Given the rapid flow of information on this blog, this is most likely old news...but Northern Trust's Kasriel is out with his current recession call, citing:
"...the U.S. economy has entered a period that will most likely be declared a recession by the National Bureau of Economic Research (NBER)."
Well, I think without a doubt we can say that Sebastian is not Lacker - although we probably could have said that months ago...
Great post CR.
Lacker is shooting straight and clearly looking at the data and listening to main street.
Get ready for the second leg down.
Back in 2005/2006, material prices were extremely high and construction labor could not be found. Many commercial and public works projects were delayed as a result. I think this explains why nonresidential has held up for as long as it has. However these delayed projects are now coming to completion and we should see a rapid reduction in construction employment over the next few months.
--
Yup, clueless economists continue to ignore the simple truth -- CRE is coincident-to-lagging indicator of the economy and when economy goes into a severe recession, let alone depression, it does much worse than the RRE.
In Tehachapi, CA, CRE space grew by some 20-30% during the past 5 years (Wal-Mart is planning to build, but my prediction is that it will not build) while RRE definitely didnt grow more than 10%.
What would happen to CRE when the official Unemployment Rate exceeds 10% (that means the actual rate close to 15%)?
Do we really expect Lacker to say anything other than "mild recession"?
I'm shocked he'd say recession.
The Shiller video was spot on - an extreme deterioration in confidence would be catastrophic so the fed/govt will do all they can to prevent that - as they should. Even if it means being more optimistic in your public forecasts.
Prepare for the worst and hope for the best. The best may be a mild recession now, but the worst is extremely ugly and will be determined by the degree to which the consumer loses confidence and faith in the system. It's going to be bad, but I think our country has seen worse.
Excerpt from Lacker's speech:
While observers were raising concerns early on the late Federal Reserve Governor Ned Gramlich, for example2 it wasn't until last year, after home prices had peaked in some major markets, that more quantitative evidence began to emerge regarding the substantial extent to which mortgage loans made in 2006 and later would underperform previous vintages.
They could have read CR or HousingPanic or housingdoom or any of the blogs and got a headstart in understanding the issue.
And again:
In fact, lower reference rates have meant that more adjustable-rate mortgage borrowers will see their interest rate go down rather than up.
Not for subprime borrowers who are the borrowers at issue here. If he looked up Tanta's post of "Subprime ARM initial rates" of 12/7/07, he'll see that the average teaser rates were 8%, and the margin was 6.04%; with 6 month LIBOR at 3.18%, that gives a reset rate of 9.22%;
9.22 > 8 % by my math.
Idiots. Or should I say, Morons, we've got morons here.
I read Lacker's speech, and while I respect Lacker, I found it disappointing.
Lacker says the Fed's rate cuts are the right response to a weaker economy. They may, in fact, allow the economy to "skirt a recession."
Fine, maybe that's true. But what is the cost? You NEVER hear a Federal Reserve official saying: "We will cut rates at the risk of higher inflation later. We are willing to accept higher inflation in exchange for higher growth."
In the Fed's universe, there is no trade off. Sure they argue, like Lacker, that we have to "remain vigilant," against inflation. But they never put two and two together, never admit that their actions will CAUSE higher inflation.
Better rewrite the textbooks. Monetary easing is the ultimate free lunch.
Thanks, D-w-, for the link to Kasriel. He is clear, logical, and convincing. However, he is too optimistic, given his call for a recovery in late '08.
Economists, just do a simple extrapolation of the latest downward trends in employment, confidence, and spending; then, accelerate the downward trend given the forthcoming defaults and foreclosures and the now underway return of the risk premium.
"Although the Federal Reserve has been quite aggressive in reducing the fed funds rate and will likely continue to be aggressive, we expect an anemic recovery. Why? Because the financial sector is likely to incur some large losses in this downturn. The losses will not be confined to securities related to residential mortgages, but will involve credit card debt, auto loans, commercial mortgages and high-yield securities (known as junk bonds in a less politically-correct era). The financial sector, especially the banking system, is the transmission mechanism between the Federal Reserve and the private sector of the economy. If the financial transmission is not functioning properly, the Federal Reserve can mash on the monetary accelerator but little power gets transmitted to the wheels of the economy. Credit losses can lead to capital inadequacy of the financial system. Capital inadequacy means that the financial system cannot extend as much credit to the private sector as otherwise would be the case. So, even though the Federal Reserve is offering to extend credit to the financial system at relatively low interest rates, the financial system, because of capital inadequacy, cannot, in turn, extend as much credit to the private sector."
Fine, maybe that's true. But what is the cost? You NEVER hear a Federal Reserve official saying: "We will cut rates at the risk of higher inflation later. We are willing to accept higher inflation in exchange for higher growth."
Nor will you hear them admit that their last round of cuts leveled the housing market like a neutron bomb.
