In a terse statement from GMU’s Mercatus Center economist Anthony Sanders asserts that the U. S. economy has become “numb” with respect to fiscal and monetary stimulus:
“This is the aftermath of a credit bubble. Basically, the government relaxes credit (or fails to supervise) and a bubble forms and bursts. As could have been predicted, Fannie Mae and Freddie Mac, the formerly private government-sponsored enterprises, have been effectively nationalized,†Sanders said.
I’m not as convinced about his next couple of sentences:
“Credit has contracted rather severely. This is one reason why the housing market, and the national economy as a whole, have taken so long to recover.â€
When the Tulip Mania, ended tulip bulbs never returned to their previous high which in today’s dollar would be in the tens of thousands for a single bulb. What had been pushing the prices ever higher was the expectation that prices would continue to rise which is very much what pushed housing prices up just a few years ago.
Consequently, I would have said that the housing market and national economy as a whole have been seriously distorted by the housing (and credit) bubble, housing prices may not return to their previous highs for decades if ever, and it will take a very long time, indeed, to wring the distortions out of the economy as a whole. The more that we prop up the housing market the long it will take for the economy to recover.“Credit has contracted rather severely. This is one reason why the housing market, and the national economy as a whole, have taken so long to recover.â€
Hat tip: Glenn Reynolds
If we were sitting at average rates of CRE and housing production, our economy would be pretty good. I just dont see anything coming along and replacing this part of our economy. It’s one of the things that makes me dubious about the NGDP and MMT approaches. Austerity rarely works w/o major devaluation. I think we just need time and build up of demand as the population grows and balance sheets get better.
Steve
“First, additional federal debt has little impact on GDP growth, so additional fiscal stimulus is unlikely to achieve economic growth.
This is an assertion. The large deficits being run are allowing the private sector to increase its rate of saving and offsetting the large hole in consumer spending. I don’t think Mr. Sanders is aware that for the private sector to increase its financial wealth the government sector MUST spend in excess of what it taxes. I would suggest the experience of the U.S. as it muddles through with weak growth is a superior alternative to the stagnating or recessional economies which have enacted austerity measures.
“Second, the M1 Money Multiplier has been dropping for decades and crashed during the recent recession.
There is no money multiplier because deposits do not create loans; loans create deposits thanks to the dynamics of bank reserves. The Fed itself has acknowledged this.
“Third, M2 Velocity (a measure of the effectiveness of monetary policy) has crashed as well. In other words, monetary policy is relatively ineffective.
He’s right. This is because the Fed has no way to stimulate aggregate demand with the tools at its disposal. All its loaning and money printing remain endogenous to the banking system and have no channel into the real economy. The argument our economy has numbed to monetary policy mistakenly assumes it was ever effective in providing stimulus at all.
“Finally, interest rates have been driven to zero at the short end and have very little room on the mid-to-long end,†Sanders said.
For the Fed Funds rate, yes. For the inter-bank rate, no. The Fed is intervening to prevent that rate from falling to zero by paying interest on reserves.
I know its a very specialized market, the leveraged loan market. But the assertion that credit has dried up, at least in this venue, is simply false. Its as robust as ever.
Considering the size and scope of current and projected future deficits, that’s worrying. If the economy is this crappy at near-historic levels of deficit spending, then how are we going to fill that hole?
@Dave Schuler
Your post reminds me of an interview with Eugene Fama back in 2010 in which he asserted there was no credit bubble and that the recession “must have” predated 2007, otherwise people would not have stopped paying their mortgages. He then goes on to argue that no one understands why recessions happen, but he’s sure it could not have been due to market irrationality because markets always perfectly distribute resources.
http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html
Fama, you may recall, is the originator of the Efficient Markets Hypothesis and has spent the last four years spinning like a top to protect it despite all evidence to the contrary.
Fama, you may recall, is the originator of the Efficient Markets Hypothesis and has spent the last four years spinning like a top to protect it despite all evidence to the contrary.
This gets back to what we discussing the other day, Ben, about the “meritocracy” that rules us all. 😉
I’ll let these people talk economics and just say that I at least appreciate the title on this post, Dave.
“I’ll let these people talk economics and just say that I at least appreciate the title on this post, Dave.”
Philistine.
“I know its a very specialized market, the leveraged loan market. But the assertion that credit has dried up, at least in this venue, is simply false. Its as robust as ever.”
I thought you guys had the paralyzing vapors over uncertainty.
@sam
Banks have plenty of lending capacity, what they lack is creditworthy borrowers.
He said recover, not that it had to return to its previous level. You seem to be conflating the two.
“I thought you guys had the paralyzing vapors over uncertainty.”
This comment shows complete lack of understanding. No one is surprised.
“…but he’s sure it could not have been due to market irrationality because markets always perfectly distribute resources.”
The usual incorrect portrayal of the EMH. EMH is about information dissemination and digestion, not potential incorrect or irrational reactions to information.
“I’ll let these people talk economics and just say that I at least appreciate the title on this post, Dave.”
That’s why we have learned it is of no use to pay attention to your views on business and economics. Thank you for the honesty.
Banks have plenty of lending capacity, what they lack is creditworthy borrowers.
So why are they trying to give me more credit cards even though I’m about to file bankruptcy? I’m pretty sure my credit score is a negative number by this point, but I still get a couple of offers a week.