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Very good sentences
Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble.
Here is more, from Paul Krugman. That is another reason why I think that aid to homeowners will not hit the target and why I think markets are failing to solve an economic calculation problem. The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty is encouraging a scramble for liquidity and decisions to wait. We can see the information -- about what to do next, economically -- disintegrating before our eyes.
Posted by Tyler Cowen on December 22, 2008 at 11:34 AM in Economics | Permalink
Comments
And a Merry Christmas to you too.
Posted by: Finnsense at Dec 22, 2008 11:55:04 AM
So what you are saying is that stimulus can only provide a bridge from a state X to a state very much like X, and if we don't believe that the second X is like the first X, we can't believe in a stimulus?
That makes some sense, but maybe to first approximation the second X is something like 0.95X -- maybe that changes the course of action?
Posted by: babar at Dec 22, 2008 12:00:37 PM
Does Krugman think that only the housing market experienced a bubble? That would be news to the private equity/LBO firms and commodity producers that have taken haircuts recently.
The housing industry and mortgage-backed derivatives traders were not from the only people who bought into bubbles.
The effects of Easy Al's credit machine were wider than housing, so it makes sense that they were more dispersed geographically. It's economic geogrphy 101 once you're armed with Hayek.
Posted by: Bill Stepp at Dec 22, 2008 12:01:07 PM
Bill Stepp: do you contend that PE haircuts and frozen credit would have happened even had the RE bust not occurred?
Just curious.
Posted by: at Dec 22, 2008 12:11:52 PM
Who's to say another bubble won't work?
It worked in 2001 and it'll work again now. The government is going to paper over this downturn and delay it for another two to ten.
We'll all meet at this same place again in 2013. Ride the bubble early and remember to hop out before the crash!
Posted by: Mercutio.Mont at Dec 22, 2008 12:15:00 PM
'The worst of the crisis'? We can only hope that this is the worst of the crisis. But in any case I'm guessing Krugman is wrong, since the slightly greater increase in unemployment in the states he cites as affected pales in comparison to the loss of homeowner wealth experienced in the directly affected states.
Of course, if you regard that real estate equity as illusory and its loss therefore as equally unreal, maybe you could make Krugman's case. But I doubt the homeowners feel that way.
Posted by: bbartlog at Dec 22, 2008 12:24:27 PM
I don't see this as a surprise at all. Much of the south experienced an increase in population, mostly from the northeast and midwest. Unlike places like Washington, DC and San Diego, places where housing supply could not keep up with demand, prices skyrocketed. Here in the south, the increase in demand was not met with an increase in price, but with an increase in housing supply. Once demand abated, the demand for factors fell. I would be interesting to see how much of the unemployment is not auto related, but instead housing related.
Posted by: Mark at Dec 22, 2008 12:29:39 PM
We can see the information -- about what to do next, economically -- disintegrating before our eyes.
What "we" should do is the same thing we should have been doing all along. Namely, wait for, or even encourage, the housing bubble to fully collapse and income to housing ratios return to "normal". By the way, ARM's mostly finish adjusting in spring of 2009.
When that happens (my best guess is summer 2009), bargain hunters rush in. They take inventory off the books of banks and CDO holders, as well as off the hands of frustrated owner occupied homes who couldn't sell previously because buyer shad stepped away from the market.
Coupled with ARM defaults *finally* verging towards "model", the secondary market for CDO's should explode into liquidity, thus finally ending uncertainty in the financial sector. This in turn ought to increase willingness to buy corporate debt, pushing down yields. This in turn encourages companies to issue more debt, will also improve the stock market. An increase in stock market prices in turn should increase IPO's.
The new corporate debt along with new equity financing will in turn enable companies to invest in underexploited sectors of our economy (neatly bypassing demand siders who can't see past "overcapacity"). Economy grows.
Sadly all of this will likely roughly coincide with expanded fiscal "stimulus" spending, and prefix Keynesians will run around falsely saying "I told you so", and hordes of naive college stdents will continue to be taught that taking money from Peter to give to Paul for digging useless ditches and filling them up again actually helps when in reality it has a negative sign.
Posted by: happyjuggler0 at Dec 22, 2008 12:36:56 PM
We have the typical technology shock. Our knowledge of where valuable goods are has doubled in accuracy over the last ten years. Hence, there will be large changes in utility and substitutability.
These information shocks put strain on transportation of goods as we see better how to arrange goods to minimize scarcity.
The Great Depression was a result of the technology of commercial radio, and we are at that problem again. As in the Great Depression, the solution will come when we find out how to reform the movement of goods to match the web, quite frankly.