D-P-, I presume that the Fed folks really believe in a direct relationship between economic activity and price levels: slowing economy --> reduced pressure on prices.
Sure, a slower economy reduces demand pressure. But, if the Feds is raining credit and overseas folks are repatriating dollars stateside, we get lots of dollars and purchasing power sloshing around in the economy, and still get an increase in prices.
You guys might think this is too much of a conspiracy theory, but I truly am convinved that the Patriot Act plays a much larger role in financial markets and actions by the government than most believe. GB and his misguided cohorts have absolute control when they want.
Right on schedule w/ CR blog forecasts. No surprises, other than the acceleration of the pace of events. Buckle seatbelts, engage long-range sensors, battle stations.
As it turns out, SocGen's rogue trader story wasn't exactly accurate, according to today's FT.
The money lost in closing out trader's accounts wasn't the 4.9 billion euros reported. It was 6.3.
Most of it was lost in the panic unwind, not by the trader himself.
And it was offset by a 1.4 billion profit trader made in 2007 (on positions reportedly closed out).
In other words, had SocGen discovered traders PROFIT at any time in late 2007 or the first two weeks of January, he would not have cost the bank a dime and might have made it quite a bit.
One of the biggest deals is the turning of consumer psychology - not an original observation to be sure - front page of Yahoo atm is "8 painless cutbacks
You can cut back on spending without sacrificing too many of life's pleasures."
Sure, a slower economy reduces demand pressure. But, if the Feds is raining credit and overseas folks are repatriating dollars stateside, we get lots of dollars and purchasing power sloshing around in the economy, and still get an increase in prices.
To see this happen, you'd need Asian producers to be able to decouple from American consumers. Problem is, there isn't any drop in replacement for the American consumer right now.
Eventually this decoupling will happen. At that point, you'll see a strong surge in long term rates coupled with a sharp drop in the dollar.
The lower 4 quintiles of American workers would be bankrupt in less than three months if they lost their jobs.
This is the folly of asset based savings. When you need the savings most, they become worth less, or worse, illiquid. This is why there is such a fear of recessions today.
Stocks and houses don't pay monthly bills. Simple duration mismatch.
Knock back a cool one and watch the boomers go bust.
I'm glad CR re-blogged on this non-residential spending topic, because it allows me to mention something I didn't have a chance to comment on yesterday.
Non-residential spending isn't just office building and shopping malls. Roads, highways, bridges, tunnels, dams, levees, schools and water/sewer treatment plants are all big-ticket, long-term non-residential construction projects, typically funded by tax money and/or bond issuance, not bank lending. So, there's a massive amount of spending that wouldn't show up in the banking system as loan demand.
Just one of the possible explanations for why loan demand has been falling for a long time and spending isn't responding.
That is a good conjecture for the disconnect, I think that the .gov sector is going to be doing some belt tightening - budget growth with RE boom - case can be made for CA as canary in the coal mine (though not, as I understand, for the Triangle area).
Martin Wolf takes Ben to task at The FT, for attempting to reflate another bubble and trying to repeat Greenie's dirty tricks FT.com | Economists' Forum | Bernanke’s reflation gamble may work too well
Then Adam Posen (ex-economist at the Fed ) comes to the Fed's defense saying "activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own."
Wolf fires back, and probably writes the best summary of what Grand Conman Greenspan did and the dangers of what Ben is trying to do
I would put it as follows. Aggressive monetary ease is like pouring petrol on straw. That may well not start a fire, as Adam writes: the straw may be wet, for example, or the people around the straw may be responsible. As it happened, these people were pyromaniacs. But the Fed did next to nothing to discourage them. On the contrary, it was opposed to tighter regulatory standards. This was the combination that created the credit blaze. So the combined policies - monetary easing along with regulatory laxity - do indeed bear responsibility for what happened.
I will go further. Since the chances of serious regulatory tightening (the subject of my next column) are close to zero (in my judgement), I fear the same danger still exists. If the Fed pours on petrol once again, the pyromaniacs will try to restart the fire.
I agree that the straw is very wet at the moment. So this will take a while. I also agree with Adam that this does not have to be the case if effective regulatory changes are made. But since I do not expect the latter to happen, I fear the longer-term consequences of present policies.
Rob Dawg asked: "This fully confuses me. Why should there be a recession in a few more years if the the current conditions won't cause a recession now?"
Because as bad as conditions might seem, they simply don't rise to the level of recession-inducing, just panic-inducing.
they simply don't rise to the level of recession-inducing, just panic-inducing.
Just what about FOUR TRILLION in largely irresponsible lending, 2003-2006, don't you understand???
This is a double whammy, since the lending itself was what was pumping the economy up during that time.
