Like jumping off a cliff

This chart compares job losses for every recession in the past forty years. Paul Krugman says it is time for another stimulus. Many will argue, "The $700 billion bank bailout and the $800+ billion stimulus falied. We can't keep doing this." The answer is that the graph above would look even worse if those bills hadn't passed.

I haven't blogged about the economy for a long time because it's too depressing (and I don't think many of my readers care to read my take on it). It is difficult to view our current situation as anything but an express train to hell. The best the government can do now is put on the brakes. Calls to cut spending will only put the foot on the accelerator.

I really need to revitalize the uplifting music theme...

Housing

You may have heard statements like "home sales have not dropped as much as expected. The reason? Foreclosure sales.

The real number to watch is the new home sales. The red line above shows a decline from 1.4 million at its peak to under 400,000 in January. Housing is key to economic recovery. Until it starts to recover, the economy will continue to slide... regardless of the Dow's recent two good weeks.

Anytime you want to feel good about America's system of government, look to Europe.

Eastern Europe needs a bailout. Spain is on the brink of dropping the European Union altogether. Germany says nein (no) to both.

Imagine our crisis if each state had to argue what the policy would be. Smaller states, like Iowa would be over powered by larger states like New York, Texas, and California.

As a German with at least 3/4 German blood I can't say that I'm surprised that Angela Merkel is the one with the head in the sand trying to claim that there's not much wrong. We Germans naturally view the world dimly, what is going on now is something we've been thinking about for years. We are not a happy-go-lucky people. (Remember our two contributions to the food world are sauerkraut and beer.)

In two words: Really screwed

A month ago I wrote "In a word, screwed." The GDP (the amount of stuff the country produces) fell by a lot in the final in final quarter of last year. I said at the time that the numbers were bad but the real story was much worse - due to the way it was counted it actually made things look better than reality.

Well, the reality number was released today: The economy contracted by 6.2% in the fourth quarter of 2008... Which is worse than predicted. You'll read that this is the worse decline since 1982.

So is the economy only as bad as the early 1980's?

No, it's much worse. In 1982 oil was at $34/barrel and over the next four years dropped to $13 (a huge savings for us). In 1982 the prime rate on loans was over 15% and would be cut in half over the next four years. By 1982 the housing market had been decimated. Bottom had been hit and housing prices moved up as interest rates came down.

Where are we now? Oil has already dropped by 2/3. There's not much more it can drop. The Fed is giving money away... and holding a gun to the heads of bankers and saying, "You will take this." Interest rates are at record lows. And housing prices still have not hit bottom.

In other words, none of the positives that brought us out of the 1980's recession will help us now.

Cheers!

*****
Dad, please plant extra sweet corn this spring. One, I'm going through withdrawal and will eat more this summer than ever. Two, whatever excess can go to a soup kitchen nearby. I'm sure it will be appreciated.

Nationalizing banks - oh, the horror!

There must be something I'm missing. The US is in the midst of a very bad storm. There are huge issues to deal with. Whether or not to nationalize Citi and/or Bank of America isn't one of them. They already have one foot in the grave. Dumping the rest of the body won't take much work.

The term "nationalization" sounds like "communism." It's not. It's simply saying this big bank owes more in debts than it has in assets. It is bankrupt but we can't have a bank like Citi (once the world's largest bank) simply shut its doors... so the US government is going to step in and keep the doors open. They'll take over the toxic debt and break the bank up into sellable pieces. The big losers are current stockholders who see their equity wiped out. Shares are trading around $2 so they've already lost most of their investment. (Taxpayers could also be the losers if the debts are really, really toxic but... well, it beats the alternative.)

It won't be pretty, but it's a fixable problem... unlike some of the other challenges we face.

Stimulus

There's no point trying to write my thoughts about the stimulus when you can read Paul Krugman's article.  He sums it up quite well.

On the economics side of it I agree with Krugman 100%:  The bill should have been bigger, been more focused on getting people to work through spending and less on tax cuts that everyone is simply going to save.

On the politics I am slightly more optimistic.  Obama really wanted a bipartisan bill.  He gave up way too much way too early and the Republicans made it clear they didn't want to play ball.  Fine.  The result is Obama's popularity is remaining in the upper 60% range.  Even if it fell 10 points it is historically very high.  

