Yesterday I pointed out the dog in the manger on the BLS’s most recent jobs report: that at the present rate it would take an unconscionably long time to bring unemployment to where it was when the recession began and even when it does an enormous amount of harm will have been done. On the NPR blog Jacob Goldstein has produced a graph, reproduced above, comparing employment growth following the late recession with other post-war recessions that may differ somewhat from the one you may be familiar with and which Bill McBride of Calculated Risk regularly updates.
As you can see, employment is recovering far too slowly, virtually the definition of an “L-shaped recession”. To their credit some of the Left Blogosphere blogs have latched on to this graph. Daily Kos front page regular Meteor Blades, whose work I’ve frequently liked, remarks:
A lot of people lost their homes. Spent all their savings. Exhausted their unemployment benefits. Graduated and couldn’t find a job right away—a delay that analysts say will have an negative impact on their wages from now until they retire. Took a job exactly like the one they were laid off from but that pays less and provides fewer benefits than before. Retired early because they couldn’t find a job and needed that Social Security check to survive, which as a result will now be smaller for the rest of their lives than it would have been had they been able to wait until full benefits kicked in.
Twelve million Americans are officially unemployed. Eight million are working part-time jobs not out of preference, but because they can’t get the full-time jobs they need. Another 6.8 million are no longer in the labor force but say they want a job. All told, 26.8 million Americans either unemployed or underemployed.
Even if the same 236,000 new jobs were created each month from now on, it would take (depending on how you count) from today until somewhere between October 2017 and July 2019 to recover where we would have been if the recession had not occurred.
very much echoing what I wrote yesterday.
Some, like David Adkins at Hullabaloo attribute the shortfall in jobs to weak aggregate demand:
Why is this happening? Well, we know it’s not because the rich “job creators” don’t have enough money. We know it’s not because corporations don’t have high enough stock valuations, or because they don’t have enough profits. We know it’s not because labor has too much power in the marketplace.
The answer is pretty simple: it’s a matter of weak aggregate demand.
He goes on to quote Paul Krugman. As should be clear from my previous posts, I’m skeptical of that explanation. I think the essence of a “bubble economy” is a sudden, dramatic decline in production due to the sharp drop in prices of the bubble commodity. Productive capacity is measured in dollars, not houses, bushels of wheat, or iPads. Keynesian stimulus isn’t a strategy to boost productive capacity. It’s a strategy to boost “aggregate demand” to fill the gap between that demand and productive capacity. No excess production—no gap. We need to increase production and fiscal stimulus may or may not do that. It depends on how the money is spent and the ARRA may have made some people very rich but it didn’t do nearly enough to increase production because it was predicated on shaky premises.
Our problems didn’t start in 2013 or in 2009 or 2007 or even in 2001. They started long, long before than and are now structural in nature. It will take structural reform to correct them. Areas ripe for structural change include government and its handmaiden industries: healthcare, education, finance.
In the meantime I should remind you that the Forbes Index of the Cost of Living Extremely Well has been rising very sharply over the last decade, more than tripling relative to the CPI. If you’re wondering why all of the Fed’s efforts at pumping money into the system haven’t produced inflation, it’s because you don’t buy the stuff that’s being inflated.
very much echoing what I wrote yesterday.
And also echoing what I’ve been foaming at the mouth about for years now.
“I think the essence of a “bubble economy†is a sudden, dramatic decline in production due to the sharp drop in prices of the bubble commodity. Productive capacity is measured in dollars, not houses, bushels of wheat, or iPads. Keynesian stimulus isn’t a strategy to boost productive capacity.”
So in 2006/2007 we had the productive capacity to build X number of houses and in 2009 we had the capacity to build 0.2X ? Why did the prices suddenly drop? If it was not a drop in demand, then why would prices suddenly drop? Too much supply?
Steve
Because it was a bubble. There was nothing but speculative frenzy pushing the prices up.
And you’ve got it wrong. We had the productive capacity to produce $X worth of houses. When the bubble burst those houses were worth $ΔX. Counting $X – ΔX as something that still exists is just an error. The point is that bubbles are different from ordinary cyclical downturns.