Now with that cash flow from savers to spenders proving unsustainable, both the direct stimulus effect (HUNDREDS of BILLIONS each year moving into spenders hands via HELOCs and RE cash-outs) entire sectors of the economy -- the real estate agents, loan brokers, bankers, furniture resellers, importers, home improvement big-box, etc etc are getting squeezed mightily hard and we will see this squeeze continue for the foreseeable future.
Just a panic, not a recession, even though the lending meltdown is taking out the consumer and 3-10% of the ancilliary GDP with him.
Anybody find it strange that the years that Giants won a Superbowl weren't great economic years? 1987 had the crash- and 1991 wasn't great. 2008 looking like crap, much worse than '87 and '91.
We Giants fans can get a victory but lose our shirts- such is our lot!
Troy asked: "Just what about FOUR TRILLION in largely irresponsible lending, 2003-2006, don't you understand???"
It's 2008. If conditions are as serious as you imply, why didn't we fall into recession a long time ago?
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment. U.S. real GDP is still rising. U.S. manufacturing is still expansionary.
Incomes are up, productivity is up, inflation was higher in the aftermath of Katrina than it is now.
If housing was a problem, it would have to be problemmatic. If the economy essentially says "So what?"...well, so what?
So, now you think that the Fed has become more knowledgeable and competent?
My data isn't any better than anyone else's, I just understand what it means better than most, and don't over-react to false threats.
Sebastian
Obvious you don't actually read much of what is written here, or comprehend it, either.
I've always thought that the Fed was doing as good a job as possible under the circumstances, until 2 weeks ago when the Simian-in-chief was screaming for more cuts and they knuckled under.
There job since August was to help Banks and other idiots unwind their positions in an orderly manner to forestall a credit crunch. Expansion of the discount window(I was for), SuperSIV, the easing(that I was against) delayed this from August to February and reduced its severity, but it's still happening.
And your theory that it's muni infrastructure that's keeping things going is so wrong I don't even know where to begin. These kind of projects take forever to plan out(In Maricopa County it took 5 years for a master plan 20 years ago that is in its closing stages today), those projects were started before developers got the green light to put up their product and have been finishing the last couple of years.
To the extent that overseas investors take the hit on residential mortgage losses, does our economy walk away unscathed on those losses?
I'm thinking of this passage in Minyanville yesterday:
"Industrial & Commercial Bank of China (yes, that very same number one by market cap bank!), said it has set aside reserves equal to 30% of its $1.2 billion in subprime holdings to cover possible losses, a state news agency reported according to the Associated Press.
ICBC isn't alone among its Chinese peers. China Construction Bank holds about $1 billion in subprime debt and has set aside reserves to cover a possible 40% loss, AP reported. And the number two largest Chinese bank, Bank of China, last month, disclosed nearly $8 billion in subprime backed securities."
My dad did even better- he hit the ticket lottery and sold for nice profit- get this- to a freaking Patriots fan. bummer for that dude, good for the old man.
If conditions are as serious as you imply, why didn't we fall into recession a long time ago?
Something of a fair question.
Economies don't turn on a dime. I expect the current situation to play out very similarly to the 1929-1933 drawdown, and the 1990-1999 Japan drawdown.
Those trillions lent out 2003-2006 are still pinging around the economy.
The issues will come when the asset holders find out the borrowers aren't repaying them and the assets on their books get written down 30-50%, and the debtors find out there's no more hits in the crack-pipe for them
This graph I made last month illustrates the debt overhang quite well. [Note that I estimated FY07 by doubling 3Q07, which might be an overestimate of the lending . . . the Fed will report new numbers in March].
FWIW, from a naive first-appreciation look at that graph, $400-$500B/yr in lending in 2003-2006 would appear sustainable. It was that peak to $1T/yr that both inflated real estate valuations and provided spenders money to pump the consumer sector, plus also provided employment for a million or three paper-pushers and Realtors® in the REIC.
Re: Lacker's "dramatic change" in CRE investment is imminent.
Does this mean walmart wont be going ahead with its goal to be everywhere where they are not? I always wondered about the dumbass nature of that model,as it seemed a little too optomistic to keep taking money from China and building new SUPERSTOR BIG*BOXES 10 miles apart! Year ago I once examined how many square miles of America have been destrpyed by this froth-like expansion, but its too depressing now to remember and Ill go with Lacker's "dramatic change" in CRE investment as being imminent! Yippie!!!!
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment. U.S. real GDP is still rising. U.S. manufacturing is still expansionary.
Seb
Except that unlike in the past, the workforce is not growing. Durring past recessions, particularly in the 70's and early 80's there was a demographic tidal wave of new people flooding the job market, the baby boomers and women. Now boomers are on the way out to pasture, and the % of women in the labor force is stable, they already participate at almost the same rate that men do. Thus we should expect to have low unemployment. That does not mean a growing economy though. If the workforce shrinks, total hours worked can decline, even with the unemployment rate falling. Unless the low growth in hours worked is made up for by productivity growth the economy stalls. This recession will not be as bad as 74 or 82 in terms of unemployment, but will be long and protracted. After all how high has Japan's unemployment rate gotten over then last 15 years or so? Certianly not near double digits, yet Japan has had a persistently sick economy.
