News What is wrong with the US economy? Part 2

[Jimmy Snyder]

Former Fed chief says U.S. now in recession.

The economy, I believe, is in recession.

What a difference a word makes. Mr. Volker knows that the nber decides when recessions begin and end, not former Fed chiefs. The nber has not. Don't give up hope though.

 

[Gokul43201]

What a difference a word makes. Mr. Volker knows that the nber decides when recessions begin and end, not former Fed chiefs. The nber has not. Don't give up hope though.

But the NBER only decides 2 quarters after a recession has begun. So it's possible for someone to be right even if the NBER hasn't said a word yet.

So far, we've had a few dozen or more economists that have been wrong over this year - what's another?

 

[Jimmy Snyder]

But the NBER only decides 2 quarters after a recession has begun. So it's possible for someone to be right even if the NBER hasn't said a word yet.

So far, we've had a few dozen or more economists that have been wrong over this year - what's another?

They predicted 9 of the last 5 recessions. They've been predicting the next one for 5 years running. Why is it called the dismal science? They are the epitome of what an optimist should be.

 

[Count Iblis]

http://en.wikipedia.org/wiki/Credit_default_swap#Criticisms"

The market for credit derivatives is now so large, in many instances the amount of credit derivatives outstanding for an individual name is vastly greater than the bonds outstanding. For instance, company X may have $1 billion of outstanding debt and there may be $10 billion of CDS contracts outstanding. If such a company were to default, and recovery is 40 cents on the dollar, then the loss to investors holding the bonds would be $600 million. However the loss to credit default swap sellers would be $6 billion. When the CDS have been made for purely speculative purposes, in addition to spreading risk, credit derivatives can also amplify those risks.

http://www.independent.co.uk/news/business/news/a-163516-trillion-derivatives-timebomb-958699.html"

 

[B. Elliott]

The credit trouble definitely has it's roots in the Clinton administration.


Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

http://query.nytimes.com/gst/fullpa...sec=&spon=&partner=permalink&exprod=permalink

 

[Astronuc]

Highest budget deficit ever
http://money.cnn.com/2008/10/14/news/economy/budget_deficit.ap/index.htm?postversion=2008101416
Red ink hits $454.8 billion in 2008, more than double that of 2007; economists say bailout to weigh on next year.

WASHINGTON (AP) -- The federal budget deficit soared to $454.8 billion in 2008 as a housing collapse and efforts to combat the economic slowdown pushed the tide of government red ink to the highest level in history.

The Bush administration said Tuesday the deficit for the budget year that ended Sept. 30 was more than double the $161.5 billion recorded in 2007.

It surpassed the previous record of $413 billion set in 2004. Economists predicted a far worse number next year as the costs of the government's rescue of the financial system and the economic hard times hit the government's balance sheet.

Some analysts believe that next year's deficit could easily top $700 billion, giving the next president a formidable challenge.

A litany of economic woes

The administration blamed this year's record deficit on a litany of economic woes. The prolonged housing slump sharply reduced economic growth and has sent the unemployment rate rising, developments that reduce tax revenues.
. . . .

 

[edward]

The credit trouble definitely has it's roots in the Clinton administration.


Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999

http://query.nytimes.com/gst/fullpa...sec=&spon=&partner=permalink&exprod=permalink

The two areas in Tucson with the highest dollar value in sub prime mortgages are very upscale.

Did Clinton really make the mortgage companies give sub prime loans to the upper middle class? You Left out Carter and FDR btw.

If so why didn't Bush change the situation instead of:

In 2002, the Bush administration charted a more aggressive course by pushing for lower down payments and touting vouchers that would allow public-housing tenants to one day own homes.

http://online.wsj.com/article/SB122118681151726565.html?mod=googlenews_wsj

There is a lot of blame to share on this issue. You can blame; the buyers, the real estate agents, the appraisers, and the loan writers who bundled and sold the paper. At the top of the chain you will find "Credit Default Swaps", they are the financial derivatives that made it all happen.

 

[mathwonk]

well i can tell the economy is down, my car was just stolen. can i blame that on wall street?

 

[lisab]

well i can tell the economy is down, my car was just stolen. can i blame that on wall street?

WHAAA ? Oh no, mathwonk - damn, that bites!

 

[OmCheeto]

well i can tell the economy is down, my car was just stolen. can i blame that on wall street?

yes. you can blame anything on wall street.

but that's not going to get you a new car.

can I send you a https://www.physicsforums.com/showthread.php?t=261884" of one of my 9 vehicles?

I'll sell you one cheap...

 

[Astronuc]

well i can tell the economy is down, my car was just stolen. can i blame that on wall street?

Boy that sucks!

