Meltdown

[Coopmv]

He reputedly did.  The thinking was that he would leave JP Morgan as a hero, almost as legendary as Pierpont himself, and then go into public service to do good things.  You know, he'd be the next Robert Rubin or Hank Paulson.

Robert Rubin is a disgrace.  While he received $100M as the chairman of Citigroup but under his watch, Citi took on all the toxic debt that ultimately resulted in a $45B taxpayer bailout.  Hank Paulson's decision to let Lehman go down was a poor decision, perhaps it was deliberate so he could get rid of a serious competitor to Goldman where he had accumulated most of his personal wealth.

[Todd]

In all fairness, Rubin did not run Citi.  He was chairman only briefly, for a bit over a month in late 2007.  He was brought in to be a rainmaker.  From what I've read, he voiced concerns here and there, but there really was nothing he could do.  I've seen no evidence that Paulson let Lehman go under because of his ties to Goldman, though conspiracy theories will always exist.  The decision was clearly a poor one, but the various accounts of the decisions being made indicate that his concern was more to prevent every financial firm from getting government funds.  Didn't really work out that way in the end.

[eyeresist]

But does he really care to be the next treasury secretary?  He has to take a severe pay cut to take that job ...

He'll take a consultancy instead. That's where the money is.

[snyprrr]

Hollande:

GROWTH FINANCED BY DEBT!!


Woo hoo, oh dear, here we go!

Wow, gosh, if we'd just heard about this sooner, maybe we wouldn't be in the mess we are in now, huh?

[Todd]

GROWTH FINANCED BY DEBT!!

Alexander Hamilton proposed something similar in the 1790s.  Turned out pretty good, all things considered.  But what did Hamilton know?

[DieNacht]

So did he:

[Todd]

So did he:

Sort of.  FDR maintained a fiction that the regular budget was balanced and that only his emergency measures resulted in debt.  Um, okay.  He then turned his focus to balancing the budget after 1936, which helped lead to the 1937 boo-boo.  Few American politicians have ever been as blatantly pro-debt as Hamilton.  Can you imagine someone today saying "A national debt, if it is not excessive, will be to us a national blessing"?  I cannot.  Yet a national debt, if it is not excessive, is critical to the proper functioning of the financial system as a whole, which in the case of the US means the global financial system, and to proper public finances.  The question, of course, is what does "not excessive" mean?  I think it's safe to say that current levels are excessive in the long run, but in the short run not so much.

Ironically, Alan Greenspan – he's a devil now, don't you know? – explained a similar position in The Age of Turbulence, though his concern had more to do with proper administration of monetary policy and the mounting surpluses of the late Clinton years.  If there is no national debt, then a central bank would not be able to direct short term rates by buying and selling public debt; it would have to turn to private debt, and that would be bad.  Of course, if you're a Paulite, you say get rid of the central bank.  Problem solved!

The public debate on public expenditures unfortunately is unsophisticated and jingoistic. 

[Coopmv]

Sort of.  FDR maintained a fiction that the regular budget was balanced and that only his emergency measures resulted in debt.  Um, okay.  He then turned his focus to balancing the budget after 1936, which helped lead to the 1937 boo-boo.  Few American politicians have ever been as blatantly pro-debt as Hamilton.  Can you imagine someone today saying "A national debt, if it is not excessive, will be to us a national blessing"?  I cannot.  Yet a national debt, if it is not excessive, is critical to the proper functioning of the financial system as a whole, which in the case of the US means the global financial system, and to proper public finances.  The question, of course, is what does "not excessive" mean?  I think it's safe to say that current levels are excessive in the long run, but in the short run not so much.

Ironically, Alan Greenspan – he's a devil now, don't you know? – explained a similar position in The Age of Turbulence, though his concern had more to do with proper administration of monetary policy and the mounting surpluses of the late Clinton years.  If there is no national debt, then a central bank would not be able to direct short term rates by buying and selling public debt; it would have to turn to private debt, and that would be bad.  Of course, if you're a Paulite, you say get rid of the central bank.  Problem solved!

