There has been a consistent effort by pundits on the right to characterize our current financial crisis as being just like every other recession. They have tried to characterize recessions brought on by bank runs from failed efforts to corner a market as being equivalent to our current crisis which is international in nature and entailed record amounts of personal and corporate debt. Schularick and Taylor have looked at what should have been clear to anyone with a modicum of interest in the topic. What do recoveries with a financial crisis* and very large levels of private debt look like? Do the deeper output drops associated with a financial crisis mean a faster recovery? The authors note that you simply don’t have enough of these kinds of crises if you limit your sample to the US.
Can economic history cast light here? We share concerns that short-broad datasets for postwar emerging markets may not be a suitable benchmark for most advanced countries. And long-narrow samples using a single country (e.g., the US) may provide too few recession observations for robust inference. Such doubts provide an argument for a different type of analysis, i.e. an approach focusing only on the experience of advanced countries, so as to better focus the lens of history for current observers.
We reach back into the historical record over 140 years, examining the experiences of 14 advanced countries, to document the pervasive cyclical influence of credit in the economic fortunes of nations (Jordà et al. 2011). This dataset is not a sample; it is close to the entire population, so better evidence may be hard to find.
With that in mind, we set out to address two key questions:
Are financial-crisis recessions and recoveries significantly different – that is, more painful – than normal recessions?
Is the intensity of credit creation, or leveraging, in the preceding expansion phase systematically related to the severity of the subsequent recession phase?
The answer to both questions appears to be yes, and therein lie the lessons that can inform our current economic outlook.
The authors go on to lay out their methods. Of import, they note the impact of the shadow banking sector. They conclude that financial crises with large credit expansions are associated with extended, slow recoveries. Compared with other recoveries, our current one is stronger than an average recovery with similar conditions.
By this reckoning the US has done quite well, steering out of the to-be-expected financial recession range based on the inherited level of excess credit, especially if the shadow system is considered. Most importantly a deep financial recession was avoided at the outset, and this level effect remained intact.
Seeing this US outperformance it may be tempting for readers to map the paths into policy shifts. The extraordinary, coordinated central bank and fiscal actions of 2008–09, both globally and in the US (Fed liquidity and QE1 programs and the ARRA stimulus); and then the arguably premature tapering of such policy supports (Fed dithering over QE/twist programs, and the phase out of ARRA with no further stimulus). We think such conjectures represent fertile ground for future research…
To assume that this US recovery would resemble previous “normal recession” is to use the wrong benchmark. Such forecasts risk overstating growth, lending, interest rates, investment, and inflation. Our work shows that the leverage run-up was unusually high going in, so as in the past it is unsurprising that a painful deleveraging dynamic is taking its toll on the way out.
This time actually is different – and worse – in one very clear and measurable dimension. Now, as in past debt overhangs for more than a century, credit has exerted a crucial influence on the course of the business cycle.
I suspect this is intuitively obvious to most people if they think about it. We know that there are large shadow inventories in private and commercial real estate hanging around. These markets are unlikely to heal until these inventories are worked off. People know that that they took out home equity loans when the real estate market was booming. They assumed that there homes would continue appreciating in value. All of the experts told them this was safe. Now, they still have those loans, and homes that are underwater. Even if they can make the payments, they are stuck with the debt that cannot be paid off in time of need by selling the house, the back up plan if things went bad. We talk about public debt and its potential fro slowing the economy, yet surely people also realize that business owners saddled with record levels of debt are not going to be taking out new loans.
As the authors note, this time really is different. The cottage industry devoted to denying this has its own goals. Truth is not one of them.
*Efforts to mischaracterize the current recovery have been successful at obscuring the meaning of this term. They use it in an overly broad manner to obscure, rather than illuminate, the nature of our current problems.
yet surely people also realize that business owners saddled with record levels of debt are not going to be taking out new loans.
My good Steve,
How are we to reconcile the picture you are trying to paint above from abstruse academic economic theory with the on-the-ground universal reports that continue to this day of business sitting on record levels of cash, unwilling to invest in new capital expansion and new hiring because of their uncertainties?
I already demonstrated to you here that both business executives themselves and a Federal Reserve head are claiming that uncertainties over government economic and financial policies, in the face of such companies holding record amounts of, not debt, but cash, are what is continuing to postpone their active economic recoveries.
Your response was the assertion of a country anesthesiologist – you – that There is zero proof that uncertainty causes our current problems.
