Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

The Big Meltdown, Paul Krugman

by wchurchill Fri Mar 2nd, 2007 at 07:24:29 PM EST

So Krugman has just issued his 9th forecast of a recession in the last four years.  Did I miss something?  Maybe there was a recession and I slept through it.  

The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand's currency in the summer of 1997, it took many months before people realized how far the damage would spread.
He "dates" the article Feb 27, 2008 and tries to be tongue in cheek about his forecast.  I honestly don't get it,,,,how does this guy call himself an economist, and how does he earn a living as a "forecaster".  The Big Meltdown seems to be Paul Krugman!!  Well I've disagreed with the last 8 recession forecasts, so there is no reason to change now.  You're hearing it here for free, NO RECESSION!  Here's the link, but it's behind that Times Select wall that costs $7.95 per month to read it.  I'm embarrassed to tell you I paid it because I needed a good laugh on a Friday afternoon.  Don't do it, he's worthless.

I am a little surprised that housing prices are still rising in the US, though therate of increase slowed in the fourth quarter.  I am not expecting the housing crash many of you have been forecasting, but I have been expecting the slowdown in sales we've been seeing for just under a year, and would have thought that would have shown some price falls--particularly given the torrid pace of housing price increases over the past several years.  

WASHINGTON, DC - The rate of home price appreciation in the U.S. remained steady
in the fourth quarter of 2006, extending a general trend of deceleration begun earlier in
the year. Home prices, based on repeat sales and refinancings, were 1.1 percent
higher in the fourth quarter than they were in the third quarter of 2006. This is slightly
above the revised growth estimate of 1.0 percent from the second to the third quarter.
Prices in the fourth quarter of 2006 were 5.9 percent higher than they were in the same
quarter in 2005.
Price appreciation in 2006 was substantially smaller than the tremendous price gains of
recent years, which ranged from 7.4 percent in 2002 to 13.2 percent in 2005. The figures
were released today by OFHEO Director James B. Lockhart, as part of the House Price
Index (HPI), a quarterly report analyzing housing price appreciation trends.
"These data show that, on the whole, prices are still rising, albeit at a much slower
pace," said Lockhart. "This suggests that house price appreciation is, for now, more in
line with historical norms."

House prices grew faster over the past year than did prices of non-housing goods and
services reflected in the Consumer Price Index. House prices rose 5.9 percent, while
prices of other goods and services, excluding shelter, rose 0.9 percent.
I still think we'll say a fall in the first half of this year.  The only state to show an actual price fall was Michigan, where price declines were only 0.4%.  I would have expected a bigger drop in Michigan since for the past 15 years the auto industry has been moving out and to southern states, in the form of Japanese and German auto factories.

Wchurchill: serious question.  Do you believe there is enough to go round, and economics is about finessing that distribution?

Or do you think there is a limit, and the markets are best at allocating who gets what?

And...I feel the tao coming on...;)

(Randomly chosen...)

The title Tao Te Ching or Classic of Tao and Te, derives, then, from the fat that, as indicated in Ssu-ma Ch'ien's acccount, these two concepts constitute the core of the philosophy expounded in the work.  Tao (pronounced like the "dow" in "down"), the term from which the school of Taosim takes its name, means literally a "way" or "path" and is used by other schools of philosophy to refer to a particular calling or mode of conduct.  But in Taoist writings it has a far more comprehensive meaning, referring rather to a metaphysical first principle that embraces and underlies all being, a vast Oneness that precedes an in some mysterious manner generates the endlessly diverse forms of the world."

Here endeth my typing skills.  Quote from Tao Te Ching,, lao Tzu, translated by Stephen Aldiss and Stanley Lombardo, Introduction by Burton Watson...but who wrote the above....

Hey!  I'll have a very small investment for you, if you're interested--a CD could wing its way to you in the not too distant future--but maybe only kudos, zen, karma and other esoteric mechanisms can...well...I like your approach but you you always have to remember those who have nothing...what are they doing?  Spread it all out and around...I believe you do...

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Fri Mar 2nd, 2007 at 08:44:09 PM EST
I don't want you to think I'm ignoring your comment.  Your comments and questions often make me think, and reflect.
by wchurchill on Sun Mar 4th, 2007 at 02:23:14 AM EST
[ Parent ]
No problem.

