Check out Barry Ritholtz’s post on whether housing prices have bottomed out. Now combine that with PIMCO’s Bill Gross’s remarks from his recent newletter:
Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk†and the “price†of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.
I think we’re at a major turning point in the U. S. economy. Housing and the associated credit will not be the engine of growth going forward that it has been for nearly all of my lifetime.
We have been there before. The primacy of housing in economic growth isn’t a law of nature. It’s an artifact of demographics, policy, and history.
We’re going to need to find something new. In all likelihood there won’t be one main overwhelmingly significant economic driver but lots of less significant drivers. Whatever they may be they won’t be education or healthcare. Each of those depend too highly on government spending. They’re drags rather than engines of growth.
Waiting for housing to recover or, worse, targeting policy at such a recovery is a waste of time, energy, and money.
I don’t know if this is right or not….and I’d like to stress I’m not at all implying this is wrong, merely that I just don’t have a clue (and I don’t think too many people really do either). However, assuming it is true a few thoughts….
1. If it does turn out to be that economic growth is now determined more by smaller activities that might be a good thing. It might be a good thing in that it will diversify the determinants of growth and thereby making it more resilient. Note this doesn’t mean we’ll have faster or slower growth, but that said growth might being less dependent on a single industry will be more stable. Maybe.
2. Economic history rarely shows economic stagnation. Where we do see stagnation it is usually coupled with policy that promotes stagnation–e.g. Japan. This is why I think attempts to craft policy to solve this problem will not work and have a good chance of being counter productive. Why? See point 3.
3. Politicians and policy makers are inherently conservative (not the small ‘c’ there). They don’t like the idea of an industry shedding jobs, prices declining, and the unhappiness and hardship it brings. Voters who are unhappy and facing hardships will look to somebody to blame/take out their frustrations and that will be the incumbents and those they appoint. And the finance industry still has quite a bit of influence as well and wont want to see the gravy train stop. So, policy absolutely will be focused on fixing housing and those industry that have become dependent on it…i.e. the financial sector.
For these reasons whenever I hear any politician or wannabe politician talk I cringe. They all want to go back to where we were 4-5 years ago. That point is not attainable and even if it were it is not sustainable. Lots of energy and resources will be wasted on that endeavor and it will be futile. So it will take quite sometime before we see something like point 1 and we will go through an indefinite period like in point 2. There is no policy response for this problem. None at all…that is politically viable. So feel free to continue arguing and screaming and gnashing teeth, but in the end it wont even amount to nothing…it will amount to considerable waste.
The President recently announced his third attempt to re-inflate the housing bubble, with HARP III. Clearly, Schuler, you don’t know what your talking about, just like that woman who told Obama her husband couldn’t find a job – if he says the economy is doing great then the economy is doing great! (Funny to see the President basically call a voter a liar. He’s all class, that one.) And how can’t education lead to even more growth. Look at how much it has done so far, and we still have over 50% of the country to educate!
Now you touch on a point I’d thought of posting about today. IMO one of the president’s problems is that he’s taking the info that the BEA and CBO are giving him without as much skepticism as is needed. The BEA’s unemployment stats are simply made-up garbage. They’ve said as much themselves when acknowledging that the business birth-death ratio they use as a fudge factor is out of whack.
Talk about Undercover Boss! What we need is Undercover President. IMO Barack Obama is probably a pretty decent bloke. But he’s never held a job of the sort that 90% of the people hold down. I’ll bet he didn’t take a job in the Dole cannery the way a lot of my Hawaiian friends did in the summer. He’s probably too young. What in the heck is his frame of reference? He’s not alone. Neither has Mitt Romney or George W. Bush. I have no idea about Bill Clinton. What did he do during the summer when he was a teenager? I have no idea. Did he work a part time job in high school?
As to higher education there are three basic problems:
1. The only way that something between half and three quarter of the population could graduate from college is to lower the requirements for graduation to what would have been the equivalent of junior high 70 or 80 years ago.
