Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, November 13, 2008

For the First Time I'm Scared about the Economy

Word comes out today that Sec'y Paulson has abandoned the initial plan - approved just six weeks ago - to bail out banks by buying distressed mortgage securities and other 'toxic' assets. This plan was sold to Congress as the way to get credit markets moving again. Paulson now says it won't work, and we are shifting to direct cash infusions to banks. In other words, the $750 billion bailout plan approved by Congress has already pre-failed. So Paulson is hoping to find something else to do with all that cash that might help. Bush, the "MBA President" is nowhere to be found. Apparently a group exercise in synergies isn't going to help.

Oh my God - do you realize this means that the government is desperate and clueless? The problem appears to be that banks refuse to loan money normally no matter what we do. The only solution may be to nationalize the banks and install new management that isn't so recalcitrant. President Obama (feels so good) has to call in the chiefs of these banks and knock some heads together. Start acting like the risk-taking publicly-backstopped entities you are or die.

We are headed into the Christmas ("Holiday") shopping season. They call the day after Thanksgiving "Black Friday" because many retailers see their first profit of the year that day, then spend the next five weeks making up most of the profit they will see all year. If small business credit isn't working, or if consumer credit isn't working, this will be a disaster. If Christmas sales are that bad, many small and even larger businesses will go under, with resulting mounting unemployment, fear, and more risk-averse behavior. This is exactly the downward spiral of fear, hoarding, and refusal to engage in profitable economic activity that led to the Great Depression. [Republicans like to blame the Great Depression all on tariffs (Smoot-Hawley) but that was just a bad decision among many. Protectionism will hurt more today, but trade barriers aren't the cause of today's woes.]

It's scary. Everyone keeps thinking that "this will pass, right?" What if it doesn't? I will lose my job (I'm one of the few on this blog employed in the wonderful 'free' market) and (next) my house. We really need good economic news soon.


USwest said...

Do not think that those employed in civil service will be much better off. Job security in civil service is something of a myth these days. Many would preferr to contract out our jobs to the private sector.And if there isn't money flowing into government coffers, then less "critical" agencies will be cut back. My agency is already experiencing that. A 32% budget cut for FY 2009.

There is still part of me that that feels like this needed to happen. I don't like it, but I am resigned to it. We were all getting a little to fat and comfortable. That's in part why Bush got elected in the first place. When economic times are good, people vote values and they vote Republican. I was born in the bust if the 1970s. I came out of grad school when the last bubble burst (after watching 20 somethings make millions on nothing more than fumes); Me with my MA degree worked as a temp employee because that was the best I could get; I've been laid off, sat unemployed for 8 months; been shut out of the larger economy by this latest bubble; and now that I am finally getting a foothold, this latest crisis. So I'm pretty used to the economy screwing me. Thank God I was raised by my grandparents. I know how to economize, reuse, do it myself, and make do without. What else is new?

Big businesses are already suffering. The latest that I know of if Circuit City, which was already struggling. But (I say this somewhat tongue in cheek)I won't worry about loosing your house, LTG. The government, apparently, has a plan for preventing that, if nothing else. And there is always the printing press!

The Law Talking Guy said...

Yes, indeed, inflation would be terrific for debtors.

Pombat said...

"this will pass, right?" Yes it will. Eventually. And there's the rub - it's going to take a while to play out, and that eventually is going to be too far off for some.

Job security in the civil sector does very much depend on what bit of the civil sector you're in as USWest says - one of my reasons for taking my current job is that it's in a 'safe' bit of the sector. Just as there are some jobs in the private sector that are effectively safe (less of them maybe, but still). Why so sure you'd lose your job just because you're in the free market LTG? One thing I was told (and ignored) when choosing a post-maths-degree career was that the world will always need lawyers and accountants - surely you'll be ok?

I agree with USWest - this needed to happen. The credit/housing bubble, just as so many bubbles before it, was exactly that - a bubble. And eventually they burst. We're going to be seeing massive realignment across the financial world (well, we already are!), we're almost certainly going to see a lessening of America's power in the world (China is still forecasting growth next year, not as fast as previous years, but still growth, India's rising etc), we're going to see a lot of pain for some people (those with high debt), and potentially a lot of joy, or at least nonchalance, from others (those with zero debt / those finally able to afford a house). It's going to be very messy, very scary for some, but will ultimately be alright. We just have to make sure we all stay alright with it - minimise debt, maximise savings, live within our means.

