The Mortgage Crisis - 10 years on

Aug. 9, 2007: The Day the Mortgage Crisis Went Global

Excerpt:

Ten years ago this Wednesday, the first glimpses of the global financial crisis came into view.

The French bank BNP Paribas froze three investment funds, saying a lack of trading in subprime securities made valuing them impossible. The bond market seized up, rattling investors and central bankers who previously soft-pedaled the notion that the U.S. housing bust would hit the economy.

Aug. 9, 2007, marked the beginning of the most far-reaching economic disruption since World War II. The events that Thursday made clear that subprime-lending excesses wouldn’t be “contained,” as Ben Bernanke, then Federal Reserve chairman, had predicted just months earlier. Yet few people appreciated the scope of the disaster that would unfold over the next 18 months.

By now it is widely understood that the global financial industry was overleveraged, that the U.S. mortgage market was rife with loans that wouldn’t be repaid, that investors and financial institutions everywhere were paying high prices for highly rated securities that were actually extremely risky....

Investors knew before that day that souring subprime loans would cause losses. But few realized they would show up with such disruptive effects in Europe, thousands of miles from the epicenter of the subprime crisis in southern California.

Investors understood the housing bust would hit the finances of major lenders such as Countrywide Financial Corp. But even after the firm warned that afternoon of “unprecedented disruptions” in markets, few appreciated how gravely impaired the entire U.S. mortgage sector would become as borrowing costs rose, housing prices fell and losses started to mount.

The depth of the existing losses and the efforts to keep the system running would ultimately combine to turn the August liquidity scare into a full-fledged run on markets.

That day didn’t expose just the disarray of the global financial industry. It also illuminated behavioral patterns that helped accentuate the crisis, notably investors’ expectation that central bankers and other policy makers would intervene when markets started to shake. ...

From the vantage point of August 2017, it is clear there have been changes. Subprime has been banished from the lexicon. Banks are better capitalized and more liquid. Investors are constantly on the lookout for imbalances that might signal a coming market catastrophe.

Comment: How it impacted us: We actually came out OK.

• Our house valuation dropped fairly dramatically but: Stayed well above what we paid for it in 1996 AND we never went underwater.
• The housing crisis caused the collapse of Wachovia and its acquisition by Wells Fargo. My job was in limbo but I came out ok. Click Wachovia for my blog coverage of this. I went from top dog in my position to 2nd or 3rd fiddle in the new larger organization but I still received raises and bonuses (but no more promotions)
• We paid off our house (Fall of 2007) and we were able to begin equity acquisitions big time at cheap prices - eg 1000 shares of FITB for about $ 1 a share.
• Today our house value surpasses what it was pre-crisis. 

21st Century Soup Lines - a modern-day depression

Those Jobless Numbers Are Even Worse Than They Look - Still above 8%—and closer to 19% in a truer accounting

Excerpts:

• Don't be fooled by the headline unemployment number of 8.1% announced on Friday. The reason the number dropped to 8.1% from 8.3% in July was not because more jobs were created, but because more people quit looking for work
• 40.7% of the people counted as unemployed have been out of work for 27 weeks or more—that's 5.2 million "long-term" unemployed.
• Fewer Americans are at work today than in April 2000, even though the population since then has grown by 31 million. We are still almost five million payrolls shy of where we were at the end of 2007, when the recession began
• Involuntary part-time workers ... are working part-time only because they've been unable to find full-time work. This involuntary army of what's called "underutilized labor" has been hovering for months at about 15% of the workforce. Include the eight million who have simply given up looking, and the real unemployment rate is closer to 19%.
• Adjusting for inflation, wages are contracting.
• Older Americans can't afford to quit. Ironically, since the recession began, employment in the age group of 55 and older is up 3.9 million, even as total employment is down by five million. These citizens hope to retire with dignity, but they feel the need to bolster savings as a salve for the stomach-churning decline in their net worth
• the jobs that are available are mostly not good ones. More than 40% of the new private-sector jobs are in low-paying categories such as health care, leisure activities, bars and restaurants
• food stamps: More than 45 million Americans are in the program! An almost incredible record. It's 15% of the population compared with the 7.9% participation from 1970-2000. Food-stamp enrollment has been rising at a rate of 400,000 per month over the past four years
• Social Security disability—another record. More than 11 million Americans are collecting federal disability checks. Half of these beneficiaries have signed on since President Obama took office more than three years ago

Comment: Behind the WSJ paywall. Speaks of the absolute failure of the Obama administration!

