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08/09/2009

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Anonymous

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Anonymous

I am enjoying this series of posts. I have to make one observation relative to economists and ability to predict. I am a mere banker, and no economist. Yet as far back as March 2007 I was picking up on threads that told me we had a problem.

Not that I saw everything, but then neither am I an economist. My point is that perhaps traditional economics and thinking got in the way of rational thinking.

http://thebankwatch.com/2007/03/14/more-on-the-us-sub-prime-mortgage-market-wharton/

"This analysis from Wharton in Philadelphia describes the strategic run up to the current issues. It also implies the possibility that there might be a soft landing out of this, but its a definite maybe. In particular the tie to the overall capital markets is worrisome."

Anonymous

I agree with Professor Posner on this one although for a slightly different line of thinking. As you know, the "news" is always several months behind the facts of social movemnent which often drives economic movement. If you ask almost any traditional ethnic immigrant group they will tell you that their first generation members are returning to their native homelands in particular the Indians and the Polish. They cite the fall of the dollar, the diminishing real wages in the US, the growth in India and the fact that Poles can settle anywhere in the EU. If that kind of thinking is going on in those communities, you can bet it is happening in others as well. I know many first generation immigrants who are telling their children that the future is not in the US in addition to their thinking that the US is losing its freedoms to a more all encompassing government. If one adds all of that thinking to the obvious fact that our economy is based on consumer spending and bubbles (the next one being the "green" bubble), the economy will remain stagnant for quite some time. Who could imagine that the US goverment would own the financial sector (and indirectly the housing sector) the auto sector, the insurance sector and potentially the healthcare sector and that federal deficits would approach 40% of the GDP. Next they will be attaching personal financial assets. Does anyone think that productive people will work harder in these circumstances? Does anyone think that federal spending is "productive"?

Anonymous

I'm with the Judge on this one. We've got a "W" rally in Wall St investment securities, that's all. The U.S. had one in 1938 but only the WW II mobilization pulled the vast majority of American households out of the ditch. A year or two from now we'll still be wrestling with unemployment/underemployment, soaring govt deficits, residential foreclosures, and a severe bust in commercial real estate values and loan defaults. Quit listening to the pump-n-dump rapid-trader crowd and read the handwriting on the walls of Main St.

Brian Davis
Austin, TX

Anonymous

Posner errs in speculating that bankruptcy filings by GM and Chrysler, without government intervention, likely would have led to liquidations of those firms. This is rather shabby dismissal of the bankruptcy system established by Congress -- with authority granted by the Constitution -- as compared to the neo-bankruptcy system crafted by the Obama Administration, which in ends and means amounts to sheer political thuggery.

That aside, Posner is correct in noting (even though he doesn't come right out and state the fact) that the Obama Administration is like a bunch of children unleashed in the dynamite shack with lots of matches.

Anonymous

Mr Posner's comments on the adverse feedback possibilities of a capitalist economy remind me of "Lazarus Long's" comments in Heinlein's novel.

Anonymous

The present crisis is not one of economic theory or economic policy. It is a crisis of character. Either we will insist upon fiscal discipline, or we will not. In the late 1970s, we had the extreme good fortune to appoint a man to the Chairmanship of the Federal Reserve who was prepared to do whatever it took to halt the spiral of inflation. Today, alas,there is no one individual, or group of individuals, who has the power to put a stop to the spiral of federal spending. Only a committed electorate can accomplish that, and I am far from confident that there is enough character left in the nation to sustain that effort. Next to that question, all other issues of economic policy seem to me to be utterly trivial.

Anonymous

I agree with the comment above. It is not a matter of economic theory but rather of national character or the lack thereof. The public elects the followers who make destructive decisions to keep the public voting for them in the short term while the long term keeps going down hill. It is a sad case of national suicide.

Anonymous

All said and done, banks are still big, regulation is still lax, savings is still low, nothing in the horizon which promises productivity, higher deficits and profligate spending. While we can debate on whether this recession is going to be over or not, it is probably the effect of Tylenol. Where is the antibiotic?

Anonymous

"Because economists have yet to achieve an adequate understanding of the macroeconomy and business cycles, I do not think it is possible to fault the government for having acted aggressively--and expensively--to fight the crisis."

This is an interesting argument in the sense that it is very similar to the "Neoconservative" case for torture. The perceived worse case scenario is another great depression in one case and a another 9/11 in the other. I'm not passing judgment, just thought I would point that out.

Also, I think a lot of people will be proven wrong when we come out of this with a without a high level of inflation. The more the fed inflates -- the more tools they have to deflate. The fed still seems to have a lot of tools at their disposal to get credit flowing again, especially, if they heed Scott Sumner's advice on negative interest rates on excess bank reserves.

Anonymous

I'm not exactly sure how stocks and houses are necessarily much different than savings. It is possible for some level of over investment in these areas, but generally savings also get used for loans or investments by banks to justify a rate of return.

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I agree with you on the actual crisis being not only financial and economic, but also theoretical – in economical theory, but also in political and business ethics. However I think both your analysis, especially Berger’s but also your own, lack the long term perspective. Namely, the analysis of this crisis according to something like Carroll Quigley’s “instrument of expansion”. For your readers that understand Portuguese, I’ve developed this idea in http://onodoproblemaocidental24x7.blogspot.com/2009/08/perspectivas-economicas-para-proxima.html.

Anonymous

Thanks for the post. Reading it late, but that's why I love your site--it's timely, but not ephemeral.

A minor note on your point that "[a] recession or depression ends, in my view, when output rejoins the GDP trend line"--there is some evidence that after a financial crises GDP may never rejoin the original trend line. See here, for example: http://gregmankiw.blogspot.com/2009/08/blanchard-on-outlook.html

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