Posted by: MattYoung at Dec 22, 2008 12:43:53 PM
We can see the information -- about what to do next, economically -- disintegrating before our eyes.
Typical economist (smile). We select few, will explain and chaperone the "way out", and although the current version is disintegrating we shall find and deliver the new Solution. Stay tuned.
I doubt anyone in 1982, 1987, 1990, 2000 knew the way out in its entirety or general thrust, and yet it came; probably on the back of millions of discrete little decisions that created the new economic driver. The economy will work itself out once we stop handing off enormous power and dollars to what we hope is a Strongman Cabal with a Plan To Save Us All, but who act like a bunch of teenage girls freaking out over having no prom date.
I could be wrong, no one or no group has the answer.
Posted by: guy in the veal calf office at Dec 22, 2008 12:57:14 PM
happyjuggler0,
Trouble is, the housing bubble is unlikely to fully pop until 2011. See for instance this very long PDF presentation.
Posted by: at Dec 22, 2008 1:03:47 PM
Mark,
Not perfect, but good answer.
Posted by: Brian Shelley at Dec 22, 2008 1:26:09 PM
Bill Stepp: do you contend that PE haircuts and frozen credit would have happened even had the RE bust not occurred?
Not sure what you mean by "frozen credit." There are 8,500 community banks in the U.S. that sidestepped the derivatives mess, and didn't do subprime (or at least not like anything as much as the Countrywides and New Centuries) and which continued to lend, as the WSJ pointed out in a big article.
The PE haircuts would have happened even if the real estate bubble had not been as big, but they would have been less in some rough proportion to the diminished bubble/bust in the real estate sector.
Ditto for the commodites bubble/bust.
Posted by: Bill Stepp at Dec 22, 2008 1:37:32 PM
Yes, I am waiting. I've been out of the market since 12/2007. Things looked too much like the panic of 1837. I'd be in the market for equity and bonds if it weren't for extreme activist Keynesians like Bernanke and Krugman, ner-do-wells like Paulson, and the green socialists of the next administration. It's a situation that encourages rent-seeking through bailouts, not investment. So now, my investor colleagues and I will hold on to cash while we wait to see.
Posted by: Adam at Dec 22, 2008 2:52:09 PM
"We can see the information -- about what to do next, economically -- disintegrating before our eyes."
Well this is the gnarly and indigestible core of the problem at hand, isn't it? Everybody wants a stable equilibrium, but our mechanism for identifying stable equilibria isn't working. We can be pretty sure of that because somehow we've arrived at this extremely unstable state.
If you subscribe to the idea that asset bubbles are a symptom of excess liquidity, then the institution that's supposed to identify productive (and therefore profitable) uses of capital (Mister Money Market™) has not only failed to identify the correct price of the bubble asset, but failed to identify any alternative uses for that capital. It has, to put it bluntly, failed completely. It is, as the saying goes, an ex-market.
If that's the scenario then how the hell do we proceed? Forcibly diverting capital toward whatever purposes some central planning institution identifies as productive is, de facto, just creating bubbles to bleed excess liquidity into. That puts Mister Market -- our mechanism for discovering costs and risks and identifying innovations -- onto life support, gives him a portable oxygen tank and some prosthetics even. But it still doesn't mean that Mister Market will be able to do his job any time soon, unless Mister Market makes a pretty miraculous recovery.
Unfortunately, if the bubble is big enough and we don't do anything at all, then the risk is high that collapse will cause Very Very Bad Things to happen during the period between the bubble collapse and the re-emergence of a functional marketplace. Maybe to our currency, maybe to the price of other assets, maybe to productivity, maybe blocking critical innovations or adoptions which are starved for capital, etc... but we don't have any way of knowing which bad things to expect. (at least not if we're to believe those highly dangerous complexity folks ;-)
JFTR I like the idea of penalizing banks for not lending. It addresses the problem of seized-up capital flows but forces individual agents make the actuarial decisions. If you know that a bunch of banks are going to fail, try to encourage the dumber, less "productive" ones to fail first. The downside being that that might not work either, because all we've done then is increased the incentive to identify profitability, not the incentive to identify productivity. The most market-friendly solutions would be the ones that devalue idle capital generally. Selective demurrage, so to speak, but I can't even think of a plausible way to do that, let alone do it safely. Raising capital gains taxes might have helped if we'd done it when people were still making those gains, but wouldn't really solve the problem anyway, because in this case taxation is just another way to say "diversion." Unless the government just takes some of the tax receipts out of circulation. Which ain't gonna happen.