Dropping out

Why Did the Unemployment Rate Drop?

 Excerpt:

The decline in the unemployment rate wasn’t because more people had jobs. In fact, the number of people employed as measured by the household survey declined by 119,000. The fall came from fewer people looking for work in August and dropping out of the labor force. The number of jobs added to the economy and the unemployment rate come from separate reports.

The number of jobs added — the 96,000 figure — comes from a survey of business, while the unemployment rate comes from a survey of U.S. households. The two reports often move in tandem, but can move in opposite directions from month to month. In August, the household survey might have recorded a drop in the jobless rate, but below the headline number were more worrying signs.

The unemployment rate is calculated based on the number of unemployed — people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. That number declined by 250,000 in August, but it was overwhelmed by a 368,000 drop in the size of the labor force. That suggests that many of those 250,000 stopped looking for work not because they found a job, but because they dropped out of the labor force. The unemployment rate is calculated by dividing the number of unemployed by the total number of people in the labor force.

Comment: Article may be behind the WSJ paywall. Results are dismal!

Say What!? Chinese "saving frenzy" responsible for the Great Recession

China - Not Wall Street - Caused 2008 Crisis: Study

Excerpt:

Thought the global financial crisis in 2008 was caused by subprime bonds, collateralized debt obligations (CDOs) and other Wall Street engineering? Think again.

According to a new study, China, not Wall Street bankers, was responsible for the global crisis and the ensuing recession.

The study from the Erasmus Research Institute of Management says the saving frenzy of the Chinese created the cheap money, which fueled the U.S. housing bubble and its collapse.

Heleen Mees, writer of the study and assistant economics professor at Tilburg University in the Netherlands, says that exotic mortgage products could hardly have been the cause of the U.S. housing market bubble and the its ultimate collapse.

According to the study, mortgages with those special features -- like mortgage-backed securities and CDOs -- accounted for less than five percent of the total number of new mortgages from 2000 to 2006.

Comment: Blaming Chinese "saving frenzy" strikes me as way off! Image above from Wiki "Yellow Peril" article.  Compare also Stereotypes of East Asians in the United States.

Out of Bullets

The Government Can’t Save the Market This Time

Excerpt:

But there are also several very important differences between this market crash and the ones a few years ago:

• The Fed has fired most of its bullets (interest rates are already at zero)
  
• Our budget deficit is already out of control, and Congress has had it with "stimulus"
  
• The public has had it with bailouts
  

That means the government's ability to do anything about this market crash is severely limited. Yes, we'll almost certainly have a "QE3." And maybe that will prop things up a bit. But it won't fix the fundamental problems clogging the economy, just as QE1 and QE2 didn't permanently fix anything. (The only thing that will fix our economy is debt-reduction, discipline, and time.)

To get a good sense of how hamstrung the government is, you need only look as far back as last week, when Congress was so paralyzed that it almost put the country into default rather than raise the debt ceiling. And you also need only note that, when the 2000 crash began, the US federal budget was running a surplus, and when the 2007 crash began, the deficit was only $200 billion. Now, the deficit's about $1.4 trillion.

Comment: Image source. The problem:

• Debt-reduction? Does anyone see that happening?
  
• Discipline? Time? Congress and the President are more interested in their own political fortunes!
  

Econony at ‘Stall Speed’

U.S. Economy Running at ‘Stall Speed’

Excerpt:

Pacific Investment Management Co. and BlackRock Inc., which together oversee almost $5 trillion, say the U.S. economy is stalling.

Bill Gross, who runs the world’s biggest bond fund at Pimco, and Peter Fisher, head of fixed income at BlackRock, say the Federal Reserve is preparing measures to counter the slowdown.

“We’re not looking at a recession yet, but we’re at a tipping point,” Gross said yesterday in an interview on Bloomberg Television. “We’re at what we call a stall speed in which corporate profits don’t grow, jobs aren’t created,” said Gross, who is based in Newport Beach, California.

The U.S. recovery that began two years ago has been losing momentum and there are even odds the nation will slip into a recession, according to Harvard University economics professor Martin Feldstein

Comment: Despite QE1, QE2, TARP, Auto bailouts, Cash for Clunkers, Rebates for home buyers, et cetera. Job creation is near zero. My take is that Obamacare has introduced a lot of doubt into the business world and is counter-productive to economic growth

Anti-Stimulus

Obama’s Economists: ‘Stimulus’ Has Cost $278,000 per Job

Excerpt:

The report was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.

In other words, the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the “stimulus,” and taxpayers would have come out $427 billion ahead.