Let me give an example to make it clearer. On November 12, 1636 let’s say the total productive capacity for tulips in Holland was 1 million guilder. By February 3, 1637 the total productive capacity for tulips in Holland was 20 million guilder. By May 1, 1637 the total productive capacity for tulips in Holland was 1 million guilder again.
Between November 12, 1636 and May 1, 1637 there was no net change in productive capacity. The 19 million guilder difference between February 3 and May 1, 1637 was an illusion.
We were producing something like 2.2 million homes a year for a demand of around 1.5 million. One answer to steve’s question is that a number of the construction companies no longer exist, they entered bankruptcy, their unsold houses were distributed to their creditors, their equipment and machinery sold, their business formation destroyed.
I’ve always thought the Keynsian issue was that in being forced to cut costs and excess housing inventories, businesses would be forced to cut more than necessary in the long-run. For instance, moving towards 0.7 million unit capacity for the short-term, leaving millions of workers jobless until the long-term trend resumes. Thus the government should prop up demand for that labor until the industry gets back to a 1.5 million unit capacity, not back to 2.2 million.
I think a second generation illusion in the housing market may be in the making — the big difference is that it is being created at a faster pace, or so say some housing industry people.
For example, here in CA, specifically the west side of Los Angeles, prices are beginning to incredibly spike again. Yesterday, a friend of mine relayed an incident of a house in her neighborhood (just outside of the west side enclave) selling at an over-the-top high price. The buyers bit because they had recently been outbid on 10 other homes they had been interested in purchasing. That’s the same kind of competitive bidding frenzy that led up to the last housing bubble collapse — where homes sold for far more than they were actually worth, and/or the buyers could legitimately afford.
And then there are a lot of people, corporations and governments that are very happy to park their money in treasuries earning negative real interest rates rather than invest in the productive economy. Why?
Why?
Lack of confidence in what seems like a non-productive economy, and what the future holds in more government regulations and taxation.
http://www.census.gov/construction/pdf/bpsa.pdf
We bottomed at 513,000 housing starts in Mar 2009. At the peak, we had about 2.2 million starts and through most of the 80s/90s we probably ran about 1.4-1.5 million. Case Shiller for the 80s/90s ran about 110-120, peaking at about 200 and hitting about 150 (complosite numbers) in 2009. Using dollar amounts, it looks as though we lost about half of our productive capacity as you define it, or is Case Shiller not useful?
Query- Why did the bubble end? I agree that there was frenzy (and fraud) holding up the prices. What stopped it? We surely had the ability to make the same number of things. Since I think we are largely in a balance sheet recession, I would agree that we lost the ability to purchase the same dollar amounts of goodies. As Cowen says, we werent as rich as we thought we were.
Steve
The demand for houses had several different components. The most obvious, of course, was people who wanted houses to live in. But that wasn’t the only component. Another major component was demand from speculators. As long as it was erroneously believed that a decline in housing prices was inevitably local and short-lived buying houses for resale was seen very nearly as free money. Most realtors I know have engaged in it for decades but increasingly it became a vehicle for speculation by practically everybody. The proverbial stock tips from your elevator operator. Hence the many television programs of the “Flip This House” variety.
Buying and reselling houses is no longer seen as free money and won’t be for many years to come. That component, which I believe to have amounted for between 25% and 50% of the whole at it’s peak, won’t return any time soon.
It’s not how I define it. It’s how everybody is defining it. Look at all of the graphs illustrating the gap in aggregate demand. They all show actual GDP (measured in dollars) compared with potential GDP (also measured in dollars). I think that potential GDP they’re pointing to is illusory.
Paul Krugman doesn’t show charts of housing starts to justify fiscal stimulus. He uses charts of GDP.
In an ordinary cyclical downturn that’s perfectly reasonable. Whether it’s the aftermath of a bubble or a balance sheet recession it wasn’t an ordinary cyclical downturn. Pump-priming fiscal stimulus, intended for an ordinary cyclical downturn, isn’t nearly as effective if you don’t have one. And it’s even less effective when timed and targeted wrong.
