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Where the recession will stop

by Jerome a Paris Wed Mar 4th, 2009 at 07:49:02 AM EST

I never tire of posting this graph from the WSJ, as it provides a perfect snapshot of the "W" economy:

But it also provides an important insight on what's happening today with the economic crisis.

To cut to the chase: the growth of the past few years (ie the GDP line above) was fake. And the economy is now tumbling back to where it really should have been - at the line below.


The fact remains, of course, that the difference between the two did exist for a while, in the form of a debt bubble (what I call counterfeit money). As we all know, that fake wealth was captured by a small minority (the financiers with their hands on the tap, and the rich who held assets and saw their value nicely inflate) - and the problem is that, dollars being dollars, that fake wealth was mixed with the real kind and diluted it, which means that the bursting of the bubble takes away something from everybody, and not just from those that benefitted from the bubble in the first place.

Economic statistics, no longer sustained by bubble hype, are crashing to "safe" ground, ie from what people can spend with plentiful debt, to what they can actually afford with no debt. And that first crash, which first looked mostly like a financial event, of course has further second order effect consequences on the real economy: people who suddenly feel they have less money to spend, do spend less, cut demand, and further shrink the economy - the real one.

So we'll end up below the flat line of the W years. But the sharing of the wealth has been changed in the meantime, and will not revert because of the crash, unless policies change (and Obama's budget proposals go in the right direction in that respect).

Which means that all Americans face a 20% drop in living standards, on average - unless macro-economic policies change in a massive way.

That 20% income/output gap was stolen over the past presidency, and is just "acknowledged" today - with collateral damage. But that's the size of the problem - in the best scenario.

Display:
http://www.dailykos.com/storyonly/2009/3/4/6354/58625/350/704449

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 4th, 2009 at 08:09:24 AM EST
Which means that all Americans face a 20% drop in living standards, on average

Let me give some examples.

Start with myself.  As long as I can feed my cat, my only dependent, I'll make all reasonable sacrifices but I live on a subsistence level anyway and squirrel away excess cash for the "rainy day".  Old school mentality.

People who I live with.  They own their house free and clear.  Are retired.  Are thinking of buying a new car (Suburu Forester ?) because prices are so good.  They see themselves living out their lives in complete middle class comfort unless the mobs come to burn down their house.

My students?  They may have to cut back on "going out to dinner"; my tutoring services become a "necessity" once the process gets rolling (got a story on that one).

So what about the rest of you Americans at ET.  How will a 20% drop in your "living standard" affect you?  

My allegiance to the human species ends at the California border.

by THE Twank (yatta blah blah @ blah.com) on Wed Mar 4th, 2009 at 08:18:44 AM EST
The real problem isn't the "average decline of 20 to 35%".  The real problem is the huge number of individuals who will (not so) suddenly find themselves unemployed, up to their gills in debt, possibly bankrupt, possibly homeless, and then looking to survive by ripping off their neighbors for whatever they can steal in order to just survive.  That's what I think most politicians are trying (unsuccessfully) to avoid.

My allegiance to the human species ends at the California border.
by THE Twank (yatta blah blah @ blah.com) on Wed Mar 4th, 2009 at 09:40:23 AM EST
[ Parent ]
... combined with Public Health Care can short-circuit a large majority of the people pushed to the worst extremes in the sequence above.

Indeed, one little recognized aspect of the Job Guarantee policy is that shelter for "economic homelessness" shifts into "providing places that can be rented on the JG wage".

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 4th, 2009 at 01:05:01 PM EST
[ Parent ]
If 20% is an "average," then it will be pretty bad for some individuals, families, households, and not too bad for others.

For me, I guess 20% loss right now in the value of my condo means I may have a hard time getting a loan modification when rates go down, and of course, I've lost my down payment.

by jjellin on Wed Mar 4th, 2009 at 10:30:01 AM EST
[ Parent ]
The fake bubble affected rural Oklahoma much less than it did in more urban venues.  The downside of living in a sleepy backwater is, the booms generally don't benefit us all that much.  The upside is the busts, generally speaking, don't hit us as hard either.

Unless things get a lot, lot worse, the biggest effect for me and the Momcat is probably that my very tentative retirement date about four years out just went to somewhere over the event horizon.

