By The Tim on April 13, 2009
Here is your open thread for Monday April 13th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.
Be sure to also check out the forums, and get your word in the user-driven discussions there!
Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
It is fascinating to see how the US quickly recovered from the economic crash of 1919/1920 by following a very different strategy than our leaders are taking today. Instead of stimulus spending, the government actually cut spending (and taxes).
Warren Harding, as it happens, turns out to have been a pretty good President.
http://surkanstance.blogspot.com/2009/04/depression-youve-never-heard-of-1920.html
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RE: Sniglet @ 1 – I wouldn’t necessarily assume causation. Also, it’s possible that was merely a precursor to the larger event later.
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Give me a break Sniglet. The recession then is more akin to 2002 than 2008. They “solved” that recession by creating a huge bubble that ruined the economy a few years later. The Japanese response to their lost decade was eerily similar to what anti-stimulus Republicans talk about today: prop up the banks with taxpayer money, but make sure to not give the taxpayers any of it via stimulus. Once the Japanese decided to actually try stimulus, they went into it half-hearted and pulled back immediately at the first sign of recovery, which plunged things back into the toilet again. If both parties want to shovel money down a hole, I am more in favor of that hole being bridges and roadwork than tax cuts for businesses and rich people.
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RE: Sniglet @ 1 – Wow. An Alabama-based Libertarian “think tank” whose stated goal is to “undermine statism in all its forms” says that laissez-faire economics is the solution for our problems
Quel suprise!
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Hardly. Yearly GDP numbers didn’t even go negative during the 2001/2002 recession, and unemployment didn’t exceed 6%. By contrast, 1920 saw a 24% contraction in GDP and the unemployment rate shot from 4% to 12%. This was a far more dramatic decline in the economy than anything we have seen in decades, and was certainly much worse than what the US is experiencing in 2008/2009.
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Yes, the Austrian school of economics has an ideological bent, and they certainly don’t have the answers to everything (I quibble with them about inflation/deflation, for example). Nevertheless, I thought this piece raised some interesting comparisons to 1920. I had never given a lot of thought to the economic problems in 1919/20, and the crisis that confronted the world at that time turns out to be much worse than I had realized.
Just because they are idiological doesn’t mean they can’t have good ideas. :)
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http://www.kunstler.com/mags_diary25.html
http://www.kunstler.com/mags_diary25_bruegel.jpg
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It’s announced that pending sales are up and all of a sudden my inbox is filled with 6 way overpriced houses. I’ve been looking for nearly two years. Sometimes I see listings that make me think people are starting to get it. And then there are days like today where Seattle takes two steps back.
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RE: Sniglet @ 1 –
You can not compare the end of World War One to any other economic period in present or past. You are talking about a time when the United States Industrial Empire stopped making tanks and battle ships while the troops came home.
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RE: Scotsman @ 7 –
So Scotsman, do you read your kids Edgar Allen Poe stories at bedtime. Don’t you read anything with a happy ending like “Barak and the Beanstalk” or “budding young scientist discovers free energy produced by fast growing hydogen producing microbe?” I feel like commiting suicide after reading Kunstler’s stuff but it would seem redundant.
Perhaps as Jef Goldbloom’s character said in Jurasic Park, “life will find a way.” Optimism generally sounds really misplaced coming from me, but one of my dad’s uncles became a millionaire in the 1930′s in a hybrid seed corn company in Coon Rapids, Iowa. It was a very early biotech agra-business. Farmers couldn’t afford to buy seed corn so they gave them the seed in exchange for half of the increased yield per acre at harvest. Science and capitalism, you gotta love em, even if sometimes they seem like an inside straight. Maybe if they put T. Boone’s CNG plan to work they can buy some time to fend off peak oil and put new energy systems on line. That is what I thought a huge part of the stimulus package should have been used for. Put an army of scientist to work on the we’ll be energy independent program, like the man on the moon program of the 1960′s.