Furthermore, the council reports that, as of two quarters ago, the “stimulus” had added or saved just under 2.7 million jobs — or 288,000 more than it has now. In other words, over the past six months, the economy would have added or saved more jobs without the “stimulus” than it has with it. In comparison to how things would otherwise have been, the “stimulus” has been working in reverse over the past six months, causing the economy to shed jobs.

Comment: An Anti-Stimulus would be a retardant

Obama's Job Cremation

Why the Jobs Situation Is Worse Than It Looks - We now have more idle men and women than at any time since the Great Depression

Excerpt:

In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment.


The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America's greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million.

Job Cremation Council

Excerpt:

Mr. Immelt chairs the President's Council on Jobs and Competitiveness, and Mr. Chenault is one of its 26 members. They've been at work for 90 days, developing their recommendations. Here are some of the thoughts they've come up with so far, which they enumerated in a Wall Street Journal op-ed article:

• Send folks to community colleges and vocational schools. (If nothing else, this feels like work.)
• Cut red tape. (We've been hearing about this pesky red tape forever and finally there's a White House-appointed committee with a magic pair of scissors.)
• Improve visa processes so rich tourists from other countries can more easily visit. (Yes, come see the ancient ruins of the Anasazi, and the foreclosed properties surrounding them, known as America.)
• Get loans to small businesses. (We've heard this before, too. Why can't GE and American Express just show us the money?)
• Put construction workers back to work. (Yeah, go put up another vacant building. Or spray some foam insulation in occupied buildings, and President Obama will put out a press release touting green jobs.)

Comment: ObamaCare is a giant job killing bill!

Obama vs. ATMs: Why Technology Doesn't Destroy Jobs

Excerpt:

The story goes that Milton Friedman was once taken to see a massive government project somewhere in Asia. Thousands of workers using shovels were building a canal. Friedman was puzzled. Why weren't there any excavators or any mechanized earth-moving equipment? A government official explained that using shovels created more jobs. Friedman's response: "Then why not use spoons instead of shovels?" That story came to mind last week when President Obama linked technology to job losses. "There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers," he said. "You see it when you go to a bank and you use an ATM, you don't go to a bank teller, or you go to the airport and you're using a kiosk instead of checking in at the gate." The president calls this a structural issue—we usually call it progress. And it isn't exactly a new phenomenon. It's been going on for centuries, and its pace has accelerated over the past 50 years. Businesses relentlessly look for ways to replace workers with machines. The machines get better and smarter. We go from spoons to shovels to excavators, not the other way around. Telephone switchboard operators lose jobs to automated switching. Toll collectors get replaced by E-ZPass. Auto workers get replaced by robots. The magnitudes are stunning. As the Washington Post reported in 2007: "The textile industry has been particularly aggressive in replacing people with machines. A half-century ago, a typical North Carolina textile worker operated five machines at once, each capable of running a thread through a loom at 100 times a minute. Now machines run six times as fast, and one worker oversees 100 of them." That's a 120-fold increase in output per worker. When a worker is 120 times more productive, you usually don't need as many workers as you did before.

...

It's true, there are some structural issues in the labor market. New jobs are being created but not at the usual pace and not fast enough to soak up the unemployed. But President Obama is wrong to blame innovation. A bigger problem is housing, where hundreds of thousands of workers have lost their jobs. The source of that problem isn't technology but an over-reaching housing policy and distorted finance. The solution is to let the housing market clear—let interest rates rise, stop subsidizing mortgages, and clean up the foreclosure mess. That would let housing starts return to something like normal. The other challenge is simply confidence. Businesses aren't hiring because they're uneasy about the future. There's no easy way to instill confidence, but we know how to kill it—create uncertainty about taxes and regulations. Reducing that uncertainty would certainly help. In the meanwhile, enjoy the ATM machine and the kiosk at the airport with a clear conscience. Doing more with less is the road to prosperity. When confidence returns, even more Americans will share in the bounty from innovation.

Comment: The Obama adminstration is at war with the economy. Will be a one-termer (Carter 2)?

The Economy: "a bigger deficit without economic growth"

The Economy Is Worse Than You Think

Excerpt:

The administration's most obvious failure was its misguided fiscal policies: the cash-for-clunkers subsidy for car buyers, the tax credit for first-time home buyers, and the $830 billion "stimulus" package. Cash-for-clunkers gave a temporary boost to motor-vehicle production but had no lasting impact on the economy. The home-buyer credit stimulated the demand for homes only temporarily.