The public debate on public expenditures unfortunately is unsophisticated and jingoistic.

It was a big mistake when Reagan did not retain Volcker but brought in the Bubble Man to the Fed instead ...

[Todd]

It was a big mistake when Reagan did not retain Volcker but brought in the Bubble Man to the Fed instead ...

Not really.  The Fed's response to the 1987 crash was generally considered to be just about right, and the policy of increasing rates in 1994 was also correct.  Greenspan is now one of the villains of 2008, of course, but it's hard to see how the Fed could have prevented the meltdown by itself.  The federal government pushed to open lending; Glass Steagall was repealed, allowing banks to take unacceptable risks, including excess leverage; new financial products came to market which increased risk; and raising short term rates may not have been able to have the desired effect.  The Fed could have done that, and taken heat like they did in 1994, and they could have also raised reserve requirements, which would have brought even greater howls of protest from right and left, but starting in the mid-90s, and really sooner, a variety of policy and industry changes set up the conditions for a panic.  Both parties are to blame, and as powerful as the Fed is, the chairman is not omnipotent, nor is he a king.  It's also questionable whether either Clinton or Dubya would have stood by and supported unpopular policies the way Reagan did with Volcker.  We'll never know, now, but the notion that one person bears a huge portion of the blame is too simplistic.

[Coopmv]

Not really.  The Fed's response to the 1987 crash was generally considered to be just about right, and the policy of increasing rates in 1994 was also correct.  Greenspan is now one of the villains of 2008, of course, but it's hard to see how the Fed could have prevented the meltdown by itself.  The federal government pushed to open lending; Glass Steagall was repealed, allowing banks to take unacceptable risks, including excess leverage; new financial products came to market which increased risk; and raising short term rates may not have been able to have the desired effect.  The Fed could have done that, and taken heat like they did in 1994, and they could have also raised reserve requirements, which would have brought even greater howls of protest from right and left, but starting in the mid-90s, and really sooner, a variety of policy and industry changes set up the conditions for a panic.  Both parties are to blame, and as powerful as the Fed is, the chairman is not omnipotent, nor is he a king.  It's also questionable whether either Clinton or Dubya would have stood by and supported unpopular policies the way Reagan did with Volcker.  We'll never know, now, but the notion that one person bears a huge portion of the blame is too simplistic.

There is no doubt in my mind that by keeping the Fed Fund rate at 1% (IIRC) for an unnecessarily long period of time, Greenspan was laregely responsible for causing the housing bubble.  Where was the risk premium that ought to be there in a 1% money market rate environment?

[Todd]

There is no doubt in my mind that by keeping the Fed Fund rate at 1% (IIRC) for an unnecessarily long period of time, Greenspan was laregely responsible for causing the housing bubble.  Where was the risk premium that ought to be there in a 1% money market rate environment?

The Fed Funds rates were cut after 9/11 and started increasing again in late '04.  The rate was at 1% for about a year starting in June 2003.  The rate was between 4-5% in the early stages of the meltdown.  When was the unnecessarily long time period you refer to?

[Coopmv]

Here is the bottomline.  The US is run by a bunch of lunatics.  One party absolutely refuses to raise taxes while the other absolutely refuses to cut spending.  The only cure for this exploding federal deficit is to do both.  Taxing the rich alone simply will not solve the deficit problem ...

[Todd]

One party absolutely refuses to raise taxes while the other absolutely refuses to cut spending.  The only cure for this exploding federal deficit is to do both.  Taxing the rich alone simply will not solve the deficit problem ...

I agree, and have written as much multiple times.  It is still important to rely on accurate facts when discussing what happened, and what types of policies should be pursued. 

[Coopmv]

The Fed Funds rates were cut after 9/11 and started increasing again in late '04.  The rate was at 1% for about a year starting in June 2003.  The rate was between 4-5% in the early stages of the meltdown.  When was the unnecessarily long time period you refer to?

