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Posted by on Mar 5, 2009 in Economy, Politics, Society | 48 comments

How Is This Depression Different from the Great Depression?

There, I said it. We are in a depression. Not a recession but a depression. We haven’t yet hit the textbook definition of a “depression”: a fall of GDP by 10% over three years along with a 10% unemployment rate. But we are fast approaching the official definition.

And let’s be honest…it sure FEELS like a depression.

Take a look at this index of the stock market compared to the great bear markets of the post-tech bubble burst, the oil crisis of 1973-75 and the Great Depression; note that the 1929-32 drop is the Dow and the others are the S&P 500.

Four Bad Bears

Yes, the market is actually in WORSE shape now compared to the great sell-off from 1929-1932. The market has lost 56.4% of its value from its peak. In the Great Depression the Dow lost 89.2% of its value before rebounding between 1933 and 1937. It faced another drop-off in 1937-38 and then headed back up again with Lend Lease and the build-up for World War II (which was, to a large extent, a massive New Deal jobs program).

There are other ominous similarities to the Great Depression. First and foremost is housing and banking. What many people don’t realize is that the the modern amortized mortgage was actually a creation of the Federal Housing Act of 1934. Along with insurance for saving and loans under FSLIC, the new FHA helped spur massive construction in home building and made it possible for millions of Americans to own homes for the first time. Prior to the Housing Act, most mortgages lasted amortized in about 3 to 5 years and required a 60% down payment. As you can imagine, home ownership was fairly restricted. Still, the collapse in the banking sector and rise in unemployment to 25% by 1932 meant that foreclosures reached an all-time high. These foreclosures, in addition to speculative losses on Wall Street and a spate of bank runs, utterly decimated the banking system.

We all know the role of the housing issue in causing the current depression: sub-prime loans fed a housing bubble that burst, carrying down with it a global financial system buttressed by securitized sub-prime loans. The resulting credit crisis destroyed many financial institutions and led to a more generalized economic downturn. The secondary downturn is actually far more damaging to the housing crisis as people with prime mortgages are losing their jobs and an ability to pay their mortgages.

The collapse in retail spending is another similarity to the Great Depression. The 1920s witnessed the beginning of the “installment plan” – the forerunner to the modern credit card, which allowed millions of middle class Americans to afford all sorts of new consumer goods like vacuum cleaners, automobiles and washing machines. Like the last few decades, the 1920s boom was more illusory than real, and was based mostly on leverage. (Yes, there were real advances in productivity and technology, but not nearly as much as the equities market suggested).

So does that mean this depression is the same as the Great Depression? No. There are three key differences. Two that make the Great Depression far worse and one that makes this one worse.

The Great Depression was made worse by an underlying agricultural crisis that had its roots in the over-planting of the post-Civil War era. Farm prices started dropping in the 1870s and, with a brief exception of World War One, never really recovered. By the early 1920s the roughly half of Americans living in the countryside faced an economic depression. Quite simply, farmers could not sell the goods they were producing. Interestingly, the vast majority of the banks to fail in the Great Depression were rural banks. The Roosevelt Administration’s Agricultural Adjustment Act established the modern farm subsidy regime and encouraged the mechanization of agriculture. Basically, it told the poor sharecroppers and tenant farmers to move to town and it paid the remaining big farmers a lot of money to buy mechanical cotton-pickers and combine tractors.

Needless to say, we don’t suffer from the same sort of agricultural crisis in America. Food stores are still filled with fresh items as mechanized and commercialized farms still deliver necessities to our kitchens with ease and efficiency.

Another key difference is the unemployment rate. The reason earlier recessions this century (not to mention the Great Depression) had such high unemployment rates is that manufacturing tends to employ – and shed – a ton of jobs according to business cycles. An ironic effect of outsourcing over the last few decades is that the job losses stemming from our drop in consumption are being felt in China primarily. Obviously, that was not the case in the 1930s.

But, on another level, the current depression is worse. Why? Because the modern financial system is far more globally connected. Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke could develop the most ingenious banking plan tomorrow and it would still have only limited effect on the global depression because the Europeans can’t get their act together and the Chinese are focusing inwardly on their own depression. There needs to be much more financial coordination between treasury secretaries to unwind global credit default swaps and other bogus means of “insurance” that leveraged all the great “economic miracles” of Ireland, Eastern Europe and elsewhere.

Suffice it to say: if a major bank like Citigroup or a massive manufacturing company like GM goes bankrupt, you’ll hear a lot more people speak of this as the Second Great Depression. Right now, nobody wants to go there.

But I think it’s important to reckon with the great monster that we’ve created over the last few decades. The global capitalist system is in great peril right now. And it is not the so-called “socialists” that are threatening it.

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Copyright 2009 The Moderate Voice
  • AustinRoth

    Hmm. Interesting.

    The graph trend tracks with the previous 2 most recent bear markets until about 5 months ago, when it became a crash. What happened then? Let’s see. Bank bailouts, and Obama was elected.

    BTW – where is the 1987 bear market caused by Black Monday on this graph? Why was it excluded?

  • PJBFan

    One of the biggest problems we are having with the markets right at the moment is one of confidence. If we all, collectively, stopped panicking, the market would recover a lot faster than if we keep repeating how bad the economy is, and scaring people.