Don't fight forces, use them R. Buckminster Fuller.
by rg (leopold dot lepster at google mail dot com) on Sun Mar 4th, 2007 at 07:20:50 AM EST
[ Parent ]
it's a difficult question for me, because one of the fundamentals to answer it is to assess what people need.  I don't think we really need much materially.  Thoreau's book Walden was fascinating because it showed how he could live in the beauty of our world, for almost nothing.  but he had neighbors who were working their tails off, feeling they had very little,,,and it was all due to different expectations, different life plans, etc.  The neighbors had really accepted the expectations that they thought society had put on them, and by trying to meet those perceived requirements, they created a life of foolish activity that left no room for enjoying the world's beauty.  I really think I could be happy with a small home, maybe even just a room,,,a library close by,,,,a computer and internet connection would be wonderful--books and computers are windows to the world.  a job that would provide enough to eat.  and a spiritual place of worship and some fellowship would be wonderful.  but that is actually with us as we walk around every day.

materially I think markets with appropriate government controls are the best way to allocate things.  Human beings are so incredibly creative, we will create an abundance if we have the right incentives.  I look at our history over centuries and see incredible growth in material wealth.  poverty levels are way down in the world, and imho going far far lower over the next 50 years.

I think we have bigger challenges spiritually than we do materially.  Your question is a little too deep for me and I'm rambling, so I'm driven to the Tao:, Chapter 16, Stephen Mitchell translation:

Empty your mind of all thoughts.
Let your heart be at peace.
Watch the turmoil of beings,
but contemplate their return.

Each separate being in the universe
returns to the common source.
Returning to the source is serenity.

If you don't realize the source,
you stumble in confusion and sorrow.
When you realize where you come from,
you naturally become tolerant,
disinterested, amused,
kindhearted as a grandmother,
dignified as a king.
Immersed in the wonder of the Tao,
you can deal with whatever life brings you,
and when death comes, you are ready.

by wchurchill on Sun Mar 4th, 2007 at 03:17:08 PM EST
[ Parent ]
fly around in their Lear jets.  

Really.  What else matters?  

The Fates are kind.

by Gaianne on Fri Mar 2nd, 2007 at 10:33:11 PM EST
by wchurchill on Sat Mar 3rd, 2007 at 12:40:36 PM EST
[ Parent ]
All statistics I've seen show a fall in median house prices over the past year, and massive drops in the volumes, both signs of things not going quite so swimmingly.

I'll dig up numbers.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Mar 3rd, 2007 at 05:17:24 AM EST
Drops in volume are bad... a nice little graph about house price and transaction volumes :

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Sat Mar 3rd, 2007 at 09:58:41 AM EST
[ Parent ]
Interesting graph, and a little complicated.  Just to make sure I am reading it right?,,,,:  It seems to show that in Paris, housing became more affordable in the early 1990's, housing being measured as a ratio of appartment prices to disposable income.  The ratio fell steadily from 1990 to 1996.  Then leveled off in 1996 to 1998.  And it has been climbing very steadily from 1998 to 2005, with very large increases in 2004 and 2005.  It's a little hard to read the scale, but it would appear the price index was something like 130 in 2003 and 165 in 2005, which would say the "affordability index" increased 27% over that two year period.

Is that your interpretation?

by wchurchill on Sat Mar 3rd, 2007 at 12:38:29 PM EST
[ Parent ]

Will the market bear a drop in people willing to purchase in Paris? It's beginning to be very hard buying in Paris.

I know that where I work - IT engineers in a large bank, couples can't buy a two bedroom apartment in Paris.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Sat Mar 3rd, 2007 at 04:20:59 PM EST
[ Parent ]
Is it true that a lot of people rent in Paris rather than buy.  I don't know a lot of people who live in central Paris, but the ones that I do rent.  I was under the impression that they were in appartments that were to some degree rent controlled, so there is great incentive for them to stay in their place.

What a wonderful city, of course.  I can understand how prices would be bid up there.  But of course it's a huge problem if you work there to not have affordable housing.

by wchurchill on Sat Mar 3rd, 2007 at 05:14:29 PM EST
[ Parent ]
There is some sort of rent control - rent cannot rise higher than a government statistic on construction prices, for a length of 3 years.

Also, renters are very thouroughly protected by law - it's impossible to evict a renter unless at the end of a 3 years term, and then the owner must warn 6 months beforehand.

Central Paris is not much attractive to children, and thus not attractive to buyers - most are likely to end up living in the suburbs or the rest of France when they get children.

The big problem in Paris is that Paris "intra muros", which is the size of Manhattan in a New York -sized city, is the only part that is well connected with mass transit. So the suburb are not very attractive.

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Sat Mar 3rd, 2007 at 06:18:36 PM EST
[ Parent ]
Are you working for BNP Paribas by any chance? (I am :).
by Laurent GUERBY on Sun Mar 4th, 2007 at 02:37:03 PM EST
[ Parent ]
Nope, I work for the one which is red, black and rising :) (Although the amount of IT types going from BNP to SG and back, or to CaLyon, is impressive, considering that IT knowledge is not very bank-specific...)

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Sun Mar 4th, 2007 at 05:59:14 PM EST
[ Parent ]
The salient feature of the graph is that it took a year for the volumes to collapse by 50% but seven years after that for the price level to go down from about 170 to about 100, where it hit maximum volume.