As for the "stimulus" package, both its size and structure were inadequate to offset the enormous decline in aggregate demand. The fall in household wealth by the end of 2008 reduced the annual level of consumer spending by more than $500 billion. The drop in home building subtracted another $200 billion from GDP. The total GDP shortfall was therefore more than $700 billion. The Obama stimulus package that started at less than $300 billion in 2009 and reached a maximum of $400 billion in 2010 wouldn't have been big enough to fill the $700 billion annual GDP gap even if every dollar of the stimulus raised GDP by a dollar.

In fact, each dollar of extra deficit added much less than a dollar to GDP. Experience shows that the most cost-effective form of temporary fiscal stimulus is direct government spending. The most obvious way to achieve that in 2009 was to repair and replace the military equipment used in Iraq and Afghanistan that would otherwise have to be done in the future. But the Obama stimulus had nothing for the Defense Department. Instead, President Obama allowed the Democratic leadership in Congress to design a hodgepodge package of transfers to state and local governments, increased transfers to individuals, temporary tax cuts for lower-income taxpayers, etc. So we got a bigger deficit without economic growth.

Comment: On "we got a bigger deficit without economic growth". Almost always happens. $$ sent to DC just sucks wind out of the economy. The economy doesn't "feel bad" for me personally. But I have two adult male family members out of work.

Job's report: Half Burger Flipping

Half of Last Month's New Jobs Came from a Single Employer — McDonald's

Excerpt:

McDonald’s ran a big hiring day on April 19 — after the Labor Department’s April survey for the payrolls report was conducted — in which 62,000 jobs were added. That’s not a net number, of course, and seasonal adjustment will reduce the Hamburglar impact on payrolls. (In simpler terms — restaurants always staff up for the summer; the Labor Department makes allowance for this effect.) Morgan Stanley estimates McDonald’s hiring will boost the overall number by 25,000 to 30,000. The Labor Department won’t detail an exact McDonald’s figure — they won’t identify any company they survey — but there will be data in the report to give a rough estimate.

Comment: 9.1% unemployment.

Helping "drive this recovery"?

Graph for the Day for February 5, 2011

Excerpt:

"The unemployment rate declined by 0.4 percent to 9.0 percent, down 0.8 percent in the last two months... And we continue to create jobs... I am encouraged by the drop in the unemployment rate and convinced that the actions taken by the administration have helped drive this recovery." Secretary of Labor, Hilda L. Solis, February 4, 2011.

Comment: Oh really?!

Call it recession or recovery, for tens of millions of Americans, there’s little difference

Across the U.S., Long Recovery Looks Like Recession

Excerpt:

In Atlanta, the Bank of America tower, the tallest in the Southeast, is nearly a fifth vacant, and bank officials just wrestled a rent cut from the developer. In Cherry Hill, N.J., 10 percent of the houses on the market are so-called short sales, in which sellers ask for less than they owe lenders. And in Arizona, in sun-blasted desert subdivisions, owners speak of hours cut, jobs lost and meals at soup kitchens.

Less than a month before November elections, the United States is mired in a grim New Normal that could last for years. That has policy makers, particularly the Federal Reserve, considering a range of ever more extreme measures, as noted in the minutes of its last meeting, released Tuesday. Call it recession or recovery, for tens of millions of Americans, there’s little difference.

Born of a record financial collapse, this recession has been more severe than any since the Great Depression and has left an enormous oversupply of houses and office buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national moratorium, could cast a long shadow of uncertainty over banks and the housing market. Put simply, the national economy has fallen so far that it could take years to climb back.

Comment: NYTimes graphic associated with the article.

Remember the James Carville quote?

You can file this one either in the, "Just Too Rich for Words," or the, "How Do You Spell Irony?"categories. James Carville, who famously created the Bill Clinton campaign catch phrase, "It's the economy stupid," is quoted today at Politico:

"It's gotta feel good to get out of the fetal position," said former Bill Clinton adviser James Carville. "You have to try something, right? You can't just talk about the economy.

2 years ago: Cusp of harsh recession?

Retro post: from 10/20/2008

Cusp of harsh recession?

Excerpt:

Many experts expect unemployment will soar from its current level of 6.1 per cent and worry it could go above 8 per cent.

The Fed now thinks that unemployment will rise above 7 per cent and is likely to peak at about 7.5 per cent – a level last seen in 1992.

“We may be talking about one of the most severe recessions in the post-war period,” said Larry Meyer, chairman of Macroeconomic Advisers and a former Fed governor.

