Matt Yglesias recently made this remark in a post criticizing Tyler Cowen’s assertion that the GSEs significantly worsened the US housing/banking crisis:

The part where unwise public policies to subsidize homeownership would seem to come into this is step (1), but we in fact see this happening in many markets (Spain, commercial real estate) where Fannie and Freddie weren’t players.

I’m not sure what Matt means by “many markets.”  According to the interactive housing price graph constructed by The Economist, only the US and Ireland experienced major housing bubbles.  Spain had a smaller one (although I suspect more accurate figures would show a more serious price decline in Spain.)  Japan and German also saw price declines after 2006, but they had had zero price run-up before 2006–so no bubbles there.  The vast majority of industrial countries saw big increases in real housing prices between 2001 and 2006, just like the US.  But unlike the US, prices tended to move sideways after 2006, even in real terms.  (Of course you can find some brief price dips in the severe 2008 recession, but nothing like the long collapse in the US, which pre-dated the recession.)

But let’s take a look at Spain.  It’s true that Spain does not have a single institution called “Fannie Mae.”  But do they have a similar problem of governments deeply involved in promoting real estate lending?  I’m no expert (and I welcome critiques) but my initial impression is that the answer is yes.  Here’s The Economist:

Another duality lies in the banking system. Observers fret that the Spanish state may have to pump a lot more money into the banks than the roughly €25 billion ($36 billion), or 2.5% of GDP, it currently reckons will be the total bill from Spain’s epic housing boom and bust (Ireland’s bank bail-out bill is over 40% of GDP).

The problem is concentrated in the cajas, local savings banks that make up around half the domestic banking system, rather than big Spanish banks like BBVA and Santander, which are protected by big international businesses. Not before time the government is overhauling the cajas. Their ranks are being slimmed””the number has fallen from 45 to 18″”and they are being reorganised as joint-stock companies that can raise equity capital. José Maria Roldan, director-general of banking regulation at the Bank of Spain, says that the reform is “a huge step forward, replacing the caja model with a standard banking template that is more secure and comprehensible to international investors.”

So I decided to further investigate the cajas, and this is what I found (also from The Economist):

IN THE end CajaSur trusted in God. On May 22nd the small savings bank (or caja), which is controlled by the Roman Catholic church in Córdoba, was seized by the Bank of Spain after failing to agree on a merger with Unicaja, a larger Andalusian rival. The move shocked investors and prompted other savings banks to hasten consolidation. But mergers between wobblier cajas, which are unlisted and make up close to half of Spain’s financial system by assets, are merely a first step in a longer process.

CajaSur is tiny, holding just 0.6% of Spain’s financial assets. Yet its seizure unsettled investors for two reasons. First, it was a reminder that politics often trumps rationality.

.   .   .

The politicians who control the cajas like this virtual structure because it allows the banks to keep their own brands, governing bodies and local retail operations while combining treasury and risk-management functions.

.   .   .

Encouragingly, both the government and the opposition have agreed to reform the law governing savings banks.Attracting private capital requires other changes, too, such as a reduction in the influence of politicians, something caja managers would relish. Greater openness about banks’ balance-sheets would also help: on May 26th the Bank of Spain moved in this direction by announcing plans for tougher provisioning rules.

“The politicians who control the cajas”?  I thought banks were supposed to be controlled by businessmen, not politicians.  I’m still no expert on Spanish banking.  But I’d wager that further investigation would turn up the same incestuous relationship between politicians and the cajas that we saw between politicians and the GSEs.

So we observed clear-cut housing bubbles and busts in just two countries with more than 5 million people; the US and Spain.  And both suffered from the same problem—politicized institutions that will require massive transfers from the public.  Both also had large private banks that made mistakes, but at least they didn’t impose huge burdens on the taxpayers.

Matt also mentioned commercial real estate in the US, but I don’t think that proves what he wants it to prove.  As you know, the profession has not accepted my argument that lack of AD, not the banking crisis is responsible for our macroeconomic problems.  But the one weakness in my argument is that the subprime bubble blew up well before the recession.  This leads Matt to draw a connection between the financial crisis and the recession.

Banking activities need to be regulated or else asset price fluctuations will lead to macroeconomic instability.

That’s why the stakes in this debate between progressives and libertarians are seen as being so high.  If it was just the TARP bailout, I’m not sure people would care that much.  The big banks are repaying the loans.  Indeed I’ve seem progressives praise the auto bailout, even though GM may never pay back all the money.  No, the reason this is so important is that it’s seen as a crisis that led to 9.2% unemployment three years later.  Fair enough.

