MacroEconomic Malpractice

Posted: July 20, 2009 | Author: | Filed under: Global Financial Crisis, Team Obama, The Great Recession, U.S. Economy, Voter Ignorance | Tags: , , , , , , | Comments Off on MacroEconomic Malpractice

If the U.S. economy was a patient, I’m sure we all would be talking medical malpractice by now. After having 8 years of nothing to lecture on during the Clinton years other than, yes Keynesian economics works, we are now on our 9th year of wtf? (Feel sorry for my poor undergrads.) We’re still dealing with the spinning of the complete failure of Voodoo Economics, Trickle-down economics, Reaganomics or Supply Side economics from the free spending, tax dollar giveaway as success story with no real point other than supporting faith based economic hypotheses and the rights of the ultrarich to stay that way in to something it was not. I simply cannot believe that any REAL democratic administration with some roots in the Clinton years could possibly be choosing to continue the failed policies of the right.

So, since I’ve been on a populist rant over Wall Street Bonuses, let me just fuel the fire some more with this little piece in the Washington Post website today with the unsurprising title “Bailout Overseer Says Banks Misused TARP Funds”. No kidding cupcake. Why do you suppose the same risk happy folks that got their bonuses last year are getting big ones this year? We might as well funded a national road trip to Vegas.

Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government’s financial rescue program.

The report, which will be published Monday, surveyed 360 banks that got money through the end of January and found that 110 had invested at least some of it, that 52 had repaid debts and that 15 had used funds to buy other banks.

logo-mr-monopolySo, we’re basically funding a real time game of monopoly. Okay, Republicans, let me just explain this to you ONE more time. MONOPOLY is the antithesis of market capitalism. It isn’t Socialism. Socialism is NOT an economic concept any more than GOD is a Buddhist one. It’s the difference between, I buy houses in Houston and I buy All the houses in Houston. We actually prove markets are efficiently working by comparing competitive markets to centrally planned ones and find the same result when they are. However, that’s IFF (if and only if) things in both circumstances are perfect (which they NEVER are). We live in a land of frictions and 30 years of research shows that we’ve just about got as much chance of having the Pure Capitalist dream as we do the Pure Marxist dream. Zip, Zilch, nada, no way! Our lives our lived in imperfect markets where government sometimes steps in to make things worse, and some times steps in to make things better. We’re basically in the search for the middle path.

Right now, we’re funding and sustaining a financial market structure that perpetuates extraordinary profits for the capital owners, less products available to the market, and higher prices for every one. It is also well-researched that bigger institutions do not bring efficiencies of scale to the market so how is this a good thing? Just pick up any basic microeconomics book and study market structures. The bottom line is a welfare loss for the market as resources will be inefficiently used, quantities will be reduced, prices will be higher, and the demand side of the market will experience a loss of welfare. (Sorry, I keep having to remind myself I have the summer away from theory, but I’m an old dog and that’s a new trick for me.) The empirics on this have supported these theories for hundreds of years!

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How Low Can We Go?

Posted: March 5, 2009 | Author: | Filed under: Equity Markets, Global Financial Crisis, U.S. Economy | Tags: , , , , , | Comments Off on How Low Can We Go?

caution

The Financial media and economics blogosphere is full of wonky goodness this week  with all kinds of forecasts of the economy.  The big question is how bad will it get?  The secondary questions deal with economic forecast assumptions built into the Obama Budget.  Are they overly rosy or realistic?  I’ll save the wonkiest battle for last even though it is the most interesting.   It is between Mankiw and Krugman (with me agreeing with Mankiw for a change on a technicality) but it’s based on some pretty high level math so let’s start with the the least technical shot across the bow of  the good ship Hopey Changey.

Robert Barro has the most blunt assessment of the big question in this week’s WSJ.  His opinion piece just asks the question out right.  What Are the Odds of U.S. Depression? Barro is a member of what you could possibly call the elite team of economists in the country.  His credentials and CV are impeccable.  His record of academic publishing is unassailable.  He teaches at Harvard.  He also tends to be a voice from the right.   However, he’s presenting research in this opinion piece so this isn’t based on dogma, but some high level number krunching.   He’s actually put the probability of a ‘great’ depression at 20%.dtd04

The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.

Our research classifies just two such U.S. events since 1870: the Great Depression from 1929 to 1933, with a macroeconomic decline by 25%, and the post-World War I years from 1917 to 1921, with a fall by 16%. We also assembled long-term data on GDP, consumption and stock-market returns for 33 other countries, sometimes going back as far as 1870. Our conjecture was that depressions would be closely connected to stock-market crashes (at least in the sense that a crash would signal a substantially increased chance of a depression).

I’d really suggest you buck up and actually read his story line about his data because it is very interesting.  He basically looks back at periods when there were severe stock market crashes (like now) and looks at trends.  His database is not restricted to US history but includes severe recessions and depressions from 34 different countries.

His assessment of forecasts is based on looking at the Fed scenarios.  He tips his conservative bent at the end of this quote by basically saying none of the policies we’ve seen to date are going to do much.  I highlighted his proposed time line.  He does think we’re going into a situation that will be worse than the 1980s recession but most likely not as bad as the Great Depression of the 1930s.

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