The B Word The New York Times Last week, Robert Rubin, the former Treasury secretary, and John Lipsky, a top official at the International Monetary Fund, both suggested that public funds might be needed to rescue the U.S. financial system. Mr. Lipsky insisted that he wasn’t talking about a bailout. But he was.
Sowing the Seeds for the Next Crisis Investor's Business Daily In deploying its most powerful weapon, the Federal Reserve made clear that some banks are simply too big to fail. While Bear Stearns' (BSC) near-death experience is sending shudders through the financial world, it also provided a reminder that banking giants have the ultimate insurance policy — a government rescue.
Dollar Sell-Off Gathers Pace Financial Times The dollar plunged to record lows against the euro and Swiss franc and its weakest level since 1995 against the yen on Monday as fears over the state of the US financial system sent the currency tumbling.
March 18, 2008
U.S. Steel Lays Off Another 10,000
General Motors Stock Down From $500 a Share to $10 a Share
Chicago Teachers Feed 11,000 Hungry Children
Kentucky Coal Miners Found Living on Dandelions
Those aren't headlines from today. They're from 1932. But reading the papers and listening to the nightly news, you'd think it were 1932 all over again. Which got me to thinking: Is it?
From 1929 to 1932, U.S. National Income (what we now call Gross Domestic Product) fell from $81 billion to $41 billion.
About 85,000 businesses failed. 9,000 banks failed, and 9 million accounts were wiped out.
The income of the average family fell 40% from $2,300 a year to $1,500.
Unemployment was a steady 25% for much of the 1930s.
Many people peg "The Crash" to Oct. 29, 1929. In fact, the stock market didn't hit rock bottom until July 7, 1932, when the New York Times stock index closed at 33.98, down more than 89% from its Sept. 19, 1929, high of 311.90.
So how does 1932 compare to today?
A quick check of the facts reveals that unemployment remains below 5%. Inflation, too.
U.S. Per Capita Income is close to $40,000.
Real consumer spending is expected to eke out a slight gain for the first quarter, while overall economic growth is pegged at 1 percent. Not great, but it's not a recession (and nowhere near what we saw in the 1930s).
The stock market looks like a bad investment - especially with gold topping $1,000 an ounce and oil above $100 a barrel. But if you take the long view, you know the stock market bottomed at 33 in 1932. It took until 1987 to get above 2000, and it wasn't until 1999 that the Dow hit 10,000.
Today, it's just shy of 12,000. Down from it's all-time high, but 20% above where it was less than a decade ago.
Even if you look at the housing market, which supposedly started all this, a few facts get in the way of the nightly predictions of doom and gloom. Yes, median home values dropped 5.8% in 2007 to $206,200. But what were they in 2000? $119,600. Not a bad ROI.
The most interesting facts that caught my eye are these: Only 7% of the current outstanding mortgages are what would be termed high-risk, variable interest-rate mortgages. And for all the talk about defaults, 98% of all mortgages are being paid - in full and on time.
The point of all this isn't to defend the Bush economy or make a case for Adam Smith over Keynes or Marx. My issue - if you want to call it that - is with our friends in the media.
Where, in the last two months, have you heard any of these facts put in this context, except from Warren Buffet, who said, "Over time, my children are going to live better than I do, although they don't believe it."
Cowen on Monetary Policy econtalk.org Why things are far more troublesome than most people expected (and that is the really tough question; real estate bubbles have burst before), why monetary policy matters at all, the tricky balancing act played by the Fed, why a gold standard isn't the answer, and many other macroeconomic topics.
Our Economy Is Not a Child's Erector Set Cafe Hayak Like Gail Collins, I was unimpressed with George Bush's speech yesterday to the Economic Club of New York ("George Speaks, Badly," March 15). But I disagree with Ms. Collins that "in times of crisis you would like to at least believe your leader has the capacity to pretend he's in control."
Uncle's Sam's Massive Bailout Capital Commerce blog The irony of the Federal Reserve's bailout of investment bank Bear Stearns is that the firm has a reputation as being among the most free-market loving on Wall Street—and that's saying something about a company located smack in the middle in America's financial capital.