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment.
Seb, the wheels fell off this cart in August.
Employment isn't going to respond to this in one or two quarters, and the picture isn't 100% negative.
The federal government is going to spend $3T next year. Divide that by $100K/nominal and you get THIRTY MILLION JOBS directly fed by government spending next year.
Subtract the government sector jobs and the 2002-2006 job recovery doesn't look so hot even with the bubble fluff jobs that were added due to the opening of the lending floodgates.
(Plus I don't think there was $4T in irresponsible lending, perhaps half that. But the issue is there was $4T lent into the teeth of the mother of all bubble markets, where anyone could take out a 2 teaser-rate year loan on million dollar assets with nothing down and no income verification).
an extreme deterioration in confidence would be catastrophic so the fed/govt will do all they can to prevent that -
Yeah but that would imply that people believe what the FED/govt says. I think after Iraq, people have simply stopped believing much of anything that the government says.
Seems like the Fed knew all along that lowering standards would drive up demand for RE loans (ie drive up RE prices). So the question is why did the FED want the house prices to increase? That is the hot potato no one on this site tosses about.
Lacker says 'uncomfortable with the inflation picture'
Another surprise rate cut coming
Lacker: Not clear more rate cuts are needed if data not poor
Lacker: Fed may lose credibility if inflation continues up
May lose credibility? May???
(Psst) Crispy.. Do you want that extra "http" in front of your homepage linky?
Let me channel Sebastian. Lacker is wrong. Where is the evidence?
Thanks James!
No prob
First!
If only there was a fingers in ears emoticon for O-Joe.
I worry not for Sebastian, his data is much better than the Fed's. < /Sarcasm >
Mild recession is a possibility, Fed's Lacker says - MarketWatch
Larker : 'Mild' recession possible.
This blog is the source of Lacker's source.
These guys are SO late as usual.
Lacker: Not clear more rate cuts are needed if data not poor
Lacker: Fed may lose credibility if inflation continues up
Lacker: Best to inflate using fiscal policy rather than monetary policy so maybe the bond market won't catch on.
Larker : 'Mild' recession possible.
Sounds more like a mild case of ebola to me...
Given the rapid flow of information on this blog, this is most likely old news...but Northern Trust's Kasriel is out with his current recession call, citing:
"...the U.S. economy has entered a period that will most likely be declared a recession by the National Bureau of Economic Research (NBER)."
Link to forecast here:
Recession Now Putting Our Forecast Where Our Mouth Has Been
Well, I think without a doubt we can say that Sebastian is not Lacker - although we probably could have said that months ago...
Great post CR.
Lacker is shooting straight and clearly looking at the data and listening to main street.
Get ready for the second leg down.
Back in 2005/2006, material prices were extremely high and construction labor could not be found. Many commercial and public works projects were delayed as a result. I think this explains why nonresidential has held up for as long as it has. However these delayed projects are now coming to completion and we should see a rapid reduction in construction employment over the next few months.
Whenever feds talk too much they cut.
The weatherman pulls up the shade and looks out the window.
Makes sense, bsneath.
OT -- will the hedgies pull out a save late today? Or, do we get to close 'red'?
--
Yup, clueless economists continue to ignore the simple truth -- CRE is coincident-to-lagging indicator of the economy and when economy goes into a severe recession, let alone depression, it does much worse than the RRE.
In Tehachapi, CA, CRE space grew by some 20-30% during the past 5 years (Wal-Mart is planning to build, but my prediction is that it will not build) while RRE definitely didnt grow more than 10%.
What would happen to CRE when the official Unemployment Rate exceeds 10% (that means the actual rate close to 15%)?
Economists are very bad with declines!
Jas
Do we really expect Lacker to say anything other than "mild recession"?
I'm shocked he'd say recession.
The Shiller video was spot on - an extreme deterioration in confidence would be catastrophic so the fed/govt will do all they can to prevent that - as they should. Even if it means being more optimistic in your public forecasts.
Prepare for the worst and hope for the best. The best may be a mild recession now, but the worst is extremely ugly and will be determined by the degree to which the consumer loses confidence and faith in the system. It's going to be bad, but I think our country has seen worse.
Can I haves me rates cut now, puweese? And ponies...I like ponies.
I wonder how many text messages Ben has gotten from GWB today demanding he cut rates.
If we finish green today without a good reason, i'm closing my brokerage account.