    Politics of hope, my lily-white behind. No, this is as much fearmongering as the Bush Machine in 2004.

  • elrod

    Confidence is not based on speech-making and fluff. Confidence is based on real indicators of growth. Right now there are none. If Obama gave a bunch of happy-talk speeches he would be laughed at – rightly.

    Austin,
    Actually, you can point to one day when the market collapsed: September 15, 2008. That was the day Lehman Brothers collapsed. The next big collapse was in early October and it began the day Congress voted down the bank bailout. The markets had a low-volume lull in December (usually markets stage a year end rally) and then resumed plummeting in early January.

    The only singular moment of Obama’s Administration that caused the market to drop was Geithner’s vague bank bailout plan. Every other drop has been connected to a piece of terrible economic unrelated to politics.

  • pacatrue

    The state of China is unclear to me and so I would love some enlightening. Elrod for instance refers to China’s own depression, but I’ve heard, maybe today?, Chinese government officials claiming that their GDP was still growing, though not at the same torrid pace as before. Anyone know what’s going on there for sure? (This may include Elrod.)

    • mikkel

      It’s not. The way that China releases GDP numbers makes it nearly impossible to determine how it’s doing in the recent quarter, but people calculated Q4 by itself and got between -1% and 2%. China is either on the verge of outright contraction or it’s already begun. They are talking about meeting 8% GDP growth this year but that is a political statement. It is said that 8% growth is needed to prevent massive job losses and is part of the social contract that the government has with the people in exchange for their authoritarian nature. If the officials said that they were only to grow at 3-4% that would put severe political pressure on the regime.

      Based on how much growth they need to tread water compared to how much we need to tread water, I’d say their 0% GDP is roughly equivalent to our -6% GDP. Their GDP is also on the verge of collapsing because they overbuilt for the olympics and there is literally a 15 year oversupply of office space etc. Thirty million migrant workers lost their jobs over the last couple months and most likely 30-40 more will over the year.

  • PJBFan

    Actually, AR is correct that the markets have reacted incredibly negatively to President Obama. Considering that even the election and inauguration of the most anti-capitalist President until the election of Obama, FDR, saw bumps up in the market, the election of Obama, which saw an actual drop in the markets upon his election is suggestive that it is Obama, and the Democrats, to whom the markets are reacting.

    As to having confidence, I cringe at quoting FDR when he said “we have nothing to fear, but fear itself” is exactly on the money, especially as regards the economic crisis. What is causing these sudden drops beyond the reaction to the anti-capitalist Government that is in Washington, is that people are afraid. Trust in the markets and they will rebound, because what we are seeing is, as Phil Gramm rightly stated, a mental recession. We’re wishing ourselves into this recession; this is a comment upon which economists, left wing (excepting the hack that is Paul Krugman) and right wing, agree on. We need to start realising that things in the financial sector are not as bad as they seem. This is merely a collapse of a bubble. Yes it had negative effects, but the roots are fairly clear. The indicators you mention are being pushed by the fear we are experiencing. If we merely step back, take a breath, and stop playing Chicken Little, we will be fine.

    • mikkel

      “Nothing to fear but fear itself” was said when most of the bad debt had been written off meaning there was little leverage left and the P/E ratio on the stock market was about 6. Right now the banks are still leveraged 15x here and 30x in Europe, plus the P/E ratio is still around 12. We still have a very long way to go in order for all the bad debt to be extinguished. It has nothing to do with confidence, just a return to historical sustainability.

  • mikkel

    Elrod I disagree with your assertion that the world is much more interconnected these days. True information travels faster, but there was a surprising amount of global trade back then (and global crises dating back to the 1600s). True CDS and stuff complicates matters because the financial system might be more interconnected, but interconnectedness is a hallmark of all global crashes. The biggest difference between then and now has to do with the fact that the actors have changed, where the US is now the largest debtor instead of creditor. This actually works to our benefit in a deflationary depression but could be a large negative if we try to inflate out of it.

  • elrod

    PJBFan,
    You sound like an ideologue and a hack and not an analyst. Have you heard about securitization and the packaging of sub-prime loans into mortgage-backed securities that banks around the world bought?

    Phil Gramm did more to cause this depression than any other human being. His decision to keep credit default swaps unregulated should land him in jail.

    Phil Gramm and the deregulatory extremists did more to kill capitalism than Hugo Chavez could ever hope to do.

  • elrod

    mikkel,
    What connected global markets before 1933 was the common currency of gold. The availability of gold affected markets around the world alike. In that sense, yes, the financial markets were always global (and obviously there was plenty of global trade).

    But today’s financial markets are interconnected in ways that the financiers of the 1920s could only dream. The rapid flow of information is, in fact, a key component of that interconnectedness.

    • mikkel

      I agree with you that the rapid flow between markets today means there is a higher chance for systemic collapse with little warning, but I guess what I’m wary of is the idea that the interconnectedness makes the fundamentals worse. I think that being highly connected creates powerful feedback loops that augment both upturns and downturns, but as I mentioned above we’re still at the point where we need to worry about not being at historically sustainable levels, not about overshooting to the downside. I think confusing the two points is what is making the government response so ineffectual.

      Also I’m sympathetic to the concern that how rapid we decline is a big factor in how much people panic and thus social and political strife, so by that measure there is more to worry about now.