2. We aren’t creating enough jobs for people with college educations.
3. We can’t persuade a hefty chunk of our young people to graduate from high school. How the heck will we persuade them to graduate from college or, worse yet, grad school? It’s absurd.
I have no idea about Bill Clinton.
I give Clinton more credit for the simple reason that whatever jobs he did or didn’t have, he grew up rough. When he said he felt your pain, it was at least plausible that he couldn’t do so.
Well, pretty soon no one will be able to afford higher education. After all, costs there are increasing almost as much as health care, doubling, IIRC, about every ten years. It’s already about 2.5 times what I paid in the 1980’s and it will double again by the time my kids are college age in a decade. It will be fun figuring out how to pay for that, for whatever health care will cost in ten years, the increased taxes that are sure to come, all on an income that probably isn’t going to grow much. Who says math isn’t fun?
When he said he felt your pain, it was at least plausible that he couldn’t do so.
That he COULD do so. Sheesh.
“A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk†and the “price†of money at the zero-bound.”
That virtuous cycle got derailed almost twenty years ago when the Clinton Administration foolishly decided to reduce the deficit. The tax increase was bad enough, and the decision to run surpluses was even worse. Government policy FORCED the private sector to accumulate massive debts, and when the crooks of the financial sector took advantage government crafted policies which aided them, resulting in the largest and most rapid (only possible with massive fraud) credit bubble in history occur.
I’m not really sure what Mr. Gross thinks should happen. If the Fed were to stop intervening to control interest rates they’d fall to the zero bound anyway; that’s the natural rate in our banking system. The only way to restore lost income from interest would be for the Fed to force the Fed Funds Rate higher, but that means more intervention and more policy.
Andy, over the last thirty years or so higher education costs have risen faster than healthcare costs. It’s all a scam to get more financing for the banking interests and the government.
I think he’s mourning the loss of a way of life that has made him a heckuva lot of money.
Now you touch on a point I’d thought of posting about today. IMO one of the president’s problems is that he’s taking the info that the BEA and CBO are giving him without as much skepticism as is needed. The BEA’s unemployment stats are simply made-up garbage. They’ve said as much themselves when acknowledging that the business birth-death ratio they use as a fudge factor is out of whack.
Talk about Undercover Boss! What we need is Undercover President. IMO Barack Obama is probably a pretty decent bloke. But he’s never held a job of the sort that 90% of the people hold down. I’ll bet he didn’t take a job in the Dole cannery the way a lot of my Hawaiian friends did in the summer. He’s probably too young. What in the heck is his frame of reference? He’s not alone. Neither has Mitt Romney or George W. Bush. I have no idea about Bill Clinton. What did he do during the summer when he was a teenager? I have no idea. Did he work a part time job in high school?
You’ve pretty much encapsulated my views on the man since he hit the seen. Just a few caveats.
First, do I think he wants to ruin the country? Of course, not, that’s Dr Evil stuff. I just think he’s never held a real job (that is, a commercial job) in his life and his worldview is formed by sophomoric/idealistic bull sessions in college/academia and “community organizing”….and advisors with the same backgrounds or political agenda. We are seeing the fallout, and it’s not pretty. But more importantly he is showing a proclivity to double down. That’s arrogance and a lack of capability to adapt. Not executive material.
As for a bush or Clinton. Whatever you t hink of them, at least they were governors…….executives. I’d take Clinton, as much as I’d have to hold my nose, over Obama in a heartbeat. That’s a no brainer.
I remember my first executive position. It didn’t take me six months to sober up and rid myself of childish notions of how organizations, competition or markets worked. My god, man, I know more about that than the President of the United States in a time of economic turmoil? Now that’s scary.
Ben,
After that comment I really have a hard time not thinking you don’t think deficits matter. I find that position just…incoherent. It is things like that that make me think, MMT…hmmm interesting theory, but then again so was Lamarckism…and also completely wrong.
Steve V., but what if it is more correct than what the people running the show are using?