The Law Talking Guy said...

My job depends on businesses having money to hire lawyers for litigation. If they don't, or if they cut back, our jobs start to go. Law firms nationwide are laying off lawyers, although right now mostly in the finance side of things. It's unprecedented.

If we face a decade of hard times, falling wages, and high unemployment, we will all be hurt.

Dr. Strangelove said...

The way I figure it, Paulson's trouble is simple: The Bush Administration simply has zero credibility with the American people and the markets.

Raised By Republicans said...

This is going to be a rough time globally, and in the US. But despite the reports of China's expected continued growth, I heard that they too are chipping in $500 billion or so in a stimulus package of some sort.

As for the oft predicted (wished for?) decline of the US, the US GDP in 2007 was $13.8 trillion. The second biggest economy in the world is Japan with $4.4 trillion. So the US economy is about 3 times larger than the second biggest economy in the world. China's GDP is $3.3 trillion making it smaller than Germany but larger than Britain's.

To put this in perspective, the UK never really had the world's largest economy. And China was the largest economy for much of the 18th Century. The US took over as the largest economy in the world in 1900. At that time, the UK was maintaining (at great expense) a global empire. While the US is spending ridiculous amounts on stupid wars but compared to what the British were doing in the twilight of their empire, the US is not as over extended.

Also, the US imports 16% of all it's imports from China. And China exports 19% of all their exports to the US. (the US exports 21% of its exports to Canada).

I'm not trying to be a cheer leader for US hegemony so much as put this all in perspective. The gap between the US economy and the next biggest potential rivals is enormous. Many of the people who predict US decline base those expectations on the pattern observed in the European powers (especially the British Empire but also France and German) in the early 20th century. What I'm pointing out here is that the US relationship to the world is much much different than those countries at that time.

Check out this guy's blog:

monkeyman said...

RbR, while I agree with you that there is no reason to panic for Americans I still don't buy your argument completely. In terms of the world's second largest economy, I would vote for the European Union. It's hard to see them as one entity in terms of foreign policy, but economically it might be justified. Also, I'm pretty sure the Roman Empire was still the dominating economic power long after its decline had started.

The Law Talking Guy said...

Headline in NYTimes today, "Crisis spreads to financial sector." The word "crisis" implies a short term storm. The headline could have been "depression spreads to financial sector." The word "depression" implies nothing about an end. I'm glad the papers still view this as a short term crisis, but I am starting to fear that we may be in REAL trouble for the decades of Republican-led deficit spending.

The Law Talking Guy said...

Most Americans, I think, no longer have the option of minimizing debt and maximizing savings. We already have house and car payments - we can't "minimize" them now - which dictate a low savings rate. That's done. Indeed, we were encouraged to "save" by investing in a house with real estate's double-digit annual appreciation rather than putting money in a bank to earn 3%. The cost of everything, from food to education to health insurance to gas, is eating up whatever cushion may have been left for savings. So cash savings are low and aren't going to improve much - indeed, they will likely *shrink*. And we are in danger of losing our jobs anyway.

I don't see any solution except real debt relief in the form of cash, refinancing at gov't expense, or plain old inflation.

Raised By Republicans said...

Monkey Man,

It is certainly the case that if you are looking to make the argument that the US is in significant decline you can find data points to support your position. I'm only trying to point out that it is far from obvious that the US is in decline at all (at least not significantly) but I remain agnostic about whether or not the US may be in some sort of shallow decline.

And this kind of nuance matters because, to carry on with the Roman comparison, we could be comparing the US equivalent to Tiberius' debt ridden reign to the Golden Age of Augustus. Romans in the reign of Tiberius (and his successor Gaius/Caligula) would certainly have thought the empire was in steep decline. But the subsequent reign of Claudius was quite successful as was the Flavian dynasty that followed the death of Nero. Rome continued to have periods in which it appears to thrive or decline for hundreds of years - all the while being the dominant power in the hemisphere.

In contrast the British Empire went from being the global hegemon to near complete collapse in the 20 years or so running up to and including World War I.

Raised By Republicans said...

Not to quibble but actually, if we count the EU as a single potential rival to US power (a poor assumption if you ask me), then the EU has the largest economy.

