January 31, 2008 10:30
The corporate slogan of the month award goes to ... Oxford Funding Corp.
Houston-based Oxford "is a publicly traded Asset Resolution company specializing in the purchase and management of individual and bulk loan portfolios consisting primarily of Sub-Performing, and Non-Performing Residential and Commercial loans." I went to its website after reading a post at Calculated Risk about Oxford buying a bunch of mortgages from an unnamed bankrupt lender for "approximately 30% of the collateral value." Now that sounds like a nice business.
January 31, 2008 6:53
Ricardo Hausmann calls for an end to the whining about recession
In today's FT, Harvard economist Ricardo Hausmann gives the Fed and this entire nation of whiners we live in a scolding:
[M]acroeconomic policy should not be based on a panicky attempt to avoid a 2008 recession at all costs but on a forward-looking strategy that achieves the needed reduction in consumption at the lowest cost in terms of the stable growth. This is not achieved by giving US households a $1,000 cheque by April, a trick that no macroeconomic textbook would argue is particularly effective. If there is fiscal room – a big if, given the weak structural position of the US government and its likely cyclical worsening – it would be better spent in accelerating investments in plant and equipment via accelerated depreciation schemes, to improve the capacity of the economy to keep on growing after the crisis.The logic behind monetary easing is also suspect. Much of it is automatic, as central banks pump in money just to keep interest rates steady. It is understandable that politicians facing a November election and bankers with a lot of their money at stake should feel that this is the worst crisis ever and have an obvious interest in exaggerating the consequences for Main Street. ...
The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the policy agenda.
As I wrote a couple of weeks ago, mainstream American economists tend not to buy the idea that "a year of negative growth" is ever a good thing--and can be downright dismissive of those who say that it is. Yet lots of perfectly respectable economists outside the U.S. have been arguing lately that a downturn could be healthy. Hausmann teaches at Harvard, but he's Venezuelan who has served as his country's minister of planning and as a member of the board of its central bank. Does he know something his less-well-traveled colleagues don't?
January 30, 2008 12:33
A SocGen executive's interesting ideas about normality
Reader Henri Tournyol du Clos calls to my attention a post I wrote back in September on an FT interview with Jean-Pierre Mustier, chief executive of corporate and investment banking at Societe Generale. The FT wrote:
Mr Mustier reckons that credit conditions will normalise at around the level they were late in 2004. This means that private equity groups will be able to borrow to finance leveraged buy-outs, but at one or two multiples of cashflow less than the average level earlier this year, he says. ...“We have to go through the rationalisation, leave behind the irrational mistrust and move to a more rational and a more normalised view of what the world should be,” he says. “And the normalised view is not June 2007.”
At the time I asked "how can the man be so sure late 2004 was normal?" Henri now comments:
By now, ie nearly five months later, and with hindsight from the amazing Kerviel fiasco, it indeed does look very much like the management at SocGen had all along fairly proprietary ideas as to what is "normal" in financial markets, on top of a fairly idiosyncratic pricing of risk.
I don't know enough about SocGen to say whether that's right. I do think Mustier's words represent a pretty common misconception that things will at some point revert to "normal." There is no normal in financial markets. There is reversion to the mean, but it's not as if prices are going to stay right there at the mean. They invariably swing past it to the upside or the downside. And if you're not prepared for that then you're doing a pretty pathetic job of risk management.
January 30, 2008 10:40
Miami and Phoenix head back toward pre-2005 house prices
Graphic by Feilding Cage/Time.com
The latest S&P/Case-Shiller Home Price numbers came out yesterday. The headline was bad: The 10-city composite was down 8.4% in the 12 months ending in November, the worst performance in the history of the index, which goes back to January 1987.
But real estate is, as they say, local. So Feilding Cage and I have put together another graphic view of the metropolitan-area-level numbers. This time I thought it might be interesting to see the short-term trajectory. I picked January 2005 as a starting point--mainly because 2005 and the first half of 2006 were probably the period of greatest craziness in the mortgage market, but also because I tried starting with January 2004 and the chart just didn't look as good.