The ignorance of these guys is astounding:
Excerpt from Lacker's speech:
While observers were raising concerns early on the late Federal Reserve Governor Ned Gramlich, for example2 it wasn't until last year, after home prices had peaked in some major markets, that more quantitative evidence began to emerge regarding the substantial extent to which mortgage loans made in 2006 and later would underperform previous vintages.
They could have read CR or HousingPanic or housingdoom or any of the blogs and got a headstart in understanding the issue.
And again:
In fact, lower reference rates have meant that more adjustable-rate mortgage borrowers will see their interest rate go down rather than up.
Not for subprime borrowers who are the borrowers at issue here. If he looked up Tanta's post of "Subprime ARM initial rates" of 12/7/07, he'll see that the average teaser rates were 8%, and the margin was 6.04%; with 6 month LIBOR at 3.18%, that gives a reset rate of 9.22%;
9.22 > 8 % by my math.
Idiots. Or should I say, Morons, we've got morons here.
-K
"If we finish green today without a good reason, i'm closing my brokerage account"
there will be a reason all right. not sure how, but the disinformation campaign will come up with something.
sk,
I think that is it - morons studying to become idiots!
They could have read CR or HousingPanic or housingdoom or any of the blogs and got a headstart in understanding the issue.
Maybe the Fed doesn't have the Internets yet. It is just a government operation after all.
I'm worried about bank failures. Residential loans are a joke. The losses will be enormous. Commercial loans are at serious risk too.
Where's that FFDIC dude?
I read Lacker's speech, and while I respect Lacker, I found it disappointing.
Lacker says the Fed's rate cuts are the right response to a weaker economy. They may, in fact, allow the economy to "skirt a recession."
Fine, maybe that's true. But what is the cost? You NEVER hear a Federal Reserve official saying: "We will cut rates at the risk of higher inflation later. We are willing to accept higher inflation in exchange for higher growth."
In the Fed's universe, there is no trade off. Sure they argue, like Lacker, that we have to "remain vigilant," against inflation. But they never put two and two together, never admit that their actions will CAUSE higher inflation.
Better rewrite the textbooks. Monetary easing is the ultimate free lunch.
Thanks, D-w-, for the link to Kasriel. He is clear, logical, and convincing. However, he is too optimistic, given his call for a recovery in late '08.
Economists, just do a simple extrapolation of the latest downward trends in employment, confidence, and spending; then, accelerate the downward trend given the forthcoming defaults and foreclosures and the now underway return of the risk premium.
No way is there a recovery ANYTIME soon.
From Duceswild link
:
"Although the Federal Reserve has been quite aggressive in reducing the fed funds rate and will likely continue to be aggressive, we expect an anemic recovery. Why? Because the financial sector is likely to incur some large losses in this downturn. The losses will not be confined to securities related to residential mortgages, but will involve credit card debt, auto loans, commercial mortgages and high-yield securities (known as junk bonds in a less politically-correct era). The financial sector, especially the banking system, is the transmission mechanism between the Federal Reserve and the private sector of the economy. If the financial transmission is not functioning properly, the Federal Reserve can mash on the monetary accelerator but little power gets transmitted to the wheels of the economy. Credit losses can lead to capital inadequacy of the financial system. Capital inadequacy means that the financial system cannot extend as much credit to the private sector as otherwise would be the case. So, even though the Federal Reserve is offering to extend credit to the financial system at relatively low interest rates, the financial system, because of capital inadequacy, cannot, in turn, extend as much credit to the private sector."
Fine, maybe that's true. But what is the cost? You NEVER hear a Federal Reserve official saying: "We will cut rates at the risk of higher inflation later. We are willing to accept higher inflation in exchange for higher growth."
Nor will you hear them admit that their last round of cuts leveled the housing market like a neutron bomb.
Where's that FFDIC dude?
I believe its a woman. Altho dude could be gender agnostic!
.............
I wonder how many text messages Ben has gotten from GWB today demanding he cut rates.
This mental picture is cracking me up...
CLANK!
What's that?
Oh, just one more nail in the coffin.
"-50bps, plz. -gwb"
"plz"
rotfl
D-P-, I presume that the Fed folks really believe in a direct relationship between economic activity and price levels: slowing economy --> reduced pressure on prices.
Sure, a slower economy reduces demand pressure. But, if the Feds is raining credit and overseas folks are repatriating dollars stateside, we get lots of dollars and purchasing power sloshing around in the economy, and still get an increase in prices.
Schmucks.
You guys might think this is too much of a conspiracy theory, but I truly am convinved that the Patriot Act plays a much larger role in financial markets and actions by the government than most believe. GB and his misguided cohorts have absolute control when they want.
Service sector activity plummets
Institute for Supply Management index shows first negative growth in business activity in nearly 5 years.
January service sector activity plummets - Feb. 5, 2008
Right on schedule w/ CR blog forecasts. No surprises, other than the acceleration of the pace of events. Buckle seatbelts, engage long-range sensors, battle stations.
