If the US has a Recession, Who is to Blame?


"Alan Greenspan really made a mess of all this. He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages.”
–Joseph Stiglitz

So says Joseph Stiglitz, the Nobel Prize winner in economics, former World Bank chief economist, and current Columbia Prof. His macro forecast has a 50% chance of US recession.

The other 50%? 

"Growth will certainly slow to less than half of its 3% potential."

Why? All of this comes back to one of our favorite themes: Housing was the key driver of the economy from 2002-05. It disproportionately drove job creation and wages. Far too much capital was allocated to the entire sector, beyond the natural limits that population growth, income gains and interest rates place on it. As credit costs went higher and easy financing was choked off, the Housing boom began to reverse. This led American consumers to begin to run out of rocket fuel for spending.

The canary in the coal mine is the holiday shopping season. 

The economic good news is that Americans typically keep spending — even after they run out of money. The bad news is, well, you already know what the bad news is. We are already seeing some discouraging signs for Holiday Retail: Fed Ex (FDX) warns that shipping volumes are down; Starbucks (SBUX) reports its first ever decline in same store traffic.

After a weak back-to-school season, and a disappointing September and October, all eyes now turn to Black Friday. The usual suspects are cranking up their forecasts, but this year, they may be fighting to strong a tide.   

We expect a modest holiday retail season — anywhere from +2.5% to -1.5% year-over-year. Shopping volumes are likely to be slower than many Wall Street retail analysts are presently expecting.

This comes at the same time that inflation pressures are causing a
quandry for retailers: If they raise prices, they risk losing some
customers and revenue in the process (i.e., Starbucks). Or, they can
eat the cost input increases, and lose profitability.

Why does this matter so much? Because Retail is serious business: According to the National Retail Federation (NRF), the last 2 months of the year account for 20% of total annual sales. For department stores, its closer to 24% and for  jewelers, 31%.  And according to the International Council of Shopping Centers (ICSC), nearly a third of retailers profits come in Q4.

A lousy holiday season has deep ramifications: it says a lot about  consumer’s budgets; indirectly reflects the state of wages and income. Mostly, it reveals the state of consumer sentiment in real terms, rather than merely expressed in a telephone survey. Last but perhaps most important, consumer spending accounts for ~2/3rds of GDP.

Seasons greetings, indeed . . .



Greenspan `Mess’ Risks U.S. Recession, Stiglitz Says

Reed V. Landberg and Paul George
Bloomberg, Nov 19, 2007

Holiday Sales May Be Worst Since ’02 as Retailers Cut Forecasts

Cotten Timberlake
Bloomberg, Nov 19, 2007

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What's been said:

Discussions found on the web:
  1. Eric Davis commented on Nov 19

    What are you talking about ?

    Obviously it’s all the protectionist talk by the Democrats, and the 1 year of the “Do nothing Congress”… Don’t you watch Kudlow?

    and it has nothing to do with the 6 years of congress that showed up for 1.5 days a week, and the Massive deficits, and lack of substantial economy.

    If Only we could Lower Taxes on the top 15% of the Economy to 0, then we would see some progress in this economy. And the Uber Wealthy could Lord over us like masters of the universe shackling middle America to the Yolk that they were born to… umn…Er… “Provided the Stable Economic base” to create the Greatest Goldylocks economy Ever.(that was super fun to write)

    Don’t you watch the news? this has been spun already.

    But… Honestly. It’s our overspending… our fat American lifestyle, and the deficit…Caused by the war, which we, as Americans supported.

    Like most things, we have no one to blame but ourselves…

    But definitely political Hay will be made of it, as a side-show(on both sides) and it will make it even more difficult to come up with solutions.

    Hurray for democracy!!!

    And Recessions are inevitable.

    Listen to the Black helicopter crowed and it’s the Fiat Dollar, and the International bankers.

  2. justin commented on Nov 19

    But really with all those misfortunate events that have happened during Bush’s two terms – Reccession, 9-11, Katrina. He did not in anyway get things handed to him in any way as favorable as Clinton. Now have there been bad moves made? Some could argue that they did what anyone else would have done. (Now don’t tell me that a Democratic president wouldn’t have went to war…remember the Balkins?

