"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Thursday, May 22, 2014
It Wasn't Household Debt That Caused the Great Recession by Heather Boushey
It’s not just that 7.4 million workers lost their job during the years of the Great Recession of 2007-2009 but also that the employment crisis continues to this day. While jobs are no longer being shed at the rate of 20,000 a day, the share of the U.S. population with a job fell to a low of 58.2 percent in November 2010 from a high of 63.4 percent in December 2006, but has only increased by a fraction of a percentage since then, hitting just 58.9 percent in April 2014....
Their story starts with an accumulation of debt—lots of it. After the Asian financial crisis in 1997, investors were looking for safe havens to park their money. What they wanted were AAA-rated bonds. What they got were mortgage-backed securities that were rated AAA but turned out to be junk. As we all now know—but most of us didn’t know at the time—Wall Street firms in the early 2000s began slicing and dicing and then reassembling mortgage debt into more and more exotic and risky mortgage-backed securities in ways that made them look risk-free.
But, it wasn’t just that there was more securitization. It was that loans made to riskier borrowers were more likely to be securitized. This both drove the housing bubble and made the consequences of it popping all the worse. Mian and Sufi point out that between 2002 and 2005, the growth in mortgage credit and household incomes became negatively correlated, that is, credit expanded in areas where incomes were declining. This makes no sense: How can you pay back a loan if your income is falling? They point to academic research by Yuliya Demyanyk and Otto Van Hemert showing the profound consequences: By 2006, loans had become so disconnected from prudent business practices that “an unusually large fraction of subprime mortgages originated in 2006 and 2007 [became] delinquent or in foreclosure only months later.”
As these foreclosures began to pile up, affected households cut back sharply on spending. Thus, the catalyst for Great Recession had begun two years before the dramatic demise of Lehman Brothers. In the second quarter of 2006, the collapse in consumption started with residential investment, which fell by a 17 percent annual rate. Non-residential investment didn’t begin to fall until late in 2008, but by then households had already pared back spending sharply.
This fallout from the collapse of the housing bubble was amplified by the unequal distribution of net wealth. What Mian and Sufi find is that counties with the largest decline in total net worth—were the ones that cut back most on spending when house prices declined. As housing prices began falling in 2006, in counties where net worth had declined most, consumption fell by almost 20 percent, compared to only five percent for the entire U.S. economy. In contrast, even through 2008, counties that avoided the collapse in net worth saw almost no decline in spending. If debt had been more equally distributed then the decline in consumption would have been less dramatic and the recession would have been less devastating.
Wednesday, May 21, 2014
Tuesday, May 20, 2014
Monday, May 19, 2014
Sunday, May 18, 2014
In our "Fisher dynamics" paper, Arjun Jayadev and I showed that the rise in debt-income ratios for the household sector is not due to any increase in household borrowing, but can be entirely explained by higher interest rates relative to income growth and inflation.Pace Dean Baker and House of Debt. Or maybe not.
Diagnoses and Prescriptions: The Great Recession by Jared Bernstein
Ryan Avent: Secular Stagnation: Glut Busters: “A particular view about the macroeconomics of the pre-crisis period seems to be coalescing…. Since we haven’t solved the underlying savings glut, the American economy now has three options, according to this view: 1. Suffer through the same low growth (“secular stagnation”) that was characteristic of the early 2000s. 2. Use monetary policy to raise demand through higher asset prices and credit growth, restoring decent growth but creating a risk of new bubbles. 3. Use deficit-financed fiscal policy to absorb excess savings and boost demand, without relying on rapid growth in private credit. Certainly, parts of this story are correct. But is this really the best way to describe what was taking place?… One might… argue that the problem in the 2000s was not that the Fed haplessly created a bubble in order get the economy going again…. The problem was that it… ought to have done… was intervene aggressively in foreign-exchange markets to dampen the dollar’s rapid appreciation…. Doug Campbell… [and] Ju Hyun Pyun…. Now obviously, direct intervention in foreign-exchange markets is not the sort of thing America is supposed to do…. But this is a taboo that needs rethinking. Depreciations have historically been the most effective way to lift expectations for growth and inflation…. The Fed will not do any of the above autonomously. The decision to change the global monetary system will be political, just as it was in 1933 and in 1971, when American presidents made the necessary policy shift. Such decisions only tend to be made when the status quo is clearly untenable or when large political majorities demand a different course. Unfortunately, America’s secular stagnation mess does not seem likely to test either limit for some time to come.”