Comment: Unemployment holds above 9.5% for 14 months

The U.S. jobless rate in September spent its 14th straight month above 9.5%, the Labor Department said Friday, making it the longest such spell since the 1930s - eclipsing the downturn of the early 1980s, which forever disrupted the industrial way of life in the Milwaukee region and the Midwest.

"We're not (officially) in a recession," said Tim Smeeding, professor of public affairs and economics at the University of Wisconsin-Madison. "But if you look at it in terms of people affected and jobs, we're still in a big recession."

10 years to recover lost jobs?

U.S. Won’t Recover Lost Jobs Until March 2020 At Current Pace


Excerpt:

The current jobs slump also is the deepest of any in the post-war era, with payrolls down as much as 6.1%. They are still 5.6% below their December 2007 level.

With state and local governments likely to shed workers for at least the next year or two as budget woes continue, the hiring burden will fall entirely on the private sector.

Private employers did add 64,000 workers last month, but that was a little less than consensus forecasts and far below what’s needed.

The U.S. needs to create 125,000-150,000 jobs each month just to absorb new workers and prevent unemployment from rising. So returning to the old peak employment a decade later would hardly suggest a healthy labor market.

(Unemployment held at 9.6% last month as the separate household employment survey reported an increase in jobs. But the underemployment rate rose 0.4 point to 17.1%, matching the 2010 high.)

The bottom line: It’s quite possible that the next recession will hit before the U.S. returns to old employment highs.

Comment: Article has chart. Click through to view!

Warren Buffett: "We're still in a recession"

Warren Buffett: "We're still in a recession"

Excerpt:

Billionaire investor Warren Buffett said the U.S. economy remains in recession, disputing this week's assessment by a leading arbiter of economic activity that the downturn ended more than a year ago.

"We're still in a recession," Buffett told CNBC television in an interview broadcast on Thursday. "We're not gonna be out of it for a while, but we will get out."

On Monday, the National Bureau of Economic Research said the world's largest economy ended an 18-month recession in June 2009, but cautioned that its assessment did not mean normal activity had resumed.

Buffett said he defines a recession differently from the NBER, saying it ends when real per capita gross domestic product returns to its pre-downturn level.

Comment: Whether one calls where we now are "in a recession" or not, it sure feels like it to the 9% unemployed (and that number is understated!)

Economic tidbits

Recession Ended in June 2009

Excerpt:

The business-cycle dating committee met by phone on Sunday and came to the determination. “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month,” the committee said in a statement. The 2007-2009 recession is the longest in the post-WWII period.

The decision by the NBER means that any future downturn in the economy would be considered a new recession and not a continuation of the recession that began in 2007.

Comments: Probably accurate (the official ending of the recession), but it sure does not feel like a recovery! Eg: The very high unemployment, the underemployment, the chronically unemployed, etc.

Defaults Account for Most of Pared Down Debt

Excerpt:

The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all.

Comment: Defaulting debt may look good for the borrower, but for the lender it is just a write-off.

Greenspeak - stimulus was a waste!

Greenspan: Fiscal Stimulus Worked Far Less Than Expected

Excerpt:

The former head of the Federal Reserve said fiscal stimulus efforts have fallen far short of expectations, and the government now needs to get out of the way and allow businesses and markets to power the recovery.

“We have to find a way to simmer down the extent of activism that is going on” with government stimulus spending “and allow the economy to heal” itself, former Fed Chairman Alan Greenspan told a gathering held at the Council on Foreign Relations in New York on Wednesday.

At this point, “we’d probably be better off doing less than more” because “you’d be far better off to allow the normal market forces to operate here,” Greenspan said. That’s largely because stimulus spending is not proving as effective as many had hoped. “To the extent the evidence suggests very large deficits concurrently crowd out capital investment, there is a debit to the stimulus program that is somewhere between a third and a half of what the gross stimulus is,” he said.

Comment: Greenspan understated

Shrinking Banks

A Capital Mistake

Excerpt:

... the nation’s banks are shrinking. At the end of 2008, Federal Deposit Insurance Corporation data showed that the American banks it insured — around 8,000 of them — had $13.84 trillion in assets. At the end of the second quarter of this year, they held a total of $13.22 trillion — a decline of $620 billion.

Fewer assets means fewer loans. From the summer of 2008, just before the financial crisis, to the present, business loans made by American banks declined from $1.49 trillion to $1.175 trillion, a drop of some $315 billion. Mortgages on one-to-four-family homes declined from $2.155 trillion to $1.874 trillion. Over all, the total value of loans in the American banking system has fallen from $7.996 trillion to $7.395 trillion — a drop of $600 billion.