When an otherwise hiring business executive tells you that he is not hiring because of uncertainties over government policies and your response is “there is zero proof”, I believe our readers would be reasonable in questioning your mental faculties.
Are Richard Fisher and the business executives reporting directly on their own plans for their own companies based on their own reasons to be understood to be the ones you wish to refer to as “The cottage industry devoted to denying this has its own goals. Truth is not one of them.”?
How is anything in your post relevant to the contrary facts on the ground, facts reported, not by academics studying the most abstract common denominators of many different international financial crises, but by employers holding cash and wanting to grow their businesses and hire additional workers?
Here is how, and the only relevancy it offers is one you are concealing out of your own embarrassment over its failure: early 20th Century Keynesian theory concerning the effects of government stimulus fails in the face of excessive consumer debt. Period. However, the “fate” which that appears to deliver – and your entire post is nothing but fatalistic in that regard: financial recessions deliver a special abstract macroeconomic doom somehow intractable to the best efforts of business and government alike – appears to fly in the face of very easy to understand facts to the contrary: as a business owner, what will my taxes be if we go over the fiscal cliff? The ACA/Obamacare on the one hand is a government health care revision plan; on the other hand, it is a government plan to revise the benefits business costs of 1/16th of the entire economy whenever its regulators actually decide what those will be. How will this gargantuan actual regulatory revision not yet in place, not the sketchy legislative outline, affect my future hiring and employee costs?
The academic abstractions of a digested porridge of many international recessions doesn’t offer anything at all to a real world member of a real American economy, particularly one charged with its recovery and expansion.
You realize that merely scuffing your toe like a recalcitrant child and simply submitting the same assertive but non-demonstrative post over and over again proves only that you are helplessly locked into an idee fixe, a lullaby from which you are unable to escape.
This lullaby has at least one benefit, though: it “proves” to you that the policies of the current President of the United States are, at best and worst, not the cause of anything.
H. M. Stuart
Alexandria
The cash being held is concentrated among a relatively small handful of companies. Small business, one of our prime job creating areas, is not holding on to record cash levels.
http://blogs.barrons.com/incomeinvesting/2012/06/11/corporate-cash-balances-deceptively-top-heavy/
You should also look at corporate debt.
http://www.prweb.com/releases/2012/2/prweb9227990.htm
“I already demonstrated to you here that both business executives themselves ”
Yes. These would be the same business execs who claim that if we cut their taxes to zero and do away with all regulations they will create all the jobs we need. Gullible.
Steve
You should also look at corporate debt.
http://www.prweb.com/releases/2012/2/prweb9227990.htm
Hmmm. Perhaps I should. Let’s see what I find if I actually follow the link:
My good Steve, you would seriously insult the readers here by trying to bluff your way through an issue you scarcely grasp using a self-referencing, self-published investment newsletter tout? This is on the order of our late Objectivist Edward’s finding the Original Sin theories of inherent business immorality
of a market timer (and poet! and novelist! and artist! and historian!) from Hanoi “thought provoking”.
Of course Michael Lombardi, MBA, is the “lead editorial contributor”.
Yes. These would be the same business execs who claim that if we cut their taxes to zero and do away with all regulations they will create all the jobs we need. Gullible.
They would? How would you know? But of course you wouldn’t, would you; this is merely a summation of your psychological resentments, not a statement of fact or reason.
So what do we have here? Starting out, it appeared to be a profound, rational economic analysis of financial recessions. But when examined, what sort of sticks do we find propping up the cardboard facades of yet another of Steve’s Potemkin villages of vague limbic urges posing as reason? The honkings of an obscure investment tout and Steve’s own sordid class resentments.
But it gets horribly, horribly worse for you: you have created your own reductio ad absurdem argument:
Let us assume, arguendo that financial recessions generally do lead to slower recoveries. If this is even remotely true, then it is something that has generally been known for some time, easily preceding Obama, and now simply gaining greater and greater certainty – that is, if true. What we know without a doubt, though, is that such a theory did not simply spring to life ex nihilo post-recession and command a position of prevailing, eternal truth.
So it – financial recessions are generally worse and longer and more difficult to recover from – is either not true, or, if true, has been known to some meaningful degree to be true for some time, that time including the time during which Obama formulated his policy responses to it.
So…in the middle of and in the aftermath of what is clearly a serious financial recession, what are the smart moves a President should make?
Focus like a laser on the recession to the exclusion of everything else until the problem is solved? Because, as we know, financial recessions have been known for some time now by broad consensus to be deeper, longer, and more difficult to recover from, and so they naturally should command all the President’s focus and resources since a recovered economy is the key to everything else.