I saw a different version of this graph and it looked to me (just eyeballing the lines) that we were recovering at about the same rate as the 2001 recession. Of course this was a much deeper downturn and a much longer climb back up.
Am I mistaken?
@steve
Query- Why did the bubble end? I agree that there was frenzy (and fraud) holding up the prices. What stopped it?
The bubble was created from the availability of money. The Fed was injecting money into the system, and that money was being leveraged by “investors”. MBS with a CDS was a “no-risk” investment. Hence, money was being thrown at the housing sector. There was more money available than borrowers, and therefore, new borrowers were created from the “credit challenged”.
By 2008, everything began coming apart. The recession and ARM resets were causing the mortgage defaults to overload the system. The MBS market assumed a certain number of defaults, but these would be mostly covered by rising prices and the CDS’s. As it became apparent that the numbers were going to exceed the assumption by an order of magnitude, money began pouring out of the housing market.
The financial industry had levered the MBS and CDS markets to astronomical levels, and as the housing market began to collapse, the financial industry began to collapse. Housing is no longer a “no-risk” investment, and the amount of money available is substantially reduced. Instead of attracting new borrowers, the mortgage industry is repelling as many new borrowers as possible.
The problem mortgages were the 2005 & 2006 vintage ARM’s. (If politicians are to be blamed, please blame the correct party.) They were scheduled to reset in 2008, and the terms were harsh. This combined with the recession ended the party. All this was known to anybody who chose to see it. (The coming Student Loan Crisis will be deemed to have been “unforeseeable”.)
The only way for housing to “recover” is to recover the “risk-free” status of housing. The Fed is trying to do this with “free” money, but the risk/reward is not sufficient to attract the investors needed to re-inflate the bubble. The housing bubble was being inflated by the financial industry, and the Fed does not have anything close to the money needed to replace the financial industry.
RE: Aggregate Demand
Not all demand is equal. Demand for existing products may be increased by injecting more money into the system, but multiplier is fractional. The growth resulting from the increase will be small.
Demand for non-existent products far exceeds demand for existing products, but until the product is developed, the demand is unknown. This demand is similar to start-ups. The new products require infrastructure to be developed, and this causes a multiplier effect greater than one.
“The only way for housing to “recover†is to recover the “risk-free†status of housing. The Fed is trying to do this with “free†money, but the risk/reward is not sufficient to attract the investors needed to re-inflate the bubble. The housing bubble was being inflated by the financial industry, and the Fed does not have anything close to the money needed to replace the financial industry.”
According to Drew, the govt just has to tell the banks to make loans and they will do it. Odd that they cannot do that now.
” As it became apparent that the numbers were going to exceed the assumption by an order of magnitude, money began pouring out of the housing market.”
People stopped buying.
Steve
I alluded to the graph I think you’re talking about in the post above. That’s why this is a better representation—it illustrates more clearly the nature of the problem. The recovery in employment after the recession of the early Aughts had been completed within roughly 44 months of when net job losses had begun.
But that recession was relatively shallow. This one is relatively deep and, unlike other deep recessions of the post-war period, recovery in employment is proceeding sufficiently slowly that it’s all but inevitable that another recession will take place before full recovery has happened.
TastyBits:
Basically, another way of saying what I did above. I think a key problem is that investments in housing have been revealed as riskier than had been thought. IMO that will continue to be the case for the foreseeable future.
steve:
I think he’s saying that speculators stopped buying.
I saw a different version of this graph and it looked to me (just eyeballing the lines) that we were recovering at about the same rate as the 2001 recession. Of course this was a much deeper downturn and a much longer climb back up.
Two points:
First, both recessions followed burst bubbles.
Second, both recessions peaked (from an unemployment standpoint) about two years in: IIRC about 24 months into this one and about 26 months into the one from 2001. (I had looked at them earlier today for the bottom. Goldstein’s graph could use some more colors.) They both took the same amount of time to bottom out. Why are they taking such divergent paths to recover?
