Q: Do you think we’re going to avoid a recession?
A: No.
But there are recessions and then there recessions. The previous
two were short, and the most recent one was not only short but shallow.
I think that’s what really matters to people. The average resident
doesn’t distinguish between whether the economy is growing half a
percent or one and a half percent. That’s not their interest. It’s
more, how does this feel? Are conditions generally improving noticeably
or aren’t they?>
Wow, that’s a pretty explicit admission from Gary Stern, president of the Federal Reserve Bank of Minneapolis. Stern is the co-author of “Too Big To Fail: The Hazards of Bank Bailouts.”
Stern suggested in an interview that the U."S. economy may face “subdued” performance for the next two quarters, with output that’s barely positive or barely negative."
You know, kinda like the last 2 quarters of 0.6% GDP.
I disagree with his assessment of the current environment being "similar to the early 1990s when “headwinds,” a phrase then Federal Reserve Chairman Alan Greenspan used to refer to the lenders’ reluctance to lend, weighed on the economy."
The rest of the interview can be found on the WSJ’s
Real Time Economic: Stern: Credit ‘Headwinds’ to Weigh on Economy Beyond 2008
Source:
Stern: Credit ‘Headwinds’ to Weigh on Economy Beyond 2008
Real Time Economics, May 13, 2008, 3:23 pm
http://blogs.wsj.com/economics/2008/05/13/stern-credit-headwinds-to-weigh-on-economy-beyond-2008/?mod=WSJBlog#comments
To me it feels like no wind. Its like we are slowly going to grind down and this will become extremely frustrating. I feel we are Japan of the 90’s.
“It’s more, how does this feel? Are conditions generally improving noticeably or aren’t they?”
Conditions are not good, and they are getting worse. The only people who don’t realize it are economists and chief investment strategists.
It’s exactly like Japan. US will be flat for years. There’s no growth to be had.
What are we going to do expand in Asia again? We pumped money over there for the last 5 years to build the growth we saw.
Look at AMAT profit clipped by a third. Now that says something.
Most of what every company sells can only be sold once in a limited timeframe.
John, a column in the FT today:
“One of the origins of the subprime crisis was that off-balance sheet liabilities held in external conduits reverted to the balance sheet of large financial institutions, immediately lowering their capital ratios. However, once that happened, these institutions were quick to mark those assets to market and to recognise their losses. That led them to seek external capital.
Contrast this with the catastrophic failure of Japanese banks, indulged by regulatory forbearance, to ensure the proper disclosure of their non-performing loans. That failure, a relatively small issue confined to problems in the real estate sector in 1992-1995, snowballed into a full-blown crisis. By 1997 several big institutions had gone bust. The government bought time by injecting public money into the banks, but a full resolution was delayed until 2002-2003 when Heizo Takenaka, then the financial services minister, forced banks to adopt serious restructuring.
US policymakers have also reacted more quickly than the Japanese authorities did. The Fed and the Treasury have swiftly deployed unconventional weapons, such as liquidity injections and a fiscal stimulus package, in order to prevent a domino effect.
The differences are big enough to suggest that the policy prescriptions should also be different. In particular, Japan would be wise to avoid preaching about the merits of a public injection of money to shore up the banks. As long as banks disclose their exposure and raise private-sector capital to plug the holes, that intervention probably will not be necessary.
Japan suffered a 13-year collapse of real estate prices that left much of the land valued at a third, or less, of its 1990 peak. That explains why the real economy, as well as financial institutions, fell into a long stagnation. US housing damage has, so far at least, been milder with a 10-15 per cent price fall in some big cities. In all probability the decline will not be as sharp as in Japan since US house price inflation never reached the dizzy heights of 1980s Japan. Yet there is one final note of caution; the size of a bubble is never known until its collapse is complete.
The writer is professor at the University of Tokyo, and a member of the prime minister’s Council on Economic and Fiscal Policy”
http://www.ft.com/cms/s/0/37b6315a-2087-11dd-80b4-000077b07658.html
Gee, who’da thunk that in a debt-currency economic system dependent on credit expansion that banking losses, which lead to tighter credit, would be associated with lower growth? I mean, who could have guessed? What the hell do you expect from us? Who do you think we are, friggin’ Einstein, for God’s sake?!?! We’re economists.
I wonder which causes more harm – my house falling in value $50,000.00 or a gallon of milk rising $1.07 in value? Seems like I could buy a hell of a lot of expensive milk for $50K.
Besides, I can always substitute and drink water instead of milk – what do I substiture for my lost $50K?
I spoke to our real estate agent out here in SoCal today and he says that a couple traditional bank lenders have closed up shop and that it’s near impossible to get a loan unless you have spotless credit. Even the increase in the conforming loan limit to $729K has not opened things up. He also indicated that there are still a lot of foolish buyers out here trying to catch a falling knife- He mentioned a short sale that started at $319K and ended up closing for $450K in a bidding war. Amazing…. He also mentioned an interesting strategy that is being played out here. If a lender has 10 properties in a particular area and one is in trouble, that lender will avoid foreclosure and sale so that the other 9 don’t end up upside down in their currently performing mortgages due to falling prices. The homeowner in trouble may stay rent (mortgage) free for years. This does not bode well for an economy powered by MEWs and the associated consumption over the past few years.
Stern(No)*(1.0/1.0)*14,000 = Priced In
The US already is the next Japan, however, we probably won’t be like Japan for as long due to the ability and greater willingness of US Institutions to write things off, fire employees, and re-structure their organizations. Lifetime employment for Japanese workers clearly did not help that cause either.
The oddsmaker in me predicts that the US will have Japan-like conditions for 1/3 of the total Japanese slowdown/deflation time period. The problem is that is still a mighty long time for most americans.
Residential housing will be the walking dead for a generation. Just wait until the central mass of baby boomers start downsizing their lifestyles…
>> we probably won’t be like Japan
My guess is the banks and corporations will be better off; but individuals in the “bottom 80%” will not be.
>> greater willingness of US Institutions to write things off,
>> Contrast this with the catastrophic failure of Japanese banks, indulged by regulatory forbearance, to ensure the proper disclosure of their non-performing loans.
How different is the US? The US has “reclassified” a lot of assets as Level 2 or 3. With enough time and money/credit growth — 5 years? 10 years? — many of these non-performing assets will be moved out of Level 2/3 and declared “performing”. But, in any “real” sense they weren’t. What did Japan reclassify (in whatever jargon they used at the time)?
When we compare the US and Japan, are we comparing 200 apples with 599 apples or with 40 oranges? It’s hard to compare two baskets of (damaged) fruit when both grocers shoo you out of the back where they’re holding their inventory. Heavy regulatory intervention keeps everyone guessing about *basic* facts and makes it hard to get on with the business of trading fruit.
The average resident doesn’t distinguish between whether the economy is growing half a percent or one and a half percent. That’s not their interest. It’s more, how does this feel? Are conditions generally improving noticeably or aren’t they?
It’s nice to know we are thought of as laboratory rats.
B.F. Skinner to the trading floor, stat !!!
I’m long, Bernanke is my buddy.
Suge aka “Bernanke’s Boy”
On the upside, we might have a good deal of illusory growth thanks to understated inflation to at least make people feel better about the stagnant economy.
Always look on the bright side of life.
Part of the problem is our beloved government doesn’t even calculate GDP correctly! Let’s start with that. Pento has a good take on this.