We all bleed the same color.

by budr on Wed Mar 4th, 2009 at 10:57:07 AM EST
[ Parent ]
Same here in Mountain Home, north-central Arkansas, AKA Geezerville.  In the fourth quarter the only reporting district in the State of Arkansas to report an increase in home sales over the previous year contained our county, Baxter, and the adjoining county, Marrion.  Between them, ( see map ,) they comprise the Twin Lakes area and also contain three rivers.  The two main industries here are health care and tourism.  Most of the tourism is by relatively well off types, lots of well to do small contractors and other relatively prosperous families who enjoy hunting, fishing and, in the summer, water sports.  Summer will tell the tale about tourism.

Arkansas, including the Twin Lakes area, has seen unemployment increase due to layoffs by national companies and a collapse of housing construction, but the state tax revenues exceeded estimates during the fourth quarter and we appear to remain on schedule to reduce the sales tax on food by another penny this year.  I saw an article, (can't find but found the original from a blog,) about the resilience that a large population of retirees and an emphasis on the environment can bring.  (They could still use some work on the environmental part with respect to developers, but construction has slowed down, so we get a little more time there.)

Real estate here never went up like in California, Nevada and Florida and the local banks are in good shape and are profitable.  Our home may still be worth a little more than we paid for it and I may be able to find a decent job when I need one.  Considering what I see in the rest of the world, I feel fortunate.  (Knock, knock!)  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 4th, 2009 at 11:26:01 PM EST
[ Parent ]
(got a story on that one)

A story like this one from financial armageddon? At least the name of the blog fits your usual commentary.

In the story there is said, that some Americans have trouble to get transport for their children going to school. Is this really an issue? Aren't even in the US school busses to transport children to school? Someone told me, they would be unpopular ('shame train', 'looser cruiser'), but still I expected it generally to exist.

Some of the comments are as well interesting, though in an unexpected way...

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers

by Martin (weiser.mensch(at)googlemail.com) on Wed Mar 4th, 2009 at 08:25:04 PM EST
[ Parent ]
"Is this really an issue? Aren't even in the US school busses to transport children to school?"

Of course there are busses to take kids to school.

There are also paranoid soccer moms who won't let their kids out of sight, and so have to drive them 1 km to school. And there is school choice, which means going to an out-of-district school with no transportation. And how are the kids to get home after soccer practice?

by asdf on Wed Mar 4th, 2009 at 11:58:43 PM EST
[ Parent ]
Did bicycles get outlawed all of a sudden? Did the US stop making and importing shoes?

(Actually, in a rather comical anecdote, one of my relatives was once taking a morning stroll in a US suburb, when a police cruiser pulled up beside him and asked whether his car had been stolen, and offered him a lift. 'Muricans are nothing if not generous...)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 5th, 2009 at 01:19:50 PM EST
[ Parent ]
European Tribune - Comments - Where the recession will stop
I never tire of posting this graph from the WSJ, as it provides a perfect snapshot of the "W" economy:

...

To cut to the chase: the growth of the past few years (ie the GDP line above) was fake. And the economy is now tumbling back to where it really should have been - at the line below.

...

So we'll end up below the flat line of the W years. But the sharing of the wealth has been changed in the meantime, and will not revert because of the crash, unless policies change (and Obama's budget proposals go in the right direction in that respect).

Which means that all Americans face a 20% drop in living standards, on average - unless macro-economic policies change in a massive way.

This is all well and good, but why can't one say the following...
I never tire of posting this graph, as it provides a perfect snapshot of the economy since the First Oil Shock.

...

To cut to the chase: the growth for my entire lifetime (i.e., the GDP line above) was fake. And the economy is now tumbling back to where it really should have been - at the line below.

...

So we'll end up below the flat line of the last 35 years. But the sharing of the wealth has been changed in the meantime, and will not revert because of the crash, unless policies change ...

Which means that all Americans face a 35% drop in living strandards, on average - unless macro-economic policies change in a massive way.

And it might not just be macroeconomic policy that needs to change...