Another feature of the graph is that it goes mostly counter-clockwise [as expected, if you think about it: volume increase -> price growth -> volume decrease -> price decrease] and that when it goes up or to the left it can do it straight, and [the first point I raised] quite fast in the case of going left [rapid contraction at constant price, halting expansion and price decline, sustained price growth at maximum capacity].

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 04:13:37 AM EST
[ Parent ]
to me the salient point is it's pretty darn expensive today to live in Paris or London (see Jerome's charts below).  It's interesting that his affordability index shows things are much more affordable in the States.  That has usually seemed true to me.  When I shop for groceries or clothes, it always seems to me the prices are far better in the US--not very scientific I admit.
by wchurchill on Sun Mar 4th, 2007 at 02:29:22 PM EST
[ Parent ]
There are definitely drops in volume.  There is no question there is a housing slowdown--everyone has been predicting one for close to a year now, and we have been certainly in it for a while.

The question is will it be a housing crash, with prices dropping 20% or more and the impact carrying over to start an overall recession.  Or is it more in the vein of the ups and downs of the housing market.

This is not a report I normally use, but it just appeared in my regular headline search of business and investing news.  I am as I said a little suprised with this data, in that it doesn't show some drop in pricing.  I would be very interested in other data, of course.

by wchurchill on Sat Mar 3rd, 2007 at 12:04:37 PM EST
[ Parent ]
When sales volume drops, continued growth in mean sales price is consistent with a fall in mean market valuation. A seller who expects rapid appreciation but receives only shockingly low offers will be unlikely to transact. Because of this expectation-based selection effect on transactions, sales prices can continue to rise (though at a decelerating rate), despite a drop in mean market valuation. A decline in sales volume despite an abundance of would-be sellers would suggest that this bias mechanism is operating.

There is some spiral causation here: Reports that sales prices still edging up will reinforce a seller's judgement that low offers should be rejected, which in turn will bias the statistics upward.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Sat Mar 3rd, 2007 at 09:04:19 PM EST
[ Parent ]
yes, I agree with you, and I think your description of this process is an excellent one.  It is what happens in a housing slowdown.  

But a housing crash, is a step beyond a slowdown.  Some people are in a position where they don't have to sell, in a housing slowdown, and they just take their house off the market.  So unit sales drop, but prices don't.  A housing crash lasts longer, and eventually people have to sell, and to sell they have to lower their price.  I've been in housing crashes, and condo prices fall 30--40%, while home prices fall 20--25%.  And it's possible that this still may turn into the housing crash that Jerome and others have been predicting.  I'm just surprised that this far into the slowdown, that we haven't seen even a dip in housing prices.  So this enforces my belief that we are not going to have a "crash", but simply a "slowdown", and perhaps a milder slowdown than I, with my optimistic outlook, would have thought.  and no housing led recession.

by wchurchill on Sun Mar 4th, 2007 at 02:20:34 AM EST
[ Parent ]
Regarding predictions of a crash (as distinct from predicting the time of a crash), a good pair of questions may be:

  1. Is there a major housing bubble?
  2. Have major housing bubbles consistently ended in crashes?

Regarding (1), A friend of mine who experienced the Hong Kong bubble (and crash) says that the bubble pattern in the U.S. is very strong. For example, aside from conventional statistics, one sees many people leaving professional-level jobs to become real estate agents. It is hard to see what new, real factors now justify this reallocation and re-training of skilled labour.

Also regarding (1), a striking graph (thumbnail):

Regarding (2), an example of a crashless end to a comparable situation would be interesting.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Sun Mar 4th, 2007 at 03:39:52 PM EST
[ Parent ]
look at Jerome's last graph on housing affordability, UK and US.  How would you answer your two questions for the UK?

would you expect the UK and US housing markets to behave differently?

by wchurchill on Sun Mar 4th, 2007 at 04:07:56 PM EST
[ Parent ]
I'd answer that it looks like the UK had a very nice bubble-and-crash in the late 1980s, and is now in the bubble phase of another, bigger one. (Real-estate crashes have less precipitate slopes than stock market crashes, of course, because of illiquidity, the inertia of occupancy, etc., etc.)

It's odd that the graphs compare UK means to US medians. The U.S. National Association of Realtors no doubt prefers the appearance of graphs that use the median.

Words and ideas I offer here may be used freely and without attribution.

by technopolitical on Mon Mar 5th, 2007 at 04:45:43 AM EST
[ Parent ]
I'd be careful there, wc.  Krugman was predicting the Dot-Com Crash long before it happened.  He's also been chanting about the housing market for quite some time, and now we've got Greenspan essentially providing a moderate-sounding version of Krugman's statements, only a few years later.  Not being right immediately doesn't imply being completely wrong, as anyone who works in forecasting, yourself included, knows.