 

[Astronuc]

JPMorgan Chase beats estimates with an 84 pct profit drop, revenue is worse than expected
http://biz.yahoo.com/ap/081015/earns_jpmorgan_chase.html

NEW YORK (AP) -- JPMorgan Chase & Co.'s profit tumbled 84 percent in the third quarter after it took big hits from souring mortgage investments, leveraged loans and home loans.

Profit at the New York-based bank, considered one of the stronger players in the current financial meltdown, came in better than Wall Street anticipated. But the deterioration seen in all types of loans -- from home equity loans to prime mortgages to credit cards -- bodes badly for a banking industry that is requiring unprecedented investment from the federal government.

. . . .

I believe that Citibank, BoA have yet to report their latest Q results. However the government is taken stock in the 9 largest banks, and some smaller ones.

Meanwhile, the Bush administration is following Gordon Brown's lead.

 

[mheslep]

The lower tax rate is what makes Ireland the European country of choice amongst the other EU countries but is not the reason why US firms have a European presence. The driver behind the European presence is to be close to one's markets.

If the US did not establish subsidiaries in their markets it would not help their domestic plants grow whatsoever, instead they would simply lose business to their competitors who do have a local presence.

How do you establish this point? That is, how do you establish cost savings from a forward presence in Ireland vs anyone of many other EU contries outweighs the unique Irish tax adavantages (~margin 20% )

 

[Ivan Seeking]

There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

-Richard Feynman, physicist, Nobel laureate (1918-1988)

 

[mheslep]

Some in the media did see it coming, e.g. Paul Krugman, economist from Princeton University and winner of 2008 Nobel Prize in Economics. But they were dismissed as alarmist. Krugman indicated back in 2003 that the US economy was headed for a cliff...

The videos posted earlier featuring Krugman have nothing at all to do with the current mortgage based credit panic. Krugman was speaking clearly and forcefully in the 2003 video on the dangers of large government deficits - that was the 'heading for a cliff' reference. I don't know that he was dismissed as an alarmist on that subject (government deficits), as I am sure many economists agree with that point in general (I know I do) the only difference being the matter of scale given that the deficit and debt as a percentage of GDP are not historically that severe (compared to the post WWII years). Also note that he backs away from the deficit hawk position somewhat in the second 2007 video.

 

[Astronuc]

Bernanke says country's economic health won't return quickly
Bernanke: Quick economic rebound not in cards
http://news.yahoo.com/s/ap/20081015/ap_on_bi_ge/bernanke

WASHINGTON - The country's economic health won't snap back quickly even if badly needed confidence in the U.S. financial system returns and roiled markets finally calm, Federal Reserve Chairman Ben Bernanke cautioned Wednesday.

"Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away," Bernanke said in a speech to the Economic Club of New York.

The government's new powers under the $700 billion financial bailout package signed into law two weeks ago should help reduce risks to the economy, Bernanke said.

Tapping that new authority, the Treasury Department announced Tuesday that it will inject up to $250 billion in U.S. banks in return for partial ownership. It is hoped that banks will use the cash infusion to rebuild their reserves and lend money more freely to businesses and consumers.

. . . .

The comment "should help reduce risks to the economy" should more accurately reflect "should help reduce some of risks to the economy". There are more risks or systemic problems (e.g. federal debt and deficit, trade deficit, . . .) that have not been dealt with.

 

[mheslep]

The credit trouble definitely has it's roots in the Clinton administration.


Fannie Mae Eases Credit To Aid Mortgage Lending
By STEVEN A. HOLMES
Published: September 30, 1999

http://query.nytimes.com/gst/fullpa...sec=&spon=&partner=permalink&exprod=permalink

There are many to blame for the Fannie/Freddie collapse. The Clinton administration's role was contradictory. They get some blame as above for CRA, and some of the leadership appointments (President appoints the GSE leadership -another opportunity for political boondoggles), but I believe Clinton's treasury (Reubin) also tried to rein them in a little. The efforts were resisted in Congress then as it was later in this decade.

 

[Art]

How do you establish this point? That is, how do you establish cost savings from a forward presence in Ireland vs anyone of many other EU contries outweighs the unique Irish tax adavantages (~margin 20% )

Because that's part of what I do for a living. so I can tell you. the decision on whether or where to locate is a lot more complicated than 'who has the lowest tax rate'. To mention a few in no particular order of importance; labour rates, freight costs (Ireland being an island doesn't help), gov't grants, educational levels, employment levels, real estate prices, regulations etc etc.

 

[nuby]

interesting article on deflation
http://www.virginiainstitute.org/viewpoint/deflation.html

 

[mheslep]

Because that's part of what I do for a living. so I can tell you. the decision on whether or where to locate is a lot more complicated than 'who has the lowest tax rate'. To mention a few in no particular order of importance; labour rates, freight costs (Ireland being an island doesn't help), gov't grants, educational levels, employment levels, real estate prices, regulations etc etc.