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 08:38:16 AM EST
I put that as my first comment in the dKos thread...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 4th, 2009 at 08:52:03 AM EST
[ Parent ]
Saw that, Jerome. The Kos comments were a bit disappointing- at least the first hundred or so,- except for the actually off-topic photoshops of Bush administration figures- I highly recommend them for good laugh material.
I was hoping the question that Miguel brought up might get more play.
I've branded myself a commie dingbat for almost two decades by trying to get Americans to realize that their whole prosperity scene peaked about 1974, and that family income- a phony number if there ever was one- has remained almost the same since then---but with twice the number of workers to generate it. They still don't get it- even those who comment perceptively on the numbers somehow haven't really realized just how savagely and thoroughly they've been robbed.

Capitalism searches out the darkest corners of human potential, and mainlines them.
by geezer in Paris (risico at wanadoo(flypoop)fr) on Thu Mar 5th, 2009 at 03:38:26 AM EST
[ Parent ]
that 35% drop, is it a 35% drop based on the average GDP figure, which people havent reached though, so would be in effect in excess of a 50% drop for the average person?

Any idiot can face a crisis - it's day to day living that wears you out.
by ceebs (ceebs (at) eurotrib (dot) com) on Wed Mar 4th, 2009 at 09:02:37 AM EST
[ Parent ]
GDP is at 190 and income at 125. Both are at 100 in 1973 (oil shock). 125/190 ~ 0.65, hence -35%.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 09:04:54 AM EST
[ Parent ]
Jerome in fact overstates his case. 100/117 ~ 85% so the 20% drop is already an overshoot.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 09:09:24 AM EST
[ Parent ]
That was the year of all excesses for unbalanced income allocation... But I agree, 20% was just a first estimate of the scale of the problem, before the second round effects of economic dislocation.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 4th, 2009 at 09:16:11 AM EST
[ Parent ]
Maybe you can explain the concept of "fake GDP growth"?
by vladimir on Wed Mar 4th, 2009 at 12:07:53 PM EST
[ Parent ]
Monetizing future cash flows which were not even there to begin with, and calling that GDP growth.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 12:24:58 PM EST
[ Parent ]
When the price of your stock market portfolio goes up in a speculative bubble, it does not produce any real wealth (railroads, factories, ball bearings, y'know stuff). That's the point of a speculative bubble: That asset prices go up faster than asset values. But the GDP counts only prices, not values. So when the price goes up faster than the value, phony GDP growth happens.

Now, of course you can strip this phony GDP growth out - which is what you attempt to do by inflation-adjusting GDP. But (quite aside from the fact that inflation rates have been gimmicked considerably) asset prices are not part of the inflation indices, so asset price inflation will not be stripped out of your corrected GDP figure.

Hence, asset price inflation (above and beyond consumer price inflation) creates a mirage of increasing GDP that does not represent any tangible value in the real world.

Or, to put it more bluntly - when asset price inflation is different from consumer price inflation, GDP numbers are nonsense (even moreso than usually).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 4th, 2009 at 12:25:57 PM EST
[ Parent ]
Asset prices don't impact GDP. The fact that my house is worth 30% more this year has no impact on the sales figure that my company reports to the IRS - or the sales tax it reports. The latter 2 indicators are used to calculate GDP... asset prices aren't.

A couple of things could contribute to fake GDP growth:
> the sale of NEW homes which indeed had been artificially inflated
> revenues generated by banks - which are directly proportional to asset prices

But I don't see these two sources of GDP representing 20%-35% of "fake" growth. If the banking sector represents 6% of GDP and its revenues are inflated by a bubble which is say 50% over its real value - we've got 3% fake GDP. Same reasoning applies to the real estate sector... another 3% to 5%... we've got max 10% fake GDP.

by vladimir on Wed Mar 4th, 2009 at 12:59:00 PM EST
[ Parent ]
Assets are bought and sold - and borrowed against for consumption. This latter, in particular, is essentially counterfeiting money on a grand scale. So by inflating asset prices and easing credit, the consumer could keep up spending in the face of a contracting real economy, because they could spend counterfeit money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 4th, 2009 at 01:09:16 PM EST
[ Parent ]
OK. But then that's REAL GDP growth which is financed by unsustainable means.