The question of "When?" certain factors move, and produce their basic macroeconomic effects, is a guessing game of months and sometimes even a couple of years, but I'd say Krugman has the fundamental points roughly correct.  Whether it turns into a large enough fall to cause recession, I don't know, but it's abundantly clear that it is causing a fall.  Our solid 3.5% Q4 growth was, as you know, revised to only a bit over 2%.  This is anemic for an economy that should be turning in 3-4% annual rates.  And the economy's average growth rate has been quite weak -- nearly a full percentage point lower than the Clinton years -- over the cycle.

My prediction, as you know, was for a recession in late-'06 or early-'07, if I remember correctly.  It looks like mid- to late-'07 would be the smart bet, if people are going to bet on recession.

So far, the only thing Krugman has been wrong about is the recession, but one must stress the So far... in that.  Housing busts tend to be nasty.  Oil prices could well rise this summer, especially as Hurricane Season gets moving.  So we are, by no stretch of the imagination, out of the woods.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 3rd, 2007 at 02:45:53 PM EST
Let's not forget that industrial production figures came in showing contraction, as well.  Were it not for demand in the service sector, we'd already be in a recession, as Brad DeLong pointed out.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Mar 3rd, 2007 at 02:48:55 PM EST
[ Parent ]
true, but don't forget Drew that we are moving very much toward a service economy,,,and not a manufacturing economy.  Not service in the pejorative sense of flipping McDonald hamburgers, but in the sense of things like investment banking, financial advisors, private equity, venture capital,,,the services side of health care.  Even for businesses that have a large manufacturing component like medical devices, we do the clinical discovery, the R&D, managing of clinical trials, the market launch in the US,,,,but the manufacturing is moved offshore when the product design is stable.  
by wchurchill on Sun Mar 4th, 2007 at 02:34:40 AM EST
[ Parent ]
Nothin' to argue against in that.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 04:59:42 AM EST
[ Parent ]
methinks you are seeing an opening for a chance at that pint.  we'll see.  I was expecting the slowdown, it was in the cards with all the rate hikes.  I don't think it will be a recession, but it's your best shot in a while.  Bernanke could have raised rates one or two times too many.  but your comments on the economy are very good.  and you're right that there is always the chance of an outside event propelling a not strong economy further downward--a Katrina, or terrorist attack, or something like that.

the only think about the time span comments on Krugman is that you've can't cut him too much slack on timing.  I mean, there is going to be a recession sometime.  so if he keeps saying it, he's eventually going to be right.

by wchurchill on Sat Mar 3rd, 2007 at 03:10:09 PM EST
[ Parent ]
As far as a housing bubble, don't forget about the own / rent ratio:

you are the media you consume.

by MillMan (millguy at gmail) on Sun Mar 4th, 2007 at 03:17:43 AM EST
MillMan, your graph didn't come through to me.  I'm a Mac guy, so maybe it is me rather than you.
by wchurchill on Sun Mar 4th, 2007 at 04:36:07 AM EST
[ Parent ]
Is lack of predictive success the only reason to discount Krugman?

It would be sad if a big market crash, or catastrophic climate climate change, would be overlooked just because of empirical confidence that we haven't seen things going that badly, or that skeptics had been too hasty with their doom predictions.

How are you supposed to foresee a catastrophe, if at any moment you can say "Things generally allways go up in the long term", or "Doomsayers have been wrong so many times"? Can the National Association of Realtors be the most reliable forecaster of the housing market?

Now comes a Fortune interview that surprisingly reveals Lereah to have had doubts and fears about the housing market as far back as two years ago (when he says he knew the subprime market was "in trouble"). On a normal day, we would make some effort to track down Lereah's public statements at the time and see if he shared any of that insight with the general public. But this is no normal day.
by das monde on Sun Mar 4th, 2007 at 03:32:33 AM EST
Please note that the main point of my article is that Krugman has now forecasted for the 9th time in four years that the US would have a recession.  Since the last US recession was March 2001, and it's now March 2007,,,,,,well, what do you think?

You have focused on the second part of my diary which points out that while many on this website began forecasting a housing crash that would lead to a US recession more than one year ago, not only has there not been such as crash, but though unit sales have fallen, prices have not.  Jerome and others may yet be correct, that there will be a housing crash leading to a US recession, but let's just highlight right now that so far those projections are absolutely wrong, and I, amongst others, would forecast that there will be no US recession in 2006 or 2007 (what I've said all along, btw).

by wchurchill on Sun Mar 4th, 2007 at 03:52:03 AM EST
[ Parent ]
Does it mean that Krugman's all 9 forecasts are already false? Are they forecasts of 9 different recessions?

The main question of my comment remains: Do unfulfilled (as yet) forecasts disqualify Krugman's concerns?

