"Business Cycle" or "Gotterdammerung?"

"The S&P Case-Shiller National Home Price Index reported that prices sank a record 18.2% during the last three months of 2008, compared with the same period in 2007.

Case-Shiller's index of 20 major metropolitan areas fell 18.5%, also a record.

"The broad downturn in the residential real estate market continues," said David Blitzer, chairman of the Index Committee at Standard & Poor's, in a statement. "There are very few, if any, pockets of turnaround that one can see in the data."

All 20 metro areas in the 20-city index recorded declines, with home prices falling more than 20% in eight of those cities. National home prices have dropped 26.7% since they peaked during the second quarter of 2006.

The decline does not seem to be slowing - just the opposite. The average home price dropped 2.52% between November and December in the 20 top metro areas. That was a larger increase than the 2.25% drop a month earlier."  CNN.com

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Ironically, the real estate market in Washington seems the least affected by all this.  We sit near the trough.

I wish to propose here an economic question for which I will, at least rhetorically, not admit of having an answer of my own.

Whether for crass political reasons or for genuine difference of opinion, the two American political parties are projecting diametrically opposed views of the nature of the present economic crisis and its probable outcome.

The Democrats state that the present depressed state of the economy is different both in quality and depth from any recession that we have seen since WW2.  They seem to believe that, if left to its fate, the economy of the United States and therefore probably of the world will spiral downward into a dark abyss from which it might well not climb for a long, long time.  In that pit would be; very high unemployment rates, deflation, low levels of investment, etc., We have not seen doctors and lawyers paid for their services with baskets of eggs and dead chickens for a long time, but that seems to be what the Democrats seem to think possible.

On the other hand the Republicans seem to think, or at least to say, that what is going on is really just the trough inherent in an exceptionally deep business cycle.  They seem to believe that if left alone the economy will "right" itself like a swamped boat, shrug off the water and rise to the surface.  Having that view, they say that all the money being appropriated and disbursed for "recovery" is just unnecessary and a surreptitious means to enactment of the Democrats' desired socialist re-structuring of the United States.  The belief in the "business cycle" theory of the crisis appears to be largely ideological, but subject to test by events, but the "socialist conspiracy" theory is, to some extent, supported by some of the items that the House Democrats chose to fund under the "stimulus" bill.  The Democrats would argue of course that all expenditures are stimulative.

I am curious to hear the arguments on both sides.  pl

PS  Watch your language.

 

Comments

[dilbert dogbert]

Hoover's Sec Treasury seemed to be on the side of let the rotteness be flushed from the system. Voters didn't agree in 1932.
Conservatives should not be on the side of letting chaos loose. History doesn't support chaos as a good thing.

[rjh]

For a perspective on housing prices see: http://www.calculatedriskblog.com/2009/02/house-prices-real-prices-price-to-rent.html

It deals with both rental and housing sales. Take a look at the Schiller housing index towards the end. Over the past century (starting with 1890) housing holds at about 100. There is still more to fall.

Fighting this will be futile and likely self destructive. Housing was grossly overpriced. It needs to fall back to normal levels. The goal should be to accomplish this fall without major associated damage. That will be hard. Neither Republican nor Democrat appear willing to accept this as the goal.

[wcw]

I don't think smart Republicans believe what they're saying. The only macroeconomists who are not part of the zero-bound consensus are the Chicago and Austrian schools, neither of whom may admit the truth, since the truth tends to destroy the foundations of each school's thought. This pattern repeats itself with the GOP. It has come to the entirely correct conclusion that to admit the truth of what's going on is political suicide. If it backs stimulus, it undercuts the foundations of its current overall message. Moreover, if stimulus works, the Democrats get the credit anyway. You have to pretend stimulus is not necessary if you cannot imagine changing your party and if you want your party to have a chance in the next couple decades. Apparently the Republicans in power now cannot imagine a conservative party that admits sometimes large fiscal stimulus is necessary.

Similarly, I think smart Democrats will admit that the stimulus bill has more than its share of crass politics. They entirely correctly would point to the tax cuts (much less-effective than spending, much more-palatable to the GOP) as the largest such line item therein, of course. They have much less of an issue here, since a large aggressive stimulus plays to the foundations of their party message and its history as the party of the New Deal and the Great Society. The real test will come when things eventually normalize (for an object lesson of how that goes without government action, see 1873) and the party needs to cut back.

[Leanderthal]

It's for crass political reasons. Hell hath no fury save a GOPher scorned.

Fox News(Pravda West) and Limbaugh are propaganda machines for GOPhers.

