Latest Story

Terrible Recovery

June 25, 2014
By
Terrible Recovery

A month ago, we compared the recovery from the Great Recession to the recovery after every recession since 1950. It looked pretty bad.

Real GDP growth for 2014q1 was revised downward today to -3.0% on an annualized basis. Yes, our reading of Table 1.1.3 of NIPA shows -3.0%, not -2.9%.

Here is real GDP indexed to the quarter before each recession for all 10 recessions since 1950, taking into account this morning’s revision. Notice the significant bend downward in the last quarter for the 2007-2009 recession (solid red line). It makes the recent recovery look even  worse relative to previous recoveries.

Just a terrible recovery. Terrible.

 

. . .

Read more »

Subprime Lending Drives Spending

June 13, 2014
By
Subprime Lending Drives Spending

A concern that we highlighted in yesterday’s post is that the only way the U.S. economy can generate significant consumer spending is through aggressive lending to borrowers with low credit scores. Here is more evidence supporting that view.

In the chart below, we plot retail spending on appliances, furniture, and home improvement, or “home-related spending” (blue line) and spending on new autos (red line) from 1998 through 2014. We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010 to 2014. In order to be able to include 2014, we focus only on the first four months of each year.

 

 

When subprime mortgage lending was booming from 2003 to 2006, so were purchases of home-related goods. As soon as the subprime mortgage lending market crashed, so did home-related spending. In fact, in 2014, home-related spending is still below its 2006 level in nominal terms. It’s a pretty incredible boom and bust.

For auto spending, growth was positive prior to the Great Recession, but unspectacular. But as soon as subprime auto lending heated up in 2011 . . .

Read more »

Spending Worries?

June 12, 2014
By
Spending Worries?

Census retail sales for May came out today, and they missed the consensus forecast slightly on the downside. But there is another pattern that may be more concerning. Let’s take a closer look at what has been going on with household spending.

First, new auto purchases have been an important driver of household spending for the past two years. The chart below plots year over year spending (in nominal terms) from January to April for 2013 and 2014. The blue bar shows total spending, and the red bar shows spending excluding new auto purchases.

Over the past two years, nominal spending growth has been about 3% on a year-over-year basis. But if we exclude auto sales, the numbers are much worse, especially for 2014. Spending excluding autos in the first four months of 2014 has been less then 1.5% nominal, which implies a decline in real terms. This includes March and April, so it is hard to argue that weather alone explains this weakness.

So purchases of new vehicles have been an important boost to household spending and the overall economy. But what is driving this great performance of auto sales? A clue . . .

Read more »

Piketty and U.S. Wealth Inequality

Piketty and U.S. Wealth Inequality

It seems crazy to have such a heated debate on facts that are so easily measurable. Here we use the SCF from 1992 to 2010 to show the pretty unambiguous rise in wealth inequality in the United States. The housing boom hid the rise in inequality to some degree, but the crash in house prices from 2007 to 2010 made inequality transparent.

At the end of this post we tell you where to get the data and we give you the Stata code. We did this pretty quickly, so happy to be told if we’ve made some mistake.

The SCF is not a huge sample, so we have chosen to look at the top 20% (80% to 100%) of the wealth distribution versus the middle 20% (40% to 60%) of the distribution every year. Below, we plot the ratio of wealth of the richest 20% versus the middle 20%. We took the averages within each of these quintiles.

The graph shows that the top 20% of the wealth distribution had 15x the wealth of the middle 20% of the distribution in 1992. In 2010, the richest 20% has more than 25x the wealth of the . . .

Read more »

Employment Scars of the Housing Bust

Employment Scars of the Housing Bust

The central argument we make in our book is that the housing bust in combination with excessive household debt burdens were the key drivers of the economic downturn. Failure to more adequately address the housing disaster was the greatest policy mistake made in the Great Recession.

One way to see the scars of the housing bust is to look at the unemployment rate today in counties that saw the biggest decline in house prices. As we argue in the book, such an approach actually significantly underestimates the impact of the house price-driven spending collapse. This is because even people living in areas that were not hit by housing lost their jobs when people living in areas where house prices crashed stopped buying goods. But even with this under-estimation, here is the picture we get:

 

The unemployment rate in counties hit hardest by the housing crash is more than 3% higher in 2013 relative to 2006. The rise in the unemployment rate is twice as high as the rise in counties with the smallest decline in house prices. The housing crash has led to a large and persistent increase in unemployment. The evidence is undeniable.