I went into economic details in other post, below. The situation of falling volumes but steady prices is a predictable stage of a crisis. Are you optimistic of what will follow?

by das monde on Sun Mar 4th, 2007 at 06:19:34 AM EST
[ Parent ]
I agree with you regarding classifying differentrecession forecasts.

He "dates" the article Feb 27, 2008 and tries to be tongue in cheek about his forecast.

I think WC should read this differently. It would be reasonable to take this article as a nailing of colours to the mast. I assume most (all ?) previous articles were suggesting a future (date unspecified) recession. In effect, this article offers a time-limit. If there is no serious recession within the next year, then Krugman's predictions were incorrect.

by det on Sun Mar 4th, 2007 at 07:30:46 AM EST
[ Parent ]
Even then, he's not incorrect.  Remember that there is a significant lag between a change taking place and that change showing up in the aggregate measures, which is why economists don't tend to say that we're headed for recession, but rather that the recession has already begun.  If we're supposed to see contraction by February of 2008, then we're already experiencing the contraction, and it has simply yet to completely move through the economy.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 07:36:28 AM EST
[ Parent ]
So what would Krugman have to do to be wrong on his forecast?

the problem with economists like Krugman is that some people are actually modifying their investment decisions based on what he says.  Not just the "fat cats" either, but the smaller guys that are putting their earnings into 401k plans for retirement.  Krugman's "the sky is falling" approach has likely kept a lot of small investors in bonds over the last 4 years.  the S&P 500 closed at 830 the week of March 3, 2003.  Last Friday's close was 1387.  that is a 67% increase foregone, if you are a Krugman follower.  Luckily there are other economists who write regularly and with reasoned economic thought.  so we can all pick our own guru, or set of gurus, to influence our choices.

by wchurchill on Sun Mar 4th, 2007 at 02:18:13 PM EST
[ Parent ]
Krugman is one of many sources an investor can look to for macroeconomic advice.  Will he be correct come February of 2008?  I have no idea.  No one should lay claim to that level of power in forecasting, -- I don't think Krugman is at all claiming to have that power, by the way -- because things change, and it would be ridiculous to predict the exact timing of the effects.

Does Krugman tend to get into the doom-and-gloom bit a lot?  Yes.  But he was also warning us about irrational exuberance long before Greenspan decided it was time to pay attention.  (Recall now that Greenspan is, once again, following Krugman -- this time on housing.  Krugman has not become one of the most highly regarded economists on the planet by being stupid.  People listen to him because history shows that he tends to know what he's talking about.)  Anyone who invests based upon the words of a series of columns belongs at McDonald's, not on Wall Street.  What Krugman can give people is a good description of big-picture issues.

It's the difference between macroeconomics and finance.  Finance guys are great, if you need to open a college fund for your kids, or need a plan for retirement, but they don't, in my experience, know much about macroeconomics.  (Note that finance guys tend to be Supply-Siders while economists tend to be Keynesians with a little Neoclassicalism mixed in.  Finance guys also tend to speak in absolutes with regard to the macroeconomy, while economists are, as always, two-handed in their analyses -- hence Krugman's ending.)  If you want short-term advice, talk to AG Edwards.  But if you want serious discussion of what problems we may face, on the national and global levels, talk to Krugman.

If we make it through this downturn without a recession, and get back up to the trend or higher with consistency, I think it will be fair to say Krugman was wrong.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Mar 5th, 2007 at 05:55:22 AM EST
[ Parent ]
You're clearly not an economist.

I'm reading an economics textbook that claims that the business cycle consists of recession and expansion, and that "expansion is the normal state of the economy" while recession is abnormal. In other words, the economy normally grows strongly, except when it doesn't, but you can discount that.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 03:58:03 AM EST
[ Parent ]
I'm reading an economics textbook that claims that the business cycle consists of recession and expansion, and that "expansion is the normal state of the economy" while recession is abnormal.
I guess we could write a book on this one, but clearly there are periods of economic history where expansion has not been the normal state--certainly the dark ages is a great example.  but in the US anyway we have had one recession in the last 16 years, and it was a minor one (though brutal for those that fell into the trap of the technology stock market bubble--but minor in terms of jobs).  Odd that period covers 8 years of Clintons and 8 years of Bush's, so I find it hard to put a real political spin on it--in fact history shows Democrats (clintons) lead to better stock market performance and wealth enhancement!

I think I would enjoy having a drink with migeru, but I think as we toasted each other my glass might be half full, and his half empty.  Which reminds me Migeru, you are obviously an economist at heart.

by wchurchill on Sun Mar 4th, 2007 at 04:34:38 AM EST
[ Parent ]
Well, if you're ever in London...