So I think we're mostly screwed. The present political cost of implementing a controlled devaluation of idle concentrations of capital is greater than the political cost of accepting uncontrolled devaluation or diverting capital into new bubbles. We (presently) have no mechanism available with which to fix or replace the mechanism that's broken. We're basically gonna have to hold our breath for a few years and hope for the best.
Posted by: radish at Dec 22, 2008 2:55:50 PM
Adam, if you're not part of the solution, you're part of the precipitate.
Posted by: radish at Dec 22, 2008 2:57:02 PM
Census Bureau data out today show that, from July 1, 2007 to July 1, 2008, South Carolina had a net domestic in-migration of nearly 50,000 people. Nearly all the Southeastern states imported people from other states, on balance. Even with its terrible housing bubble collapse, Florida had a net domestic out-migration of less than 10,000.
In contrast, New York had a net domestic out-migration of 126,000. New Jersey had a net domestic out-migration of 56,000. Out west, California had a net domestic out-migration of 144,000.
It seems pretty obvious to me that the reason unemployment is relatively low in the Northeasst and on the West Coast is because they are exporting the problem to other states. That's where Krugman's analysis really falls on its face.
Posted by: Stan Greer at Dec 22, 2008 3:15:53 PM
@Stan Greer
"exporting the problem to other states"
I don't see evidence for that in the data; nowhere do the data on this that I can find show the age of the population leaving. From living in NYC, I would say my experience is that people are leaving primarily to retire. They are moving to Carolina and Arizona to play golf.
My friends in Cali report that people there are leaving in search of larger houses at affordable prices; even with the end of the bubble in CA, that extra bedrooom you need for your new baby just costs too much, so you're transferring to Colorado, Arizona, Montana, Texas, Utah or New Mexico.
Posted by: StreetWalker at Dec 22, 2008 4:08:47 PM
Amazing how no commentators here get what the issue is. No, it is not Texas where the lack of restrictions on building houses kept a bubble from emerging. It is states like Ohio and Michigan where the recession is hitting the hardest, but which also have been recessed/depressed for a long time. Their long term low level of economic activity kept them from having a housing bubble, but now their housing prices are going down. That is not happening as much in those southern states that built housing and had robust economies.
Posted by: Barkley Rosserr at Dec 22, 2008 5:06:46 PM
Barkley "gets it."
States with sinking economies, such as Ohio and Michigan, never had a bubble, and in fact had a bankruptcy and foreclosure crisis starting several years ago.
Since the pointy headed did not care about losing dirty undesirable manufacturing jobs for those undesirable blue collar workers, many did not care about the problems in these states.
So take sinking state, throw in a credit crisis and those states are sinking faster.
So should we be sympathetic about those who bought expensive houses with little equity in bubble states? Not here in Michigan.
Posted by: Rusty at Dec 22, 2008 11:53:39 PM
Oh, you don't have to be sympathetic, Rusty. The costs will be dumped upon thee whether there is sympathy or not.
But have no fear. The coming collapse of state budgets will hit those states like a ton of bricks delivered by a freight train rolling across an asteroid.
Posted by: Alan Brown at Dec 23, 2008 12:11:20 AM
At least part of the problem is that it's HARD to start a new company these days, with all the employee protections you've got to observe. You can protect employees with laws, or you can protect employees with a strong and vibrant job market. We've chosen the first, and it's not serving us well now.
Posted by: Russell Nelson at Dec 23, 2008 1:44:54 AM
Except that once again Krugman has his facts wrong.
California, Nevada, Florida -- ground zero of the subprime mess, and among the leading states in unemployment.
Orange County, CA has been in a deep downturn for 2 years and counting.
Krugman wrote:
"Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble."
If Krugman just stupid. Is he simply deeply dishonest?
Or BOTH.
I'm going with BOTH.
Posted by: Greg Ransom at Dec 23, 2008 3:42:01 AM
I'm seeing boarded up stores all over south Orange County, CA.
The Orange County Register's "Big O" index has dropped 7 quarters in a row, and is already matching lows last reached 18 years ago.
http://www.ocregister.com/articles/year-homes-sienna-2260807-one-barisic
Orange County is one of the "ground zeros" of the subprime mess / housing boom -- and it's getting hit hard.
Posted by: Greg Ransom at Dec 23, 2008 3:49:13 AM
Note well: Orange County has the highest foreclosure rate in the state of California:
http://www.recordonline.com/apps/pbcs.dll/article?AID=/20081120/BIZ/81120033
Posted by: Greg Ransom at Dec 23, 2008 3:53:57 AM