But in that case Matt can’t use commercial real estate, as that was clearly a symptom of the recession.  Indeed commercial RE was still booming in mid-2008, and only turned south toward the end of the year.  Now in fairness to Yglesias, the fall in commercial RE did bring down lots of smaller regional banks, and this resulted in costly FDIC bailouts of depositors.  If we insist on having FDIC (a big mistake in my mind), and insist on not reforming it by placing $25,000 caps on insured deposits (and even bigger mistake), then yes, we need to regulate banking.  We tried to re-regulate after the 1990 S&L debacle, and it didn’t work.  We tried again with Dodd-Frank, and again failed to deliver an effective set of regulations (like, umm, banning subprime loans, for instance.)  But I would agree that in the presence of FDIC, a completely unregulated banking system will take far too many risks.  I don’t consider that the failure of “laissez-faire”, I view it as the failure of a banking system where much of the liabilities are essentially nationalized.

PS.  Interested readers may want to play around with the Economist’s interactive graph at this link:

It’s a bit hard to read the graph below, so a few comments.  The steady drop (orange line) is Japan.  The only other two countries down in real terms from 2001 are the US (grey) and Ireland (green, of course.)  Spain is a rather dark line that rises steadily to almost 180, then slips back to 140.  As I see the graph, most other countries had substantial real price run-ups, like the US, but then real prices trended sideways.  This shows that not everything that goes up must come down.  I see lots of commenters patting themselves on the back about how they predicted the bubble would burst.  Count yourself lucky that you live in America; otherwise you probably would have been wrong.  Germany is not listed because of incomplete data, but it had no bubble in the first place.

Also note that the default option is nominal prices, which is actually more supportive of my “very few bubbles” claim.  I converted to real for the graph below, which puts more of a downward bias on prices after 2007.

Here’s a recent report on the housing markets in responsible cities that didn’t get swept up in the sub-prime mania:

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix.

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

“When I go out and talk to people around town, they say, ‘Wow, I thought we were going to have a 12 percent correction and call it a day,’ “ said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. “But this thing just keeps on going.”

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow’s calculations, still has as much as 10 percent to fall. . . .

The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been.

The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis.  [emphasis added.]

This should be no surprise to readers who were following themoneyillusion back in 2009.

And speaking of being ahead of the curve, who was the one who argued back in 2009 that China was a powerful engine of recovery in the global economy?  And that the last thing we should be doing is pressing China into a highly deflationary policies such as immediately hiking the yuan by 25%?  China decided to take it slow, and raise the yuan gradually once its recession ended.  And here are the results of this pro-growth policy:

BEIJING (AP) — China’s exports surged in January in a sign of rebounding global demand and its politically sensitive trade surplus fell to a nine-month low, possibly easing pressure on Beijing to allow its currency to rise.

China’s global trade surplus fell 55 percent from a year earlier to $6.5 billion, customs data showed Monday. Exports soared 37.7 percent — more than double December’s rate — to $150.7 billion, while China’s strong domestic demand drove explosive import growth of 53.5 percent to $144.3 billion.

“Strength of exports, and even more so imports, points to solid demand — globally and domestically. The former bodes well for global recovery,” said Dariusz Kowalczyk, senior economist for Credit Agricole CIB in Hong Kong, in a report.  [emphasis added]

Remember all those xenophobic protectionists, the ones who insist China’s just a big mecantilist bully, which exports lots of stuff but closes its own markets to the rest of the world?  The ones who see the world as a giant zero-sum game?  I wonder how they’ll spin this trade number?

BTW, might we replace the word ‘sign’ in the first sentence with ’cause?’

PS:  It’s true that while US exports to China are soaring rapidly in percentage terms, they are still far smaller than imports.  We tend to export more to places like Latin America and Australia, where there is a boom in natural resources and the building of infrastructure to support resource development:

Owens adds about 65-percent of Caterpillar’s construction equipment sales last year were in emerging markets including China and Latin America.

But think about this:  Where do most of those natural resources go that are dug out of the ground in Chile and Peru and Brazil using Caterpillar equipment?

There’s been a lot of response to my argument that the loss of residential construction jobs did not play a major role in the recession, rather falling NGDP was to blame.  Bob Murphy countered with some graphs showing the level of employment in construction was quite different from building starts (or building completions for that matter.)  But what matters is employment in residential construction, so lets break out the data by category.  I will simplify this BLS data by adding both construction workers and trade workers, since most of the employment on both residential and non-residential structures is trade workers.  (These two categories include the vast majority of all construction workers, the remainder are building infrastructure.)  Here are the totals in thousands:

Category              January 2006            April 2008        October 2009

Residential                3422                        2931                 2172

Non-residential         3204                        3436                 2771

Total                         6626                        6367                 4943

Un-rate                     4.7%                       4.9%                 10.1%

If you look at the total level of construction employment, you see that data that caused Bob Murphy to reject my hypothesis.  Although housing construction was down sharply by April 2008, total construction employment had fallen only slightly.  But that data has no bearing on my claim that the decline in residential employment contributed heavily to the recession.  We need to focus on residential construction jobs.