  3. justin commented on Nov 19

    Forgot to mention that I am an Independent, which helps me see both sides of the isle objectively. Speaking of isles, and issues they have been kind of flip-flopping these last couple of decades. Oh sweet politics, yuck!

  4. mhm commented on Nov 19

    “The canary in the coal mine is the holiday shopping season.”

    Maybe not… I think Santa will come in shape of a new (higher) credit card limit.

    Anedoctal evidence, one of my cards has a limit 80% higher than a year ago. The other is 50%. I wonder if the credit card companies also package and sell the debt and, is so, who buys it.

    Anyway, I aways pay in full. Maybe that’s why they keep bumping it higher (no risk).

  5. Fred commented on Nov 19

    Posted by justin:
    > Now have there been bad moves made?

    Understatement of the decade. Where to begin… where to begin…

    (In no particular order) Tax cuts for the rich. Handling of post 9/11. Iraq. Mission Accomplished. More tax cuts for the rich (despite wartime). Enron. Abu Ghraib. Domestic Spying. Loss of Constitutional rights. Katrina. Firing of US Attorney Generals. Terry Schiavo. Stem cell research. And the list goes on and on…

    Sure, I don’t claim to be an independent, but when you ask “have there been bad moves made”, you are guilty of trying to be fair and balanced in a situation where the facts are very lopsided.

    I apologize. I know this is a finance blog and not a political one.

  6. D. commented on Nov 19

    Growht might not slow down for some time… It’s easy to make GDP growth look strong when you’re under reporting inflation.

  7. Ralph commented on Nov 19

    On a strictly financial note.
    I agree that housing was a major force. I disagree, that it was the major culprit. Credit went crazy on all types of loans and in all aspects of our financial endeavors.

    Housing is the most visible so far. It is just a matter of time. The parts that will hurt the most are the folks that leveraged debt. On the mild side is Stock margin and credit card debt. The limit for most folks is to be levered 2 to 1.

    The big ones will be hedge funds and private equity. There we find 10 to 1 leverage is common.

    The buy outs where the deal makers put in almost none of their own money and then lever up the company debt months later so that they end up with none of their money in the deals. These are going to make housing look like a picnic.

  8. D. commented on Nov 19

    Anedoctal evidence, one of my cards has a limit 80% higher than a year ago. The other is 50%. I wonder if the credit card companies also package and sell the debt and, is so, who buys it.

    Have you looked at money market funds? All the one I’ve come across have a minimum exposure of 50% in a mish mash of SIV stuff, asset backed stuff: mortgages credit cards…

  9. Philippe commented on Nov 19

    May be worth to explain how the banking world operates?
    Take all your doormen and provide them with 100 Million USD bullet loans (loans repayable at once in fine) Ask them not to eat it all and to keep enough money to service the interest rates payments for the next three to five years (variable horizon to be tailored in accordance with your tenure)
    Throughout these years every one is happy the doormen eat better and the managers get their fat bonuses.
    When the CEO tenure is over the mess is for the ambitious successor.
    When executed at a macro level this program is even more rewarding if you stay closer to the money supply.

  10. Tom B commented on Nov 19

    “Now don’t tell me that a Democratic president wouldn’t have went to war…remember the Balkins?”

    1) How expensive was the Balkan war? How many American Boys died? Was it generally successful or not? I rest my case

    2) Clinton would have warred with Afghanistan. Indeed, he DID try to bomb Bin Laden during his term and was roundly criticized by a GOP that was more interested in a certain blue dress. Clinton WOULD NOT have warred with Iraq. They were already under no-fly rules; Saddam was keeping the kooks (Shiites) under control; and they had NOTHING to do with 9/11

    Personally, if I had a sociopathic desire to conquer the whole Middle East myself, I’d have started (after Afghanistan) with 1) Iran (they are the big guys on the block, military-wise) or Saudi Arabia– the 9/11 nut cases DID come from there and the Govt., though technically an “ally” is probably worse than Saddam’s. Like, man, they do plenty of torture– oops, I forgot– that’s OK now. And, I seem to recall, that, unlike Saudi women, who are treated worse than camels, Iraqi women actually used be able to DRIVE and walk outside without hiding their faces in shame– before our “liberation” tha is.

