Thursday, August 8, 2013

Thursday Night Brief Update and Reposting of Paul Krugman Blog Entry (Finalized Version)

The morning surf at Daytona Beach, Fla., 11:06AM October 5, 2011.

Yes, I have posted this picture before but since (1) it has been nearly 2 years since I posted it; and (2) I have no other suitable lead entry pictures, it will do.

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OK, I was going to post an entry tonight but I have to finish an editing assignment by tomorrow afternoon, and I'd like to work on it a bit tonight before I go to bed. I went to the gym tonight after work as I did last night. This included treadmill, some weight-lifting, and swimming pool, although the latter two tonight were shortened. I'm talking off from the gym tomorrow and Saturday. I intend to post a few entries over the weekend.

The night is a balmy, breezy one this August night but no precipitation / t-storms have occurred in D.C. proper (or at KDCA) the past week.

The DeLand Amtrak train station. I was there in October 2011 during a torrential rainstorm waiting for a train to head SOUTH from Daytona Beach (by way of DeLand) down to Deerfield Beach, which the train did ... by way of frickin' Tampa. It took 8 hours. The taxi driver who drove me there in the morning was so appreciative of the tip I gave him -- how unlike D.C. is that?

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I spoke to my dad on the phone. He was actually NOT in Flagler Beach in the usual chaos and insanity, but today and tonight he is at my great aunt and great uncle who live in DeLand. I refer to my late paternal grandfather's younger sister, my great Aunt Rose (who left New Jersey to go down to Florida back in the 1930s) and her husband, my great Uncle Haywood, who is now 95 years old.

(This is the only "Southern" element to my family, excluding another element in my late paternal grandmother's late older sister's late daughter, Kathleen, i.e., my second cousin, who died had five children by a Kentucky redneck who left her and the kids in their then-house in Little Silver, N.J. Kathleen, who died about 12 years ago at age 60, ballooned up to about 400 pounds. She also smoked about 4 packs of cigarettes a day, and once when she lit one up, my dad said to her in this cloying voice, "I didn't know you SMOKED!" The whole family picked up and moved to Las Vegas around 1994.)

As it is, Haywood is more Deep Old South, not Highland Appalachia South.) I last saw Rose and Haywood in September 2010 as I wrote about in this entry.

Note that I am a lot thinner now than I was in a picture featured in that entry. Here is a comparison:

Yours truly as seen (left) in a blurry cellphone picture on September 4, 2010 in Flagler Beach, Fla., at my dad's place (he has since moved to another place in Flagler Beach) and (right) tonight at the YMCA here in Washington, D.C., Aug. 8, 2013.

This is a difference of at least 35 pounds as possibly as much as 40 pounds of fat.

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OK, the remainder of this entry features a COMPLETE reposting of a Paul Krugman blog entry, direct link here. Also, here is Prof. Krugman's regular Friday op-ed NYT column.

Krugman has written more witty pieces, but I really like this entry because it so nicely summarizes the  nature of the deleveraging shock that has resulted in such a depressed economy and how America's politics have made matters worse. I have added info on the pictures.

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Krugman entry:

What Janet Yellen -- And Everyone Else -- Got Wrong

Don't worry, this isn't another entry in the Larry/Janet debate, where I've said my piece. Instead, it's prompted by a nice but I think incomplete analysis by Matt O'Brien of the reasons Janet Yellen underestimated the damage a bursting housing bubble would do; analyzing that issue, it seems to me, is a good way to get at the broader question of why recovery has been so sluggish.

The starting point is that we had a monstrous housing bubble, and Janet Yellen recognized it in real time. Here's housing prices deflated by consumer prices:

Real housing prices as given by the CPI-deflated Case-Shiller Index set to a ratio with a January 2000 index price of 100/Index. This shows the magnitude of the American real estate bubble.

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It's important to notice that just being willing to see the obvious here puts Janet Yellen way ahead of a lot of people who still presume to give us advice on the economy.

But Yellen initially thought the damage from a bursting bubble could be contained, although she was starting to worry by 2007. Why was she wrong? Matt emphasizes the financial crisis ;-- the way the bursting bubble created a run on the shadow banking system. And that’s clearly key to understanding the severity of the 2007-9 slump. However, financial stress peaked in early 2009, then fell sharply:

The St. Louis Federal Reserve's Financial Stress Index from 1994 through 2013. For more info on what the "STLFSI" is, read here.

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Unfortunately, the economy didn't come roaring back. Why?

The best explanation, I think, lies in the debt overhang. For the most part, even those who correctly diagnosed a housing bubble failed to notice or at least to acknowledge the importance of the sharp rise in household debt that accompanied the bubble:

Household debt to personal income from 1980 to 2013 expressed as a ratio of 1/1000th of millions of dollars for total household debt divided by billions of dollars of personal income. This representation allows for the easy ratios you see.

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And I would argue that this debt overhang has held back spending even though financial markets are operating more or less normally again.

Finally, nobody really anticipated the disastrous response of policy, above all the squeeze on public spending at a time when we needed more government spending to sustain the economy until private balance sheets were repaired. Here’s total (all levels) government spending deflated by the implicit GDP deflator (an overall price index), comparing the last recession and aftermath with the Bush years; if spending had grown this time the way it did in the past, unemployment would probably be close to 6 percent:

This chart is explained in the above paragraph. It measures real government expenditures in the quarters (CPI deflated) with the time axis the number of quarters since previous economic peak (i.e., the peak before the 2001 recession and the peak before the Great Recession started in 2008).

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In short, getting the bubble right, while no small thing, wasn't enough; Yellen (and many other people, myself included) underestimated the fragility of the financial system, but also the importance of household debt, and, above all, the foolishness of policymakers.

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OK, that's all for now. I will try to update this blog on Friday, and if not, certainly over the weekend with a few entries.

--Regulus

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