I’d also point out that on Goldstein’s chart the 1948 recession looks almost as bad as this one at the bottom, but the recovery was MUCH faster. There have been some other bad recessions since WWII, but there has not been a recovery as piss-poor as this one. This is easily the worst recovery. And since we’re still not back to the level of jobs we had in December of 2007 (still 3,000,000 jobs or so short), and that doesn’t account for population growth, one can argue that we haven’t actually recovered at all from an employment standpoint. There are similar graphs our there for wages, and those haven’t really recovered either.
In early 2005 my wife and I started looking to buy a house. Along the way we met a woman who at that time owned eight or nine houses. She was just someone who had decided to start flipping houses to make a living. So she quit her job and started flipping houses.
We decided not to buy when we realized that the house we liked had gone from 140,000 in 2000 to an asking price of 330,000 in the spring of 2005. And they were likely to end up selling it for more than that. Those were insane numbers, and we realized we didn’t have that much crazy in us. Another correct call for us that didn’t do us a goddamned bit of good.
Here’s a quote from Goldstein’s article:
This is considered successful management of the economy by Democrats.
The question is how we define “typical.” Why draw a circle around “post-war” as opposed to looking at just the two or three most recent examples? If we look at just the most recent couple of recessions, doesn’t this all start to look more like a new pattern of modern recessions, substantially different than other post-war recessions? Does the labor market in 1948 have anything in common with 2008-13?
@steve
@Drew is talking about banks and their loan portfolios. The majority of loans are not owned by banks. They are packaged into MBS’s. The mortgages are originated by “banks”, and they are sold into MBS’s. The banks do keep the better loans, and if there were no MBS’s to sell loans into, they would not have been a housing bubble.
Most people do not understand how the housing market financing works. Securitization took off with the repeal of Glass-Steagall and the unregulated CDS market. Anybody want to guess who was pushing for the repeal?
The demand for housing was created from a demand by financial investors for more MBS’s. The investors were retirement funds, money market funds, 401(k)’s, and other safe investment vehicles. They needed AAA securities to purchase for their funds. MBS’s were “risk-free”, and they needed more and more.
Once a MBS is created, it needs to be filled with loans. Once all the credit worthy borrowers were taken, new borrowers needed to be created. Today, the demand for borrowers is low, and therefore, the number of buyers is fewer.
People did not stop buying. People stopped being able to borrow to buy houses.
Student loans are using the same dynamic. The supply of money to be lent has been artificially increased. Money needs to be lent, and students need to be created to fill the loans.
@Dave Schuler
I was coming at it from a different direction. The same scenario is happening with student loans.
If we look at just the most recent couple of recessions, doesn’t this all start to look more like a new pattern of modern recessions, substantially different than other post-war recessions?
If you look at just the last couple of recessions, the time from the start to the bottom and the time from the bottom to pre-recession levels are about the same length of time. In fact, that’s pretty much true of all of them, roughly speaking. This recession hit an employment bottom 25 months in. We’re 56 months AFTER the start of the last recession, and we’re still nowhere near an employment recovery.
This recovery is the worst of the bunch, and that’s a fact. And this is exactly what you have voted for – the worst recovery since we started keeping decent records. So own it.
@TB- It has been Drew’s contention, as i understand it, that originators were forced to make loans by the govt. In particular, loans to poor people. Since only about 6% of subprime loans were subject to the CRA, I am not sure how this created the problem. Contributed? Sure, there were lots of factors.
“The demand for housing was created from a demand by financial investors for more MBS’s. The investors were retirement funds, money market funds, 401(k)’s, and other safe investment vehicles. They needed AAA securities to purchase for their funds. MBS’s were “risk-freeâ€, and they needed more and more.”
I have long agreed with this, though I think you forget the importance of repo for short term finance.
“This recovery is the worst of the bunch”
This is the only one associated with an international banking crisis and massive numbers of insolvent banks. The only one associated with record levels of private debt. We financed our expansion since about 1980 by running up record levels of debt. That has ended.