    And where’s that Iraqi oil we were supposed to be swimming in? I keep reading stories about Iraqis making deals regarding that oil– in my mind, they should not be allowing to touch a drop of it until they’ve fully re-paid our expenses, with interest.

  11. Stuart commented on Nov 19

    debt levels reaching critical mass accelerated of late through irresponsible monetary and fiscal policies. A orgy of spending, oceans of cheap money… who’s to blame. Alot to share in the finger point IMO. Fiscal overspending is ultimately to blame. Those who look the other way while we live well beyond our means on borrowed money yet only looks at bought assets to perceive wealth, conveniently neglecting the liability side of our purchases over the past several decades. Too much debt. Time to pay the piper is nigh. We are responsible, all of us collectively, an irresponsible joe public, an irresponsible congress approving the spending, an irresponsible White House with spend happy policies, an irresponsible Fed pushing too much money, irresponsible regulators for allowing fraudster to entice the unsuspecting and narcissistically greedy to binge beyond their means. We either cut back spending or “print more money” a.k.a. as Ron Paul put it, fight inflation with more inflation. Recession my butt. As this credit contraction worsens and proves this is no longer a contained matter of liquidity but a solvency crisis, there will be alot of finger pointing as there will be alot of pain to share. We all contributed to this in our own way.

  12. The Dirty Mac commented on Nov 19

    I blame VJ. And also the rich people because they make too much money.

  13. Richard Leite commented on Nov 19

    Money from Central Banks Like Rain from Heaven.

    But it is not all Greenspan’s fault. Let us not forget the role the BOJ did with their ZIRP (Zero real Interest Rate Policy) and the carry trade (borrow cheap risk-free, lend risky) that ensued.

  14. pjfny commented on Nov 19

    off- topic:

    Swiss RE losing 1.2 bil on credit default swap (underlying asset not disclosed)…..imagine a weaker seller of CDSs not being able to perform on its obligations…..the cascading effect and the potential systemic risk!

  15. me commented on Nov 19

    ” He did not in anyway get things handed to him in any way as favorable as Clinton.”


    I seem to recall Bill Clinton saying that a president needed a war to be great. Bush lied, started a war, so no, he handed it to himself.

  16. ron commented on Nov 19

    The corner shell game runners moved to Wall Street and supported by their political water boys in Congress. Creating illusion has become the role of finance in modern life look no further then the FED flow of funds report Q2 showing 11 trillion dollars of SFH American equity. Maybe the consumer can take that report with them when they go shopping this season, no different then Paulson and Co as they run around the globe talking about the “greatest economy ever”

  17. m3 commented on Nov 19

    i’m with eric.

    everyone has been so busy blaming greenspan, lenders, and bush. but it’s OUR fault.

    we elected bush twice.

    we went along with his tax cuts.

    we supported the war.

    we are the ones who went on a wild spending binge buying homes we knew we couldn’t afford.

    alan greenspan did not put a gun to people’s heads telling them to accumulate a pile of crushing debt.

    we did all of this willingly.

  18. Marcus Aurelius commented on Nov 19

    Never in history has mankind achieved the likes of the American Middle Class.

    Look at your neighbors: $500K (minimum) home, Beamer and SUV in the driveway, along with the camper and/or boat. One or more trips abroad each year. Eats in restaurants and enjoys a bottle of wine a couple of times a week. Has cable, internet, flat panel TV(s), cell phone(s), one or more computers and software, a couple of kids, and all of the cheap bullshit middle Americans want.

    Add to that a household tax liability (deficit) of $112,000 (family of 4).

    Now: How much does the family make per year? $250K? I doubt it. What you are looking at is not wealth – it’s debt.