My reading of the chart is that the metro areas that show the clearest signs of having been caught up in a lending-fueled bubble that is now deflating seem to be Phoenix, Miami, Tampa, and to a lesser extent Los Angeles. My suspicion is that home prices in all those areas may be headed back to something close to (or below) January 2005 levels. In Phoenix, where prices have already fallen 14% from their June 2006 peak, that would mean another 20% drop.
One other thing: Portland and Seattle look like they've finally peaked.
January 29, 2008 5:00
The top five reasons why journalists go to Davos
Time.com has assembled a photo gallery of my Ten Things I Learned at Davos. As I worked on the list on the plane home Sunday, I realized that I really hadn't learned much at all. I had to do a bit of padding, and recycling from this blog. And now I'm wondering why the heck my employer sent me all the way to Switzerland to learn so little.
It just so happens that Yvette Kantrow was asking the same thing the other day in The Deal (via Romenesko). She wrote:
[I]t's a bit mind-boggling that journalists, and everyone else for that matter, are so eager to hear the prognostications of the Davos elite--arguably the same group that helped us land in our economic predicament in the first place. Among the media, The Wall Street Journal was one of the few outlets to note that irony: "Of course, most of the Davos crowd got the economy wrong last January--not a great return on the ticket price of Sfr20,000 [$18,090], on top of the 40,000-franc membership fee," it intoned in a Davos preview story.The reporting media, of course, doesn't pay those steep fees, but attending Davos is not cheap. Indeed, the BBC came under fire in British newspapers last year for spending £50,000 ($97,800) to send 37 journalists to the confab. But even in these times of cost cutting, big media remains undeterred in its coverage, with everyone from Forbes to the Journal to the BBC to The Times offering Davos blogs (which compete with the World Economic Forum's own Davos blog, not to mention its Webcasts, podcasts and vodcasts.)
Readers certainly aren't clamoring for the latest news from the World Economic Forum. This blog's regulars seem to have been bored to tears by it. And who can blame them/you? It's a bunch of people making speeches and participating in panel discussions--the kind of things that are usually ignored by the big papers (and magazines) when they happen in New York or Washington D.C.
So why do journalists travel all the way to Switzerland for the WEF? I have my theories.
1) They're planting the flag. Davos is an unparalleled gathering place of potential advertisers and potential sources. If your news operation has a significant presence there, that presumably raises its profile among people who matter. This is hard to quantify, but it strikes me as at least a semi-legitimate excuse.
2) They're getting access to people who normally wouldn't talk to them. This is especially true for journalists from smaller countries--at Davos they can accost people in the hallways who would never get around to returning their calls in normal life. But it was true for me, too: I had a nice chat with Steve Schwarzman as we waited in line to go through a metal detector, I talked to the Dutch prime minister at a party, I met Sergey Brin at another party. Because I work for Time I could conceivably get to these people through normal channels, but it would take some work. (That I failed to think of anything substantive to ask any of them was my own personal failing, not a shortcoming of Davos.)
3) They've got a beat to cover. If most of your sources are going to be in Davos, you might as well be there too. I think that pretty well describes what Floyd Norris, the NYT's financial columnist, was up to last week. He wasn't really covering the World Economic Forum; he was just writing piece after piece about the weird stuff going on the financial world last week, while interviewing people in person instead of over the phone.
4) They like being members of a semi-exclusive club. At Davos, journalists--at least the select couple hundred who are deemed "media leaders" and get white badges just like the ones that CEOs and central bank presidents wear--are treated as part of the club. With only a few exceptions, they get invited to the same parties and meetings as everybody else. This is, from the perspective of both readers and media-company shareholders, a totally bogus reason to send journalists to Davos. But for the journalists themselves it's enormously seductive, and--unlike a couple years ago--a few top bloggers are now being co-opted right along with the MSMers. (So much for the Army of Davids.)
5) They're looking for a job in a less economically troubled industry. If you're aiming to change careers, Davos is a pretty great place to lay the groundwork. Not that I'm aiming to change careers. I'm just sayin' ...
January 28, 2008 5:15
Do capital gains tax cuts increase revenues?
