Recalculation in 2006-08; recession in 2008-10

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?


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30 Responses to “Recalculation in 2006-08; recession in 2008-10”

  1. Gravatar of Morgan Warstler Morgan Warstler
    14. February 2011 at 08:37

    Housing: all the more reason we should have ripped the damn Band Aid off, and forced the banks into insolvency, kicked the foreclosed out of their homes and sold everything in dollar auctions.

    The rest of it, bully for you Scott! Take off the gloves.

  2. Gravatar of marcus nunes marcus nunes
    14. February 2011 at 10:40

    Scott. According to EPI it is the Fed that needs a “helping hand” from FX policy and fiscal policy!
    Economic Policy Institute economist Josh Bivens testified before the House Financial Services Subcommittee on Domestic Monetary Policy and Technology this morning, where he discussed the actions the Federal Reserve has taken to stabilize the economy. Bivens explained that the Fed’s actions have been effective, but that they haven’t been buttressed by strong exchange-rate and fiscal policy responses. “In short, the Fed saw the economic downturn coming before any other major macroeconomic policymaking body, acted more aggressively than any other, and continues to attack the problem of sluggish recovery in both output and employment with greater urgency than any other team of economic policymakers. If our fiscal and exchange-rate policies were as aggressive as our monetary policy in historical terms, we could well have an unemployment rate 2-3 percentage points lower today and hundreds of billions of dollars of additional economic output,” said Bivens.
    Monetary Policy was not responsible but was the “macroeconomic stabilizer during the great recession”!

    http://www.epi.org/publications/entry/6753/

  3. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. February 2011 at 11:39

    Scott,
    According to Zillow, home values are down nearly 30% in my town since late 2006. Hockessin, Delaware (19707) is the 67th highest income place in the US with a population of at least 10,000. (Mind you, I’m probably the lowest income person in town, although, unlike most of my neighbors, I nearly own my home outright.):

    http://en.wikipedia.org/wiki/Highest-income_places_in_the_United_States#Highest-income_places_with_a_population_of_at_least_10.2C000

    We were totally bubble free (and largely subprime free) and up until the recession I thought we were totally immune. It shows you what a collapsing NGDP will do.

    And Martin Feldstein wrote the following last month:

    “The policies that China will adopt as part of its new five-year plan will shrink its trade and current-account surpluses. It is possible that, before the end of the decade, China’s current-account surplus will move into deficit, as the country imports more than it exports and spends its foreign-investment income on imports rather than on foreign securities.”

    http://www.project-syndicate.org/commentary/feldstein32/English

    Based on the rate of China’s import growth it looks like Feldstein may only have to wait a year, not a decade, to see his prediction come true.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. February 2011 at 16:01

    Housing Cause Denialists, hide your eyes:

    ‘The slump began when the low-quality loans that drove the latter stage of the boom began to go bad…’

  5. Gravatar of Scott Sumner Scott Sumner
    14. February 2011 at 19:03

    Thanks Morgan.

    Marcus, That’s pretty typical of what most economists still believe about the Fed.

    Mark, Feldstein may be right–Korea ran deficits during many of its high growth years.

    Patrick, Yes, and I love how they accuse us of “blaming the victim” when we criticize housing policies that tried to get everyone into a owner-occupied home. As if poor people passed those laws. If I was poor I would have grabbed the opportunity, but that doesn’t make the law wise.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. February 2011 at 21:22

    Scott,
    David Leonhardt has a somewhat different take on the housing report:

    http://economix.blogs.nytimes.com/2011/02/14/seattles-foreseeable-housing-bust/

    My main counterpoint is that Hockessin doesn’t have a rental sector. So how do we evaluate the appropriate price for homes here by his measure?

    P.S. Ken Houghten has a similar take to Leonhardt’s at the Angry Bear.