Regarding the "normal state of the economy" and cycles, we had a discussion here of cycles in the UK housing market, and made the point that measuring growth rates "peak-to-peak", "trough-to-trough" and "trough-to-peak" give so widely different results that one has to be very careful in reasoning about these things. But the point is that what's "normal" is the business cycle, not any part of it. And if the latest US recession was minor, the recovery has been slow and "jobless". So maybe the business cycle is getting less pronounced, but that also means slower growth on the expansion side. [By the way, my "prediction" in that thread has already failed, in that the price index we had been discussing is growing again after plateauing for about 2 years, breaking any possibility of extrapolating past behaviour beyond the plateau]

And that is assuming that, long-term, the 3% growth rate is not an expansion phase of a very long business cycle with a pronounced collapse at either end. When people say complete collapse of our economic system cannot happen, I cannot but think of the end of the Roman Empire, or the 14th century in Europe. It has happened before and it could happen again.

As for the bit I paraphrase from the economics text I'm reading, I was reminded of reading Goldstein's classic Mechanics book, where he discusses phase diagrams of the harmonic oscillator and bifurcations, and he has the howler that "fortunately, bifurcations are rare in practice". That was one of the biggest blind spots of classical mechanics, as was discovered in the 1960's and 70's, shortly after the book was published.

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 04:54:43 AM EST
[ Parent ]
Well, if you're ever in London...
well next time in London may be a little far off,,,,but,,,,Drew owes me a pint, and he will, I'm sure, include you and your wife in that hosting, and I'll be happy to host the dinner when that time comes.  but as much as I love europe, my business schedule won't get me there until summer of '08--and that is (gasp) paris--<snark on the gasp>.  mais,  le plus ca change,,,,,qui sais?
by wchurchill on Sun Mar 4th, 2007 at 05:18:06 AM EST
[ Parent ]
So maybe the business cycle is getting less pronounced, but that also means slower growth on the expansion side.

But that's not what has occurred, in truth.  The Clinton expansion was the fastest (and longest) peacetime expansion in history.  The Reagan expansion comes in at No. 2 or 3 -- its competitor being the Kennedy/Johnson one.  Despite the moderation in business cycles that we've seen since the Depression, growth rates have generally been a bit faster, with the exception of (I can only assume) the '70s.

Even taking the Bush II expansion, growth has not been very weak.  Job growth really blows compared with the Clinton years, but, to be fair, comparing those two expansions is a bit like comparing Mike Tyson with Muhammed Ali.

(Write your own Tyson-Bush joke.)

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:22:52 AM EST
[ Parent ]
Above-trend growth at full capacity is not "normal," just as recession is not "normal," so it's not quite so clear-cut.  Economies growing too fast will chew through their spare capacity rapidly.  That's what pushes labor markets into causing inflation.  Spare capacity is gone, so companies begin poaching workers from their competitors, or they attempt to bring, for example, older workers back from retirement.  In the end, wages rise, which is what we've begun seeing, as I understand it, in America over hte nine months or so.  With spare capacity gone, companies cannot expand to meet the new level of demand, which inevitably causes inflation and higher interest rates.  The process goes on.  Sometimes it leads to recession, while other times it leads to a slowdown and eventually a return to strong expansion, as we've seen over the last year or two in Britain.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:12:19 AM EST
[ Parent ]
Above-trend growth at full capacity is not "normal,"

That's why you're not an academic economist any longer ;-)

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 05:13:26 AM EST
[ Parent ]
Too true, mi amigo, too true.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:23:23 AM EST
[ Parent ]
Can I at least play one on tv, though?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:27:16 AM EST
[ Parent ]
You can have a syndicated column on a blog.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 05:32:29 AM EST
[ Parent ]
Good point.  Can get away with more outrageous stuff on the blogs, anyway.  To Hell with those prudes on CNN.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:37:10 AM EST
[ Parent ]
Is Drew J Jones the next Brad DeLong? Next on CNN.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 05:38:46 AM EST
[ Parent ]
Might actually be the one big story less worthy of coverage than Anna Nicole Smith, but, hey, it certainly beats the American Idol route.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:46:56 AM EST
[ Parent ]
You don't look nearly Aryan enough to be a CNN anchor, Mig.  Get off the set, and make way.  I'm sure they've got a blond chick lying around somewhere to take over.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 07:16:10 AM EST
[ Parent ]
(And, with that, away goes any hope of Drew appearing on CNN.)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 07:18:37 AM EST
[ Parent ]
Now, is the business cycle normal or not? In that case, above-average growth in the expansion phase is a normal part of a normal process, but then so is recession. As ATinNM put it last night,
One of the more amusing aspects of the Global Financial Market is the bewilderment of the participants when they discover markets go down as well as up.