I'd call that a consumption bubble.

by vladimir on Wed Mar 4th, 2009 at 02:09:56 PM EST
[ Parent ]
... half a dozen of the other.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 4th, 2009 at 02:19:02 PM EST
[ Parent ]
The sale of the assets -- in this case, houses -- is irrelevant if they weren't built in the period you're examining.  A house built in 2001 has no direct impact on GDP if it's sold in 2004 at a higher price.  It's not new production.  What is relevant to GDP, as you noted, is debt backed by phony net worth.  In that case you're essentially trading higher growth today for lower growth tomorrow, assuming you're buying stuff that won't appreciate in value and produce the ability to consume more later.

So your economy grows at (say) 4% in 2004 -- a point above trend -- but only 3-1-(further deduction for interest)% in 2008 when everybody pays their debts off.

So is the growth "fake"?  It depends, I guess.  Assuming the debts are basically paid off -- we can get into how insolvencies throw a wrench into this, but, again, I'm trying to keep it simple for now -- with future income, then no, it's real.  It's kind of a dumb way to go about consumption, but it's nonetheless real, and the difference from what I think we would consider a normal economy in the end result will simply be the interest payment.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri Mar 6th, 2009 at 10:28:34 AM EST
[ Parent ]
But if the debt was subprime and it predictably doesn't get paid, and has to be written off, doesn't it result in a net loss after the cycle?

Drew J Jones:

we can get into how insolvencies throw a wrench into this, but, again, I'm trying to keep it simple for now
Oops, sorry, got ahead of ourselves here :-)
So your economy grows at (say) 4% in 2004 -- a point above trend -- but only 3-1-(further deduction for interest)% in 2008 when everybody pays their debts off.
And if the debt binge just manages to get you growing at trend and the underlying growth rate is below trend, then what?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Mar 6th, 2009 at 10:32:29 AM EST
[ Parent ]
In that case you're essentially trading higher growth today for lower growth tomorrow

Before various undesirable effects of bull markets are taken into account... Almost by its very nature, a bull market means that resources will be betrayed into hopelessly unproductive works, chasing a gain that is nothing more than a figment of the imagination. Those are real resources wasted. And then there's the over-correction which leads to sound companies being liquidated, which is also wasteful.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 6th, 2009 at 11:52:57 AM EST
[ Parent ]
"> the sale of NEW homes which indeed had been artificially inflated"

I don't know much about counting GDP, but if this is counted in the GDP directly then there is a fake GDP. In urban areas, at least 50% of home price is land value and that is not an output of production.

by kjr63 on Wed Mar 4th, 2009 at 02:42:04 PM EST
[ Parent ]
kjr63:
I don't know much about counting GDP, but if this is counted in the GDP directly then there is a fake GDP. In urban areas, at least 50% of home price is land value and that is not an output of production.

What we have seen is that rentiers have captured - through privileges such as private property over land and knowledge, and the privilege of limitation of liability - the use value of these Commons.

The anthropocentric assumption of conventional economics - that only Labour is "productive" - is complete, totally self-serving, bollocks.

But this assumption allows the privileged to justify keeping - their privileges untaxed - the undeserved rents they extract from the productive sector through the "finance capital" legal claims of Equity and Debt we take as a given.

The remorseless mathematics of compound interest combines with the iron grip of private property rights over Commons to give the result starkly illustrated in the chart. ie a transfer of value from Labour to Capital.

This is, and throughout recorded history, always has been unsustainable, as Michael Hudson in particular has documented so eloquently. The result has been cycles, firstly of Debt Jubilee, and more recently of booms and busts.

But This Time It's Different, I think, as migeru touched upon upthread.

Greenspan and the rest of the greedy bastard cheerleaders have fucked it up so absolutely, thoroughly and irretrievably, that conventional solutions of playing around with the quantity of financial claims either by Default and Depression or Printing and Inflation just will not cut it.

My take is that the direct instantaneous connections of the Internet will cometo to the rescue. It is in fact possible to change the quality of financial claims by removing the repayment date and thereby creating simple new forms of quasi-Equity, within a new property relationship of Co-ownership between financiers and users of finance.