There are many reasons for this. The size of the credit market is smaller today because banks will no longer make risky loans to marginal borrowers. Additionally, commercial companies have seen their cash flows improve because the economy is still growing (albeit too slowly). Therefore, corporations do not need as many bank loans.

However, the main reason bank lending has declined may be that the banks’ capital requirements have increased, and this encourages them not to lend. They certainly don’t have a shortage of capital. The F.D.I.C.’s data shows that the common equity in the banking system — the amount of money invested — as a percentage of all bank assets is now at the same level as it was in 1937. If one calculates what is called the banks’ “capital ratio,” which is done by adding the banks’ reserves and common equity and then dividing by the assets, it appears that the banking system has more capital than at any time since 1934.

Yet banks are sitting on the money rather than getting it out into the economy. Why? Because ever since the collapse, politicians and policymakers have been insisting that risky lending by the banks was the prime culprit, and have demanded that banks build up a cushion of capital to protect the system.

In the past 18 months, in order to meet these demands for higher capital ratios, banks have raised some $192 billion by selling stock — despite declining prices — and attempting to grow earnings. But this has not been enough for the regulators. The banks have also had to shrink their balance sheets — that is, to have fewer loans outstanding.

The trouble with overcapitalizing banks is that when banks cut back on loans, they start a domino effect. When a loan is paid off, money is subtracted from the overall money supply. And while economists can debate whether a growing money supply is necessary for economic growth, it is very unusual for a nation’s economy to grow when its money supply is shrinking.

Comment: A somewhat technical read but interesting. It's related to Fractional-reserve banking.

"The Great Stall" and "the deflationistas"

Economists React: ‘The Great Stall’ Takes Hold

Excerpt:

The “Great Recession” has officially morphed into the “Great Stall”. There are no signs in this morning’s report on July employment of building momentum for the second half of this year. If anything, there are more signs of a deteriorating labor situation .

2 Top Economists Differ Sharply on Risk of Deflation

Excerpt:

According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

Comment: The problem is the Fed cannot further reduce interest rates, stimuli hasn't seemed to do much, and the government is $ 13 Trillion in debt (and basically can't afford more stimulus!)

Invisible jobs

Three Million Imaginary Jobs - The White House says the stimulus worked beyond even its hopes. Seriously.

Excerpt:

It may be that the last people in America who believe that the $862 billion economic stimulus of February 2009 created millions of net new jobs are Vice President Joe Biden and the staff economists in the White House. Yesterday, President Obama's chief economist announced that the plan had "created or saved" between 2.5 million and 3.6 million jobs and raised GDP by 2.7% to 3.2% through June 30. Don't you feel better already?

Christina Romer went so far as to claim that the 3.5 million new jobs that she promised while the stimulus was being debated in Congress will arrive "two quarters earlier than anticipated." Yup, the official White House line is that the plan is working better than even they had hoped.

We almost feel sorry for Ms. Romer having to make this argument given that since February 2009 the U.S. economy has lost a net 2.35 million jobs. Using the White House "created or saved" measure means that even if there were only three million Americans left with jobs today, the White House could claim that every one was saved by the stimulus.

The White House also naturally insists that things would be much worse without the stimulus billions spent on the likes of Medicaid payments, high speed rail projects, unemployment benefits and windmills. Mr. Obama said recently in Racine, Wisconsin that the economy "would have been a lot worse" and the unemployment rate would have gone to "12 or 13, or 15 [percent]" if government hadn't spent all of that money.

This is called a counterfactual: a what would have happened scenario that can't be refuted. What we do know is what White House economists at the time said would happen if the stimulus didn't pass. They said the unemployment rate would peak at 9% without the stimulus (there's your counterfactual) and that with the stimulus the rate would stay at 8% or below. (See the nearby chart.) In other words, today there are 700,000 fewer jobs than Ms. Romer predicted we would have if we had done nothing at all. If this is a job creation success, what does failure look like?

All of these White House jobs estimates are based on the increasingly discredited Keynesian spending "multiplier," which according to White House economist Larry Summers means that every $1 of government spending will yield roughly $1.50 in higher GDP. Ms. Romer thus plugs her spending data into the Keynesian computer models and, presto, out come 2.5 million to 3.6 million jobs, even if the real economy has lost jobs. To adapt Groucho Marx: Who are you going to believe, the White House computer models, or your own eyes?

Comment: Word of the day - counterfactual