  • PJBFan

    Actually, Elrod, I will have you know that I have a background in economics, specifically microeconomics and econometrics, so, actually, I really do know what I am talking about when it comes to markets.

    As to Phil Gramm and deregulation, let’s remember that Gramm-Leach-Bliley passed 98-0 in the Senate, and was readily signed into law by President Clinton. Remember that it was President Clinton and Congress, who took thousands of pages out of the CFR and the US Code.

    Finally, Hugo Chavez versus Phil Gramm, one siezes companies and industries, and puts them under the onus of the state. The other tries to remove state control from every industry. Sounds to me like the latter is actually the capitalist, while the former is the socialist.

  • PJBFan

    By the way, whose economic analysis do you think I am going to trust, Elrod, yours, or Dr. Gramm’s? I assume you know that he has a Doctorate in Economics. The choice should be obvious.

    • mikkel

      LTCM was cofounded by a Nobel prize winner. This whole mess was presided over a host of PhD and Nobel prize winners. Fisher lost his shirt in the Depression. Most of modern economics is built on equations that have assumptions that aren’t necessarily correct and many systems engineers say that our financial system is designed in the worst way possible. Minsky, Mandelbrot and Taleb are right, Friedman and Keynes were wrong (at least for the environment we’re at now) and I’ve read several of the most prominent economists starting to question whether people should have faith that their equations actually mean anything more than an abstract model. The bigger question is why anyone would pay attention to Gramm and Bernanke, Summers, et al. rather than a host of commentators that predicted exactly how this would unfold.

      • Don Quijote

        To your list, I would add Dean Baker

        The problem with Keynes would be?

        And as to why we ended up where we are right now? Daily Show vs CNBC

        • mikkel

          “The problem with Keynes would be?”

          Well Keynes was more concerned with trade than most Keynesian economists pay attention to, and I think that’s very important…so perhaps I think there is more a problem with Keynesians than Keynes himself. The part he was wrong about were some of the fundamental relationships re: interest rate curves and unemployment as it relates to inflation and productivity. Those things were originally noted in the 70s which is why Friedman got so famous. The application of his ideas that I think is wrong is like when Paul Krugman or the CBO throw up GDP projections based on “full employment” and then talk about an output gap that can be filled with government spending. That assumes relationships that I think aren’t constant and greatly rely on both internal and external debt. In a highly debt laden environment with few investment opportunities, I don’t think the GDP gap is that large.

          Now when the debt deflates then I think it is. I’m not critical of what he said about the need to restart the economy when in the doldrums of a depression.

  • denisedh

    Mikkel,
    Who are some that predicted this? I’d like to read them to try to get a better understanding of what’s happening. Your posts have been very helpful in that regard too.

    • mikkel

      Thanks. In addition to calculated risk my daily reads are

      http://www.nakedcapitalism.com
      http://www.ritholtz.com
      http://globaleconomicanalysis.blogspot.com (Mish used to be very good at explaining exactly what he thought was going to happen and why things would fail and had the most detailed predictions about deflation, etc. but recently it’s more just screeds so it is less informative than it used to be)

      Between the four of them they connect to all sorts of worthwhile commentaries about both current events and more philosophical things.

  • elrod

    Denise,
    One of the most astute commentators was an analyst named Tanta who regularly blogged at Calculated Risk. Sadly, she passed away a few months ago. Still, Calculated Risk is one of the best sites on the financial crisis.

    http://www.calculatedriskblog.com/

  • StockBoySF

    PJBFan, I agree with you that some of the foundation of the current state of the economy has been years in the making and Gramm-Leach signed by Bill Clinton was but one of those events.

    But it was the continual erosion of deregulation under Bush 43, including his tax breaks for the upper earners and his heavy spending (including for an unnecessary war with Iraq) that got us into this mess. I will also point out that Bush was in business before politics and he couldn’t make his companies work…. and once he became president and applied his same beliefs he ran the country into the ground. There were certainly some contributing factors before Bush, but he did what he wanted and spent what he wanted, ignoring common sense (that you have to bring in money to spend it) and the opinions of experts.

    As far as Obama….. the economy didn’t just wind up where it is right now overnight and Obama’s plans will need a chance to get passed, funded and kick in before the economy picks back up. The current state of the economy and Dow has little to do with Obama. In fact that brings me to my next point… capitalists v. socialists. It is Obama who wants to keep the banks in private hands but the words of such Republicans as McCain, Lindsey Graham and others who feel that nationaliation of banks is the way to go which is causing the stock market jitters.

    The stock market doesn’t know where the bottom is and analysts and traders will only be comfortable once the bottom has been reached. Obama is sincere in supporting capitalism, but analysts and others don’t trust him because they are used to years of Bush being a cheerleader in all sensitive matters. Once an adult is in the room (Obama) who speaks his mind with the unvarnished truth not many people know how to respond.

    Americans are willing to give Obama a couple years to straighten the economy out. They are not hanging onto his every word like the political junkies (or economic junkies) and selling stock when Obama or his team says something negative. It’s the traders, analysts and professional money managers who are moving the markets. These days very few people have enough stock to make these big moves.