Steve
Any number of reasons. Recordkeeping is better since the end of the war. The post-war economy is more like the present economy than the pre-war economy was. The last recession took just about as long from when it started to when the recovery began but it recovered significantly faster. Note the first part of that sentence: from start to trough the two recessions took about the same amount of time. By this point in the previous recession jobs had already recovered.
That leaves you with just two prospective conclusions: the policies put in place by the Administration were a failure (whether through design or ignorance) or the late recession was sui generis. If you take the latter position, you’re pushed to the supposition that the recession had nothing to do with constants, “eternal verities”, like human nature or the business cycle and is solely dependent on technology or structural changes that have happened since 2001.
I think that comparing the late recession with all pre-war recessions is a better choice than either of those alternatives.
If you compare the present recovery only with the last two recoveries, it looks even worse.
The last two or three recessions (i.e. since 1990) had much weaker recoveries than all of the other post WWII recessions. The older recessions returned to an approximate 3% rate of GDP growth, which we haven’t gotten since 1990.
“like human nature or the business cycle and is solely dependent on technology or structural changes that have happened since 2001.”
Like all of the world’s large banks needing to be rescued. Or record levels of private debt. Reinhart and Rogoff went through most of the recessions seen by the industrialized world fo rthe last several hundred years. Some kinds of recessions consistently take longer for recovery. Those associated with international banking failures and massive levels of debt. I dont think it takes a lot of imagination to see the difference in a recovery between a recession caused by overly tight monetary policy vs one caused by the international banking system going insolvent.
Steve
steve:
You’re treating those things as though they were laws of nature rather than artifacts. That just moves the discussion from a discussion of failures of fiscal policy to failures of regulatory policy. What measures have been taken since 2007 to restructure banks so they would be sound enough to float on their own or reduce the level of private debt? Essentially, nothing.
In particular, loans to poor people. Since only about 6% of subprime loans were subject to the CRA, I am not sure how this created the problem. Contributed? Sure, there were lots of factors.
The political environment, leading up to the ’08 housing market crash, was to make home ownership available to anyone who wanted it, regardless of their financial situation. This led to the fiscal oversight and landscape surrounding housing to significantly soften, becoming distorted and irrational in it’s attempts to accommodate itself to not barring the door to those desiring home ownership status.
Consequently, basic loan qualifications weakened and creative financing became vogue, like teaser ARMs. The result of these changes created untempered demand and paniced buying that rapidly accelerated unhealthy housing prices, everywhere. People, though, didn’t seem to care, as the common response was, “If this house is actually worth less now than what I’m paying for it, my equity basis will only increase, making up the difference before too long.” Few even ventured to contemplate that “What goes up can come down.” The by-product of government tinkering with housing market was an explosion of unsustainable prices, followed by a predictable collapse.
So, IMO, the root of the problem originated with the early-on political arm-twisting applied to make housing more available and fair to anyone, which then snowballed in a way that upset the balance and housing viability, across the board, for everyone.
Eerily, the same ‘fairness’ doctrine is being politically applied to other social/financial matters, demanding blanket equality over individual merit, something that can only be achieved through the mechanism of heavy government intervention legislating income redistribution policies
Here we go again……
“was to make home ownership available to anyone who wanted it, regardless of their financial situation. ”
Patently not true. What had been done was lowering down payment requirements for CRA loans. They had actually performed quite well. What changed everything was the no-doc (liars) loans. That was never required by anyone (it was an invention of the mortgage originators) and was used extensively with alt-A loans. Lastly, the real growth was in the shadow banking system, not subject to any CRA rules and much, much less regulated than traditional mortgage lenders.
Steve
@steve
@Drew is a big boy, and he can defend his position. I just do not want the casual reader to think what I wrote was directly linked to his position. I understand the dig but others might not.
We mostly agree on the “balance sheet” aspect, but I do not agree that more spending is the answer. I agree with @Dave Schuler on Keynesian based stimulus. I also think that the recession started as any other recession, but the recession combined with the housing crisis created the “perfect storm”. The “recovery” is operating in a larger negative economy.