Ok, it was sub-2%.  That was good enough to cause speculation in the housing market.  Based on your graph, the rate stayed at 2% or below for some 3 years ...

[Todd]

Ok, it was sub-2%.  That was good enough to cause speculation in the housing market.  Based on your graph, the rate stayed at 2% or below for some 3 years ...

It's not "my" graph, but simply a representation of Fed Funds rate data.  As I pointed out previously, the rates were cut after 9/11 and starting increasing in 2004, and were between 4-5% when the meltdown started.  It is pretty clear that in the post-9/11 economy, rates would have been and should have been lowered.  Rates were kept too low for too long - ie, there was excess liquidity - and that contributed to the problem, but there were other significant factors as well.  Had banks not been able to put as much capital at risk as they did due to changes in regulation under both Democratic and Republican administrations, then the damage would likely have been less severe.  Let me ask you, when should rates have been raised, and to what level, and what data do you have from that time that offer such conclusive support for that?  In hindsight, everything is clear, but it was not so clear in 2003, for instance.

[Coopmv]

It's not "my" graph, but simply a representation of Fed Funds rate data.  As I pointed out previously, the rates were cut after 9/11 and starting increasing in 2004, and were between 4-5% when the meltdown started.  It is pretty clear that in the post-9/11 economy, rates would have been and should have been lowered.  Rates were kept too low for too long - ie, there was excess liquidity - and that contributed to the problem, but there were other significant factors as well.  Had banks not been able to put as much capital at risk as they did due to changes in regulation under both Democratic and Republican administrations, then the damage would likely have been less severe.  Let me ask you, when should rates have been raised, and to what level, and what data do you have from that time that offer such conclusive support for that?  In hindsight, everything is clear, but it was not so clear in 2003, for instance.

But when rate at relatively normal time (compared to the last three years) stayed at 2% or below for some 3 years, that was a long enough period for the housing  bubble to develop.   I certainly do not feel the few years after 9/11 were that different from normal time.  The ensuing recession was quite shallow when compared with the recession in the early 1980's.

[Todd]

I certainly do not feel the few years after 9/11 were that different from normal time.  The ensuing recession was quite shallow when compared with the recession /in the early 1980's.

Then you disagree with a large number of economists, left and right.  That's certainly your prerogative, but the decrease in industrial output and financial activity were serious enough to warrant action. 

I'm not quite sure what comparing the (pre and) post 9/11 recession to the early 80s recession has to do with anything; the 80s recession was, up until 2008, the sharpest downturn since the Great Depression by every measure except deflation (last experienced in 1948).  Are you implying that the government and Fed should only take action if the economy is hovering around 9% unemployment and industrial production drops by around 8% in a year?  The economic data for 2001 show that the economy was already in recession when 9/11 occurred, and the Fed had already started easing credit, which is standard policy during recession.  The unemployment rate started to move up from a low level of 4.7% annualized in 2001 to 5.8% annualized in 2002, per the BLS, showing the standard lag in unemployment during recessions.  Industrial production also decreased.  To prevent any additional shock that may result from 9/11, additional measures were taken.   This is pretty standard fare, and all but the most ardent free-market economists support basic stabilization policies, with the emphasis being the biggest difference (ie, use of fiscal or monetary policy).  It seems you disagree, so let me ask you, based on data from the time, what policy actions should the Fed have taken and when should they have started increasing rates?

[Karl Henning]

The percentage of Americans between 25 and 54 years old who have jobs is at its lowest in 23 years.

[Coopmv]

The percentage of Americans between 25 and 54 years old who have jobs is at its lowest in 23 years.

and this number may get worse ...

[snyprrr]

Nothing to see here. Just move along:

http://www.reuters.com/article/2012/06/12/us-usa-economy-budget-idUSBRE85B16B20120612?feedType=RSS