I think Kunstler’s timetable to doomsday is too short and he’s a little too pessimistic but it’s interesting stuff. I’ve never been all that fond of western civilization but the easy life of store bought food and a big house with indoor plumbing and hot water would be tough to give up at this point. In my dreams, I always wanted to be a communal subsistance farmer, or to live on a sailboat as a hunter/gatherer, but I always had the feeling it would end badly like that kid who ate the wrong plant and died near Denali in the early 1990′s. In any event, you gotta love a guy with the literary precision and cojones to use the term “Cluster F_ _ _ .” It’s my expressions of choice for complex systems gone wrong and failed interpersonal relationships, at least when social pressures don’t dictate other vocabulary.
So are you going to move to a non-inflated farming community outside of Spokane and grow your own food or to a condo near a mass transit line?
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RE: Sniglet @ 6 –
Sniglet, you’re wrong about inflation/deflation. Inflation may be a nuclear weapon, but deflation is the doomsday machine. Deflation destroys the financial systems capital by destroying the value of collateral for loans. A financial system without sufficient capital is non-fuctional. And without a financial system, a capitalist economy has no ability to function. Inflation causes problems, but not nearly the problems of deflation. The powers that be will error on the side of inflation at all cost.
Inflation may decrease our standard of living by changing the relative prices of imports caused by a sudden devaluation of the dollar (all the Chinese goods at Walmart suddenly go up in price before our economy reacts with overall wage and price increases) but it also has the unique benefit of eliminating a large portion of our debts (especially to foreign governments) without actually having to pay them back.
As to the 1919 crash and Hardings apparent supply side policies, I believe that in most cases there is little practical difference between Keynesian policies and supply side policies except perhaps which individuals get the economic benefit. A dollar in commerce is a dollar of GDP no matter if its spent by a wealthy investor or an unemployed laborer. And theoretical multipliers are guestimates. When one rich guy recognizes a capital gain by selling stock to another, there is no increase in capital for business and no increase in productivity though lower taxes unless the seller re-invests the money in a business or spends it in the economy. If there are capacity constraints keeping down production then supply side theory may be a better tool, but if demand is down, then in my opinion, supply side theory has at best no more value than it’s Keynesian counterpart.
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RE: One Eyed Man @ 11 – Where have you been? What a pleasant breath of fresh air instead of the usual hot air.
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sniglet@1
When the only tool in your toolbox is a hammer, everything looks like a nail.
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Deflation can certainly be painful when it suddenly presents in an economy which has hitherto relied on inflation. However, “deflation” is NOT a bad thing, and would actually be the normal state of affairs if we didn’t have fiat currencies and central banks.
When everyone EXPECTS deflation, then the whole system adjusts itself. Interest rates are typically lower in economies that have long-term deflation, since the relative value of the currency paid on the loans continually increases. Invidivuals find that their standard of living increases because their existing wages buy more than they used to.
Admitedly, we are in a desperate situation right now since a mountain of debt has been created over the last few decades which DEPENDS on inflation to enable repayments. Unfortunately, the reality is that a huge number of these outstanding loans were bad to begin with (i.e. they never made economic/business sense at day 1) and they will have to be written off and “purged” at some point. The recession of 1920 is very relevant in this regard because it shows how allowing an economy to find clearing prices, and rid itself of mal-investments, can lead to a swift recovery.
By contrast, attempts to re-inflate bubbles, and avoid the discovery of new market prices (as the US is doing now), only leads to prolonged agony.
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RE: Sniglet @ 14 –
Way to stick by your guns Sniglet! Excellent points even though I might disagree. First, I think you’ll be waiting a long time if your fix for the economy is to do away with central banks and fiat currency. I generally laugh when people say we are a “right of center” county (isn’t the center, “the center” by definition? But if conservatism is resistance to change, we are definitely too conservative for the vested interests to consent to doing away with central banks and fiat currencies without a prolonged battle.