Moreover, I don't think that there is anything - short of nuclear war - that can actually now stop this emergent process of transition from an intermediated Market 2.0 to a disintermediated Market 3.0

I believe we are about to enter an era of

Peer to Peer Finance

Within a very short time the financial world will be a very different place.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 4th, 2009 at 03:48:20 PM EST
[ Parent ]
Holy shit Chris! I'm gonna sleep on that one before commenting. Whatever it is, it DOES look sexy.
by vladimir on Wed Mar 4th, 2009 at 03:55:29 PM EST
[ Parent ]
vladimir:
Whatever it is, it DOES look sexy

LOL. That's a first, then!

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Mar 4th, 2009 at 08:39:27 PM EST
[ Parent ]
Chris, if your talking about disintermediation through MIFID driven MLTFs - I agree, although it's only partial disintermediation in that the stock markets are being cut out - but investors and issuers still go through buy side & sell side players.

On the retail end, P2P banking isn't a new concept. Zopa has been on that one in the UK and California for about 10 years now with no major breakthrough. In fact, although demand for credit was healthy, they've got major problems raising capital from retail lenders. I probably wouldn't be long on this type of initiative.

by vladimir on Thu Mar 5th, 2009 at 04:46:57 AM EST
[ Parent ]
Zopa doesn't do P2P banking. They are more like a P2P Credit Union, but unlike a Credit Union, they don't implicitly guarantee that the borrowers' credit is good.

All they do is move existing money around - Peer to Peer investment, maybe.

They launched in the UK in 2005, and I went to meet them about a year later when they said they were planning their US move.

Zopa - Wikipedia, the free encyclopedia

Zopa launched in the US in partnership with six Credit Unions on December 4, 2007 but it closed to new business due to the US Government bailout of financial institutions on October 8, 2008.


"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 5th, 2009 at 06:06:04 AM EST
[ Parent ]
They don't guarantee that a borrower's credit is good, but they DO sell insurance coverage to the lender... and in fact it's their major revenue source.
by vladimir on Thu Mar 5th, 2009 at 06:18:36 AM EST
[ Parent ]
How we make our money
Zopa charges borrowers a fee of £118.50 and lenders a 1% annual service fee. And that's it. There are no hidden charges, no additional costs, no sneaky clauses.

What Zopa say is this

Zopa blog - Banning PPI sales at credit point of sale is good for consumers

Interesting news today from the Competition Commission re PPI sales. We used to sell this product but stopped for 2 reasons:

1) we hardly sold any, probably because we simply made it available, with no real sales effort. That's not to say we didn't describe it properly but we didn't push it, or even worse leave the borrower with the impression it would mean they would be more likely to be granted a loan if they bought it. Sellers are really really not supposed to do this but I question how they get (or should I say used to get) such high conversion rates without doing so;

2) we discovered that the level of claims made by the borrowers under the policies we did sell was tiny, so we didn't consider the policy offered value for money.

ie they used to sell PPI (but not much), which is in fact insurance sold to the borrower, not the lender, but of course in a P2P model should protect the lender, too.

But according to them, they stopped selling it for reasons given.

Where do you get your info re Zopa's revenue sources from? They've moved on their business model a bit, I suspect.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Mar 5th, 2009 at 06:53:24 AM EST
[ Parent ]
I got it from Richard Duvall over dinner - March 2006, 7 months before he passed away.
by vladimir on Thu Mar 5th, 2009 at 07:11:04 AM EST
[ Parent ]
Ok, that figures.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 5th, 2009 at 07:29:43 AM EST
[ Parent ]
Btw it was James Alexander and a couple of others I met.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Thu Mar 5th, 2009 at 07:34:13 AM EST
[ Parent ]
Never met James. But I do know that they spent 9 very difficult months looking for & closing the first round of financing.
by vladimir on Thu Mar 5th, 2009 at 07:52:37 AM EST
[ Parent ]
Funny, but when I look at this graph, I don't see a 'fake' growth story.

What I do see is that higher revenues are not being distributed equitably throughout society. I see a the impoverishment of the middle classes.

by vladimir on Wed Mar 4th, 2009 at 02:13:57 PM EST
[ Parent ]
but the higher revenues came from transforming cheap debt into apparent income via financial shenanigans. Apparent being the operative word.

What was real was the income capture this allowed, and indeed, the inequitable distribution they made possible.

Seriously, you have to see this as 7 of income from outside the finance sector, and 3 of 'income' from the finance sector (monetization of future cashflows on the basis of unrealistic assumptions of growth of asset prices, revenues and profits), with the financiers claiming 3/10th of the overall result.