MonkeyMan said...

sorry, I think I might have given you the wrong impression and I also think I misunderstood yours. I didn't mean to argue that the US is gonna collaps soon. I totally agree with you that it's less than clear whether there is a serious decline. My point was that while you are making a good case about the differences to the Empires you mention, this does not disprove the decline theory. But I totally agree with the points you make (although I do maintain that the EU in some regards could be seen as a unified block).

Raised By Republicans said...

Cool. In the interests of continuing interesting conversation...

The problem with thinking of the EU as a single, unified block is that with regards to foreign policy it really is quite divided. Of course, on regulatory issues the EU is unified and is increasingly powerful player in negotiations to establish global regulatory standards in a variety of issue areas (such as accounting or environmental standards etc).

But with foreign policy, things are starkly different. About half of the EU member states actually sent troops to Iraq in 2003 including four of the six largest member states (UK, Italy, Spain and Poland). When you consider that the EU makes decisions by unanimity this division on how close to be to the US alone makes it pretty unlikely that the EU could counter US power under any circumstances.

Think of it this way. Can you imagine an action that all 27 EU member states would agree to do that the US would oppose? Alternatively, can you imagine an action that the US would undertake that all 27 EU member states would oppose? Certainly the invasion of Iraq is the most controversial action by the US since the War in Vietnam if not since World War II. If even under that kind of strain to trans-Atlantic relations, half of the member states not only tolerated US actions in Iraq but actually sent troops in support of them, I really can't see a situation where the EU would unify in opposition to US action.

Now, you might be saying, "what if the EU started making decisions by qualified majority vote or simple majority vote?" Even in that even, given the weights that the member states get because of their populations etc, the EU could not even have passed a non-binding statement condemning the US invasion of Iraq because half of the member states representing more than half the population were invading with them.

The Law Talking Guy said...

I wonder what sort of political crisis will put the Europeans to the test of moving to majority or supermajority rule in the EU rather than giving each member an effective veto? In the USA, of course, we remember it was a financial crisis provided the political opportunity for a new the US constitution in 1787- or rather the decision of popularly-elected state governments to expropriate creditors and protect debtors, plus debtor revolts. Maybe this financial crisis could spur Europeans to take several giant steps down the road to "ever closer Union."?

Pombat said...

LTG - I think the papers/media are probably using the word "crisis" because it sounds snappier and scarier than "depression", which as we all know only requires a couple of Prozac to fix.

Right, you say that most Americans can't minimise debt because you "already have house and car payments" and can't minimise them now. First point - why do people have car payments? What's wrong with saving up and buying a car you can afford outright? Or, given that you're committed to finance plans now due to a lack of savings, why not talk to the dealer to downgrade the car to a smaller/older/cheaper/more fuel efficient one? You know well that my way of thinking is rather different to the "I want it now, put it on credit / a plan" view that consumerist people have.

The house payments - fair enough, hard to change now in the current market without getting screwed, but I still have little sympathy for people who over-stretched themselves in the belief that housing values, or should I say prices, would keep going up, and the interest rates would stay put, and it would all just be fine and dandy. I actually knew someone in the UK who calculated that he and his partner could afford the house they were planning on buying, provided that interest rates didn't rise more than 1.25%. He discussed this on the newsgroups at work, and had many, many people telling him he was crazy, don't do it, but chose to ignore them. I'm guessing he doesn't own his home anymore.

Now to your solutions:

Inflation - isn't this what's causing price rises on everything "from food to education to health insurance to gas", which is in turn minimising your savings potential, and making life unaffordable? In which case, how's it going to help?

"Refinancing at gov't expense" - firstly, why should someone who was daft enough to take on a loan that they couldn't afford get refinanced? I think I've stated my views on this enough for you all to know my position well. Secondly, on the personal level, am I right in remembering that you bought your house - as a bit of a bargain - as the result of someone else's foreclosure? Would that mean that I'm also right in thinking that if those people had gotten a government assisted refinancing plan, their house would not have been on the market, and you therefore would not have been able to buy it? Why is it that profiting from their misery is ok?