The story most Americans are hearing is "Obama is trying to reach out but the Republicans are jerks."  As that opinion solidifies it will pay dividends down the road.

Why a credit crisis IS an economic crisis

I'll use a local (UAE) example: HSBC is a British bank that is a major player here. To buy a new car they used to require an income of $33,000. Now they've doubled the requirement to $66,000. Since income here is non-taxed that's the equivalent of saying an American would have to have an income near $100,000 to buy a new car.

Obviously, sales of new cars will drop and drop quickly.

It's not love that makes the world go round... or money for that matter. It's credit.

And if you read this you'll see that the world came close to a halt at 2PM on September 18, 2008.

Update: Denise asks,

Okay, Steve, dumb it down further for your English major friend. What does an "economic collapse" mean for me? I can't buy a car, prices would rise, but a political collapse? There would've been a run on the Capitol overthrowing the government? Looting and raping in the streets? Cannibalism?

If credit seizes up virtually all purchases for cars, houses, and even major appliances will end. (How many cars would be sold in the US if banks required a $100,000 salary?) As sales plummet millions lose their jobs. The economic crisis worsens and scared banks cut back lending even more.

Rinse and repeat and continue on a downward spiral...

Denise, you have a pretty secure job at a pretty secure company (assuming they don't get swallowed up by a bigger player). In the worse case scenario you will see your home value drop but that's probably about it. There won't be high inflation, if anything it will be deflation. You'll get great deals on things because stores with major appliances and large TV's will sell at a discount to clear their inventories.

Travel for your husband and you will become much cheaper. Already here in the Emirates hotel prices have been slashed. All the places you'd want to visit will have fewer pesky tourists with jobs so it will be much more enjoyable.

Come to think of it, you might do pretty well in an economic collapse!

Sometimes a graph helps explain

Click on the graph above to see it more clearly. It shows job losses in the previous two recessions as compared to job losses in the current recession.

The economy is in free fall. There is no comparison to recent recessions. I am disappointed in Obama because he created a package with a bunch of useless sweeteners to attract Republicans. If this package ends up being insufficient -and I believe it will - Republicans are the real winners. They get all the tax cuts they could have hoped for AND get the chance to blame the recession deepening on the Democrats.

I've had enough of this post-partisan bullshit. Hillary would never have made this mistake.

Calvin and Hobbes

I spent most of today writing my syllabi for the next term catching up on news. A good part of my day has been reading economic analysis. Unfortunately, the news is grim; we are screwed. I did come across this cartoon linked on economist Greg Mankiw's blog.
People who read this 15 years ago had to smile. People today will groan.

*****
I have plenty of posts in the future about the Coke Museum and the trip back. Right now I'm trying (unsuccessfully) to unwind. And I can't find my Ambien. I know I brought it back...

In a word: Screwed

Today's economic news is worse than reported.  The number showing a 3.8% decline in output is artificially good.  Why?  Business inventories rose in the fourth quarter.  That's usually a sign that companies are gearing up because they expect strong sales.  In this case the build in inventories is because people stopped buying.

Therefore, the real number for this quarter is a stunningly bad 5.1% and that build in inventories means companies will cut back even more sharply now.

Yep folks, we're screwed.

Update 1:  You may be listening to the news and hearing, "The number is not as bad as expected..."  Yeah, the top line number isn't as bad as expected but it's because of a fluke in inventories.  

Update 2:  Here's the real sign we are screwed:  Rush is telling listeners that things aren't that bad.  It's all media hype...  Further he is conducting a count of "casualties" of the Obama administration.  He says every laid off person is real and affecting real families so he's going to count the casualties "the way the drive by media counted casualties" in Iraq.

The guy is equating someone losing their life to someone losing their job.  If a commentator on my side of the aisle did that they'd be run out of the country.

A perfect storm

Economist Robert Samuelson writes in the Washington Post that we really are screwed. He says we face 3 problems any one of which would create big headaches.  Combined the problems are practically unsurmountable because the cure for one causes another to be worse.

The three problems he cites:

1.  Collapse of consumer spending.  Consumers are 70% of our economy.   When we stop spending we are in a recession, period.