    Who is to blame?

    Your neighbor, of course.

  19. VJ commented on Nov 19


    “He did not in anyway get things handed to him in any way as favorable as Clinton.”

    You mean like the massive and exploding federal deficits (largest in history, at that time), four years of negative private-sector job growth, rising Poverty, declining wages, recession, the list goes on…

    On the other hand, the current squatter in the White House was “handed” federal budget surpluses, the lowest real Unemployment in decades, the largest decline in Poverty in decades, rising real wages, the list goes on…

  20. VJ commented on Nov 19

    The Dirty Mac posted:

    I blame VJ

    Yep. I was up on the hill twisting arms for all those tax cuts for the Rich & Corporate and record levels of Corporate Welfare. Not to mention I told Tenet to tell Uncle Dick the WMD in Iraq was a “Slam Dunk !”.

  21. p de vries commented on Nov 19

    Bloomberg also quotes Stiglitz as saying, “Americans have been taking money out of their houses to finance a consumption binge,” Stiglitz said. “Last year alone mortgage equity withdrawal was between $850 billion to $950 billion. That game is over.”


    If Stiglitz’s estimate of 2007 home equity extraction is correct, the credit tightening that is underway will put the US into a recession in 2008 despite any overall income and employment growth.

  22. A Reader commented on Nov 19

    Here are words that Barry quoted in the section ‘Your Fault, Dear Reader’ of his ‘Apprenticed Investor’.

    “He who blames others has a long way to go on his journey. He who blames himself is halfway there. He who blames no one has arrived.”

  23. The Dirty Mac commented on Nov 19

    “Yep. I was up on the hill twisting arms for all those tax cuts for the Rich & Corporate and record levels of Corporate Welfare. Not to mention I told Tenet to tell Uncle Dick the WMD in Iraq was a “Slam Dunk !”.”

    VJ – Thank you for your admission.

  24. donna commented on Nov 19

    Um, what makes you think finance isn’t political? It’s probably one of the most devastating political things going on right now.

    Come on, wake up. The rich didn’t get rich on their own, really.

  25. ray commented on Nov 19

    Angelo Mozillo, CEO of Countrywide, has got my vote hands down, for bringing down the economy by flooding the market with time-bomb mortage backed securities.

  26. John commented on Nov 19

    Dire forecast. Black Friday to Christmas are going to be a bust. Only bit of cheer sales in NYC and any other areas with big foreign component taking advantage of cheap dollar (that would be NYC).

  27. Movie Guy commented on Nov 19


    Retail is off the mark down in Atlanta. We hit the Mall of Georgia last week and it’s apparent that the big spending season is off to a slow start. Even the Sam’s Club floor traffic was light. (We helped out, though, and they all know us when we walk in – we’ve been loading up the Suburban for the new home up in the mountains).

    The related restaurant traffic is down as well (as expected).

    Assume that the post Thanksgiving sales will be strong this year. If that falls through…look out.

    **The frame off Olds 442 arrived yesterday via a FedEx delivery (remember Passport? Fed bought ’em and added it to their critical care shipment unit). You’ll have to run better than 11.0 in the quarter to take me. Its rocks. Not as fast as two of my Typhoons and the Beast (screamer Syclone), but respectable. Fast enough, anyway. Yeah, we rolled through the Dairy Queen… everyone loved it.

    We can run for pinks over at the NHRA track in Commerce, Georgia when you come down. Bring a plane ticket for the ride home. :)

  28. shopaholic commented on Nov 19

    Shop traffic in DC area still pretty high. Gov’t contracts, I guess.

  29. me commented on Nov 19

    To follow up Movie Guy on Atlanta, I noticed the traffic was slow this past weekend as well.

    The paper today said that in the 90s about 1/3 of the jobs were premium where now about 1 in 10 is a premium job created.

    A premium job pays $40,000. There are more graduates from UGA, GSU and Tech than that. At that rate they won’t even pay on their student loans.

  30. me in OC commented on Nov 20

    Look for blame when it’s all over. Then, look to se how to prevent it next time.

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