World Financial Crisis: Warning Contains Context and Analysis

geneer

Worth reminding ourselves what the housing bubble has really cost us.

But surely it was all about supply and demand some will say?
Apparently not :rotfl:

http://www.nytimes.com/2011/07/22/opinion/22krugman.html?_r=1&partner=rssnyt&emc=rss

The Lesser Depression
By PAUL KRUGMAN

We can only hope that the politicians huddled in Washington and Brussels succeed in averting these threats. But here’s the thing: Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.
In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.
Let’s talk for a moment about why our economies are (still) so depressed.
The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.
Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.
Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.
So we have depressed economies. What are policy makers proposing to do about it? Less than nothing.
The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.
Yet the conversations in Washington and Brussels are all about spending cuts (and maybe tax increases, I mean revisions). That’s obviously true about the various proposals being floated to resolve the debt-ceiling crisis here. But it’s equally true in Europe.
On Thursday, the “heads of state or government of the euro area and the E.U. institutions” — that mouthful tells you, all by itself, how messy European governance has become — issued their big statement. It wasn’t reassuring.
For one thing, it’s hard to believe that the Rube Goldberg financial engineering the statement proposes can really resolve the Greek crisis, let alone the wider European crisis.
But, even if it does, then what? The statement calls for sharp deficit reductions “in all countries except those under a programme” to take place “by 2013 at the latest.” Since those countries “under a programme” are being forced into drastic fiscal austerity, this amounts to a plan to have all of Europe slash spending at the same time. And there is nothing in the European data suggesting that the private sector will be ready to take up the slack in less than two years.
For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.
Did I mention that the European Central Bank — although not, thankfully, the Federal Reserve — seems determined to make things even worse by raising interest rates?
There’s an old quotation, attributed to various people, that always comes to mind when I look at public policy: “You do not know, my son, with how little wisdom the world is governed.” Now that lack of wisdom is on full display, as policy elites on both sides of the Atlantic bungle the response to economic trauma, ignoring all the lessons of history. And the Lesser Depression goes on.

pqrdef

Of course fiscal stimulus would be so much easier if we'd been running a budget surplus during the good years.

We won't make that mistake again next time round, will we.

That's if there is a next time.

dtsazza

The real lack of wisdom was in the huge piles of debt that have been allowed to build up, both at the sovereign and household levels (as pqrdef points out).

Until this has been deleveraged to a reasonable level, which is going to take several years, we are not going to have any notable real amount of growth. The sooner this is generally accepted and allowed to sink in, the more orderly we can proceed to that point and paying off yesterday's consumption (since we're now in the "tomorrow" whose money was already being spent on purchases).

The problem was that GDP growth was artificially inflated over the last decade by governments and citizens spending beyond their means. This was always going to have to be paid for eventually and would be doubly bad when it came; since not only would consumer spending be lower than "average", but this would be a drop from a higher than "average" level. (And when you put it into that context, current GDP growth figures look pretty good; even sustaining 0% change in this context is quite impressive).

Effectively we've had an international Ponzi scheme throughout the 2000s. Crying that it's failed and trying to keep it going is a fool's errand. The best possible outcome is to settle the fallout, and then resume growing in a sustainable manner (critically, without depending on consumer demand being at a higher level and growing faster than consumer income).

pqrdef

dtsazza wrote: »

The real lack of wisdom was in the huge piles of debt that have been allowed to build up, both at the sovereign and household levels

Well democracy means we get the economy run by the voters.

When so many voters think that their apparent but fragile prosperity is the signal not to save but to overborrow, it's political suicide for a government not to do the same.

Conrad

So we had some years of plenty and now some of lean, and?

What, we expect only a one way ticket, with no down time?

Why do we suppose growth can continue apace? In the end the Earth is not grwoing in size, so perhaps a period of lessor growth ain't such a bad idea. Still taking more than the Earth can supply though. Growth is so yesteryear, we need a new goal.

Jegersmart

Conrad wrote: »

So we had some years of plenty and now some of lean, and?

What, we expect only a one way ticket, with no down time?

Why do we suppose growth can continue apace? In the end the Earth is not grwoing in size, so perhaps a period of lessor growth ain't such a bad idea. Still taking more than the Earth can supply though. Growth is so yesteryear, we need a new goal.

Your last point is very important. Earth's GDP is really limited by our resources and how we are able to use them (and sustain them perhaps). The only reason we are at 7 billionish people now is due to our development in the area of harnessing energy. Once our energy resources are depleted the reverse will undoubtedly happen *unless* we come up with viable alternatives.

Also, at some point if it is not happening already, some areas of high growth will be growing at developed countries' expense which is understandable and will continue into the future. Unless a new "way" is found there will be increasing competition to survive.

imho, dyor.

Bullfighter

Jegersmart wrote: »

Your last point is very important. Earth's GDP is really limited by our resources and how we are able to use them (and sustain them perhaps). The only reason we are at 7 billionish people now is due to our development in the area of harnessing energy. Once our energy resources are depleted the reverse will undoubtedly happen *unless* we come up with viable alternatives.

Also, at some point if it is not happening already, some areas of high growth will be growing at developed countries' expense which is understandable and will continue into the future. Unless a new "way" is found there will be increasing competition to survive.

imho, dyor.

Spot on. Ernst Schumacker observed that one cannot have infinite growth in a finite enviroment.

geneer

The western capitalist system was deemed too big to fail. So Wall street and BTL numpties alike are given breathing room.
I would harbour a guess that if the banks hadn't pushed things to the absolute melting point, then beyond, we'd be having very different discussions about house prices today.

dtsazza

Conrad wrote: »

Why do we suppose growth can continue apace? In the end the Earth is not grwoing in size, so perhaps a period of lessor growth ain't such a bad idea. Still taking more than the Earth can supply though. Growth is so yesteryear, we need a new goal.

Bullfighter wrote: »

Spot on. Ernst Schumacker observed that one cannot have infinite growth in a finite enviroment.

Very good points.

I have always wondered why "growth" is considered the holy grail of, well, almost everything (in the economic sphere). Why does it really matter - or to phrase that differently, what would blow up if growth was exactly 0% for a few decades?

(Perhaps there are different answers if you're looking at the consumer vs. the systemic level. The answer to the latter might well be "the entire capitalist system" - I haven't thought too deeply about this but it would not surprise me to learn that there are Ponzi elements to our current situation. Fractional Reserve Banking seems a prime candidate, for instance.)

purch

I have always wondered why "growth" is considered the holy grail of, well, almost everything (in the economic sphere)

Probably because the whole capitalist economic system is based on debt (credit) and without growth you cannot repay the debt.

Bullfighter

Growth [STRIKE]/[/STRIKE] Prosperity