  7. Gravatar of Rien Huizer Rien Huizer
    15. February 2011 at 05:26

    Scott,

    China’s monthly trade statistics are a bit volatile and the end of a lunar year especially so (rising affluence means more effort spent on holidays= more output before them and more imports invoiced as well). The thing that surprises is exports, they are quite strong. Imports tend to be all over the place much of the time. Maybe China’s new leading group will have a different approach. If so, it will take a while, but “the while” starts before they are officially in power. This lunar year is one of those “end of term” years when things are carried over or pulled forward, depending on transitional politics. The signs are that the next mob will be different. In what respect? no one knows, because the old mob does not lose power right away. But keep in mind that the current mob is not as awe-inspiring (apparently), sometimes even almost human) as previous mobs and maybe the next one will be a bit more dynamic and assertive. Look at Japan: The Taisho emperor was weak, allowed almost democratic political activity, useless. His father, the Meiji empreror was so hagiographed that no one knows what he did or not and the succeeding Showa emperor (the last one to play that role to his hearts’ content) aka Hirohito was not particularly forceful as a person but really lived the part. Maybe Mr Xi’s upbringing and personality will produce a Meiji, but certainly no Taisho.

    What about economics? why?

  8. Gravatar of Rien Huizer Rien Huizer
    15. February 2011 at 05:29

    Mark,

    Looking for a cheap but nice condo. When to buy and in what state? Must be seaboard an preferably on the East coast.

  9. Gravatar of Doc Merlin Doc Merlin
    15. February 2011 at 06:52

    “Where do most of those natural resources go that are dug out of the ground in Chile and Peru and Brazil using Caterpillar equipment”

    I don’t know about most, but I imagine the plurality goes to China.

  10. Gravatar of Doc Merlin Doc Merlin
    15. February 2011 at 06:54

    Wait, he says a 1.5 Trillion deficit fueled stimulus (adding the bailout to the “stimulus package” as they were both Keynesian style stimuluses.) Isn’t enough… so roughly 10% of GDP isn’t enough? This makes me suspect that the Keynesians don’t have an “enough” condition, their answer is always “more”.

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. February 2011 at 09:24

    Rien,
    I’m not hardly an expert on real estate so I can’t really help you.

    But I can offer some general observations based on the Case-Shiller Indicies:

    1) Condo prices are doing better in NYC and Boston than house prices but not in LA and San Francisco. But that’s information on only four metro areas.
    2) After house prices bottomed in roughly the middle of 2009 and modestly increased through roughly the middle of 2010 in almost all of the major metro markets on both coasts, they have resumed their decline with perhaps the exception of Washington DC. Washington DC probably has the strongest economy on either coast right now so perhaps that’s not surprising.

    The bottom line is we are experiencing a double dip in housing prices in the US with many new post bubble record lows expected in the months to come. When will the bottom come? Who knows? (EMH) But if I wanted to minimize my losses, the greater Washington DC metro area is probably your best bet.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. February 2011 at 09:27

    “not hardly” should read “hardly” and “But if I wanted” should read “But if you wanted”. Actually Morgan has a good point about the lack of a comment editing option.

  13. Gravatar of Doc Merlin Doc Merlin
    15. February 2011 at 10:39

    @Mark:

    School market reform is also going to cause a pretty interesting effect on housing prices, as school becomes decoupled with neighborhood.

  14. Gravatar of Matt W. Matt W.
    15. February 2011 at 12:28

    “Wait, he says a 1.5 Trillion deficit fueled stimulus (adding the bailout to the “stimulus package” as they were both Keynesian style stimuluses.) Isn’t enough… so roughly 10% of GDP isn’t enough? This makes me suspect that the Keynesians don’t have an “enough” condition, their answer is always “more”.”

    Stiglitz apparently suggested that Greece should ramp up deficit spending, because the increase in deficit spending will encourage economic growth and creditors will be comforted by the fact that Greece will definitely grow out of its debt. If he actually argued this, it’s asinine to say the least. Credit card companies are always comforted by me opening up and maxing out more accounts.

    IMO, both die-hard Keynesians and Supply-siders delude themselves to support their own love for bigger government or smaller taxes. No matter how much evidence is thrown up that deficit spending does NOT lead to sustainable economic growth or that lower taxes do not typically lead to higher revenues, they still stick to their theories.