Yes I am aware taxes are not the only issue. I assert that financially, for many US companies, taxes are often the most significant of these issues, thus the reason for locating in Ireland vs Scotland, France, or Germany, i.e. places even closer to dense markets.

 

[mheslep]

The two areas in Tucson with the highest dollar value in sub prime mortgages are very upscale.

Did Clinton really make the mortgage companies give sub prime loans to the upper middle class? You Left out Carter and FDR btw.

If so why didn't Bush change the situation instead of:



http://online.wsj.com/article/SB122118681151726565.html?mod=googlenews_wsj

There is a lot of blame to share on this issue. You can blame; the buyers, the real estate agents, the appraisers, and the loan writers who bundled and sold the paper. At the top of the chain you will find "Credit Default Swaps", they are the financial derivatives that made it all happen.

I think almost no economists will say CDS's 'made it all happen', preferring some blend of causes statement, so that this is at least an over simplification. I agree there was a 'blend' of causes, but if one must pick a fundamental I still point to the uncontrolled growth of the GSEs. My test: if the GSEs never existed, or at least dismantled by the late 90's, then this credit panic never happens. Instead we have a very limited Enron scaled scandle. I do not believe this is true of any of the other contributing causes: CDSs, liar loans, private mortgage bundlers, fradulent lenders, irresponsible shadow bankers. Derivitives of securities such as interest and currency trades are in no serious trouble, and far outsize the CDS's on mortgages. (See the ISDA data posted upthread). None of these other problem areas could reach any signficant scale without the GSEs first establishing a multi-trillion dollar market. We periodically see private rogue firms trying to grab markets in over leveraged positions and, as we saw with Enron and energy. Eventually when they grow large enough the market (e.g. short sellers) start asking serious questions about their business model, and absent very good transparent answers, the market shoots them in the head.

 

[Astronuc]

I think almost no economists will say CDS's 'made it all happen', preferring some blend of causes statement, so that this is at least an over simplification. I agree there was a 'blend' of causes, but if one must pick a fundamental I still point to the uncontrolled growth of the GSEs. My test: if the GSEs never existed, or at least dismantled by the late 90's, then this credit panic never happens.

Except that only 16% of sub-prime mortgages were from the GSEs, and the other 84% were from private companies or non-GSE institutions - like Countrywide.

It was the combination of the sub-prime mortgage defaults (and their volume) in conjunction with unregulated CDS's (and other questionable financial instruments) that caused heavy losses.

Deregulation and lack of oversight created the environment in which sub-prime mortgages and questionable financial instruments were allowed to flourish.

 

[turbo]

Deregulation and lack of oversight created the environment in which sub-prime mortgages and questionable financial instruments were allowed to flourish.

Plus the divorcing of the people making the loans from the people holding the notes after they were bundled and sold. Mortgage lenders made loans to people who had no reasonable prospect of making the payments, because they earned commissions and fees when they did so. When these mortgages were bundled, the ratings folks inflated their quality ratings, encouraging investors to buy them. If the mortgage lenders had to hold the notes or assume the notes that went into default, they would have loaned more cautiously. As it stood, they got their money up-front with no risk going forward.

 

[Astronuc]

Ten minutes to go and the Dow 30 Industrials

Index Value: 8,704.31
Trade Time: 3:50PM ET
Change: 606.68 (6.52%)
Prev Close: 9,310.99
Open: 9,301.91
Day's Range: 8698.82 - 9308.76
52wk Range: 7,773.71 - 14,075.80 (This is a good indication that something is fundamentally wrong with the US economy.)

The fact that the US government has borrow $700 billion and offer another $150 billion (tax credits and incentives), on top of the nearly $300 billion, with more proposals for $billions more is another indication that something is fundamentally wrong with the economy).

 

[mheslep]

Except that only 16% of sub-prime mortgages were from the GSEs, and the other 84% were from private companies or non-GSE institutions - like Countrywide.

Couple mistakes here. 1) If you check you'll find the 16/84% figure is only for recent years, and I believe just one recent year. Its only recently that private firms started getting into the bundling market and taking share from Fan/Fred. For the entire sub-prime market over time, going all the way back into the 90s when Fan/Fred started the huge growth in mortage securities, nobody even comes close. Fan/Fred created the sellable mortgage backed securities market almost completely by themselves, with others joining the party only recently. Again, no Fan/Fred, no mortgage securities market at this scale. 2) Countrywide is an example of a mortage originator, not a bundler as were Fan/Fred (to which they sold). No Fan/Fred and Countrywide is some crooked single office S&L in a strip mall.

It was the combination of the sub-prime mortgage defaults (and their volume) in conjunction with unregulated CDS's (and other questionable financial instruments) that caused heavy losses.

Deregulation and lack of oversight created the environment in which sub-prime mortgages and questionable financial instruments were allowed to flourish.