I'm wondering how the folks in SC and LA are going to treat their respective governors if the latter refuse stimulus funds which include help for the unemployed.

Republicans talk about self discipline and boot strap morals. That's fine when you're on top. Obama is all about safety nets for real people, not boot straps for imaginary Horatio Algers.

We're all conservative in the abstract until a bad can of tuna shows up at the market, we lose everything in the market and have no job.

GOPher ideologues are truly a cynical bunch. They redefine hypocrisy.

[Duncan Kinder]

The use of "Gotterdammerung" is useful here because, actually, Wagner's Ring Cycle is instructive here.

In the Ring Cycle, Wotan enters into an incredibly bad real estate deal - to build Valhalla - with some giants.

Seeking to evade the consequences of this deal, he tries to worm his way out. Each solution gives rise to further problems, however, until finally, in Gotterdammerung the whole edifice burns up.

[J]

I think we should go back to the original design -- The American Credit System, and jettison the 'old' European Banking System which we now so wonderfully enjoy, that makes serfs of us all.

[William R. Cumming]

Opinions--Krugman says house prices will fall another 20% in recent article. Fact--K-12 education which is usually 60-85% of local government expenditures is primarily based on local property taxes. Public safety-Police and fire is usually 5-19% of local budgets, including HAZMATS and EMT and Public Health. Basically the property tax in most of the 60-90,000 local govenmental units is because STATES and Local governments either choose to or cannot by law impose a progressive income tax on their citizens. This failure (IMO) is going to result in long term damage to the future of the US if Krugman is accurate in his prognosis. Now that oil/gas prices are headed back up (note PL's past posts this subject) it looks like $2.00/gal minimum for a long while. Transportation, education, and public safety are pretty much analyzed sinews of the economy short and long term so to me looks like economic muscle is gone, sinews are going, and bones will soon be broken (stress fractures already). Again the banking system is dead and despite articles saying some banks are sound, we should start a wholly new system.

[Charles I]

The economy has never been "left alone" as the Republicans claim, since the days of sliced bread at least. To say that Republican governments are free marketeers and Democrats power crazed interventionists flies in the face of the historical and legislative record.

The Republican campaign against government and regulation were not campaigns against government and regulation but against differing versions of the same that would direct the costs and fruits thereof from one class of beneficiaries rather than to another.

"Trickle down economics" was not the unfettered working of the market. How much a pound do the rich go for nowadays anyway?

It was the jiggering of the tax rates to subsidize the few growing rich with the lolly(and future tax burdens) extracted from the many growing poor.

Clean coal, ad hoc steel tariffs, weapons procurement and the glaring absence of universal health-care in the U.S. are just a few of many many instances of policy intervention in the economy with the blunt instrument of the legislature to favour particular private interests.

For heaven's sake, the introduction of Pharmacare was attended with a promise not to seek the natural market advantages of a huge purchaser, but a promise to protect new profits on the taxpayer's dime. THIS is what they mean by "market forces" - private interests promoted by legislative fiat.

That's the exact opposite of how the illegal drug market works, although the War On Drugs and the huge Apparat that prosecutes and jails hundreds of thousands of mainly black Americans are in fact, intervention in that market by the government for very specific purposes by very costly and specific means.

If Drugs are such a public health threat that a War on them at such social costs is sellable, why not make a different policy choice, and intervene in the market by legalizing drugs, remove the vast clandestine untaxed profit and invest it in health care?

Because there are vested economic and political interests that value that War and its attendant corruption and profit more than they value the health of the citizenry, society or the victims of drug-cash armed militias around the globe. Or ANY free market.

Under either an illegal or legal drug regime, consumption remains stable, human nature being what it is. Only the costs and beneficiaries change. A private weakness for the Creator's gifts of flora, fauna and science is converted into an industrial complex.

That is how "the market" is conducted.

The rich are almost always the largest absolute and usually the most relative beneficiaries of the never ending call for lower taxes, notwithstanding that every economist knows that the most stimulative effect comes from getting income into the bottom half, who have no choice but to spend on necessities rather than savings, investments or luxury.

The EU has recently announced that it will be regulating hedge funds as part of the cleanup, so we know where it stands on free markets today.

At least there is a business cycle. For the poor, the oppressed, the addicted, it is always business as usual, prosecuted with a bit more ferocity and less discretion since the advent of the GWOT.

I am confident that however great the present dislocations, once ALL the various and sundry bailouts and free cash injections have been dispersed, there will eventually be a resumption of economic activity.

This time around, anyway.

The goose has a few golden eggs in it yet, and they must be extracted by The Market before the goose is finally pronounced "Cooked" and ready for ultimate consumption.