  15. Gravatar of Manny C Manny C
    15. February 2011 at 14:12

    You might want to comment on this working paper published by the Basel Committee on Banking Supervision on the transmission mechanism between the financial and real sectors of the economy: http://www.bis.org/publ/bcbs_wp18.htm

    BTW: would love a post from you as to what your thoughts are on a transmission mechanism, its existence, the importance you lend to it etc.

  16. Gravatar of Manny C Manny C
    15. February 2011 at 14:13

    Oh, direct link to working paper here:
    http://www.bis.org/publ/bcbs_wp18.pdf

  17. Gravatar of W. Peden W. Peden
    15. February 2011 at 15:34

    Matt W.,

    Stiglitz argued for fiscal stimulus in the boom of the 1990s, so his support for fiscal stimulus is only (at best) partly driven by an aim of demand management. If one ALWAYS wants fiscal stimulus, that’s not demand management, that’s a fundamental goal of expanding the size of government. It would certainly help clarify matters, however, if Stiglitz stopped trying to use selectively demand management as an argument for this goal.

    It’s true that Keynesians and Supply Siders are very good at explaining away contrary evidence to their theories. The fact that there’s a grain of truth in both theories (a larger grain, I would argue, in the case of Keynesianism) makes them all the more frustrating.

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. February 2011 at 15:38

    ‘As if poor people passed those laws.’

    Even more importantly, it wasn’t ‘the poor’ who took advantage of them, for the most part. Once underwriting standards were loosened in the name of the poor, the deluge followed. Before 1992 it was the rare home loan (about 1 in 200) that had a low down payment, or was made to someone with impaired credit. By 2007 abut half the 55 million mortgages in the country were such.

  19. Gravatar of Morgan Warstler Morgan Warstler
    15. February 2011 at 18:29

    http://www.youtube.com/watch?v=nAxEzxHkqyY

  20. Gravatar of Rien Huizer Rien Huizer
    16. February 2011 at 01:31

    Mark,

    Thanks, you took most of my appetite away. One reason for following this blog is to get a feel for what the avant garde of macroeconomics has to offer and to what extent that is likely to succeed in politics. It takes a theory/approach that you think may help, and political agents that are willing/capable to design and execute along those lines. Handelsblatt in Germany suggested a few weeks ago to appoint mr Woodford ECB chair (fresh face, state of the art, non-european).. Looking at the limited effort US politicians and central bankers are making to avoid a double dip or a plateau and the difficulty my manily political brain has with trying to imagine a path for Scott’s approach (which I like but do not believe capable of being embedded in institutions soon enough, even if the political will was there), I rather invest in money…

  21. Gravatar of Philo Philo
    16. February 2011 at 08:15

    I see that the Canadian and Australian dollars, which not so long ago were in the range of sixty-some U.S. cents, are now at par with the U.S. Dollar. Since (as you contend) money in the U.S. has been too tight, does this not suggest that money in Canada and Australia has been even tighter? Yet so far as I can see the recession in Canada and Australia has been milder than in the U.S. How did they escape the worst consequences of too-tight money?

  22. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. February 2011 at 14:56

    Philo: does this not suggest that money in Canada and Australia has been even tighter? Not according to our inflation rate. Speaking as a ‘naive observer’, the Oz$ seems to be influenced by expected levels of economic activity. For example, there was a massive fall in the $A in 1997, it bottomed at about 52c US, as our ability to sell to Asian trading partners that were in difficulty was discounted. The effect was to make our exports so competitive, we could sell to just about anyone and sailed through the crisis. Conversely, as it became clear that the GFC and Great Recession had passed us by, the $A began to rise. Now, someone much cleverer than me about exchange rates could no doubt collect the dots, but that appears to be a major part of what happens.

  23. Gravatar of bertusmaximus bertusmaximus
    16. February 2011 at 16:49

    neither canada nor australia have a policy of debasing their currency, have a sounder fiscal situation and terms of trade (export prices going up faster than imports) keep getting better … rate differentials also have impact … canada and australian rates are not restrictive versus output gaps and inflation targets which are headline inflation … unlike the yanks, aussies and canucks actually eat food and use fuel.