"Real debt relief in the form of cash" - what?! How is that fair? How is it fair to all the people who haven't gotten themselves into debt, who haven't been taking on mortgages that they can't afford, haven't bought over-sized cars on 'finance', haven't run up credit card debts, but have simply lived within their means, only buying things once they actually, already, possess the money for them? Handing out cash does not fix the problem - it salves a few peoples' personally created issues, whilst leaving others even further behind.

Sorry if any of this has been a bit too personal or pointed, but I'm just running out of sympathy for the "gimme a handout to help me sustain this life that Pombat doesn't have yet cos she's being sensible" brigade.

RbR: how much a country spends on defence does not define how good its military is, nor how big it is. One thing China has, more than any other country I believe, is people power: a quick glance at the Wikipedia page on their army gives their stats as the biggest army in the world, with 3million members. When you've got that many people, you don't need the shiniest, most expensive new gizmos.

Raised By Republicans said...

"When you've got that many people, you don't need the shiniest, most expensive new gizmos."

No, but you do need boats, good boats and lots of them, to get them anywhere on a planet that is mostly water.

The Law Talking Guy said...

Pombat - the problem with housing payments is not so much the people who overstretched, but the people who were quite sensible but have seen their houses LOSE value such they are upside down on the loans and can't even sell without a big loss. Every homeowner has an incentive to make sure that housing prices do not decline further.

Why do people have car payments? Because where most Americans live, they need cars to go to work. So most people borrow the money for cars. This is not true everywhere, but it is generally true that most Americans need a car to get or keep a job. My car is 12 years old, and I am thinking of buying a new one. Will I spend my savings on a car? Probably not - it's a rainy day fund. Americans who can save cash are loath to part with it because of the risks.

I don't think foreigners understand the enormous economic risks and costs of life in the United States. If I lose my job, I lose my health insurance. The only solution is a "COBRA" plan which - unbelievably - means the same health care costs several times more for the unemployed than for those with a job. Even with my excellent health insurance, I'm now fighting over a $3500 bill for going to an emergency room because they're claiming it's somehow not covered. I can't even switch over to my wife's coverage except during an 'open enrollment' period once a year.

Most people are not living the good life and complaining about a handout, Pombat. They're just trying to get by, and it's getting harder and harder. I'm one of the lucky ones in a good two-earner family with two paid-off automobiles and a house, and we are worried, as you see.

Pombat said...

Right, the sensible people who are now in negative equity / facing a big loss if they sell. Since they're sensible, their mortgage payments are still affordable for them, and so they are not going to lose their houses. Yes, they can't move, which may restrict their career choices etc, but that's tough luck unfortunately - when you buy a house, you do so with the knowledge that the value may go down, and you take on that risk. Every wannabe homeowner has an incentive to make sure that housing prices do keep falling.

Car payments - I understand why people need cars. Having lived in the UK for most of my life, outside of London, I understand well the need for a car to get to work (my last house/job in the UK was a seven minute drive, or a 1hr45 public transport trip. Or 25min cycle in the summer, not safe to do in the winter as it was on unlit roads). However, needing a car does not necessarily equate to needing large car payments. You start off with a cheap, old car. You save, by putting the money that you would be using on car payments into the bank instead, and once you have a lump sum, you buy a better car. Taking out a finance plan - on any purchase - means you end up paying a lot more for the item than if you bought it cash.

Job/health insurance worries - yep, fair enough, that's something that we don't have to worry about here, we do have it good, and making claims is ridiculously easy. I can see why people are worrying about this. I can also see that their worry is probably a good thing, in terms of persuading them to accept the taxation changes etc that will be needed to develop a decent health care system in the US - if everyone is worried about losing health care, they're going to be much more supportive, and hopefully not mind the increases so much, as opposed to the situation where only a few people are worried, and everyone else is resisting increases, on the basis that they're ok, thanks.

You still haven't answered my question about the people who were forced to sell the house you now own...

You say that most people are not living the good life, but the one thing that struck me about the US, both as an eleven year old travelling across multiple states, and an adult, admittedly just visiting LA/Orange County, is the level of consumerism. It seems everything has to be bigger, better, shinier, newer. I wanted to go to Walmart/Costco, just to see them for myself, and Costco horrified me to be honest. Everything there was huge, including the trolleys - spirits came in bigger bottles than I'd ever seen! - and because of the scale of everything, it started looking normal. It was only when we got our 1.75l bottle of gin home and stood it next to our 'normal' 0.75l bottle that we got the perspective back. The "American Dream" seems to be increasingly about stuff - the house, the two cars, all the keeping up with the Joneses crap that Costco et al will happily supply. And from the outside, looking in, that's not just getting by. But maybe that's because we have different definitions of "getting by".

