Month: May 2009

Boom/Bust

Leverage.gif

by Richard Florida

Mark Thoma points to San Francisco Fed research on the lasting effects of the past decade's run-up in consumer debt and current "deleveraging" on the U.S. economy and American consumers.

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007. That dramatic rise in debt was accompanied by a steady decline in the personal saving rate. The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.

In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes.

Thoma believes this means recovery will be slow in coming because:

… unlike some recent recessions, this time the economy cannot go back to where it was prior to the recession, and the structural change that must occur to move resources out of housing and the financial sector and into other, productive uses will take time to bring about.

Speaker To Resign

by Chris Bodenner

No, not ours – Britain's. Labour MP Michael Martin, mired in a financial scandal, will be the first Commons Speaker forced from office in 300 years. Erick Erickson adds context:

For some time Mr. Martin has been under fire for questionable personal behavior. Historically, the British Speaker must remain above reproach and not be accused of partisan operations. In fact, the British take the role so seriously, they typically give the position to a member of the party opposite, no one runs against that person, and the Speaker is squired away in a palace away from the temptation to play partisan favorites.

But when [former Speaker] Betty Boothroy retired, Labor put up a hard charging partisan in Michael Martin. He never really abandoned the partisan hackery. … In the latest lapse, the ethically compromised Martin did not keep the reins tightly pulled and allowed members of the House of Commons to pull a fast one on the British public by abusing expense accounts.

The Telegraph runs a reax of other MPs.

A Failure of Capitalism (IV): More on Bubbles

by Richard A. Posner

The housing bubble is so central to our current economic troubles, and such a mysterious phenomenon from an economic standpoint, that I want to elaborate on my brief remarks in the previous entry.

A few figures: At the beginning of 2000, the federal funds or overnight rate–the short-term interest rate that the Federal Reserve focuses on influencing through its purchase and sale of Treasury bonds–was 5.45 percent. Though short term, this rate influences long-term rates, because it is the rate at which banks borrow from each other, and the more (less) they borrow ,the more (less) they are able to lend to their customers; and the more (less) they lend, the lower (higher) their interest rates are. Also at the beginning of January 2000, the average interest rate for the standard 30-year fixed-monthly-payment mortgage was 8.21 percent.

By December 2003, when the overnight rate had fallen below 1 percent, the mortgage rate had fallen to 5.88 percent and housing prices had risen (since the beginning of 2000) by 42 percent. The overnight rate than gradually rose, to 5.26 percent in July 2007, by which time the mortgage interest rate had risen to 6.7 percent, yet housing prices had continued to increase and were more than 80 percent above their 2000 level. After that both interest rates, and housing prices, began to decline.

If low interest rates drive up housing prices, high interest rates should (and eventually do), drive them down. Yet we have just seen that housing prices continued rising after interest rates started to rise. Moreover, a leading housing economist, Edward Glaeser, has pointed out to me that, on the basis of studies of the responsiveness of housing prices to interest rates in other periods, it is unlikely that the fall in mortgage interest rates during the early 2000s accounted for more than 20 percent of the increase in housing prices.

What I think we are seeing in the numbers is the classic bubble phenomenon, a phenomenon that has been observed in a variety of markets in a variety of countries for centuries. The low interest rates of the early 2000s pushed up housing prices both directly and indirectly. Directly by reducing the cost of housing debt–and housing as I mentioned in my last entry is bought mainly with debt. Indirectly by pushing up the value of common stocks. The low interest rates, as I said, caused asset-price inflation. Common stock is an asset, and was affected by the inflation. As the market value of people's savings, increasingly concentrated in common stock (whether in brokerage accounts, retirement accounts, college savings plans, or health savings plans), rose, people felt (and were, for the time being anyway) wealthier, and this increased their demand for houses–for owning rather than renting, or for owning a bigger or fancier house than their present house. And banks, including mortgage banks, being able to borrow capital at low rates, for lending, were eager to encourage borrowing by relaxing their credit standards. So people who could not have qualified for a mortgage at any interest rate earlier were now able to borrow at affordable rates.

