent. Mortgage originators, issuers of mortgage-backed securities, rating agencies, and investors would all suffer if they made bad decisions. Nobody would be too big to fail, and taxpayers would be off the hook - at least in theory.

But full privatization probably works better in theory than it would in practice. Whatever legislators pledged never to do, global investors assume the U.S. government would rescue the housing market in a crisis. Meanwhile, a privatized mortgage-finance system would significantly raise costs for borrowers, and it would be a much less reliable source of credit.

Privatization would also endanger the 30-year fixed-rate mortgage, a bedrock of home lending since the Great Depression. Such loans are practically unique to America; nearly everywhere else, homeowners can obtain only adjustable-rate mortgages, with monthly payments fixed for specified short periods. But because they are risky for banks and difficult to manage, long-term fixed-rate mortgages will almost certainly disappear without some federal support.

Fortunately, there is a middle way between nationalization and privatization. A hybrid mortgage-finance system would allow private institutions and the federal government to share the risks. It holds the most promise for consistent, affordable mortgage loans on prudent terms for borrowers, with minimal costs to taxpayers.

In a hybrid system, some of Fannie's and Freddie's operations would be turned over to the private market, while others would be transferred to the government. Instead of the market-distorting implicit government support for Fannie and Freddie, the government would offer insurance at an explicit price. The hidden cost of Fannie's and Freddie's subsidies to homeowners would also be made visible on the government's books. Private institutions would provide the bulk of the system's capital and would originate and own the mortgages. The government would insure the system against catastrophe, regulate it, and spell out whatever subsidies are given to low-income families or others.

A hybrid system would preserve the key benefits of nationalization and full privatization. Investors would remain on the hook for most losses, keeping incentives in place for prudent lending and risk pricing. The government's involvement, however, would keep mortgage rates lower and help mortgage credit flow freely.

Decisions made in coming months about the future of Fannie and Freddie will affect homeowners and the economy for decades. Success will depend on striking the appropriate balance between the benefits of the private market and the backstop of the federal government. Finding the right balance will result in a stronger housing market, a more stable financial system, and a healthier economy.

China in the House

Wed, 19 Jan 2011 17:23 GMT

Mark Zandi talks with Bloomberg about global imbalances, U.S. housing and more.

Picture Europe

Thu, 13 Jan 2011 11:18 GMT

The graphic wizards at The Economist have boiled down Europe's current situation to a handy set of maps and charts. A nice complement to Dismal Scientist's global map on the Sovereign Risk Tracker page.

The Employment Issue

Fri, 7 Jan 2011 08:15 GMT

Latin American Predictions

Wed, 5 Jan 2011 15:57 GMT

Alfredo Coutino talks with CNN's Latin America desk about the outlook for that region in 2011.

Employment Looking Up, Maybe

Wed, 5 Jan 2011 15:35 GMT

The latest employment numbers look promising. Mark Zandi discusses the outlook with Bloomberg TV:

An Optimist's Guide to the Long Term

Tue, 4 Jan 2011 15:56 GMT

Mark Zandi helps Yahoo TechTicker reach consensus on the long-term outlook.

More of Mark on Yahoo here.

The Year Ahead for Housing

Wed, 22 Dec 2010 09:58 GMT

Mark Zandi talks housing with blogger and real-estate appraiser Jonathan Miller.

Speaking to the Heartland

Fri, 17 Dec 2010 17:07 GMT

Concern about Europe's debt problems stretches as far away as Minnesota. Our colleague Jeet Dutta chats with radio station KDLM in Detroit Lakes.

Download MP3

Forecast Assumptions

Mon, 13 Dec 2010 17:46 GMT

Monetary policy. Monetary policy is expected to remain highly stimulative throughout 2011. The Federal Reserve’s current zero interest rate policy will stay in place into 2012, and the Fed will complete its scheduled purchases of $600 billion in Treasury securities by June, as scheduled. This is in addition to the $300 billion in purchases needed to offset those securities that will run off the central bank’s balance sheet during this period. A stubborn, nearly double-digit unemployment rate and core inflation that is firmly below 1% are behind policymakers’ aggressive stance.

However, additional quantitative easing will be unnecessary, as the unemployment rate will be moving definitively lower by this summer and core inflation will stabilize. This will be a relief to policymakers, given the withering criticism they have received from global central banks over currency concerns, fixed-income investors fearful of accelerating inflation, and congressional Republicans who say that the Fed is overstepping its mandate.

While these criticisms are largely overdone, QE does complicate the Fed’s eventual exit from its highly stimulative monetary policy. The size of the Fed’s balance sheet is expected to peak in mid-2011 at over $2.5 trillion; the Fed has just over $2 trillion on its books, up from $800 billion prior to the start of the financial panic in 2007. It will be difficult to reduce this hefty balance sheet without fueling uncomfortably high inflation at some point.

Despite the economy’s better prospects this year, the Fed is not expected to raise short-term rates until the spring of 2012. The interest rate on reserves is expected to end 2012 at 2% and will not normalize, to just over 4%, until late 2013.

Fiscal policy. There will be little progress in reducing the budget deficit in the current fiscal year; it will come in near $1.3 trillion in fiscal 2011, or 9% of GDP. This is about the same as in fiscal 2010 and only a bit less than the record $1.4 trillion fiscal 2009 deficit.

Adding to this year’s deficit is the deal reached in late 2010 between the Obama administration and Republican congressional leaders. The major provisions include the extension of current personal income tax rates for two more years, the extension of the emergency unemployment insurance program through the end of 2011, a sizable Social Security payroll tax cut, and the expensing of any business investment. The size of the deal was a surprise, and while fiscal policy will still not add to economic growth this year on net, at least it will not be much of a weight. The deal helps ensure that the recovery will evolve into an economic expansion.

A much better economy and fading of fiscal stimulus measures will result in a much smaller budget deficit beginning in fiscal 2012. By fiscal 2014, the deficit is expected to settle in near the “structural” budget deficit—consistent with an economy operating near its potential—of close to 5% of GDP. However, that is still well above the sustainable long-term budget deficit of about 3% of GDP. Given the current divided government, the forecast assumes that meaningful deficit reduction will not take place until at least 2013.

U.S. dollar. The U.S. dollar has firmed in recent months as the prospects for more Federal Reserve quantitative easing have faded and the European debt crisis has revived. The dollar is up most against the euro. In the near term, the dollar is expected to gain further against the euro and, to a lesser extent, the pound. The U.S. recovery is expected to gain traction, and the European economy will backtrack as fallout from the European debt crisis, including financial and fiscal restraint, takes full hold. The European Central Bank and Bank of England will not begin normalizing their monetary policies until well into 2012. Longer run, the dollar is roughly appropriately valued against the euro and somewhat overvalued against the pound.

The dollar is expected to depreciate against the yuan by some 5% annually over the next five or six years. U.S. policymakers would like this to occur much more quickly given the very wide trade deficit with China, but the Chinese are unlikely to accommodate this given the problems it would pose for their export-oriented manufacturers.

On a broad trade-weighted basis, the dollar is expected to depreciate modestly over the long run. Concerns over a rapid broad-based weakening in the dollar are overdone.

Energy prices. Oil prices have moved higher in recent weeks, with the price of a barrel of West Texas Intermediate crude recently trading near $90. Political turmoil in Egypt has had only a small impact on prices, with the problems there not expected to spill over into the key energy-producing regions of the Middle East.

Over the past two years, the price has ranged from $40 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Natural gas prices remain low, particularly compared with oil prices, at under $5 per million BTUs.

Oil prices are expected to remain close to the current $90 per barrel through much of 2011 and range as high as $100 in the next several years. This would be consistent with global demand and supply fundamentals, abstracting from the business cycle. Prospects for even higher oil prices are low given significant global excess productive capacity, particularly in Saudi Arabia. Lower prices would occur only if the global expansion falters.

Natural gas prices will have trouble keeping up with oil prices during the next several years, given a very substantial glut of natural gas. Demand weakened with the recession, and supply has increased substantially in response to previously very high prices. Natural gas prices are expected to average $5 per million BTUs in 2011 and closer to $8.50 over the longer term.

The 2012 Problem

Fri, 10 Dec 2010 09:38 GMT

David Leonhardt gets Mark's take on the consequences of the tax and benefits compromise for growth in 2012:

I asked Mark Zandi of Moody’s Analytics about the 2012 problem — the fact that the tax-cut deal between President Obama and Congressional Republicans would likely reduce economic growth in 2012, as Paul Krugman and others have pointed out.

Mr. Zandi agreed. “In my previous baseline I expected real GDP growth of 2.8 percent in 2011 and 4.2 percent in 2012,” he wrote in an e-mail. “I’m now expecting real GDP growth of 3.9 percent in 2011 and 3.4 percent in 2012.”

Yet Mr. Zandi still favors the package. He explained:

There are four key reasons why slower 2012 growth with the package should not forestall its passage.

First, stronger growth in 2011 (particularly in the first half of 2011) will ensure that the recovery achieves escape velocity. That is, enough GDP growth to generate enough job growth to bring down unemployment and propel the recovery into a self-sustaining expansion. This is a necessary condition for addressing our long-term fiscal problems. Without this additional boost, unemployment would continue to hover near 10 percent throughout 2011 and the recovery would remain very vulnerable to anything that might go wrong. The objective of the Recovery Act was to end the Great Recession and jump-start a recovery. It succeeded. The objective of this package is to ensure the recovery evolves into a self-reinforcing expansion. I’m confident it will do that.

Second, getting unemployed workers back to work more quickly will reduce structural unemployment; the longer people stay out of work the greater the odds they will not get back into the work force as their skills and marketability erode.

Third, it eliminates the need for more quantitative easing; QE is a plus for the economy but a small one and it complicates things enormously with the Fed in their relationship with other central banks and the Republican Congress.

Fourth, despite slower growth in 2012 with the package, real GDP and employment are higher and unemployment lower by year-end 2012 than in the previous baseline.

Hosannas and Hoots

Fri, 10 Dec 2010 08:33 GMT

No comment on this, aside from some curiosity about what David Stockman eats for breakfast.

Trans-Atlantic Outlook

Thu, 9 Dec 2010 10:35 GMT

Mark Zandi talks with Bloomberg News about the Fed and the outlook for the U.S. in 2011.

Washington Calling

Thu, 9 Dec 2010 08:52 GMT

Washington Post policy-wonk Ezra Klein blogs on the new tax/stimulus deal:

I called Moody's chief economist Mark Zandi this morning to see what he thought of the tax cut deal. When it comes to stimulus, Zandi's figures are probably the most influential in the country, and I've cited them several times before on this blog. So what does he think? Well, he likes it. He really, really likes it...

Update: NYTimes econ-pundit Paul Krugman weighs in on language.

Stealth Stimulus?

Thu, 9 Dec 2010 08:43 GMT

The debate on the tax deal shifts from fairness and deficits to whether it will be effective stimulus. Gus Faucher talks with NPR's Marketplace.

Sad Surprise on U.S. Jobs

Fri, 3 Dec 2010 11:14 GMT

November's job numbers were a major disappointment. Mark Zandi discusses with the CNBC crew.

And Gus Faucher explains the numbers to NPR's Marketplace.

A Strategy on Taxes

Wed, 1 Dec 2010 10:24 GMT

Mark Zandi talks with Fox Business News about the tax debate.

Taming the Fiscal Monster

Sun, 28 Nov 2010 17:57 GMT

The following appeared in The Philadelphia Inquirer on Sunday, Nov. 27:

Our fiscal challenges are big, but manageable

By Mark Zandi

Of all our nation's economic worries, none are scarier than the federal government's record budget deficits and mounting debt load. Unless we find a way to make big changes to Social Security, Medicare, and other government programs, and also fix our tax code, the economy will break. The vitriol of the midterm elections and the seemingly broken political process only add to the anxiety.

It may seem odd given all this, but I'm optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn't good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult - for context we spend more than $100 billion a year in Iraq and Afghanistan - but it is doable.

Particularly encouraging is the intellectual consensus now forming. You can see it happening around recent proposals from two different bipartisan commissions formed to tackle long-term federal budget issues. While the proposals will not become law, they lay down important benchmarks and establish the basis for a healthy and ultimately successful debate.

The key point of agreement is that government spending cuts and tax increases are necessary to repair our budget hole. Perhaps more important, both commissions agree that the focus should be on spending restraint. An examination of other periods of fiscal austerity here and abroad suggests that adjusting spending is better for an economy than raising taxes. Where to balance spending restraint with tax increases will be the focus of political battles to come, but judging by the commissions' proposals, an achievable middle ground exists.

The proposals put so-called tax expenditures in the crosshairs. The exclusions, exemptions, deductions, and credits that riddle the tax code cost the government more than $1 trillion each year. The mortgage-interest deduction alone costs more than $100 billion annually. But hundreds of other special provisions fund student expenses, health insurance, child care, local property taxes, and on and on.

These tax expenditures are more properly thought of as government spending than tax cuts. A deduction for local property taxes, for example, is no different from the federal government's sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax breaks for specific purposes is analogous to eliminating congressional earmarks.

Most tax expenditures are also inefficient and regressive. The mortgage-interest deduction doesn't improve housing affordability, its ostensible goal. Any tax benefit is simply "capitalized" into house prices, which rise as the deduction fuels demand. The benefits flow to owners of bigger homes with larger mortgages and higher incomes, who can itemize and thus claim the deduction.

On direct government spending, a growing consensus favors moving Social Security from an entitlement to an insurance policy. People would receive benefits as they are needed. Higher-income earners would pay more in payroll taxes to fund the program and receive less in benefits. There is still debate over whether the retirement age should rise, although given Americans' increasing longevity, a slow increase seems logical.

Government spending on health care would be subject to an explicit budget. As they are currently structured, the large and rapidly growing Medicare and Medicaid programs are uncapped; there is no real mechanism to hold spending to affordable levels. The result, unsurprisingly, is runaway health-care spending. While specific proposals to rein in health-care spending remain elusive, even with the new law in place, the idea is that strict budget caps will force changes that ultimately make government-provided health care more efficient.

No one is arguing that all tax expenditures should be eliminated today, or that every needed spending cut can occur next year. As long as we lay out a credible path soon, we can implement the changes over the next decade. The United States isn't Greece or Ireland, nations that have no choice other than an immediate change in direction; or even France or Germany, where problems must be addressed within the next several years.

Global investors still have faith in America; this is clear from our still very low interest rates, and the fact that investors still run for safety in U.S. Treasury bonds when there is trouble anywhere in the world - even here. Of course this faith can be stretched only so far; if we don't find the political will to map out this credible path soon, our fiscal morass will only deepen and our economy will be significantly diminished. But we are up to the task. I'm optimistic, but it is time to execute.

Why the Fed Must Be Independent

Wed, 24 Nov 2010 13:26 GMT

Mark talks with CNBC producer Lori Ann LaRocco:

Zandi: In Defense of Fed Independence

The Fed has been politicized like never before. Now some Capitol Hill lawmakers are arguing that its dual mandate—price stability and full employment—should be stripped. I decided to speak with Mark Zandi, chief economist of Moody's Analytics about all of this and what's his message to Congress.

MZ: I think the worst thing that could happen is if the Fed was politicized. An apolitical Federal Reserve is a cornerstone of our financial system and broader economy. So nothing is more important than maintaining the Fed's independence. And the fact that its wrapped in the political process is just disturbing and disconcerting.

LL: Was QE2 necessary?

MZ: From the Fed's perspective part they view this as a part of monetary policy. So when you an economy that is struggling, an unemployment rate that is near double digits, and inflation that is low and decelerating it calls for more monetary stimulus and this is the next step.

I think they were probably surprised by the response and the fact it got wrapped up in the political debate . In hind site, they might have done things a bit differently. Maybe they would have waited until the next the next FOMC meeting which would have been on the other side of the election, and with the emphasis that the right thing for the economy is more QE.

LL: Do you think the Fed should continue to have the dual mandate?

MZ: I think reducing the dual mandate to a single mandate, would not result in a significant change in the way they conduct policy. I do think though, it may send an unfortunate signal to the broader population that the Fed's only purpose going forward would be on inflation and not on their plight in finding a job. So timing, I think particularly, would be unfortunate because people might believe the Fed is not focused on what they care about the most and that's finding a job.

So, given that the change in mandate doesn't mean a whole lot, symbolically, it means something and I don't think it makes sense to make the the change. Certainly not at this juncture when things are in such flux and the economy is still struggling to get going. This is perhaps a debate for another day when the economy is functioning more normally.

LL: What are your thoughts on Ron Paul who will be overseeing the Fed when he chairs the House Subcommittee for Domestic Monetary Policy and Technology and wants to revolutionize the monetary policy. Ending the Fed or at least auditing it. Is an audit in order?

MZ: I think an audit of the Fed should be very well defined and narrowly focused and should be designed not to effectively, or seemingly affect the monetary policy process because that would be very counter productive.

Audits are not a bad thing per say, but they have to be well defined and focused. Its the independence of the Fed that is the bedrock of the financial system and the economy.

LL: Do you think the Fed is being unfairly targeted by the GOP?

MZ: What Bernanke is doing is what Bernanke thinks is what is needed and is appropriate. What they are doing is a function of the tough economy and prospects for out right deflation. So I think what they are doing has nothing to do with politics.

This is what they think is best, so therefore, it would be prudent for Congressmen, policymakers, Administration and whomever else, allow the Fed to do their job and not interfere with them because that has always worked well for us. We have a lot of problems to addressed.

LL: Would you have an criticisms on how the Fed has handled this?

MZ: The only criticism I would have on the Fed is probably the marketing of all of this. I think they needed to be clearer up front with how they expected QE2 to benefit the economy, what the downsides were and if people had that framework then maybe, some of this might not have happened. But in terms of what they have done, I think its entirely appropriate. And its entirely inappropriate for other policy makers to interfere in the process in anyway particularly at this point.

Forecast Assumptions

Tue, 16 Nov 2010 14:47 GMT

Forecast Assumptions

BY MARK ZANDI

Monetary policy The Federal Reserve announced the resumption of quantitative easing at the early November FOMC meeting. Policymakers committed to purchasing $600 billion in Treasury securities by June 2011, in addition to the $300 billion needed to offset those securities on the Fed’s balance sheet that will run off during this period.Financial markets had already largely discounted the move, pushing down 10-year Treasury yields to 2.5% and fixed mortgage rates to a near-record low of 4.25%, fueling a 10% gain in stock prices. Inflation expectations have also firmed.Motivating the Federal Reserve to restart QE is the weaker recovery; annualized real GDP growth is about 2%, below the economy’s potential. Employment growth is thus weak, and the unemployment rate seems likely to return to the double-digits in coming months. Inflation is also very low—less than 1% based on the core CPI—and still decelerating. Given the considerable risk of outright deflation if the economy were to backtrack into recession, prudent risk management argues for more monetary easing. A bit more QE is likely during the second half of 2011.The economy will not be strong enough for the Fed to begin tightening monetary policy until the spring of 2012. When policymakers do begin raising rates, the interest rate on reserves, and not the federal funds rate, will be the key target rate until the Fed has successfully drained the large amount of excess reserves it has supplied to the banking system. The interest rate on reserves is expected to end 2012 at 2% and will not normalize to just over 4% until early 2014.

Fiscal policy The federal government's fiscal problems remain enormous but are slowly improving. The budget deficit came in just below $1.3 trillion in fiscal 2010, down from a record $1.4 trillion in fiscal 2009, or 10% of GDP. The deficit is expected to narrow further this year to nearly $1 trillion and again in fiscal 2012 to $850 billion, 5% of GDP.The unprecedented recent deficits reflect both the Great Recession and the costs of the government’s response. The total direct costs, including the fiscal stimulus and efforts to repair the financial system, are expected to reach almost $1.5 trillion. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is $2.25 trillion, over 15% of GDP.The most important near-term fiscal policy decision is what to do about the soon-to-expire individual income tax cuts passed under President Bush. The Obama administration has proposed allowing the tax cuts to remain in place for joint filers with incomes of less than $250,000 and allowing the cuts to expire in 2011 for those making above that. Given the fragile recovery and Republican opposition to allowing any of the cuts to expire, it is assumed that the tax cuts will be extended for everyone in 2011, with higher rates for higher-income taxpayers phased in beginning in 2012.Given the divided government in the wake of the midterm elections, it is assumed that there will be no other near-term significant fiscal stimulus efforts. Dealing with the nation’s daunting long-term fiscal challenges will wait until after the 2012 elections.

U.S. dollar Tensions have mounted in global foreign exchange markets as the Federal Reserve’s resumption of quantitative easing has resulted in a weaker U.S. dollar against most other currencies. The broad trade-weighted dollar has fallen more than 5% since markets began assuming QE this past summer.The dollar’s decline has been most pronounced vis-à-vis the euro, yen, and emerging economy currencies. While this is a plus for U.S. trade and growth, it is a hardship to these other economies. Greatly adding to this hardship is that the Chinese yuan and a number of other Asian currencies, given their peg to the dollar, have also fallen against these currencies. Global criticism of the Federal Reserve’s QE policy has thus intensified, as has the ire over the Chinese currency peg.The yuan appears to be undervalued by as much as 30% and is expected to strengthen gradually against the dollar over the next five to six years. With the dollar’s slide nearly over, it is assumed that global policymakers are able to keep a lid on protectionist pressures. Indeed, the dollar is expected to gain traction against the euro and pound by early next year.Longer run, the broad trade-weighted dollar is not expected to move substantially. It will decline against the yuan and other emerging economy currencies but rise against the yen, euro and pound.

Energy prices Oil prices have moved higher in recent weeks with the weakening dollar; the price of a barrel of West Texas Intermediate crude is close to $90. Over the past two years, oil prices have ranged from $40 during the depths of the recession to a record of almost $150 in the summer of 2008. Natural gas prices remain low, particularly compared with oil, at under $4 per million BTUs.The price of a barrel of oil is expected to remain close to $85 into 2011 and range as high as $100 over the next several years. This would be consistent with trend global supply and demand, abstracting from the vagaries of the business cycle.Prospects for even higher oil prices are low given significant global excess productive capacity to produce oil, particularly in Saudi Arabia. This supply would likely be brought on line if oil prices were to rise too high, too fast. Prices would move lower only if the global economic expansion falters.Natural gas prices will have trouble keeping up with oil over the next several years as a very substantial glut of gas has developed. Natural gas prices are expected to average $4.50 per million BTUs in 2010 and closer to $8.50 over the longer term.

For Econometricians Only

Fri, 12 Nov 2010 16:03 GMT

Speaking of notable staff achievements, Senior Economist Brian Poi's book, Maximum Likelihood Estimation with Stata, 4th ed. has just been published and will appeal to economists with a taste for seriously quantitative analysis. Stata is the leading statistical analysis package used by academic economists as well as researchers in government, non-profits, and private industry.

This book is for people who do cutting-edge analysis and want to apply the latest statistical methods to their data, before those methods are even available as canned solutions in other software packages. You can read more about the book here.

Poi joined Moody's Analytics' West Chester office in September after spending the past eight years as a senior developer at StataCorp.

What the Top Forecasters Say

Wed, 10 Nov 2010 10:15 GMT

Not that we're averse to tooting our own horn. But how much better to outsource the horn-tooting to an independent third party—in this case Marketwatch, which has awarded our Dismal Scientist forecasting team of Aaron Smith and Ryan Sweet the title Forecasters of the Month for October. Why? Read on:

Economy stabilizing, top forecasters say

Sweet, Smith of Moody’s Analytics say it’s still lackluster growth

WASHINGTON (MarketWatch) — Top forecasters are breathing just a little easier now that the economy is showing signs of stabilizing, following a few months of iffy growth.

Recent data show the economy has improved, but “the pace of growth is still fairly lackluster,” said Aaron Smith, a senior economist for Moody’s Analytics, who, along with his colleague Ryan Sweet, won the October Forecaster of the Month contest. It’s the third award for the team from Moody’s, which was formerly known as Economy.com...

Smith and Sweet say their forecasts for the high-frequency data are the result of true teamwork. Smith tends to be more optimistic, while Sweet is the more cautious one. They also take advantage of the company’s large group of economists, led by founder Mark Zandi.

“We bounce our forecasts off” the other economists, Sweet said. It helps to have access to specialists in regional economies or in individual sectors of the economy, such as housing, labor markets, or retail.

To win the October contest over 44 other forecasters, Smith and Sweet came from behind with the contest’s most accurate forecasts on the last two indicators of the month: new-home sales and durable-goods orders. They also had among the most accurate forecasts on the ISM index, the consumer price index and the consumer confidence index.

The Case for Optimism

Tue, 9 Nov 2010 15:09 GMT

Mark Zandi laid out the case for a strengthening recovery in the U.S. at last week's Fall Outlook Conference. Dismal Scientist subscribers can listen to highlights of his talk here. Everyone can read a synopsis of his argument, as presented to the 18th Annual State Fiscal Policy Conference in Washington, DC and transcribed by the NC Policy Watch blog, here:

Reason #1: The Federal Reserve’s fiscal policy actions. Zandi thinks “they get it,” and are going to be aggressive in preserving the recovery. While there is still a chance of a double-dip recession, Zandi says it’s one in three or less.

Reason #2: Businesses, especially big and medium-sized businesses, are “very profitable” now. Current business profit growth is 40 percent this year. “That’s about as good as it gets,” Zandi says. As profits surge, jobs should follow. For now, we’re seeing layoffs stop, but hiring should pick up within nine months or so, Zandi says. Credit constraints on small business could limit this, he cautioned, which is why it’s important to offer assistance to small businesses.

Reason #3: We’re righting the wrongs that got us into this mess, including financial reform to fix bad loans, says Zandi. Lack of oversight allowed big banks to perform casino-style gambling with our economy... Also, household debt has fallen by $1 trillion since peaking two years ago. To give you perspective, that’s 6-7 percent of total household liabilities. People are getting out of debt, which means they will be able to both spend more and save more.

Reason #4: housing inventories have peaked. This is a bit more complex than the others, but the upshot is that our housing crisis may finally have hit bottom.

Reason #5: The recovering economy means state tax revenues will revive in 2011. This will ease the budget stresses [in state capitols]. Nationally, the revenue growth forecast is 4.8 percent.

Fixated on Jobs

Fri, 5 Nov 2010 09:00 GMT

All eyes on the U.S. employment report for October.

Of Taxes and Gridlock

Thu, 4 Nov 2010 08:43 GMT

After the midterm elections, is Washington capable of economic policymaking? Mark Zandi discusses with Bloomberg News.

The Big Picture on Housing

Wed, 3 Nov 2010 15:35 GMT

NPR's Planet Money asks where the housing market is headed.

Election Aftermath

Wed, 3 Nov 2010 11:36 GMT

NPR's Marketplace asks Mark Zandi how the midterm results might affect economic policymaking.

audio here

October Forecast Assumptions

Wed, 3 Nov 2010 09:26 GMT

Monetary policy

The Federal Reserve is expected to resume quantitative easing—in which the Fed creates money electronically and uses the proceeds to expand its holdings of Treasury securities in an effort to reduce long-term interest rates—by year’s end. Policymakers are expected to initially make a commitment to purchase $300 billion in securities, but they will ultimately buy $1 trillion by next summer. Financial markets have already largely discounted this move, a key reason why 10-year Treasury yields have fallen to near 2.5%, the dollar has weakened, and the stock market has rallied.

The economy will not be strong enough for the Fed to resume tightening monetary policy by raising short-term interest rate until early 2012. Before raising rates, policymakers will need to be sure that the unemployment rate is definitively moving lower and that inflation is reaccelerating. When policymakers do begin raising rates, the interest rate on reserves and not the federal funds rate is likely to become the key target, at least until the Fed successfully drains the large amount of excess reserves it has supplied to the banking system during the financial crisis and recession. The interest rate on reserves is expected to end 2012 at 2.5% and will not normalize to 4% until mid-2013.

Fiscal policy

The federal government's fiscal problems remain enormous. The budget deficit ballooned to near $1.4 trillion in fiscal 2009, up from $475 billion in fiscal 2008. This year's deficit is expected to be closer to $1.3 trillion, and the cumulative deficit over fiscal 2009-2012 will be nearly $5 trillion.

These unprecedented deficits reflect both the Great Recession and the costs of the government’s multifaceted response to it. Total direct costs, including the TARP, the fiscal stimulus, and other efforts, are expected to reach almost $1.6 trillion. Of this, just over $1 trillion is the cost of fiscal stimulus efforts. Adding in nearly $750 billion in lost revenue from the weaker economy, the total budgetary cost of the crisis is projected to top $2.35 trillion, about 16% of GDP. For historical comparison, the savings and loan crisis of the early 1990s cost some $350 billion in today's dollars: $275 billion in direct costs plus $75 billion due to the associated recession, equal to almost 6% of GDP at that time.

The most important near-term fiscal policy decision is what to do about the expiring individual income tax cuts. The Obama administration has proposed allowing the tax cuts to remain in place for joint filers with annual incomes of less than $250,000 and allowing the cuts to expire in 2011 for those making more than that. Given the fragile recovery, it is assumed that the higher tax rates for upper-income taxpayers will be phased in beginning in 2012.

The longer-term budget remains very disconcerting as the costs of the Medicare, Medicaid and Social Security programs balloon. President Obama's budget proposals have not significantly addressed the nation's long-term fiscal problems, with the U.S. federal debt-to-GDP ratio rising to over 80% a decade from now under the president's plan. This is double the approximately 40% ratio that prevailed before the financial crisis. This long-term budget outlook thus remains untenable and will ultimately force various substantial changes to entitlement programs and tax policy, which are assumed to occur in the longer-term outlook.

U.S. dollar

The weaker U.S. recovery and Europe’s ability to shrug off any serious economic fallout from its sovereign debt crisis, at least to date, has weighed on the U.S. dollar vis-à-vis the euro and British pound in recent weeks. The euro had been trading as low as $1.2 in the teeth of Europe’s debt crisis earlier this summer, but is now closer to $1.4. The pound has also strengthened, trading as high as $1.6.

The dollar is expected to gain traction against the euro and pound early next year. The U.S. recovery will remain intact and the European economy is expected to backtrack as fallout from the recent crisis, including financial and fiscal restraint, take hold. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2012. Indeed, the ECB is still buying sovereign debt to help put an end to the crisis.

Longer run, the broad trade-weighted dollar is expected to drift lower, particularly against the yuan as China ramps up its revaluation process. The dollar is an estimated 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling. There is no more efficient way for China to address its own inflation and speculation concerns than allowing its currency to appreciate.

Energy prices

Oil prices, as measured by a barrel of West Texas Intermediate crude, have been recently trading below $80. Over the past two years, prices have ranged from well below $50 at the start of 2009 during the depths of the recession to a record of almost $150 in the summer 2008. Retail gasoline prices have declined to $2.7 per gallon, compared with an all-time high of close to $4. Natural gas prices remain low, particularly compared with oil prices, at around $4 per million BTU.

Oil prices are expected to remain close to their current $80 per barrel through the remainder of the year, and to range as high as $100 over the next several years. This would be consistent with trend global supply and demand, abstracting from the vagaries of the world business cycle.

Prospects for even higher oil prices are low, given current significant global excess productive capacity to produce oil, particularly in Saudi Arabia. Producers would likely bring this online if oil prices were to rise too high, too fast. Lower prices would occur only if the global economic expansion falters.

Natural gas prices will have trouble keeping up with oil prices during the next several years, as a very substantial glut has developed. Natural gas prices are expected to average $5 in 2010 and closer to $9 over the longer term.

All Economics Is Local

Thu, 28 Oct 2010 09:40 GMT

Macroeconomics guru Gus Faucher was in DC this week, coaching reporters and bloggers from around the U.S. about covering the recovery at the local level. His talk went unrecorded, but the slides are pretty educational all by themselves:

Tracking the Economic Recovery in Your Town by Gus Faucher of Moody's Economy.com

View more presentations from Reynolds Center for Business Journalism.

Foreclosure Fallout

Mon, 25 Oct 2010 09:36 GMT

How distressed should we be about the mess in processing defaults? Mark Zandi discusses with CNBC:

When Numbers Get Serious

Wed, 20 Oct 2010 14:49 GMT

Today, if you hadn't noticed, is 20-10-2010 (unless of course you use the U.S. dating convention, in which case it's 10-20-2010, but never mind). And that apparently has moved the OECD to declare it World Statistics Day. Which moved us to offer this reprise of a guest column we posted on Dismal Scientist last year:

Who Cares About Federal Economic Statistics?

By Andrew Reamer in Washington, D.C.

Two years ago, the state of the federal government's system for gathering and maintaining economic statistics was like the name of this web site—dismal.

In response to former President George Bush's threat to veto what he viewed as excessive federal spending, Congress cut the budgets of a number of agencies, including three whose responsibilities include gathering the nation's vital economic statistics: the Census Bureau, the Bureau of Labor Statistics, and the Bureau of Economic Analysis.

These agencies didn't yield particularly large savings. Congress snipped some $35 million from the BLS and the BEA and delayed about $60 million for the Census Bureau, all to help cover a $22 billion gap in a $3 trillion appropriations bill.

Statistical values

Congress could order these cuts because most of its members don’t fully comprehend the value that the $1 billion federal economic statistical system provides to the nation. Data collected by government agencies guide fiscal and monetary policy in a $14 trillion economy and inform the investment decisions of 6 million U.S. firms. Without timely and accurate statistics, thousands of private and public agencies would be unable to successfully carry out efforts in transportation, education, healthcare, affordable housing, and economic, community and workforce development.

Congress’ actions pushed the federal statistical system, which had not been faring well for some time, into dire straits. Because of the budget cuts, in 2008, the Census Bureau couldn’t add new quarterly and annual data it planned to collect on the nation’s finance, insurance and real estate industries. As a result, the BEA now lacks optimal data for measuring economic activity in those areas that were at the heart of the recent recession.

The cuts also left the BLS unable to update its consumer price index survey with information from the 2000 census. The CPI's housing sample thus continues to be based on data from the 1990 census, which has created a visible, growing age bias in the sample.

There were other consequences of Congress' budget cuts as well.

The BEA said it would stop publishing industry subsector estimates for metro and county GDP and earnings. Researchers therefore would be unable, for instance, to track Detroit's dependence on auto manufacturing.
The BEA also halted the collection and publication of detailed state foreign direct investment data, despite protests from state economic development agencies, which depend on that information to help attract overseas firms.
The Census Bureau cut back and postponed the 2008 "dress rehearsal" for the 2010 census, leaving it unable to test its procedures and technologies for the upcoming decennial count.
The BLS killed current employment statistics for 65 small metro areas.
The Department of Housing and Urban Development discontinued the residential finance survey, which gathered data on mortgage debt, and had dramatically cut back the number of metro areas covered by the American housing survey, which examines local housing conditions and markets.

With only a $2 million appropriation, the Census Bureau’s innovative Local Employment Dynamics program barely dodged elimination and was relegated to pilot status. Starved for funds, the program could not realize its potential to use existing administrative records to track worker movement over time and space—knowledge that could transform how we understand the workings of our national and regional economies.