Well, I sure do hope so...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aSkmSdwtzXBw&refer=home
As it turns out, SocGen's rogue trader story wasn't exactly accurate, according to today's FT.
The money lost in closing out trader's accounts wasn't the 4.9 billion euros reported. It was 6.3.
Most of it was lost in the panic unwind, not by the trader himself.
And it was offset by a 1.4 billion profit trader made in 2007 (on positions reportedly closed out).
In other words, had SocGen discovered traders PROFIT at any time in late 2007 or the first two weeks of January, he would not have cost the bank a dime and might have made it quite a bit.
Alec said: "I worry not for Sebastian, his data is much better than the Fed's."
So, now you think that the Fed has become more knowledgeable and competent?
My data isn't any better than anyone else's, I just understand what it means better than most, and don't over-react to false threats.
Sebastia
rich, don't you think they HAD discovered it, they just figured he was doing so well, why not "let it ride", right?
One of the biggest deals is the turning of consumer psychology - not an original observation to be sure - front page of Yahoo atm is "8 painless cutbacks
You can cut back on spending without sacrificing too many of life's pleasures."
Like the people said, buckle up!
Sure, a slower economy reduces demand pressure. But, if the Feds is raining credit and overseas folks are repatriating dollars stateside, we get lots of dollars and purchasing power sloshing around in the economy, and still get an increase in prices.
To see this happen, you'd need Asian producers to be able to decouple from American consumers. Problem is, there isn't any drop in replacement for the American consumer right now.
Eventually this decoupling will happen. At that point, you'll see a strong surge in long term rates coupled with a sharp drop in the dollar.
Ancillary topic: how is the CP rolling over? I had the impression that there were some biggish rollovers coming up this week or next week?
Anyone got data? Buehler?
--
"Idiots. Or should I say, Morons, we've got morons here."
Yeah, you are in denial of the TRUTH -- WE GOT CROOKS HERE! They lie until they can't. Got it?
Jas
Jas Jain is in Tehachapi? It's a beautiful part of Calif. right up there with Turlock in scenic beauty. Much better than Bakersfield.
The lower 4 quintiles of American workers would be bankrupt in less than three months if they lost their jobs.
This is the folly of asset based savings. When you need the savings most, they become worth less, or worse, illiquid. This is why there is such a fear of recessions today.
Stocks and houses don't pay monthly bills. Simple duration mismatch.
Knock back a cool one and watch the boomers go bust.
I'm glad CR re-blogged on this non-residential spending topic, because it allows me to mention something I didn't have a chance to comment on yesterday.
Non-residential spending isn't just office building and shopping malls. Roads, highways, bridges, tunnels, dams, levees, schools and water/sewer treatment plants are all big-ticket, long-term non-residential construction projects, typically funded by tax money and/or bond issuance, not bank lending. So, there's a massive amount of spending that wouldn't show up in the banking system as loan demand.
Just one of the possible explanations for why loan demand has been falling for a long time and spending isn't responding.
S.
--
"Lacker: Best to inflate using fiscal policy rather than monetary policy so maybe the bond market won't catch on."
ac,
Fed is now impotent to inflate the consumer sector (or aggregate demand)!
Whatever is best for the Crooks will be enacted in laws by the USG, composed of the agents of the Crooks. What a system!
Impotent Fed and politically impotent American People. Crooks are potent and powerful.
Jas
Re energyecon's post:
Yahoo's number one method of saving money: take bubble baths! ROFL
Methinks not many will want to have anything to do with the words "bubble" or "baths" after this mess.
Sebatian-
Do you consider recessions part of the normal business cycle?
crispy&cole asked: "Do you consider recessions part of the normal business cycle?"
Of course, and I fully expect to see one in a few more years.
S.
Sebastian,
That is a good conjecture for the disconnect, I think that the .gov sector is going to be doing some belt tightening - budget growth with RE boom - case can be made for CA as canary in the coal mine (though not, as I understand, for the Triangle area).
Q: "Do you consider recessions part of the normal business cycle?"
A: Of course, and I fully expect to see one in a few more years. - Sebastian
This fully confuses me. Why should there be a recession in a few more years if the the current conditions won't cause a recession now?
Wow, the hedgies have a tall task ahead of them this afternoon, with the Dow down 300.
Give it up, schmucks!
Please!
There's a post on Mark Thomas blog "Activist Monetary Policy Did Not Cause the Bubble"
Economist's View: "Activist Monetary Policy Did Not Cause the Bubble"
Martin Wolf takes Ben to task at The FT, for attempting to reflate another bubble and trying to repeat Greenie's dirty tricks
FT.com | Economists' Forum | Bernanke’s reflation gamble may work too well
Then Adam Posen (ex-economist at the Fed ) comes to the Fed's defense saying "activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own."