The Coming Tax Hike gregmankiw.blogspot.com Intrade now lets people bet on future marginal tax rates. The top marginal tax rate for the federal income tax, which is now 35 percent, is expected to rise. Here are the current probabilities for the top rate in 2011: P(top rate equals or exceeds 38 percent) = .87 P(top rate equals or exceeds 40 percent) = .33 P(top rate equals or exceeds 42 percent) = .18
I'm in the real estate business (in the San Fernando Valley, Southern California). Despite all t...
— ExPat
March 18, 2008 7:45 PM
Are we headed for a Recession?
24% 23% 13% 40%
gotleib1 said...
No one ever said that today's liberal media wasn't nihilistic. But for them, disaster sells. However, it is a travesty that your everyday American takes the information that flows out of the media for gospel. Fair & Balanced doesn't exist. It is incumbent upon everyone to search out the facts for themselves.
Backtable said...
Ask yourself this: If the median home price was $119,600 in 2000, what was the median income for a family of four at that time?
I think the markets have it wrong. The problem per se is not defaulting mortgages. It's the negative savings rate in this country and consumers' reliance on credit that has us in a predicament.
Artificially low interest rates inflated housing prices at the turn of this century. If the 'average' income for a family of four is $40k (or as the US Census Bureau claims, $48k in 2006) and the median housing price is $216,000, then the 'average 'family' still can't afford housing, particularly under traditional lending requirements of 10-20% down and 30yr. fixed mortgage rates.
Consumers make up 70% of US GDP. Housing prices have to come down (or incomes go up) to get consumers spending again, and yet, we have a slowing economy, higher commodity prices and a glut of housing.
If consumer spending slows, where are corporate earnings going to come from? Increased imports from a weaker dollar? Is this a good thing? Not if we at home don't increase our national savings rate and get a handle of massive deficit spending. Japan in the 1990's anyone?
pookiemou said...
Ah pessimism!
Easy isn't it?? Especially in an election year!!!
I personally find it sad that people are taking the Henny Penny outlook on life.
Here in the Pacific Northwest, Boeing (despite losing the USAF Tanker Deal??) is still hiring (at excellent wages, I might add), and it is is to be noted that close to 50% of ALL exports from the entire United States come from this one company.
Despite issues with the new processes and untried suppliers, the 787 Dreamliner has sold 892 aircraft without flying yet---and other projects are on the horizon.
I intend to purchase my first home this summer--now is the time to buy!!!
I do not imagine that all is well everywhere, however, if ANY economy has the ability to survive and rebound quickly from these issues it is ours. Look carefully at the things that the news has said in the past that should have collapsed our economy if people had listened---does anyone remember the S&L crisis???
America is NOT Japan---our businesses do not have the straight-jackets that Japanese businesses have by law and tradition. Look deeper into these issues and you will learn how we surpass our difficulties and always will.
Sleep well.
Forty Rod said...
What do I think? I think it's great to find a site that isn't doing its level best to talk us into depression, finacial and mental.
I've watched as politicians, news media, liberal celebrities, and business leaders have told us how bad the economy is, watched people buy into this message and stop spending money on anything but essentials, and watched the "recession/depression" begin to become come a self-fulfilling prophecy.
Thanks for a dash of reality.
tmemedia said...
Rather than the "henny penny" way of thinking about the economy, as you refer to the so-called pessimism of the media, I prefer to call it realistic. Let's look at the worst case scenario and make sure we put measures in place to avoid that scenario, instead of comparing numbers of today to numbers in the depression. As if the climate and situations we are facing today have anything to do with the 1930's! What's truly scary is our political leaders claiming that they've got things under control, and if any economy can weather this storm, it's America. Flag waving makes people feel better, yes, but what we really need are some hard headed, sharp economists in this country putting their heads together to figure out how to get the dollar strong again and raise wages in this country. Sure, it's a good time to buy if you have money -- that is, if you can afford rising health care costs, college tuition, gas for your cars, heat for your home, and those pesky property taxes that funnily enough are NOT going down as the value of your house plummets.
Let's get real, folks, and start acting instead of wallowing in denial. Or would you prefer America becoming a third world country in need of an IMF bailout?
Teresa
The financial system in the US is broken; it needs a reset. Yet the fed, in bailing out BS, has emphatically declined to let the system heal itself. Where's the story on that?