. . .

Read more »

Book Related Links

Sorry we’ve been busy with the book, but will get back to posting soon. Here are some book-related links in case you’ve missed them:

New York Times: The Case Against the Bernanke-Obama Financial Rescue

Economist Free Exchange: The Opposite of Insurance

Paul Krugman (NYT): Springtime for Bankers

Book Interview on RT Boom/Bust

Washington Post: Why Tim Geithner is Wrong on Homeowner Debt Relief

New York Times: Housing Crisis Was Overlooked

Huffington Post: Did Washington Rescue the Wrong Economy?

Economist Free Exchange: The Unwinnable War

Brad DeLong at Equitablog

 

 

. . .

Read more »

Save the Banks, Save the Economy?

Paul Krugman has an excellent column this morning hitting many of the same themes we discuss in our new book. As he puts it:

In the end, the story of economic policy since 2008 has been that of a remarkable double standard. Bad loans always involve mistakes on both sides — if borrowers were irresponsible, so were the people who lent them money. But when crisis came, bankers were held harmless for their errors while families paid full price.

And refusing to help families in debt, it turns out, wasn’t just unfair; it was bad economics. Wall Street is back, but America isn’t, and the double standard is the main reason.

In some of the early reviews of our book, our argument is caricatured as saying we should have let the banks fail and we should have saved homeowners. We do not make such an extreme claim. In fact, we commend both Ben Bernanke and Tim Geithner for some of their policies that were directed at stopping dangerous runs in the banking system. We agree that bank runs threaten the payment system and the entire economy, and policies should be undertaken . . .

Read more »

Debt Forgiveness In History

In the face of large-scale economic shocks, enforcing debt contracts places an unbearable burden on debtors, who cut back their spending and send the entire economy into deep recession. One of the main arguments we make in our new book is that debt forgiveness makes a lot of sense when the economy experiences a large-scale negative shock that is beyond the control of any one individual.

History seems to understand this lesson well. The 48th provision of the Code of Hammurabi, written more than 3,500 years ago in Mesopotamia, states that: “If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not growth for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.” The main threat to economic activity in ancient Mesopotamia was a drought, and one of the first legal codes understood that debt should be forgiven if such a negative shock occurred.

In 1819 when agricultural prices in the United States plummeted leaving farmers overly indebted and unable to pay their mortgages, politicians ran to their defense. Many . . .

Read more »

A European House of Debt

A European House of Debt

The end of 2011 and early 2012 was one of the most stressful periods in modern European history. Even the otherwise composed German chancellor Angela Merkel was brought to tears.

At issue was the very survival of European Union which had once again gone into a recession, and financial markets were seriously doubting the viability of the European integration project. Spreads on Greek, Italian, and Spanish sovereign bonds reached historic highs, and their banking sectors were faced with the real threat of bank runs.

What had brought Europe to this precarious position? Why was the unity of Europe, a remarkable political and social achievement, in serious doubt?

The answer is debt.

In the years leading up to the Great Recession, the financial markets had reposed great confidence in the so-called “peripheral” economies such as Greece and Spain. Lenders from creditor countries such as Germany and the Netherlands were willing to lend to these peripheral countries at very low spreads by historical standards.

The result was a great run up in debt inside Europe between 2002 and 2008. The figure below summarizes the net borrowing / lending position of each European country on the horizontal axis. Each country is ranked on this axis by its average current . . .

Read more »

Tim Geithner Is Wrong

We published our post over at WaPo’s WonkBlog today — one of our favorite sites. Here is the link

As a quick follow up, here is a quote from a research paper by Richard Disney and others:

“However, we do find a strong asymmetry in the response for households in “negative equity”—households in negative equity experiencing a surprise gain exhibit a consumption response five times stronger than households that had initially positive equity values in their housing stock.”

Again, the MPC estimate that Geithner uses is absurdly small, outside of the range that most economists use.

. . .

Read more »