Don’t be silly; one should never let a good crisis go to waste politically. Instead of heeding the truth of financial recessions (that is, assuming such truth arguendo), a President cannily determined to never let a good crisis go to waste instead decides to:
- spend the first two years entangled in forcing through a trillion dollar new partisan social entitlement which immediately creates mass business uncertainty while not delivering the bulk of its benefits and costs until after his term; free birth control, now! 26-year-old “children” on policies, now! “doughnut hole” filled, now! cheap political chicken-nuggets-in-every-pot, now! The bill, however, to be detonated some time down the road, on his successor’s watch; in the meantime, since what it will cost to hire you, unemployed schmuck, has just been completely overturned, you’ll have to wait until those costs are ultimately figured out to be hired. Plus-or-minus 8% unemployment, indefinitely. But your 26-year-old “child” can stay on the policy you would have if you were, in fact, employed.
- support a trillion-dollar pork spending bill targeted primarily at constituents and interest groups which support him; were you one of those? No? Sorry, that’s where the funding went, not to simply buy your mortgage at cost and write it off, or to make it as easy as possible for an employer to determine the value of hiring you.
- support a complex financial regulation bill that, again, creates mass business uncertainty while leaving an escape hatch for those very too-big-to-fail institutions ostensibly responsible for the recession in the first place
So…does the theory of financial recessions excuse the failings of Obama economic policies overtly undertaken in the face of them? Or does it highlight those policies as even more cynically self-serving and dismissive of the common good, the cheerfully unapologetic opportunisms of a national Tammany?
What, exactly, was the actual point of your post again, good Steve? That the greater problem posed by financial recessions somehow mitigates the critiques of the policies Obama continues to pursue in the face of them? Really? Did you even have a point?
H. M. Stuart
Alexandria
:-)
Put in total corporate debt. This is pretty well known not controversial information.
http://research.stlouisfed.org/fred2/graph/?utm_source=research&utm_medium=website&utm_campaign=data-tools
Steve
Setting aside the rant, the following is an important point.
“So…does the theory of financial recessions excuse the failings of Obama economic policies overtly undertaken in the face of them?”
I, like many others, believe that there are limits to the amount of debt we can carry. It appears that many on the right, you appear to be in this group, believe that there is no limit to the amount of private debt we can carry. Or, you think that the record levels of debt we saw in 2007, from which we are deleveraging, are irrelevant. History indicates that they are very relevant. If you believe them to be irrelevant, you need to make a case as to why that is so. It should be kept in mind that for the last 40 years our economic expansion has been a credit financed expansion. How do we now grow w/o that continuing credit expansion, or how do keep growing with unlimited credit?
Steve
People with small businesses have been faced with nothing but uncertainty when it comes to health insurance costs for many years. We have coped, all of us, with it and managed to have our economy grow. This is nothing new.
My good Steve,
I have never contested the problems of debt qua debt. Frankly, I pay little attention to the substance of your posts on debt, given your consistent grinning hypocrisy on the subject, clutching your pearls over it when it might prove a smokescreen to obscure disastrously disruptive Obama economic policies while attempting to undermine, with lies, the efforts of any who actually try to address it. Your needs to rationalize the world to your Bush-deranged psyche do not, in the end, add up to reason.
What I have contested are your suggestive insinuations that debt represents an alternate to the bogeyman Bush to rationalize and excuse Obama and other current Democratic policies which make intelligent business planning impossible and thus make intelligent economic recovery planning impossible.
Frankly, you have no way of demonstrating how debt displaces or otherwise mitigates the problems presented to those charged with making intelligent economic recovery planning possible by administrative policies which leave near future taxes unknowable and which make the costs of employment unknowable. You keep throwing up these charts about debt because that is all you are capable of mastering.
When I repeat over and over the claims of business itself that it is uncertainty that paralyses it, you dissemble and offer straw men like this which every reader knows you yourself know to be untrue:
But, and as you yourself know full well, it is not no taxes and no regulation that is the sine qua non of doing business: even the highest known taxes and the most stringent regulations can be priced and business decisions made on the basis of them. What paralyses business now is not debt currently being held at the lowest prime rates in human memory – that in itself merely becomes a current common denominator of doing business, like climate – but rather vast now-unknowable areas of decision making, in regulations which might mean this but might instead mean that, in taxes which might be this but might instead be that, in personnel costs which might be this but might instead be that.