Properly funded, LED could show patterns of labor turnover by worker characteristics such as age, sex, race, industry and occupation, down to the community level. It could trace how workers fare after layoffs, shedding light on such questions as the fate of construction workers after housing markets collapsed. And the program could provide a demographically rich picture of where people live in relation to where they work, a valuable tool for business site location and transportation planning.

Turnabout

One year and a new administration later, the situation is markedly different.

In the budget for fiscal 2009, Congress gave the Census Bureau the $8 million it needed to collect data from finance, insurance and real estate firms quarterly and annually, rather than once every five years. The BLS also received sufficient funds to update the CPI housing sample and restore current employment statistics for the 65 small metro areas cut under the last Bush budget.

The American Recovery and Reinvestment Act gave the Census Bureau $1 billion to improve operations and beef up its "get out the count" efforts, to ensure a more accurate 2010 census. The Census Bureau also initiated a new Business Dynamics Statistics program that allows researchers to examine longitudinal trends in business development.

For fiscal 2010, the House and Senate are on the verge of agreeing to fund several important economic data improvements. Assuming budget passage, these positive developments are in store:

The BEA will improve its estimates of service industry contributions to GDP using the newly expanded Census Bureau services industry data.
The BEA will restore detail to regional NAICS for GDP and earnings and also create a new interarea price index to produce real measures of state and local area product and income.
The Census Bureau’s LED program will become permanent, with increased funding for significant enhancements. Among these would be a “job-to-job flows tool” allowing analysts to see how different categories of workers move among industries and regions over time.
The Department of Housing and Urban Development will receive a substantial increase in funding for improved housing statistics. In particular, HUD will expand the American housing survey and begin capturing residential finance data in a more timely way.
If the House agrees to Senate funding levels, the BEA would reverse cuts to the state FDI data program and the Economic Development Administration would create an industry clusters research and information center, including detailed cluster mapping.

Apart from this year’s appropriations process, agencies are pursuing several efforts to improve the statistical system. The BEA is exploring the creation of measures of economic well-being and sustainability. The Census Bureau has proposed collecting data needed to create a modern poverty measure as well as a new program to improve its longitudinal business datasets. The Census Bureau also is looking at ways to expand the sample size of the American Community Survey (to increase its reliability) and to improve its annual population estimates program. In addition, an administration-supported effort is under way to improve the accuracy, comparability and usefulness of economic statistics through a series of “data synchronization” activities across statistical agencies.

Looking ahead, however, the political and budget winds blow in different directions. The good news is that senior Obama administration officials understand the importance of reliable and extensive economic statistics. OMB Director Peter Orszag has written about using statistics to drive sound policy, for example.

Time to speak up

The bad news is that for the foreseeable future, Washington will be under enormous pressure to reduce spending. It is quite possible that the administration's understanding of the need for good statistics will not be reflected in the president’s upcoming budget proposals—unless data users weigh in. And if the past is a guide, Congress may well make cuts because it doesn’t naturally comprehend the nearly infinite economic return on a relatively small taxpayer investment in data collection and product development.

To a great extent, then, the future health of the federal statistical system is in the hands of data users. Historically, consumers of government statistics have had little direct contact with federal decision makers. Congress and the bureaucracy take data users' concerns seriously when they hear them, but they rarely do. If the federal statistics system is to sustain recent improvements and survive upcoming budget battles, data users need to make their case. Silence in this instance is the opposite of golden.

_____________________________________________

To be heard about funding or future plans for federal economic statistics, contact any of the agencies, congressional offices or membership associations listed below. Note that the BEA, the BLS, and the Census Bureau issue periodic calls for public comment on proposed new and revised data collections. Letters are taken seriously and become part of the public record.

Andrew D. Reamer is a Fellow with the Metropolitan Policy Program of The Brookings Institution and president of the Association of Public Data Users.

Grading the Policymakers

Wed, 13 Oct 2010 11:45 GMT

Mark Zandi discusses the European sovereign debt and the U.S. outlook with Bloomberg Television.

More Disappointment on Employment

Fri, 8 Oct 2010 09:53 GMT

The September jobs report was a downer. Mark Zandi joins the CNBC crew for a breakdown.

Details, Details

Mon, 4 Oct 2010 10:45 GMT

Will banks' mortgage mistakes stretch out the foreclosure crisis? Mark Zandi discusses with Bloomberg news.

Who Says Financial Innovation is Dead?

Wed, 29 Sep 2010 15:35 GMT

I'm not quite sure I believe this.

A German firm that installs and manages gold vending machines aims to introduce them into the United States this year as it expands rapidly to take advantage of demand for bullion in times of economic uncertainty.

Thomas Geissler, creator of the Gold to Go brand and chief executive of Ex Oriente Lux, told Reuters on the sidelines of the London Bullion Market Association conference that the company aims to issue a "couple of hundred" machines next year...

The machines, which update the gold price every 10 minutes to match international markets, take cash or credit cards and dispense small bars—including 1 gram, 5 gram, 10 gram and 1 ounce units—as well as coins such as South African Krugerrands, Australian Kangaroos and the Canadian Maple Leaf.

Even if it's true, what do you do with the stuff after you've got it?

When Cuts Expire

Wed, 29 Sep 2010 08:34 GMT

What should Congress do about the expiring Bush tax cuts? The NYTimes hosts a mini-symposium.

Down So Long It Looks Like Up

Mon, 27 Sep 2010 09:26 GMT

Is there any sign of a housing recovery? Celia Chen discusses with CNBC.

Debating the Policy Response

Wed, 22 Sep 2010 15:37 GMT

Mark Zandi, Alan Blinder and John Taylor make the case for and against the government's policy response to the recent recession at Wednesday's Senate Budget Committee hearing. Read the prepared testimonies here, or watch the hour-long hearing itself here.

It Ain't Over Till It's Over

Tue, 21 Sep 2010 10:57 GMT

The NBER calls an end to the worst recession in 70 years, and nobody smiles.

Visit msnbc.com for breaking news, world news, and news about the economy

Policy and the Recovery

Wed, 8 Sep 2010 09:06 GMT

What will Obama's latest tax proposals do for the recovery? Mark Zandi discusses the issues for fiscal policy here, and also on Bloomberg.

Facing the Nation

Fri, 3 Sep 2010 11:09 GMT

Another program note: This Sunday morning the economy will take top billing as Mark Zandi panels up with former CEA chair Laura Tyson and New York Times reporter Gretchen Morgenson on CBS' "Face the Nation." Check local listings for times.

Squawk Alert

Wed, 1 Sep 2010 10:25 GMT

Mark your TV calendar: Mark Zandi will be hosting CNBC's "Squawk Box" gabfest this Friday from 7 to 9 a.m. Not coincidentally, the August employment report is due for release at 8:30 a.m. Stay tuned.

Playing the Odds

Thu, 26 Aug 2010 12:45 GMT

Mark Zandi talks with Bloomberg about the odds of a double-dip recession.

Breakfast with the Monitor

Thu, 26 Aug 2010 09:45 GMT

Mark Zandi tells reporters at the Christian Science Monitor's breakfast why the stimulus worked, assertions to the contrary notwithstanding.

A Double Dip for Housing?

Mon, 23 Aug 2010 17:47 GMT

Mark tells CNBC that housing is already nearing a double-dip recession.

Regions at Risk

Thu, 19 Aug 2010 15:41 GMT

CNN's Money picks up on our latest update of the U.S. recovery status map, and contributes their own version here.

Fix 'em or Forget 'em?

Wed, 18 Aug 2010 08:28 GMT

Debating the future of Fannie Mae & Freddie Mac.

Tax Cuts, Pro and Con

Tue, 17 Aug 2010 09:12 GMT

The following appeared in the New York Times op-ed section Sunday, Aug. 15:

The Tax Cut We Can Afford

By MARK ZANDI

UNLESS Congress and President Obama act soon, Americans’ taxes will increase in 2011, when the cuts enacted under President George W. Bush are due to expire. Almost everyone agrees that this makes little sense given the economy’s fragility. But consensus ends there. The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

The president’s plan would be taking an unnecessary gamble with the struggling recovery. Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. Even under the best of circumstances, the unemployment rate will remain near 10 percent well into next year. The high rate of joblessness has cast a shadow on the collective psyche that will only worsen with higher taxes, raising the already uncomfortably high odds that the economy will suffer a double-dip recession.

Sundays with Fox

Tue, 17 Aug 2010 08:39 GMT

Parsing the latest economic data on the cable TV network:

Potholes in Recovery Road

Fri, 13 Aug 2010 14:36 GMT

The latest monthly update of the U.S. Recovery Status map shows some areas are at risk of falling into a renewed recession.

The metro map shows which ones are at risk:

July Forecast Assumptions

Thu, 12 Aug 2010 15:05 GMT

Monetary policy

The Federal Reserve is not expected to begin raising interest rates—either the interest rate paid on reserves or the federal funds rate—until spring 2011. The initial rate hike will coincide with the point when the unemployment rate has begun to move definitively lower. Employment has stabilized, but job growth sufficient to bring down the unemployment rate on a consistent basis is unlikely until year’s end.

Inflation should also remain low and inflation expectations well-contained through at least spring 2011. Core inflation is already below the Fed’s implicit target range and will slow further in coming months given the nearly double-digit unemployment rate, high vacancy rates, and low utilization rates in manufacturing.

The Fed will effectively begin tightening monetary policy well before raising interest rates, however. It recently ended its purchases of mortgage securities, and the TALF, which had supported asset-backed securities markets, has also ended. Also, just prior to raising interest rates, policymakers will likely begin draining reserves through reverse repurchase agreements, in which the Fed effectively borrows from banks, and term deposits.

Policymakers will then be prepared to begin raising rates, hiking the interest rate on reserves and the federal funds rate simultaneously. The interest rate on reserves is likely to become the key target rate until the central bank successfully drains excess reserves. The funds rate is expected to end 2011 at 2% and to have normalized to just over 4% by year-end 2012.

Fiscal policy

The federal government’s fiscal problems remain enormous. The budget deficit ballooned to $1.4 trillion in fiscal 2009 and is expected to be a similar size this year. The cumulative deficit from fiscal 2009 to 2012 will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag of more than $2 trillion to taxpayers for the financial crisis and Great Recession, equal to 14% of GDP. For historical context, the savings and loan crisis in the early 1990s cost taxpayers some $350 billion in today’s dollars, equal to almost 6% of GDP at that time.

Of the over $2 trillion cost of the financial crisis and recession, $1.3 trillion is the direct cost to the government of its response to the financial crisis. This includes the fiscal stimulus and what has been committed to support the financial system and the auto and housing industries, less what the government will eventually recoup in future asset sales. The weaker economy and resulting loss of tax revenues and increased spending to support those losing their jobs and other income support programs will cost the Treasury an additional $700 billion.

The budget outlook remains extraordinarily disconcerting even after the costs of the financial crisis abate, because the costs of the Medicare, Medicaid and Social Security programs will balloon as the baby boomers retire. President Obama’s recent budget proposal does not significantly address the nation’s long-term fiscal problems.

U.S. dollar

The European debt crisis and the global flight to quality are lifting the value of the U.S. dollar. Although the euro has strengthened a bit over the past month, it is still near $1.25, just slightly above its recent four-year low. The British pound is also under significant pressure, at around $1.50.The dollar is expected to strengthen further vis-à-vis the euro and pound through most of the year. The European economy is expected to slip back into a mild recession by early next year as a result of the recent crisis and the resulting fiscal restraint. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2011. The ECB is purchasing sovereign debt to help quell the crisis, but is sterilizing those purchases; if conditions do not stabilize soon, it will likely increase them and may even decide not to sterilize, allowing interest rates to fall further.

The dollar is expected to drift lower beginning about this time next year when the euro and pound stabilize and the Chinese allow their currency to appreciate more quickly. The dollar is about 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling.

Energy prices

The price of a barrel of West Texas Intermediate crude oil has weakened to below $75 in response to the European debt crisis and the implications for global growth and energy demand. This is despite the mounting disruptions to offshore drilling from the ongoing BP oil spill. Over the past two years, oil prices have ranged from well below $50 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Retail gasoline prices have declined to $2.70 per gallon, compared with an all-time high of close to $4.

Oil prices are not expected to slump much further, as the global economic expansion should remain intact and global oil producers will manage supplies. For all of 2010, oil will average $80 per barrel, and range as high as $100 over the next several years; this is consistent with trend global demand and supply fundamentals, abstracting from the world business cycle.

The likelihood for even higher oil prices is low given current significant global excess productive capacity for oil, particularly in Saudi Arabia. This supply is likely to come online if oil prices rise too high, too fast.

Natural gas will have trouble keeping up with oil prices over the next several years as a very substantial glut of gas has developed. Prices will average $6 per million BTU in 2010, and closer to $9 over the longer term.

Employment Watch

Fri, 6 Aug 2010 09:27 GMT

Pre- and post-game analysis of the July U.S. employment data:

Visit msnbc.com for breaking news, world news, and news about the economy

The Real Bailout

Wed, 4 Aug 2010 16:20 GMT

Wall Street Journal columnist David Wessel supports the Blinder-Zandi position that government averted Depression 2.0, but he also notes that the biggest cost to taxpayers came not in the bank bailout, but inthe rescue of Fannie Mae and Freddie Mac.

Most people believe big Wall Street banks got bailed out and continue to profit from low interest rates. That's true, but many banks have paid back taxpayers with interest. Fannie and Freddie, though, burdened by huge mortgage portfolios, have taken $145 billion so far. In a new analysis, Alan Blinder of Princeton University and Mark Zandi of Moody's Analytics put the ultimate price for saving them at $305 billion...

The government didn't nationalize the banks. Someday, it will sell its stake in GM. But it nationalized the mortgage market and hasn't found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.

Up With Cramdowns

Wed, 4 Aug 2010 15:37 GMT

As the foreclosure crisis drags on, one potential cure is getting a new look—from researchers if not (yet) from policymakers. It's called the cramdown, and it's long been a bugaboo to lenders. More than year ago, indeed, legislation that would have allowed cramdowns was defeated in the U.S. Senate.

But now, two analysts from the Cleveland Fed suggest it could be just the thing to help stabilize the mortgage market:

Allowing bankruptcy judges to modify mortgages secured by primary residences remains one of the most contentious proposed responses to the ongoing home mortgage foreclosure crisis. After all, any legislative reform that allows bankruptcy judges to strip down debt secured by primary residences can potentially alter the terms of financial contracts, a change that could have unintended consequences.

The debate is not a new one. The 1980s farm foreclosure crisis sparked similar proposals and concerns. Congress’s response was to include a stripdown provision in a newly created chapter in the bankruptcy code specifically intended for family farms. The effects of that stripdown provision, in place for more than two decades, on the availability and terms of agricultural credit suggest that there has been little if any economically significant impact on the cost and availability of that credit.

Mornings with C-SPAN

Mon, 2 Aug 2010 11:29 GMT

C-SPAN's Washington Journal opens the floor to discussion of Mark Zandi and Alan Blinder's paper on U.S. policy in the recession.

More on Policy and Recession

Fri, 30 Jul 2010 12:38 GMT

The Zandi-Blinder paper has sparked widespread debate about the government's success (or not) in preventing the Great Recession from turning into something worse. A sampling from the blogosphere:

From E21, a right-of-center policy blog:

the Blinder/Zandi paper concluded that the TARP stabilization measures combined with the Fed’s quantitative easing had a greater positive effect on subsequent economic growth than the Obama stimulus. It is important that these sets of policies be treated separately when quantifying the effect of overall government intervention. There is a profound difference between policies designed to prevent a collapse and those designed to speed the pace of recovery. Viewing these policies as parts of the same “government intervention” trivializes distinctions that are central to the lessons policymakers should draw from the response to the crisis.

While from the left, Dean Baker opines:

While the analysis of the stimulus is pretty standard and very much in keeping with other estimates, this is not the case with the analysis of the financial sector policies. The problem with the study is the implicit counterfactual. It effectively assumes that if we did not do the TARP and related policies, that we would have done nothing even as the financial sector melted down.

Ezra Klein muses about models:

My interviews with Alan Blinder and Mark Zandi focused, probably to the great boredom of my readers, on the nature of the model they used to estimate the effects of different stimulus and financial policies. I did that because this question of models is an important one: If you believe the macroeconomic models, they say the stimulus has worked extremely well. If you don't, then it's harder to answer.

And a blogger named Dr. Duru says he's been convinced:

Despite my skepticism, I was prepared to give this research a try because I have found Zandi’s past economic commentary to be generally insightful and, most importantly, devoid of the ideological rants or dogma that seem to plague too much economic analysis. Still, I was prepared to nitpick at every flaw and find reasons to cling to my skepticism. Instead, my doubts about the efficacy of stimulus and monetary policy were eased a little by this well-structured and carefully considered study.

Parsing the Second Quarter

Fri, 30 Jul 2010 12:25 GMT

Mark Zandi discusses second quarter U.S. GDP with Bloomberg TV.

Of Models, Stimulus and the Great Recession

Thu, 29 Jul 2010 08:31 GMT

Nice discussion here between the Washington Post's Ezra Klein and Mark Zandi on how the Moody's Analytics model shows that U.S. policy staved off a second Great Depression. A snippet:

Your results suggest that the financial rescue was, if anything, even more significant than the stimulus. It’s since become wildly unpopular, but you’re saying that George W. Bush and Hank Paulson deserve some credit for the policies they created in the immediate response to the crisis.

Absolutely! I think TARP was incredibly important. The mistake was for Congress to vote it down initially. That eviscerated confidence and took the equity market down to a whole other level and exacerbated our problems. By that time, the damage was so serious that the intent of TARP had to shift. Originally, it was about buying bad assets, which would’ve been more graceful. But because of the no vote and the damage it did, they had to make TARP a source of capital for the financial system. The capital purchase program was ultimately the one key thing that was necessary for stabilizing the financial system and the economy.

Klein's companion discussion with Alan Blinder is here.

Elswhere, PBS interviewed Zandi and Blinder on the Nightly Business Report:

SUZANNE PRATT: So Alan, let me start with you. Those policies include everything from TARP to the Fed's purchase of mortgage-backed securities. Which was most important do you think for the economy?

BLINDER: It also included the fiscal stimulus. But what we found, somewhat to our surprise, we didn't know going into the work, that at least according to this model, the panoply of financial policies, including the things that you mentioned and other things were actually more important quantitatively than the fiscal policies -- the stimulus, the tax rebates of 2008 and so on.

Meanwhile, the Blinder-Zandi paper continues to draw attention, both supportive and critical. No matter how you view it, however, isn't it refreshing to see real economic issues getting some airtime?

Facts and Counterfacts

Wed, 28 Jul 2010 11:10 GMT

Mark Zandi discusses the new stimulus study with the Squawk Box crew on CNBC.

How the Recession Was Beaten

Wed, 28 Jul 2010 09:19 GMT

The blogosphere is all atwitter this morning about this.

How the Great Recession Was Brought to an End

by Alan Blinder and Mark Zandi

The U.S. government’s response to the financial crisis and ensuing Great Recession included some of the most aggressive fiscal and monetary policies in history. The response was multi-faceted and bipartisan, involving the Federal Reserve, Congress, and two administrations. Yet almost every one of these policy initiatives remains controversial to this day, with critics calling them misguided, ineffective, or both. The debate over these policies is crucial because, with the economy still weak, more government support may be needed, as seen recently in both the extension of unemployment benefits and the Fed’s consideration of further easing. In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11½% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.

The full text is here. The New York Times summarizes it here. Bloomberg's version is here. Notable bloggers comment here and here. The Dallas Morning News weighs in here. CNBC discusses here. Britain's Guardian joins in.

Update: The critics weigh in, here and here.

Forecast Assumptions

Tue, 27 Jul 2010 16:08 GMT

Monetary policy. The Federal Reserve is not expected to begin raising interest rates—either the interest rate paid on reserves or the federal funds rate—until spring 2011. The initial rate hike will coincide with the point when the unemployment rate has begun to move definitively lower. Employment has stabilized, but job growth sufficient to bring down the unemployment rate on a consistent basis is unlikely until year's end.

Inflation should also remain low and inflation expectations well-contained through at least spring 2011. Core inflation is already below the Fed's implicit target range and will slow further in coming months given the nearly double-digit unemployment rate, high vacancy rates, and low utilization rates in manufacturing.

Fiscal policy. The federal government's fiscal problems remain enormous. The budget deficit ballooned to $1.4 trillion in fiscal 2009 and is expected to be a similar size this year. The cumulative deficit from fiscal 2009 to 2012 will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag of more than $2 trillion to taxpayers for the financial crisis and Great Recession, equal to 14% of GDP. For historical context, the savings and loan crisis in the early 1990s cost taxpayers some $350 billion in today's dollars, equal to almost 6% of GDP at that time.

The budget outlook remains extraordinarily disconcerting even after the costs of the financial crisis abate, because the costs of the Medicare, Medicaid and Social Security programs will balloon as the baby boomers retire. President Obama's recent budget proposal does not significantly address the nation's long-term fiscal problems.

U.S. dollar. The European debt crisis and the global flight to quality are lifting the value of the U.S. dollar. Although the euro has strengthened a bit over the past month, it is still near $1.25, just slightly above its recent four-year low. The British pound is also under significant pressure, at around $1.50.

The dollar is expected to strengthen further vis-à-vis the euro and pound through most of the year. The European economy is expected to slip back into a mild recession by early next year as a result of the recent crisis and the resulting fiscal restraint. The European Central Bank and Bank of England are thus not expected to begin normalizing their monetary policies until well into 2011. The ECB is purchasing sovereign debt to help quell the crisis, but is sterilizing those purchases; if conditions do not stabilize soon, it will likely increase them and may even decide not to sterilize, allowing interest rates to fall further.

Energy prices. The price of a barrel of West Texas Intermediate crude oil has weakened to below $75 in response to the European debt crisis and the implications for global growth and energy demand. This is despite the mounting disruptions to offshore drilling from the ongoing BP oil spill. Over the past two years, oil prices have ranged from well below $50 at the start of 2009, during the depths of the recession, to a record of almost $150 in the summer of 2008. Retail gasoline prices have declined to $2.70 per gallon, compared with an all-time high of close to $4.

How Are We Doing?

Thu, 22 Jul 2010 11:07 GMT

Sometimes the simplest questions draw the best answers. Harlan Levy illustrates with Andres Carbacho-Burgos at Seeking Alpha:

H.L.: How is the U.S. economy doing?

A.C-B.: In the U.S. we’re seeing a recovery which is starting to slow because the fiscal stimulus is petering out. The majority of those funds have now been dispersed and will run out this year.

Another Inconvenient Truth

Wed, 21 Jul 2010 17:04 GMT

If it's true that the definition of a gaffe in Washington is telling the truth in public, then Mark Z. just might have gaffed big-time. The WSJ reports:

Moody’s Analytics Chief Economist Mark Zandi has some bold advice for the housing industry: It should push to limit the mortgage interest and property tax deductions that have helped to fuel U.S. home sales for decades.

And the industry shouldn’t be shy about its support for such action either, Mr. Zandi argued Wednesday in Washington. Rather, it should “get out ahead of this” and “lead the way,” he said.

Scaling back such deductions is “the most logical way” to help plug the budget deficit and reduce the federal subsidy for housing, Mr. Zandi said

Assessing Damage in the Gulf

Mon, 19 Jul 2010 16:13 GMT

Marisa Di Natale discusses a new report on the impact of the Gulf oil spill with Fox Business News.

Explaining UI

Fri, 16 Jul 2010 09:18 GMT

Sophia Koropeckyj gives NPR an earful about the economic importance of support for the jobless.

The Recovery Rolls On

Thu, 15 Jul 2010 11:24 GMT

More U.S. metro areas are moving from recession to growth, Andrew Gledhill reports:

While Steve Cochrane explains which regions are moving ahead fastest, and why.

Credit Scorecard

Wed, 14 Jul 2010 15:38 GMT

Not surprisingly, the creditworthiness of U.S. consumers has taken a beating. Cris deRitis explains why to the LA Times.

Consumers with low credit scores will have increased difficulty obtaining credit cards and other loans, said Cristian deRitis, director of credit analytics at Moody's Analytics.

A high national unemployment rate — 9.5% in June — has helped drive down scores, DeRitis said. "Delinquencies are on the rise. People out of work are not making payments on debts, and that negatively impacts their scores," he said.

Many people also have high credit balances when compared with the total amount of credit available to them, DeRitis said. This trend, when combined with an inability to acquire more credit, has served as a "double-edged sword" for the economy, he said.

Viva Spain. Now Back to Work

Tue, 13 Jul 2010 09:44 GMT

From Sydney via India's NDTV, Matt Robinson weighs in on global recovery in light of Europe's continuing debt woes.

Back From Break

Mon, 12 Jul 2010 16:38 GMT

While DataPoints was on holiday, the debate over policy in the recovery took no vacation. At NPR's On Point show, Mark Z. squared off with other notables on the stimulus, the deficit, and what next.

Recalculating the Default Option

Wed, 23 Jun 2010 16:42 GMT

Is it rational to walk away from your underwater mortgage? Maybe, but for those considering the strategic default option, the calculation may have just become a bit more difficult. This from Fannie Mae:

Fannie Mae announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers who have extenuating circumstances may be eligible for new loan in a shorter timeframe.

Why U.S. Productivity Might Fall Off this Month

Wed, 23 Jun 2010 16:02 GMT

A random sample of U.S. office life this week, from the Business Insider.

Rethinking Homeownership (Again)

Wed, 9 Jun 2010 15:30 GMT

What seemed like a crazy thought a couple of years ago may be turning into a meme. Or a movement. We'll see. Anyway, pop-urbanologist Richard Florida apparently agrees that an optimal rate of homeownership exists, and that it's somewhere south of where ours peaked before the bust.

From Florida's WSJ op-ed:

Owning a home may actually be a drawback given the economic flexibility required to power long-lasting recovery. My colleagues and I tracked homeownership levels across U.S. cities and regions to see how they correlate to other measurable demographic and economic factors ... [C]ities with high levels of homeownership ... had on average considerably lower levels of economic activity and much lower wages and incomes. Far too many people in economically distressed communities are trapped in homes they can't sell, unable to move on to new centers of opportunity.

UPDATE: The NYTimes' Joe Nocera joins the club. What shall we call it? His headline suggests an answer: The Wake-Up-Time Club...

The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.

Two Hundred Years

Tue, 1 Jun 2010 14:58 GMT

This is likely the coolest graphic you'll see this week, if not all summer.

"Gapminder" has an interactive history of the past 200 years, told in the form of a bubble chart tracking income per capita and life expectancy for the world's nations.

The three screen shots here offer a rough outline, but to really appreciate it you need to click through and hit "play."

A bracing antidote to today's gloomy headlines follows.

Once Around the Rink

Thu, 27 May 2010 08:37 GMT

Mark Zandi summarizes the current outlook and reveals he's a Flyers' fan.

Taking a Breather

Wed, 26 May 2010 10:52 GMT

Mark Zandi and Simon Johnson help New York public radio decide just how much nervousness is appropriate right now.

Talking Politics

Wed, 26 May 2010 09:48 GMT

Memorial Day may mean beaches and barbecues, but it also means November is less than 6 months away. And the economy will clearly be a major driver of this year's U.S. midterm election results. Gus Faucher looked ahead recently with Chris Satullo of Philadelphia's public broadcasting outlet WHYY:

Sausage Being Made

Fri, 21 May 2010 16:07 GMT

Mark Zandi, whose views on financial regulatory reform are outlined here, gives Marketplace a quick update on the action in Congress.

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On Air in the Big Apple

Thu, 20 May 2010 08:33 GMT

Mark Zandi discusses financial regulatory reform and the prospects for U.S. recovery with New York public radio host Brian Lehrer.

Belated Horn Tooting

Mon, 17 May 2010 16:34 GMT

Away last week, we missed this bit of recognition from Market Watch for our forecast team. Never too late, however:

Over the past year, the top economists are, in order: Nigel Gault and Brian Bethune of IHS Global Insight; the team at RBS Securities now led by Michelle Girard and formerly headed by Stephen Stanley; Maury Harris's team at UBS; Spencer Staples of EconAlpha; Aaron Smith and Ryan Sweet of Moody's Economy.com; Peter D'Antonio of Citigroup; Ethan Harris's team at Bank of America Merrill Lynch; David Wyss and Beth Ann Bovino of Standard & Poor's; Lou Crandall of Wrightson ICAP, and John Silvia's team at Wells Fargo Securities.

Best and Worst Housing Markets

Thu, 6 May 2010 14:06 GMT

Talking housing at the spring Economic Outlook conference, Celia Chen shared her 10-best and 10-worst housing markets to invest in, based on local trends and future growth prospects. Depressingly for those of us in the Northeast, all the action seems to be South and West.

Recovery Timeline

Thu, 6 May 2010 10:23 GMT

At the spring Economic Outlook conference, Mark Z. laid out the major economic mileposts of the recent past and future.

Global Warming

Thu, 6 May 2010 09:28 GMT

Live from the Spring Economic Outlook conference: Mark Zandi is describing the recovery's trajectory, noting that global policy efforts to combat the recession have paid off. The world is coming back, led by Asia.

Follow Us on Twitter

Mon, 3 May 2010 16:49 GMT

Seems like everyone is tweeting—that is, sharing news and tips on the popular social media network Twitter. We are too: As of today, you can receive alerts and links to the latest Dismal Scientist content via Twitter. Just sign in and become a follower: www.twitter.com/dismalscientist. And don't forget to tell—or tweet—your friends and colleagues as well.

Calculating Stocks' Value

Wed, 28 Apr 2010 15:09 GMT

Longtime subscribers to Dismal Scientist might recall a tool on the site called the U.S. Stock Market Value Calculator. Now, after a hiatus for repairs and upgrades, the stock-value tool is back, better and easier to use than ever.

Why a market calculator? Not to provide hot buying tips or an early sell signal. The point is rather to treat equity prices as an economic indicator. At their most efficient, markets aggregate the opinions of millions of investors, opinions that can influence business investment, consumer spending and ultimately the path of overall economic growth. The calculator's model draws together fundamental drivers of equity value—earnings growth, interest rates and commodity prices—to produce a view of "fair value". Moody's Economy.com's forecast assumptions are shown on the chart, but readers can plug in their own assumptions as well.

Please check it out, and send us your feedback.

Deja Vu All Over Again?

Tue, 27 Apr 2010 15:24 GMT

The authors observe that “by nearly every measure, real estate securities were as toxic in the 1930s as they are now.” Widespread economic optimism after World War I fueled demand for office space, boosting average commercial rents nationally 168 percent from a pre-war base through 1924. That kicked off a speculative commercial real estate construction boom not matched until the mid-2000s.

That's from the latest NBER Digest summary of a working paper entitled: "Securitization in the 1920s." From the paper's abstract:

"A substantial retail appetite for real estate securities during this period may have significantly contributed to a real construction boom, but overly optimistic speculation in these securities may have led to overbuilding. The rapid deterioration of these securities and a near complete drop in issuance show, ex post, that investors were overconfident in building fundamentals during the boom years. The breakdown in the value of real estate securities as collateral assets preceded the crash of 1929 and may have contributed to the fall of asset prices more generally. "

Raises the interesting question of how, or whether, Depression-era regulatory reform touched this market, and whether there are lessons there for today.

Wineconomics Update

Wed, 21 Apr 2010 16:32 GMT

Some economists have all the fun. Colleague Ed Martinez helps Sonoma vintners decide whether 2010 will be a good year. The North Bay Business Journal reports:

‘Flight to value’ to continue for wine consumers

NORTH COAST — This year is shaping up to be another challenging one for the wine industry on the North Coast as signs of recovery in the U.S. economy and consumer spending slowly take hold, according to an economic report released today.

“The health of U.S. consumers will improve in the near term but is still some distance away from a full recovery,” wrote Ed Martinez, senior economist with Moody’s Economy.com, in the industry report prepared for the Sonoma County Economic Development Board.

Key indicators of that health are retail sales, personal savings rate, consumer confidence, stock market indexes, home prices and household net worth. They have improved from the depths of the recession a year ago but remain below levels at the start of the economic recession at the end of 2007, according to the report.

For example, the savings rate for the first two months of this year was 3.1 percent, which was lower than the 3.9 percent average for the first half of 2009.

“However, expectations of weak-at-best economic and labor improvements weigh on any outlook for an end to consumers’ flight to value in the near term,” Mr. Martinez wrote.

Taxes and Shelter

Wed, 21 Apr 2010 15:36 GMT

Another reason never to take what the headlines say about tax policy at face value. Obama wants to raise rates on the wealthy; this should cause tempers to rise in every affluent neighborhood from Greenwich to Beverly Hills, right? Wrong! As Benjamin Harris of the Tax Policy Center explains:

The combination of the recently-passed health care legislation and the President’s proposed rollback of the Bush tax cuts for upper-income taxpayers would sharply boost tax rates on the wealthy. This is great news for the high-end real estate market.

It may seem counterintuitive, but raising taxes on those in the top brackets could increase urban house prices by as much as 10 percent, and even more in east and west coast cities where homes are most expensive. The drivers of this windfall: higher top rates on ordinary income and hikes in capital gains taxes. Obama’s proposal to limit the benefit of itemized deductions to 28 percent could more than reverse this housing windfall, but that measure is unlikely to win congressional approval.

A longer version of Harris' thesis is here.

The Squawk Box View

Mon, 19 Apr 2010 17:12 GMT

Mark Z. helped the CNBC crew make sense of the macro situation as the SEC-Goldman story heated up.

Live from New York

Fri, 16 Apr 2010 17:00 GMT

CNBC fans: Catch Mark Zandi as guest host of "Squawk Box" Monday, April 18, beginning at 7 am ET.

Mark will join anchors Joe Kernen, Becky Quick, and Carl Quintanilla, discussing the latest economic and business news with scheduled guests Andrew Ross Sorkin (author of “Too Big To Fail”), Rep. Barney Frank (House Financial Services Committee chairman) Robert Engle (2003 Nobel Laureate in economics) and others.

VAT's Happening?

Thu, 15 Apr 2010 11:21 GMT

Nice update on the value-added-tax talk going around in DC from Tax Vox, including this gem:

Larry Summers joked that a VAT was opposed by conservatives who saw it as a money machine and opposed by liberals who feared it was regressive. It will win broad support, Larry predicted, once liberals realize it is a money machine and conservatives recognize it is regressive.

Which brings to mind this fairly recent discussion of the VAT idea from Scott Hoyt. Excerpt:

A VAT has the potential to generate a large amount of revenue. U.S. consumer spending totals some $10 trillion annually, or about 70% of GDP. The actual tax base will likely be far smaller; most countries with value-added taxes exempt food at grocery stores (7% of U.S. spending) and medical goods and services (21% of spending). Apparel, food at restaurants, charitable giving, insurance, education, child care, and other categories could also be exempted or taxed at a lower rate. Yet, even if half of all spending were exempt, the VAT's revenue potential would be large.