As to 1919, David Losh has a great point. There are a lot of extraneous factors in that time period that are not accounted for without looking at the short term dislocations in the economy which were probably caused by the end of WW I and not actually cured by Harding’s policies.
Although I generally believe in free markets and capitalism, in my opinion they don’t always insure success of what may be the best macro-economic solution. This is due to numerous factors including, without limitation, such things as free rider effects, barriers to entry, economies of scale, lack of transparency, unequal bargaining power, and other assorted factors. That’s not to say that a less government manipulated market wouldn’t come up with a better solution, but its also no guaranty that an unfetterred market would. There are costs to government regulation and intervention, but there are also huge risks (and potential costs) to unregulated markets.
If you believe in the possibility of systemic risk, then allowing the financial markets to attempt to clear on their own may have resulted in collapse of the financial system. And in my opinion, a less regulated market is just as likely, if not more so, to develop problematic solutions like CDO’s, credit default swaps and all the other money making financial Frankensteins that made short term big bucks for a few at the expense of the economy as a whole.
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RE: One Eyed Man @ 10 –
As Poe provides the perfect bed time story for Halloween or that summer camping trip, Kunstler provides a needed dose of reality in the face of blind economic optimism. His premise of “what exactly are we expecting to return to?” is worth some thought. And I would add, what has changed that could lead one to believe we’ve turned the corner and are headed for better times? When I start reading about S+P 1100 on Bloomberg, it’s time for a cold splash of reality. I’ll admit his use of Bruegel was a bit over the top though.
I’m personally optimistic about the coming decade- change always brings opportunity as a partner, and I hope to take advantage of both. Mad Max isn’t in our future, but some hard changes and a different set of expectations are. The “good life” for many will be redefined with less emphasis on materialism and more on security and community. Most people dislike or fear change and unpredictability, so consistency and stability will come to the front in our value systems.
Almost everything I read underestimates our adaptability and responsiveness to change. The “collapse of the financial system” is a case in point. My bet is that within a month systems would be up and running, meeting people’s needs on both personal and corporate levels. Unlike the GD or times past, the national infrastructure for communication, transportation, etc. on all levels is so superior that corrections could happen very quickly.
The constraints we face are real- too much debt, not enough productive capacity, too much “overhead” in social and governmental programs. Scarcity will force all to make harder choices than we’ve faced in the past, but the result will be clarity of purpose and a focus on foundational values. I’ll find it refreshing.
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RE: One Eyed Man @ 15 –
With regard to the nature of a resurgent financial system, I disagree. Complexity and trust go hand-in-hand, and with the destruction of trust what we will see is simplicity and only the most basic types of transactions. Traditional collateral based lending and relationship lending will rule. My guess is it will be some time before the convoluted financial machinations that brought us to our current demise return. The need for CDO’s, etc. was never real outside of the fees and returns they generated. Capital flowed as needed long before the 1980′s and the appearance of the alphabet soup of financial destruction. When fear is real, losses are real, and distrust has recently been brought to the front burner, regulation will be unnecessary as the demand side of the market will control.
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DR ROUBINI CALLS THE BANK STRESS TESTS FRAUD LIPSTICK ON THE ECONOMY PIG
All the banks are passing the phony FDIC stress tests, because the GDP drop, unemployment, etc is all overally optimistic and a fairy tale in the data.
See the proof:
http://www.rgemonitor.com/roubini-monitor/256382/stress_testing_the_stress_test_scenarios_actual_macro_data_are_already_worse_than_the_more_adverse_scenario_for_2009_in_the_stress_tests_so_the_stress_tests_fail_the_basic_criterion_of_reality_check_even_before_they_are_concluded
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I am not really expecting any significant changes to occur with regards to the structure of our currencies or central banks. I was merely pointing out that under such a system there will be long periods of inflation punctuated by severe boughts of deflation that can last 5 to 20 years.