Fair enough, though this still misses the point of the fundamental flaw in creating pseudo governmental organizations allowed to act as private companies. I assert that once Fannie was made into quasi-governmental for profit organization, that it was inevitable that sooner or later it would wield enough politcal influence to escape oversight. No amount of initial oversight/regulation would hold up. Nor will it now, if they are released to operate as before.

These organizations were orginally part of the government (Fannie since 30/40s) and were made quasi-companies because the government did not want the political load of carrying their costs as part of the federal budget for politcal reasons. There will be large pressures to take them off budget again.

 

[Count Iblis]

It is now expected that unemployment will go up sharply. This will cause far more people to default on their mortgages.

 

[mgb_phys]

It is now expected that unemployment will go up sharply. This will cause far more people to default on their mortgages.

Not a problem, we know how to deal with that now - you just give the banks $700Bn again.

 

[mheslep]

Plus the divorcing of the people making the loans from the people holding the notes after they were bundled and sold. ...

I believe that is very close the fundamental problem. In general, non-perishable commodities are turned over many times from the originator/manufacturer and initial buyer without ill affect (e.g. cars, etc). In this case, what was missing was good information in the bundling operation. Now how does something like that happen? How do we get wide spread reselling of some mystery black box commodity, where we're told no need to look inside. In most cases such a pitch quickly gains the seller the label of a snake oil salesman, or a TV informercial talkin head. It certainly does not gain the 'pseudo' full faith and credit of the US government. How does this happen? Enter the GSEs.

 

[Astronuc]

Couple mistakes here. 1) If you check you'll find the 16/84% figure is only for recent years, and I believe just one recent year. Its only recently that private firms started getting into the bundling market and taking share from Fan/Fred. For the entire sub-prime market over time, going all the way back into the 90s when Fan/Fred started the huge growth in mortage securities, nobody even comes close. Fan/Fred created the sellable mortgage backed securities market almost completely by themselves, with others joining the party only recently. Again, no Fan/Fred, no mortgage securities market at this scale. 2) Countrywide is an example of a mortage originator, not a bundler as were Fan/Fred (to which they sold). No Fan/Fred and Countrywide is some crooked single office S&L in a strip mall.

I'd like to find the data on the sub-prime and who was involved as originator and bundler.

I found this:

About 21% of all mortgage originations from 2004 through 2006 were subprime, up from 9% from 1996 through 2004, says John Lonski, chief economist for Moody's Investors Service. If mortgage lenders stop making subprime loans — as is likely — then fewer buyers will be entering the housing market at its critical springtime peak. A deep enough decline in home prices, in turn, could lead to higher delinquencies in prime mortgages and a reduction in consumer spending. That, in turn, raises the risk of recession.

Lonski estimates the likelihood that the subprime mortgage market's woes will throw the economy into a recession at about 20%. Those are fairly long odds, but not insignificant.

From March 15, 2007! - http://www.usatoday.com/money/perfi/columnist/waggon/2007-03-15-subprime-woes_N.htm

That was a warning sign there of problems ahead. Somebody should have said - hey, there's some smoke, we'd better check it out.

Then what happened in 2007-2008. I think sub-prime mortgages dried up early 2008?

Meanwhile, at AIG - http://www.forbes.com/markets/2008/10/12/aig-federal-reserve-markets-equity-cx_md_1010markets35.html

 

[Astronuc]

It seems that folks started to notice a problem in 2007, but apparently didn't fully realize the scope.

Chairman Ben S. Bernanke
At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois
http://www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm
May 17, 2007
The Subprime Mortgage Market

The recent sharp increases in subprime mortgage loan delinquencies and in the number of homes entering foreclosure raise important economic, social, and regulatory issues. Today I will address a series of questions related to these developments. Why have delinquencies and initiations of foreclosure proceedings risen so sharply? How have subprime mortgage markets adjusted? How have Federal Reserve and other policymakers responded, and what additional actions might be considered? How might the problems in the market for subprime mortgages affect housing markets and the economy more broadly?
. . .

Interesting diagram here - http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Shame to have to rely on Wikipedia to find this stuff in one place.

This seems a pretty reasonable assessment;

The subprime mortgage crisis is an ongoing financial crisis characterized by contracted liquidity in global credit markets and banking systems. A downturn in the housing market of the United States, risky practices in lending and borrowing, and excessive individual and corporate debt levels [over-leveraged] have caused multiple adverse effects on the world economy. The crisis, which has roots in the closing years of the 20th century but has become more apparent throughout 2007 and 2008, has passed through various stages exposing pervasive weaknesses in the global financial system and regulatory framework.

No mention of government debt levels and deficit spending, which I think is a symptom. If the government are comfortable with huge debts and deficient spending, then I would suspect that they are less inclined to impose stricter regulation and oversight on the financial/credit markets.