One of the most cherished beliefs of supply-side zealots is that cuts in capital gains tax rates always increase revenue. To be sure, there are often dramatic upward revenue swings right after the cap gains rate is cut. But that is in part because people can choose when to enter into the transactions that result in capital gains--and they'd be idiots not to hold off a few months if they know the tax rate is about to drop.
A better test is whether receipts are higher over the course of an entire business cycle. Last week, as part of its latest 10-year budget projections (pdf!), the Congressional Budget Office published its estimate of capital gains receipts in fiscal 2007. I'm willing to bet that, recession or no, FY 2007 will prove to be a peak in capital gains receipts that won't be matched for several years. Which means we can compare it with the peak of the last cycle, in 2000. Here's the chart, with the numbers adjusted for inflation:
So no, the reduction in the capital gains tax rate from 20% to 15% in 2003 did not result in an increase in revenue over the course of the business cycle. In 2000 receipts totaled $119 billion, which equals $143 million in 2007 dollars. In 2007, they totaled $122 billion. That's a 15% decline.
Now I guess you could argue that 2000 was the peak of a once-in-a-lifetime stock market boom, making it an unfair comparison. But that would amount to admitting that forces other than the capital gains tax rate determine the course of the stock market. Perish the thought!
January 27, 2008 3:36
One last gratuitous Davos photo album
I'm in the Zurich airport waiting for my flight home, and can't think of anything better to do than post more thrilling photos of my trip. I might post a little more about Davos on Monday but after that I promise I'll shut about it.
New techniques in serving champagne at the closing gala
The Google party at the Belvedere hotel
The Google party, photographed by a tall person/Photo by David Aikman
The scary Austrian-Swiss mascot twins of Euro 2008
January 25, 2008 12:17
Cherie Blair wants to kill the world's intestinal worms
I realize that this photo is a blurry mess, but it may be the only visual record of one of the most surreal Davos moments ever. Somewhere behind those backs of people's heads are Cherie Booth Blair (you know, Tony's wife), pretending to be an intestinal worm, chasing (while wearing boots with three-inch heels) after a bunch of Davos attendees pretending to be schoolchildren. Meanwhile, Gene Sperling (a top economic adviser in the Clinton administration), is pretending to be a teacher, rushing to get antiworm medicine to the kids before Cherie gets them.
This was all the doing of Deworm the World, an initiative that's grown out of research by MIT's Abdul Latif Jameel Poverty Action Lab showing that kids who have taken antiworm medicine are more likely to attend school and do well than their worm-ridden peers. (It's been put together by several of my fellow Young Global Leaders of the World Economic Forum, but I didn't have anything to do with it.)
The dewormers have enlisted Ms. Booth/Mrs. Blair (she seems to use the names interchangeably), who was herself happily dewormed as a child, as a celebrity spokesperson. Tony Blair will not be joining her. "Every time I mention this subject to my husband," she said, "he looks very distressed and runs out of the room."
The worm pursuit game had been designed as an educational tool for kids, and the deworming project is already up and running in Kenya. Bill Gates got a bit more press today for his pledge to spend $306 million to help "transform agriculture" in developing countries. But I'm pretty sure his presentation didn't involve any role-playing tag games.
January 25, 2008 9:45
CapitalistCast: Why am I here? When can I sleep?
Here's my final CapitalistCast from Davos. It's the most content-free yet! The folks in New York have been bugging me to be more like Ana Marie Cox and Mark Halperin and impart actual information about the day to come. But by the time you watch this, the day in Davos will already be mostly or entirely over. Plus I'm just shallow, and perpetually exhausted. This year's World Economic Forum has been a reminder, as it always is, that true membership in the global elite requires being able to get by on four hours of sleep a night. I just don't have what it takes.
If you're curious about Brian Behlendorf, who plays a supporting role in the video, you can read his Davos blog. It's much less frivolous than this one, although it doesn't appear to have been updated since he got here. I think Brian needs more than four hours of sleep, too.
January 25, 2008 8:14
The Curious Capitalist goes full RSS
In response to the extortionate demands of one Felix Salmon (and because I agreed with Felix that it's a good idea), this blog now offers a full RSS feed.
If you don't know what that means, don't let it trouble you. It's, like, really really hard technology stuff, and you're much better off just reading this blog right here at Time.com. (Maybe click on a few mortgage ads while you're at it!)
