Evan Soltas documents the Great NGDP Expectations Crash of 2008
I have often claimed that expectations of NGDP growth crashed in late 2008, and that this caused a crash in asset prices, which made the financial crisis much worse. Indeed it probably played a role in the demise of Lehman Brothers (although I don’t doubt that other factors relating to the subprime fiasco also played a role.)
Now Evan Soltas has found data that documents this sudden change in NGDP growth expectations:
I recently discovered that the Survey of Professional Forecasters has been recording NGDP expectations since 1968. Better yet for those inclined — that is, me — they have all of the individual anonymized forecast records, mean forecasts, median forecasts, and cross-sectional dispersion statistics on the forecasts. And it’s a quarterly forecast for several quarters ahead.
You can do a lot with this. I’ve actually never seen someone really work with Survey numbers to make the NGDP case, and this is only the tip of the iceberg. (I’m practically pleading with everyone else to write something.)
The first is a graph of mean NGDP expectations, with each line is a time series of expectations for NGDP percent growth one through five quarters out.
. . .
You can see the NGDP shock as a shock to expectations. Notice that the effects are noticeable for a full year out. It’s not hard to see how a sudden collapse of short-to-medium expectations, with no “bounce-back” recovery seen in the future, could be more important than current-quarter NGDP.
You should check out the various graphs in Evan’s post.
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27. January 2013 at 01:10
One can also find the same pattern in the Michigan Survey of Consumers, as Greg Mankiw noted back in May 2011: http://gregmankiw.blogspot.com/2011/05/household-expectations.html
27. January 2013 at 01:19
But one could equally argue that it was the crash which caused expectations to plummet.
27. January 2013 at 05:59
Jonathan,
There is a sort of “giving up” mechanism at work, where people inadvertantly convince themselves there is nothing left they can do to free up growth in constructive ways. Staying true to output gives those who would continue to seek progress a chance.
27. January 2013 at 06:22
Thanks Integral.
Jonathan, But only if the Fed let it happen.
27. January 2013 at 07:10
Scott
I took Evan´s “plea” to heart:
http://thefaintofheart.wordpress.com/2013/01/27/bringing-ngdp-expectations-into-the-picture/
27. January 2013 at 08:06
Dr. Sumner:
“I have often claimed that expectations of NGDP growth crashed in late 2008, and that this caused a crash in asset prices, which made the financial crisis much worse.”
Falling asset prices per se are not problematic. If more assets are able to be produced into a given demand, that causes prices to fall, but because this fall in prices is accompanied by an increase in supply, there is no fall in revenues and no fall in profitability.
But as we all know, falling prices can also be caused by a fall in spending, and that is associated with a fall in profitability. So we have to be sure to keep the two reasons for falling prices distinct.
Thus, when you say the fall in spending caused prices to fall, I would argue it’s not really the fall in prices that caused the problems. This fall in prices was a symptom of falling spending, and that can be argued to be a problem.
For what is the alternative? If, given a fall in spending, prices (such as wage rates) don’t fall, then they are labeled as sticky and that causes problems. But if, given a fall in spending, prices (such as asset prices) do fall, then they are labeled as not sticky but it still causes problems. So it would seem non-sticky prices and sticky prices causes problems. Well that means there are always problems no matter what.
27. January 2013 at 10:24
[…] of how NGDP expectations are ultimately found (Scott has a link to an Evan Soltas article on another approach), we need a good estimate. If Market Monetarism is the best family of macroeconomic models for our […]
28. January 2013 at 05:02
Does anyone know how to stop wordpress from automatically posting a comment if I link to a post? The above comment being automatically made from my account after I linked to this post. Sorry for spamming your comments Scott.
28. January 2013 at 07:45
Marcus, Thanks for doing that post.
Geoff, You said;
“I would argue it’s not really the fall in prices that caused the problems. This fall in prices was a symptom of falling spending, and that can be argued to be a problem.”
I agree, but dtoh will argue with you.
Justin, No problem, but I can’t answer that.
29. January 2013 at 05:03
“As the Senate Permanent Subcommittee on Investigations reported in April 2011, during January and February 2007, Goldman Sachs “rapidly sold off or wrote down the bulk of its existing sub-prime RMBS [residential mortgage-backed securities] and CDO inventory, and began building a short position that would allow it to profit from the decline of the mortgage market.” In other words, Goldman Sachs, like other banks, was aware of the disaster that was about to befall the housing market, and was betting that it would collapse”
http://www.wsws.org/en/articles/2013/01/26/fede-j26.html