The prolific Niall Ferguson with a long narrative of the financial crash in Vanity Fair:
The key point is that without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks.
Alex Tabarrok wonders whether the U.S. should sell some of its massive land holdings to help pay for its latest binge, with more surely to come. Conceptually, it’s interesting. I and others like John Rutledge have long argued that we need to look at total U.S. assets when doing any macroeconomic analysis. This would include potential trillions worth of federal lands. But it’s not clear the government would actually have to sell the land to reap the gain. Merely owning it is useful collateral for issuing more debt. On the other hand, getting more land into private hands might be a good thing in and of itself.
Chief panic prophet Nouriel Roubini sees long-term decline:
The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions.
There’s no hope of a V-shaped recovery:
a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising.
And there’s a real
risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate
leading to global
stag-deflation
When a permabear like Roubini has been right so often for the past year (lo for the wrong reasons) it may seem a tall order to refute him. But John Tamny does an admirable job:
just as housing was the hot asset class in the early and late ‘70s, so was it this decade not due to economic growth per se, but thanks to currency debasement that always leads to a flight to the real. In short, the subsequent moderation of home prices has not been an economic retardant so much as it’s been the result of economic sluggishness that always reveals itself when currencies are allowed to weaken.
Roubini holds the reputation of soothsayer at present, but the very analysis that has made him all-seeing was faulty on its face. Lower home prices are an undeniable good for less capital going into the ground, as opposed to the entrepreneurial economy. What led to housing’s moderation of late was paradoxically what caused its boom. When currencies decline, hard assets do well, and investment in real economic activity withers. . . .
In short, Roubini made the correct call a few years ago about looming economic difficulty, but the call ignored the real cause which decidedly was the weak dollar. Happily for Washington’s political class, Roubini’s suggestions for “stimulating” the economy absolve it of its own mistakes, all the while allowing it to do what it does best: spend the money of others.
With the government doing so many things so quickly to relieve problems it really doesn’t understand very well, what will be the results? Do we know? Do they? Not really. Not really at all. Just one unintended consequence among many cited today by Brian Wesbury:
Take, for example, the extension of unemployment benefits enacted in June. Normally, jobless benefits are available for 26 weeks. The extension, which will last temporarily through early next year, added another 13 weeks. Following this, between June and October – in only four months – the unemployment rate has risen from 5.5% to 6.5%, a full percentage point.What’s odd about the jump in the jobless rate is that it has been accompanied by an unusual increase in the number of people who say they are looking for work. Normally, when the unemployment rate leaps upward we see a decline in the share of the population either working or looking for work (what economists call the participation rate). Not this time.In order to receive unemployment benefits, a person must be looking for work, so the extension of benefits is artificially coaxing many people who would no longer be in the workforce at all to say they are still looking for work, just so they can continue to collect benefits. The unintended consequence is that the unemployment rate is boosted faster and further than normal in a recession, making it more likely that policymakers further extend benefits, boosting the deficit and pushing up future tax payments.
Among those suggested as probable Obama Treasury Secretaries or economic consiglieres are Larry Summers and Paul Volcker, who have been advising him for many months now. This is very encouraging to those of us who balk at much of Obama’s economic agenda. Summers and Volcker are very smart Democrats. Volcker helped get us out of the ’70s inflation mess. And anyone who earns the wrath of the Harvard faculty for telling the truth, as Summers did when he was the University president — enough to get fired — can’t be all bad either.
I do have some reservations, of course. Lots more to say as the story evolves. . . .
Maximum Entropy