People with small businesses have been faced with nothing but uncertainty when it comes to health insurance costs for many years. We have coped, all of us, with it and managed to have our economy grow. This is nothing new.
I understand you support the ACA/Obamacare because you believe it will lower the health insurance costs of your business while allowing you to be paid directly from the U.S. Treasury which would also streamline your administration and thus further reduce your costs of doing business as a health care vendor.
However, you are also thus saying the unknowable impact of the still evolving ACA/Obamacare on business employment costs – what they must now purchase at penalty of law for which employees under what conditions, but which itself has not entirely been written yet – is nothing new.
I’m sorry, Steve, but if you actually believe this rather than offering it merely to mislead others you are precisely what is meant etymologically by the term idiot (< Latin idiōta < Greek idiṓtēs private person): a person marooned in his own entirely private understanding of a world he inhabits but does not live in, influenced only by the reflections from the interior walls of that hermetically closed mental chamber and from nothing without.
H. M. Stuart
Alexandria
Nope. The record levels of household debt we saw were very close to what we had in 1929, which are very similar to the levels of debt the authors note in their study. You can claim correlation and not cause, but I dont think you can claim these levels of debt are not important. They are clearly associated with prolonged recoveries.
Steve
Nope. The record levels of household debt we saw were very close to what we had in 1929, which are very similar to the levels of debt the authors note in their study. You can claim correlation and not cause, but I dont think you can claim these levels of debt are not important. They are clearly associated with prolonged recoveries.
My good Steve,
When you lead anything off with your lazy, areferential “nope”, it is impossible for anyone to know what you are responding or referring to; in the absence of such knowledge you appear to be muttering only to voices in your own head, particularly when you claim “I dont think you can claim these levels of debt are not important.” In the future, I will take such grunts to mean you wish to be left alone to talk to yourself publicly, undisturbed.
What I did in fact claim was something very clear and simple: that the sort of academic economic abstractions which understandably enthrall you are entirely unpracticable – one cannot act in any manner whatsoever on “levels of debt are …clearly associated with prolonged recoveries” other than, at best, not to contribute further to them, any more than one could act on your excited claim, with graphs, that “I have a kitty!” Thus they simply cannot be the basis of any sort of implied excuse mitigating criticism of economic policies which were and are, by definition, actionable.
You have never raised this subject of debt levels outside of partisan arguments concerning Obama’s conduct during the recession and after; you have never offered them as simple, standalone show and tell – “Look at these debt associations!” “Look at my kitty!” “I like food” – or as any other sort of semi-interesting, self-contained phenomenon, and therefore I can only conclude that you are offering them, not as what they are, mere economic abstractions, but rather as some sort of pivotal element meaningfully influencing Obama’s economic decision making.
When I raised the article by Bordo and Haubrich as an extant alternative theory about financial recessions – economists which Schularick and Taylor regard well enough to cite more than once – what you immediately tried to do was to hastily smear and dismiss them as mere Wall Street Journal editorial board hacks; they weren’t even interesting to you as economists – because the last thing you are actually interested in here is the economics itself.
What you are interested in, your transparent modus operandi time and time again, is trying to mask your psychological and partisan urges as some type, any type of science; whatever sciency thing which happens to be handy will suffice. If you succeed, this will make your pronouncements appear to be automatically the stuff of fact and reason when in point of fact entirely separate operations are taking place: one, your actual underlying psychological or partisan thrust, the other the pseudo-scientific cloak within which you try to disguise those efforts.
But the ultimate ridiculousness of this sort of attempted masquerade, its non sequitur irrelevancy – precisely and only the type of irrelevancy I was taking about – can be seen by simply juxtaposing the two subjects in their simplest forms:
an outstanding question, “How are we to regard our President’s responses to the financial crisis which has devastated us?”
and your offering, “Levels of debt are important. They are clearly associated with prolonged recoveries.”
Your kitty is important, too, Steve, but neither your kitty nor levels of debt nor poor sweet Obama having been raised by a courageous single mother can excuse or explain away Obama’s disastrously irresponsible actionable economic policy moves which continue to negatively impact business in the face of any of them, and the more that any such levels of debt do in fact make recovery difficult, that much less can such disastrously irresponsible economic policy moves be excused or explained away by any such debt levels.
H. M. Stuart
Alexandria
our current crisis which is international in nature and entailed record amounts of personal and corporate debt.
All the pundits, which are mostly right wing or libertarian, I hear agree with this except they include government debt also. You conveniently provide no supporting evidence of your “pundits on the right” claim. I’m sure you’ll dig deep enough to find one, just as you could dig deep enough to find a “pundit on the left” if you wished. But, as your goal is confirmation bias rather than truth, this is what we see.