[graywolf]

George Bush, with his inane "compassionate conservatism", NCLB, Medicare Part D, and so forth opened the door, wide open, to a socialist direction.
Then the financial tsunami hit.
The electorate threw a tantrum and elected the left and far left -not really knowing what they were doing. They just wanted be rid of Bush and the Republicans.
The democrats would be fools to let this chance escape. this is their big chance to turn America into France.
That joke of a "porkulus" bill proves the point.
Obama provides "leadership" by preaching fear - about an economy of which he knows nothing.
Would McCain be doing better?
It's a coin toss.
The governing class is dishonest,ignorant, self-satisfied and grossly incompetent.
The Secretary of the Treasury is a tax-cheat.
THAT SAYS IT ALL.

Somebody needs to take a blowtorch to everything inside the beltway.

Now, Iran is on the verge of a nuclear weapon.
What happened to the fabled NIE (produced by the governing class) that said Iran was NOT on it's way to a nuclear weapon?
More incompetence and dishonesty
And the beat goes on.....

[Eric Dönges]

Keep in mind that I'm located in Germany, not the U.S., so things might be different on your side of the pond - but from what I've been reading in the financial news, your economy is tanking just as badly as ours. Isn't globalization wonderful ?

Anyway, I work for a small company selling software to machine tool manufacturers, mostly for the automotive and semiconductor markets. While we actually managed to moderately grow our sales to Europe and the U.S., the Asian market has completely collapsed, costing us 50% of our total sales in January. Since the Japanese fiscal year ends in January and is thus traditionally the best month business-wise, the situation is unlikely to improve any time soon.

And it's not just us. Our customers have their order books filled until March/April, but nobody is getting much in the way of new orders. Companies are reacting by cutting benefits, reducing working hours and/or layoffs on a scale unprecedented since the 30s. This means lots of people will have a lot less disposable income, so other industries are going to be hit as well. 2009 is going to be a complete write-off, and it's not clear if 2010 is going to be any better.

So from my personal outlook, I'd have to say the Republicans are deluding themselves. This is not a normal downturn - it's global, and it's hitting multiple industries simultaneously, so there is nothing to absorb the impact.

The cynic in me believes that the Republicans' opposition to the stimulus package is just for show - they know it will pass without their approval, so if it fails they can say they where against it from the start, and if it works they can count on voter amnesia or argue that the economy would have recovered without any help. If they are sincere in their opposition, they can refuse to accept any of the stimulus money for their districts and states.

That being said, I'm skeptical if the stimulus packages being enacted around the world are actually going to work, since the root cause of the crisis - total irresponsibility by our so-called financial "elites" - is not being addressed anywhere.

[VietnamVet]

Colonel,

The economy is tanking so fast and hard that the only Bear Market it tracks now is the Great Depression. Despite the recent happy talk about bouncing back to normal in 2010, four changes assure that America is much poorer and will not recover any time soon:

1) The American economy has been hallowed out. Production has moved overseas, shipped to the USA in ships larger than aircraft carriers. 70% of the US economy is the service industry. When we stopped buying, the US economy collapsed.

2) Big business is either a multinational like Boeing or is owned by foreign multinationals. InBev, a large Belgian brewer, bought Anheuser Bush. If you want to spend money on an American beer, you have to purchase a micro-brew. Boeing has yet to fly its new carbon fiber 787, years late.

3) Politicians are in the debt to big business to get elected. Both the Democrats and the GOP enabled the housing bubble and deregulation. Middle Class housing, stock and pension value were looted. Electricity and Medical costs skyrocketed.

4) The era of cheap energy that built America is over.

[Dave of Maryland]

Husbands & wives can bicker all they want. At some point the children flee.

Watch what cities & states do.

[ads]

Opinions--Krugman says house prices will fall another 20% in recent article. [K-12 education and Public safety-Police and fire, which make up 65-94% of local government expenditures, are primarily based on local property taxes.] This is going to result in long term damage to the future of the US if Krugman is accurate in his prognosis.

It may take awhile if reduced appraisals have to be fought for on a case-by-case basis as is the custom here in Baltimore. They don't even automatically provide owner-occupied tax credits limited annual increases to 10% anymore, you had to apply for one by Sept 30th of last year.

Eventually there will be no one left living here except people on public assistance, the homeless, the ones who can't afford to move, and those who have to live close to work (Hopkins and UMAB med students, Federal Hill financial industry professionals, etc.)

(I appreciate your not banning me, Col. Lang. I must have tripped the profanity filter last week.)

[steve]

Really two issues here. Is it a different kind of recession (depression) and then what do we do about it.