I contend that there are two aspects of the economy, and they have become disconnected. If you are employed, things are great, but they are not bad. If you are unemployed, things are bad – really bad. I also agree with @Dave Schuler on the unemployment outlook and the ramifications for those folks.
I agree with my friends on the right that President Obama is making a bad situation worse, but I disagree on the degree of his impact. I think Mitt Romney would have been the opposite, but I do not want to rehash the election. When the financial mess has cleared up and the economy is ready for a recovery, I believe this is when policies will matter.
I think the parallels with the Great Depression should not be overlooked. The US may need WWIII to tear up the oil fields in the Middle East to fix the problem.
I thought this was an interesting video on the problems with the economic recovery. Its an animated interview with Ed Leamer for the Hoover Institute.
The interesting graphs are at
00:34 — showing that the first 8 post-war recessions had recoveries that fairly quickly returned and often exceed a 3% GDP growth trend line.
01:55 – showing how poor the last three recoveries have been measured by GDP, and how much worse the current one is.
http://www.youtube.com/watch?v=1qIjnKd2Zzc
His analysis is way too manufacture-centric for me, but interesting.
BTW/ Isn’t the graph above (and the other used by Calculated Risk) measure the variance from the number employed at the beginning of the downturn? I didn’t think it accounts for the need for more jobs due to population increase.
Patently not true.
I disagree.
When you lower standards in one area, encourage lenders to go easy on their qualifications, it changes the equation throughout the industry. Basically, reconfiguring the ratios or the limit lines feeds into creating rationalizations for one’s borderline practices, or out- right dishonesty.
Loan officers become more apt to look the other way, make unsuitable loans, so they receive their fees, etc. Real estate brokers create unreal value estimates based on manic increases in comparables. Manipulation, greed, false documentation in reporting of income, all go hand-in-hand with poor oversight and weakened regulations — just to make something like housing more accessible to a greater number of people.
@jan
The traditional banks that were subject to the CRA is a very small portion of the mortgage market. The people that you rely upon for your understanding do not have the foggiest idea of what they are talking about. These were the same people who did not think banks would foreclose because they did not want a lot of REO property. They had no clue that banks have a small number of mortgages, and those mortgages are the better ones. Their prediction was a big fail. Actually, they have been wrong about everything. They predicted this could never happen.
The cause was too much money being available. The money was seeking the safest investment. The days of George Bailey and Bedford Falls are long gone. Today George would originate the loan, and he would sell it to investors. George would keep some mortgages on his books, but these would be subject to regulation. These regulations prohibit George from making bad loans.
What measures have been taken since 2007 to restructure banks so they would be sound enough to float on their own or reduce the level of private debt?
Active measures have been taken against repairing balance sheets, when any action has been taken at all. Student debt is being encouraged (see aspects of the ARRA, for example), the Administration has encouraged people to go buy new cars while taking used cars off the road, et cetera. And there’s no point in even arguing about the fact that this Administration is easily the most fiscally irresponsible the nation has ever seen, and by a HUGE margin. (FDR can be forgiven his worst deficits by the little matter of WWII.)
What has the Administration done to encourage any action towards repairing the balance sheets of anyone other than the big banks, who along with themselves are the only people the Administration’s policies have benefited.
It’s all about looting the country for the chosen few, and impoverishing those not connected. Again, ignore what they say, and look at what they’re doing.
When the financial mess has cleared up and the economy is ready for a recovery, I believe this is when policies will matter.
Tasty,
So true. But that is usually when complacency sets in, people start dumpster-diving into expanding legislation resulting in greater public dependency, which then leads us down the same path to where we are today — unless there is a massive amount of compensatory growth in the economy to off-set such recycled trends.
I think the parallels with the Great Depression should not be overlooked. The US may need WWIII to tear up the oil fields in the Middle East to fix the problem.
Yes, history does tend to repeat itself, but few people take note. The parallels/similarities extend to how long the Great Depression was, to how long our economical malaise has been. Both, IMO, are related to the poor policies created under FDR and Obama, engineered to give government more power, expand social programs, divide people into warring constituencies, placate unions and demonize the private sector. It was all about exerting maximum control during FDR’s reign — the same being experienced with today’s president.