We did not, and do not, have record levels of public debt. I can easily find pundits on the right who are concerned about public debt. It is unusual to find one who writes about private debt. Just ask yourself if you can remember anyone you read who think sit an important topic.
Steve
To the general points:
“Corporate uncertainty”, stated here without sarcasm as I usually include, has little to do with government policy. The disconnect from my POV is simply stated: corporations have as their sole priority profitability, expressed as ever-increasing rewards to their investors, and ever-increasing compensation to their executives; government, should it choose to do so at any given time, gives its priority to the well-being of the people when it is not staying at least passive towards corporations. Aside to JM: corporatism is indeed our present reality. It is also a form of tyranny. It has its basis in anti-moral and anti-ethical notions.
There is plenty of room for sarcasm there, starting with the validity of my assumptions, but the case really is that clear. Wages and benefits are a cost of doing business, and are always on the chopping block when it comes to the profit margin. I offer, as comparison, the “mutual” company, which is by law and regulation unable to generate a profit in any given fiscal year. Mutual companies are focused on the cost of doing business, not on increasing stock values and better dividends.
From my personal POV, stipulating the limitations thereof, private debt is a direct function of the diversion of profit away from wages and benefits. Whichever “class” one wishes to name, lower middle or upper, disposable income rises as profit falls, and the next resort for corporations who insist on the opposite direction of that balance is to promote borrowing to keep consumer spending up.
So, from my personal POV, is it reasonable of me to assert that holding worker compensation down is actually an insane focus on short-term profits, to the detriment of us all when the short-term cycle explodes — the real estate bubble — and everyone whines about falling profits? I extend that view to the cash hoarding mentioned above. That cash, “invested” in rational increases in worker compensation, would translate to a stabilization of the entire economy… the only drawback being a decrease in rewards to investors. It leaves me to speculate that those most afraid of “income distribution” are keenly aware of the fact that their pockets are lined with the denied increases in worker compensation. Their shelves are lined with loaves of bread their fourth-generation descendants won’t be able to consume, yet they consider it theft to return it to the hungry masses. Shrug.
“Wages and benefits are a cost of doing business, and are always on the chopping block when it comes to the profit margin. ”
If the worker is valuable, you cannot simple cut his salary – he would leave the company and go somewhere else. It appears as if you knowledge of business is based on children’s cartoons.
Hail, H-A. I hope you have been and continue to be well.
The worker’s value is in direct proportion to his contribution to the profit margin. That has been true forever, and is the core principle behind (for example) the company town and the violence done to early union organizers.
Please, a little practical reality here: the bottom tier of wage jobs can certainly be had more or less ubiquitously, but they are finite in any location. If one’s only opportunities are in that tier, and one lives in a “buyer’s market”, one is not going to find work for anything more than that tier, and if the local job market is overloaded, the only choice is to move. Your “go somewhere else”, unless it recognizes dragging up one’s roots and risking the job market after a residence move that itself can be very expensive, is dismissive bordering on ad hominem.
Workers have no individual value when for each of them there are six unemployed people waiting in line to take their position. Simple jobs do not have the turnover cost to the employer that makes them hesitate to replace a worker demanding a living wage (or the hours to constitute one). More complex jobs, such as my personal example in IT, have that implied constraint. My employer shows its appreciation of my value by paying me a salary commensurate with my value to their profit margin, and I respond by showing loyalty to that employer and giving my best efforts. If my employer, responding to investor pressures or the threat of a hostile takeover, cuts my wages or denies me even minimal increases, I will start by not putting in voluntary overtime, and begin an immediate search for greener pastures… which, if they don’t exist, or they are geographically distant, will become a constraint on my ability to earn a living wage. There is no children’s cartoon that tracks the journey from bright-eyed entrant to the workforce ending with being a wage slave.
Yawn….
Steve, you bring one study that makes one claim, we bring another that proves quite the opposite. Simply claiming that some mythical guys proved beyond any doubt that Obama had to deal with far worse economic crisis than Reagan in 1981-83 is silly…
“Or, you think that the record levels of debt we saw in 2007, from which we are deleveraging, are irrelevant. ”
Or you think that 15% inflation that Reagan had to fight was irrelevant? Or maybe the stagflation he had to deal with, which was building for years was irrelevant? Or maybe it’s irrelevant that Reagan NEVER had full control over Congress the way Obama did in 2009-2010?