As to the first question, there are people of good will on both sides of this issue. For me, the determining factor is the international scope of this financial crash. During the dot com crash and the S&L crash there were other strong economies. We cannot buy other's exports and other countries cannot buy ours.

As to the second question, there is no correct answer. Macroeconomics is not a fine enough science. Too much like predicting weather. The best we can do is look at the past and try to extrapolate to the present, realizing the parallels are inexact. Finally, all solutions are written up by politicians, not economists. One suspects that Summers,Romer and Furman would have written a much different stimulus bill. I suspect they also believe that fixing the banks is more important than the stimulus bill too.

Steve

[b]

The world has a global (first time ever) case of what Irving Fisher diagnosed as serious Debt deflation.

The Keynesian remedy against that is "stimulus".

But is not what the Dems are providing. They have spend MUCH more money to prevent the inevitable bank bankruptcies than they spend on public investment that builds the base of a new rise for all.

House prices in the U.S. will not return to their means but will drop much lower than necessary because of so many foreclosures.

There are ways to prevent that.
- Allow judges to adjust mortgages to real value of house.
- In extreme cases /areas allow destruction of supply, i.e. dismantle overbuild houses.

It will take four years of an ever sinking economy until The Powers That Be will catch up with the real problem and finally get to the right solution.

2014/15 may be a good year to bet on better market prices.

[JTCornpone]

This didn't start like the usual business cycle recession and it has worsened much faster. Intervention is definitely in order as evidenced by the fact that it was the Bush administration which started it with the TARP (which passed without Republican filibuster threats). If the insiders could get Bush to intervene in the private economy they must have convinced him he was looking at Hooverdom. Every time he talked up the TARP you could tell he hated it.

Here's a pretty well reasoned argument in favor of stimulus and why the government can afford it:

http://www.dailykos.com/story/2009/2/22/11528/2240/518/700197

Roughly summarizing, there are ways for this to get totally out of hand and government debt as a percent of gdp has hardly changed in 30 years. Financial and Private debt has exploded.

I'm still optimistic we will avoid all-out armageddon. There is a significant number of people out there on social security (like me) and military pensions and the like with a secure base of income to spend. My 401K is now a 301K and I'm being careful but I'm still buying the basics every day and I think the sum of that type of activity will provide some kind of floor under the economy which wasn't there in the 30s. Social Security and Medicare put just under a Trillion$ in the economy in 2007:

http://www.ssa.gov/OACT/STATS/table4a4.html

Total personal income was a little under 12Trillion$ in 2007:

http://bber.unm.edu/econ/us-tpi.htm

so social security and medicare are not insignificant.

For those who have to have a job to survive and keep their house these are going to be very tense times and that's why stimulus is necessary. Good luck to us all.

JT

[frank durkee]

Adam Smiths comment about companies and their leaders is relevant here: "Whenever twor or more are gathered together they immediately begin to plot against the common good". It is important to remember that Smith was both a moralist and a realist.

[zanzibar]

Pat

I think if we look at the reality we could conclude that neither are the Democrats "socialists" nor Republicans "free market capitalists". In fact there is really no difference between the parties since they are both inflicted with "crony-itis" - meaning its capitalism for a favored few when the going is good and socialism for the same group when the going is not so good. Its a version of heads I win and tails you lose. The party that gets screwed in every instance is the average American working stiff and their progeny. All one needs to look at is a graph of real wages for the bottom 95% over the past quarter century.

With regards to residential real estate - it is still relatively high compared to historical norms on the basis of rents and affordability (price to income). What many people may not realize is that around 50% of residential property in the US is owned free & clear. As the Case-Shiller price chart you pointed out shows we had a huge (several standard deviation) move up due to the credit bubble.

IMO, the best frame to understand the current downturn and the role of politics is the debt/GDP cycle. The only times in the recent past where we have had a collapse of the banking stocks while the central bank has had a monetary policy of ZIRP with an exploding balance sheet are the 30s, 90s Japan and some cases in Latin America.

For context we need to remember that in the 30s collapse the US was a creditor nation with trade surpluses (much like China today). Also our nominal GDP contracted by 50% then. So for those using Great Depression as the moniker of the moment are they forecasting our GDP will be down to $6.5 trillion over the next couple years when it is currently declining at a 4% annualized rate? Another favorite point is that what got us out of the Great Depression was WWII. But if we look at it in the debt/GDP frame what we see is that private sector debt came down throughout the early 30s while the national debt expanded. Households and businesses delevered and strengthened their balance sheet. They were ready to expand once again through increased spending by the time the WWII "stimulus" came through.