January 25, 2008 5:07
Dutifully promoting the brand
The view from outside the Panasia Gallery in Davos Thursday night
Yeah, that's Rick Stengel in the middle of the picture. The event was the Time cocktail party last night. Good crowd. No heads of state that I was aware of. But there was a head of a state (New Jersey Gov. John Corzine). I spent a while talking to Mario Moretti Polegato, the billionaire founder and head of shoemaker Geox. The most important thing I learned: He came up with the idea for his well-ventilated shoes while attending a wine convention in Reno in the mid-1990s (he was running the family winery at the time). He went for a walk in the desert, his feet got all sweaty, and he decided that somebody needed to start making shoes with holes in them.
January 24, 2008 12:41
Nouriel Roubini turns bullish, in a fashion
Last year, when Time's Board of Economists gathered for its annual debate in Davos (and no, Time doesn't really have a Board of Economists on an ongoing basis, we just gather them together every year here at the World Economic Forum), economist and superblogger Nouriel Roubini was the only gloomy voice in the crowd. As Peter Gumbel recounted in Time last January:
"Goldilocks is threatened by three bears," Roubini said — a housing recession, the beginning of a credit crunch and continued high oil prices. (He pointed out that, while it may be true that crude prices have fallen in the last few months, they are still high in historical terms.) Roubini was open in his use of language that others avoid: "I worry about a U.S. hard landing," he said.
He got that pretty spectacularly right. And so this year, people were paying a lot more attention to his words. As I recount in the story for the magazine that I was whining so much about yesterday:
"The debate is not whether we're going to have a soft landing or a hard landing in the U.S. but how hard the landing is going to be," says Nouriel Roubini, professor of economics at New York University. He sees a sharp, possibly year-long U.S. recession and a global slowdown.
Nobody on the panel really disagreed with that negative assessment. Which got me thinking that, now that almost everybody agrees with the Roubinis and Steve Roaches of the world, it might be time to start discounting their opinions a bit.
This morning, as I sat on a comfy chair writing my post on Al Gore and Bono, I noticed that Roubini had settled in with his laptop a few comfy chairs away. So I sidled over and asked him if he thought maybe economic gloom had gotten too much in fashion.
He cited the five stages of grief (denial, anger, bargaining, depression, acceptance). "I think we’re getting into the depression stage, we’re going to go soon enough into acceptance," he said. "The mood here is pretty depressed. That sets the stage for acceptance and fixing the problems and moving on."
So are you turning bullish? I asked him. "At least we’re reaching the bottom point, or close to it," he said. "It’s a start."
January 24, 2008 10:50
CapitalistCast: A World Economic Forum in search of a theme
This one was taped in a Davos parking lot. With some camerawork and other excellent assistance from Mrs. Curious Capitalist.
January 24, 2008 3:42
Bono recounts his confession to Father Al (Gore)
When Al Gore talks, Bono and Tom Friedman listen
This morning's big attraction here in Davos was a breakfast in which Bono and Al Gore were supposed to talk about "Combining Solutions to Extreme Poverty and the Climate Crisis."
Bono noted up front that there's competition as well as combination: "We have noticed that interest from the media that had been so acute on issues of extreme poverty is not so acute now because of the climate crisis."
Then again, Gore cited the League of Conservation Voters scorecard on how many times TV interviewers have asked presidential candidates about global warming. It's currently 4 times out of 2,830 total questions asked, so that doesn't seem like overwhelming media attention either.
Any discussion on climate change at an event full of people with private jets is a bit cringe-inducing. Bono, to his credit, did not shy from his role as a major global polluter. He described having Gore over to his house: "Here's the recycler, Al. I've got a posh car but it runs on ethanol, Al."
Then he said Gore reminds him of an Irish priest. Bono would confess to him his Gulfstream-flying sins, and Gore would say, "What are you gonna do about it, son?" To which Bono would respond: "I'm trying to be good, Father Al, but to be honest oil has been very very good to me."
After that sobering comedy routine, Gore said:
It's important to try to move away from the idea that personal actions by each of represent solutions to this crisis. In addition to changing the light bulbs, it's far more important to change laws. The one way to solve the climate crisis is to put a price on climate.I think we need to put a price on carbon, and it needs to be effected globally so those who don't pay a price for carbon don't have an advantage over those who do.
Is that a copout? I dunno. (Is it a copout to write "I dunno"? Yes!) Although from an economic perspective taxing carbon obviously makes a lot more sense than organizing lots of tree-planting campaigns.
A few more interesting lines from the discussion:
Gore: "I've recently begun to fear that I'm losing my objectivity on Bush and Cheney." (That got a big laugh.)
Bono: "When things are re-examined, when there's a new order ... it comes after a catastrophe, not before. We're asking people to imagine it before it's a catastrophe."
Gore: "It is a catastrophe, it is unfolding. But it is also an opportunity to reimagine ourselves as a planetary civilization."
Bono, on what he says when people ask him why he spends so much time whispering his arguments in the ears of politicians. "The reason is we don't have a social movement yet."
January 23, 2008 7:28
Davos Wednesday photo album
So I've been too overwhelmed with dead-tree stuff to report much here today. But I did at least take a few pictures:
Davos by night, and a fine Alabama-made vehicle (go American exports!)
Alice Waters, talking about the fine dinner of local goat and stuff she put together (sorry it's so dark, but I figured a flash would be bad form)
Michael Pollan's ears. It was at the Alice Waters dinner, and he was saying smart things about food, as he is wont to do
Fortune's Andy Serwer, sending home an important message
January 23, 2008 2:22
CapitalistCast 2: Life in Davos is hard
Here goes. I know, I've got to work on the whole centering-my-face in the screen thing. I should add that Ned Phelps, whom I just met, is a very entertaining guy. Not that I really captured that (or tried to) in the video. But here's a little sample. George Soros has an opinion piece in today's FT headlined "The worst market crisis in 60 years." Phelps peered at it suspiciously, then said, "What is Soros referring to when he says 'the worst crisis in 60 years'? That was 1948."
January 23, 2008 9:05
Plagued by buzzing noises in Davos
That's Becky Sharp of CNBC and Tom Donohue of the U.S. Chamber of Commerce, wishing a Swiss Army helicopter would stop buzzing them. I was supposed to go on a little later with Andrew Sorkin of the NYT, but we got bumped by stock market events in the U.S. I'm frantically trying to finish a piece for dead-tree Time at the moment. Will blog (and vlog) later.
January 22, 2008 11:27
Watching the markets and the Fed from a snowy place
I really can't think of a better place to spend a global financial semi-meltdown than in the cozy bar/cocktail lounge of the Parkhotel Silvretta in Klosters (a sweet little resort town just down the hill from bigger, less-charming Davos). Outside it's snowing. Inside it's warm, and I'm sitting in a comfy chair, partaking of an excellent (if expensive) Wifi connection while the Young Global Leaders of the World Economic Forum (a group to which, thanks to some kinda big-time clerical error a couple of years back, I belong) learn about competitive strategy in a changing world in the next room.
Oh wow, now a waiter just stopped by to ask if I want anything to drink! A mineral water, please.
There's a Wall Street guy a couple chairs away from me, also skipping out on the meeting for obvious reasons, e-mailing and yakking away on the phone. He seems to be keeping pretty calm, though. Oh, and a Canadian politician just walked by and said he told his broker to sell all his stocks last week (the guy raised his cash position, but couldn't bring himself to sell out).
I'd feel silly relating such trivialities, except that coverage of stock market craziness like today's and yesterday's is always an assemblage of trivialities. It seems pretty obvious that the market drop of the past couple of days has something to do with fears of a deep U.S. recession and fears that ever more sectors of the global debt market will follow the steep downward path blazed by subprime mortgages. Beyond that, who knows?
And it seems to me that the Fed's 75 basis point rate cut today will steady things a bit but won't end the debt problems or the talk of recession. Beyond that, who knows?
As I've written before, consumer indebtedness in the U.S. has been rising since the early 1980s. Then, starting in about 2001, it absolutely exploded. In fact, let's replay that chart (I put it together in November):
Now we're dealing with the unraveling of that. It's going to continue for a while, and at times it will be ugly. And it's really not the Fed's job to stop it. It's the Fed's job to try to keep the financial system from freezing up along the way.
January 22, 2008 11:00
CapitalistCast from Davos
So I'm here in Davos, and for no good reason other than that I want to seem like the very model of the modern multimedia journalist, I have just recorded my first ever CapitalistCast here in my hotel room. Here goes (and just so you know, I haven't slept in 25 hours):
January 22, 2008 9:01
All is not well in the world of Davos
Here's a guest post from Michael Elliott, editor of Time International:
It was cold and clear on the way up from Zurich to Davos last night, the sort of weather that makes you hope that the next day will see brilliant sunshine, you'll head to the Jakobshorn for a quick half-day on the slopes, and all will be well with the world.
All is not well with the world, at least, the world of the Davos devotees. This morning I woke up to find a gray sky from which snow was quietly weeping - all of which will, of course, make the skiing even better later in the week, but which for now seemed to mirror the mood of the movers and shakers making their way up the mountain. The World Economic Forum's planners may have hoped that this year's conference would focus on the collaboration needed to make the most of new technologies, on middle east peace (special envoy Tony Blair is a co-chair of the conference), on the prospects for Pakistan and Afghanistan, both of whose presidents will be here. But to heck with all that - what Davos will be obsessed with this week is the specter of an American recession and the impact it will have on economies around the world.
"Decoupling" is the word of the hour. In the last year or so, there's been an optimistic take on the global economy, which goes like this. Yes, the US has problems, a credit crunch brought on by reckless lending in the subprime mortgage category - and maybe in commercial property and credit cards, too - but we could handle it. Growth was so strong elsewhere in the world - not just India and China, but Africa and the oil economies too - that global prospects could weather an American storm.
Er, doesn't look like that today. The two-day sell-off in Asian markets is a reminder that the world has been dragged along by the insatiable desire of the US consumer for stuff, much of it made in China. If the US really does slow down, so - goes the fear - will all those factories up the Pearl River Delta whose wages are keeping millions of Chinese happy.
Wall Street was off Monday for Martin Luther King Day, which made the suspense Tuesday morning even more sharp. What will the Street do when the opening bell peals? We'll find out soon enough. Meanwhile, the Jakobshorn looks awfully tempting.
January 21, 2008 2:19
The vast ecumenical holding company that is Davos
Mrs. CC and I are headed off to Switzerland tonight for a week of winter sports and debauchery high-minded panel discussions in the mountain resort of Davos. I will be posting regularly and even, heaven forfend, vlogging.
But before I go, I'll leave you with these encouraging words from Arthur Jensen, the big-media CEO (played by Ned Beatty) from the movie Network. He's giving Howard Beale, the Lou Dobbsian network anchor (played by Peter Finch) a talking-to:
There is no America, there is no democracy, there is only IBM and ITT and AT&T and DuPont, Dow, Union Carbide, and Exxon ... The world is a college of corporations inexorably determined by the immutable bylaws of business. The world is a business, Mr. Beale, it has been since man crawled out of the slime. And our children will live, Mr. Beale, to see that perfect world in which there's no war or famine, oppression or brutality. One vast and ecumenical holding company for whom all men will work to serve the common good, in which all men will hold a share of stock, all necessities provided, all anxieties tranquilized, all boredom amused.
And yes, I've used that line before. Just trying to keep you amused on behalf of my holding company.
January 21, 2008 10:04
Recession guru says we're almost there
The Economic Cycle Research Institute, a forecasting firm in New York, did a better job of calling the start of the last recession than just about anybody else, so I checked in last week with ECRI managing director Lakshman Achuthan to see where he thought things stood. He still doesn't think we're quite in a recession, but says we're very close:
[I]n a word I'm saying the economy's state is "precarious." Specifically, the self-reinforcing downturn that leads to recession has begun, but it can still be averted by prompt policy action.We talked about the key indicators that define recession, and we're now seeing Sales decline in a way that reduces Production, in turn weakening Employment which them reduces Income. Lower Income then goes full circle to reduce Sales and so on... This negative feedback loop, once it gains momentum, will have to run its course regardless of any policy attempts to the contrary. Recall that in January 2001 the Fed started to cut rates sharply lowering them by 200 basis points in three or so months yet we still had a recession because the effort came too late.
The current window of opportunity for policy stimulus is limited to a couple of weeks, or maybe a month. The reason for the opportunity is that we do not have an inflation spiral in front of us, high energy prices notwithstanding.
And in a subsequent e-mail:
I don't know the exact numbers but we'll either spend 100 billion or so now, or 500 billion or so later trying to mitigate a full-blown recession which will also bring months of job losses on end.
January 21, 2008 6:47
More reasons why 2008 isn't 1971
My list of the 10 reasons why 2008 is different from 1971 caught the attention of A-list econoblogger Tyler Cowen (wow, writing lists really is a surefire ticket to blogging fame and fortune). Writes Cowen:
This is funny ... but of course it misses the point. One big difference is that we use energy much more efficiently than we used to. Expensive oil needn't crush us. The second big difference is that the Federal Reserve is far more competent today than in the 1970s. That is true even if you are not a Ben Bernanke fan. The third big difference is that a negative shock or financial collapse from China could crush us today, but not in 1971. Whoops, forget that third difference.
January 18, 2008 5:39
New column: The rites of recession
I have a column in the magazine with "The Science of Romance" on the cover (in the U.S., overseas it's Ny lon kong--which, somewhat disappointedly, is not the amazing tale of a giant pantyhosed gorilla) and online here. The column begins:
Every day it's looking more like a recession in the U.S. The December economic numbers (released in January) have been mostly bad: unemployment up, to 5%; retail sales down 0.4%; industrial production flat. The housing market, where all the trouble started, is still in the tank. Banks are reporting big new losses and layoffs. Stock prices are plummeting. Presidential contenders are starting to focus on the economy on the campaign trail. It's ugly out there.So let's just say it is in fact recession time for the world's biggest economy. What does that mean, exactly?
To be pedantic about it, that means a "significant decline in economic activity spread across the economy, lasting more than a few months." That's the semiofficial definition of a recession, courtesy of the National Bureau of Economic Research, a private think tank that since 1929 has determined the start and end dates of U.S. downturns. A clearer but clunkier standard is two straight quarters of declining gross domestic product. Or there's Harry Truman's classic definition: "It's a recession when your neighbor loses his job; it's a depression when you lose yours."
What we're talking about is an economy-wide mood swing. Businesses in lots of industries shed jobs. Consumers tighten their belts. Banks curtail lending. And then, usually within 12 months, things bottom out and start heading upward again. It's a temporary, cyclical phenomenon--not to be confused with long-term trends like the rise of China and India, the growth in income inequality and the decline of the TV sitcom. Read more.
So much has happened in the two days since I finished writing the column that it seems a little strange to look back at it now. Actually, scratch that. Nothing significant has happened in the past two days; it's just that a lot has been said about stimulating the poor old ailing economy.
January 18, 2008 12:24
Turns out George Bush is a Keynesian, too
President Bush mentioned (outlined is really too strong a word) his 1% solution for the economic slowdown this morning. That is, a temporary stimulus that equals about 1% of GDP. That is, $140 billion.
This comes after Ben Bernanke declared Thursday that he favored temporary fiscal stimulus of about that size, and made pretty clear that he was opposed to any longer-term stimulus like an extension of the Bush tax cuts due to expire after 2010. I declared at the time that this sounded remarkably Keynesian of the Fed chairman. This morning the WSJ chimed in with an outraged editorial headlined "We're All Keynesians Now." Complained those unrepentant (and increasingly embattled) anti-Keynesians:
A fiscal stimulus that really stimulates would change incentives, and do so permanently so workers and investors can know what to expect and take risks accordingly.
Well, now the president appears to have joined Bernanke on the Keynesian side of the economic-policy river. One can understand why: I hear there's a big election in November, and history teaches us that the worse the economy does this year, the worse things will turn out for the party currently in control of the White House. So ideology be damned. It's time to stimulate!
As Hank Paulson just put it in his press conference: "The potential cost of not acting has become too high."
Eddie Lazear, the current chairman of Bush's Council of Economic Advisers, did say the administration wants to get some amount of investment tax relief into the package. It'll be interesting to see if the Democrats go for that.
Update: Another Paulson quote: "There’s plenty of evidence: You give money to people quickly, they’re gonna spend it."
A note to newcomers (and returnees): If you try to comment you'll probably get a message saying you're "not authorized" to. All this means is that you need to sign up and verify that you are more or less human (and not a spambot). We're not harvesting e-mail addresses or trying to thwart those who want to tell me I'm an idiot or anything like that. So please, sign on up. Revision: The actual wording of the message is "You do not have permission to comment on this blog" and I think you only get it if you're already signed in to comment on another Time.com blog. It's a bug and we're working to get rid of it, but you can get around it by signing out and signing back in again.
January 18, 2008 10:43
Do we need a recession to purge the rottenness out of our system?
The commenter formerly known as p_lukasiak (now charmingly rechristened mediasux), asks an excellent question:
Now, correct me if I'm wrong, but the whole purpose of the Fed was to act as a brake on the economy when inflation rears its ugly head. And while I was initially supportive of a stimulus package, the problems with the economy are structural -- temporary stimulus can delay the recession, but it can't prevent it.The one thing I give Reagan credit for (sort of) is riding out the recession that occurred during his first couple of years in office -- the economy was completely out of whack as a result of the oil embargo in the seventies from which it never recovered. Doesn't it make more sense (at least economically) to ride this one out?
Actually, the Fed was conceived in the aftermath of the Panic of 1907, and its purpose was to put someone other than J.P. Morgan in charge of halting financial crises before they turned into depressions. It failed pretty miserably at that in the early 1930s, and I think one of the things Bernanke is doing now is trying to avoid repeating those mistakes in a financial crisis that is similar in form if not in gravity to that which unleashed the Great Depression. Stuff like the discount rate cuts and the Term Auction Facility are meant to grease the wheels of the financial system and keep it from freezing up. Cutting interest rates helps, too, simply because an interest rate cut immediately boosts the financial position of banks.
As for cutting rates and squirting money around to stimulate the overall economy, as opposed to letting the recession take its "natural" course, there's some serious disagreement. Andrew Mellon's belief in the early 1930s that a depression would "purge the rottenness out of the system" hasn't held up very well. Writes Brad DeLong:
Milton Friedman likes--alas! liked--to quote R.G. Hawtrey of the British Treasury, who said that Mellon and the others who thought in 1930-1933 that the big danger was excessive inflation were "crying 'Fire! Fire!' in Noah's Flood."
Mainstream American economists simply don't buy the argument that economic downturns have some sort of redemptive and cleansing effect. Here's Paul Krugman, writing almost a decade ago about what he called the "hangover theory":
The hangover theory, then, turns out to be intellectually incoherent; nobody has managed to explain why bad investments in the past require the unemployment of good workers in the present. Yet the theory has powerful emotional appeal. Usually that appeal is strongest for conservatives, who can't stand the thought that positive action by governments (let alone—horrors!—printing money) can ever be a good idea. Some libertarians extol the Austrian theory, not because they have really thought that theory through, but because they feel the need for some prestigious alternative to the perceived statist implications of Keynesianism. And some people probably are attracted to Austrianism because they imagine that it devalues the intellectual pretensions of economics professors. But moderates and liberals are not immune to the theory's seductive charms—especially when it gives them a chance to lecture others on their failings.
Funny thing is, the theory also continues to appeal to perfectly serious (and non-Austrian) economists across the Atlantic. Here's "Maverecon" Willem Buiter of the London School of Economics, writing just a few days ago:
A significant slowdown in the US, perhaps even a recession, is necessary to restore a sustainable desirable level of the national saving rate. There can be further beneficial longer-run effects from a recession, because recessions are quite efficient mechanisms for purging, through defaults, insolvences and financial and real restructuring, the distortions, inefficiencies and misallocation of resources that were created by the financial excesses in the US economy during these past five years. When it has to happen, why wait?
Or Gilles Saint-Paul of the University of Toulouse (home of possibly the top economics department in continental Europe):