Even in the residential sector, it is true that jobs fell more slowly than construction activity.  But I’d still argue the data strongly supports my hypothesis:

1.  Almost 40% of the job loss had occurred by April 2008, yet the national unemployment rate remained relatively low.  Those workers mostly found jobs in non-residential construction, or other fields, or in a few cases returned to Mexico.

2.  In mid-2008, economic forecasters were predicting fairly low unemployment for the year 2009, even though they already knew that housing starts had fallen much faster than housing employment.

3.  In mid-2008 commercial real estate prices were still quite strong, despite the fact that residential housing had been declining for more than 2 years.  No spillover was expected.

4.  Then NGDP fell sharply after June 2008.  Even if there had been no pre-existing subprime crisis, one would expect a sharp break in NGDP to severely depress the housing industry.  Not surprisingly, it was after mid-2008 that prices began falling in non-subprime markets like Texas.  Surely a big portion of the post-April 2008 housing downturn was caused by the fall in NGDP.  Australia did not see a decline in NGDP, and did not see a housing crash in 2008-09, despite even more inflated prices.

5.  So nearly 40% of the job losses had little effect on the national unemployment rate, and a big portion of the remaining 60 % were almost certainly caused by the drop in NGDP.  How much of the rise in the national unemployment rate can be plausibly attributed to job losses in housing not attributable to a fall in NGDP?  I’d say well under one percentage point of the more than five percentage point increase in the unemployment rate.  What do you think?

HT:  Marcus

PS.  I can’t get the BLS link to work, they are series CES2023610001, CES2023620001, CES2023800101, CES2023800201.

This is a meta-analysis of my blogging.

Adverse economic shocks seem to be distributed somewhat randomly.  A priori, you’d expect them to occasionally occur in close proximity, especially if one problem might help trigger another.  When we have the bad luck of seeing two or three big adverse shocks back to back, we can get a major economic disaster.

My research on the Great Depression convinced me that it was two depressions, occurring one right after the other.  A demand-side recession that began around September 1929, and a supply-side depression that began in July 21, 1933 (with another demand shock in late 1937.)  Because they occurred back-to-back, most saw them as one “Great” Depression, and looked for explanations of what caused “the” Great Depression.  No mono-causal theory has proved plausible.

I thought of this recently because of my posts arguing the housing vacancy “problem” is actually two problems, or maybe three.  First, we built too many houses in 2002-06, perhaps due to bad regulation, or maybe bad private sector decisions.  Two other factors increased house prices; low interest rates caused by the tech crash (not easy money), and rapid immigration.  Those two reasons are “good” reasons for a housing boom.  So the housing boom was not good or bad, but partly good and partly bad.

The vacancy problem is also multifaceted.  Partly it was the bursting of the housing bubble.  Partly it was the slowdown in immigration.  And a big part was the huge drop in NGDP relative to trend, which drove unemployment much higher for young first-time home buyers.

And then I realized that my other blogging has a similar pattern.  The financial crisis was really two crises.  The first was caused by lots of foolish sub-prime lending, and led to a bailout of Bear Stearns.  The second was caused by a sharp fall in NGDP after June 2009 [Update: I meant 2008], and led to the failure of Lehman.

The recession itself is complex.  The initial part of the recession (after December 2007) was caused by both a drop in housing construction, and a drop in auto output as a result of soaring gas prices.  It caused RGDP to be flat in the first half of 2009.  Then a completely different problem occurred in late 2008, when tight money drove NGDP and RGDP much lower.  Even the recovery is complex, with the slow recovery being mostly attributable to weak NGDP growth, but also to unusually pronounced wage rigidity triggered by 99 week UI and a 40% minimum wage rise.

So that’s my shtick.

When I read others I often see what looks to me like overly simplistic views of these problems; “the” Great Depression, “the” financial crisis, “the” housing glut, “the” Great Recession, etc., etc.  But here’s the great irony.  I think others see me as the guy with the one-size-fits-all mono-causal explanation for everything.  Mr. NGDP.  Here’s Tyler Cowen, expressing what I think is the prevailing view of my blog:

I believe that the prominence and persistence of “demand-only” theorists in the blogosphere (DeLong, Krugman, Sumner, and others) give blog readers quite a skewed picture of the actual debate.

I see supply-side labor market problems as being a bit more important in this recession than Krugman and DeLong.  But on the other hand my view of the cause of the drop in NGDP is probably much more focused on monetary policy, whereas they’d give more weight to financial distress, fiscal policy, etc.  That’s what makes me seem so mono-causal, I view monetary policy as being “the” determinant of NGDP growth, more so than almost anyone else.