  24. Gravatar of Richard W Richard W
    16. February 2011 at 17:14

    I would say the AUD depreciated in 2008/09 because of the unwinding of the carry trade especially in relation to Japan. As it turned out Australia was largely unaffected by the GFC, and as a consequence the NAB cash rate started to rise so the interest rate differential returned. Therefore, the AUD appreciated driven by the interest rate differential. It is all a search for yield story in relation to Australia.

  25. Gravatar of marcus nunes marcus nunes
    16. February 2011 at 17:16

    @ Philo, Lorenzo
    No mistery whatsoever! The A$, C$, BRL (that´s Brazilian Reais) are known as “Commodity Currencies”. In 1997/98, commodity prices plunged following the Asian Crisis. So did the A$. Now commodities have been going up (actually since early 2002 and the general trend of those currencies has been up (relative to the dollar) barring brief moments of “flight to safety” like during the second half of 2008.

  26. Gravatar of Scott Sumner Scott Sumner
    16. February 2011 at 17:53

    Mark, Boston price to rental ratios have been rising during the time I’ve been here. When will the bubble burst? (I’ve been in Boston since 1982.) I say never.

    Rien, From monthly Chinese trade data to Japanese history in one post. I agree the monthly data is erratic, but the trend is toward strongly rising Chinese imports.

    Doc Merlin, Yes, China. And check on my new post on fiscal stimulus.

    Matt W. I agree.

    Manny, I have done stuff on the transmission mechanism. I assume a permanent monetary shock raises future expected NGDP, and this raises current asset prices and current velocity, and if wages are sticky this raises current output and prices. I’ll try to do something soon I how this differs from other views.

    W. Peden, Stiglitz also opposed QE2, which I thought was really strange.

    I actually think there is more truth in supply-side economics than Keynesianism. But I’d agree that the wacky supply-siders are even wackier than the extreme Keynesians.

    Patrick, Good point.

    Morgan, When someone links to an hour and 26 minute video, without comment as to whether there is anything worth watching, you can be pretty sure I won’t watch, given I couldn’t get all the things done I need to get done if there were 48 hours in a day.

    Philo, Monetary policy is one of many factors that affect nominal and real exchange rates. The real value of those two currencies has risen sharply on the world commodity boom. The best measure of the tightness of monetary policy is NGDP growth, a point I’ve consistently argued. When you don’t have NGDP expectations, exchange rates are one of many lesser indicators (along with stocks, commodities, TIPS spreads, real estate prices, etc) no single one of which is reliable.

    bertusmaximus; You said;

    “neither canada nor australia have a policy of debasing their currency,”

    I like Australian monetary policy, precisely because they’ve debased their currency at a faster rate than other developed countries, and thus avoided the liquidity trap. They tend to have higher inflation than the US over significant periods of time.

    Marcus, That’s right.

  27. Gravatar of Doc Merlin Doc Merlin
    18. February 2011 at 04:08

    @Scott
    “I like Australian monetary policy, precisely because they’ve debased their currency at a faster rate than other developed countries, and thus avoided the liquidity trap. They tend to have higher inflation than the US over significant periods of time.”

    I thought you didn’t believe in liquidity traps?

  28. Gravatar of Scott Sumner Scott Sumner
    19. February 2011 at 05:37

    Doc Merlin, I don’t, I always mean “liquidity trap” in quotations markers, indicating others believe in them, and act irrationally on that basis.

  29. Gravatar of Lorenzo from Oz Lorenzo from Oz
    6. August 2011 at 17:11

    That will teach me to quote numbers from memory. The $A did fall dramatically during the 1997 Asian Crisis, but the 52c $A/$US exchange rate was from September 2000. I remembered two different events and put them together!

  30. Gravatar of W. Peden W. Peden
    6. August 2011 at 18:19

    Doc Merlin,

    I assume by “liquidity trap” he just means the zero-lower bound.

    I offer Marshall’s* Law: for any economy, there is at least one use of the term ‘liquidity trap’ that applied at some point during that economy’s history.

    * In the tradition of George Stigler on eponymous laws.

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