Wolf fires back, and probably writes the best summary of what Grand Conman Greenspan did and the dangers of what Ben is trying to do
I would put it as follows. Aggressive monetary ease is like pouring petrol on straw. That may well not start a fire, as Adam writes: the straw may be wet, for example, or the people around the straw may be responsible. As it happened, these people were pyromaniacs. But the Fed did next to nothing to discourage them. On the contrary, it was opposed to tighter regulatory standards. This was the combination that created the credit blaze. So the combined policies - monetary easing along with regulatory laxity - do indeed bear responsibility for what happened.
I will go further. Since the chances of serious regulatory tightening (the subject of my next column) are close to zero (in my judgement), I fear the same danger still exists. If the Fed pours on petrol once again, the pyromaniacs will try to restart the fire.
I agree that the straw is very wet at the moment. So this will take a while. I also agree with Adam that this does not have to be the case if effective regulatory changes are made. But since I do not expect the latter to happen, I fear the longer-term consequences of present policies.
Well worth the read
Rob - Thanks! That was very close to my next question.
Rob Dawg asked: "This fully confuses me. Why should there be a recession in a few more years if the the current conditions won't cause a recession now?"
Because as bad as conditions might seem, they simply don't rise to the level of recession-inducing, just panic-inducing.
S.
Marketwatch imitating the NY Post:
"Stocks Falling like Confetti"
they simply don't rise to the level of recession-inducing, just panic-inducing.
Just what about FOUR TRILLION in largely irresponsible lending, 2003-2006, don't you understand???
This is a double whammy, since the lending itself was what was pumping the economy up during that time.
Now with that cash flow from savers to spenders proving unsustainable, both the direct stimulus effect (HUNDREDS of BILLIONS each year moving into spenders hands via HELOCs and RE cash-outs) entire sectors of the economy -- the real estate agents, loan brokers, bankers, furniture resellers, importers, home improvement big-box, etc etc are getting squeezed mightily hard and we will see this squeeze continue for the foreseeable future.
Just a panic, not a recession, even though the lending meltdown is taking out the consumer and 3-10% of the ancilliary GDP with him.
""-50bps, plz. -gwb"
I think it's more like:
"50bps 2day, u fkr. u dont ur goin 2 Gitmo gwb"
Giants-Superbowl Wins and Economy:
Anybody find it strange that the years that Giants won a Superbowl weren't great economic years? 1987 had the crash- and 1991 wasn't great. 2008 looking like crap, much worse than '87 and '91.
We Giants fans can get a victory but lose our shirts- such is our lot!
Hilarious, D-!
I couldn't figure out why I hated the Giants, but now I know why. It's all Eli's fault!
ades,
his pages are not gwb they are POTUS
Troy asked: "Just what about FOUR TRILLION in largely irresponsible lending, 2003-2006, don't you understand???"
It's 2008. If conditions are as serious as you imply, why didn't we fall into recession a long time ago?
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment. U.S. real GDP is still rising. U.S. manufacturing is still expansionary.
Incomes are up, productivity is up, inflation was higher in the aftermath of Katrina than it is now.
If housing was a problem, it would have to be problemmatic. If the economy essentially says "So what?"...well, so what?
S.
Seb-
Simply, businesses & people will be running out of cash soon and will need credit that will not be available. Now can you envision it it?
So, now you think that the Fed has become more knowledgeable and competent?
My data isn't any better than anyone else's, I just understand what it means better than most, and don't over-react to false threats.
Sebastian
Obvious you don't actually read much of what is written here, or comprehend it, either.
I've always thought that the Fed was doing as good a job as possible under the circumstances, until 2 weeks ago when the Simian-in-chief was screaming for more cuts and they knuckled under.
There job since August was to help Banks and other idiots unwind their positions in an orderly manner to forestall a credit crunch. Expansion of the discount window(I was for), SuperSIV, the easing(that I was against) delayed this from August to February and reduced its severity, but it's still happening.
And your theory that it's muni infrastructure that's keeping things going is so wrong I don't even know where to begin. These kind of projects take forever to plan out(In Maricopa County it took 5 years for a master plan 20 years ago that is in its closing stages today), those projects were started before developers got the green light to put up their product and have been finishing the last couple of years.
To the extent that overseas investors take the hit on residential mortgage losses, does our economy walk away unscathed on those losses?
I'm thinking of this passage in Minyanville yesterday:
"Industrial & Commercial Bank of China (yes, that very same number one by market cap bank!), said it has set aside reserves equal to 30% of its $1.2 billion in subprime holdings to cover possible losses, a state news agency reported according to the Associated Press.
ICBC isn't alone among its Chinese peers. China Construction Bank holds about $1 billion in subprime debt and has set aside reserves to cover a possible 40% loss, AP reported. And the number two largest Chinese bank, Bank of China, last month, disclosed nearly $8 billion in subprime backed securities."