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Sun Mar 4th, 2007 at 05:36:14 AM EST
[ Parent ]
The entire use of the word "normal" makes no sense to me.  Business cycles are normal, because markets are not perfect.  Factors don't adjust immediately.  As I've pointed out, the 2001 crash was not, technically, a recession, since we never had two consecutive quarters of contraction.  (Why, by the way, do my fellow economists insist on calling it "negative growth"?  Is that anything like "jumbo shrimp"?)  And that's, obviously very odd looking at history.  Same story in Britain.  Yes, I'd say that above-average growth is certainly a normal part of a normal process.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:44:00 AM EST
[ Parent ]
I made a purely logical point with the post above. The particular critique of Krugman might be just a negative case of the "appeal to authority" fallacy.

I went on with economic points in a subsequent long post, below.

by das monde on Sun Mar 4th, 2007 at 06:23:52 AM EST
[ Parent ]
WC, it's 4.30 in the morning in Chi-town, so what in God's name are you doing up?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:24:37 AM EST
It's late, but I'm in California.  I keep moving around so I'm not such an easy target.  <snark>
by wchurchill on Sun Mar 4th, 2007 at 05:34:05 AM EST
[ Parent ]
Ah, and how did you stumble into the misfortune of being shipped off there?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 05:58:35 AM EST
[ Parent ]
Complementing my previous comment here, I have to say that Krugman's skeptisism makes more sense since the last week.

First off, statistics of the housing market are not great, and getting worse. The current situation (the big volume drop, while prices are not going down) is certainly not the end of the story. Something will follow.

It is not a big secret that great many people recently jumped into the housing market with speculative expectations. If these expectations won't be improved by greater demand after some time, people will start make conclusions and do something.

While the housing market enjoyed growing demand just recently, that demand was admitedly fuelled by the influx of the same optimistic newcommers. It might be stupid to ask, how would the market have done without masses of newcommers. But it is very reasonable to ask, how will the market perform when the stream of newcommers will dry out?

I am getting a picture which is even less mysterious than Krugman's. I start to "appreciate" what Bush's massive tax cuts are accomplishing.

It is now easier to make money in the markets than working - you pay less taxes for the same income. The bottom line is this: Bush's tax cuts increased (perhaps purposevily) the volume of speculative markets, and the pool of market players, enormously. Yes, those tax cuts benefit not only the 0.01% most wealthy, but many others as well. The other question is, what is the proportion of the benefits across the wealth spectrum. It is pretty clear here that the top wealthy capture an obscene portion of generated wealth, while the others... Well, I fear that most of them will never exercise the equity they nominally have at this moment.

The vast volume increase in speculative markets should be well appreciated. We have millions of new markets players, lurked by an established material wealth receipe (think of the "rat race") and favourable tax regime. Then we have pension funds  and hedge funds (beside any "traditional" market players), basically specialising in market speculation. Pension funds have perhaps 40-60% of market shares of many markets, even given the volume increase. Effectivity of hedge funds must be normally depressing to other players.

Besides that, we have vastly increasing markets outside the US. Chinese were opening new brokerage
accounts at the rate of 90,000 a day just before Shanghai's "Black Tuesday". Market speculation in other economies was increasing in lesser scale naturally, but nevertheless, everyone caught the same model. That's what globalization did to the world.

It cannot be denied that most of these markets have been steadily growing. But on other hand, given a steady influx of new players... can it be hard for the markets to achieve this performance? You surely know pyramid schemes, don't you?! What is a chance that the current global econonomy is not much more but a pyramid scheme, where most of the new players -individuals and countries - are gonna be duped pretty soon? (By the way, if you like virtual game worlds as reality models, check this.)

Hence the question: how would the world  markets perform without the expansion of player's pool? After all, globalization has the limits of the globe. How the markets can be tested?

Well, there was a test last week. The Chinese government was planning to curb speculative markets more seriously, and to make growth of these markets more difficult with capital gain taxes. What is the market reaction? Shanghai tanked, New York tanked, everyone followed. Why are the world markets so sensitive to "freedom" of speculative markets? Do they badly need a few bubbles in China?! Is this why Europe is pushed "to reform" so persistently, so to put effectively all its social infrastructure into a pyramid?

I tried to read conservatice commentators at "National Review", such as Larry Kudlow. Of what little they could write, I could only affirm my suspissions. You see, raising capital gain taxes and going after speculations is a terrible thing to do. Isn't this ironic that today's economy has to be massaged so subtly by the government?

Today's world economy is dominated by ever increasing and ever expanding speculation in stock and real estate markets. Can you convince me otherwise?

by das monde on Sun Mar 4th, 2007 at 06:07:22 AM EST
House prices are underpinned by rental values, which in turn are based upon ability to pay.

The 1990'ish decline in house prices was bad because lots of people lost jobs, and couldn't keep up the mortgage or an equivalent rental.

As I have said frequently, Growth is only a necessity because we live in a deficit-based economy where the money supply is driven by the inexorable demands of compound interest.