The Fannie-Freddie Suggestion Box

Wed, 14 Apr 2010 17:22 GMT

How many times have you have said to yourself: "Boy, if I ever had the chance I'd tell those government guys just what to do with Fannie Mae and Freddie Mac." Well, now you can! The U.S. Treasury is asking for public comment on the future of the housing system, and more specifically wants to know what it should do with the GSEs. To focus your thinking, the Treasury has asked for answers to seven questions:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

3. Should the government approach differ across different segments of the market, and if so, how?

4. How should the current organization of the housing finance system be improved?

5. How should the housing finance system support sound market practices?

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

For background, you can refer to this article by Cris de Ritis. And don't forget to copy your answers to our "comments" box below.

Dating Dos and Don'ts

Mon, 12 Apr 2010 14:02 GMT

Here's a fine how-de-do. Sort of turns the old "often wrong, never in doubt" idea of forecasting on its head...

CAMBRIDGE, April 8 -- The Business Cycle Dating Committee of the National Bureau of Economic Research met at the organization’s headquarters in Cambridge, Massachusetts, on April 8, 2010. The committee reviewed the most recent data for all indicators relevant to the determination of a possible date of the trough in economic activity marking the end of the recession that began in December 2007. The trough date would identify the end of contraction and the beginning of expansion. Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature. Many indicators are quite preliminary at this time and will be revised in coming months. The committee acts only on the basis of actual indicators and does not rely on forecasts in making its determination of the dates of peaks and troughs in economic activity. The committee did review data relating to the date of the peak, previously determined to have occurred in December 2007, marking the onset of the recent recession. The committee reaffirmed that peak date.

The Forecast Also Rises

Wed, 7 Apr 2010 12:55 GMT

This just in: the forecast for U.S. economic growth this year has been raised. In his latest U.S. Macro Outlook, Mark Zandi writes:

The economy’s near-term outlook is improving. Real GDP growth is expected to expand almost 3% in 2010, 4% in 2011, and 5% in 2012. Employment gains will also accelerate, with the monthly payroll count averaging growth of about 100,000 this year, 250,000 in 2011, and more than 350,000 in 2012. Unemployment will drift higher, peaking near 10.25% late this year as the labor force resumes growing, but will decline steadily in 2011-2012. Employment is projected to return to its prerecession peak by early 2013, and unemployment will reach a full-employment rate of 5.5% by 2014.

The outlook for 2010 in particular has brightened steadily. In the December 2009 forecast, real GDP was expected to grow just over 2% in 2010, monthly employment gains were projected to average 46,000, and unemployment was expected to top out at 10.5%.

Whom Do You Owe?

Fri, 2 Apr 2010 10:17 GMT

View in full-screen (if your computer supports it) to better see development in the early years. Note how China passes Japan in 2008. And who knew the U.S. was in hock to Luxembourg?

Who Owns America's Debt - A Dynamic Perspective on Major Foreign Holders of Treasury Securities (2002-Present) from Computational Legal Studies on Vimeo.

Mortgage Mysteries

Tue, 30 Mar 2010 14:53 GMT

The WSJ joins the crowd waiting to see if the Fed's planned exit from the secondary mortgage market will cause a ruckus:

The Fed will officially put the kibosh on its $1.25 trillion shopping spree in the mortgage securities market Wednesday, essentially removing the one major buyer from a market that still bears deep scars from the financial crisis.

The prospect of the Fed’s buying power vanishing had caused some consternation among those who watch the mortgage markets. They wondered whether bidding adieu to the biggest buyer might mean that prices would fall and yields would rise, yanking up consumer mortgage rates and raising another hurdle for the housing market.

But... the mortgage market seems to be pretty placid over the Fed’s ever-so-gentle, and well-telegraphed exit...

Nathan Topper offered Dismal Scientist readers a more extensive discussion of the question late last week:

There are two competing theories of what will happen after the Federal Reserve removes a key support from the mortgage market by ending its purchases of Fannie Mae and Freddie Mac mortgage-backed securities this coming week. The first holds that investors have already priced in the end of the Fed’s purchases and rates will remain near historic lows as long as the central bank maintains holdings equaling roughly 20% of the agency MBS outstanding. The second assumes investors have not priced in the Fed's conclusion of purchases and foresees a sharp rise in risk premiums in the next few months as MBS issuance overwhelms demand.

Our outlook is for a gradual rise in agency MBS spreads. The maintenance of the Fed's portfolio is enough to keep agency MBS credit spreads unusually small. Narrow credit spreads for Fannie Mae and Freddie Mac would be most conducive to a recovery in the housing market, especially since the loss of another government support—the first-time homebuyer tax credit—will likely hurt demand. Home sales should benefit as the economy and job market improve, but how far sales can rise will depend on how high mortgage rates rise after being artificially low for so long.

Read the whole thing, free

Forecast Assumptions

Tue, 30 Mar 2010 14:48 GMT

Monetary policy. The Federal Reserve is not expected to begin raising interest rates—either the interest rate paid on reserves (the deposit rate) or the federal funds rate—until early 2011. The initial rate hike will coincide with definite downward movement in the unemployment rate. Employment is expected to stabilize early this year, but job growth sufficient to bring down the unemployment rate on a consistent basis in unlikely until the end of 2010.

Inflation should also remain low and inflation expectations well-contained through at least mid-2011. Core inflation is already at the bottom end of the Fed's implicit target range and will slow further in coming months given the near double-digit unemployment rate, high vacancy rates, and low manufacturing utilization rates.

It will also take the better part of this year for the financial system to fully normalize. The system has stabilized as interbank lending and corporate bond markets have returned to normal. But other parts of the system are still not functioning well. Issuance of private residential and commercial mortgage-backed bonds is moribund, a steady stream of small banks continues to fail, and most depository institutions are reluctant to extend credit except to their household and corporate borrowers with the most pristine balance sheets.

The Fed will effectively begin tightening monetary policy well before raising interest rates. Also, just before raising interest rates, policymakers will begin to drain reserves through reverse repurchase agreements, where the Fed borrows money from banks using Treasuries as collateral, and term deposits. The Treasury has also recently restarted the Supplemental Financing Program, in which it sells Treasury bills and deposits the proceeds at the Fed.

Policymakers will then be prepared to begin raising rates, hiking the deposit rate and federal funds rate simultaneously. The deposit rate is likely to become the key target rate until the excess reserves are successfully drained. The funds rate is expected to end 2011 at 2.5%, and to have normalized at close to 4% by the end of 2012.

Fiscal policy. The federal government's fiscal problems remain enormous. The budget deficit ballooned to near $1.4 trillion in fiscal 2009, up from $475 billion in fiscal 2008. This year's deficit is expected to be about as large, and the cumulative deficit from fiscal 2009 to 2012 will be nearly $5 trillion.

This very poor fiscal situation reflects the expected ultimate price tag to taxpayers of more than $2 trillion from the financial crisis and Great Recession, equal to 14% of GDP. Of the over $2 trillion cost of the financial crisis and recession, $1.3 trillion is the direct cost to the government of its response to the financial crisis. This includes the fiscal stimulus and what has been committed to support the financial system and the auto and housing industries, less what the government will eventually recoup in future asset sales. The weaker economy and resulting loss of tax revenues, and increased transfer payments to support those losing their jobs and other income support programs, will cost the Treasury another $700 billion. These are very substantial costs, but the costs of governmental inaction would have been measurably greater.

The budget outlook remains extraordinarily disconcerting even after the costs of the financial crisis abate, with the costs of Medicare, Medicaid and Social Security set to balloon. President Obama's recent budget proposal does not significantly address the nation's long-term fiscal problems; the nation's federal debt-to-GDP ratio will rise to over 80% a decade from now under the president's plan. This is double the approximately 40% ratio that prevailed prior to the current financial crisis. The long-term budget outlook will thus remain untenable and will ultimately force various substantial changes to entitlement programs and tax policy.

U.S. dollar. The U.S. dollar has remained largely unchanged since the financial crisis and Great Recession hit in 2007. At times it has been stronger and other times weaker, depending on the level of angst in the global financial system. The dollar strengthens when global investors are nervous, as they flee to the perceived safety of U.S. assets.

The dollar has received some recent support from the serious fiscal problems of Greece, which are symptomatic of developing difficulties in a number of euro zone countries. The European Central Bank will be under pressure to keep euro zone rates lower for a longer time in an effort to support the region's economy as necessary budget cuts weigh on growth. The dollar is thus expected to continue appreciating against the euro in coming months. The British pound will also remain under pressure given Great Britain's own economic and fiscal problems; these are now more serious as continental Europe will not be as ready a market for U.K. exports.

However, the dollar is expected to drift lower over the next several years as the Chinese are expected to resume revaluation of their currency by this time next year. The dollar is some 25% overvalued against the yuan, and while the Chinese will be slow to revalue, the economic logic for doing so is increasingly compelling. There is no more efficient way to address the Chinese own inflation and speculation concerns than allowing their currency to appreciate in value.

Concerns that the U.S. dollar is at risk of rapidly declining or losing its reserve currency status are overdone. The dollar accounts for nearly two-thirds of global reserves, and that is unlikely to change much anytime soon, as the U.S. remains far and away the global economy's largest and most stable economy and the predominant player in global trade. There are also no good alternatives: Europe's current economic problems preclude use of the euro.

Energy prices. The price of oil, as measured by a barrel of West Texas Intermediate crude, has been between $75 and $80 in 2010. Over the past two years, prices have ranged from well below $50 at the start of 2009, during the depths of the recession, to a record high of almost $150 in the summer of 2008. Natural gas prices remain low, particularly compared with oil prices, at below $5 per million BTU.

Global economic conditions and their impact on energy demand will be the primary drivers of energy prices. Prices are expected to trend more or less higher over the next couple of years as the global economy slowly gains traction. For all of 2010, the price of a barrel of oil is expected to average $80, and to range as high as $100 in the next several years; this is consistent with trend global demand and supply fundamentals, abstracting from the vagaries of the world business cycle.

Natural gas prices will have trouble keeping up with oil prices during this period, as a very substantial glut of natural gas has developed. Abstracting from the impact of weather, demand has weakened with the recession and supply has increased substantially in response to previously very high prices. The price of natural gas is expected to average $6 per million BTU this year, and closer to $9 over the longer term.

Are Home Sales Bouncing?

Tue, 30 Mar 2010 09:55 GMT

Is the federal homebuyers' tax credit making home sales bounce (again)? The New York Times says so:

After several disastrous months for home sales across the country, when volume dropped by 23 percent, the pace appears to be picking up again. The number of Des Moines homes under contract in February rose by a third from the January level. The number of pending contracts jumped 10 percent in Naples, Fla., 14 percent in Houston and 21 percent in Portland, Ore.

But where do these numbers come from? The Times doesn't specify, curiously. And while we also expect some uptick in sales in the next few months—as Ryan Sweet wrote earlier this week—you certainly can't see it in the recent data. Witness the last few weeks of mortgage purchase applications

Maybe the next mortgage survey—due out Wednesday—will tell a different story. Meanwhile, it would be helpful if the Times disclosed its sources...

Health Reform: Success and Failure

Sun, 28 Mar 2010 08:04 GMT

The following commentary, by Mark Zandi, appears in today's Philadelphia Inquirer:

Healthcare reform will significantly impact all our lives, but when added up will have little impact on the broader U.S. economy. This is both a success and a failure, and is also why the long, painful debate over healthcare reform isn’t over.

The reform bill’s success is that it insures the uninsured and, more or less, pays for itself. Extending coverage to more than 30 million Americans who currently lack insurance—achieving nearly universal coverage—is an impressive achievement. Equally impressive is that the cost of this will be split, with roughly half coming from tax increases on the healthcare industry and high-income households, and half from cuts in the growth in Medicare spending.

The nonpartisan Congressional Budget Office, whose job is to calculate the cost of government policies, has determined that healthcare reform will actually lower the federal budget deficit over the next decade. This is probably optimistic, due to restrictions on how the CBO makes its estimates, but it is reasonable to conclude that the new law will be deficit-neutral. In other words, healthcare reform is paid for.

The most difficult part of paying those costs will be the planned future savings in Medicare. Healthcare providers must become more productive, which means changing in ways that many won’t like. Congress will surely come under pressure to scale back some of those changes. But CBO has a done a good job of calculating the cost of health legislation in the past, such as the Medicare drug benefit enacted in 2003 under the Bush Administration, and the large cuts in Medicare spending implemented during the Clinton Administration. There is no good reason to doubt CBO’s current analysis.

Higher taxes on high-income households – couples making over $250,000 a year – aren’t without negative economic consequences, but the tax hikes are small and so too will be the economic fallout. Moreover, any ill effects should be washed out by the economic benefits that flow from the reform. For example, prohibiting insurance companies from rejecting those with pre-existing conditions could allow greater mobility in the workforce, a meaningful plus for economic activity. Workers have long been anxious about changing jobs due to the possibility of losing their insurance. Removing that source of anxiety reinforces a key U.S. economic strength, and is particularly helpful at a time of high unemployment.

On the other hand, healthcare reform fails in that it falls well short of reining in future healthcare cost growth. President Obama has often made the point that unless healthcare costs grow more slowly it will be impossible to reduce future federal budget deficits. He is absolutely correct. At their current rate of growth, Medicare and Medicaid costs will completely overwhelm the government’s budget. We will have a fiscal crisis unless the healthcare cost curve begins to bend soon.

Healthcare reform does take a stab at this with the introduction of a so-called Cadillac tax. The tax is targeted at high-dollar insurance plans provided by employers – those with annual premiums above $27,500 for a family – that are a luxury compared with most insurance plans. The tax would encourage employers to scale these high-end plans back, so that households would more directly feel the cost of their decisions. This would make them more careful shoppers, forcing healthcare providers to be more judicious in their pricing. The principal economic failing of the nation's healthcare system is that big consumers of healthcare don't directly experience the financial pain of their decisions. The Cadillac tax was supposed to change this. Unfortunately it won’t, at least not for a long time, as the tax that ended up in reform bill is too small to have a meaningful impact.

The reform also sets up an independent advisory board to recommend ways to slow the growth of Medicare if it exceeds projections—which it will. But the board’s authority was significantly diminished in the final draft of the reform bill; the panel ended up being very limited in the steps it can take. To make a real difference, such a board must have the authority to make tough decisions about which medical procedures have meaningful benefits and which don’t. This could not happen once opponents had succeeded in branding this the “death panel.”

Optimistically, we may hope that policymakers will be able to strengthen the Cadillac tax and advisory board down the road so they are more effective. But a realistic appraisal must acknowledge that reform will not slow healthcare cost growth, and that the nation’s long-term fiscal challenges remain daunting. Another long and painful healthcare debate is in our future.

Another Mass. Miracle?

Wed, 24 Mar 2010 14:03 GMT

The Bay State looks to be a leader in the recovery, the Boston Globe reports:

Recession has ended in Mass., say analysts

Supported by universities and hospitals, and buoyed by a housing rebound, Massachusetts has pulled out of recession ahead of most states and could start to add jobs steadily in coming months, according to a leading economic forecasting firm.

Moody’s Economy.com of West Chester, Pa., which analyzed employment, production, and housing data, estimates that Massachusetts began a recovery in January, becoming one of 22 states with growing economies. New Hampshire, the only other New England state no longer in recession, began its recovery in December, according to Moody’s Economy.com.

“The data has been strong enough to move Massachusetts out of a moderating recession into a recovery,’’ said Gus Faucher, director of macroeconomics at Moody’s Economy.com. “Massachusetts will be seeing job gains pretty consistently from here on out.’’

Lone Star Status

Wed, 24 Mar 2010 09:38 GMT

Texas gets a look at its outlook in recovery, the Dallas Morning News reports:

Texas cities will outpace the rest of the country coming out of the recession.

But that doesn't mean there won't be bumps in the road to recovery, the folks at Moody's Analytics said Tuesday at their annual Dallas economic confab.

There's still some bad news – more woes in store for the battered real estate sector. But Moody's predicts that Texas will find new jobs in health care, high tech and energy.

"This region really does lead the nation in terms of recovery and will be one of the first regions to achieve a new employment peak," Steven Cochrane, Moody's Analytics' managing director, told more than 100 local businesspeople at the session. "The recession was just so shallow here because the housing cycle was shallow.

Employment Forecast

Mon, 22 Mar 2010 16:46 GMT

USAToday took our employment forecast data and created this nifty interactive page, with a map and bouncing bar charts, no less. Check it out.

Tracking the Recovery

Fri, 19 Mar 2010 16:01 GMT

As the U.S. recession has given way to recovery, so our former Recession Watch feature has been updated as well. It's now the Recovery Tracker -- a feature page designed to be a kind of GPS for the economic road back.

Here you'll find a real-time look at the most important indicators of recovery, as selected by Chief Economist Mark Zandi, and also a comprehensive look at how the current sitution compares with past U.S. business cycles. For instance: How does employment growth today compared with severe and mild recessions since World War II? Our charts will tell you.

From here you can also follow the links to our popular U.S. Recovery Status and Global Recovery Status maps, providing a snapshot of economic progress around the world or state-by-state for the U.S. And you'll also find links to the latest relevant news and commentary from Dismal Scientist analysts.

The Maestro Speaks

Thu, 18 Mar 2010 15:37 GMT

"...we never had a sufficiently strong conviction about the risks that could lie ahead. As I noted earlier, we had been lulled into a state of complacency by the only modestly negative economic aftermaths of the stock market crash of 1987 and the dotcom boom. Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions."

Alan Greenspan, from "The Crisis" — forthcoming from the Brookings Institution

Makes we want to reach for my Fedspeak dictionary. Is "gradual" longer than "extended period" ? How about "for some time" ? Could the entire financial crisis have been avoided if somebody had just been a little more concrete in his terminology?

Stuck in the Partisan Thicket

Wed, 17 Mar 2010 09:54 GMT

I don't begin to understand their math, but these researchers have certainly come up with a plausible sounding model for the current mess in Washington:

Ideologues: Explaining Partisanship and Persistence in Politics (and Elsewhere)

This paper provides an explanation for why political leaders may want to adopt ideological positions and maintain them over time even in the face of conflicting evidence. We study a dynamic framework in which politicians are better informed than the voting public about an underlying state of nature that determines the desirability of a given policy measure. The issue itself is nonpartisan (everybody has the same policy preferences) but voters attach ideological labels to both candidates and available policy alternatives. We show that both sides may be caught in an ideology trap: because voters expect the perceived ideology of office holders to determine their political actions, politicians are tempted to act according to their perceived ideology, resulting in political failure.

(An ungated version is here.)

Meme Change

Mon, 8 Mar 2010 13:17 GMT

John Cassidy, writing in this week's New Yorker, rethinks the financial bailout:

Economists are still debating what it was that ended the financial crisis and turned the economy around. It is inarguable, though, that Geithner’s stabilization plan has proved more effective than many observers expected, this one included...

More specifically, Cassidy notes that the Obama administration now looks smart for resisting calls to nationalize the nation's largest banks:

Many financial experts who aren’t aligned with either party now believe that Geithner was right. “The people who were against nationalization have been vindicated: such a policy was not necessary,” Nariman Behravesh, the chief economist at IHS Global Insight, a leading economics consultancy, said. Mark Zandi agreed. “Of all the various policy efforts to stabilize the financial system, none has worked better than the bank stress tests,” he said. (During the 2008 election, Zandi advised John McCain, but he regards himself as an independent.) Together with the original decision to inject public money into the banks, he said, the tests “put an end to the panic and stabilized the system. Geithner got it about right. Nationalization would have caused havoc.”

Historical Page Turners

Mon, 1 Mar 2010 17:13 GMT

Back story, meta-narrative, secular trend: whatever term your discipline favors, the idea is the same. It's all about the larger context in which we frame current events. A helpful convention, but one that can lead to stereotypes and inside-the-box thinking. So I personally cherish those moments when the context changes, or some piece of news threatens to change the narrative. News like this (from last Friday's New York Times):

Just a year after laying off millions of factory workers, China is facing an increasingly acute labor shortage...unskilled factory workers here in China’s industrial heartland are being offered signing bonuses. Factory wages have risen as much as 20 percent in recent months...

Some manufacturers, already weeks behind schedule because they can’t find enough workers, are closing down production lines and considering raising prices...

The immediate cause of the shortage is that millions of migrant workers who traveled home for the long lunar New Year earlier this month are not returning to the coast... China has drained its once vast reserves of unemployed workers in rural areas and is running out of fresh laborers for its factories.

And then there's this, (from the National Bureau of Economic Research):

The conventional wisdom that Africa is not reducing poverty is wrong... We show that: (1) African poverty is falling and is falling rapidly; (2) if present trends continue, the poverty Millennium Development Goal of halving the proportion of people with incomes less than one dollar a day will be achieved on time; (3) the growth spurt that began in 1995 decreased African income inequality instead of increasing it; (4) African poverty reduction is remarkably general: it cannot be explained by a large country, or even by a single set of countries possessing some beneficial geographical or historical characteristic.

A Dish Best Eaten Cold

Mon, 1 Mar 2010 15:19 GMT

A friend of Generation-X years believes with some passion that most of the troubles facing her cohort can be laid the feet of the Baby Boomers. Soaring debt, stagnant employment, endless Woodstock and Beatles reunions—you get the idea.

Well she, as well as all the other Gen-X, Gen-Y and Millennials coming up, could have the last laugh. Or so it occurred to me after reading this blog post, containing the arresting one-liner:

“Inflation is the young’s revenge on their elders for over-spending."

Think about it. And remember, if you're old enough, who complained loudest about the miseries brought on by high inflation in the 1970s. Hint: It wasn't us baby boomers, then in our teens & 20s. Old folks, with fixed-income pensions and 3% yields on their insurance annuities, were the ones then taking the brunt.

'Nuff said.

Asia Update

Mon, 22 Feb 2010 10:32 GMT

From Sydney, Matt Circosta talks with CNBC about the forecast for the important Southeast Asian economy.

Meanwhile, Matt Robinson tells Bloomberg what's up Down Under:

Japan's Liquidity Trap

Wed, 17 Feb 2010 17:16 GMT

Nik Bhattacharyya discussed Japan's liquidity trap for Dismal Asia/Pacific readers earlier this month. Later, CNBC asked him to tell the wider world..

Making Sense of Greece

Wed, 17 Feb 2010 09:28 GMT

Matt Robinson talks with India's NDTV about how one small nation's debt problems became a global obsession.

Inside the Beltway

Fri, 12 Feb 2010 16:09 GMT

The internet may be destroying traditional journalism, but it's also gestating some pretty cool new forms of information dissemination. Students of government spending, in particular, have a host of new ways to get inside Washington's budgetary skull. Here is ProPublica, for example, on where the financial bailout money is going.

And here's the New York Times, offering what truly is a triumph of information substance over style, in the form of an interactive chart of the federal budget for 2011.

Blow it up to full-screen for the full effect. And click the "hide mandatory spending" button for an idea of just how tough it's going to be to get this sucker under control.

Is There An Optimal Homeownership Rate?

Wed, 3 Feb 2010 15:59 GMT

Tuesday the Census reported another drop in U.S. homeownership, taking the proportion of Americans who own rather than rent back to the pre-housing boom level. The rate had bubbled up above 69% in 2005; now it's down nearer 67%.

It's no mystery, of course, that homeownership should recede under a tidal wave of falling prices, foreclosures and the worst recession in decades. But the news did raise a question that, as far as I know, has never been answered: What should the homeownership rate be? Or in economic terms, is there an optimal rate? And if so, what?

Until the recent unpleasantness, of course, the near-universal consensus held that anyone able to purchase a house should do so—and that those who could not deserved society's help, via tax breaks, mortgage subsidies and all the financing tricks that Wall Street's best and brightest could conjure up, to become homeowners themselves.

Well, so much for that idea. Even a Congressman now seems to be able to tell homeownership from apple pie:

“Some people will never own. There will be people who choose not to own; there are people who for economic circumstances will not be able to own. And there is no conflict between promoting homeownership and recognizing that decent, affordable rental housing will also be very important indefinitely for tens and tens of millions of Americans.” -- Barney Frank

Ok, then. So if up isn't the only right way for homeownership rates to go, it stands to reason that a "sweet spot"—the aforementioned optimal level—exists. Or, as this blogger put it not long ago:

Just as every nation has a ‘natural’ unemployment rate, every nation therefore has an ‘optimal’ homeownership rate, one that balances population growth, rates of household formation and dissolution, labor and employment mobility, and large-scale demographic shifts. We don’t know what that rate is, and it can shift over time.

I can see where such a calculation could be quite challenging, requiring assumptions about demographic trends, income levels, industrial composition and quite a bit more. But does that mean the concept must remain merely theoretical? Is an optimal homeownership rate any more elusive than NAIRU or the long-run potential rate of GDP growth?

I don't know. I do think that such a target, if it could be even roughly calculated, might have a fairly important role to play in housing policy. If, as Cong. Frank suggests, there's a good reason to encourage some proportion of the population to rent, we might want to know when a host of currently sacred political cows, from the FHA to the mortgage-interest deduction, would serve us better as hamburger.

Have Home Prices Turned?

Tue, 26 Jan 2010 15:41 GMT

Still looking for the light at the end of that long, long, housing tunnel, Mark Z. talks with CNBC:

Bank Regulation: Good, Bad & Ugly

Sat, 23 Jan 2010 12:00 GMT

The following is scheduled for publication in Sunday's Philadelphia Inquirer:

The Good, the Bad and the Ugly in Regulatory Reform

by Mark Zandi

Our financial system has failed us. It’s not a stretch to blame today’s 10 percent unemployment rate on the trillions of dollars in loans made during the housing bubble that subsequently went bad. Financial institutions aren’t solely to blame for this mess, but they were a big part of it, and they need substantive reform.

The reforms proposed by the Obama administration last year were roughly right. Giving the Federal Reserve responsibility for overseeing risk throughout the financial system; creating a new way to shut down troubled institutions, and establishing a new agency to advocate for consumer financial protection make sense. Even the president’s new plan to tax the nation’s largest banks to pay for the Troubled Asset Relief Program has merit. But the proposal made this past week to effectively break apart the largest banks does not. More significantly, it suggests the administration is set to take reform efforts too far.

The good

The TARP tax is a good idea. Indeed, the administration’s proposed levy on financial institutions should be made permanent to pay for the subsidy taxpayers provide those large and complex banks considered too big to fail.

The TARP was a success; without it, the system would likely have collapsed. Initial fears that the $700 billion allocated for TARP would vanish were misplaced; taxpayers will get back all but an estimated $117 billion. Much of the TARP money injected into financial institutions has been or will be repaid, with interest. Money the government won’t get back includes the amount used to take over insurer AIG and to support the auto and housing industries.

Asking the banks to ante up to cover other TARP beneficiaries may seem odd, but it is appropriate. The institutions that survived the financial crisis benefited enormously from taxpayer largesse extending well beyond TARP. And given the industry’s consolidation during the crisis, bank profits now flow to a much smaller group of shareholders, employees and executives.

The TARP tax would also be a step in the right direction toward mitigating too-big-to-fail risk. Large, complex institutions can borrow more cheaply because, with the implicit backing of taxpayers, investors believe their money is safe. It is appropriate for taxpayers to be compensated for this subsidy.

True, bank shareholders and executives would not bear the full cost of the tax themselves: part would be passed through to consumers and businesses in the form of higher borrowing costs or tighter loan standards. This effect can’t be completely avoided, but it should be modest, as many of the country’s 8,000 smaller banks would step up if big institutions were to raise rates or curtail lending too much.

The bad

On the other hand, breaking large institutions apart, as the president proposed this past week, is a bad idea. If adopted, banks with FDIC-insured deposits would be barred from many kinds of trading and investment. The administration seems to believe these activities are too risky, and that without them, banks and presumably the entire financial system will be safer.

To be sure, banks’ securities portfolios lost a boatload of money during the crisis, much of it from the kind of trading the president wants to prohibit. But the banks also lost a lot from traditional lending. Of the 140 banks that failed last year and the 550 currently on the FDIC’s troubled list, nearly all stumbled because of bad residential and commercial mortgage lending, not because of risky trading.

The administration would still allow banks to trade for clients, but it won’t be easy to tell which trades are for clients and which are not. If a hedge fund client of a bank wants to sell a security, and the bank can’t find a ready buyer and instead buys the security itself, is that good customer service or inappropriate proprietary trading?

Security holdings also give banks an important way to keep their customers’ money readily available, a feature known as liquidity. A sound bank is one that has sufficient capital and sufficient liquidity, and banks need to hold securities to manage liquidity prudently. Owning securities means being able to trade them when necessary; that in turn requires a healthy proprietary trading operation.

The administration seems to believe that pushing trading activity outside of the banks will make the entire financial system more stable. This is also questionable. It stands to reason that nonbank trading operations and global financial firms will grow bigger if the reform passes. Will the Federal Reserve and other regulators be better able to monitor and manage the risks taken by these very secretive, privately held institutions? It’s hard to see how.

The ugly

The president’s frustration with big banks is understandable; the financial system needs reform but financial institutions are using their substantial resources to prevent it. But while it may be good politics to bash the banks — particularly in an election year when unemployment is in double digits — using voter anger to fuel reform could get ugly. It is rare that good policy is made when politics trumps economics.

E-mail Mark Zandi at help@economy.com

Indexing Adversity Again

Thu, 21 Jan 2010 12:14 GMT

Using data generated by Moody's Economy.com, MSNBC has been tracking the recession's impact across the U.S. for almost a year now. And while we see the picture as improving, the headline jockeys over there claim the economy is "stuck in neutral."

Judge for yourself:

The Inquiry Opens

Wed, 13 Jan 2010 12:57 GMT

“... To examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

That's the point of the hearings beginning today in Washington, where bankers, policymakers and (ahem) economists will be testifying about the roots of the recent meltdown. The Financial Crisis Inquiry Commission's own site is here a rundown on the panel from the liberal American Prospect is here. An alternative take on the panel's work is here.

And Mark Zandi's testimony (in pdf, with charts and graphs such as this one) is here.

Housing Bubbles, Here and There

Tue, 12 Jan 2010 11:48 GMT

Really neat web tricks department: This interactive chart from The Economist lets you compare 20 years of house prices across countries. If you thought the U.S. had a bubble, take a look at South Africa.

Asia-Pacific Outlook

Fri, 8 Jan 2010 09:25 GMT

In a live interview with India's NDTV, Matt Robinson discusses the Asia Pacific economic outlook for 2010, and India's economy in particular. The full story on the region is here.

The Rap on Keynes

Thu, 17 Dec 2009 14:25 GMT

Public broadcasting has a new mission: Proving it can make even dry, boring old economics into something the masses will embrace. This latest example offers a little bit of everything: Keynes, Hayek, rap music, hosts wildly flapping their arms ... it's a doozy. Hey dude, where's my full-employment equilibrium?

Update: A longer video version of Russ Roberts and Robert Skidelsky debating Keynes' legacy (without the rap) is on line here. And if you really dig the rap, Roberts would like a donation.

Good Morning Sydney

Thu, 17 Dec 2009 08:22 GMT

Update from Down Under: Matt Robinson talks to CNBC about Australia's latest GDP data and its central bank's next move:

Housing Snapshot

Mon, 14 Dec 2009 09:08 GMT

USAToday has come a long way from the days when they routinely printed "We love our spinach" graphics on the front page. Using sophisticated data (that is, ours) they've now come up with a concise and informative snapshot of the housing market's dramatic rise and fall.

The Return of Saving

Thu, 10 Dec 2009 15:39 GMT

As the speedy scribes at the Atlantic note, the Fed's latest Flow of Funds data confirm a shift in U.S. saving behavior.

The Fed's new report underscores the points Chris Cornell and Mustafa Akcay were making in their recent Dismal Scientist article—Though Chris and Mustafa went a bit deeper into which segments of the population have actually been saving more:

The financial crisis has scared U.S. consumers straight, leading to a dramatic turnaround in the saving rate. A close look at recent data finds the greatest changes in saving among households with lower levels of educational attainment, those most dependent on labor income, and those who relied most on home equity lines of credit to finance earlier consumption.

The degree to which consumers have boosted saving also appears to depend on how threatened they feel by changing economic circumstances, suggesting that much of the new saving is precautionary. Longer term, we expect saving rates to rise further, stabilizing around 8%, driven by the probability of future tax increases and perhaps also by a lasting change in attitudes. By contrast, the impact on saving rates of declining household wealth will be temporary; indeed, the least-threatened consumers are already moderating their recently heightened desire to save.

State of the States

Wed, 9 Dec 2009 09:51 GMT

Mark Z. talks to Stateline.org about Obama's latest don't-call-it-stimulus plan to help state and local governments:

Q. How crucial is it for states to get additional stimulus?

A. I think it’s vital states get additional stimulus. If no more aid is forthcoming, then they’ll be cutting jobs, programs and raising taxes…because their fiscal situation continues to deteriorate more rapidly. Tax revenues are still falling at a very rapid clip. So states are going to have a huge hole beginning in 2011 when the current stimulus runs out. I suspect they’ll be cutting spending and raising taxes long before reaching that cliff.

States have run out of budget tricks—various ways of managing through it. I don’t know if states have many more rabbits in the hat they can pull out.

More..

The Summit for Unemployment

Thu, 3 Dec 2009 15:30 GMT

As we await the official word on November's employment situation, Joe B. tells Bloomberg the jobless rate should peak around 11%.

Meanwhile, Mark Z. discusses the jobs dilemma with NPR's On Point.

Unleashing Small Business

Thu, 3 Dec 2009 15:02 GMT

Mark Z. explains to Congress why and how to jump-start the small-business job machine.

(Testimony starts about 47:10) U.S. News summarizes. Full text of the testimony is here.

Who Expected Dubai? (II)

Tue, 1 Dec 2009 08:17 GMT

Continuing to puzzle through last week's desert debt bomb, Matt Robinson talks to Australian CNBC.

Meanwhile, Matt's podcast on Dubai is quoted extensively here.

Who Expected Dubai?

Fri, 27 Nov 2009 07:59 GMT

A shock by definition is unexpected, and who expected Dubai? On the other hand, given the flashy growth in that Persian Gulf entrepot in recent years, perhaps we should have seen this coming. From Sydney, Matt Robinson fills in the background:

Dubai World is the state investment holding company of Dubai, and is behind some of the emirate’s most ambitious projects. Media reports suggest Dubai World has around $60 billion in debt, up to $50 billion of which is due to mature in the next two years. This includes a $3.5 billion bond issued by one of the group’s real estate businesses due on December 14. (The property developer—Nakheel—has suffered heavily as Dubai’s property market has plunged post-global financial crisis.) The government of the emirate has announced it is seeking a six-month moratorium on repayments until at least May next year.

Markets immediately reacted to the news, fearful that the request for postponement of Dubai World’s repayments could indicate that the Dubai government is struggling with its other debts. Fears that this could develop into a broader sovereign default situation sent investors into a tailspin; credit default swaps on 5-year Dubai government debt rose to 541 basis points, up sharply from 316 basis points on Tuesday. Risk spreads on neighbouring Gulf region sovereign debt also rose in response, including those of Abu Dhabi, Qatar, Bahrain and Saudi Arabia. However, unlike these other economies, Dubai does not enjoy an abundance of oil or gas to fall back on.

Risk of contagion

Reports flooded the media on Friday that Dubai World’s moratorium could escalate into the government of Dubai defaulting on its sovereign debt commitments. If this occurred, this would represent the largest sovereign default since Argentina’s in 2001. A large proportion of Dubai’s outstanding debt is owed to banks in the euro zone. Financial institutions on European bourses suffered the brunt of the losses late Thursday, as investors feared the exposure could cripple the already-fragile balance sheets of Europe’s largest banks.

From most reports, it appears unlikely that many Asian institutions face large exposures to Dubai debt. However, similar to what transpired during the financial panic of late 2008, Asian scrip suffered just as much as the shock waves permeated international financial markets. Investor risk aversion and a typical “flight to quality” saw a sell off in Asian equities early in the day, replicating losses on European bourses overnight. The Hang Seng in Hong Kong opened more than 3% lower, while stock markets in Korea, India, Taiwan and Australia shed more than 2% in the opening minutes of trade on Friday.

As international investor sentiment soured, a sharp reversal in portfolio flows saw regional currencies weaken relative to the U.S. dollar. Other than the Japanese yen—which enjoys safe haven status in the region—Asian currencies were universally weaker against a strengthening greenback. Meanwhile, government bond yields in Australia and Japan fell as investor demand for safe-haven assets pushed prices higher.

Broader ramifications

Irrespective of whether the situation escalates into a sovereign default event, the ramifications are broader than simply who has loaned the emirate money. The mere fact that Dubai has sought a delay in debt repayments raises the specter of potential sovereign default in the region, which could mortally wound international investor appetite for Middle East financial securities. Market speculation regarding a potential firesale of Dubai World’s foreign assets—particularly those in the United Kingdom—could also destabilize the embryonic recovery in global commercial real estate markets.

Given the still tight funding conditions in international credit markets and fragile balance sheets of many lenders across the globe, the impact on investor confidence could prove just as disastrous. If investor risk aversion sees CDS spreads on sovereign debt rise, this would eventually flow through to risk premia on all asset classes and most likely push global interest rates higher. This would naturally undermine policymakers’ quantitative easing efforts and other liquidity measures to lower borrowing costs and stimulate global economic activity, threatening the nascent recovery. At the very least, the events of the past week in Dubai serve as a stark reminder that the full impact of the global financial crisis may not yet be over.

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.

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.

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.

How the Fed Plays in India

Wed, 17 Dec 2008 08:30 GMT

Now live on the phone from Sydney, our Sherman Chan explains to CNBC India what the Fed's unprecedented move means for their side of the world.

Recession Markers Again

Tue, 16 Dec 2008 16:45 GMT

An economist friend who works at the Philadelphia Federal Reserve (but avers that he speaks only for himself) writes to suggest a wider focus:

I was staring at your latest blog, and I think its a mistake to focus too narrowly on industrial production. The main reason is that manufacturing just doesn't account for that much of employment. I look at the world as having three components: goods (including trade and transport); cyclical services (Information, FIRE, professional and business services, and leisure and hospitality); and acyclic services (health, education, and other services, and government). As the attached chart show, cyclical services and trade, transport and utilities are doing pretty badly already.

The Fed Boldly Goes ...

Tue, 16 Dec 2008 14:15 GMT

...where they've never been before? From the statement (italics added):

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further .

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities . Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

Gus Faucher's analysis is here (subscription required). Ryan Sweet's is here . And lots more on our Fed Watch page.

Another Recession Marker

Mon, 15 Dec 2008 09:00 GMT

Worst since 1980? 1973? the 1930s? You be the judge. (Of course the current drop may have farther to go.)

How to Spend It

Sun, 14 Dec 2008 22:15 GMT

The NYTimes' Economix blog asked several economists how Congress and the Obama Administration should organize the much-discussed fiscal stimulus package being discussed for next year. Here's how Mark Z. answered:

"The package includes $300 billion in government spending and $200 billion in tax cuts. Government spending provides the largest economic bang for the buck, particularly infrastructure spending, as it immediately adds to output and jobs here in the U.S. Aid to state government will also forestall immediate cuts in programs and jobs that states have to undertake to satisfy their balanced budget requirements. Infrastructure spending will take time to benefit the economy, and a tax cut is necessary to provide some quick support to the economy. A payroll tax holiday and a permanent payroll tax credit would be effective tax cuts, particularly if designed to help harder-pressed lower- and middle-income households and smaller businesses. If I had my druthers, however, the recovery package would be measurably larger than $500 billion. It is important for policy makers to send a strong and clear signal that they will do whatever is necessary to revive the economy. Only a concerted, comprehensive and consistent policy response stands between a severe recession and another depression."

Here's a summary in tabular form:

$500 Billion Economic Recovery Package
Sources: BLS, BEA, Moody's Economy.com

			2009	2010	2009-'10

Total Stimulus			220	280	500

Government Spending			90	215	305
	Extend Unemployment Insurance Benefits		9	11	20
	Expand Food Stamps		9	9	18
	Infrastructure Spending		33	129	162
		Traditional Infrastructure	21	67	88
		Green Infrastructure	12	62	74
	Aid to State Government		39	66	105
		FMAP	14	16	30
		Grants-in-Aid	25	50	75

Payroll Tax Holiday & Credit			130	65	195

Call It What You Will

Fri, 12 Dec 2008 13:45 GMT

They're scratching their heads at the NYT, wondering what to call the current episode:

One day, perhaps, the slow-motion downturn of the economy will receive the same one-name treatment as Vietnam, Watergate and Iran-Contra. But for now, the language of the current economic woes remains understandably murky, despite the impulses of journalists.

“The news always feels the need to name everything,” Jonathan Wald, the senior vice president for business news at CNBC, said. “If it’s not branded, it doesn’t exist in modern television.” He observed that the television channels in India quickly labeled last month’s militant attacks in Mumbai as the “War on Mumbai” and “India’s 9/11.”

It's easy to understand the quandry. When a drama lacks easily identifiable heros and villains; when the climax and denoument aren't necessarily scheduled in advance for prime time; when the crux of the matter isn't how somebody feels but rather how zillions of dollars are (or are not) flowing through the cosmically complex and abstruse network that we shorthand as The Economy... then yes, it's tough to find a label you can slap on like a refrigerator magnet.

Not that we haven't tried. As long ago as September 2007, Mark Z. coined the phrase "subprime financial shock" to describe the cratering of the mortgage bubble. And even when the damage had spread to the point where "subprime" began to seem too limiting, the phrase "Financial Shock" still seemed to resonate—at least with one publisher.

We may now be near a point where the term "subprime" doesn't have to encompass the breadth of the crisis, just signal its origins. The S&L Debacle, after all, brought down a lot of institutions that weren't S&Ls before it ended. Yet the term stuck.

Predicting the Trough

Thu, 11 Dec 2008 11:00 GMT

A fearless forecast. Via Econobrowser:

The most similar recession to the current one is 1973-75 when the unemployment rate increased about 4-1/2 percentage points in about a year and a half. In the double-dip recession in the early 1980s, the unemployment rate increased by 5 percentage points but this increase took 3-1/2 years. The stock market decline this year also resembles the death by a thousand cuts in 1974, when the U.S. stock market declined by about 30 percent without hitting a particular crash point.

The author is Michael Dueker, a portfolio strategist and former researcher at the St. Louis Fed, which offers a paper on his model and methodology.

Global Crisis, Global Response

Wed, 10 Dec 2008 15:30 GMT

The international policy response to the financial crisis and global credit crunch has been unprecedented. Even before the mid-November G-20 meeting and summit, the world's leading governments were already in close cooperation to assemble a massive rescue package worth well over $5 trillion. Its stunning magnitude underscores the severity of the current crisis, and still it may not be enough. Thus far financial losses are estimated to have risen to $1.4 trillion, far exceeding previous crises.

Components of the global rescue include liquidity and lending guarantees, bank recapitalization, other asset purchases, monetary easing (notably excepting countries whose currencies are under attack), and fiscal stimulus.

This week Dismal Scientist adds a table summarizing economic policymakers' efforts around the world. Look for it here (subscription required), and watch for periodic updates as the global rescue continues.

What a Word's Worth

Wed, 10 Dec 2008 15:00 GMT

Another reason to stress clear and concise writing. From the NYT:

WASHINGTON — Efforts by the Bush administration and Congressional Democrats to fashion a government rescue of the foundering American automobile industry hit an unexpected snag on Wednesday, as a dispute over the precise wording of the bill led the House and Senate to put forward competing versions of the legislation.
The last-minute disagreement centered on a single word — with the Senate bill requiring the automakers “to comply with all applicable federal fuel efficiency and emissions requirements” and the House bill referring to “all applicable fuel efficiency requirements,” which would also include state emissions rules that the automakers oppose.

Contrary Views

Wed, 10 Dec 2008 12:00 GMT

Arguments I hadn't heard, at least not recently:

-- Low interest rates in the early part of the decade were responsible monetary policy to head off deflation, not an irresponsible contribution to a housing price bubble

-- Securitization and other factors separating ownership of mortgages from origination are not an important contributor to the crisis—Britain lacks securitization but has an even worse crisis

-- The government is wasting money by not stating a formal guarantee of Fannie Mae's and Freddie Mac's debt

-- Proposed and active programs for helping beleaguered homeowners reach only a small fraction of those in trouble and focus on the wrong goals

These are from Susan Woodward and Robert Hall. I'm tempted to call them contrarians, but its hard to know who's contrary when the conventional wisdom itself does 180s almost daily...

A Lost Decade?

Wed, 10 Dec 2008 08:00 GMT

Paul Krugman's global outlook: A sober splash of realism, or forecasting with a ruler?

"A scenario I fear is that we'll see, for the whole world, an equivalent of Japan's lost decade, the 1990s -- that we'll see a world of zero interest rates, deflation, no sign of recovery, and it will just go on for a very extended period," he told a news conference.

"And that's unfortunately very easy to see happen."

Buying Time for Detroit

Tue, 9 Dec 2008 08:30 GMT

Mark Z. tells Nightly Business Report what he learned at the auto bailout hearings:

Unfortunately, odds are that despite policy makers' best efforts, the domestic auto makers will eventually be forced into bankruptcy. But that won't happen until the worst is over for the rest of the economy and by then, everyone should be prepared for it. Policymakers are thus buying time, for the domestic auto makers, yes, but more critically for the rest of the economy. It is worth the price.

Mortgage-Mod Conundrum

Mon, 8 Dec 2008 18:15 GMT

Department of you-read-it-here-first. From the WSJ:

Modified Loans Do Little to Help Homeowners
Many troubled homeowners are quickly falling behind again on their mortgage payments after their loan is modified, new data from the Office of the Comptroller of the Currency show.

The OCC data reflects actions taken by the 14 largest national banks and thrifts, which together represent 60% of the mortgage industry. Nearly 36% of borrowers were more than 30 days past due on the loan payment three months after their loan was modified and nearly 53% were more than 30 days late after six months, according to the OCC.

Just as Cris DeRitis explained Nov. 20:

Can the Mod Squad Rescue Housing?

History does suggest that we cannot simply modify our way out of the current crisis. First of all, of modifications that borrowers have accepted in the past only about half have been successful—at a time when criteria for selection were strict and the economy was growing. Second, modification out of a housing bust has been tried before. The 1990s saw an explosion in manufactured housing, which led to a bubble that eventually burst around 1999. Servicers tried to modify their way out of this crisis under the belief that they could minimize losses if they could simply delay foreclosure until the market recovered. The recovery never came, and many borrowers were worse off than they would have been had they walked away sooner.

Bipartisan Provocateur

Fri, 5 Dec 2008 11:45 GMT

Nuggets like this are why I can't go many days without checking Tyler Cowen's blog:

It will be interesting to see if the Keynesian multiplier becomes the Democratic Party economist equivalent of the Laffer Curve, namely a "free lunch" claim used to justify many kinds of preferred policies. Have I mentioned that having their party in power was very bad for Republican economists too?

Welcome to Hard Times

Fri, 5 Dec 2008 08:45 GMT

It's bad. If you're under 35, you have no idea how bad ...

Sophia Koropeckyj fills us in (sub req):

Behind The Numbers

The labor market has sunk to its worst condition in decades. Employment has been falling sharply in recent months and has fallen by 1.9 million jobs since the beginning of the year, with two-thirds of the losses during the last three months. As a result, the job based has contracted by 1.4% since the beginning of the year.

There is hardly any part of the economy that is being shielded from downturn. Losses more than doubled in service-producing industries, to 370,000 in November, from 153,000 in October. While losses were broad based, the sharp accelerated occurred in leisure/hospitality, business services and retail trade, all industries that are dependent on consumer spending. Consumer spending has weakened not only due to declines in employment but also due to record-low confidence.

More: Sophia, Marisa and I discuss in a podcast .

Detroit Up on Blocks

Thu, 4 Dec 2008 14:00 GMT

C-Span is broadcasting the Senate hearing this morning in which CEOs from GM, Ford and Chrysler lay out their case for a bailout. That guy at the end of the table is, of course, our own Mark Z. His view of the situation was laid out here a couple weeks ago:

The U.S. auto industry desperately needs financial help, and the federal government should provide it. Without aid, the industry seems headed toward a quick liquidation, which would mean hundreds of thousands of layoffs at just the wrong time for the sliding U.S. economy. But the $25 billion loan that policymakers are now debating won't provide the kind of help that's needed, even if the automakers come up with a new restructuring plan as Congress demands. Instead, policymakers should offer financing to automakers that file for bankruptcy so they can restructure and survive as smaller businesses.

Meanwhile, Sean Maher keeps tabs on Detroit's darkening outlook over at Consumer Flow (sub req):

Finally, the recent headlines about the possibility of one or more of the Detroit Three going bankrupt is likely causing some consumers to take pause. GM and other independent sources have suggested that about 80% of consumers would not consider buying a car from a bankrupt automaker. GM also suspects that the recent bankruptcy speculation is already affecting showroom traffic. The Detroit Three just submitted their latest restructuring plans to Congress, hoping to get approval for $34 billion in bridge loans to help them survive the recession and avoid bankruptcy. However, consumers may remain hesitant to purchase new vehicles until the automakers' outlook is clearer.

Even though vehicle sales are already near rock bottom, they are not expected to improve substantially for several months to come. Consumers will shy away from major purchases until they begin to regain confidence. However, none of the headwinds that consumers face seem likely to abate any time soon. Vehicle sales are poised to total fewer than 13.5 million units in 2008 and the annual total is very likely to sink even lower in 2009.

McMansion Farewell?

Wed, 3 Dec 2008 16:15 GMT

When Hershey's gets squeezed on cost, they can shrink their candy bars. For homebuilders it's a little more complicated:

As the U.S. housing slump accelerates, homebuilders from California to New Jersey are now being forced back to the drawing board and the local planning board to downsize the American dream.

Homebuilders deploy this strategy whenever a downturn hits, [but] it never fails to generate tension with local governments, which favor the bigger homes and fancier facades that attract upscale buyers and their tax revenue[...]

This hints at one largely under-acknowleged push behind the late housing bubble: Everyone wanted prices to go up— homeowners, brokers, builders, and thousands of local politicians who saw unending streams of tax revenue in those escalating property values.

The trip back down will be long, contentious and painful.

World View

Wed, 3 Dec 2008 14:45 GMT

Maybe you can't see the global recession from space, but you can come close with this nifty new tool, crafted by our web designer Joe Enea. It's an interactive recession status map, showing at a glance how all the countries we cover currently stand.

Click on a country for the high points ... although maybe that should be low points right now. We'll be updating it regularly so you can check back and see how things change, hopefully for the better.

Off the Tube

Tue, 2 Dec 2008 10:30 GMT

From PBS' NewsHour:

GWEN IFILL: The recession news did not help the bottom line on Wall Street. The Dow Jones industrial average lost 680 points to close at 8,149. The Nasdaq fell more than 137 points to close at 1,398.

For more on this, I spoke moments ago with Mark Zandi, chief economist with Moody's Economy.com.

Mark, we have heard for months now about whether there is a recession or whether there isn't a recession. If so many people saw it coming, what is this that's new today?

MARK ZANDI, chief economist, Moody's Economy.com: Well, it's official. The National Bureau of Economic Research says we're in recession for about a year. And it confirms what many of us have felt for quite some time.

And it also paves the way for policymakers to become more aggressive. They can now say, "We're in recession, and we need to act aggressively," and I think this will help them do that.

GWEN IFILL: Usually in the past when we've heard talk of recession, they don't declare it a recession until it's actually over. Why different -- what's different now?

MARK ZANDI: Well, I think it's because it's so obvious. You know, the economy is struggling very significantly. Employment is falling rapidly. Unemployment is rising. All the economic data are very bad. And everyone knows we're in a recession. I think they're just confirming it.

GWEN IFILL: Yet Secretary Paulson today would not use the "r" word. He talked about a slowdown.

MARK ZANDI: Well, you know, everyone knows it's a recession. I think he's nervous about making people even more nervous. I'm not sure how you do that, but that must be in his thinking.

GWEN IFILL: Well, speaking of making people even more nervous, we saw the Dow take another big plunge today. Was it because of this declaration or are there other factors at work?

MARK ZANDI: No, you know, I think market participants know this. You know, it was bad economic news across the globe.

Chinese reported bad numbers, in the U.K., South America, and of course here in the United States. And I think all of that just was too much for investors to bear. And, of course, we did see a big gain last week, so I'm sure there are people out there taking profits.

GWEN IFILL: So now that we have this declaration of a recession officially being on, what does this tell policymakers?

MARK ZANDI: Well, it tells them that we're in the soup. I mean, a recession is a broad-based persistent decline in economic activity. And certainly this is very broad-based; 30 states are in recession; lots of industries are in recession.

And it's persistent. It's over a year, and things are intensifying, so policymakers have a green light to become very aggressive and try to stem further declines in economic activity as we make our way into '09.

GWEN IFILL: Mark Zandi of Moody's Economy.com, thank you.

(Why the PBS nobs don't brand this the Gwen Ifill Show I can't fathom. There's nobody on TV who's smarter, straighter or easier to watch, IMHO.)

More of Mark's musings are in a podcast from yesterday's macro meeting (sub req).

Frequently Asked

Mon, 1 Dec 2008 13:45 GMT

Required reading, from the NBER business-cycle dating committee statement:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER’s recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. As an example, the last recession, in 2001, did not include two consecutive quarters of decline. As of the date of the committee’s meeting, the economy had not yet experienced two consecutive quarters of decline.

Q: Why doesn’t the committee accept the two-quarter definition?

A: The committee’s procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP, but use a range of indicators. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in activity.” Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in 2007 and 2008.

Q: Isn’t a recession a period of diminished economic activity?

A: It’s more accurate to say that a recession—the way we use the word—is a period of diminishing activity rather than diminished activity. We identify a month when the economy reached a peak of activity and a later month when the economy reached a trough. The time in between is a recession, a period when economic activity is contracting. The following period is an expansion...

Q: Typically, how long after the beginning of a recession does the BCDC declare that a recession has started?

A: Anywhere from 6 to 18 months. The committee waits long enough so that the existence of a recession is not at all in doubt. It waits until it can assign an accurate date.

Q: Does the NBER identify depressions as well as recessions in its chronology?

A: The NBER does not separately identify depressions. The NBER business cycle chronology identifies the dates of peaks and troughs in economic activity. We refer to the period between a peak and a trough as a contraction or a recession, and the period between the trough and the peak as an expansion. The term depression is often used to refer to a particularly severe period of economic weakness... The most recent episode in the United States that is generally regarded as a depression occurred in the 1930s.

The NBER determined that the peak in economic activity occurred in August 1929, and the trough in March 1933. The NBER identified a second peak in May 1937 and a trough in June 1938. Both the contraction starting in 1929 and that starting in 1937 were very severe; the one starting in 1929 is widely acknowledged to have been the worst in U.S. history. According to the Bureau of Economic Analysis, real GDP declined 27 percent between 1929 and 1933, roughly ten times as much as in the worst postwar recession. If the term Great Depression is used to mean the period of exceptional decline in economic activity, it refers to the period from August 1929 to March 1933. If it is used to also include the period until economic activity had returned to approximately normal levels, most economists would judge that it ended sometime in 1940 or 1941.

However, just as the NBER does not define the term depression or identify depressions, there is no formal NBER definition or dating of the Great Depression.

Q: How long does the committee expect the recession to last?

A: The committee does not forecast.

The Dating Game

Mon, 1 Dec 2008 13:00 GMT

It's official. The NBER says the recession began a year ago.

The Business Cycle Dating Committee of the National Bureau of Economic Research met by conference call on Friday, November 28. The committee maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions. The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion.

Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity.

Nota bene: The NBER does not—repeat, does not—consider a recession to mean two consecutive quarters of negative GDP. Often described as the "technical" standard, the two-quarters bogey is actually more like folk wisdom—maybe valid but not handed down from anyone on high...

UPDATE: Floyd Norris says claims he told us so:

I’ve been arguing for some time that the recession started around then (between October 2007 and January 2008), but for much of that time it was a lonely vigil, with few economists in agreement until things fell apart in September.

Yo, Floyd! Over here. It wasn't all that lonely:

Putting Recession Into Our Forecast

By Mark Zandi in West Chester
February 1, 2008

Moody’s Economy.com is adopting a recession outlook for the U.S. economy. Real GDP is expected to contract during the first half of this year after effectively stalling in the fourth quarter of 2007. Recession probabilities have been consistently greater than even since last November, but the odds have risen sufficiently in recent weeks to result in this change to our outlook.

Asia Spotlight

Mon, 1 Dec 2008 11:15 GMT

As central banks across the region meet this week, further easing of monetary policy is expected.

Australia and New Zealand are expected to continue aggressively reducing benchmark rates as their outlooks sour.

Thailand will lower rates in an attempt to bolster consumer confidence and business as political instability threatens to undermine the economy.

Markets are also tipping that Bank Indonesia could lower its benchmark rate, though it remains constrained by currency weakness and persistently high inflation.

The extent to which China and India can maintain their growth will also be a major determinant of whether Asian economies remain afloat next year.

That's the top of this week's Asian Spotlight, from our man Matt in Sydney. A year ago we were all wondering whether the trans-Pacific economies had decoupled from the U.S. Guess we know now that ain't happening. For better or worse, we're all coupled up ...

Read Matt's roundup here.

For Serious Readers

Mon, 1 Dec 2008 09:00 GMT

If I had more time I'd join this book club.

I will go through the book, chapter by chapter, with an eye toward a deeper understanding of what Keynes wrote and why it is...so important. I'm not yet sure what kind of pace I can maintain but order your copy here, now. The Kindle version is only $3.96. We'll do chapters 1 and 2 by next Monday, eight days from now.

As it is, I'm left with soaking up the penumbra via my Google reader. A great thing, the Internet -- but it can't make more hours in the day.

Look Toward the Rising Sun

Wed, 26 Nov 2008 11:45 GMT

The media are filled with nervous comparisons to the 1930s. Will we get a Bank Holiday? Is Bush Hoover? Will Obama produce a new New Deal? (If so, I want some modern-realist-style murals on my local post office.)

But as our colleague Nik Bhattacharyya reports, there are more current (and cogent) comparables for the U.S. to learn from. Japan went through a bust in 1990 that looked a lot like this one:

Similar to the recent experience of the U.S., Japan witnessed an enormous bubble in house and stock prices in the late 1980s. Following the bubble's bursting, Japan's banks were left with a large array of bad loans on their balance sheets, effectively crippling their ability to lend and dragging on the real economy for years. Despite massive government spending and interest rates effectively at 0%, the Japanese economy remained moribund; the financial system failed to function adequately and economic growth lagged for a decade.

Many wonder if the U.S. faces something similar to Japan's lost decade, or if a quick turnaround will follow the current recession. Although the future is unknowable, it appears aggressive U.S. actions have the potential to avert a Japanese-style scenario.

What did the Japanese do wrong, and can we do better? Nik thinks the early signs are encouraging:

Comparing the actions of policymakers in the U.S. now with Japan's during the 1990s, there are some similarities, but the evidence thus far suggests that U.S. authorities have learnt from Japan's mistakes.

Although the U.S. Treasury Secretary and Federal Reserve Chairman have been criticised, one cannot fault their urgency. Unlike the Bank of Japan, the Federal Reserve has slashed interest rates in the space of months, not years, and zero interest rates appear a real possibility. As was the case in Japan, a main problem with lending appears to be insufficient demand as well as bank reluctance. On this front, government pump-priming will help lead to a recovery in the real economy and promote borrowing.

The whole article is here.

Car Consensus

Sun, 23 Nov 2008 12:30 GMT

Harvard's Ed Glaeser says Detroit should file first, then come talk (preferably not via corporate jet):

The hard-line enemies of a big Detroit bailout have standard economics on their side. The friends of Detroit, however, can rightly emphasize that a complete collapse of the car industry could make a bad economic downturn worse. The middle way is for car companies to go through Chapter 11 first, which will generate information and force the companies to rethink their future. Only then will it be possible to decide whether there is some role for limited government financial aid to avoid the costs of mass layoffs and defaults on pensions.

In other words, he agrees with Mark Z.

Congress should...encourage the automakers to begin a pre-packaged bankruptcy, with Washington guaranteeing the DIP financing for the Big Three in bankruptcy. The government guarantee would enable an orderly restructuring and prevent liquidation. All stakeholders—management, creditors, suppliers and the unionized workforce—would be forced by the bankruptcy to make the tough choices they have thus far been unable to confront. It's not that they haven't made strides, lowering labor and material costs and improving productivity; it's rather that the steps required to become viable in the long run are too draconian to take outside the bankruptcy process.

But Joe Nocera says it's not that simple:

"...bankruptcy is anything but a snap. It is a long, difficult, drawn-out process with no guarantee that a bankruptcy judge will go along with everything G.M. wants to do. Several bankruptcy lawyers I spoke to all made the same point: if there is any way these goals can be accomplished outside of the bankruptcy process, then that should be tried first. As one lawyer put it to me, “Bankruptcy sucks as a way to achieve real business resolution.” As it happens, I think there is another approach that might work. But it won’t be particularly easy either.

I can't tell if sending Detroit money at this point would be smart or stupid. What I do know is that the answer to that question can't be found by weighing nostalgia and nationalism on one side versus outrage and disappointment on the other.

In other words, a sound policy judgement requires you to put out of your mind both any longing for the good old days of U.S. automaking dominance and gold-plated blue-collar jobs as well as justifiable anger at Detroit's lousy gas guzzlers and overpaid management.

The question that matters now is: Will the U.S. economy recover sooner and grow more sustainably if we bail out GM, Ford and Chrysler—or if we don't?

Our Man at Treasury

Fri, 21 Nov 2008 16:15 GMT

If the brave new world of finance is daunting, the man in charge of it is not. With a boyish charm and a dry sense of humor, Mr. Geithner has taken advantage of the current calm waters of the financial markets to take an active stance, rallying Wall Street to peel apart the market of credit derivatives to try to understand its potential risks. As a financial regulator, his style is more like a cerebral Dr. Phil than an Eliot Spitzer, the former attorney general and now governor of New York, who reveled in showdowns with Wall Street.

Mr. Geithner is the anti-Eliot.

Of course, Federal Reserve bank chiefs are typically less confrontational, charged with stability, as well as being a critical part of setting monetary policy. But he has been unusually productive in tackling issues widely viewed as uncomfortably complex.

“Tim loves projects, and he wraps his projects in packages that everyone wants to be part of,” said Annette L. Nazareth, a Securities and Exchange commissioner who has known Mr. Geithner since he worked at the Treasury Department.

As Mr. Rubin put it: “He’s elbow-less. It’s really remarkable.”

That's from last year's New York Times profile of Tim Geithner, evidently tapped for Treasury by Pres-elect Obama. Markets rallied on the news. And Dartmouth celebrated yet another win over Harvard ...

The Zen of Oil

Thu, 20 Nov 2008 14:45 GMT

The plunge in crude oil prices spins the heads of experts, reports the Times:

It is a stunning — and sudden — reversal that has taken aback many experts. Oil futures on the New York Mercantile Exchange fell $2.08 to $51.54 a barrel Thursday afternoon. At one point in the morning, crude oil was down $3.71, to $49.91 a barrel. Oil futures have lost more than two-thirds of their value after settling at a peak of about $145 a barrel in July.

Some analysts predict oil could fall to $30 to 40 a barrel as the world economy worsens.

Not to diminish the value of expert analysis, but this story—experts being taken aback by oil prices—is pretty familiar stuff. Professional crude watchers were surprised in the 70s when prices soared from $3 to $30 a barrel, and they were surprised again in the mid-80s when crude prices collapsed back down from the mid-$30s to the low teens. (Raise your hand if you remember those $100-a-barrel forecasts along with Jimmy Carter telling us to put on a sweater.)

Many experts were shocked again just a couple of years ago when oil prices climbed, first to the $50s, then the $60s, then the $90s. Forecasters who-shall-remain-nameless expressed confidence that the market was temporarily distorted by geopolitics and speculation, and that the price would head back toward its fundamental value around $50 any time. This was in early 2007, just before it began heading toward an ultimate peak near $150.

Turns out those forecasts weren't wrong, just early. Maybe. Oil is back to where many thought it should fundamentally be two years ago—but that was when global growth was humming. Now it's around $50 and there's talk of another Great Depression. So what's that about?

I claim no expertise, but I do have a theory. I call it the Zen of Oil. In short: Crude prices will change direction meaningfully whenever—and only if—everyone believes they will not.

And I mean everyone. Experts, politicians, the public—it takes genuine consensus to be wrong. No half-hearted ambiguity, no lingering doubts. Everyone must believe.

There's an obvious logic here. When all are convinced that prices will fall or stay low, we fuel-guzzle with abandon. And producers don't invest, explore for more reserves or seek alternate energy sources with much vigor. The same thing works in reverse: As we saw last spring and summer, a universal belief in rising oil prices spurs both producers and consumers to act in ways that will lower those same prices.

So let us be attentive and curious about the odd fluctuations that characterize the oil market. But let us not be surprised to be surprised. It's kind of baked into the system.

The Once-Almighty Dollar?

Wed, 19 Nov 2008 16:00 GMT

Americans collectively were able to live above their means through most of the past decade thanks to the magic of the U.S. dollar. No other currency had such power. We could print a seemingly unlimited amount of Hamiltons, Franklins and Washingtons, send them across the Pacific and back would come these boats loaded with iPods, Lexises, Gucci bags and all the other accoutrements of modern fine living. In other words, the U.S. was able to run up an outisized current account deficit, because our trading partners were as happy to have U.S. paper—Treasury securities, mostly—as they were to have goods and services produced by Americans. Happier, actually.

This situation was possible in large part because the U.S., unique among nations, was able to borrow in its own currency. If Uruguay or Thailand ran up too much foreign debt, they risked a calamitous currency depreciation that could multiply their obligations to creditors, even force a default. But the U.S. government would never default; it could simply print up more greenbacks.

Could that change? Maybe. This came over the wires this morning:

Japan economists call for 'Obama bonds'

Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies. The issuance of foreign currency -denominated US Treasures would reduce the perceived risk of holding the debt.

Is this an early sign of things to come? Maybe, although our own Tu Packard says the idea idea is at best ill timed:

[T]hough the case for issuing U.S. Treasury securities denominated in yen is plausible, it ignores several factors, including global geopolitics, the current financial meltdown and the risk that the epicenter of round two in the global crisis may be Eastern Europe and the Baltic states. The world's leading governments—including big holders of U.S. Treasury debt such as Japan, China and Russia—know we are in an extraordinarily difficult period. Indeed, the severity of the financial crisis and global credit crunch are making them fervent believers in international policy coordination. Witness the remarkable statement and action plan issued by the G-20 last weekend. Given the urgent need to forestall a protracted global recession, it's not clear that lobbying the U.S. to issue foreign currency-denominated debt will be high on anyone's priority list.

Update: Virendra Singh reminds me that we've been watching for something like this for quite a while.

Shoulda Woulda Coulda

Tue, 18 Nov 2008 14:45 GMT

In his comment below, Paul Smithson points out that the subprime collapse didn't exactly catch everyone by surprise. That's true, yet even some who can claim to have seen it coming are strangely humble about their prescience. Robert Shiller, possibly the nation's best-known Cassandra, wasn't bragging in this NYTimes column a couple of weeks ago:

While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.

Should Shiller feel guilty that he didn't get on the soapbox and scream the end was near? Hard to say: I can't remember a time when there weren't lots of doomsayers out there, from Ross Perot to Joe Granville. You're dating yourself if you remember old Joe, whose star faded after his famous "Sell All Stocks!" call right before the bull market took off in August of 1982.

Russ Roberts, in his blog referenced earlier , rehashes those old saws about stopped clocks being right twice a day, and the stock market has accurately forecast 9 of the past 5 recessions. Which like a lot of cliches, are true.

I say this having (ahem) written the following in my former life as a fishwrap columnist (when I was mainly channeling Celia et. al.):

Philadelphia Inquirer - July 27, 2005

...How long can this go on? Only the brave, or the foolish, can claim a clue. "Not forever" is the only answer I'm sure of. We could still be debating this a year from now, or it could all fall apart tomorrow. Either way, I wouldn't be shocked...

But it makes a lot of us nervous when soaring prices become their own justification - that is, when people rush to buy purely because they think the escalator can't possibly stop. And that anxiety only gets worse when we hear of mortgage lenders loosening credit standards so they can keep pumping out new home loans...

Consider, for instance, the fact that housing construction now accounts for roughly 5 percent of America's total economic output. Indeed, 43 percent of the net private-sector job growth since 2001 has taken place in housing-related industries, from furniture to mortgage processing.

That means housing doesn't have to actually collapse to have an impact on the economy; if the market simply cools off, a whole lot of people could feel the chill. Add to that the potential squeeze on large numbers of home buyers who took out adjustable or interest-only mortgages in order to buy bubble-inflated real estate, and you can spin some pretty hair-raising scenarios.

Imagine a young couple who stretched to afford that starter home or condo, using one of the new "creative-financing" options, such as an interest-only loan. Then imagine them several years down the road: with loan payments scheduled to rise $500 or $1,000 per month, no equity, and a property that hasn't appreciated - maybe one that has even fallen in value.

They might not be able to refinance if interest rates have gone up. They may not be able to sell the property for enough money to pay off their original loan. And rising monthly mortgage payments could burden their family budget for years. Multiply that couple by a few hundred thousand - or a few million - and you have an economy-wide problem, to put it mildly. Foreclosures could rise, consumer spending could fall, and the entire country could feel pretty stagnant for months or years.

Such foresight looks great in hindsight. But given the way things currently look, who cares?

PS: There's a lively discussion of Who Saw It Coming (and Who Shoulda) among the Bogleheads .

Defining Down the Economy

Mon, 17 Nov 2008 16:45 GMT

I don't like to pick on my former colleagues in the newspaper biz (they have enough trouble already). Still, somebody on the NY Times copy desk needs a kick in the rear for this one:

The Euro Zone Confirms Economy Is in Recession

PARIS — The economy of the euro zone slipped into recession for the first time during the third quarter, the European Union’s statistics agency confirmed Friday, as the financial crisis continued to depress manufacturing activity and consumer demand.

First of all, I don't believe the EU statistics agency says when recession begins and ends. That job was taken on by the Centre for Economic Policy Research -- a non-official body analogous to the National Bureau of Economic Research in the U.S. The CEPR website explains their definition:

Thus the Committee defines a recession as a significant decline in the level of economic activity, spread across the economy of the euro area, usually visible in two or more consecutive quarters of negative growth in GDP, employment and other measures of aggregate economic activity for the euro area as a whole, and reflecting similar developments in most countries.

... although recessions are usually characterized by at least two consecutive quarters of declining GDP, this is not a fixed rule.

But you'd never know there was any ambiguity at all from the articles claiming Germany, Japan, the euro zone and several other economies had entered either an "official" or a "technical" recession, based solely on their having posted back-to-back quarters of negative change in GDP.

The Times article makes an even sillier mistake (though not a less common one, I'm sorry to say), when it claims the euro zone "slipped into recession ... during the third quarter." Even on its own terms, using the two-negative-quarter rule for recessions, this can't be right; the recession must by definition have started in the second quarter or sooner. This is the equivalent of saying your wife's pregnancy began when the test came back positive. Uh-uh.

In fact, as we've pointed out previously , there is no universally accepted definition of when recessions begin and end. The "technical recession" trope is just a way for uninformed media types to try and dodge around the time-lag issue; namely, that we almost never know when a recession starts or ends till months (maybe years) after the fact.

But hey - everybody knows we're in recession, so why fuss around with fine-point definitions? Here's one reason: some folks, such as the bettors at Intrade, are already starting to need a working definition for the 'D' word ...

Nuestra culpa

Mon, 17 Nov 2008 14:45 GMT

Why didn't economists see the current meltdown coming? Russ Roberts confesses, on behalf of his profession:

[W]hen home ownership went from 64% to an all time high of 69%, I foolishly attributed it to our growing standard of living and Wall St. innovation. I was right about part of it. We do have a growing standard of living (contrary to the claims that the average American isn't sharing in the economy's expansion) and Wall St. innovation did reduce the risk of lending to people who otherwise wouldn't have gotten a loan. But I, like others, didn't see the unsustainability of that rise. And most people thought that if the rise slowed or fell, then some people would lose their houses and others who invested in those mortgages would lose their money. We didn't see the systemic risk. We didn't pay enough attention to the magnitudes. Prices are unlikely to double in ten years solely because of fundamentals. The explosion of subprime securitization in 2004 and 2005 should have set off alarm bells...

The bottom line is that the ability of economics to anticipate disaster or to understand the full playing out of the complex system known as the economy is very limited. We are pretty good at microeconomics--the incentives created by a particular policy. We are not very good at macroeconomics. And we don't have much to suggest for getting out of the mess we're in. We know the conditions that are necessary--some optimism for the future, functioning credit markets, incentives to invest. But we don't know much about how to create those conditions. At this point, I think our value as economists lies in helping policy makers avoid mistakes. Not so helpful but better than nothing.

[Harvard Prof. Robert] Barro basically argues that we have a disaster like this once every 50 to 100 years. Maybe that's the best we can hope for. Events that occur that erratically are hard to understand in a systematic way. And maybe if we're lucky, this will just turn out to be a bad recession and not something worse. But nobody knows. Certainly not us economists.

Line Forms to the Left

Mon, 17 Nov 2008 09:30 GMT

This was inevitable.

Auto-Parts Makers Push for Aid

WASHINGTON -- Auto-parts makers are requesting access to the government's $700 billion financial-industry rescue fund, and Democratic lawmakers are planning tough conditions -- including a government oversight board -- on a proposed aid package for Detroit's troubled auto companies.

As was this:

Cash-Strapped Big Cities Seek TARP Funds to Stimulate Local Economies

On Friday, the mayors of Philadelphia, Phoenix and Atlanta asked the Treasury Department to set aside $50 billion of the $700 billion Troubled Asset Relief Program to spur infrastructure investment to create jobs and lift local economies. The mayors also asked for loans to cover short-term borrowing needs and to meet payroll.

But they'll have to line up behind these guys:

4 insurers ask government to let them acquire thrifts so they can receive bailout funds

WASHINGTON (AP) -- Four insurance companies on Friday asked the government to allow them to buy thrifts so they can qualify to receive federal money under the financial rescue program.

And hey, as long as we're on the subject:

"...what about the journalism industry? What about us - my friends and co-workers, and friends of friends and co-workers of co-workers, who've spent the last five years watching our business slowly circle the drain? Doesn't America need the New York Times as much at it needs the Chevy Cobalt? Isn't the Star-Ledger as important as the GMC Savana? Sure, GM employs roughly five times as many people as all all of America's newsrooms combined - but that just means that we'd be much, much cheaper to bail out! GM needs $25 billion, but we'd settle for, I dunno, five billion? Pocket change, in other words! And we'd be so, so grateful. If you think your coverage couldn't get more lovey-dovey than it already is, Mr. President-Elect, the magazine and newspaper editors of America stand ready to prove you wrong - and all for a fraction of what it took to bail out those ingrates on Wall Street.

Crisis of the Neos

Mon, 17 Nov 2008 09:00 GMT

The Spanish socialists say it's all the fault of the neos. Via the Financial Times:

Spain's governing Socialist party summed up the heady mood in some parts of Europe in an internal document, seen by El Mundo, that identified the summit as a moment of historic change.

"The origins of this crisis lie in neoliberal and neoconservative ideology," it said.

Paleos would never have gotten us into such a mess, I suppose.

It's a Recessionary World, After All

Fri, 14 Nov 2008 11:45 GMT

The recession has gone global, from Germany to Hong Kong. The intrepid Matt Robinson reports from Sydney that the OECD has put Japan on the list as well:

Ahead of this weekend’s G20 summit on the financial crisis, the OECD has provided its forecasts for GDP, inflation and unemployment for the U.S., Japan and the euro area for 2009. And it doesn’t make for pretty reading. According to their latest projections, economic activity is expected to fall by 0.9% in the U.S. next year and by 0.5% in the euro area. Japan is also forecast to remain in recession, contracting by 0.1% in 2009.

GDP for the OECD countries as a whole is expected to fall 0.3% year on year in 2009, as OECD countries enter a protracted slowdown. The average unemployment rate in the OECD area is forecast to climb by 1 full percentage point to 6.9% next year, while inflation should continue to ease as economic slack puts downward pressure on prices and the recent low levels of commodity prices ease supply-side inflationary pressures. Nevertheless, the financial crisis—the main driver of the current recession—and the ongoing adjustment in housing markets still have a long way to go, according to the organization. Economic activity across the OECD area is forecast to recover slightly to grow by 1.5% in 2010. However, the OECD concedes this outlook is surrounded by a high degree of uncertainty, with much depending on the depth and duration of the financial crisis.

All this may make fine distinctions irrelevent, but it's worth remembering that "recession" is one of those terms that gets fuzzier the closer you look. What the popular press thinks of as the standard textbook definition of a recession—two consecutive quarters of shrinking real gross domestic product—actually isn't. The closest thing we have to an "official" recession-labeling organization in the U.S., the National Bureau of Economic Research, takes pains to explain that they use a more complex set of criteria to decide when an economic cycle has turned.

Europe has only recently gone in a similar direction. Katrin Robeck explained on Dismal last August:

Spotting turns in national economic cycles is the business of several academic groups around the world, some of which have at least quasi-official status. Governments themselves do not generally issue such pronouncements, which is sensible given the political implications and possibilities for conflicts of interest. In the U.S. the widely known Business Cycle Dating Committee of the National Bureau of Economic Research dates the economy's peaks and troughs. In Japan, recessions are called by an academic panel under the auspices of the Cabinet Office, called the Investigation Committee for Business Cycle Indicators. In the euro zone the Centre for Economic Policy Research sponsors a panel called the Euro Area Business Cycle Dating Committee.

Not easy to catch

The NBER panel defines recession as a “significant decline in economic activity spread across the economy, lasting more than a few months.” Dating such periods involves a number of factors beyond GDP growth. Moreover, the final word on when a recession began may not come for months—possibly not until the downturn has already ended—because the data required may be revised, and the committee wants to wait until it can rule with authority.

The CEPR broadly follows the NBER approach, except that the European committee dates in terms of quarters rather than of months. Thus if the NBER ultimately decides that a U.S. recession began last fall, it might announce the downturn began in October or November. The CEPR, if it makes a similar call, would instead say the euro zone entered recession in the second or third quarter. Currently, the most reliable European data are the quarterly series.

A number of factors are studied. The CEPR recession-dating committee views euro area aggregate real GDP as the main measure of macroeconomic activity, but it also looks at additional variables such as employment, business investment, consumption and industrial production. The euro zone's leading economies such as Germany, France and Italy are monitored to systematically make sure that expansions or recessions are widespread over the area.

The committee informally assesses the depth, duration and severity of a recession. Although recessions are usually characterized by at least two consecutive quarters of declining GDP, this is not a fixed rule. The CEPR has identified three historical recessions in the area that today make up the euro zone: The first downturn lasted from the third quarter 1974 to the first quarter of 1975, and was linked to the 1970s' oil price shock. A second recession started in the first quarter of 1980 and finished in the third quarter of 1982; this was carried over from the U.S., which was undergoing a major disinflationary shock induced by the Federal Reserve. A third ‘official’ recession began in early 1992 and finished in 1993; the cause was the Gulf War and the resulting 1990 spike in the price of oil and also East Germany’s costly transition from a planned to a market economy.

Since the euro zone came into existence as a currency area, there has been no officially dated recession yet. At the beginning of this decade the euro area experienced a prolonged pause in economic growth, but this was not a full-blown recession according to the CEPR.

And of course, none of this applies when you get to China:

Although a growth rate of 8% would be extraordinary for most nations, in China it feels like recession. After data suggested growth would approach that level next year, authorities in Beijing announced a massive, 4 trillion yuan fiscal stimulus package on Sunday. Initially Asian markets responded positively. But as the week progressed, worries about corporate earnings in a global recession led to declines on most bourses in the region, which turned up on Friday after a U.S. rebound. Equities in China defied the week's downward trend, with the Shanghai Composite the only benchmark index to rise on Thursday despite the release of the worst industrial production numbers in seven years.

How's That Again?

Thu, 13 Nov 2008 17:00 GMT

I think this is called closing the barn door after the horse is out. Or maybe yelling fire in a theater after it's already burned down? From Bloomberg:

President George W. Bush today urged leaders of the world's biggest economies not to abandon free-market capitalism as they seek an escape from the financial crisis, calling it the ``best system'' for delivering growth.

In a speech at the Manhattan Institute in New York before weekend talks among leaders from the Group of 20 nations, Bush said policy makers should resist the urge to meddle too much in markets as they seek to reverse the financial and economic turmoil now engulfing the world.

"History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much,'' Bush said. ``Our aim should not be more government, it should be smarter government.''

Paulson to Markets: Never Mind

Wed, 12 Nov 2008 16:45 GMT

Hank Paulson's decision to pull an Emily Litella on the original TARP plan pushes us closer to confronting the uncomfortable issue of just how big a bailout we need/want/can tolerate.

The first idea, of having the Treasury set up reverse auctions for dodgy mortgage loans, was saleable in part because it seemed to mean Washington was putting just the tiniest toe in the water, expanding its role in the financial markets just enough to kick-start things back towards normal.

Now it's clear that the feds are buying not troubled assets but troubled companies, opening the bailout floodgates to any and all. This is a shocking notion, unless you believe the alternative is worse. And so the argument now turns on that point: Just how big a bump are we in for?

It's one thing to declare your faith in Schumpeter, say markets are creatively destructive, brace for a slow patch and wait for the cycle to turn. But what if that slow patch isn't a couple of quarters, or even a couple of years—but more like a half decade or more? Can we sit still for that much market-clearing, institution-leveling, destructive creativity?

In a country only a few of us remember, housewives saved string and tinfoil and families made a chicken last all week. My late mother-in-law carefully washed and stacked styrofoam meat trays that came from the Food Fair, 60 years past the end of the Great Depression. Boomers like me who came of age in the 1970s still can't use premium gasoline without a pang of guilt—and that's just the faintest echo of what our parents saw as children: Families skipping meals, fathers spending workdays at the kitchen table playing solitaire, social ties breaking down because people were ashamed to meet neighbors and friends.

The point is, how Schumpeterian do you have to be to accept as right and proper the kind of economic experience that could leave scars for life?

This isn't to buy the idea that Washington can save us, either. Having the Feds step in in a big way will inescapably bring inefficiencies, injustices and outright idiocy as Washington attempts to impose its wisdom on the rest of us.

I'm only suggesting that we understand the stakes in this debate. Megan McArdle does, I think:

I love western New York, which may be the most beautiful place on earth. I love the old cities, the Victorian shells that whisper of much happier days, and the broad, rolling hills, and the broad flat accents of the people who live on them. I love waterfalls softly falling downtown and the Buffalo City Hall. I love the place as you can only love somewhere that your family has been living for 200 years. I would save it if I could.

But I can't save it. Pouring government money in has been tried . . . and tried, and tried, and tried. It props up the local construction business, or some company, for a few more years, and then slowly drains away. Western New York has been the lucky recipient of largesse from a generous federal government, a flush state government, and not a few self-made men with happy memories of a childhood there. And still, it dies.

Moreover, it wouldn't be right to save it by destroying someone else's business, killing someone else's town. That's the choice we are facing. At its heart, economics is not about money; it is about resources. Every dollar sent to Detroit buys a yard of steel, a reel of copper wire, an hour of labor that now cannot be consumed by a business that actually produces a profitable, desireable product. It's not right to strangle those businesses in order to steal some air for the dying giants of an earlier day.

Serious stuff, either way you lean.

Poetry Corner

Wed, 12 Nov 2008 09:45 GMT

Even non-libertarians gotta love Russ Roberts. Who else writes novels about economics in addition to doing radio commentary (and a weekly podcast that you might call the capitalist antidote to Terry Gross) in addition to teaching and blogging?

And now he's revealed his inner zen master with this haiku:

Fannie and Freddie

Private Gains. Public losses.

Whose idea was that?

Still waiting for someone to compose a sonnet about credit-default swaps...

How is Maine Lobster Like Gasoline?

Tue, 11 Nov 2008 15:45 GMT

The Financial Times points out that living well is still possible in these times, if you know where to look:

Seafood shops along Portland Harbor are selling lobsters for as little as $3.89 per pound, which is about what you pay for a pound of cold cuts at the supermarket. The low prices are due mainly to an imbalance in lobster supply and demand. Consumers are dining out less at a time when the lobster catch in Maine and Canada has increased by between 10 and 20 per cent from last year...

The crisis in the global financial system is also having an impact. Some Icelandic banks, a major lender to the seafood industry, have failed, which has made processors wary of increasing their stocks of frozen lobster...

Even before the credit crunch, restaurants and cruise lines had cut back on their orders of lobster. Many grocery store chains also cut their prices. Dan Zawacki, chairman of Lobster Gram, a Chicago-based internet lobster marketer, recently introduced the "Lobster Bail Out", to help stimulate sales.

If it weren't for the weather, I'd consider a driving vacation in Maine soon...

The Unofficial Official Word

Tue, 11 Nov 2008 15:30 GMT

Is this another feature of the cyber-age? In the past, the official word on whether and when a recession had begun was the province of the National Bureau of Economic Research's Business Cycle Dating Committee. The committee took its own sweet time to announce peaks and troughs, and the rest of us had to sit on our hands and wait. Maybe a few lucky insiders might get an informal preview from some BCDC member at a cocktail party.

Now there are blogs, however. And that changes ... everything. At the infinite Internet cocktail party, we all can rub elbows with those BCDC members. And sure enough, one of them—Harvard Prof. Jeffrey Frankel in this case—spills the beans ... sort of (ital added):

The weight of evidence is now overwhelming: we are currently in recession.

Did it start at the end of 2007, when employment and the other indicators peaked? Or was the stimulus from the government and from exports enough to postpone the turning point, and did the recession thus only start towards the end of the summer, when the financial crisis intensified very sharply? I am afraid that we need to wait for some more data and some more (regularly scheduled) revisions before we will know.

In Defense of Depressions?

Mon, 10 Nov 2008 12:30 GMT

Never thought I'd see the day when depression would be treated as current event rather than history. But Richard Posner, with the steely-eyed clarity characteristic of Chicago politicians as well as economists (cf. Emmanuel, Rahm), takes the subject on squarely :

A depression is an essential backup to efforts to moderate the business cycle. The housing bubble could not expand indefinitely; leverage could not keep growing indefinitely. The government was doing nothing to prick the bubble or to limit leverage. The longer the world economy went without a depression, the worse the collapse would be when it finally, inevitably, came. The saving grace of catastrophes is averting worse catastrophes: imagine if, instead of attacking the United States with commandeered airliners, al Qaeda had waited a few years and attacked with suitcase nuclear bombs. We would not have been on guard, as we are now because of the 9/11 attacks.

Posner also suggests we call a spade a spade:

(The use of the word "recession" to describe any contraction less severe than the Great Depression is a triumph of euphemism over clarity.)

Note that this is very far from the nostalgia pieces we're already seeing about 1930s; wistful looks back at all those great WPA murals and Hoover Dam. Yes, the CCC camps left a lot of nice trails and hiking shelters in the forest, and yes, a lot of families grew closer amid the hard times. But I'm slightly sickened by the notion that we should see a new depression as an opportunity to rid America of frivolous materialism, for the simple reasons that: a) it won't happen; and b) a little therapeutic belt-tightening for folks with stable families and homes that aren't being reposessed comes at a much, much greater cost to millions of others.

Strangest Credit Card News of the Day

Fri, 7 Nov 2008 07:45 GMT

From our Sydney colleague Tine Olsen comes an odd and scary piece of credit-card news (sub req):

In an indication of how tight credit conditions are moving from the financial sector to the real economy, Taiwanese credit card companies have identified eight type of businesses to which payments no longer can be made using credit cards. The eight business categories are selected as they are perceived as particularly risky. The categories are construction firms engaged in pre-construction sales of housing units, investment and trust firms, cram schools, wedding service firms, car service firms, fitness centres, funeral services, smaller travel agents and dancing schools. Cram schools in Taiwan are educational institutions offering extracurricular academic tuition as music, sports and languages. With a decreasing birth rate many of these schools struggle to survive. In addition to limiting consumers’ use of credit cards, Taiwanese stores accepting credit cards have dropped 10% during the past year as they are no longer regarded as safe businesses by banks.

Add this to Cris deRitis' suggestion that we are all subprime now. It's getting strange out there ...

BoE's Happy Warrior Prevails

Thu, 6 Nov 2008 08:15 GMT

Kim Forkes gives us the news from London:

First Take

The Bank of England has stunned markets and cut its main policy rate by 150 basis points at its November meeting. The rate is now 3%, versus 5.50% at the start of the year and a cyclical peak of 5.75% a year ago. Bloomberg consensus called for a cut of 50 basis points, whilst calls for 100 basis points seemed unlikely to be met. The U.K. economy is deepening in its recession, but November's rate cut is hoped to put a limit on the downturn.

So, Prof. Blanchflower, are you happy now?

Global Imbalances in 8GB

Wed, 5 Nov 2008 09:15 GMT

Just what we needed: A way to track shifts in global purchasing power that fits in your pocket. And is less greasy & caloric than the alternative...

Australia is the cheapest place in the globe to buy an Apple iPod, highlighting just how far the currency has plunged since July. The CommSec iPod index shows that Australia is the cheapest place of 62 countries to buy an Apple iPod 8gb nano music player when measured in US dollar terms.

The value of the iPod index is to highlight implications of currency changes and country relativities.

In other words, it's an update of The Economist's Big Mac Index. If you're clueless, all it takes is a common good or service that's sold in identical form the world over. The local price is simply converted to a common currency (typically U.S. dollars, though I wonder for how long?) and you can see who's living how high, in relative terms. Pretty neat.

And when you're done tracking currencies, you can also use your iPod to listen to Dismal podcasts.

(Thanks to Paul Kedrosky)

What Do We Do Now?

Tue, 4 Nov 2008 23:15 GMT

The networks are spinning this as a historic achievement, primarily in the context of the civil rights struggle. It may be all that, but starting tomorrow, history may be, well, history. The issue is what happens now; how does a new administration handle the monumental economic mess it inherits?

Mark Z. has some advice for President-elect Obama: Don't wait until January.

The United States has elected a new president in the middle of what could be the worst economic downturn since the early 1980s. The danger of a severe and protracted recession is high—and will be even higher without prompt and forceful action by the Federal government. A normal transition period, with the president-elect devoting the next 2½ months to appointing key aides and writing his inauguration speech, may be an unaffordable luxury this time around.

President-elect Obama needs to fully engage in economic policymaking beginning now. For this kind of unprecedented transition he will need the cooperation of both the outgoing Bush administration and the lame-duck Congress. A number of significant policy initiatives are already in place, but more needs to be done, and critical decisions will have to be made within the next few weeks.

(I assume Obama has this movie going through his head.)

UPDATE: It's not just the economy that won't wait for January.

KABUL, Afghanistan (AP) — Afghan President Hamid Karzai on Wednesday demanded that President-elect Barack Obama put an end to civilian casualties as villagers said U.S. warplanes bombed a wedding party, killing 37 people, including 23 children and 10 women...
"Our demand is that there will be no civilian casualties in Afghanistan. We cannot win the fight against terrorism with airstrikes," Karzai said. "This is my first demand of the new president of the United States — to put an end to civilian casualties."

Big Cuts Down Under

Tue, 4 Nov 2008 17:15 GMT

Almost forgot about this dispatch from our colleagues in Sydney:

The Reserve Bank of Australia cut its cash rate by a larger-than-expected 75 basis points. The ASX200, which was down 1.2% in the lead-up to the announcement, rallied, but still ended 0.2% lower. The aussie fell 1% after the announcement. It ended the day 2.1% lower against the dollar at $0.6651. The New Zealand dollar also fell, by 1.3% to $0.5868.

Matt Robinson explains it all to Bloomberg News.

Another Era, Another End

Tue, 4 Nov 2008 09:30 GMT

David Brooks gives in to temptation and waxes Olympian (an occupational hazard on the Times op-ed page):

Nov. 4, 2008, is a historic day because it marks the end of an economic era, a political era and a generational era all at once.

Economically, it marks the end of the Long Boom, which began in 1983. Politically, it probably marks the end of conservative dominance, which began in 1980. Generationally, it marks the end of baby boomer supremacy, which began in 1968. For the past 16 years, baby boomers, who were formed by the tumult of the 1960s, occupied the White House. By Tuesday night, if the polls are to be believed, a member of a new generation will become president-elect.

Whew. Maybe he's right, though I think this tendency to break the story of our lives into presidential eras tends to be overdone.

On a more limited scale, our Cris deRitis makes a similar argument (sub required):

In retrospect, the low consumer-credit loss rates observed from 2004 through 2006 will probably be seen as a golden age for credit. Like the short-lived housing boom that fed it, consumers' wealth in those years was wonderful while it lasted—but the time has now come to face reality.

Today's Most Confusing Headline

Mon, 3 Nov 2008 09:15 GMT

The Financial Times gives me whiplash:

Embedded inflation reduces deflation threat

Though Krishna Guha's story does, eventually, get around to making a sensible point:

... while deflation is a potential threat, most economists think it is premature to be worrying about actual sustained declines in domestic prices.

Such declines remain unlikely because positive inflation is embedded in the US and Europe and the policy response to the crisis is now vigorous.

"To go so quickly from having concerns about inflation to thinking there is a massive deflation problem is jumping the gun a bit," says Jim O'Neil, chief economist at Goldman Sachs.

Indeed, some worry that efforts to avoid deflation will end up fuelling inflation.

Falling commodity prices mean many economies will at some point experience negative year-on-year inflation. But this is nothing to worry about.

With most of the press thoroughly confused about the nature of inflation-deflation, I expect more of these in coming weeks.

A Future for Fannie & Freddie

Fri, 31 Oct 2008 16:15 GMT

One sign the immediate crisis might be ebbing: We're starting to talk about longer-term solutions. From today's WSJ

Federal Reserve Chairman Ben Bernanke said Friday that however government sponsored enterprises Fannie Mae and Freddie Mac are eventually reorganized, some government guarantees will likely be needed to ensure securitization of mortgages.

He also suggested creation of a government bond insurer for mortgage funding as one potential GSE reform approach.

"Government likely has a role to play in supporting mortgage securitization, at least during periods of high financial stress," Mr. Bernanke said in prepared remarks to a mortgage symposium.

"But once government guarantees are involved, the problems of systemic risks and contingent taxpayer involvement must be dealt with clearly and credibly," Bernanke said.

Maybe the Chairman has been reading Dismal Scientist. From Cris deRitis' piece of last week, What to Do About Aunt Fan and Uncle Fred:

What to do with Fannie and Freddie going forward? Some call for dismantling them completely and leaving housing finance to the private market. Yet considering how private firms handled other parts of the mortgage market, and acknowledging the many positive externalities that housing has for the economy, this is a doubtful prescription. It would be more prudent to return the institutions to their roots, running them like regulated utilities. Their sole mission should be to provide liquidity through the issuance of MBS for good quality, fully documented, fixed-rate mortgages.

Fannie and Freddie or their successors might not prevent the next speculative bubble from forming, but at least they won't contribute to its expansion.

Recession, State by State

Fri, 31 Oct 2008 12:45 GMT

Before running off to watch the Phillies' victory parade, Andrew Gledhill reports:

The recession is widening. Thirty states were in recession as of September, according to the Moody's Economy.com coincident indicator, which combines changes in employment and industrial production. These 30 states accounted for 66% of employment and 64% of output, compared with 63% and 61%, respectively, in the previous month. New states that have fallen into recession are Hawaii, Minnesota and Utah. An additional 19 states are at risk of falling into recession.

It's getting worse at the metro level as well:

Of 381 metro areas and divisions covered by Moody's Economy.com, 276 are in recession—the largest being Los Angeles, Chicago and Atlanta. Notable joiners in September were Minneapolis; Portland, OR; and Camden, NJ. A number of new areas are now considered to be at risk of recession, including Houston, Dallas and Seattle

Here's a complete list of states and metros and their current recession status. And for Dismal subscribers, a page tracking the risk of recession in states and top metros six months hence.

UPDATE, Monday 11/3: ABC News picks up the thread .

Is the Fed Offering Surgery or a Sugar Pill?

Wed, 29 Oct 2008 16:00 GMT

The WSJ's Ahead of theTape column sees today's rate cut as a placebo.

The fed-funds rate already is well below the Fed's target and has been for most of the past month. Since the Fed cut its target to 1.5% on Oct. 8, the interest rate has traded above that level only once and has been below it the rest of the time. On several days, it has traded below 1%.

The Fed manipulates the fed-funds rate by buying and selling bonds and other securities. Lately, these open-market operations have been on steroids, and the moves, along with some technical factors, have caused the Fed to temporarily lose full control of the funds rate.
Fortunately, that doesn't matter much now. With the world shedding debt and parking cash, money supply is draining from the system, and the Fed's extraordinary efforts are just enough to replace it. The Fed [had] little choice but to cut rates Wednesday lest it disappoint market expectations. But until the demand for money starts to rise again in the broader economy, for example when lending picks up, rate cuts will have little lasting effect on markets.

I was thinking some time ago that any report on the Fed moving rates up or down needs to specify whether the central bank is actually pushing them one way or the other, or just releasing the pressure to let them fall/rise as they want to.

Look on the Bright Side

Wed, 29 Oct 2008 14:45 GMT

Want some good news? Economic forecasts are notoriously inaccurate. And they are especially inaccurate at turning points, which, according to the Blue Chip consensus, we’ve recently passed. Why do forecasts perform worst just when needed most? The shocks that hit the U.S. economy from time to time are complex and not very well behaved. The likelihood of extreme outcomes—so-called “tail risks”—vary from shock to shock. Moreover, there may be “nonlinearities” in response to these shocks, meaning economic relationships that operate one way when the economy is in an expansionary state may operate differently when the economy is in a recessionary state. So a model that may have worked well during the good times may not work so well during the bad.

That's from Mike Bryan of the Atlanta Fed, writing in Macroblog. The point is, don't be depressed just because forecasters are. Things could turn up sooner than they(we) think.

Some very nice charts here as well.

Another Stimulus, Anyone?

Tue, 28 Oct 2008 09:00 GMT

Looks like we're in for another round of fiscal stimulus. (Does stimulus come in rounds? Just asking...) Anyway, Menzie Chinn at the venerable Econobrowser blog revisits Mark Z.'s Congressional testimony from last summer, wherein he rated the relative oomph of various legislative stimuli. (Also available in this Dismal Scientist article .)

Chinn avers:

One big caveat to the argument for infrastructure spending is that it usually takes a long time to plan such projects. Hence, it is not clear when the spending for such projects would actually occur, and hence the stimulus to the economy (this is called an outside policy lag, in the jargon). The "one-year horizon" shown in the table is for the horizon of one year from beginning of spending, not the beginning of planning and appropriation.

I have two observations here. First, if the spending could be directed to the states which had construction about to start, but hindered by financing or state revenue issues, then the problem of timing could be partly mitigated. I admit that it is unlikely that there are a tremendous number of such projects (although I am happy to be corrected). That leads me to my second observation.

The CBO study Options for Responding to Short-Term Economic Weakness (January 2008) laid out three principles for effective stimulus, loosely characterized as "timely, targetted, and temporary". Spending on infrastructure is problematic on this first count if one believes the recession will be short. If one believes that it will be prolonged (in the now outdated lingo, "L-shaped" instead of "V-shaped"), then this drawback is not so significant.

Which Came First?

Mon, 27 Oct 2008 17:45 GMT

This history nugget from Stephen Roach surprised me:

This is not the first time the US Congress has needed to refine the Fed’s mandate. After the great inflation of the 1970s, the so-called Humphrey-Hawkins Act of 1978 was enacted. That required the Fed to add price stability to its original post-second world war policy target of full employment. In the late 1970s, Congress felt the Fed needed the full force of the law to tackle a corrosive inflation problem. This legislative change empowered Paul Volcker, a later Fed chairman, in his courageous assault on double-digit inflation.

I thought price stability came first, but I guess that's from spending time around freshwater central bankers.

Trolling for the Bottom

Mon, 27 Oct 2008 11:30 GMT

One month's uptick don't stop no trend:

New single-family home sales (sub req) increased 2.7% to an annualized pace of 464,000 in September, but there was a net downward revision of 12,000 to July and August's figures, which made this a soft report. Although transactions have increased in two of the last three months, the rate of decline in new-home sales actually intensified to 28% annualized in the third quarter. New-home sales are now down 67% from their peak.

Here's how things stand relative to the last 40+ years. Note we seem to be approaching historic bottom land...

The End of Inequality?

Mon, 27 Oct 2008 09:15 GMT

"Now that the top has taken this hit, I think the whole issue of inequality is going to move to the back burner. The political momentum to do something about inequality may be gone -- at least for now."

That's Edward Wolff of New York University, quoted in this morning's WSJ . But if inequality is fading as a popular (or populist) issue in the U.S., nobody told the OECD :

OECD’s Growing Unequal? finds that the economic growth of recent decades has benefitted the rich more than the poor. In some countries, such as Canada, Finland, Germany, Italy, Norway and the United States, the gap also increased between the rich and the middle-class.

Countries with a wide distribution of income tend to have more widespread income poverty. Also, social mobility is lower in countries with high inequality, such as Italy, the United Kingdom and the United States, and higher in the Nordic countries where income is distributed more evenly.

Launching the report in Paris, OECD Secretary-General Angel Gurría warned of the dangers posed by inequality and the need for governments to tackle it. “Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. Ignoring increasing inequality is not an option.”

Why is the gap between rich and poor growing?

In most countries the gap is growing because rich households have done significantly better than middle-class and poor households. Changes in the structure of the population and in the labour market over the past 20 years have contributed greatly to this rise in inequality.

Wages have been improving for those people who were already well paid.

Employment rates have been dropping among less-educated people.

And, there are more single-adult and single-family households.

Who is most affected?

Statisticians and economists assess poverty in relation to average incomes. Typically, they take the poverty line to be equivalent to one-half of the median income in a given country.

Since 1980, poverty among the elderly has fallen in OECD countries.

By contrast, poverty among young adults and families with children has increased.

On average, one child out of every eight living in an OECD country in 2005 was living in poverty.

What does this mean for future generations?

Social mobility is generally higher in countries where income inequalities are relatively low. In countries with high income inequalities, by contrast, mobility tends to be lower.

Children living in countries where there is large gap between rich and poor are less likely to improve on the education and income attainments of their parents than children living in countries with low income inequality.

Countries like Denmark and Australia have higher social mobility, while the United States, United Kingdom and Italy have lower mobility.

What can be done?

In some cases, government policies of taxation and redistribution of income have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas.

Education policies should aim to equip people with the skills they need in today’s labour market.

Active employment policies are needed to help unemployed people find work.

Access to paid employment is key to reducing the risk of poverty, but getting a job does not necessarily mean you are in the clear. Growing Unequal? found that over half of all households in poverty have at least some income from work.

Welfare-in-work policies can help hard-pressed working families to have a decent standard of living by supplementing their incomes.

The Crisis is Everywhere (but in the Data?)

Fri, 24 Oct 2008 16:45 GMT

Prospecting among the contrarians, Pat Armstrong turns up a nugget:

A new working paper by the Minneapolis Federal Reserve examines some of the most important claims made by people favoring substantial government intervention to stem the financial crisis. Specifically, the authors address four claims:

Bank lending to nonfinancial corporations and individuals has declined sharply.
Interbank lending is essentially nonexistent.
Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.
Banks play a large role in channeling funds from savers to borrowers.

They argue that, while interest rate spreads have increased, in some cases to levels never seen before, the quantity of short-term lending, particularly to nonfinancial firms, has not deviated from trend in recent months:

These figures show that, while commercial paper issued by financial institutions has declined, commercial paper issued by nonfinancial institutions is essentially unchanged during the financial crisis.

This is an extremely important point, as it deals with issue of whether the turmoil in credit markets is having a significant impact on the real economy. Given the stability of outstanding nonfinancial commercial paper, it is difficult to argue that firms outside of the financial sector are unable to obtain short-term loans. Do they have to pay more for those loans? Yes, but higher rates are being charged almost exclusively to firms with questionable credit quality. The authors point out that the rate on 90 day AA nonfinancial commercial paper, which includes companies that have high credit ratings, has barely budged over the past month, while the rate for A2/P2 nonfinancial paper, which includes firms that have significantly lower credit ratings, has spiked. The message is clear: if your company has good management in place and steady cash flow, you will not be charged exorbitant rates on short-term loans.

(Hmm. Wonder if those Minneapolis guys have been reading Aaron Smith's work here?)

Nothing to Fear

Fri, 24 Oct 2008 16:30 GMT

The New Yorker's James Surowiecki makes a good point:

...I wish we could stop saying things like “markets swoon on recession fears,” with its implicit assertion that investors are still worrying about whether or not there’s going to be a recession. At this point, it seems pretty clear that just about everyone—with the exception, apparently, of Bush Administration spokesperson Dana Perino—thinks not simply that there’s going to be a recession, but that we’re already in one. The real question is how severe it’s going to be, and how long it’s going to last.

Oops. Guess we have to plead guilty to that one.

Treasury Prices Surge on Global Recession Fears
Responding to the panic consuming financial markets, U.S. Treasury prices increased sharply Friday, extending the week's gains. Economic data have increased speculation that a global recession may be unavoidable. With the global and domestic data worsening and equities in a tailspin, investors are seeking shelter in the U.S. bond market.
Bond yields are falling across all maturities, with sharp declines at the long end of the curve. The decline in longer-dated bond yields began to pick up speed earlier this month in conjunction with weaker data on the world economy. Meanwhile, U.S. consumer spending, manufacturing and employment are all contracting, and the recent data showed that the credit crisis has already inflicted serious damage on the economy. Real GDP is expected to decline for three consecutive quarters, beginning in the third quarter.

But Surowiecki also raises the question of what, exactly, the official recession-declarers at the National Bureau of Economic Research are still waiting for. The election, maybe?

How the Credit Crunch Sinks Global Trade

Thu, 23 Oct 2008 09:15 GMT

Malaysian news agency Bernama.com channels Matt Robinson on the crisis in international trade :

Crisis Of Confidence Hits Global Shipping

KUALA LUMPUR, Oct 23 -- The intensifying credit crisis has spread to foreign trade as reports emerge of banks refusing to honour letters of credit from one another.

A letter of credit is a formal document guaranteeing payment by an issuing bank on behalf of a buyer (an importer), to a third party (the producer of the goods), for a specific amount of money, provided certain conditions are met.

"It is an I.O.U. between an importer and exporter and the lifeblood of international tradeflows," said Matt Robinson, an economist at Moody's Economy.com's Sydney office.

Some cargo ships have been stranded at ports, as stocks pile up, because exporters have been unable to arrange shipping without being afforded bank finance, he said in an article made available by Moody's Economy.com.

"If this problem persists, it will be a double-whammy for Asias export-oriented economies, already reeling from falling consumer demand in key export markets," he added.

"It is most worrisome for Asias export-oriented economies with global shipping being hit as exporters and importers struggle to secure letters of credit," he said.

Banks have also tightened lending conditions considerably by imposing more onerous requirements on importers and exporters before issuing letters of credit.

"With reports of sellers' banks deciding they don't trust the financial institutions named in buyers' letters of credit, it has become an alarming anecdote of cargo ships being stuck in home ports.

"With ships not moving, stocks have been piling up and exporters have grown desperate for income from idle inventory. Importers of raw materials for production are also feeling the pinch as supplies dwindle.

"This could lead to price distortions as demand, despite being subdued by slowing economic conditions, outstrips supply as shipments are delayed," he said.

The impact of the credit crisis has been evident throughout financial markets.

"Interbank lending has ground to a halt, wholesale funding markets have been volatile, equities across the globe have nose-dived and several Asian currencies have capitulated as US dollar funds become scarce," Robinson highlighted.

According to Robinson, the effects of the intensifying financial crisis are increasingly evident beyond financial markets.

"In the real economy, major corporations, particularly in the US, are finding it difficult to roll over short-term commercial paper, causing problems in meeting the payroll," he said.

Declining commodity prices for some of Asias key commodity exporters, including Malaysia and Indonesia, aren't helping trade balances either, Robinson noted.

"Meanwhile, the growth of the Chinese economy has been humbled by the deteriorating external environment," he said.

The Credit-Score Conundrum

Thu, 23 Oct 2008 08:30 GMT

Matt Stichnoth at Seeking Alpha channels our own Tony Hughes on the credit-score conundrum:

How is it that credit scores have risen at the same time that consumer delinquency rates have gone up? Weird, but true. Take a look:

Payment patterns, recall, constitute a major input to the credit score’s calculation. So as more people pay their bills late, by definition, the average FICO should fall, not rise. But that hasn’t happened. Hughes offers four possible explanations:

People have learned to game the system. They accept line increases (which raise scores) when offered, for instance, even if they have no intention of using them. Or they might even pay to piggyback on another, high-score consumer’s card. The moves reflect the individual’s understanding of how credit scores are tallied, not changes in his actual creditworthiness.

People (especially those with high credit scores) are using their credit cards more than ever. Higher usage means a thicker credit file, and thick credit files tend to make for high scores.

Because of a quirk in how they’re calculated, credit scores haven’t adequately taken into account the broad rise that’s occurred in mortgage delinquencies. A consumer’s score tends to get dinged when the consumer’s payment pattern varies from the broad average, but when the broad average itself shifts, changes in scores might not adequately reflect broad changes in creditworthiness.

Consumer card balances are rising. In the past, high balances have correlated with strong consumer creditworthiness. Perhaps no longer, however. Consumer confidence is in the tank and the HELOC spigot shut off for many borrowers, so rising card balances could be a sign, if anything, of rising consumer desperation.

Hughes says that all this suggest that “the relationship between credit scores and the underlying probability of default is breaking down.” He’s on to something, I suspect...

Tony's original piece is available here. All I could think of reading it was that the Lake Wobegon effect ("...where all the children are above average...") had finally found its way into consumer finance. Weird...

A Major League Slump

Wed, 22 Oct 2008 10:00 GMT

Come to think of it, the last time the Phillies won a World Series—the only time, in fact—it was 1980, and the U.S. was entering a serious economic downturn. Omigod, but does correlation imply causality? And which way does the causality run?

Baseball Hit by Money Crisis as Phillies-Rays Series Sells Out

With the Philadelphia Phillies and Tampa Bay Rays about to open the World Series tonight at sold-out Tropicana Field, three other teams -- the San Francisco Giants, Seattle Mariners and Cincinnati Reds -- are freezing the cost of tickets for 2009. The Washington Nationals, Oakland Athletics and San Diego Padres have lowered tickets by as much as 25 percent.

The credit crunch and fallout from the Standard & Poor's 500 Index falling 35 percent for the year is also hurting corporate sponsorship. The Mariners lost Washington Mutual Inc. after it was saved by JPMorgan Chase & Co., and the Arizona Diamondbacks need to find an advertiser on the pool in the right-field stands after Riviera Pools filed for bankruptcy.

"The economy has become an agenda item in planning meetings across sports, and certainly here in Arizona, we have spent a fair amount of time internally discussing various ramifications,'' said Jeff Moorad, the Diamondbacks' chief executive officer. "We have already seen some impact and are bracing for more.''

Not like we're rooting for the home-town team or anything , of course.

Election Results are In

Tue, 21 Oct 2008 14:45 GMT

Gus Faucher's model calls it for the Dems:

With just two weeks until the U.S. presidential election, economic conditions continue to favor the Democratic candidate, Senator Barack Obama. Moody’s Economy.com has updated its state-level election model with the October inflation forecast for the U.S. and unemployment rate forecasts for all 50 states and the District of Columbia. Accelerating inflation and increasing unemployment rates in most states favor the party that does not now occupy the White House—the Democrats—at the expense of the incumbent Republicans and their nominee, Senator John McCain. Our model is forecasting that Obama will win 33 states plus the District of Columbia, for a total of 388 Electoral College votes, far more than the 270 electoral votes needed to win. This is unchanged from the September forecast. As the election nears, the model becomes more stable, since the economic inputs are based largely on history, rather than on the economic forecast.

Those who put their money down say the same thing:

Crunch Was in the Cards

Tue, 21 Oct 2008 14:15 GMT

From Bloomberg:

Bank of America Corp., the largest U.S. consumer bank, lost money on credit cards for the first time since its January 2006 purchase of MBNA Corp. as more borrowers missed payments amid the slowing economy.

The card-services unit lost $373 million in the third quarter, compared with a profit of $1.04 billion in the same period last year. Defaults on cards and home mortgages contributed to a 47 percent decline in operating profit at the consumer and small-business division, the Charlotte, North Carolina-based company said today in a regulatory filing.

Credit-card lenders are facing "an exceptionally challenging period'' as the U.S. unemployment rate climbs, limiting borrowers' ability to repay loans, Moody's Investors Service said in an Oct. 16 report. "The uncertainty and tempo of the turmoil will test even the stalwarts' ability to adapt.''

Department of we-told-you-so. Back in August 2007, when most everyone thought the crisis was just about subprime mortgages, our Juan Licari said it was much bigger than that: Consumer credit of all kinds was in trouble. Juan's Aug. 22 post, hoisted from the archives:

Recent turmoil in the financial markets has its roots in the U.S. subprime mortgage meltdown. Investors in many diverse markets around the globe are being hit by their exposure to securities backed by loosely underwritten loans to high-risk borrowers. Securitization played an important role in spreading the risk from these loans around the world; now the losses are showing up in numerous global markets. As investors adjust their positions and re-evaluate their risk exposure, many are wondering if more financial distress lurks in other consumer-credit products that were, like mortgages, also securitized and widely distributed.

Our research suggests the answer could be yes. Many U.S. households who have large debt obligations related to credit cards or auto loans will face challenging times in the near term. As mortgage credit quality continues to erode, we expect other consumer credit products to face increasing difficulty as well. The charts below depict past and forecast delinquency rates for credit cards and auto loans in the U.S.

Looks like we need to update those charts.

When the Fed Gets Fiscal

Tue, 21 Oct 2008 12:30 GMT

Remember how Alan Greenspan, as far back as 2001, gave a tacit (or not so tacit) endorsement to the Bush tax cuts? And remember how he was pilloried by liberal-leaning columnists (particularly a future Nobel prize winner) for doing so?

That shoe is so on the other foot now. From the WSJ:

Ben Bernanke apparently wants four more years as Federal Reserve Chairman. At least that's a reasonable conclusion after Mr. Bernanke all but submitted his job application to Barack Obama yesterday by endorsing the Democratic version of fiscal "stimulus."
While the Fed chief said any stimulus should be "well targeted," even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new "stimulus" spending, while President Bush and Republicans are resisting. And by saying any help should "limit longer-term effects" on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.
Mr. Bernanke could have begged off -- and would have been wiser to do so -- given how much the Fed has already made itself a political lightning rod with its many Wall Street interventions. He might also have thought twice about endorsing one party's policy preferences a mere two weeks before Election Day given his obligation to preserve the Fed's independence. We can remember when tougher Fed chairmen used to refrain from adjusting interest rates close to an election for fear of seeming to be political; they would never have dreamed of meddling in campaign tax and spending debates.

Perhaps Mr. Bernanke's blunderbuss political intrusion will win him more Democrat friends, and maybe even Mr. Obama's goodwill. To the rest of the world, he has harmed the Fed and made himself less credible.

The merits of stimulus now (or tax cuts then) aside, it's interesting to hear virtually the same squeals coming from the right that were heard back then from the left. When it comes to Fed Chairmen, one side's Olympian oracle is the other's partisan patsy, and ever more shall be so.

Looking Differently at Japan (2)

Tue, 21 Oct 2008 09:30 GMT

How gracious of the Japanese to provide some models as we sift through the rubble:

Will the TARP Succeed? Lessons From Japan by Takeo Hoshi, Anil K Kashyap

Abstract:

The U.S. government is hiring asset managers to purchase up to $700 billion of toxic real estate securities that are the center of the current credit crisis. Buying up assets, if done properly, might address the collective under-capitalization that is the fundamental problem plaguing the financial system. But, experience with financial crises in other countries suggests that success is by no means guaranteed. Japan was the largest other country where the banks were seriously undercapitalized and where asset purchases were a critical part of the government's response to the problem. The U.S. bailout plan is similar to the Japanese approach in that it does not clearly identify the capital problem as critical and instead proposes using [asset management companies] to remove distressed assets from bank balance sheets. When Japan used AMCs, their effectiveness was limited in part because they did not purchase enough assets. AMCs did not help recapitalization, either, and Japan had to come up with different mechanisms to use public funds for recapitalization. Both these risks are also present for the U.S. plan.

http://papers.nber.org/papers/W14401

Looking Differently at Japan

Mon, 20 Oct 2008 12:00 GMT

Was Japan in the 1990s an example of how not to manage an economy? It certainly was seen that way by many in the West. As Jim Impoco recounts in the New York Times, the bursting of the Japanese bubble was followed by a decade of relative stagnation, which was attributed to the country's policy of propping up its leading financial firms, rather than letting them write off worthless assets and fail where necessary.

But that was then. Now, faced with the prospect of our own imploding bubble economy, the thought occurs that maybe Japan chose the best option: letting its economy limp along rather than crash.

Is America the new Japan? Or more precisely, Japan circa 1990, just as it was staggering into its Lost Decade. As recently as six months ago, the notion that the United States would face a decade or more of Japanese-style economic malaise seemed preposterous. But after the last few weeks of financial turmoil and political ineptitude, you could almost argue that America would be fortunate to end up with a downturn akin to Japan’s. That’s because in several key ways, Japan was much better equipped to withstand its financial lashing in the 1990s than Americans are today.

But if it's important to reconsider how Japan conducted itself in a crisis, its also important not to dismiss the downsides of that policy. As The Economist explains, a decade of stagnation isn't just a quiet patch between booms:

The “lost decade” irrevocably changed Japan. At the start of the crisis in 1990 it was one of the most egalitarian rich nations on earth. But income inequality increased more than twice as fast as it did in America and Europe; today Japan is above the OECD average. Relative poverty is higher than in many rich countries. Long one of the safest societies in the world, street crime began to matter. Many full-time jobs were filled by cheaper, short-term and part-time workers. They do not pay pension contributions, storing up problems for the future.

Moreover, homelessness became a problem. Relative to most countries, Japan has few people living on the street. But the shanty towns that mushroomed in public parks and on the banks of rivers shocked a society in which homelessness almost never existed. For example, the government only started counting the number of homeless in 2003, tallying 25,000 people. Today, the official number is 16,000—which is believed to be far too conservative. The average age is 57; around 16% have been homeless for more than a decade. On October 3rd the Supreme Court ruled that a park cannot be used as an address—all but preventing the homeless from obtaining public medical treatment, applying for a job or voting.

Is China Over?

Mon, 20 Oct 2008 08:30 GMT

This week's Asian Spotlight points up the trans-Pacific perception gap. From this side, China's growth rate seems to have downshifted from white-hot to smoking; but over there it's cause for considerable alarm. Sherman Chan writes:

China's growth miracle has finally ended. September quarter GDP rose 9% year on year—vigorous by ordinary measures but paltry compared with China's phenomenal spurt of recent years. The quarter's result was certainly disappointing, as it has been about five years since China last recorded a single-digit growth rate. The sharp deceleration in economic expansion, which took many by surprise, is largely justified by external weakness. The Olympic Games failed to boost economic activity during the quarter—the acceleration in retail trade seems to have been completely offset by the slowdown in industrial production.

With growth slowing markedly, China’s job creation will also lose steam. In fact, China’s great worry is yet to come. The dragon economy’s growth momentum looks set to further moderate in the next six months, testing the 8% pace, which authorities view as necessary to support the labour market. If growth dips below 8%, economic conditions in China would be equivalent to a recession in advanced economies.

When you still have 300 million folks living at close to subsistence levels down on the farm, anything short of booming causes worry about social stability. That's why China's central economic planners have been pumping as hard as they can on the gas for the past decade—and why they were deaf to U.S. pleas regarding the value of the yuan, among other things.

China’s recession alarm is flashing. Many businesses are now struggling amid weakening external and domestic demand, threatening many jobs. The most vulnerable business sectors and workers are those heavily dependent on exports. With export orders declining, China will reduce its import consumption, much of which is used to manufacture exports. This will have ramifications for the rest of the Asia-Pacific region. Australia , for instance, will be concerned about a massive slowdown in resource exports, which have been an important growth engine in recent years. Meanwhile, Japan, South Korea, Taiwan and the ASEAN economies that specialise in electronics will also feel the squeeze from a slowing Chinese economy, demand from which has been their hope for avoiding recession. The end of China's dream run will also mark the end of Asia-Pacific region’s boom.

This is critically important stuff. I'm guessing that when the history of this turbulent era is finally written, the consensus will trace it all back to the shock of adding 1.3 billion Chinese to the global economy. All those new workers and consumers, all that new productivity, all that new savings, set off a wave of liquidity; as it ripped around the world, lending rates dropped, property prices soared, commodities took off, and, well, you know the rest.

Do Not Pass Go. Do Not Collect $200.

Sun, 19 Oct 2008 22:45 GMT

Confused about how the crisis happened? Start by getting out your old Monopoly set, Tim Harford advises:

The game is one big property boom, funded by an overly generous central banker – a diagnosis many economists would also apply to the sub-prime crisis. Alan Greenspan, the Fed chairman who presided over the boom, was nine when Monopoly was widely published. It is not known whether he played the game as a child, but he seems to have taken inspiration from it somehow.

Maybe that's why I always ended up depressed after playing as a kid ...

Warren Buffett Gets Greedy

Fri, 17 Oct 2008 12:30 GMT

As Golden Rules go, this works for me:

Be fearful when others are greedy, and be greedy when others are fearful.

On the other hand, telling the world his plan has to be an act of unvarnished altruism ...

Update: Just remember that he's Warren Buffett, and you're not.

Back and Forth on Housing Starts

Fri, 17 Oct 2008 11:45 GMT

Economic hard times inspire two contradictory responses. One is to simply to want it to stop hurting. The other is to want the system purged and cleansed, at whatever up-front cost. The two are not mutually exclusive; indeed it's quite common to wish for each in turn, or even simoultaneously. But they point in opposite directions, and underly pretty much all the debate we're hearing among economists, policymakers and talk-show guests—such as this one .

Sorting them out, however, is necessary before you can intepret news such as today's about U.S. homebuilding. From Aaron Smith:

Builders slashed housing starts and residential building permits in September to their lowest level since early 1991 as they worked to realign supply and demand. Housing starts dropped 6.3% to an annual rate of 817,000 units, and permits fell 8.3% to an annualized pace of 786,000 units. The rate of decline in homebuilding has clearly intensified: Housing starts over the past three months have contracted at a 68.3% annualized rate, the worst such reading since March 1980.

You can see this as disastrous, an economic train wreck. All those lost housing jobs, all that idle investment in land, lumber and equipment. The ripple effects—on employment, retail sales, overall growth—will be severe. Somebody—like maybe a presidential candidate?—should propose a plan to boost housing construction and save the economy.

Or not. As Aaron also writes:

Although significant progress has been made in lowering the supply of new homes to a level more consistent with the current low demand, we think further cutbacks in homebuilding will be forthcoming to more quickly draw down inventories.

Progress? Yes. Remember that what ails the economy—the financial side of it, at least—stems from the plunge in house prices that followed the end of the recent bubble. Rising defaults, underwater mortgages, frozen securities markets and the global banking crisis all began there. Any recovery, therefore, depends on house prices stabilizing. But house prices can't stabilize if builders keep pumping inventory into an already glutted market. Something's got to give. And the faster and deeper it gives, the sooner we can begin to climb out of this hole.

Let me amend that. The faster and deeper it gives, up to a certain point. That being the point at which all those lost construction jobs and all that idle investment is enough to sink demand for new houses, so that even as prices plummet and "affordability" rises in some technical sense, it still doesn't revive the economy.

At which point we abandon all talk about system-cleansing, and just hope someone can make it stop hurting.

Risk, Shock and Forecasting With a Ruler

Thu, 16 Oct 2008 10:30 GMT

"We still don't know—really don't know—how many people are being foreclosed on. No one knows. And that's not the foundation of good policymaking."

That's Mark Z. talking with Wharton's Jeff Brown about the book "Financial Shock." In this 10-minute video , Mark explains why risk premia disappeared during the bubble; how even responsible money managers had to join the crazy dance, and why somebody, somewhere needs to regulate for systemic risk:

"...not just [someone] saying 'this is a bad mortgage loan, or a bad credit card loan... [but] a regulator that can watch over the entire system."

It's Bad. Just Not 1929 Bad.

Thu, 16 Oct 2008 08:45 GMT

How much has the outlook deteriorated? This much, according to Aaron Smith:

Financial conditions have tightened to such a degree in recent weeks that we have twice been forced to downgrade our forecast for U.S. growth...

We expect that by the middle of 2009, real GDP will have fallen approximately 1% from its peak. This would be about double the 0.4% drop experienced in the 2001 recession, but not as bad as the 1.3% drop in 1990-1991. The expected decline would not approach levels seen in the 1981-1982 and 1973-1975 recessions, when real GDP fell by 2.6% and 3.1%, respectively.

Don't get carried away, though: The "D" word isn't appropriate:

The recent dramatic selloff in U.S. equities last week revived memories of past crashes, including those of 1929 and 1987, and revived fears of a new Great Depression. However, our forecast does not envision a fall in output or employment anywhere close to that episode. Between 1929 and 1933, real GDP fell by 27% and the unemployment rate increased from 3% to 25%.

And there's always hope. Always. This proves it.

Bienvenidos a Uruguay

Wed, 15 Oct 2008 17:00 GMT

Three things I bet you didn't know about Uruguay:

It is a regional tourist hub, attracting Brazilians, Argentineans and Paraguayans to its beaches and safe cities.

Despite having a population of only 3 million, it is the largest software exporter in Latin America.

It contributes the largest number of peacekeepers per capita to the United Nations.

Why bring up the South American Switzerland? Because it is the latest economy to be covered by the Dismal LatAm team. Martin Soler Garcia is the analyst; among the regular indicator releases he'll be following are inflation, GDP, and industrial production (sub required). His first Uruguay Outlook posted earlier this month.

Martin notes that:

Uruguay endured its worst economic crisis in modern times just eight years ago, when its financial system was crippled by shocks from the 2001 Argentine monetary crisis and the 1999 Brazilian devaluation, and an outbreak of hoof-and-mouth disease reduced cattle herds and beef production. The following recession saw GDP fall by 15% in 2002.

The crisis did not cause a debt default and since then Uruguay has signed free trade agreements to open new markets and attracted foreign investors by guaranteeing equal treatment under the law. Currently the economy is posting the fastest growth rate in Latin America, 13% Q2 2008.

Important industries include food processing, tourism and hospitality, paper, and banking. Primary exports include beef, soy beans, wool, leather, wood, paper, and software.

Uruguayan yerba maté is superior to the Argentine version, although Argentines may disagree.

Here's the list of countries and economic regions covered by Moody's Economy.com analysts.

At the Intersection of Wall St. and Reality

Wed, 15 Oct 2008 13:45 GMT

Peripatetic occasional newspaperman Carlin Romano affixes a literary GPS to our financial dashboard:

Lately we've heard so much about "Wall Street" and "Main Street" that foreigners might think America comes divided not into states or counties, or red and blue, but boulevards, highways, and the like. Yet lots of very different people have lived at both addresses. Part of figuring out where one stands intellectually amid the financial meltdown of the moment requires absorbing the disparate images and associations we identify with both phrases ...

Romano channels Steve Fraser, author of Wall Street: America's Dream Palace:

Fraser wastes no time outlining Wall Street's contradictory "paradoxical history in American culture" as a "hot zone of credulous fools and knowing gamesmen," a place that "defies the very orderliness, discipline, and self-abnegating labor of the capitalism it presumably embodies and symbolizes."

As "protean metaphor," Fraser writes, Wall Street has stood for, among other notions, "the rich, big business, the 'money power,' parvenu greed, financial piracy, high society on parade, moral and sexual prostitution, Jewish or Anglo-Saxon or capitalist conspiracy, Yankee parasitism, the American Century, the land of Aladdin, and a good deal more."

Wall Street, in short, stands for such an astounding range of financial activities and behaviors, from the deceptions of a Charles Ponzi to the admired stewardship of "heroic savior" J.P. Morgan, that it's virtually meaningless as a description. Are we equally angry, after all, at hedge-fund traders, "credit swap" inventors, and the friendly guy at the downtown Charles Schwab?

Housing, Labor Mobility and Economic Growth

Wed, 15 Oct 2008 10:30 GMT

How does a housing bust turn into a global recession? Start with the closing of the home-equity ATM, detailed here on our companion site Consumer Flow (sub req). As households lose the ability to refinance and/or cash out, they have less to spend.

Next add the more generalized wealth effect: Even those who don't depend on home-equity cash feel poorer as they realize their homes are worth less, so they spend less too.

Add the obvious drop in construction, real-estate sales and mortgage originations, and all the jobs and income they produced. Spread that out to retailing, travel, business services and so on.

But there's one more way a housing crash can become a millstone around the broader economy's neck. As Wharton Prof. Joseph Gyourko outlines in this Dismal Scientist article , families with negative housing equity can be effectively trapped in their current houses, unable to relocate for jobs or better opportunities.

Americans are quite mobile as a group: About 12% of homeowning households move within a typical two-year period, according to the American Housing Survey. In research I recently conducted with my colleagues Fernando Ferreira and Joseph Tracy, we estimate the overall impact of negative equity and higher interest rates on homeowner mobility using data going back to the 1980s. The estimated impact of lock-in on mobility is quite large. For example, having negative equity reduces the two-year mobility rate by 5.6 percentage points—all else being equal—cutting the baseline mobility rate of 12% by almost half. A $1,000 higher real annual mortgage interest cost is estimated to reduce mobility by 2.8 percentage points, or about one-quarter.

Calculated Risk picks up the theme , adding some estimates on the current size of the real-estate mobility drag.

This isn't a new idea, of course. Ten years ago, British economist Andrew Oswald was telling anyone who would listen that homeownership was positively correlated with unemployment: That is, the higher a country's rate of homeownership, the higher its long-term unemployment rate.

It makes intuitive sense—but that's not the same as political sense. The American-dream-of-homeownership remains a powerful rhetorical trope, even now. It'll be interesting to see if it survives the current slump.

From a Crisis Come New Ideas

Tue, 14 Oct 2008 15:15 GMT

One nice thing about a crisis is it stimulates thinking -- maybe by focusing the mind, like a hanging? Anyway, new ideas on how to fix the financial mess seem to turn up almost daily.

Here's one from University of Rochester economics prof. Steven Landsburg:

The big question about those distressed assets is: What price should Treasury pay for them? You might reasonably say that the fair price for an asset nobody wants is zero. But bailout proponents tell us that these assets are plenty valuable; it's just that nobody's stepping up to buy them because it's hard to borrow right now. So how do you set a fair price for an asset that nobody else is bidding on?

... First, put 10 similar distressed assets (such as a series of collateralized debt obligations) up for auction. At the close of the auction, the Treasury pays the winning bids for nine of these properties. The tenthproperty (chosen randomly) gets sold to the winning bidder.

The advantage ... is that the Treasury buys assets and recapitalizes the firms holding those assets while paying only what some private bidder thought each property was worth. Now repeat with 10 more properties. And so on. Under this plan, nine-tenths of the liquidity comes from the Treasury, but ten-tenths of the price setting comes from the assessments of private investors with the incentive to bid judiciously. In other words, the prices can reasonably be considered fair.

And here's another, from our own Tony Hughes:

First, the origination of risky mortgages carries a public cost that may turn out to be substantial if events unravel, as they have over the past two years. The interests of taxpayers must therefore be protected...

Second ... the new rules must make it less easy to shirk responsibility for bad loan origination.

Both of these lessons can be addressed with a single action: Institution of a mortgage originators’ foreclosure tax.

...When a mortgage goes into foreclosure, the originator of the mortgage would pay a not-insubstantial tax directly to the federal government ... it would be the responsibility of the originator even if the mortgage was subsequently securitized and sold on Wall Street. Securitization would therefore still be allowed, but responsibility for payment of the tax could not be shifted away from the mortgage originator... The only way to avoid the tax would be to originate loans that do not end up in foreclosure.

My own thoughts about all this are still half-baked, but tend in the direction of putting an up-front sunset date on pretty much everything being cooked up currently. No matter how brilliant they seem now, all these ideas ought to be reexamined at some point for cost and effectiveness, before they attain institutional permanence out of mere inertia.

Latest Moves by Fed, Treasury, FDIC

Tue, 14 Oct 2008 08:30 GMT

Washington, DC-- The following statement was made by Treasury Secretary Henry M. Paulson, Jr, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila C. Bair:

Today we are taking decisive actions to protect the U.S. economy, to strengthen public confidence in our financial institutions, and to foster the robust functioning of our credit markets. These steps will ensure that the U.S. financial system performs its vital role of providing credit to households and businesses and protecting savings and investments in a manner that promotes strong economic growth in the U.S. and around the world. The overwhelming majority of banks in the United States are strong and well-capitalized. These actions will bolster public confidence in our system to restore and stabilize liquidity necessary to support economic growth.

Last week, the President’s Working Group on Financial Markets announced that the U.S. government would deploy all of our tools in a strategic and collaborative manner to address the current instability in our financial markets and mitigate the risks that instability poses for broader economic growth. This past weekend, we and our G7 colleagues committed to a comprehensive global strategy to provide liquidity to markets, to strengthen financial institutions, to prevent failures that pose systemic risk, to protect savers, and to enforce investor protections.

We welcomed the steps announced by our European colleagues this weekend to implement the action plan, and ensure financial institutions in Europe can finance economic growth. Today we are implementing our strategy with three important actions.

First, Treasury is announcing a voluntary capital purchase program. A broad array of financial institutions is eligible to participate in this program by selling preferred shares to the U.S. government on attractive terms that protect the taxpayer. Second, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, Secretary Paulson signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily guarantee the senior debt of all FDIC-insured institutions and their holding companies, as well as deposits in non-interest bearing deposit transaction accounts. Regulators will implement an enhanced supervisory framework to assure appropriate use of this new guarantee.

We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program. We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy. By participating in these programs, these institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending to U.S. consumers and businesses and promoting economic growth. They have also committed to continued aggressive actions to prevent unnecessary foreclosures and preserve homeownership.

Third, to further increase access to funding for businesses in all sectors of our economy, the Federal Reserve has announced further details of its Commercial Paper Funding Facility (CPFF) program, which provides a broad backstop for the commercial paper market. Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers.

Together these three steps significantly strengthen the capital position and funding ability of U.S. financial institutions, enabling them to perform their role of underpinning overall economic growth. These actions demonstrate to market participants here and around the world the strength of the U.S. government’s commitment to take all necessary steps to unlock our credit markets and minimize the impact of the current instability on the overall U.S. economy. The actions taken today are a powerful step toward restoring the health of the global financial system.

We're from the Government, and We're Here to Help

Tue, 14 Oct 2008 08:15 GMT

Like the man said, there are no atheists in foxholes. And no libertarians in a financial crisis.

From the NY Times this morning:

WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.
President Bush described the Treasury Department plan to bolster banks in a speech from the Rose Garden on Tuesday morning. And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

Dow Up 11%. In Just One Day.

Mon, 13 Oct 2008 18:00 GMT

936 points. I feel like Richard Farina: Been down so long it looks like up to me...

On the other hand, as Portfolio's Zubin Jelveh reminds us, one bounce does not a rebound make:

"...there have been five other times since 1929 that the Dow Jones Industrial Average has gained more than 11 percent in a session: one time each in 1929, 1932, and 1933 and twice in 1931."

And if that's not enough to keep you sober, our own Cris deRitis just posted this reminder of the Swedish experience in 1991 (sub req). Note it took eight years for house prices to come back after their bust.

The Swedish model avoided calamity and may therefore be deemed a success; however, it was no free lunch, as a nasty recession followed. Nonetheless, the Swedish outcome is perhaps the best the U.S. can hope for, and a reason to support swift, albeit costly, government intervention. That said, consumers, investors and policymakers should be prepared for what may follow over the next few quarters and years.

After years of double-digit annual growth in house prices before 1991, annual depreciation in Sweden exceeded 15% in 1992. Stunningly, it then took nearly eight years for prices to recover. The silver lining was that house prices did find a bottom within two years and moderate growth followed. Of course, the pre-1991 fairy tale of 20% annual growth rates was never seen again.

Long Island Boy Makes Good

Mon, 13 Oct 2008 12:30 GMT

I was into Krugman before Krugman was cool.

That is, I read his website, his pop-economics books, and his early columns (like this one) before he began writing his regular New York Times column in 2000. And before the Bush tax cuts evidently drove him around the bend.

I've had mixed feelings about him since then. While agreeing with a fair amount of what he wrote, I wasn't comfortable with the unbridled partisanship that overtook a lot of his newspaper writing. You give up something as a columnist (not to mention as an economist) when your analysis starts with the postulate that one party is morally bankrupt, and the other one represents the Hope of a Nation.

I also felt he over-romanticizes the era and place he grew up in—1950s Long Island, which as it happens is the same era and place I grew up in. Yes there were lunchbucket union jobs and single-breadwinner families, but it was hardly Eden. We rebelled in the 1960s for a reason.

One incident in particular made me wonder what had happened to Krugman's brain: He was a guest on a Sunday morning talk show in the summer of 2001, called in to comment on the then-darkening economy (we were already in recession then, but it wasn't official yet.)

After Krugman had been booked but before he appeared, however, some news broke in the Gary Condit case. If you've forgotten, this involved a congressman and a missing aide. It was a sexy, juicy story, and I don't remember all the details except that it had nothing whatever to do with economics.

The host introduced Krugman as a distinguishied economics commentator, then proceded to ask his opinon—of the Condit story.

And ... Krugman gave one.

None of this reflects on Krugman's authority or credibility as an economist, of course. I'll happily defer to the Swedish academy on that score.

But as a media figure, you have to admit he's carved out some strange ground.

Financial System's Saved. Now How About Christmas?

Mon, 13 Oct 2008 09:45 GMT

Even if we get past the credit panic, the holidays look lousy. Scott Hoyt has the details:

Real spending is falling, and the near-term outlook for consumers is growing darker by the day. The lift from federal tax rebates faded in the third quarter, and vehicle sales collapsed in July. Soaring prices, particularly for energy, produced declines in real spending in June and July. The near-collapse of financial markets in mid-September has significantly darkened the outlook for jobs, borrowing, and the stock market, as well as undermining the outlook for house prices. Thus, we now expect most segments to report the worst holiday sales growth in more than 15 years.

Read the whole thing here.

A Timeline to Recovery

Sun, 12 Oct 2008 13:45 GMT

Following up Mark's capsule history of How We Got Here: He's also sketched out the pathway back. The graphic below is taken from the latest Moody's Economy.com Macro Precis:

How Things Went from Bad to Worse

Sat, 11 Oct 2008 11:30 GMT

Mark Z. gives a nice summary of how we got here in this podcast (sub required, for now). If you prefer reading to listening, Mark also lays it out as part of his latest monthly U.S. Macro Outlook on Dismal:

The system has been under significant stress for more than a year, but not until the nationalization of Fannie Mae and Freddie Mac in early September did panic overtake financial markets. The Treasury Department's action may have been necessary—Fannie and Freddie seemed headed for insolvency—but it also signaled to global investors that no financial institution was too big to falter.

Investors immediately began to question the viability of Lehman Brothers. Unlike Bear Stearns, the investment bank that failed in March, Lehman had no liquidity problem. The Federal Reserve established various facilities after the Bear Stearns collapse that enabled Lehman to raise cash. Lehman's problem was that its counterparties—commercial banks, hedge funds, other investment banks, private investors—lost confidence in its ability to conduct normal business. After failing to find a buyer for Lehman, policymakers decided to let it file for bankruptcy. They took a calculated risk, betting Lehman's collapse would not create problems for the entire financial system; since Lehman's difficulties had long been known, they thought markets had ample opportunity to prepare.

The ensuing damage was unforeseen: An institutional money market fund with sizable investments in Lehman securities broke the buck—that is, the value of its assets fell below what investors had put in. This event broke a psychological barrier: Individual investors had thought money-market funds were as safe as the proverbial mattress. Redemptions began immediately, forcing the $3.5 trillion money-market fund industry to start pulling away from commercial paper, a traditional investment for many funds. The panic became a direct threat to the economy, because commercial paper is a vital source of short-term business funding for everything from inventories to payrolls. Worried households also began moving deposits from commercial banks rumored to be having trouble. The failures of Washington Mutual and Wachovia were precipitated in part by these silent runs.

Where Stocks Are Headed

Fri, 10 Oct 2008 10:30 GMT

As often pointed out over the last two decades, the best answer—really the only answer—was given by J.P. Morgan many decades back.

Asked "What will the stock market do?" Morgan replied: "It will fluctuate."

Of course, there are other predictions.

Personally, I'm just trying to pretend it's 1987:

They Expected a Different Crisis

Fri, 10 Oct 2008 10:30 GMT

Brad DeLong says that few experts expected the current financial crisis—they were expecting a different one.

"...We were expecting the Balance of Financial Terror between Asia and America to collapse and produce chaos. We were expecting a free fall in the dollar’s value that would push and be pushed by large-scale capital flight from America that would produce high interest rates and a collapse of construction and investment. We were expecting a collapse of imports into the United States that would produce a free fall in employment and in political stability in Asia...

Instead we are having a very different financial crisis: catastrophic failures of risk management throughout the entire banking sector have caused a relatively minor—by the standards of the global economy—collapse in housing prices in Riverside County, CA, Dade County, FL, and a few other places to freeze up global finance to a degree that has not been seen since the Great Depression. The first good thing about this situation is that it does not call for different central banks and Treasuries to do different things, but rather for them all to do the same thing in unison without fouling each other’s oars.

That should be relatively easy to arrange.

The whole thing is here.

The Kitchen Sink Rate Cut

Wed, 8 Oct 2008 10:30 GMT

This better work; I don't know (and haven't talked with anyone else who seems to know either) what else they've got if this coordinated rate cut doesn't do the trick.

Hey, maybe it is working...

or maybe it's this unexpected news (sub req):

The pending home sales index surged 7.4% in August to 93.4. The level of pending home sales in July was revised higher as well. This increase exceeded our expectations for a 2.5% decline. The index in August stood at its highest level in more than a year. The surge in the index was concentrated in the West. The increase in pending home sales offers evidence that buyers may be taking advantage of falling house prices.

Bringing it All Back Home

Tue, 7 Oct 2008 17:00 GMT

Edward Glaeser gets right to the heart of things:

The real problem is not the current price decline, but the previous price explosion.

Which puts me in mind of a classic line from Warren Buffet that's particularly comforting after today's Wall Street carnage:

I'm going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up, we weep. For most people, it's the same way with everything in life they will be buying--except stocks. When stocks go down and you can get more for your money, people don't like them anymore.

At Long Last, Thrift

Tue, 7 Oct 2008 16:30 GMT

I used to work with a personal-finance columnist who once confessed over beer that he had been writing the same column for 10 years or more. The headlines were different, but the essential advice was the same, week after week: Pay down your debt. Redundant as it may sound, however, such advice never really got stale—because hardly anyone took it.

That may be changing. This from MarketWatch:

U.S. families paid off consumer debts at the fastest pace in more than 10 years in August, a sign that consumers are rushing to pare back their spending and save more money as the economy slips deeper into recession.
It was the first month since January 1998 that consumers had paid off more debt than they took on. Borrowing to buy an automobile declined sharply. Consumers also charged less on their credit cards than they paid off.

On Dismal today, Sean Maher covered the story: (sub req)

The drop in consumer credit illustrates the increasing strain that consumers are under, as well as banks' growing inability or unwillingness to lend. Over the months ahead, outstanding consumer credit will be a useful, albeit backward-looking, indicator of consumer behavior. An ongoing decline in consumer credit, though not expected, would signal a sharp pullback in spending, which in turn will deepen the current recession.

Contrary Indicators

Tue, 7 Oct 2008 07:00 GMT

If credit is drying up, why is bank lending rising? Aaron has the numbers, and a tentative explanation:

So far, data on lending do not support the view that credit creation has dried up, however. There has been very little corporate bond issuance recently and financial institutions have been unable to fund themselves sufficiently in the money markets; but problems in the nonfinancial sector appear confined to riskier borrowers. Investors are demanding large premia for lower-rated nonfinancial commercial paper, but not for the investment-grade variety. On Monday, the discount rate for high-quality nonfinancial paper maturing overnight was set at 0.52%, a new cycle low. The rate on lower-quality paper is higher, but financing is getting cheaper, not more expensive, for creditworthy borrowers.

Read the whole thing here, free for now:

Why the Fed Wants to Pay Interest

Mon, 6 Oct 2008 11:30 GMT

Ed Friedman posted this last week after the first, negative House vote on the mega-bailout. Now that the bill has passed, it's no longer an academic question: the Fed announced this morning that it will beging paying interest on reserves. If you're wondering what that means, Ed's piece is a good place to start:

The bailout bill [will allow] the Fed to pay interest on reserves. That [will help] it channel liquidity to hard-to-reach markets and institutions through its various facilities such as the Term Auction Facility without worrying that it was driving the fed funds rate too low. Conventional open market operations have been less effective in this crisis because the country's large money center banks have hoarded the Fed's liquidity offerings.

This subtle refinement to monetary policy would let the Fed adjust liquidity in multiple financial markets. The fed funds rate on overnight interbank lending would never drop below the Fed's reserves rate, because it would not make sense for a bank to lend at a rate less than it could earn on its reserves. The Fed could then ease or tighten monetary policy in a simple, straightforward way by lowering or raising the deposit rate it pays on reserves. In contrast, the existing approach is a complex method that requires buying or selling the right amount of Treasury bills on the open market.

Congress had passed legislation in 2006 to let the Fed pay interest beginning in October 2011. To acquire another tool to combat the financial crisis, the Fed this May had sought to accelerate the timing to this year, and the required permission found its way into the TARP legislation. The central bank has been lobbying for such authority—originally proposed by Milton Friedman in 1959—since early this decade. Other central banks, including the European Central Bank, already do this.

Another Reason to Worry About Your Job

Mon, 6 Oct 2008 10:30 GMT

As Sophia and Marisa were saying during our podcast chat last Friday (sub req), there's not much to feel good about on the employment front. Now the Conference Board weighs in with its own forecast of gloom:

Oct. 6, 2008…The Conference Board Employment Trends Index (ETI)™ continued its decline in September, suggesting even more losses to come in the labor market. The index fell in September to 108.4, down 0.8 percent from the August revised figure of 109.3, and down almost 10 percent from a year ago.

"The deterioration in the Employment Trends Index has become very pronounced, suggesting that the unemployment rate may very well exceed 7 percent as early as the second quarter of 2009," said Gad Levanon, Senior Economist at The Conference Board. "The persistent slackening in labor market conditions, worsened by the financial crisis, has reached a level that in the past led to significantly slower wage growth across most industries."

A Subdued Crisis in Asia

Sun, 5 Oct 2008 20:45 GMT

"...Asia holds a massive portfolio of mortgage-backed securities—as well as a significant amount of U.S. equities, Treasuries and corporate debt. Until this point, the response to the ructions stateside has been a relatively modest revaluation of that asset portfolio. This is due to the composition of that portfolio, how it is being held, and also who is holding it."

That's from Dan Melser in Sydney. The full story posted tonight on Dismal's Asia/Pacific site (sub req).

The Recession Next Door

Sun, 5 Oct 2008 18:45 GMT

Bill Marsh of The New York Times offers a nice graphical synopsis of our regional recession analysis in Sunday's Week in Review section. Andrew Gledhill is quoted. Andrew's latest regional analysis (sub req) is here. An ungated list of states and cities and their most recent business cycle status is here.

There's a Credit Crunch Around Here Somewhere

Fri, 3 Oct 2008 16:30 GMT

If any one thing spooked the politicians into approving the Big Bailout this week, it was probably the prospect of a commercial paper freeze-up. Without short-term debt greasing the gears of commerce, shelves would quickly go unstocked and payrolls unmet. The recession would morph from a nightly TV show to a bomb blast on Main Street.

A Federal Reserve release showing that the volume of commercial paper outstanding had fallen in the most recent week by $94.9 billion seemed to bear out everyone's worst fear. But as Aaron noted yesterday, the top-line drop in commercial paper wasn't the whole story.

Now it seems he's not the only one seeing nuance in the data:

The portion of small-business owners who said credit was harder to get was "up a point or two" in September, but there was "no signal in the data that things suddenly got worse," according to William Dunkelberg, chief economist with the National Federation of Independent Business, a trade group representing small firms. NFIB surveys small-business owners every month. NFIB won't release its official September figures on credit availability until Monday, but Dunkelberg, who has analyzed the September data, said they show "just the normal progression we see at the end of an expansion. ... Credit is always harder to get then."

In a late-breaking email, Aaron adds:

"The discount rates for nonfinancial and financial commercial paper maturing overnight dropped below 1% yesterday. They are now tracking the effective funds rate, suggesting almost no premium is being demanded from investment-grade companies, whether it be nonfinancial blue-chips or large financials that are perceived as unlikely to fail."

Ok, They Passed It. Now What?

Fri, 3 Oct 2008 15:45 GMT

So the House reversed itself and passed the Big Bailout. Did Wall Street say thank you?

No. (Did you even have to ask?)

Must be galling to be a House libertarian. On Monday you stand up for your principles (or at least cover your rear with Rush Limbaugh) and the stock market behaves as if you just shot grandma.

So on Friday you swallow hard, hope the folks back home will forgive you, and vote aye.

And Wall Street ignores you.

Ah, well. At least we don't have to give up being sick.

Meanwhile, Gus Faucher asks the more important questions:

The passage of the bill will temporarily calm financial markets. However, there is still a great deal of uncertainty surrounding the package. What assets will the Treasury Department buy? How will they purchase them? How much will they pay? What will be the cost to taxpayers? And, most importantly: Will this be enough? Will enough banks get enough bad assets off their books to free up the flow of credit through the U.S. and global economies? We may not know the answer to that question for weeks or months. The credit crisis has already caused huge problems for the U.S. economy. It is now just a question of whether this rescue plan is enough to limit the damage.

Paulson Plan Paradox

Fri, 3 Oct 2008 12:00 GMT

Today's employment report is grim and grimmer—and it's almost certainly not the worst we'll see. As Sophia Koropeckyj and Marisa Di Natale discuss in this podcast we've just posted, the job-shedding is just getting rolling, and won't likely slow down before mid-2009, if then.

If there's a positive in the job debacle, it might be the catalyst for passage of the Paulson plan by the U.S. House of Representatives today. Voting is scheduled to get underway soon, so we'll see, but it's hard to imagine how even the staunchest anti-Wall Street types out there can maintain that the only people who need bailing out are Manhattan fatcats at this point.

The paradox, however, is that as the federal financial bailout, or rescue, or whatever it is moves forward, we're seeing clearly now that it is anything but a panacea for what ails the economy. Jobs are vanishing, firms are hunkering down, coal lumps look like the hot gift for this Christmas season and it may be a year or two before the U.S. regains anything resembling its pre-subprime pace.

Stiff in the Joints, or Rigor Mortis?

Thu, 2 Oct 2008 16:15 GMT

WSJ's Market Beat column says the commercial paper market is looking comatose:

The commercial paper market is severely stretched. It costs about 4.5% to borrow seven-day asset-backed commercial paper, compared with about 2.5% for the past few months. The total amount of commercial paper outstanding fell by $94.9 billion for the week ended October 1, 2008, a record. It reflects the unwillingness by money-market funds to buy this paper, which is normally not considered a particularly great risk. “The purge is broad and is impacting issuers with far more predictable cash flows — regular run-of-the-mill companies in need of working capital,” writes Tony Crescenzi, chief bond market strategist at Miller Tabak.

But our sharp-eyed Aaron Smith sees finer distinctions in the data:

The volume of total commercial paper outstanding tumbled $94.4 billion, the largest decline on record, in the week ending October 1... Financial paper accounted for approximately two-thirds of the decline, plunging $64.9 billion to a fresh two-year low...

...The weekly numbers for nonfinancial commercial paper—used by real-economy firms to finance receivables, inventory and payroll—are more encouraging. Volumes fell $18.3 billion in the week ending September 17, the largest decline this decade. Nonfinancial volumes edged up slightly the following week, and Thursday's data show only a small decline for the week ending October 1. Short-term financing appears to be still available, albeit at a higher cost for riskier borrowers...

Whole thing here. (sub req)

Conversations With the Archdruid

Thu, 2 Oct 2008 12:30 GMT

James Grant was bearish before bearish was cool. Like, since 1982. Which makes him either a crank or somebody who thinks long term. Anyway, he's highly articulate and always interesting; witness this video interview with the FT.

And here's part two.

People, Not Abstract Forces, Make History

Thu, 2 Oct 2008 11:45 GMT

I guess it really does matter who the Treasury Secretary is. Here's what Hank Paulson's predecessor told Bloomberg about the bailout bill:

``Doesn't this seem like lunacy to you?'' said O'Neill, who was President George W. Bush's first Treasury chief, from 2001 to 2002, in a telephone interview today. ``The consequences of it are unbelievably bad in terms of public intrusion into the private sector.''

A Simple Solution

Thu, 2 Oct 2008 09:45 GMT

From the WSJ this morning:

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.

Could it really be that simple? I'd love to think so, just on aesthetic grounds; an excess of complexity, after all is what got us into this mess. But you have to wonder, especially now that the ripples are spreading around the globe.

Or as Christine Li writes today from London:

There is increasing evidence that the financial crisis is spreading across continents. Capital is moving out of emerging financial markets as international investors cover losses elsewhere, whilst domestic investors worry about exposure to troubled Western financial institutions.... Tuesday, India's central bank stepped in to prevent a run on ICICI, India’s second largest lender. Concerns rose regarding its exposure to the bankrupt U.S. investment bank Lehman Brothers.

The whole thing's here. (sub req)

Senate Moves; Asians Unmoved

Wed, 1 Oct 2008 22:00 GMT

Asian markets react to the Senate's passage of the now-fully-larded-up financial-rescue bill. My Sydney colleague Sherman Chan reports:

The U.S. Senate has voted in favour of the revised Wall Street rescue plan, after the first one was rejected by the House of Representatives earlier in the week. But markets in the Asia-Pacific do not seem to have taken joy from the news, as most benchmark indices were in negative territory during early trade... A final nod to the rescue plan by the House of Representatives will mean a lot to the Asia-Pacific region because its export and investment outlook has been clouded by the U.S. recession, the severity of which is heavily dependent on policy actions.

Asia-Pacific economies, despite some having relatively limited direct exposure to the troubled U.S. firms and assets, are not immune from the global turbulence. Governments across the region have either implemented or started formulating stimulus plans to boost their domestic markets, which have not only felt the pinch of strong inflation but have also been battered by the global downturn. However, domestic efforts are insufficient to prevent a sharp economic slowdown in the next six months, as the root of all problems needs to be cured and this can only be done by policymakers in the U.S.

More on Dismal / Asia-Pacific (sub req).

Tipping the FDIC Cap

Wed, 1 Oct 2008 14:15 GMT

My colleague Ed Friedman kicks off the debate over raising the FDIC insurance limit from the current $100,000 to $250,000:

The question is whether the costs outweigh the benefits. The last time the ceiling was raised was in 1980, from $40,000 to $100,000. This led to rapid growth over the 1980s in large, brokered deposits of $100,000 denomination, whose interest ceilings had been removed in 1970. The point is that such an increase in the insurance cap can cause wide swings in the flow of funds. In today's crisis, if investors were to pull a lot of money out of money market funds and into bank deposits, a sharp reduction in the demand for commercial paper by those money market funds would squeeze the commercial paper market even more and drive up short-term yields even further. And if the outflows were particularly abrupt, a money market fund might need to tap the new Treasury facility to avoid breaking the buck amid redemptions.

Here's the whole thing (sub req). Elsewhere, Bert Ely has an analysis of how deposit insurance fed into the savings and loan crisis. The question at this point seems to hinge less on the long-term (or even medium-term) impact of higher deposit limits, than on whether it provides legislators sufficient cover to pass the financial-rescue bill.

UPDATE: The Congressional Budget Office has issued its evaluation of the Senate's plan to raise the FDIC cap. Note that it's being billed as a temporary lifting of the cap—but the consensus in this office is that chances for a rollback, ever, are slim and none. Italics mine:

Deposit Insurance

Section 136 would provide for a temporary increase in the amount of deposits insured by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA), raising the limit for each insured account from $100,000 to $250,000 through December 31, 2009. Both agencies would be authorized to borrow such sums as may be necessary to cover any additional costs incurred as a result of the expanded coverage. The legislation also directs the agencies to exclude the increase in insurance coverage when assessing insurance premiums in the near term.

CBO estimates that the deposit insurance funds would incur larger losses in the near term as a result of higher coverage levels and the associated increase in insured deposits. (When institutions fail, the FDIC and NCUA pay for covered deposits and liquidate the assets held by the institution. Raising the amount of insured deposits would increase payments to depositors without affecting recoveries from liquidating assets, thereby increasing the net loss to the funds.) Such near-term losses would, however, be offset over the long term by higher insurance premiums because the agencies are required by law to restore the deposit insurance funds to certain levels over time, so any additional losses from the temporary expansion in coverage will gradually be offset by higher future premiums.

The effects of this provision on outlays over the next year or two are difficult to predict precisely because of uncertainty about the volume and distribution of insured deposits that would be added by this bill. Based on preliminary information from the FDIC, however, CBO estimates that raising the limit to $250,000 through 2009 would boost insured deposits nationwide by about 15 percent. (As of June 30, 2008, deposits at FDIC-insured institutions totaled about $7 trillion, of which $2.6 trillion were uninsured. The FDIC estimate suggests that this provision would extend coverage to about $700 billion of those uninsured deposits.)

A K.I.S.S. for the Markets

Tue, 30 Sep 2008 22:15 GMT

As posted here a couple weeks ago, I believe the market meltdown was at least partially a financial version of what happened to the Challenger and Three Mile Island. That is, it happened after systems became so complex that what looked to designers like risk management was actually risk multiplication.

Now comes Jon Danielsson, with a further elaboration of that theme called "Complexity Kills" on VoxEU:

It used to be that banks became insolvent because their loans went sour. Now it is the complexity of assets that lets them down...

Before the crisis, sophisticated financial models and intricate assets structures enabled many banks to reap extraordinary profits, by enabling them to identify profit opportunities and risks in enormous detail....[However,] in such complex financial models, mathematics often assumes far greater importance than the accurate depiction of reality...A sense of invulnerability, or hubris developed within the financial system.

A Lesson in Public Choice

Tue, 30 Sep 2008 21:30 GMT

Pete Davis in Capital Gains and Games says a reversal of Monday's vote on the bailout bill is certain, with only one change to the original: Upping the FDIC's insured deposit limit from $100,000 to $250,000. This will be costly, both for banks and depositors; however it will give sufficient political cover to sufficient numbers of Congresspersons to turn the vote around. As Pete sums it up:

The key to understanding this conundrum is to realize that your elected representatives in Congress are trying to solve a political problem, how to get reelected on November 4. They need political cover. Their president can't provide it, and neither can their leaders, but maybe this deposit insurance increase aimed at "Main Street" can. Those members of the House who voted down the very same bill yesterday that they will vote for the day after tomorrow with only the addition of $250,000 of deposit insurance will have a lot of explaining to do.

I never took a course in it, but I believe this illustrates the basis for so-called public choice economics: Understanding that public servants are every bit as motivated by self-interest as the rest of us.

What Just Happened?

Mon, 29 Sep 2008 16:15 GMT

Stunning reversal this afternoon for everyone who thought that a) the financial rescue bill was the only thing standing between us and a new depression; and b) Congress, for all its posturing, contained a sufficient number of grownups to be counted on to behave responsibly in a crisis.

The Washington Post tries to make early sense of all this. Main point:

"If you have a difficult reelection race, what was your motivation to vote for this bill? "I voted in favor of a bill that I didn't really like, because I had no choice," doesn't make for a particularly snappy campaign slogan. "I stood up to my party and Wall Street," sounds much better. House Majority Leader Steny Hoyer (D-Md.) and Minority Leader John Boehner (R-Ohio) both made the argument that lawmakers needed to rise to the occasion and not think of their own political futures. But members of Congress ALWAYS think of their political futures. It's much easier to talk of sacrifice for the greater good when you're going to get reelected with 70 percent of the vote, like nearly every leader on both sides of the aisle will.

And the inevitable headline, appearing soon in a tabloid near you (but already posted on Market Watch:)

House to Wall Street: Drop dead

Update: Megan McArdle channels H.L. Mencken:

Democracy is the theory that the common people know what they want, and deserve to get it good and hard.

Shrinking the Financial Sector

Mon, 29 Sep 2008 11:45 GMT

We were having a bit of a debate this morning—as much as is possible given that major news seems to be breaking out about every 5 minutes—about something I heard over the weekend; namely, the assertion that the financial sector needs to shrink.

As Harvard economics prof. and former IMF chief economist Ken Rogoff has written:

During the epic boom of the past 20 years, the financial services sector became badly bloated. At its peak, it accounted for over one-third of corporate profits in the United States, not to mention the staggering billions of dollars in bonuses that Goldman Sachs ($12.1 billion in 2007) and others paid their employees.

Seems to me there's some logic to that. Further, I would suggest that the financial sector's outsized profits and salaries over the past two decades should have raised even more alarm bells than they did—though not for the populist-resentment reasons you typically hear in the media. I don't intrinsically care whether some Goldman hotshot takes home seven figures, provided he or she is really delivering a proportional amount of value to the customers and, by extension, to the wider market.

But is that what's been happening? Have securitization, M&A, portfolio management and all the rest of what constitutes contemporary financial intermediation actually produced as much value as they cost? Even before the current meltdown?

I think this guy would argue in the negative:

Princeton and Harvard

Sun, 28 Sep 2008 14:15 GMT

Thanks to the magic of web video, listen and watch as the top economists at Princeton and Harvard explain what's been going on. One thing that grabbed my attention: The stupendous outsized growth of the financial sector, measured by assets and as a share of total GDP, over the past 27 years. The implication--which Harvard's Ken Rogoff says explicitly-- is that we're seeing a massive mean-reversion now. There just isn't any sustainable logic to Wall Street's size of the economic pie.

Bothered in Boston

Sun, 28 Sep 2008 12:00 GMT

The Boston Globe offers a crash course in credit. Gus Faucher helps:

To understand the urgency of the biggest government bailout in US history, look no further than Don Castle, Roberta O'Connor, and Don Chiofaro.

Castle is a Lynn probation officer awash in mortgage and credit card debt who cannot get a new loan to pay for home improvements. O'Connor is a new-furniture store owner in Salem who had a credit line cut and doesn't know how she will pay for more inventory.

Chiofaro, a Boston developer, is worried about moving forward with a new waterfront development because of a virtual shutdown in lending for large real estate projects.

The enormous challenges these borrowers face in getting credit illustrates how the dried up lending markets is putting a chokehold on the US economy. The consequences are far-reaching: Consumers, who fuel 70 percent of the nation's economic activity, are drastically cutting back, and companies are hoarding cash and putting off expansion that creates jobs.

The result is an economic paralysis that is fueling fears of a prolonged recession. To avert a deeper disaster on Wall Street, the Bush administration and lawmakers are weighing a $700 billion plan to buy toxic debt imperiling the balance sheets of financial firms, freeing them up to begin lending again.

"Right now the only ones who can get credit don't need it," said Gus Faucher, director of macroeconomics at Moody's Economy.com. "It's only getting more severe."

A Bailout Breakthrough

Sun, 28 Sep 2008 08:30 GMT

We have a deal, evidently . A bill will reach Congress Monday morning.

Major compromises: Yes to executive pay caps, some public equity, and a program to prevent foreclosures. No to bankruptcy reform allowing "cramdowns" for mortgage lenders. But the main thing is, the feds will have $700 billion to buy the "toxic" assets.

The question remains: What are those assets--residential mortgage-backed securities mainly--really worth?

Daniel Gros of the Centre for European Policy Studies has an idea:

"...A bit of logic and a straightforward application of the Black-Scholes formula suggests that if current expectations of house price declines are right, securities built on subprime mortgages might be close to worthless. The key is that US mortgages are ‘no recourse’ loans, i.e. debtors can walk away from the mortgage without being held personally liable, a feature that gives homeowners a virtual put option."

His article onVoxEu is here.

The View from Chicago

Sat, 27 Sep 2008 19:00 GMT

This is from Crain's Chicago Business:

Paul Parsons, a Chicago-based engineering consultant, is curbing his spending until the stock markets end their roller-coaster ride. He and his family are cutting back on travel and are planning to exchange fewer holiday gifts.

"We are very considerate about not running any kind of deficit spending with the family, being conservative with our investments and just holding onto everything, and really hope that it's merely a paper loss and the market will regain," says Mr. Parsons, 30, adding that he has suffered significant investment losses in the past two weeks.

It's that pulling back that has Sophia Koropeckyj and other economists slashing growth estimates for the local economy. Ms. Koropeckyj, an economist at Moody's Economy.com in West Chester, Pa., expects growth of 1.2% this year, down from the 2.2% rate she predicted at the start of 2008. That forecast probably will be ratcheted down further, she says, noting that a government bailout of financial institutions isn't likely to boost the economy in the near term.

"Even if the government does manage to cobble something together, there still are a number of channels (through which) Main Street will be affected," she says.

Read the full story here.

Morgan's Mortgage Outlook

Fri, 26 Sep 2008 14:15 GMT

Just noticed this: During JP Morgan's conference call Thursday night to announce their acquisition of WaMu's banking business from the FDIC, officials discussed their loss estimates for the mortgages they are acquiring. As the Wall St. Journal reported it:

J.P. Morgan is going to inherit $176 billion of the home loans. "We think there are $30.7 billion of remaining losses," [Charles] Scharf [Morgan retail services chief] says. "So as of close, we’re going to take on $176 billion of assets, we’re going to mark them down $29.9 billion, and then we have another almost $1 billion of marks to the other portfolios, so we’re recognizing $31 billion of marks related to the loan portfolios." If it’s a severe recession, expect $42 billion or so of losses. And if it’s a really severe recession, expect $54 billion of losses, Scharf says.

If you're keeping score, a $30.7 billion writedown on assets of $176 billion is a loss rate of 17.4%. In Morgan's worst-case projection of a $54 billion writeoff, we're talking 30.6%. I wondered if those loss estimates were in line with our own. Housing economics director Celia Chen pointed me to Mark's latest set of numbers, which can be found on page 4 of this article. On all mortgage debt nationwide, he projects $623 billion in losses nationwide, on residential mortgages totaling $10 trillion, for a loss rate of 6.2%. But as Mark emails: "...three fourths of that is prime, plain-vanilla fixed-rate 30 year loans. WAMU’s was anything but. I’m estimating loss rates on private-label MBS at close to 20%. The JP mark of the WAMU book is probably very close to my estimate. A reason to be encouraged.

Meanwhile, here's a bit more from the conference call:

How did J.P. Morgan come up with those numbers? Scharf says J.P. Morgan examined the numbers over "a substantial period." And their assumptions don’t bode well for the economy: "We assume that home prices from today will continue to get worse by another 8% across the country, with Florida being down 16% and California being down 10%. You can see what the peak-to-trough is and assume that unemployment continues to deteriorate, down to a 7% level."

Update: Here are the presentation slides from Morgan's conference call, including their housing scenarios.

Rocket Man Crosses Channel

Fri, 26 Sep 2008 12:15 GMT

Oh for a time when this would lead the news...

WaMu, Morgan and the Bailout

Fri, 26 Sep 2008 08:30 GMT

Everybody's spinning wildly this morning: Markets, pundits, presidential candidates ... too much to digest over breakfast.

I think the WaMu deal is a huge relief, however. "The biggest bank failure in U.S. history" sounds scary, but it's actually a fairly clean solution, at least from a public-policy perspective: The feds came in and pulled the trigger, but found somebody else to pick up the remains. That somebody being JP Morgan, which got what was probably a heckuva deal at $2 billion to the FDIC plus a $30 billion write-down of WaMu's assets. In exchange, it gets a huge network of bank branches, deposits and loyal (well, hopefully they'll still be loyal after today) customers across the country.

So why are markets jittery ? Washington DC, not Washington Mutual. The Paulson plan may be collapsing in flames. The grownups have left the building. What's next is anybody's guess.

A Future for Investment Banking

Thu, 25 Sep 2008 15:45 GMT

We apparently have a deal , or a near-deal, for some version of the Big Bailout. Congress plans to work all weekend (again with the working weekends!) to get it passed. So maybe we're passed the crisis?

But suppose we are; that's hardly the end of the story. Next comes some serious thinking about what caused it all, and as Dylan sang, what you have to pay to get out of going through all these things twice. Among other things, that means new ideas about bank regulation. Here are some :

We have no doubt that the Fed will be better prepared to deal with the next crisis, but remarkably, neither the Fed, nor the Treasury, nor the SEC has offered any proposals to re-regulate the investment banks so as to minimize the likelihood of a future crisis. To fill this gap, we propose a regulatory mechanism modeled on the banking regulations that already protect our payment system. Our system will (i) minimize the need for a Fed bailout in a future investment bank crisis, (ii) effectively maximize the role of market discipline in controlling investment bank risk management, and (iii) maintain the overall efficiency of the US capital markets.

First, we must be clear on the conditions that led to the Fed’s bailout of Bear Stearns, since an accurate understanding of these conditions is essential to creating a new regulatory framework that would render future interventions highly unlikely.

That's by Dwight M. Jaffee and Mark Perlow: "Investment Banking Regulation After Bear Stearns," in the electronic journal The Economists' Voice (another article from that issue appears as a Guest Column here on Dismal).

Finally, Somebody Understands What Went Wrong

Thu, 25 Sep 2008 14:45 GMT

Eureka! Our Present Troubles Explained:

The roots of the current financial meltdown can be found in John von Neumann's "Model of General Economic Equilibrium," first developed in 1932. Von Neumann elucidated the behavior of an expanding autocatalytic economy where "goods are produced not only from 'natural factors of production,' but... from each other..." and proved the coexistence of equilibrium and expansion via the saddle-point topology of convex sets. Some of his assumptions—such as that "the natural factors of production, including labour, can be expanded in unlimited quantities" and that "all income in excess of necessities of life will be reinvested"—appeared unrealistic to others at the time, less so now that Moore's Law, and the zero-cost replication of information, is driving the economy of today. Other assumptions, such as an invariant financial clock cycle, are conservative under the conditions now in play.

Now, if somebody will only explain the explanation.

(It's actually worth following the link for the history of notched sticks and British Exchequer.)

The Fed's Balancing Act

Thu, 25 Sep 2008 09:15 GMT

A couple months back, my colleague Ryan Sweet pulled this together for a weekly chartbook:

We're wondering, after the further adventures of Fannie and Freddie and AIG and now the Big Bailout, where that's going. Will the Fed's own balance sheet remain strong enough to support its monetary management and other vital economy-supporting activities?

Or will it fray, heading toward that status described in an old accounting jibe: "The problem with the balance sheet is, on the left side there's nothing right. And on the right side there's nothing left."

Stay tuned...

Update, 9:58pm: Here's where that stands today:

Thinking Through the Bailout Plan

Wed, 24 Sep 2008 16:15 GMT

Venturing into the deep water, let's see if I understand the issues here:

Sec. Paulson wants up to $700 billion to buy the mortgages, mortgage-backed securities and other junk being held by banks and other financial institutions. This, Paulson argues (with Ben Bernanke's help) will unclog the arteries of the credit markets and prevent a global financial infarction, to be followed by something like the debacle of the early 1930s.

Opponents of this idea fall into three broad groups:

Some don't believe Paulson's plan will do the trick. Others don't care whether it'll work or not, they'd rather see Wall Street burn in hell than countenance any kind of bailout. A third group simply doesn't believe anything Paulson says, and would sooner chance economic Armageddon than agree to anything proposed by the current administration.

To the second two groups there is little to say, other than that their sentiments are understandable given the last 8 years. But if we're not really hankering to revisit those 1930s bread lines, WPA murals and Woody Guthrie dustbowl ballads (some old folkies I know think that'd be keen, but I'm talking about the rest of us), then the issue that counts is, would Paulson's plan work? And can we get past the populist venting and electoral posturing enough to even give it a fair hearing?

As Mark details in his piece today,(sub req) the plan is designed to help restart the stalled credit markets by setting prices for mortgage-related securities. This follows from the proposition that what's gumming up the financial works is uncertainty. Nobody's trading mortgage-backed securities because nobody knows what they're worth; and nobody knows what they're worth because there's no trading to set a market-clearing price. Simple, circular—and very destructive, because the immense volume of those securities means their market value can be the difference between solvency and insolvency for a number of major financial institutions. (This is partly why we and everybody else were calling those MBS assets "toxic" until an editor here got fed up and banned the term.)

If its proponents are correct, by simply arriving at a market price, the government could clarify things enormously. Firms would figure out where they stand, and could act accordingly—and investors would know which firms are worth investing in. The healthier firms would pick up the pieces of the losers, and we'd be on the road to recovery.

The key question, however, is whether the market-clearing mechanism employed by the government—a reverse auction or whatever else is used—would really do the trick. And that—not the perfidy of Wall Street or the misdeeds of the administration—is really the question of the hour.

Not 1929�1907!

Tue, 23 Sep 2008 21:00 GMT

While Congress wrangles and Paulson wriggles, comes now Warren Buffett to do for us what J.P. Morgan did for our forebears a century back.

At least let's hope so...

Capital Smackdown

Tue, 23 Sep 2008 14:00 GMT

Armegeddon-watchers in the sticks are taking bets: Which glittering global financial capital will be first to sprout dusty canyons of apple-selling former bankers?

Just kidding, I think.