The American taxpayers are footing the bill: yesterday JPM's market cap increased over $10B. The fed just gave JPM shareholders a nice "stimulus package." Outrageous, indeed.
Well, I figure that it's more than just pessimism in the media--it's sensationalism. CNN doesn't make money by showing you the news, they make money by showing you adds. The news just makes you watch the adds. Every news company is trying to outdo all the rest, so they make as many doom and gloom predictions as possible. Is the dollar in trouble? Yes. Is gas getting too expensive? Yes. Are we headed for an economic apocalypse? No. That just sells more papers than an honest comparison between now and the Great Depression.
thecatalyst said...
The mainstream media tends to give us just a soundbite of the actual news, then the same old "experts" give us long-winded discussions of what could happen. All too often, they discuss the worst-case scenario as if it were the likely scenario. Often their dire predictions are just not repeated when they don't come to fruition (i.e. bird flu and SARS PANDEMICs!). But when it comes to our economy, overly sensational dire predictions can have a truly negative effect.
When it comes to economic news, Jane Q. Public doesn't want Pollyanna or Henny Penny, just the straight truth, rationally presented.
"The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War. The crisis will leave many casualties." - Alan Greenspan
I completely agree!
CFOSTER said...
I HONESTLY THINK PEOPLE NEED TO LOOK AT THE WORLD IN A DIFFERENT LIGHT - INSTEAD OF "WHAT CAN I GET" "HOW MUCH CAN I HAVE" AND "I DESERVE MORE" AND ALL THE OTHER GREED BASED ATTITUDES PEOPLE NEED TO LOOK AT HOW CAN I SERVE - WHO CAN I HELP - WHAT CAN I DO ON AN INDIVIDUAL BASIS TO IMPROVE THE OBVIOUS PROBLEMS WE ARE ALL FACING.
READ, STUDY, LISTEN AND VOTE FROM AN INFORMED VIEWPOINT. THERE ARE SO MANY THINGS WE CAN ALL DO TO LIVE IN A BETTER WORLD. OVERALL WE NORTH AMERICANS (US AND CANADA) ARE SPOILED ROTTEN, MANY THINGS WE BELIEVE ARE RIGHTFULLY OURS AND SHOULD BE FOUGHT FOR ARE FACETS OF INDULGENT LIFESTYLES RIFE WITH WASTE. WHAT ARE WE TEACHING THE NEXT GENERATIONS.
Spinner said...
Are any of you retired? With the Fed reducing interest rates (again today) it is getting more and more challenging to find decent investments. Muni's with any decent return are all called and CD's are going lower and lower. Thinking for the long term is one thing, but when one is trying to live on Soc. Sec. and investments in the here and now, things are definitely getting more challenging. We find that we are having to scour the market for various low to mid cap funds and precious metal funds because we are at a point in our lives where we find that the long term investment growth is not as important as the actual income from those investments. So yes, we, as retirees are definitely feeling a very real slump. Every time the Fed lowers the interest rate, we have to hitch up our belts and re-figure our budget. And I know we are not alone. There is a whole segment of the population that is really getting hurt by all this "fixing" of the economy. And the state of the health care coverage system doesn't help...
Red Vette said...
It is in my opinion all a part of greed. People who thought they could get something for nothing, people who didn't understand what they were doing and financial institutions thinking they could cash in, and pass the mortgages on. I do take some exception to some of the points you make. Bear Stearns did have a liquidity problem and institutions did take advantage of the subprime mess. People thought that the housing market would never turn down and you can look historically and find that not to be the case. I think we are all definitely in for some belt tightning.
I'm in the real estate business (in the San Fernando Valley, Southern California). Despite all that you hear about the real estate market, people still list their homes for all the same reasons as in the past - a death, a marriage, more children, less children, retirement, job relocation. People still buy because they need a home. Perhaps the flippers and short-sighted investors have left the market, but the buyers and smart investors are still active. We have some bank owned properties and the bidding wars among buyers has been unexpected.
Someone's loss has also been some other person's gain.
I think it's not a question of optimism or pessimism but seeing the reality and looking for an opportunity. In the end, you create your own optimism.
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