Pombat said...

"No, but you do need boats, good boats and lots of them, to get them anywhere on a planet that is mostly water."

And with that many people, and the impetus that comes from another country being able to project force well, you can build a lot of boats very quickly. They might not be the best boats ever, but quantity has a quality all of its own.

Dr. Strangelove said...

Well now... Let's not hoist ourselves up on too a high horse, Pombat.

First of all, you seem to confuse purchasing in bulk with purchasing in excess. Yes, I buy my toilet paper once a month in packs of 24, rather than buying individual rolls more often--so what? It is cheaper, saves packaging, and saves gas on repeated trips to the store. Buying in bulk at discount stores is what Americans do to save money. Buying single goods only just as needed is the way rich people buy stuff. I don't buy gin in big bottles because it is more convenient to lug them around, you know.

Furthermore, you seem to have the renting/buying choice backward when it comes to responsibility. The more conservative decision is always to invest in property--not to throw away money in rent every month. We could have rented a bigger place, closer to where we work, for less money per month than we are paying now--but we realized we would never get ahead until we started to build up equity. Yes, it ties us down and removes some options (and currently has us upside-down, unfortunately) but we still believe it was the right thing to do. It leaves us with less disposable income, but we wanted to plan for the future instead of just living for today.

When it comes to cars, actually everyone I know started with a cheap old car--and lots of us still have cheap old cars. My Ford pickup truck is eleven years old, and LTG's car is even older. Even when we buy new cars, most of us don't go crazy on credit either: Mr. S financed only part of his car and had the whole thing paid off in two years. (And incidentally, we all have dents in our cars that we have decided not to fix because it costs too much.)

So yes, Mr. S and certainly I enjoy our beautiful large TV, our fancy stereo, and we sure do love our library of DVDs! But let's keep a sense of perspective here: all the money we have spent on the electronics and media together is less than a few months of housing payments. And while I am quite proud of our condo, nearly all our furniture is from IKEA, our cutlery is a $60 set from Costco, and I haven't bought a new pot or pan in five years. It's all about spending your money on what you value.

We are living well and we proud of what we have accomplished. But I kind of resent--and am somewhat baffled by--the implication that we were somehow irresponsible to invest in a house when we had the opportunity, or that shopping at Walmart means we are therefore living high on the hog.

Pombat said...

Dr.S - you are resenting an imagined implication. I've re-read my post, and yours, and from my reading it is clear that you & Mr.S are in the 'sensible' category of people who I am not criticising in the slightest, as I wish everyone was more like them: you have bought a (lovely) home with home payments you can afford (partly due to sacrifices made), have no car payments to worry about because you're fully paid up on both of yours, and buy in bulk in a sensible way as opposed to an excessive one. So as far as I can tell, you should not be offended by anything I've said.

I need to clarify my gin comment though, as I was trying to communicate two points at once, and ended up with a bad example. Your comment about buying in bulk being good in terms of saving packaging and gas on trips to the store is entirely true - this is why I also always buy toilet rolls in bulk (even if my 'gas' is food, since I cycle ;-p). And buying non-perishables in bulk, then using them at a standard rate, is a fine idea indeed.

What I was trying to get at was how your perception of a 'standard' size can be easily skewed by bulk supply shops. Say you often enjoy eating one packet of crisps. A 'normal' packet is 30-50g (couple ounces). However, in a bulk buy place, a packet is usually many times that size. If you see those packets enough, your perception ends up changing, so that the larger packets are now 'normal' in your eyes, and sitting down to eat an entire larger packet becomes usual.

Re the renting/buying responsibility choice - as we are seeing now, with the ever-growing financial crisis, investing in property is only a responsible decision if you can afford to keep up the payments. Otherwise, chaos can be caused. Of course, that chaos is partly due to US mortgages often being no-recourse: in many countries I know of, if your mortgage is say, $700k, and you default, then the bank gets your house; they then sell it quickly, for $600k say, and you end up still owing them $100k - it's not as simple as just handing the keys over and walking away.