To be more specific, it is those ecomies where huge amounts of private borrowing (denominated in the domestic currency) are occuring that are destined to suffer severe deflationary contractions. The US and Japan are good candidates for this kind of deflation, but places like Iceland, Turkey, and India are not (i.e. because much of the private borrowing is denominated in foreign currencies).
I am not stating a desire for deflation, just the observation that this is likely what is (and will continue) to occur in the US for the next 5 years or so.
Further, I still stand by my earlier comments that government efforts to prevent, or avoid, deflation will do no more than prolong the agony.
If you don’t like 1920 as an example for how economies can recover on their own, then look at the US in the 1930s or Japan in the 1990s/2000s to see how stimulus and bailouts don’t help either (and arguably make things worse).
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Sniglet -
Japans stimulus measures arguably kept it from experiencing a depression, and they had a backdrop of global growth to help where the stimulus might not. The US likely averted the collapse of the government by its stimulus measures in the 1930′s, if people had not gotten back to work on government projects thing would have become much worse quickly. And what did bring us out of the depression (which double-dipped when stimulus measures were dropped in 1937)? It was WW2, which can only be described as government stimulus on crack. I think its been pretty well shown that the government can have some effect on the economy in this respect. Its debatable if the dollars going in equal the dollars coming out, but at the very least I think its obvious that it softens the blow. The government can borrow at near zero rates right now, which I think changes the equation quite a bit.
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RE: b @ 20 – Agreed.
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RE: Scotsman @ 17 -
I don’t think I disagree with much if anything you said Scotsman. I think the only thing we might disagree about is how soon inventive minds motivated by profit will find a new financial product that consumers will devour and the financial system will be too blind to consider an inappropriate risk. Eventually some form of too good to be true financing will return and the collective consciousness of the american financial sector will either have forgotten its past wounds or be oblivious to the risks involved due to the almost absurd level of legal BS and complexity that ambitious MBA’s and lawyer’s are hired to create (ironically at least in part in the name of transparency).
I don’t have statistics to give you on this, but I can speak from personal experience at least as to the post 1980 period. In the early 1980′s, I was hired by clients to put together real estate tax shelter private offerings. Tax rates were high and everyone wanted to lower their effective tax rate. We structured real estate limited partnerships that would throw off ordinary income losses for a period of years. The losses would supposedly be recouped as capital gains on sale of the projects. Unfortunately, most of the promoters were better at creating losses than creating projects that sold at an equal or greater gain. None the less, investors bought them like hot cakes.
Decreased tax rates and changes to the tax code in the 1980′s spelled the demise of the tax shelter industry, but I soon found myself drafting construction loan documents for savings and loans that had been bought by our developer clients when savings and loans were deregulated. As I understand it, they were able to increase the capital of the S & L by dropping their development companies (which held paper profits in limited partnerships) under the S & L as a wholely owned subsidiary. The accountants and other consultants had blessed that portion of the business model and I never scrutinized the conclusion. Unfortunately this spawned a rash of lending with bad underwriting (and even 100% commercial financing in some cases). Loan officers made quick fortunes on the points in the deals. Of the 4 financial institutions I had worked for, 2 were taken over by the RTC and 2 survived.
The late 1990′s were dominated by private and public offerings of technology companies which often had little in the way of economic fundamentals but a great story and a lot of blue sky. I stuck with real estate during this period, because I thought I had at least a modest understanding of it when compared to my exceedingly limited understanding of intellectual property.
We’re now in the middle of the shadow banking fiasco. As you say, I think everyone is sufficiently scared and will go back to fundamentals and asset backed lending with reasonable underwriting. But sooner or later, some new ambitious entrepreneur will be selling lottery tickets with a 200 page prospectus (drafted by ambitious young MBA’s and lawyers) as investments. And no one will notice until its too late that your odds of getting all your money back are one in four. Hopefully the tickets won’t be issued or purchased by a too interconnected to fail entity like AIG and we can watch them die a natural death as opposed to keeping them on public money life support.