BTW, when I said that I often see others as offering mono-causal explanations for big problems, I’m excluding most of the best bloggers—especially Tyler Cowen, who is quite open to multiple perspectives.

Part 2:   Immigration

Speaking of multiple problems, Adam Ozimek sent me a post and an article where he discusses how immigration could improve the job market, and indicated Matt Yglesias had done similar posts.  Last year I argued that the immigration crackdown in 2007 might have contributed to the housing slump, but didn’t have much to say about policy implications.

I don’t think it’s realistic to have housing needs drive our immigration policy, but I agree with Ozimek and Yglesias that more immigration would help.  My general view of immigration is that it’s a good thing; indeed I agree with Will Wilkinson that it’s the best anti-poverty program out there.  (It’s ironic that the 1965 immigration bill isn’t usually considered part of LBJ’s “War on Poverty,” given that it was just about the only part of the war that was highly effective, maybe more so than all the rest combined.)

FWIW, I’d recommend increasing immigration enough to raise our population growth rate to Australian levels (2% per year), and I’d diversify to match the world’s population distribution.  That means more Africans and especially Asians, and fewer Mexicans.  I have nothing against Mexicans, and indeed personally I’d benefit more from half of our immigrants coming from Mexico, than a huge upsurge from Asia.  I’ll retire in LA where low-cost Mexican labor raises living standards for upper-middle class people like me.  In contrast, at the recent AEA meetings most of the job candidates we interviewed were Asians.  So they compete with US-born econ professors.

I see two advantages to diversifying immigration:

a.  There will be more political support as it will be seen as fairer–less focused on groups that directly compete with America’s unskilled workers.

b.  It will create more cultural diversity.  Many conservatives worry about a dual culture (Anglo/Latino) creating friction, and eroding America’s traditional culture.  Many Asians (and some Africans) get well-paying professional jobs, and blend into American culture pretty well.  I’m not saying Latinos don’t eventually do so, but the large concentration of Mexican immigrants in certain areas frightens cultural conservatives.

If we are to have a big increase in immigration we’ll have to deal with the opposition of low wage workers and cultural conservatives, and this is one way.

I recently made this argument:

Yes, housing output was low in 2009 and unemployment was high.  But is there a causal relationship?  I say no.  Housing starts peaked in January 2006, and then fell steadily for years:

January 2006 “” housing starts = 2.303 million, unemployment = 4.7%

April 2008 “” housing starts = 1.008 million, unemployment = 4.9%

October 2009 “” housing starts = 527,000, unemployment = 10.1%

So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes.  Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate.  Then NGDP plummeted, and housing fell another 480,000.

Bob Murphy responded:

The reason is that there’s more to the construction sector than simply starting new houses. That fact alone buys us another few months, as a look at housing completions shows.  [he has a link here]

But more important,

Waaaait a minute.  Note how Bob tells me housing starts are the wrong data, because construction workers keep working for some time after the starts, and then tells us to look at housing completions.  But then he merely provides a link, moving right along to something “more important.”  I wonder why?  Perhaps because housing completion data also supports my view?  Here are the numbers.  I’ve also averaged the two, as the average of starts and completions might be a good indicator of ongoing activity.

January 2006:  starts 2,303,000   completions 2,058,000    average  2,180,000

April 2008:   starts   1,008,000    completions   1,014,000     average   1,011,000

October 2009   starts    527,000     completions   745,000    average   636,000

Using the housing activity average, an even greater share of the total slowdown occurred between 2006 and 2008, when unemployment was stable, and an even smaller share occurred after April 2008.  I want to thank Bob Murphy for further strengthening my argument.

Bob also makes another argument, citing data showing that construction employment declined much less than housing construction between 2006-08.  But that’s easy to explain, as commercial real estate prices didn’t peak until late 2008.  So the commercial RE sector may have picked up some of the workers laid off from building houses.   (I don’t know about infrastructure and government building.)  And even if commercial RE didn’t add housing workers, if housing is half of all construction then a 20% decline in housing construction jobs would translate into only a 10% decline in all construction jobs.  All this of course supports my point.  The big drop in housing construction between January 2006 and April 2008 did not cause a significant impact on the US unemployment rate.  Doesn’t that suggest that those housing construction workers weren’t able to find jobs in other forms of construction, or other activities?

BTW, economic forecasters knew about the drop in housing starts by April 2008.  What sort of unemployment rate did they then predict for 2009?  I’d guess not to high, which indicates economic forecasters probably agree with my view that the housing downturn was not likely to severely impact our unemployment rate.

By the way, commercial RE did eventually decline sharply, as you’d expect when NGDP falls at the fastest rate since 1938.  But that’s not a re-allocation issue, it’s an AD issue.  It does explain, however, why the sharp drop in total construction jobs did lag the sharp drop in residential construction activity.