Japan has built many a bridge to nowhere with their Stimulus I, II, III, etc. Their government debt/GDP has skyrocketed to around 180% yet their stock market and real estate trade around 75% below their peaks in 1989. Thank goodness for the complacent Japanese people their financial elites did not gorge on all the leveraged securitized paper that Wall Street and the City churned out over the past few years. They would have been pickled even further as their banks just recovering would have been re-zombified.

I believe what we had was a perfect storm - Democrats & Republicans in cahoots with Wall Street using the messaging of "free markets" and the blunt hand of massive government intervention and policy focus around asset inflation that drove private sector debt to unsustainable levels. The Greenspan/Bernanke Fed and "the deficits don't matter" DC combined with the raw crony capitalism of the elites came together in an orgy of debt that inflicted many a American with visions of easy money in asset inflation. We are now in the deleverage part of the cycle and there is absolutely no open and public debate about who is going to take the private sector losses that were magnified by leverage. Instead what we have is both parties by saying its Gotterdammerung, obfuscating their real action which is passing on the losses to taxpayers who will pay with increased taxes and a devalued currency. We have neither socialism nor capitalism - all we have is penury for working Americans.

[condignaction]

The Republicans are simply espousing their anarcho-free-market ideology (i.e., Libertarianism and it's lipstick-variants the Chicago and Austrian schools). The problem with this ideology is that it is little more than sophomoric Utopianism and is overtly anti-intellectual. Why bother analyzing the economic situation in Japan during the 1990s to see how they handled a similar situation? In fact, why bother having Economics as a field of study at all? We already know the answer regardless of the question; "cut taxes and deregulate." They believe on faith that an unregulated free-market system is the answer.

It's actually pointless to present facts, or analysis, or economic models, or historical similarities when discussing any economic situation with free-market utopianists. Thus, when ones writes; They seem to believe that if left alone the economy will "right" itself like a swamped boat, shrug off the water and rise to the surface. The operative word is believe, the way one believes in Jesus. They may be correct and the economy may right itself but the assertion certainly isn't based on any facts or historical comparisons or analysis. Krugman might be wrong but he actually studied and analyzed the situation including comparing similar situations in other countries - he is presenting legitimate analysis.

[Sven Ortmann]

I believe neither the Democrat nor the Republican explanation that you mentioned.
The Republicans are 100% wrong, the Democrats just miss the point.

The US has lived beyond its means on a scope more dramatic than the mainstream yet accepts.

I wrote about this in my blog, and a comment is the wrong place to lay out such a big thing, so please allow me to simply link to it.

Let's quote two key phrases (that apply only to the USA):

"The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008."

"(...) we're likely talking about a reduction of about ONE FIFTH in consumption (...)"

http://defense-and-freedom.blogspot.com/2009/02/extent-of-economical-problem-because.html

[11B40]

The current economic crisis in one of solvency (i.e., debt) and how it might be restored. The political parties are engaged in a furious debate over which has the best set of policies to hide the issue by distracting taxpayers. Camouflage is an effective technique beyond the military.

In any case, the political/economic elites apparently have concluded that the rest of us can't handle the truth: the tsunami of debt incurred over the last couple of decades will have to be repaid, restructured or forgiven. Such process will be neither rapid nor elegant. Let's hope it doesn't lead to substantial levels of violence as well.

[Paul in NC]

There's no way to know who's right about the future. But we can look to see who was right in the past. And it wasn't the Republicans.

[Abu Sinan]

Col.

The farther you get from DC the less true that is. Manassas, the last few years a new bedroom suburb for DC, as seen house price drop dramatically. NPR had a show that documented townhouses going for $300,000 two years ago now being sold by banks for $60,000.

[gacetillero]

I'd argue that they both have a point. If prices fall low enough, people will start to buy again, helping establish a floor to the downturn. The Republicans are not incorrect in that analysis. But the Democrats are right in that if prices fall low enough, the unemployment, low investment and the like will impose immense social costs. So the appropriate strategy should be to soften the social costs of the downturn while letting the process of winnowing cut some of the chaff out of the economy. The debate is really about trying to balance the two optimally, for all the hyperbole spouted by both parties.

[Propagandist]

To expand on your swamped boat metaphor, the Democrats care because the majority of their constituents are riding up front on the boat’s deck, packed in with the overflow crowd. A swamping would mean many will be lost (to unemployment). The Republicans on the other hand could care less about the crowd on the deck. Their constituents are seated safely inside the cabin in leather seats. Once the boat reemerges from the water, they’ll be just fine. Or so they think.

In fact, I would suggest the bulk of the Republican constituency would approve of the decks being swept clean.