Another war, financial collapsed, nuclear strike, or even a natural disaster impacting the entire country — something that will pull people together, overcoming the class/gender/racial differences being distilled in the national brewery of today’s WH rhetoric.
@jan
Loan officers …
The majority of mortgages were stuffed into MBS’s and other vehicles. There is no loan officer sitting in the conference room deciding on credit worthiness for mortgages. For Commercial Real Estate (CRE), this does hold.
The way it works is that MBS’s are created, and within them, there are varying levels of loan quality. The lower quality loans produce a higher return, but they carry a greater risk. The idea is to balance the levels. A certain number of loans are assumed to default, and these are mostly the lower quality ones.
A CDS is an insurance policy for the MBS. This allows it to be stuffed with more low quality loans, but it keeps its AAA rating. The return on the MBS is greater. The MBS requires a certain number of lower quality loans, and this number cannot be filled with higher quality loans. No low quality loans means no MBS. No MBS means fewer AAA securities. Non risky investment funds require AAA securities, and the demand is increasing.
The scenario where low quality loans are not produced does not exist with the exception of traditional banks, but traditional banks are a minuscule part of the overall market.
If you want to fault the government policies, look at the GSE’s.
Since we’re talking about the banking crisis, I’ll just post this:
http://youtu.be/XBmJay_qdNc
“According to Drew, the govt just has to tell the banks to make loans and they will do it.
This was a nice mischaracterization, and only stating part of the position. I’m really tired of CRA denialists, as I’m the only guy here who watched it happen. Further, the 6% citation denies how these things develop. First it was CRA, then it was non-CRA regulated, but still uncreditworthy loans encouraged in the late 90’s. They were characterized by lax lending standards such as low loan to value, problematic credit history – including the single greatest repayment indicator: prior history of repayment, and of course low rates.
The ball is now rolling. Despite the mindnumbingly stupid claims that lenders just wanted to sucker people in and then perhaps foreclose, (do they endeavor to make dumb loans in any other market; how are those foreclosures working out economically??) they actually werr in dire need to get rid of the damned things before their balance sheets imploded. Tasty gets it right. Along came the surge in the securitization markets – with government being a tremendous buyer.
And now you have wholesale speculation and admittedly poor lending practices going like crazy. Just look at Countrywide and its shennanigans. But also look at widely available congressional testimony and grilling of regulators by the like of Todd, frank or Waters. (Brilliant credit minds all……..snicker.)
To deny how this all started, and only look towards the end of the game of musical chairs, is like the story of the person who jumps off a 50 story building but declares at floor 25 “everything is fine so far” and then the fire department cleaning up the inevitable mess claiming that it was all the ground’s fault.
As for this. “Odd that they cannot do that now.”
C’mon steve, keep it real. CRA would be politically impossible, but they are doing all they can with rock bottom cost of money. But beware an asset you buy with artificially low cost of financing unless you intend to hold the asset an awful long time. When financing costs return to normal asset values will fall. Think of it as a bond.
BTW – the thread is so long I really don’t want to get in this late, but I think people have been talking past each other. Just look at the notorious price volatility in commodities as physical capacity comes on in large chunks, then tightens. Rinse, lather, repeat. vs speculative excess or other exogenous factors in bubbles.
@Tasty- I agree that more spending is not the answer now.
Drew- We know that those earlier CRA loans performed pretty well. Now, if you want to say that the banks noticed this and decided to expand upon it, then maybe you have a bit of a case. However, the big losers were really the no doc loans and the exploding ARMs. Those were pure creations of the financial sector. Most of these were carried in the shadow banking sector so that they were largely unregulated. WE also know that the GSEs share of the market dropped from 50% to 30% from 2003-2005. Those securitized loans were being sold in the run up, but not so much to the govt.
Finally, I would agree that we were talking past each other. I certainly misunderstood Dave’s terminology early on. I am in general agreement that much of our growth in the last 30 years is illusory.