Now that the financial bubble has burst, the financiers still cling to their 3/10th of the 7 that still exist, and want everybody to participate ot the clean up of the disappeared 3 (leveraged over the next 20 years, so who knows how much that will be).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 4th, 2009 at 02:33:16 PM EST
[ Parent ]
Another way to look at it is that after the .com recession there was "jobless recovery". But the "recovery", being "jobless", was predicated entirely on the GDP growth, which we now know was bogus as it was based on 1) home equity withdrawals, 2) asset price inflation not filtering down to consumer price inflation, 3) hedonic pricing of GDP, 4) making future consumption contribute to the present GDP by monetizing future cash flows, 5) creating more money than central banks intended by using securitization to avoid regulatory capital requirements.

One could make a similar argument about the last 35 years. We have hidden the slumping "global standard of living" by, instead of moving to a sustainable economy, pretending that growth was still happening, and betting the planet in the process.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 03:14:43 PM EST
[ Parent ]
I really have an issue with the 3/10... which didn't all end up in the banker's pocket. 3/10 was perhaps the overall impact of the bubble on the economy - but a large portion of that went to Joe Blog's consumption (as Jake correctly pointed out).

A more correct figure to represent the bubble's impact on bankers income is to take... income generated by financial services over the past years.

Below are some OECD figures I compiled. They don't cover the insurance sector. The figures show that the banking sector's relative weight to GDP is actually quite stable over the past 20 years.

by vladimir on Thu Mar 5th, 2009 at 04:38:25 AM EST
[ Parent ]
Your figures show banking sector income going up by a good fifth or so in the US over that period. (the numbers bounce around, so an exact figure doesn't make sense) And if I'm understanding you right that's the sector's corporate net income, not including compensation which  ballooned. France does indeed look stable, though to my surprise it's higher than the US.  
by MarekNYC on Thu Mar 5th, 2009 at 04:53:20 AM EST
[ Parent ]
The figures represent the sector's net interest income + fees & commissions.
by vladimir on Thu Mar 5th, 2009 at 05:00:44 AM EST
[ Parent ]
I just had another thought.  The question which is the title of this piece, " Where the recession will stop ", is not really answered in this piece IMHO. However, when the question was asked yesterday " When will the DOW stop falling ", one person's reply was " When no-one has any more stock to sell."  Interesting answer.

My allegiance to the human species ends at the California border.
by THE Twank (yatta blah blah @ blah.com) on Wed Mar 4th, 2009 at 09:57:27 AM EST
There must be a buyer for every seller - so unless all the listed companies go belly-up, there will be people with stocks to sell.

"When all the people who've bought stock on margin have been margin-called," OTOH, might be a pretty good bet.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 4th, 2009 at 12:41:20 PM EST
[ Parent ]
Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalised and the State will have to take the road which will eventually lead to communist

Karl Marx, Das Kapital, 1867.

by vladimir on Wed Mar 4th, 2009 at 10:11:25 AM EST
Is that a real quote?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Mar 4th, 2009 at 10:29:35 AM EST
[ Parent ]
That's actually a good question. Let me get back to you.
by vladimir on Wed Mar 4th, 2009 at 10:38:23 AM EST
[ Parent ]
blimey, there's a crystal ball award, for sure...

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Henrgy Blodgett observed on his "Clusterstock" blog that "Tim Geithner is transforming into a weird reverse Robin Hood who takes money from regular people and shovels it into banks that vaporize it."

Charles Gasparino of CNBC says the entire point of all this generosity is to provide Citi with a capital cushion sufficient to sell the toxic securities from its portfolio at cheap, market prices without driving it into bankruptcy. It's a nice sentiment, but, to me, Gasparino's wishing upon a star seems more the triumph of hope over experience, since no Citi official, certainly not Citi chief executive Vikram Pandit, has suggested that the bank intends to do anything close to what Gasparino suggested with the government largesse.