Once house prices started rising, moreover–and here is the bubble phenomenon at its purest–the increase acquired momentum. An increase in the price of an asset, after that increase has continued for a significant time, creates a belief that the asset is a good value. One sees other people bidding up the price of houses and assumes they know something that perhaps one does not. And when officials and economists, and not just brokers and bankers, say that housing prices are rising because of "fundamental" changes in demand and supply that are likely to continue, the belief that a house is a good value, even though it costs a good deal more than it would have cost just a year or two ago, is fortified. There is nothing irrational about such a belief, or about action on it, though there is always a risk that the apparent increase in value will turn out to be a bubble phenomenon.

That seems to be what happened, and the basic fault lies with the Federal Reserve in having pushed interest rates too far down, and kept them too far down for too long, during the early 2000s, and with the dismantling of regulatory controls that had formerly reduced the incentive and ability of banks to lend into a bubble.

On Doubt

by Patrick Appel

Larison tackles one of the Dish's favorite topics:

Everyone is stricken with doubt at times, but it has to be understood that doubt, like an illness, is something from which one may suffer but which is something that needs to be remedied rather than perpetuated or celebrated. Physical illness can have a humbling effect, but a proper understanding of theological anthropology tells us that illness, like death, is part of our fallen state. Doubt is a function of a mind clouded by the passions–it is the result of confusion. It does not teach us anything, but rather prevents us from learning.

E.D. Kain answers back:

Doubt, to my mind at least, is not at all the “function of human confusion” though it can certainly lead to confusion if we let it consume us. Then again, if we let our appetite for any emotion or passion or pursuit consume us it is possible we will be rendered helplessly confused – by love, by greed, by faith even. By certainty, even.

Recession Comes to the Professionals

by Richard Florida

Business Week's Michael Mandel crunches the numbers and turns up some disturbing results. While recession has hit hardest at blue-collar workers, it is taking its toll on professional jobs as well. Unemployment for professionals overall increased by roughly four percent between August 2008 and April 2009. But the recession is hitting much harder at certain types of professionals. Computing and mathematical jobs (heavy on software engineers, computer scientists, and systems analysts) are down 9.3 percent; engineering and architectural jobs (two-thirds engineering) are down 10.3 percent; and "creative professional" jobs – working artists, musicians, dancers, entertainers, reporters, editors, writers, and other media types – are down 11.3 percent.

Ask The Audience: Mental Health, Ctd

by Patrick Appel

A reader writes:

I have a sister with Schizophrenia, and my family struggles every day with how to deal with her wants and needs.  Mental illness presents incredibly hard choices for families who deal with it, and it doesn’t help when its victims know how to manipulate your guilt into enabling. 

Let me start by illustrating some of the difficulties.  Medication can be very helpful in assuaging the devastating effects of the illness. My sister was able to work a job (with some help from her coworker – my mom) for some time while on the medication. The problem is in timing, meaning that it takes two weeks for the medication to be in the blood stream at levels high enough to be effective. This amount of time makes it difficult for her to understand the connection between the drugs and the return to sanity. It also means that she can stop taking the medication and won’t see the effect for a few weeks.  When on medication, my sister is able to function well enough to do some of the normal daily activities that we all take for granted; driving to the store, interact with people, work, etc.  When not on medication, she is irrational to the point of violence.  

Many of her attempts at living without medication were done in secret.  Our family only finds out a few weeks later, when her behavior makes her non-compliance obvious.  At that time, we have to pull back on many of the freedoms that we allow her when she is compliant.  The first thing we do is take away her car keys, as we can not put the community at risk.  And the more she has ceased her medication, the longer we keep the keys away.  Obviously, this only enrages her, and makes her spiral further into depression and paranoia (we are all conspiring to make her unhappy, etc). 

I have recently prodded my parents to sell the car, because I believe that it’s only a matter of time until she ceases compliance, and crashes the car before we notice the effects. The more I think of it, the more scared I am that there are mentally ill people on the roads right now. 

This leads me back to your post.  Patients freedom vs. the safety of public/family/themselves.  I don’t know the answers, but it is nice to see an influential blog like yours bring some attention to the subject.