Steve
steve
You continue to miss/dismiss my entire point. The stuff of animal spirits has root causes that take hold in nacient factors, like CRA, then “everyone should own a home” to “let’s force financing of that dream” to “hey, this is a problem, let’s make it someone elses problem” to rank greed and hysteria. I’ve watched this now for 21 years……….over and over and over. Dismiss it at your own peril.
“Finally, I would agree that we were talking past each other. I certainly misunderstood Dave’s terminology early on.”
Actually, I really don’t understand where Dave is fully coming from, and I found your: “So in 2006/2007 we had the productive capacity to build X number of houses and in 2009 we had the capacity to build 0.2X ? Why did the prices suddenly drop? If it was not a drop in demand, then why would prices suddenly drop? Too much supply?” ….to be spot on. That is why I cited commodity prices. To deny ebbs and flows in supply and demand is to deny how fundamental pricing is set. Note I said “fundamental,” not speculative.
Here’s a factoid to chew on. We think housing was a ginormous speculative bubble – fueled by “greed” (not my words) and which has dropped in price by, say, 40% and I’m too lazy right now to look up units. Well, we are looking at a chemical company right now. Pricing of a key monomer input fell by 80% !! Totally on supply and demand fundamentals. Do you remember hearing about a speculative bubble in butadiene?? No, you don’t, because it didn’t happen.
But getting back to housing – No greedy butadiene processors selling butadiene to unwitting but “pure as the driven snow” speculative or dumb buyers. No securitization of butadiene. Just simple supply and demand at perceived fair values. Huh. Wonder what was different in the butadiene market. Oh, I don’t know. No government policy encouraging below market financing of butadiene; no government policy requiring lenders to finance butadiene purchases or capacity; no government agency buying unusable butadiene buy side futures contracts. Nah. Must just be luck.
Gosh the world was great before government started getting in the way of business. Why, a man could send an eight year-old into a coal mine and work him to death for pennies without anyone interfering. And no one from the gubmint would try to tell you that you had to pay a coolie the same as a white man. When there was trouble a decent, upstanding businessman could just hire thugs to break the legs of anyone who objected to labor conditions. Those were the good old days.
Back then there were no depressions. No bank runs. And no food poisoning. “Medicine” was not limited by silly nonsense about efficacy or arsenic content and such like, which is why people lived healthy lives. The water supply was always fresh and clean. People did not burn to death in factories without exits.
Gee, if only we could go back to the good old days when guys like Drew could fill the air and water and land with poisons, build monopolies and rape their workers — and not just metaphorically — without a bunch on nonsense from government.
That’s why life is so awful today. Just awful. So much better in the 19th century. It’s been all downhill since then.
My point was that the “would be” buyers do not have access to money to make their purchases, and if money were available, buyers would be found to borrow that money. Any market will be distorted if an artificial amount of money is injected into the process.
Have the government were to create a butadiene GSE. Have that GSE began buying butadiene futures contracts without regard to future supply or margin requirements. The butadiene players will begin clamoring to remove the futures market restrictions. Have the government remove those restrictions. Observe the results. My prediction is that the butadiene demand will increase causing the price to increase causing the supply to increase.
Remove the money. The butadiene market will collapse, and the chemical industry will be left with years or decades worth of butadiene. Butadiene production will be depressed for yesrs or decades, and everything involved in the sale and production will be depressed, also. The chemical plant has overhead costs, but butadiene will contribute substantially less. The additional products the plant produces will be affected, also.
The usual business cycle caused recession has been amplified. We are in the middle of a hangover, and not much is going to help. Going the “hair of the dog” route is usually not a good idea. Also, the cries of “never again” are soon forgotten.
Please stop the absurd comments, Michael. You are becoming a charicature. The only one taking absolutist positions here is you.
Gee, if only we could go back to the good old days when guys like Drew could fill the air and water and land with poisons, build monopolies and rape their workers — and not just metaphorically — without a bunch on nonsense from government.
That’s what I would call a manic-depressive response — one that swings wildly to the absurd in order to dramatically drive home a point. Although I get your intent here, Michael, it is so hyperbole-driven, as to not be taken seriously.