Historical legend has it that Spanish Conquistador Hernanado Cortez burned his own ships in the harbor of Veracruz, Mexico, in 1519, in order to convince his men that there was no going back from their destined role as conquerors of the New World. What Geithner seems to have done here is something along these lines. As nationalization talk proceeded in February, from the likes of those red radicals such as Greenspan and Lindsay Graham, a general assumption was heard in the markets that such a move would inevitably be followed by bank shareholders seeing the value of their holdings cut to zero. Of course, bank share prices fell sharply as a result.

Geithner's move seems to have been an attempt to convince skeptical markets that nationalization was not in the cards by, in essence, jumping into Cortez's boats. "I'm not going to bankrupt the shareholders of Citi - with my 36% ownership of the joint, I'm the biggest shareholder of them all! Now do you believe me when I say that I'm not going to nationalize?"


'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Mar 4th, 2009 at 10:50:04 AM EST
[ Parent ]
It was discussed here and here

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 4th, 2009 at 10:37:38 AM EST
[ Parent ]
OK so that's settled. Should've checked before posting. My most sincere and humble apologies to all the honest people who read my partially fake post.
by vladimir on Wed Mar 4th, 2009 at 10:42:10 AM EST
[ Parent ]
His last party speech...predicted that when the British 'have got over the delirium of television', realized they were mortgaged to the hilt, and understood that consumerism had produced 'a vulgar society', they would turn to true socialism and 'we shall lead our people where they deserve to be led'.

Andrew Marr (A History of Modern Britain), quoting Aneurin Bevan, speaking in 1959.

by Sassafras on Wed Mar 4th, 2009 at 05:15:02 PM EST
[ Parent ]

where they deserve to be led

hmmmmmmm.

Any idiot can face a crisis - it's day to day living that wears you out.

by ceebs (ceebs (at) eurotrib (dot) com) on Wed Mar 4th, 2009 at 05:44:04 PM EST
[ Parent ]
Which means that all Americans face a 20% drop in living standards, on average - unless macro-economic policies change in a massive way.

I remember back in the very early 1980's when I was just entering the work force, there was a feeling of gloom and doom among Americans as they realized that there was no place to go but down. the next generation was possibly not going to do as well as the preceding generation.  So they flocked to Reagan who told them everything would be all right. Over the last thirty years I've regularly thought that American economic policy has been to provide some kind of magic cloak of invisibility that would cover up reality so that Americans wouldn't notice that their gut instinct back in 1980 was accurate.

by Maryb2004 on Wed Mar 4th, 2009 at 11:54:35 AM EST
... we would have had a chance at a better standard of living ... just at a different balance between private affluence and public squalor.

With climate chaos and Peak Oil, though, just treading water while shifting that balance would be a massive win.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Mar 4th, 2009 at 01:11:38 PM EST
[ Parent ]
we would have had a chance at a better standard of living

oh, I agree. He fooled people into thinking he would make things better and in fact made them worse.  All part of the illusion.

by Maryb2004 on Wed Mar 4th, 2009 at 03:23:43 PM EST
[ Parent ]
He told them what they wanted to hear. Can you fault him for doing it and can you fault people for voting for him? Maybe, not really. All bubbles overshoot and pop, rather than deflate.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Mar 4th, 2009 at 03:32:13 PM EST
[ Parent ]
No and yes.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Mar 4th, 2009 at 05:24:54 PM EST
[ Parent ]
Of course I can fault people for voting for him.  I didn't vote for him, so obviously there wasn't some mind control thing going on.  

I thought his economic policies would lead to disaster.  And they eventually did.  Not under him - David Stockman saved him.  But eventually.

I don't really disagree with the rest of what you are saying although since none of my comments had anything to do with the various bubbles over the last 30 years I'm not sure why you are saying it.

by Maryb2004 on Wed Mar 4th, 2009 at 06:36:49 PM EST
[ Parent ]
What I mean is that all the growth since the 1970's, and Reagan's "revolution", has been the "overshoot" on the "American Way of Life".

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Mar 5th, 2009 at 04:18:19 AM EST
[ Parent ]
I heartily agree.
by Maryb2004 on Fri Mar 6th, 2009 at 04:10:27 PM EST
[ Parent ]
Reagan was part of the process of the loss of the White House for a generation following the passage of the Civil Rights Act ... and, yes, I do fault those who voted for him either ignoring "dog whistle" racist messaging or in response to it.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Wed Mar 4th, 2009 at 08:13:37 PM EST
[ Parent ]
He told them what they wanted to hear. Can you fault him for doing it...?
That is an interesting question.  Normally I would hold any shill responsible for the fraud he facilitated.  In Ronnie's case, he may have been a true believer.  Self criticism was not his strong suit.  I have always felt that, were he ever accused of diminished capacity, his counsel had an ironclad defense in the assertion that there was never any capacity to diminish.