    Lastly, the shape of the banks and the economy scares the h*e* double–toothpicks out of me and I think we are headed further south. I don’t understand why anyone would want the president (and country) to fail with regards to the economy. The people rooting for the country’s failure believe they will always be better off and don’t care if millions of people are out of work and lose their homes. These are also the people who claim to have family values and cry about the need to protect American families. They’re not good leaders and they’re not good people.

    So I don’t know if we’re in a recession or depression, but it is scary out there and will only get scarier. Many Americans just don’t realize how bad the economy will be. This is not Obama’s fault (at the moment). But it is now his responsibility to fix and I believe any true and good American would want Obama and his economic policies to succeed (even if they disagree with them) for the good of the country and perhaps the world- this is a global issue.

  • pacatrue

    Rats. The comments went in a useful direction. I was hoping for a good old-fashioned credential-off. I’ll see your PhD and raise you one DBA.

  • greenschemes

    Rats. The comments went in a useful direction. I was hoping for a good old-fashioned credential-off. I’ll see your PhD and raise you one DBA.

    Which is why the worlds ills are never solved on blogs. Its why blogs are nothing more then vents. Its why my credentials are immaterial and I refuse to even tell anyone who I am. Its why what I say is about as important as who I am.

    Its why this site can defend democrats and rail against Republicans with absolute and total lack of facts and in the grand scheme………who really gives a s***?????

    Ill have you know I graduated Elementary school and went on to a higher education.

    Raise that.

  • CStanley

    But I think it’s important to reckon with the great monster that we’ve created over the last few decades. The global capitalist system is in great peril right now. And it is not the so-called “socialists” that are threatening it.

    Sure it is. We’re faced with a choice to either fix the global capitalist system or abolish it, and some people want to do the latter (others who might not have been inclined to think that way are being fearmongered into agreement because they believe we have no choice.)

    We can either deal with the great monster by pretending that the monster is capitalism itself, or by recognizing the aberrations and mutations that we encouraged which made it into a monster.

  • greenschemes

    Strike down the beast.

    As Obama’s dude said……”Never let a good crisis go to waste.”

    The Obamalamadingdongs………….have to make Americans believe were all going down the tubes in order to deceive them into believing that they are the way, the truth and the life…….no one comes to me except thru my daddy.

    The sky is falling they scream……..running around tossing themselves out their first story window. Its a crisis……….its a catastrophe……………we must find Karl Marx’s grave and raise him from the dead.

    Capitalism is dead. Its failed us. PUHLEASE feed us oh chosen one.

    Im outta here this site is full of leftist boogie men and as Cstanley said my Browser is not stuck on The moderate voice.

  • elrod

    We’re faced with a choice to either fix the global capitalist system or abolish it, and some people want to do the latter (others who might not have been inclined to think that way are being fearmongered into agreement because they believe we have no choice.)

    We can either deal with the great monster by pretending that the monster is capitalism itself, or by recognizing the aberrations and mutations that we encouraged which made it into a monster.

    Who is proposing to abolish capitalism? All I see out there is a reticence to nationalize the banks – even for a short period. We keep bailout out private banks and corporations. A socialist would just seize the things and wipe out the shareholders and keep it in government hands.

    Obama is a liberal, not a socialist. His plans on health care and energy, for example, are driven by private markets, albeit with shifting government incentives.

    The “aberrations and mutations” which made it into a monster are the excesses of deregulation, which encouraged all sorts of creative securitization markets that passed the risk around like a hot potato. The answer: re-regulate the markets again.

    FDR saved capitalism in the 1930s. Sometimes we forget that. If Obama succeeds in his agenda, he will have saved capitalism again.

    • AustinRoth

      FDR did NOT save capitalism; he tried to dismantle it. A combination of the Supreme Court, time, and WWII saved it.

  • HemmD

    One point I find troubling. We are now largely a service economy. Today’s numbers, 8.1%, broken down shows that the segment of the work force hit hardest was service jobs. Service economies have a point of critical mass where enough service jobs are lost the service industry will collapse like a house of cards. Just as 1930s manufacturing jobs suddenly fell, my fear is the same for our service employees.

    That would make 2 out of 3 similarities to the Great Depression. Hope I’m wrong.

  • CStanley

    Obama is a liberal, not a socialist. His plans on health care and energy, for example, are driven by private markets, albeit with shifting government incentives.

    He’d actually be a bit more coherent if he was more of a socialist. The social liberalist policies have no rational underpinning to make them sustainable. It makes no sense to think that you can continue to tax the top 5% more and more to support programs which grow indefinitely. Under that kind of tax structure, the top 5% begins to shrink while the revenue needs continue to grow.

    At least true socialists are more honest about the need at that point for the government to actually take ownership of the means of production in order to try to manage the economy.

    The “aberrations and mutations” which made it into a monster are the excesses of deregulation, which encouraged all sorts of creative securitization markets that passed the risk around like a hot potato. The answer: re-regulate the markets again.
    Sure, in part. It was actually a combination of deregulation in some areas and wrong headed government interventions in other areas. And one thing that gets very little attention in terms of regulatory failure, which I think is key, is that corporations have been permitted to grow and merge to unmanageable sizes. I believe if we return to a trust busting mentality, we’d be able to ‘save capitalism’ a lot more efficiently than we will by resorting to these big government solutions. I think it’s also the answer to the long term problem of wealth inequity; an economy made up of thousands of small pyramids isn’t as disparate as one made up of a few huge ones.

    • mikkel

      “It makes no sense to think that you can continue to tax the top 5% more and more to support programs which grow indefinitely.”

      I think you’re not giving Obama enough credit about his long term plans. He knows perfectly well that they can’t just make up for the growth gap through taxes of any sort. He has said this many times (including at the recent thing about reforming long term benefit programs) that his goal is to change the fundamentals of the government programs so the growth rates fall below GDP growth and thus become sustainable. His plan isn’t to just soak the rich indefinitely, it’s to try to rebalance the relationship between the working and upper class in the belief that it will actually raise long term GDP growth (I think it will) and to fix healthcare by getting in technologies and policies that will alter the makeup of the field and reduce cost growth enormously.

      Now there is plenty of room to say that he won’t be successful in doing that, or to challenge the worldview of course, but I don’t think it’s his goal to keep raising tax rates like that.

      Like I’ve said before, maybe he’s lying and I’m completely naive, but that is just a matter of trust. On an intellectual level though I think that Obama’s plans are principled and self consistent. My primary problem with ideas are when he’s bought into some academic and industrial theory that I don’t buy; as Pete pointed to the Brooks’ column “the White House made a case that was sophisticated and fact-based.” That’s no doubt true, I just debate whether the facts are realistic. My secondary problem is what we saw with the stimulus. The Republicans went in to talk to Obama and professed that he had a vision they could agree with, then Congress put together some crap and then Obama signed it. No matter how principled and methodical his theoretical construction of policies are, I am becoming increasingly skeptical that they can retain the necessary characteristics once turned into policy. I know that’s a conservative critique of government in general, but to be blunt, quasi-free market economics hasn’t proven to be much better…and there isn’t the political or societal will for complete free markets.

      • CStanley

        Well, I don’t know what you’ve been reading from Obama that I’ve been missing because I’ve heard none of that long range thinking. I’m not saying it’s not there, but can you point me to something? And even if he does say those things, if he doesn’t say it in forums that I’m aware of (and I consider myself somewhat politically tuned in) then are the people who are stakeholders in the ‘soak the rich’ construct going to go along when it’s time to shift gears to his long range approach? If he has these long term designs which are different than the short term direction, I’d like to know when he’s going to start selling those plans politically and how he thinks he’s going to avoid enormous backlash from people who would prefer not to make those shifts.

        I know that’s a conservative critique of government in general, but to be blunt, quasi-free market economics hasn’t proven to be much better…and there isn’t the political or societal will for complete free markets.

        On the first sentence, I presume you could see me grinning that you are coming to that conclusion. Anyway though, I think that’s a false dichotomy in your next sentence. We’ve mucked up free markets and can fix a lot of what we did to muck it up rather than making a complete paradigm shift. I’m about to comment on your other comment and address what I mean by that.

  • CStanley

    Mikkel, do you read Greg Mankiw? It seems like he’d be a good source of counterarguments for the sources you regularly read. I haven’t checked out all of the blogs you mention, but when I have followed them they appear to be pretty similarly minded and although they seem to be very detailed in economic knowledge (and not subject to a partisan type of bias) there still feels like a group think mentality going on in those circles.

    • mikkel

      CS, no offense but they have “group mentality” because they have long had similar hypotheses about which dynamics are important right now and those hypotheses turned out to be proven correct. I understand that it’s hard to jump in and read them now if you haven’t been reading them for the last 3-4 years, because there is no context or history about how they developed their outlook and detailed their reasoning, and these days it is pretty much just short hand stories and little bits of opinion that are basically just “this supports my ideas” or “well I wasn’t expecting this.” I was about to mention that in my comment above but I didn’t want to turn anyone off by saying “oh yeah you have to read 4 years of back posts to get the most out of it” (this is a problem I have about blogs in general).

      Now I still read Mankiw, Krugman and various others (such as Margin Revolution) to see what they are saying because they occasionally have good points and also they represent mainstream economic thought, but they are tied into orthodoxy that I think is completely missing the boat. Whenever Krugman has a “wonkish” post where he starts by stating “assuming all these relationships hold, we can calculate” and then they are all sorts of differential equations that don’t even incorporate time and whatever, then he arrives at a result that tells him what policy should be I just want to slam my head against the table. That’s because I know his assumptions are based on economic theory that has little empirical evidence to support it at any given point in time.

      Mankiw is even worse IMO because he is obsessed with individual marginal cost. I full agree with him that we should have more Pigovian taxes re: pollution and whatnot (in fact I believe if we could actually charge corporations all the externalities of their business then they would have to be regulated much less, but I’m not convinced that such accurate calculations are possible) but he does the same thing as Krugman: starts from a valid philosophical economic theory and then derives all these equations assuming that they held at all times in order to derive policy or individual actions. He once tried to explain how a 3% tax increase proposed by Obama would dictate how much time he’d do speaking engagements instead of playing with his kid, and how it really was a 60% increase or something if you incorporate his decreased time doing the speaking engagements, how long he had to live with investment returns and how much his kid would get through inheritance. Um, no that’s just complete BS when trying to describe real world behavior. He should instead calculate how much time he spent on that post and take that much time off to play with his kid while he still can.

      This brings me to a general point that I love about all the blogs that I posted. I am actually very conservative and skeptical about the ability for economic theory to give guidance about actions to take. There are core scientific, statistical and philosophical reasons for this (briefly you can’t repeat the same thing over again, there will never be enough data to be able to get statistical validity and once you have a policy that uses some theory people’s actions change and can invalidate the theory) so my understanding is fundamentally negative, rather than positive like Mankiw or Krugman. I think it’s much more important to understand the root dynamics of things and attempt to make a system that gets rid of some of the positive feedback and other problems and then once there is a solid core, viewing most other points as part of political policy. This is something that Yves Smith at Naked Capitalism makes many good points about.

      So the interesting thing is that while the blogs I posted have very similar ideas about how the economy and financial system work (at least at this point in time) they have very different ideas about what to do about it. Most of them advocate breaking up the banks even if it requires forced nationalization and subsequent breakup because centralization is a core problem that is driving dynamics, but if it came down to tax rates or business policies or whatever they would all disagree and accept it because the root understanding gives no guidance on that. Mish advocates doing nothing and letting there be a depression and then getting rid of the Fed and going to the gold standard. Even though those sound like completely different things, they are both trying to resolve the same issue with present dynamics.

      Sorry for the long comment but it’s something that has just been bothering me (and pretty much any systems dynamics person because it’s so obvious) a lot and is very frustrating. There are only two major economists I can think of that have an understanding of the world view that I’m talking about: Volcker in his folksy, intuitive Warren Buffett sort of way, and Joseph Stiglitz. Volcker is ignored for the most part because he has no problems with being blunt and Stiglitz is ignored because he is unabashedly liberal…but he’s liberal in a very unorthodox way. He and Mish are nearly polar opposites about implementation but would agree almost entirely about which dynamical properties are “good” and “bad” for a global economy to have.

      • CStanley

        No offense taken and you are right in that I haven’t been reading them in detail or for a long enough period…but still….

        I think I have a pretty keen sense of ‘group think’, just intuitively. Even if what you say is 100% accurate and that they’re prior predictions are proving true, there’s still a risk of overgeneralizing their ability to accurately diagnose and forecast right now.

        Take the CRA discussion we had recently- you referred me to some of those blogs and the discussions I started tracing back on that all seemed pretty circular and dismissive of contrarian views- even to the point of using a disingenuous debate tactic when they claimed that CRA couldn’t have been the culprit since it was instituted in the 70s even though the point is that changes were made to CRA during the 90s which fed into the current situation.) I brought up certain portions of the contrarian view which it seemed you somewhat agreed with when I made the points (like the general concept that the gist of the CRA was an attempt to do a social engineering program without the downside political cost, by presuming that the costs would be covered by housing values climbing into perpetuity.)

        I’m not suggesting that your confidence in those bloggers is misplaced, just perhaps a little bit overconfident and I think no matter what the situation it’s important to look for devil’s advocates who will challenge your thinking.

        • mikkel

          Yes I agree of course, and they are only human. Sometimes (with the exception of Yves Smith) I feel that they tend to spout off a bit about stuff they don’t necessarily know the specifics. Even more to the point, there is definitely the problem of being a victim of your own success, where seeing your viewpoint come true actually makes you less likely to be able to analyze stuff moving forward. On a personal level, I’m pretty much at the point where I feel there is one more wave down of the current dynamics and then quite frankly I have no idea. I think that next wave is going to be a doozy and there are too many positive feedback loops to avoid it, but once it clears the political and social consequences are unpredictable and it’ll be hard to judge anything. Because I’m an optimist (hahaha that is probably a surprise to most people that would have read my posts but it’s actually true) I’ve been telling people close to me about how even if we have a massive depression that if we can avoid global war and other things that are political in nature then we’ll be in an amazing position to have a new Renaissance.

          But that said I can fully appreciate their righteousness about their positions because on the stuff about CRA and things it’s pushed not by fact seekers with nuance such as yourself, but apologists and ideologues. Hypothetically, if we were trying to construct new programs and everyone that was involved and made billions upon billions had lost their misbegotten wealth because they made the wrong judgement calls, then yes, I would be harsher on the bloggers for not having nuance. But that’s not where we are now. Where we are now is that the side that is putting the emphasis on government failures are less interested in reform and more interested in avoiding repercussions. Most of the high profile people railing against the government programs either don’t understand (or are disingenuous) about how much their stature relies on the status quo. Mish is completely anti-government but he’s also anti stupidity. He believes that the government will ruin everything trying to “save” us but that all the bankers, mortgage brokers and everyoen should be liable and sued and lose everything as well. When Barry Ritholtz goes off it’s not on people like him, it’s about the CNBC types that enjoy privilege of the bull and are now blaming the government for trying to take the punch bowl away.

          • CStanley

            But that said I can fully appreciate their righteousness about their positions because on the stuff about CRA and things it’s pushed not by fact seekers with nuance such as yourself, but apologists and ideologues.

            See, I find that this general meme has infected all of our public discourse. It’s so much easier to brush off legitimate complaints by dismissing the complainers rather than actually debating the points. I’m not saying you are doing this- but you generally accept it from other people and I find that’s a big problem.

            I think you know what I mean but other specific examples where this happens all the time include the global warming debate and evolution. It’s even evident in the broader political sense now as the WH has adopte the strategy of using Rush Limbaugh as the poster boy of conservatism and then implying that anyone from that side is an ideologue like him.

            It’s become really insidious, IMO, and I honestly don’t think we’ll solve our serious problems this way because we’re getting all one sided solutions. You dismiss the importance of the CRA thing, for instance, because you don’t think that there’s going to be a repeat of that sort of thing and I have no idea why you’d be convinced of that. To me it’s just the opposite, and ignoring where those policies went wrong is highly dangerous when we’re now looking for more and more government intervention to ‘fix’ things.

  • CStanley

    The “aberrations and mutations” which made it into a monster are the excesses of deregulation, which encouraged all sorts of creative securitization markets that passed the risk around like a hot potato. The answer: re-regulate the markets again.

    One of the most bizarre things about the Obama administration is that they don’t seem to be addressing this at all. Where are the calls for bipartisan commisions to review what went wrong and make recommendations on fixes (well, I think McCain is calling for this, but I haven’t heard a thing from Obama’s team.) It would be politically popular to do this and would make sense (a rare combination which should be taken whenever these situations present themselves.)

    It would go a long way to restoring confidence in the markets if people felt that the underlying problems were being addressed. Is Obama’s team just too over their head to see this, or is it a more sinister desire to NOT find a way to make the stock market attractive again to investors?

    • mikkel

      “It would go a long way to restoring confidence in the markets if people felt that the underlying problems were being addressed.”

      In my cynical view there is nothing they could do to address the underlying problems without the entire house of cards collapsing. Thus they are just dumping resources trying to prop up the system and hoping things right themselves. McCain and any Republican would do the same thing. Heck I might even do the same thing if I were in that position (of course I wouldn’t be because I would have campaigned on my cynicism). It’s exactly what I figured would happen for the last two years.

      • CStanley

        I agree that a collapse of the currently overinflated market is necessary, but that has nothing to do with restoring integrity to allow for a sensible level of reinflation.

        I think it’s perfectly obvious where some major mistakes were made. First Glass Stegall which had provisions that almost guaranteed that the investment banks would keep cannibalizing each other (growing ‘too big to fail’ which unfortunately also meant they were too big to regulate and too big to manage.) Then the lack of oversight of the securitized mortgage products, and the CDSs, and the use of overly loose money supply to keep the bubble growing. It was all insane, and certainly not the way the free market is supposed to work or the only way that they could function.

        It’s like every step of the way the govt was stepping in to encourage faulty decisions, but since everyone was profitting and everyone had this bizarre belief that things could be propped up indefinitely there was no rational basis for decision making.

        I don’t doubt that the Republicans would ‘do the same thing’ but I don’t get why the Democrats aren’t doing the right thing because politically for them it would be a win win situation (as I’ve said elsewhere, one of those rare situations where their political interests are actually best served by doing the right thing.) I don’t know, maybe because it really wasn’t just a Republican failure to regulate but Democrats were going along with everything too, so maybe they are afraid of some downside risk to exposing everything that went wrong.

        • mikkel

          “I don’t doubt that the Republicans would ‘do the same thing’ but I don’t get why the Democrats aren’t doing the right thing because politically for them it would be a win win situation”

          Well not to get all radical on you, but I don’t think that the US really has a capitalist democracy, I think it has corporatism, both the ad hominem form (meaning that political interests are driven by corporate business interests) and informally at least, the political theory definition.

          “at the national level the state recognizes one and only one organization (say, a national labour union, a business association, a farmers’ association) as the sole representative of the sectoral interests of the individuals, enterprises or institutions that comprise that organization’s assigned constituency. The state determines which organizations will be recognized as legitimate and forms an unequal partnership of sorts with such organizations. The associations sometimes even get channelled into the policy-making processes and often help implement state policy on the government’s behalf.”

          While this isn’t explicit in the US, I do think it is pretty de facto. I do think that the “sole representative” can change based on popular opinion, economic makeup and who is in power, but they do drive the echo chamber. In short, when it comes to economic policy in particular, and many national policies in general, I think that the full spectrum of “options” is defined in terms of these representative groups. The reason why this and many other common sense policies aren’t adopted is because there is no large group that directly benefits, and thus the options don’t even exist for policy makers.

          • CStanley

            Oh, I mostly agree with that, but what I meant by my earlier comment is that I see an opportunity for one of the parties to break with that mold and position itself as the savior, and the Democrats are the ones who could logically take advantage of that opportunity.

            Instead of just harping on the populist message by demonizing the CEOs and bankers, they could credibly tie in the corporatist label to the GOP and position their party as the one which will restore free market policies which keep the govt as a watchdog instead of a lapdog of the business interests.

            I mean, I have to admit that it would gall me if they did that because I do know that it’s not just the GOP that’s been guilty of the corporatism- but I think that in the current environment they could get away with it and in a way I think the country would be better served if they did so instead of leaving voters to believe that this was just some sort of unavoidable mess which happens in a capitalist system and that’s why the govt should become larger in proportion to the private sector.

          • mikkel

            “You dismiss the importance of the CRA thing, for instance, because you don’t think that there’s going to be a repeat of that sort of thing and I have no idea why you’d be convinced of that.”

            Actually I don’t think that at all. As we talked about on the last thread I’ve very sympathetic to the idea that the government shouldn’t be promoting home ownership as an ideal and if it does, that it should be small and kept contained in its own box. I am very interested in how the CRA may have led to reduced standards in the private market and am concerned about that not only occurring in the future with this particularly, but how government policy can cause that generally.

            But you didn’t address the rest of the paragraph. I’m not saying those people have no point, I’m saying that they are pushing that point in order to get off the hook by obfuscating the end result about who benefited from it. That’s what set Barry off. If you came in and said “OK I understand that these banks and whatnot were responsible for this and they should have to deal with the consequences, but maybe the reason why they thought of it was because of the CRA” then he would probably at least hear it out.

            I admit that some of it comes down to ideology about which you believe is the “core” problem that needs to be addressed, but some of it also comes down to whether we’re talking about working within the system or construction of a new system. For instance I think Obama has the best ideas about what to do to ameliorate our current problems, but if we were starting a new government and economic system from scratch then my ideal would be completely different and I’d support a very tiny government that would be about a fourth of its current size.

          • CStanley

            I didn’t address the rest of what you said because I reject the idea that that’s a good enough reason to dismiss real concerns. That’s the whole point I was trying to make- that even if someone is bringing up a concern because they have ulterior motives or they’re disingenuous, if you know that what they’re saying might have some merit you have to address it anyway. You can simultaneously criticize the person for trying to use that concern as a distraction from something else, but you shouldn’t refuse to address the issue at hand.

          • mikkel

            Well I disagree. This is probably just a difference of outlook that can’t really be changed. To me if someone has ulterior motives then they should be marginalized and ridiculed. I’d much rather spend my time talking with honest people that have differences in opinion and world view and are actually looking to reach an amenable solution. Once the people at are dominating the debate are intellectually and morally honest, then it’s time for nuance. I think responsibility and justice are needed before moving forward or else it’ll just happen again.

          • CStanley

            To me, the greater point is that EVERYONE benefits from getting to the closest approximation of truth in a situation. If a person brings something to the table but that person has ulterior motives, and the others reject the piece of information or perspective that that person brought, then they’re doing themselves a disservice.

            Plus, there’s the fact that a lot of times the people who have the public podium have these ulterior motives, but they also represent a viewpoint that is shared by many people who don’t have that baggage.

            The other people in the discussion should address the substance of the issue in order to either find points of agreement or define differences of opinion in an honest manner with all of the other people who don’t get to bring their honest or nuanced views to the public forum because they’re not pundits or policymakers.

          • CStanley

            And to perhaps be more clear on my views on this….

            I’m personally not opposed to a reasonable amount of corporatism as long as there are checks and balances.

            I think that when govt is probusiness and progrowth, everyone benefits. However, that growth shouldn’t be in favor of the top management and pit them against the workers. I think there are ways to acheive a balance of both, and to help both sides in the management-labor equation become more symbiotic.

            And I think in theory, people believe that we have one party in this country which pretty overtly represents the interests of management and another which pretty overty represents the interests of labor. But first of all, that’s mostly a facade, and second, even the things they do to represent those interests are done to set up an adversarial relationship- much more than is necessary and more than is healthy.

            I tend to be more critical of the Democratic party because I think there’s a lot of disingenousness in their policies. (That’s sort of a ‘better the devil you know than the devil who decieves you’ sort of logic.) I think the Dems use rhetoric to convince voters that they’re on the side of the everyday Joe, but behind the scenes they take money from corporate interests too. And then when they really do side with labor, they tend to support stupid policies of labor unions unconditionally (which leads to situations like Detroit, where the labor unions negotiated for these unsustainable contracts for pools of laborers and costly retirement benefits.)

            I don’t think the alignment of one party with one side of the equation is healthy- I think both parties would serve the country better if they would see their ‘partnership’ with one side or the other as one which permits oversight- so that the GOP doesn’t enable terrible policy on the part of corporate leadership and the Democrats don’t enable the unsustainable demands of labor unions.

  • pacatrue

    CStanley said: He’d actually be a bit more coherent if he was more of a socialist. The social liberalist policies have no rational underpinning to make them sustainable. It makes no sense to think that you can continue to tax the top 5% more and more to support programs which grow indefinitely. Under that kind of tax structure, the top 5% begins to shrink while the revenue needs continue to grow.

    C, couldn’t this argument be made for all spending in a progressive tax structure? Military spending will grow indefinitely, so anyone who supports robust defense spending would be more consistent if they acknowledged that one must eventually seize the means of production. I guess my question is, what do you mean by ‘grow indefinitely’ and which programs are likely to do so?

  • pacatrue

    mikkel, you have spoken several times in your comments particularly about the positive feedback loops pushing us in certain directions. Do you think there is anyway to interfere with those loops right now so that they do not continue to reinforce the downward trend? I.e., is there anyway to modify the system on the fly instead of waiting for it to achieve some stable state of nastiness and only then working out of it?

  • pacatrue

    Mikkel said: “My secondary problem is what we saw with the stimulus. The Republicans went in to talk to Obama and professed that he had a vision they could agree with, then Congress put together some crap and then Obama signed it.”

    Ditto.

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