2.  Credit crisis.  Banks are not willing to lend and won't be any time soon.

3.  Global trade imbalance.  We have been running huge trade deficits with Asia.  Basically, we've been keeping their workers employed (for low wages).  

It's a depressing article.  

Martin Feldstein

Feldstein is a respected conservative economist. He served as Reagan's top economic adviser until he realized that president wasn't serious about reducing the deficit.

Today he was interviewed on CNBC. His main points:

1. To deal with a recession he would normally he'd prefer monetary policy (think low interest rates) over fiscal policy (government spending and taxation) but these are not ordinary times.

2. The stimulus must be very large and must be predominantly government spending. Those tax rebates last year were a joke of a stimulus as only 15% of it was actually spent.

3. By the end of 2009 we may see the worse of this recession but we won't likely hit bottom until 2010 or later.

In short, a fiscal-hawk conservative come out in favor of running very large deficits for the next couple of years and sees no great benefit to tax cuts. Wow.

I'm betting Rush and Hannity don't invite him on their shows anytime soon.

Just how screwed are we?

It’s a question I’ve been thinking about a lot… and an oddly appropriate question on the day we give thanks. Will we have as much to be thankful for next year? The year after? Five years from now?

Imagine it is 1929 and your family is sitting down to Thanksgiving dinner. It is very unlikely you have money in the stock market. You’ve read the news, heard it’s bad but really, you’ve been unaffected. You have no clue what is coming for the next decade.

Is 2008 the new 1929?

I have no idea, but over the course of the next couple of weeks I’m going to post my thoughts on the crisis.

And, by the way, Happy Thanksgiving!

The financial crisis explained

This American Life is a great program. Those of you in eastern Iowa can hear it by tuning in to AM 910 or FM 90.9 on Saturdays at 2 PM.
Try as I might I cannot quite get a radio signal from Iowa. Fortunately, the show is on the internet.
In May they did a great show about the sub-prime financial meltdown.
Earlier this month they did a show on the current financial crisis.
They explain things as well as any source.
***********
The headline of today's Gulf News newspaper: UAE opens liquidity traps.
Terms like "sub-prime mortgages" and "bailout" are so yesterday. The term you need to learn now is "liquidity trap." When I was teaching economics a decade ago I talked about liquidity traps. In the past few years I did not. Quite simply, I didn't think it was relevant anymore.
What's old is new. The last time the US suffered a liquidity trap was in the Great Depression. Fortunately, our current Fed Chair Ben Bernanke has spent his academic life studying the Great Depression and liquidity traps. He knows what we are in for. You may have seen him on Capitol Hill this week endorsing a new round of fiscal stimulus. He knows the US is in a liquidity trap and as Fed Chair he is powerless.
It's time to strap in and hold on to your seat.

If you think we've got it bad...

... it's worse in Europe.

I'm watching the Dow drop another 700 points today. Things are bad for the markets in the US. Our central bank - The Fed - and the government bailout are doing all that can be done to unfreeze credit in the markets. The risk is banks failing left and right. The risk is also good banks refusing to lend money to even their good customers. That's clearly happening. If we don't get out of this soon we'll be facing a recession worse than any in my lifetime.

BUT, imagine each state in the US having to protect the banks within its borders. Plus, the states have a rule that they cannot exceed a deficit of 3% or their output. If more than one bank fails the state won't have enough money to cover the losses.

That's the current situation in Europe. Each country is responsible for protecting its banks, but unlike our government, they are not allowed to simply borrow more money.

Update: The story above has led to a resurging dollar. (In other words, the world markets are saying, "It's bad in the US... but oh, man, it's worse in Europe.")

Bernanke - In the long run we're dead.

What was Chairman Bernanke's field of study prior to becoming the Fed Chair? The Great Depression.

I think he should give a speech explaining what we are in for in the next decade. How credit markets freezing up means loans will dry up. Those loans drying up will lead to businesses cutting investment and laying off workers. Citizens, those who still have jobs, will not be able to get loans for cars or homes. Never mind paying a high interest rate, the money simply won't be available. House prices will plummet. Unemployment will skyrocket. We'll likely see bank runs reminiscent of the 1930's.

The free market ostriches will say, "The market will clear itself."

Sure we'll work our way through this in the long run but (quoting Keynes) "In the long run we're dead."