I have always suffered from the fault that I prefer an ugly truth to a soothing lie, when I can tell the difference.  I suspect that that is an abnormal preference in US society.  I also believe that the prevalence of revealed religion plays a part in making that preference abnormal.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 5th, 2009 at 12:55:08 AM EST
[ Parent ]
Given that it took over three years to get to the bottom after the 1929 stock market crash, I fail to understand why anybody would think that we are going to get out of this one any time soon...
by asdf on Thu Mar 5th, 2009 at 12:05:34 AM EST
[asdf's Crystal Ball of Doom™ Technology]
by asdf on Thu Mar 5th, 2009 at 12:07:08 AM EST
[ Parent ]
One analyst I follow has noted that, in order for the Dow to fall to levels comparable to those attained after 1929 it would have to decline to about 1500.  He thinks this one will be worse, at least for stocks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Mar 5th, 2009 at 12:57:45 AM EST
[ Parent ]
You just have to look at the mood of the business class. They don't see this bottomming out any time soon. IMHO you will have to "stabilize the zombie banks" before that happens, and that will take all of 2009.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Mar 5th, 2009 at 02:20:50 AM EST
[ Parent ]
Can land price be the reason for this divergence? I mean that if rental incomes are included in GDP calculations in "production" side and rent payments (or house buying) in "consumption" side, then GDP can rise without rise in actual production (and wages).
If we assume that the value of real estate in the whole of the USA is about 20 trillion (from top of my head). Then if the price of land doubles (and more) and this causes 10% increase in real estate values, we have then 2 trillion that is about 20% "fake" GDP growth.
Is there any logic in this?
by kjr63 on Thu Mar 5th, 2009 at 07:03:41 PM EST
Asset prices do not have an impact on GDP per se. They do have an indirect impact:
> increased consumption on credit - where the collateral is the inflated asset - this in itself probably represents 98% of the "fake" growth
> increased commission income for some banking activities (but as we've seen, there's no correlation between the bubble and the size of the banking sector)
> increased rents - yes, that would go into GDP
> increased values of NEW home sales
> increased insurance income (on some types of policies - minor GDP impact)

& that's about it as far as I can see.

by vladimir on Fri Mar 6th, 2009 at 05:26:00 AM EST
[ Parent ]
> increased values prices of NEW home sales

Less the value purchase price of the land it's built upon.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Mar 6th, 2009 at 06:17:16 AM EST
[ Parent ]
Indeed!
by vladimir on Fri Mar 6th, 2009 at 06:31:24 AM EST
[ Parent ]
is it properly measured? What about the hedge fund industry, the shadow banking system, and the insurance players that jumped in (à la AIG)?

The fact that 40% of corporate profits came from the financial sector in 2006-07 has to mean something.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Mar 6th, 2009 at 07:29:10 AM EST
[ Parent ]
You're right to point out that the hedge fund business grew significantly over the the past decade and that its impact on economic growth is unaccounted for in the statistics I provided above. Most funds are off shore in the Caiman Islands and other tax havens - so not included in OECD statistics.

At its height, the hedge fund industry was worth 1 400 billion Euros. It's expected to shrink to between 300 and 900 billion Euros by end 2009. But even this is peanuts relative to the size of the world's banking sector. For example, assets under management of UK banks was 9 000 billion Euros at end 2008.

You're right about the insurance sector (AIG, ...) that gained significant premium income on some very dodgy deals. Although the losses from these deals are staggering, the premium income generated was negligible on the GDP scale.

by vladimir on Fri Mar 6th, 2009 at 08:13:46 AM EST
[ Parent ]
 And of course, there's externalisation that's not properly counted. Much of IT employement in Paris in the last decade was in banking - but a fair share of those programmer were contracted by other companies...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Fri Mar 6th, 2009 at 11:49:42 AM EST
[ Parent ]


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