We Giants fans can get a victory but lose our shirts- such is our lot!
JoeMortgage |
Speak for yourself, I won $2000 on the Jints(2 units of $500 to cover as a hedge to my 1 unit on the money line for the G-men.)
Of course if they got blown out I woulda lost $1500, but I'm pretty good at reading certain tea leaves;)
Seb,
Real average hourly wages are trending down on a YoY basis.
There is no way that you can rely on "increasing income" as your basis for no recession in 2008.
The decreasing PCE numbers bear this out as well.
Alec- great for you.
My dad did even better- he hit the ticket lottery and sold for nice profit- get this- to a freaking Patriots fan. bummer for that dude, good for the old man.
Alec said: "Obvious[ly] you don't actually read much of what is written here, or comprehend it, either."
Better than you.
That's how I know how misleading it is.
CR is never going to get a correct "read" on the economy by excluding most of the economy from his analysis, and neither will you.
Respectfully.
S.
Rob Dawg,
What is it about the Wright-effing-MODEL B that you don't understand!?!
so what's the play here
Buy SRS
Short: VNO,SPG.
If conditions are as serious as you imply, why didn't we fall into recession a long time ago?
Something of a fair question.
Economies don't turn on a dime. I expect the current situation to play out very similarly to the 1929-1933 drawdown, and the 1990-1999 Japan drawdown.
Those trillions lent out 2003-2006 are still pinging around the economy.
The issues will come when the asset holders find out the borrowers aren't repaying them and the assets on their books get written down 30-50%, and the debtors find out there's no more hits in the crack-pipe for them
This graph I made last month illustrates the debt overhang quite well. [Note that I estimated FY07 by doubling 3Q07, which might be an overestimate of the lending . . . the Fed will report new numbers in March].
FWIW, from a naive first-appreciation look at that graph, $400-$500B/yr in lending in 2003-2006 would appear sustainable. It was that peak to $1T/yr that both inflated real estate valuations and provided spenders money to pump the consumer sector, plus also provided employment for a million or three paper-pushers and Realtors® in the REIC.
Seb,
Even though I do not agree I am glad you post.
^ likewise. A knife only remains sharp when it has a whetstone to grind against.
Re: Lacker's "dramatic change" in CRE investment is imminent.
Does this mean walmart wont be going ahead with its goal to be everywhere where they are not? I always wondered about the dumbass nature of that model,as it seemed a little too optomistic to keep taking money from China and building new SUPERSTOR BIG*BOXES 10 miles apart! Year ago I once examined how many square miles of America have been destrpyed by this froth-like expansion, but its too depressing now to remember and Ill go with Lacker's "dramatic change" in CRE investment as being imminent! Yippie!!!!
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment. U.S. real GDP is still rising. U.S. manufacturing is still expansionary.
Seb
Except that unlike in the past, the workforce is not growing. Durring past recessions, particularly in the 70's and early 80's there was a demographic tidal wave of new people flooding the job market, the baby boomers and women. Now boomers are on the way out to pasture, and the % of women in the labor force is stable, they already participate at almost the same rate that men do. Thus we should expect to have low unemployment. That does not mean a growing economy though. If the workforce shrinks, total hours worked can decline, even with the unemployment rate falling. Unless the low growth in hours worked is made up for by productivity growth the economy stalls. This recession will not be as bad as 74 or 82 in terms of unemployment, but will be long and protracted. After all how high has Japan's unemployment rate gotten over then last 15 years or so? Certianly not near double digits, yet Japan has had a persistently sick economy.
You say there's $4 trillion in irresponsible lending, but the economy's reaction to that is a 4.9% unemployment rate, essentially full employment.
Seb, the wheels fell off this cart in August.
Employment isn't going to respond to this in one or two quarters, and the picture isn't 100% negative.
The federal government is going to spend $3T next year. Divide that by $100K/nominal and you get THIRTY MILLION JOBS directly fed by government spending next year.
Subtract the government sector jobs and the 2002-2006 job recovery doesn't look so hot even with the bubble fluff jobs that were added due to the opening of the lending floodgates.
(Plus I don't think there was $4T in irresponsible lending, perhaps half that. But the issue is there was $4T lent into the teeth of the mother of all bubble markets, where anyone could take out a 2 teaser-rate year loan on million dollar assets with nothing down and no income verification).
Funny man: didn't he also predict the "possibility of a mild recession"???
an extreme deterioration in confidence would be catastrophic so the fed/govt will do all they can to prevent that -
Yeah but that would imply that people believe what the FED/govt says. I think after Iraq, people have simply stopped believing much of anything that the government says.
Seems like the Fed knew all along that lowering standards would drive up demand for RE loans (ie drive up RE prices). So the question is why did the FED want the house prices to increase? That is the hot potato no one on this site tosses about.
Well worth the read.
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