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RE: One Eyed Man @ 22 –
Agreed, there will always be “the hot new thing” ready to masquerade as the easy road to riches. I think the difference this time will be one of scale. REITs, Dot-com IPOs, etc. all affected a somewhat limited group of interests. Relatively few were involved in REITs, and while the dot-com bust put some serious money down a hole, neither threatened the world’s economic structure. From a national perspective those were slaps on the wrist- they smarted, but were easily forgotten. This time we’re going to the woodshed, and dad is pissed and a bit drunk. We won’t forget. Like the GD, this lesson will stick for at least a full generation. The public may even turn off their TVs and take some time to learn a little about economics. Time will tell.
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Eastside Real Estate statistics — 6 year study of Active and Pending sales and sales ratios.
Includes all inventory. Inventory under $699,999. Inventory over $700,000. Inventory over $1 mil
Also includes a YOY chart for end first quarter. Here you can see the relative percent of sales in the various pricing zones.
http://www.workingforyou.typepad.com//realestate/2009/04/eastside-real-estate-statistics-6-year-study-of-active-and-pendings.html
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RE: b @ 20 –
Well said b @ 20.
Sniglet, my opinion is only that (and not necessarily even a well educated opinion when it comes to economics). But given our financial system as it is, I’m still betting on b @ 20 and Mikal @ 21 as having a higher probability of being the correct analysis.
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This is certainly the conservative bet. I am definitely out in the wilderness with my calls for deep, prolonged, deflation. In fact, there is only one prominent figure I can think of who has the same perspective. Virtually EVERYONE else believes that inflation (or hyper-inflation) will rear its head in short order.
Actually, even I would agree that we will have massive inflation eventually. I just think we are going to see a lot more deflation before we get there.
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RE: Sniglet @ 26 –
I’m looking for 5 plus years of deflation, then single digit inflation- at worst. And I may be overly optimistic. Hyperinflation is out of the question unless you want a revolution. Looking at Japan again, they have a national debt equal to 200% of GNP. The only reason they are still viable is the unusually low interest rates (and level of inflation) that government policies have produced. And in fact, it is only the last couple of years that have shown any periodic hints of inflation as opposed to the deflation that plagued them for over a decade.
Those who argue for inflation don’t follow the money. Most of the dollars we’re putting into the system now are being absorbed in reserve pools or paid against losses. They certainly aren’t making it into consumer’s pockets, and that is a requirement for sustained inflation. The government doesn’t want inflation, the banks don’t want inflation, the consumer isn’t in control of it. Those who think government would like to pay off its debts with inflated dollars forget the other side of the equation, the cost to its own operations and political stability of doing so. It’s the ultimate short-term gain for a suicidal loss in the end. I certainly wouldn’t count on it in my personal planning. If things change, there will be plenty of warning, but inflation’s eventual occurrence is far from certain.
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Hey, what could go wrong? Truly a brilliant move:
http://www.marketwatch.com/news/story/Fannie-Mae-Chief-Executive-Herb/story.aspx?guid=%7B861F527B%2DF191%2D4B0F%2D9381%2D9380AB2B4C03%7D&dist=hplatest
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RE: Sniglet @ 1 –
War; Japan does not have the ability to go to war.
Every example of a recession you have is followed by military spending. Japan has no military spending to rely on.
!970s Vier Nam, 1980s the Berlin Wall came down and Reagan spent massive amounts of money on the Star Wars project. BTW what ever to that?
1990s Clinton paid down the National Debt with the Peace Dividend. 2000s we were paying for a couple of wars, more or less.
Obama is pulling the plug on war by offering to negotiate a peace.
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Instead of war – why not spend on roads and infrastructure? If you need to blow up sthg – then you can say
blow up a building site
build a building a site
blow up building site
buold a building site
- do it as many times as necessary.
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