This from the New Zealand Herald:

Numb in New York, meet limp in London

The London-New York tug-of-war for bragging rights as the world's pre-eminent financial centre is now a race to the bottom.

Six months after Bear Stearns was bailed out by JPMorgan Chase and a week after Lehman Brothers Holdings filed for bankruptcy, both cities are bleeding. While it will take months to determine which will be hardest hit, New York has so far lost more financial services jobs and London's luxury housing market has taken the first hit.

"London and New York will be hit comparatively harder than other financial centres," said Mark Yeandle, a risk consultant at London-based Z/Yen Group and lead author of the Global Financial Centres Index, which ranks the competitiveness of such cities.

"New York, up until a month ago, seemed to be recovering more quickly than London, but we have to wait and see what sort of fallout the more recent turmoil will generate."

The market value of London's publicly traded financial firms has dropped by £99.4 billion ($268.4 billion) in the past 12 months, cutting their worth by about 25 per cent. Their counterparts in New York have lost £477 billion in market capitalisation, or 37 per cent.

"We won't see the big Christmas parties this year," says Sinead Mallozzi, chief executive of the Michelin-starred Sketch restaurant in London's West End.

In New York, Vincent Alessi, general manager of Bobby Van's Steakhouse on Broad St, says the same. "It's tense," he says. "But my bar business is doing great."

London's financial services industry is expected to lose 42,000 jobs, or about 10 per cent of the total, in the next year, according to the City of London, the municipality for the UK capital's main financial district.

The New York metropolitan area is forecast to lose 64,000 positions, or 13.5 per cent, by the second quarter of 2010, according to West Chester, Pennsylvania-based Moody's Economy.com.

Last week's bankruptcy filing by New York-based Lehman Brothers, once the fourth-largest US investment bank, and Charlotte, North Carolina-based Bank of America Corp's buyout of Merrill Lynch, prompted Economy.com to increase the forecast for job losses in the New York area by 6.6 per cent...

While financial services firms account for about 12 per cent of New York City employment, they represent almost 30 per cent of total wages and salaries, said Marisa Di Natale, the regional labour market specialist for Economy.com.

Bill Kokkosis, owner of the Majestic Delicatessen Cafe across the street from the New York headquarters of Lehman Brothers, said he was missing about half of his usual lunch customers last Monday, the day the firm announced its bankruptcy.

"This ... affects the whole area," Kokkosis said. "It looks like 9/11."

More about London here.(sub req)

Consider the Source

Mon, 22 Sep 2008 15:30 GMT

If I had anything insightful to say about the bailout, I'm pretty sure it would sound like this:

I used to think the brain was my most important organ. But then I thought: Wait a minute, who's telling me that? ~Emo Philips.

Every time I ponder this bailout, I come back to that quote. Wall Street is telling us that Wall Street needs to be bailed out. A Goldman man has run the Treasury for six of the last thirteen years. I am sure that they think what they are doing is necessary. But anyone who works long in any industry comes to view it as having an outsized importance in the world. If you doubt this, spend a few moments listening to journalists prate about the sacred privileges of the press.

Fun's Over

Mon, 22 Sep 2008 14:00 GMT

So Morgan Stanley and Goldman Sachs become commercial bank holding companies. I'm not sure this marks The End of Wall Street , but it certainly marks the end of some high rollin' :

[A Morgan Stanley spokeswoman] said that the firm would reduce its leverage ratios -- a measure of a firm's risk in relation to the equity on its balance sheet -- over the next few years from current levels to something more in line with that at commercial banks. Investment bank ratios now stand above 20, with commercial banks closer to 10.

Here's the question: If Wall Street operates with 10-to-1 leverage instead of 20-to-1 leverage, is it still Wall Street?

Update: Irwin Kellner says it's Back to the Future.

What Will It Cost?

Mon, 22 Sep 2008 11:30 GMT

Mark Z.'s analysis of the mega-bailout: Costly, but necessary.

"Assuming the Troubled Asset Relief Program is passed this week, the government's moves should stop the financial panic and restore at least a fragile stability to the global financial system. Investors appear to get the message, namely that the government will do whatever is needed to ensure that the system does not unravel.

"Despite this, substantial damage has already been done to the real economy. The recession that likely began in late 2007 will continue through the first quarter of 2009. Before the recent panic, real GDP growth in the fourth quarter of 2008 was expected to come in just above 1%, and growth for all of 2009 was projected to be 1.75%. It is now very likely that this year’s fourth quarter will witness a decline in GDP, as will the first quarter of next year. Growth for all of 2009 is now expected to be only 1.3%. Some 1.25 million payroll jobs will be lost peak-to-trough, with the bottom expected in the second quarter of 2009. Unemployment will rise steadily throughout next year, topping out at 7% at year’s end. It had previously been expected to peak at 6.5% in the third quarter of 2009.

"The housing and mortgage markets will also be hurt, given the worse than expected job market. House prices are now expected to fall another 10% through the third quarter of 2009, with a total peak-to-trough decline of 30%. Home sales and housing starts will be only a bit weaker than previously thought, with both bottoming out by the end of this year."

Even sadder to contemplate is the opportunity cost: $500 billion or $1 trillion spent to clean up the mortgage mess rather than on fixing bridges, building schools or funding research on energy, medicine and technology. Still,

"...the cost of governmental inaction would be measurably greater. A financial meltdown and a severe recession would hammer tax revenue and lift spending, resulting in much more than the estimated $500 billion price tag for dealing with this financial crisis now."

Understanding the Crisis

Sun, 21 Sep 2008 14:30 GMT

The size and suddenness of the mega-bailout is boggling minds all over the world. Mine as well. Here are links to a few reasonably cogent thoughts I've stumbled across in my Sunday search for enlightenment:

Finally, James Hamilton on conditions for the bailout: This sums it up:

Before the taxpayers are asked to commit such sums, we are owed a coherent and compelling explanation of why this kind of problem is never going to occur again.

More to come, including an analysis by Mark Z. being penned as we speak.

Ahead of the Curve

Sun, 21 Sep 2008 09:30 GMT

Department of you-read-it-here-first. From the WSJ:

The most ambitious part of the government plan is to create a new entity to purchase impaired assets from financial firms. The process could work as a type of reverse auction, in which the government would buy from the institution that sells its assets for the lowest bid.

Sound familiar? Then you must have heard Mark Z.'s Congressional testimony from last February. (Maybe somebody from Treasury was listening as well?)

Confidence that financial markets will work through their problems, aided by lower interest rates and some coaxing by the Treasury Department, increasingly appears misplaced. The financial system may not be up to the task of restarting itself, at least not quickly enough. A more aggressive response, specifically targeted to the problems in the nation’s housing and mortgage markets and financial system, seems necessary. At the very least, policymakers should be planning as if their efforts to date will not be sufficient...

One potentially attractive idea is to establish a taxpayer-financed fund to buy up mortgage loans and mortgage securities. This could be done via auctions, in which mortgage owners would sell mortgages and securities to the government at a steep discount; just how deep a discount would be determined by the bidding. An immediate benefit would be to provide liquidity to the frozen securities market, which would reduce pressure on the entire financial system. The process would also provide a clear price for mortgage securities, thus facilitating efforts by financial institutions to appropriately mark-to-market their mortgage holdings.

Mark's cost estimate back then might seem a little low:

The total cost of the plan would ultimately be very modest. At the extreme, the upfront cost would be approximately $250 billion, assuming that the federal government purchased all 2 million loans that are expected to end up in foreclosure through the end of the decade at a 30% discount.

But he notes that only included residential mortgages, while the current plan adds in commercial mortgages as well. Moreover, he says: "I don’t think they are going to use all $700 billion….it was a big # for symbolic purposes to restore confidence."

On the other hand, on the streets of Manhattan yesterday I noticed the tabloids were screaming about a $1 trillion bailout. Was $700 billion chosen because its far enough below $1 trillion to defuse such headlines? I wonder.

Notice Anything?

Fri, 19 Sep 2008 10:30 GMT

Does this new homepage design make me look fat?

Seriously, we've made some changes to the www.dismal.com and we'd like your thoughts. Is the look ok? Can you find what you need? Anything you find annoying?

Do let us know.

You Read It Here

Fri, 19 Sep 2008 09:00 GMT

"Policymakers must also begin to think about what other policy tools they can pull from the tool-shed. Even a RTC-like fund (Resolution Trust Corporation) should be put on the proverbial drawing board for consideration. The fund would buy up mortgages and mortgage securities, allowing households to stay in their homes until each case can be carefully considered.

This would also have the benefit of providing liquidity to the frozen securities market, reducing the pressure on the hard-pressed financial system. While this sounds a bit extreme, so did a rate freeze just a few weeks ago. Putting intellectual energy into such proposals now perhaps will allow policymakers to be a step ahead instead of one behind if conditions erode in the teeth of the Presidential election."

That's from Mark Z's article, "A Step Behind" posted here on Dec. 6, 2007. Just sayin ...

Another Normal Accident

Thu, 18 Sep 2008 22:45 GMT

You know we've reached a turning point when the financial mess is being analyzed as a physics problem:

This is meant to illustrate the credit-default swap market, highlighting the intense interconnectedness of what's been estimated at $60 trillion-plus worth of contracts among banks, hedge funds, insurance companies, etc. Pull out one node (say, Lehman Brothers) and you may cause untold havoc among the adjoining nodes, which spreads to their neighbors, etc. etc.

This is why the Fed and Treasury have been willing to commit billions of public dollars to the bailouts of Fannie, Freddie, AIG -- and now possibly the whole shootin' match via a new incarnation of the old Resolution Trust Corp.

All of which put me in mind of Charles Perrow's book from 1984, "Normal Accidents." Perrow, a Yale sociologist, wrote the book as a way of understanding what went wrong at Three Mile Island in 1979. When the Challenger blew up in 1986, journalists looking for intelligent analysis turned to him as well. I'm straining my brain a bit, but as I recall, the simple idea behind "Normal Accidents" was that, at some point, any system that grows overly complex can't be made safer by unless it is made simpler.

Three Mile Island, to take Perrow's prime example, was like most nuclear plants of the 1970s: All during and after its construction, safety systems were added on to meet the growing concerns of government and the public. Each safey system made the plant more complicated. Yet at some point, the whole exercise became futile, because every additional another backup device, redundancy or layer of protection just created more ways for things to go wrong. As they did.

Does this sound familiar? Mortgages used to be relatively simple. Then someone came up with the very good idea of the secondary mortgage market. That was later refined into the mortgage-backed security, which started out as a single pool of loans but then split into tranches, which later got resliced into collateralized mortgage obligations, packaged with insurance wraps which in turn were traded as credit-default swaps, and on and on.

The system grew so fragmented, with so many moving parts and layers upon layers, that what was thought to be a grand system for managing risk made risk essentially unmanageable.

Is it 1929 Again?

Thu, 18 Sep 2008 16:45 GMT

Brad DeLong assures us that we're not rerunning history:

Is 2008 our 1929?

No. It is not. The most important reason it is not is that Bernanke and Paulson are both focused like laser beams on not making the same mistakes as were made in 1929.

They are also focused, but not quite as much, on not making the mistakes made by Arthur Burns in the 1970s.

And they are also focused, but not quite as much, on not making the mistakes the Bank of Japan made in the 1990s.

They want to make their own, original, mistakes...

Meanwhile, the Columbia Journalism Review responds to all those armchair business editors:

Critiquing the business press right now...is like critiquing the London fire department during the Blitz...

Wharton's Diagnosis

Thu, 18 Sep 2008 11:15 GMT

The subprime crisis "was a wreck that could have been predicted." That's Wharton Prof. Jeremy Siegel's synopsis, which leads a very nice web primer on the whole mess. Sounds like he's in agreement with this author.

Elsewhere at the Wharton school, Prof. Joe Gyourko worries that the commercial side of the real-estate bust is just beginning. (What happens, for instance, if AIG has to forced-sell its commercial mortgage-backed securities portfolio?) Gyourko muses: "If I could re-invent myself, I'd be a distressed property fund."

Shiller's Prediction

Wed, 17 Sep 2008 17:30 GMT

This may be piling on, what with the Dow down 449 points today, but on the other hand, maybe it's the right time to bring this up. It was back in March 2000, when tech stocks were just about at their bubbliest, that I interviewed Yale's Robert Shiller about the book he had just published: Irrational Exuberance. You may recall that book was seen at the time as wildly pessimistic in its predictions for the stock market; you may also recall that it was correct.

Anyway, I asked Shiller at the time how far he thought the market would fall. He wouldn't give a near-term number, but did make this prediction: Dow 10,000. In 2020.

"It kind of shocks people," he said. But "because the market is so overpriced now relative to historical standards, it's easy to go through a 20-year period where there's no increase."

That was published March 31, 2000. The Dow closed that day at 10,921.92. Today—more than 40% of the way to 2020—the Dow closed at 10,609.36.

Brokebuck Mountain

Wed, 17 Sep 2008 12:15 GMT

The meltdown continues. The Fed and Treasury are piling sandbags on the levee as fast as possible, but the water keeps rising. Here's a good summary (sub req) by the overworked Aaron Smith.

Meanwhile, I continue to fret about these money-market funds. As I replied to Pat's comment, I don't assume at all that most people know the difference between insured bank deposits and uninsured money-market mutual funds. Mutual fund firms have done a great job for decades of blurring the distinction; disclaimers to the contrary notwithstanding, they've done nothing to discourage savers from thinking their money is just as protected in an MMA account as it is in a passbook or community-bank certificate of deposit.

And now that we have at least one major fund offering its savers a haircut, I worry about the consequences—financial, economic and political—of millions of American savers losing faith in money-market funds. Here is Diana Henriques explaining how this all works. And here is Tyler Cowen fretting about the Fed's independence.

The Real Fed Action

Tue, 16 Sep 2008 21:15 GMT

Turns out the FOMC meeting was just a diversionary tactic. The important Fed action Tuesday was all in New York, where the central bank agreed—this still sounds almost unbelievable—to take an 80% stake in AIG in return for an $85 billion loan.

And while we were fussing over how the markets would react to the FOMC decision to hold rates at 2%, the financial crisis was taking a new and dangerous turn. A money-market fund broke the buck—declaring its net asset value to be less than $1. If this spreads, it would the modern equivalent of the millions of ordinary savers who lost their money during commercial bank runs in the early 1930s. Deposit insurance was the government's cure for that sort of thing happening again. But there's no FDIC for money-market funds.

I bet this is what Hank Paulson was talking about this evening on Capitol Hill to an all-star lineup of Congressional heavyweights from both parties. A nation of middle-class people taking haircuts on their safe-as-cash money-market funds is a prospect that, like a hanging, will focus the mind of any legislative incumbent.

Update: It's official.

Wall Street Cheers Fed

Tue, 16 Sep 2008 16:45 GMT

Goes to show you. Never try to outguess the market.

Still, the fact that the Fed didn't lower rates was a sign that it doesn't believe the economy needs that type of stimulus. It reiterated that it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and in turn the economy overall.

"This was the right thing to do," said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. "I just don't think the Fed should be responding to the financial market crisis at this stage."

But was holding the right thing to do? Did the FOMC stand pat because it sincerely believes rates are at the right level for today's conditions? Or was it just playing head games with the market? Should we take comfort in the extra-monetary steps being taken to help AIG and other troubled Wall St. firms? Or is the central bank behind the curve?

The floor is open. Click the comment link below to share your view.

Wall Street Boos Fed

Tue, 16 Sep 2008 14:45 GMT

These guys must be from Philadelphia .

While the [FOMC] decision disappointed some Wall Street pros – there was booing on the floor of the New York Stock Exchange – others were holding out scant hope that a Fed move could alleviate the fears that have gripped the U.S. financial system since the weekend due to soured, hard-to-unload credit bets lingering on major firms' books.

Yet all may not be lost:

"What we're going through amounts to a margin call on a grand scale" in which firms' soured bets on mortgage securities using truckloads of borrowed money are being reconciled, often in painful ways, said Ted Weisberg, a floor trader at Seaport Securities, a New York brokerage.

That said, Mr. Weisberg said he and his customers have been buying stocks this week, including some financial names as a bet that a recovery is near. "When there's blood on the streets, that's when you have the most opportunity" to make big profits, he said.

Fed on the Tightrope

Tue, 16 Sep 2008 14:30 GMT

How many central bankers can balance on the head of a pin?

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Strains in financial markets have increased significantly and labor markets have weakened further. Economic growth appears to have slowed recently, partly reflecting a softening of household spending. Tight credit conditions, the ongoing housing contraction, and some slowing in export growth are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Ms. Cumming voted as the alternate for Timothy F. Geithner.

Gus Faucher has more here . (sub req)

Bring Back the RTC

Tue, 16 Sep 2008 09:45 GMT

Hmmm. Seems we were talking just recently about this very idea:

Sept. 16 (Bloomberg) -- House Financial Services Committee Chairman Barney Frank said financial market turmoil is likely to force Congress and the administration to consider whether the U.S. government should buy distressed debt and mortgages.

The ``next question'' for lawmakers and the Bush administration will be whether Congress should create an agency like the Resolution Trust Corp., which took over the assets of failed savings and loan associations almost two decades ago, Frank, a Massachusetts Democrat, told reporters in Washington.

Wait, I'll save you a click. Here's how how Mark put the case:

Nationalization of Fannie Mae and Freddie Mac may not have been the best policy step—that depends on how bad their balance sheets really are—but it is a very reasonable one. With this move, the U.S. government is using its own Aaa balance sheet to shore up the balance sheet of the global financial system. This is not unlike what was done in the early 1990s, when the Resolution Trust Corp. was established to nationalize the nation’s teetering savings & loans. The RTC worked effectively then to stem that financial crisis, and the nationalization of Fannie and Freddie will surely work now. Other financial shoes are likely yet to fall, but when the history of this period is written, it will show that the Treasury’s actions marked the beginning of the end of the subprime financial shock.

Fed's Dilemma

Tue, 16 Sep 2008 09:15 GMT

You can tie yourself into knots trying to figure out what the Fed will do today—which suggests the folks around the FOMC table may be tied in knots themselves. What to do now? Cut? The fed funds target is only at 2% already, so how much lower can the central bank go before it runs out of bullets? And how much actual good will cutting rates do? But would a hold send Wall Street the wrong signal? Would any signal even get through the roar of panic now deafening the markets?

Mark Z. bets on a hold, but with a shift to an explicit easing bias. (sub req)

The New Central Bank

Mon, 15 Sep 2008 15:15 GMT

From the New York Times :

In an obscure but highly important announcement late Sunday evening, the Fed said it would let Wall Street firms post as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.

Old style central bank:	New style central bank:

Could 1,000 Banks Fail?

Mon, 15 Sep 2008 09:15 GMT

Wilbur Ross tells CNBC he expects 1,000 bank failures. This is way beyond Ross Perot's famous prediction at the height of the S&L mess in the early 90s. (It was also the height of the presidential campaign of that year, but maybe that's an analogy too far.) But Ross is not Perot; he's a distressed-asset (dare we say "vulture") investor who's got quite a record of picking up stuff just when nobody else seems to want it and making a killing on the turnaround.

Ross told CNBC he'll be definitely shopping for the regional banks he expects to be failing -- but only if the feds help out." What we're mainly lookng for is stable sources of deposits, not so much the loan portfolios," he said.

This sounds familiar: In that last big bank meltdown, I covered the seizure of the venerable Philadelphia Saving Fund Society by federal regulators in 1992. PSFS' parent company, called Meritor , succumbed to the commercial real-estate bubble of the mid-1980s, and was handed over by the FDIC to Mellon Bank of Pittsburgh. My morning-after piece concluded:

Meritor's assets included billions in loans it couldn't collect, and foreclosed property it couldn't sell. The cost of servicing and maintaining it all produced million-dollar losses each quarter.

Meritor's deposits, however, were its treasure—hundreds of thousands of loyal accounts, crammed into long-established neighborhood branches that cost relatively little to operate. Many of its customers were rowhouse owners in places like South Philadelphia , who continued to save in old-fashioned passbook accounts even when money-market funds and other investments offered far higher rates.

For these, Mellon was willing to pay a record price.

Under its deal with the Federal Deposit Insurance Corp., Mellon assumed all of Meritor's deposits but took on only $2.5 billion of its approximately $4 billion in assets. And under its agreement, any losses Mellon realizes on those assets will be largely made up by the FDIC.

In other words, Meritor's assets were ultimately its biggest liability—and its liabilities turned out to be its biggest asset.

Massacre or Catharsis?

Sun, 14 Sep 2008 22:45 GMT

There are two very different perspectives on recent events. The darker view is that this will be the catalyst for a chain of failures throughout the financial system, exacerbating the credit crunch and the recession. A vicious cycle has been ignited. There will ultimately be $2 trillion in investor losses—to date there have been $510 billion in public writedowns and probably another $100 billion at private institutions—and unemployment will rise sharply through the end of the decade.

The more sanguine view is that this is a cathartic event that will exorcise the weak links in the financial chain. Once the chain is put back together—the Bank of America and Merrill Lynch merger is a good example—it will be much stronger. The financial crisis is much closer to its end than its beginning; unlike Japan , the U.S. is willing to take its financial pain upfront.

That's Mark Z.'s take on Sunday's Wall Street carnage. Of course, it doesn't mean investors aren't in for a stormy Monday. And Tuesday could be just as bad...

Another Bloody Wall St. Sunday

Sun, 14 Sep 2008 14:45 GMT

This just in:

LONDON - Barclays PLC has pulled out of talks to buy parts of Lehman Brothers Holdings Inc., according to a person at the British bank with knowledge of the negotiations. The move complicates efforts to find a buyer for Lehman and save it from collapse.

The person, who spoke on condition of anonymity, citing company policy, said the decsion was "very unlikely" to change.

The person said that while Lehman was attractive, the investment bank did not meet what he described as Barclay's stringent requirements.

U.S. government officials and top Wall Street bankers are trying to sell Lehman and avert a collapse that could severely disrupt global markets.

This could be the place where the bailout line is drawn. But with what consequences for the markets? As has become common, we close the weekend awaiting an initial verdict from Asia.

Barbara Kiviat at Time has comments.

Political Predictions

Fri, 12 Sep 2008 15:30 GMT

For the past few months, Moody's Economy.com's in-house model has predicted the November presidential race will be a Democratic rout. That's based on the correlation between state unemployment rates, inflation and a few other factors with historic voting behavior. Gus Faucher, who developed the model, is pretty confident of its reliability, but hey -- it's a complicated world out there. And the way things have been going, the November contest could fall either way. At least that's what the bettors are saying:

Gus updates his model every month. The latest is here .

Long Time Coming

Fri, 12 Sep 2008 09:00 GMT

Hard to remember a more stomach-churning economic moment. Fannie & Freddie in bailout mode, Lehman gasping for air, other financial players eyeing at each other like patients in an oncologist's waiting room—and that's not even to mention the real world, where retail sales are down , foreclosures are up, your 401(k) is down and the "help wanted" signs are fewer and farther between.

Yet all is not lost. As CSNY sang way back when, and as Mark Z. reminds us in this month's Macro Outlook (sub req), the darkest hour is always just before the dawn:

Although all this ensures that the economy will struggle well into next year, there are some hopeful signs that the economy's excesses are slowly being worked off. With the crash in house prices, housing affordability is being restored in a growing number of metro areas. House prices are now finally consistent with household incomes and effective rents in Boston, Chicago, Denver, and even Orange County CA. Nationwide, another 5% to 10% decline in house prices and another 5% increase in rents will restore the long-run relationship between prices and rents. This should happen by summer 2009.

The collapse in housing starts, while a massive drag on the economy, has finally pulled construction below even the depressed level of new-home sales. Inventories of new homes for sale are now falling, and the overall inventory of vacant homes for sale has peaked. Although it likely won’t be until late 2010 before the mountain of unwanted inventory is worked off, construction is on track to hit bottom sometime before this year is over.

In fact, Mark says that with a little luck (ok, actually more than a little) a year from now we'll all be feeling a lot better:

Whether the financial system stabilizes and the economy regains its footing critically depends on future house price declines. If they are consistent with our forecast, our baseline outlook is for measurable improvement by this time next year. More serious price declines will keep the economy limping well into the next decade.

The Words We Use

Thu, 11 Sep 2008 14:00 GMT

Floating around the blogosphere today is this little gem:

The moral content of economic terminology in the popular press: A guide

Foreign direct investment (inbound): Good
Current account deficit: Bad
Trade deficit: Catastrophic
Capital account deficit: Not used. Presumably bad.

Weak national currency: Bad
Exports: Good
Imports: Bad

Rising house prices: Good
Falling house prices: Bad
Affordable houses: Good
Unaffordable houses: Bad

Free trade: Neutral
Unfettered free trade: Bad
Fair trade: Good
Outsourcing: Evil
Buying local produce: Divine

Pay rises: Good
Low interest rates: Good
Inflation: Bad

Communism: Very Bad
Socialism: Bad
Capitalism: Bad

As one who formerly peddled economic terminology in the popular press, this really resonates. And it brings up a favorite theme of mine: the disconnect between how economists think and how nearly everybody else thinks. No, scratch that: It's less about how we think than how we talk. English has been around few centuries longer than economics, and when economists started trying to explain the world as they understood it, they were stuck with a pre-existing vocabulary. Words that had long acquired all sorts of emotive or affective connotations were borrowed and reemployed for what the economists saw as very neutral, descriptive uses. But these didn't quite connect with what people heard. To take the simplest of examples: You can call that straight line you just drew on a graph a curve; only another economist will think you're not talking nonsense.

Farther Along

Thu, 11 Sep 2008 11:00 GMT

Celia Chen gives us the word:

The Treasury Department’s plan to shore up Fannie and Freddie does not change Moody’s Economy.com’s housing market baseline outlook. Disappearing jobs and stagnant income growth, combined with deteriorating household balance sheets and the relative lack of mortgage credit, are resulting in a deep and prolonged house price crash. Even with the recapitalization of the GSEs, the easy credit of the earlier part of the decade will not return.

Sales are likely near or at bottom, while construction will stabilize by year’s end. 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 60%. Mortgage credit quality, however, will worsen further before it improves. The surge in mortgage foreclosures will keep inventories of homes on the market bloated, despite weakness in new construction, and will consequently keep house prices descending until mid-2009. From peak to trough, the median house price is expected to decline by about 20%.

There's more here (subscription required).

Exporting America

Wed, 10 Sep 2008 22:15 GMT

"...(E)xports have become a key to greater local prosperity more than at any time in decades...Foreign buyers are scouring the U.S. for everything from guitar strings and wine corks to used dump trucks and newsprint. The volume is so great that some inland trade hubs can't find enough metal shipping containers to load products headed overseas."

That's from Thursday's Wall Street Journal. The proof—rising exports as a share of metropolitan regional output—can be found in a nifty interactive map. Or, if you prefer your data raw, Steve Cochrane lays it all out on Dismal Scientist here.

Thrift Crisis Redux

Wed, 10 Sep 2008 17:30 GMT

Seems like old times: Another savings & loan in trouble, and for many of the same reasons that scores of S&Ls went under in the 1980s: Aggressive growth in the good times without a big enough cushion to weather the bad. Market Watch offers this analysis, which was more than a little reminscent of the many failiing-thrift stories I covered in the early 90s.

If you were watching Sesame Street at the time, here's a recap: Savings & Loans used to be to banking what Mr. Rogers was to television: The safest, homiest, most comforting fellows on the block. All they offered—literally—were savings accounts and home mortgage loans. That was it. You went to your local S&L, got a passbook account that paid maybe at most 3%, and when you wanted a mortgage, they'd give you one, as long as your credit was good.

For this they were rewarded with the love and respect of a grateful nation. Thrifts were idealized in the Jimmy Stewart movie "It's a Wonderful Life" which you can see again next Christmas. The people who ran thrifts were accepted as pillars of the community. The only problem was that they rarely got rich.

Actually that wasn't the only problem. There was a much more fundamental one. To wit: Thrifts borrowed short and lent long. And when interest rates began bobbing around in the late 1960s and 70s, in response to that decade's inflation and economic volatility, thrifts got caught with their maturities down. Limited by law in the rates they could pay depositors, thrifts could only watch in horror as those depositors moved their money to higher-paying bank and money-market accounts. The mismatch left many institutions gasping for air, and demanding help from Congress.

Congress did help—though that help is what arguably did them in. A series of deregulatory moves allowed thrift institutions to venture far, far from their original business model, and equally far from the competence zones of their managers. At the height of the 1980s, thrifts were investing in everything from Florida real estate to Wall Street derivatives; anything that looked like it might provide the returns they needed to compete with other financial institutions.

It all turned sour as the expansion of the 1980s ended and it became clear that developers had overbuilt. There were too many shopping centers, office buildings and golf-course communities; and when these had to be marked to market it wiped the solvency right off the books of scores of S&Ls. Government had to step in again -- this time to clean up the mess it had helped create. The bill for the S&L debacle ran to $150 billion in 1990 dollars, which isn't too far away from what some estimate Fannie and Freddie and associated messes will end up costing taxpayers to clean up this time around.

That Sucking Sound

Wed, 10 Sep 2008 14:00 GMT

"There is a risk that you could get the equivalent of a financial black hole, and more people getting sucked in."

So says Robert Litan of the Brookings Institution. Is this what he means? Or this ?

China in the Long Run

Wed, 10 Sep 2008 08:30 GMT

An old saw has it that Americans plan for the next year; Europeans plan for the next decade, and Chinese plan for the next century. When former premier Zhou Enlai was asked what impact the French Revolution had had on the world, he reportedly replied it was too soon to tell.

But as my Sydney colleague Alisatair Chan reports, China's long-run plans for economic growth may not work out quite as expected. The consequences of China's infamous one-child policy, imposed some 20 years ago, are now becoming clearer. And they don't support the kind of robust expansion we've seen recently:

"...It is estimated that the number of Chinese joining the workforce each year will peak in 2009, at 24.5 million, and decline every year thereafter, before stabilising around 2018 at the 13.5 million level... Estimates by the UN suggest that China’s population will peak at 1.46 billion in 2035, and by 2050 will have declined to 1.41 billion. The median age will nearly double, from 24 now to around 45 in 2050.

The Olympics last month showed the world a picture of a young, vigorous nation on the rise. But that may all change faster than many, both inside and outside of China, are expecting.

Read Alistair's analysis here, or get it as a multimedia briefing here . (subs required)

Something New

Tue, 9 Sep 2008 11:30 GMT

A quick introduction, then let’s get right to business. To quote a former vice presidential candidate: “Who am I? Why am I here?”

Short answer: I’m not an economist, but I used to play one in the newspapers. I spent 25 years covering business in what we now call the Main Stream Media, the last 10 of those writing an economics column for The Philadelphia Inquirer . Currently I edit the Dismal Scientist website, which as you may know is our real-time economics forum here at Moody’s Economy.com.

What we do here is a lot like journalism, without the anecdotal leads. Our researchers study data from all over the world and report, analyze and forecast—and present the results on line, round the clock, in a variety of formats.

Today we’re adding one more format in the form of this blog, which we’re calling DataPoints. What makes it different from our other fare? Several things:

It’s free-form. I’ll be throwing out ideas and pointing to interesting sites all over the cyber-world, as well as highlighting our work at Moody’s Economy.com.
It’s interactive. Comments are welcome (see link below). Lively (but civil) discourse is the goal, and everyone with a relevant thought, opinion or question is invited to participate.
It’s open. Whether you’re a hard-core data-cruncher or an armchair economist, whether you work in Wall Street or Main Street or academia, or even if you’re just a casual passing internet surfer, we hope you’ll find it informative and engaging.

Enough for now. There’s tons to talk about, and from all I can glean about this blogging business, the point isn’t to hand down Olympian wisdom in each post – it’s to keep the discussion lively. So that’s what we’ll try to do. Welcome.

Bailing Out

Tue, 9 Sep 2008 11:00 GMT

Is it accurate to call what the Treasury did to Fannie and Freddie a bailout?

Maybe I'm old fashioned, but I question whether the word fits. I remember the bailouts of Chrysler in the 1970s, Continental Bank in the 1980s, and Long Term Capital Management in the 1990s. In each case the feds came in with a loan, a guarantee or some other form of financial backstop in order to keep a private institution from going under. In none of those cases did the Federal action wipe out the private entity's shareholders.

Earlier this year, the Treasury and Federal Reserve moved on Bear Stearns , providing financial backing for a takeover that essentially wiped out the shareholders and deposed the management, while protecting creditors and counterparties—and by extension the wider financial system—from presumed calamity.

Early press reports referred to it as the Bear Stearns "bailout". But in contrast to Chrysler and LTCM, this description was problematic, since Bear Stearns itself was no longer afloat. So the term quickly faded from most responsible press reports, although it continues to be used, quite effectively, in populist political rhetoric.

That brings us to Fannie and Freddie, and my original question. Was it a bailout?

Unlike Bear Stearns, the two mortgage giants are still with us, and will be for at least for the next couple of years. But their management and common shareholders aren't—Treasury Secretary Hank Paulson on Sunday effectively bade them farewell , with wishes that the door not spank them on the way out.

So who was bailed out?

Maybe it was the central banks of China and Russia (sub req), and sovereign wealth funds from Abu Dhabi to Singapore who collectively own hundreds of billions in Fannie and Freddie paper, and who (according to press reports) were starting to place nervous phone calls asking what Sec. Paulson planned to do in the event the two GSEs went insolvent?

Maybe it was the homebuilders, mortgage servicers and real estate agents, whose livelihoods have withered as house prices tumbled and sales dried up?

Maybe it was all of us ordinary American homeowners, whose net worth and buying power have similarly been squeezed under the weight of the housing bust?

I'm not sure. I do think, however, that whether we call it a bailout or a seizure or an intervention or whatever term you'd care to offer does matter. Words frame our mental image, and thus our understanding of the bigger forces and themes at work.

So what should we call it. A bailout? Something else? The floor's open.

Russia Worries about Oil

Tue, 9 Sep 2008 09:30 GMT

Fresh dispatch from the London office:

Russian Finance Minister Alexei Kudrin warned today that the country is “psychologically” unprepared for lower budget spending in decades to come as the oil industry’s contribution to the economy drops. Kudrin noted that ministers' spending proposals for 2009 to 2011 were several times higher than is realistically possible.

This reminds me of the interview I recently heard with columnist Tom Friedman, in which he argued that it wasn't Ronald Reagan who brought down the Soviet Union at the end of the 1980s—it was the collapse of oil after the 1970s spike. Friedman maintains there's an inverse relationship bewteen global crude prices and the health of democracy around the world. Oil at $30/barrel = rising liberal democracy in places such as Russia, Venezuela and Iran. Oil at $150/barrel = more power for the likes of Putin, Chavez and Ahmedinijad.

Sounds as if they're at least thinking about this in Moscow.

Fannie and Freddie

Sun, 7 Sep 2008 18:45 GMT

This is either long overdue or the beginning of a quagmire -- or maybe both. Here's Tyler Cowen's take on why it's necessary.

But let's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

More to come on this, soon.