But I believe a new factor is changing the picture economically to make a nonsense out of all the assumptions in respect of inflation, spare capacity of labour and so on.

This is implicit in the rise of the service economy in turn involving the rapid replacement of Labour with Capital in the form of Intellectual Property.

I addressed this subject, and much else in this paper at Lancaster University


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

by ChrisCook (cojockathotmaildotcom) on Sun Mar 4th, 2007 at 06:14:42 AM EST
What really hit people in the early 90s in the UK was a credit squeeze. Banks called in loans, credit card companies called in debts. People suddenly found themselves bankrupt. A house price collapse was inevitable.

In the UK, we don't seem to be in such dire straits yet, because there's still an equity bubble driving the economy. As long as the City has some scraps it can throw to the mob, prices will continue to be stable and may even increase.

But if the bubble collapses, the housing market will also collapse. As 'investors lose confidence' (to use the magic phrase) bonuses will shrink, jobs will go, another credit squeeze is likely, and there will be a dramatic contraction.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Mar 4th, 2007 at 12:31:48 PM EST
[ Parent ]
I have good reason to remember the 1989 crash, because that's when I got married and bought a house.  It took seven years to save up the negative equity so we could move...

But when I look at the current market, it seems more fragile now than then.  And the reason I think that is the structure of mortgage payments.  High borrowings at a relatively low interest rate.  A 1% rise in rates is twice as painful when you're paying 5% on £200,000 than when you're paying 10% on £100,000.

Just as before, the banks have been falling over themselves to lend people absurd amounts of money relative to income.  It wouldn't take a large increase in interest rates or unemployment to start tipping a significant number of people over the edge.   From what I remember, the way it went was interest rates and repossessions up, first time buyers scared off, house prices fall slightly, first time buyers decide to wait and see it they fall further, house prices crash.  But because of the huge capital sums involved now, any fall could well be longer and more painful than last time.

by Sassafras on Sun Mar 4th, 2007 at 04:27:30 PM EST
[ Parent ]

There was good news and bad news for America's housing market. Sales of existing homes rose to an annual rate of 6.46m in January, the highest level for seven months. But after increasing in December, the median price of an existing home fell by nearly 5%, to $210,600. Separate data for the smaller market in new homes showed that sales plunged in January by 16.6%, to an annual rate of 937,000--the biggest drop in 13 years.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Mar 4th, 2007 at 06:15:22 AM EST
The median price/income ratio isn't way out in left field, though.  I believe this puts it at about 4.5, which exceeds the traditional bar, as I understand it, of 4 but pales in comparison to the 10 you'll find in many parts of Britain these days.  I believe average prices have reach levels above £300k in London, at this point, and even worse in some areas.  Ran through, just for the hell of it, a few real-estate searches on Great London the other day.  Found nothing -- literally nothing -- for less than £140k, and what you got for that money was essentially a four-square-foot trashcan in Bethnal.

So it's not, in my opinion, as bad as is sometimes feared, given all the hype in the press.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 06:24:49 AM EST
[ Parent ]
See my last graph below. England is indeed in a worse bubble than the US.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Mar 4th, 2007 at 06:26:52 AM EST
[ Parent ]
Ah, do have trouble keeping up with all of your graphs, much as I love them.  The scary bit is that prices, last I checked, were not on their way down in Britain.  The correction appears to be well under way in the states, which is, of course, frightening but necessary.  When I last read up on housing in Britain at the BBC it appeared they were jumping up once more.  Something's got to give there.  You can't have citizens forking over six, eight, ten times their income for a house.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 06:40:03 AM EST
[ Parent ]
Speak of the Devil: January House Prices Rose 1.3% (BBC).  Obscene.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sun Mar 4th, 2007 at 06:47:56 AM EST
[ Parent ]

Mortgage rates (red=variable rates, black=fixed rates)

Median house prices, yoy - and house index

New houses - sales and stock available

Same for old houses

That should for now. I have more...

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

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 4th, 2007 at 06:22:03 AM EST
Question, could the price/income ratio be less of an issue than it seems due to rising inequality? I'd imagine that the income of the median house buyer is higher than the overall median - I doubt that people in the bottom quintile are buying many houses. Given that the higher you go, the faster incomes have been rising, I would also imagine that even if house buying rates by quintile remained the same over time, you'd still see their income rising faster than that of the average American household. If that's the case part of the recent rise might be an illusion.
by MarekNYC on Sun Mar 4th, 2007 at 11:48:14 PM EST
[ Parent ]
there's a newish law in italy prohibiting property sales until said property has been owned for two years.

i imagine this is an effort to slow down the 'fluff & flip' brigade, and slow rising house prices, but perhaps there is more to it.

de gondi, can you elucidate?

'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 Tue Mar 6th, 2007 at 04:14:11 AM EST

Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries