Tuesday, December 2, 2008

No shortage of money (3)

This is a long-running theme that can't be neglected. As I've mentioned many times before, this crisis has nothing to do with a shortage of money. This chart shows total credit extended by commercial banks. As you can see, we are not only within a stone's throw of an all-time high, but credit has been growing at a rate faster than we saw during the recession of 2001. (Last datapoint: Nov. 19th)

Whatever measure of money you choose, all are showing continued growth and all are at or very near all-time highs. The problem is a shortage of buyers; a lack of confidence; fear. People have pulled back, but not because they don't have money. This suggests that the recovery from this crisis could be relatively quick and easy.


Tom said...

Scott, this is the old Keynesian "inadequate demand" rubric, although it is much older than Keynes. It is also down right silly. In selected industries we have just been through a credit-inspired boom that stretched "demand" way beyond what could be expected without growing indebtedness. In my opinion, fear is not the principal constraint on economic growth.

Now, the monetary policy people are thinking all they have to do is rev up the credit machine and drive demand to even higher levels. Does this really sound like a sensible, sustainable improvement to the economy? I don't think so. Furthermore, it is pretty clear that it won't work this time -- our unprecedented Fed/Treasury actions demonstrate that we are not just looking at another routine "post war" recession.

I know, I am once again touching on a fundamental difference in our economic thinking, and I am sure you are right: we won't ever bridge this gap. So, let me just say that I believe your statements in this post will prove to be as wrong as your assertions for much of the last year that no recession was in sight. Now we have heard from the NBER, and we are a year into the recession.

Just a polite, no money bet on future developments. I hope I lose! :-)

Tom Burger

Mark Gerber said...

I appreciate the alternative perspective of your posts.

My opinion is similar to yours: fear is not the PRINCIPAL constraint on economic growth. However, I believe fear is a significant factor. I also agree that we are not just looking at another routine "post war" recession.

I once heard somebody describe this as a structural recession, and state that history of such recessions have, on average, resulted in a 55% drop in stock prices.

So, if this is a recession emanating from a broken financial structure, doesn't it make sense for the central bank/treasury to do what it can to soften the shock? In other words, rather than do nothing and just let the economy collapase and asset prices deflate rapidly bringing unproductive suffering from high unemployment and other shocks, isn't it better for the central bank to try inflate the economy somewhat to at least reduce/slow the level/intensity of deflation?

Wouldn't it be better to mitigate the fear now growing out of the awakening to the the excessses (debt) of our overly optimistic past boom so that instead of being gripped by depression we're left in a balanced, realistic set of reduced expectations?

It seems to me if the Fed/Treasury can pull this off, we will certainly experience a prolonged (several years) economic stagnation, but that is better than a severe break into depression followed by who knows what -- anarchy? revolution? fascism? total socialism?


Scott Grannis said...

Tom, I think you would agree that easy money helped fuel the housing bubble, and that it must now deflate as we get rid of "malinvestments." Government policies (e.g., Freddie and Fannie) were also big contributors. And easy money also fueled a commodity boom. The economy has to reprice and resources need to shift away from housing before this is all over.

On that score, I am encouraged by the significant repricing of housing, commodities and energy that has already occurred, and by the fact that the great majority of subprime-related losses have been taken. We are a good three years into the bursting of the housing bubble, and lots of progress has been made. Residential construction has most likely contracted about as much as it needs to, and prices could be within 10% of a bottom. I see the problems being addressed in meaningful fashion in the real economy and I think that is very good news.

This market is so pessimistic that just turning down the volume on bad news would be enough to spark a powerful rally and a return of confidence. It's time to start looking out across the valley of despair.

Tom said...

Mark & Scott,

I think the government and Fed actions are intended to prevent the necessary repricing of mortgage related securities, bank stocks, houses, bonds, and many other important assets. It's true that in spite of the government's most assine behavior there has still been significant price changes, but it has happened in spite of the government, not because of it.

I think these actions will prevent capital from being distributed to its most productive purposes, and in fact will leave billions of dollars in the hands of proven idiots who should never again be at the helm of a financial institution.

In short, government and Fed actions will (try to) perpetuate an economy that is thoroughly unrealistic and based on little more than monetary stimulus on steroids.

The Teasury and Fed actions actually constitute the early stages of fascism and totalitarianism, they are not protecting us from those risks -- they are taking us dangerously closer to them. I hope people will wake up one of these days.

It's a great idea to look across the valley, but what valley have you ever seen with a topography similar to what are now seeing?

The government and the Fed are not in any way helping to put back in place a viable set market-based behaviors. They are busy putting themselves into the central planning catbird seat -- which I think we all agree does not work. It's not a matter of degree -- central planning absolutely does not work worth a damn, period.

I will just reiterate that I think there are significant maladjustments left in the economy that are just coming into view. I would be confident that the necessary adjustments would happen relatively quickly if it were not for the fools in the Fed and the Treasury. These people are stealing countless billions from us and using that money to harm us in unconscionable ways.

Tom Burger

Mark Gerber said...

I still don't understand all your conclusions. As you wrote, repricing is taking place in spite of government action. I agree with this conclusion.

You then state that billions of dollars will remain in the hands of proven idiots. I'm not sure of the exact meaning of idiots, but I agree many leaders in our country have made huge mistakes for many years, and some of them are still leading financial companies that are being stabilized by Fed/treasury action. However, some of the leaders have learned from the mistakes that have been made while others have been or will be replaced.

You then wrote wrote that the Fed/Treasury action will (try to) perpetuate an unrealistic, monetary stimulated economy. It seems, however, that your "try to" insertion here is in agreement with my understanding of Fed/treasury action merely mitigating the speed/intensity of the deflationary forces of deleveraging rather than entirely stopping them or reversing them to perpetuate the pre-2008 unrealistic, over leveraged economy.

You then wrote the Fed/Treasury action is more likley to result in Fascism/Totalitarianism. I don't understand this. If they succeed in easing us into our new, lower leverage economy, free of hyper-deflation and free of hyper-inflation, isn't that the best scenario for a stable country?

SpeakToMe said...

I just don't understand where anyone could argue with your analysis. Asset prices have been inflated by easy money, and they now need to come down to levels conducive to risk capital.

The jury is still out on your thought that "These people are stealing countless billions from us and using that money to harm us in unconscionable ways." Don't give up so easily. It is entirely possible that the government will get back every penny of the $3 trillion (?) in credit extended. It is also possible that our country will not permanently seed our national heritage of entrepreneurship. Its still possible. We'll see.

Tom said...


You say "If they succeed in easing us into our new, lower leverage economy, free of hyper-deflation and free of hyper-inflation, isn't that the best scenario for a stable country?"

Okay, Mark! Sure. But I think this possibility has exactly a zero percent chance of happening. There are always unintended consequences associated with government interventionism, which lead to new interventions. Besides that, they have the opposite intention -- they are trying to preserve and increase the leverage in the economy.

Yes, repricing is taking place, but the resulting prices are still being distorted by the various interventions, so the result will still be a maladjusted economy.

The idiots I have in mind are those people presiding over failed banks, financial institutions, auto companies, AIG, and who knows how many other companies being bailed out.

A capitalist economy works because of private property, (relatively) free markets, and profit/loss incentives. The Fed and the US government are distorting all of those conditions ... and they are not done yet.

The rate of interest is arguably the most important price in the whole system, and the Fed is distorting rates across the whole spectrum. Now, we hear that the Treasury is hatching a plan that specifically seeks to drop mortgage rates again-- and government officials are pushing the GSEs and banks to lend, lend, lend. This is precisely what caused our current problems; these further interventions will only lead to more difficulties at a later time.

My problem with all of this is that our government and Fed are likely to prevent an economic recovery for quite a long time if they continue these interventions.

Tom Burger