Are we experiencing a repeat of the 2008 financial crisis? The New York Times explores the question. It’s a good overview; I encourage you to read the whole thing. I am inclined to side with the pessimists, but I hope I’m wrong.
More broadly, I fear we’ll look back at 2010 as a “dead cat bounce” rather than a genuine (if weak) recovery between recessions, and likewise we’ll view 2011 through whenever not as a “double dip,” but as part two of an ongoing Great Recession/Depression that started in 2007 and has not yet truly ended, and won’t for a while. The structural flaws in the U.S. and global economies that were thrown into sharp relief in 2008 and 2009, then masked by frantic government efforts to prevent a depression, have not actually been solved, even if analysts and investors spent much of 2010 and early 2011 ignoring them and trying to forget about them. The housing market is still in deep doo-doo; global trade imbalances are still massive; we still don’t have a plan for replacing excessive, debt-fueled consumer spending as the “engine of the economy”; and we’ve simply shifted a lot of debt from companies to governments, so instead of too-big-to-fail banks threatening the stability of the economy, we have too-big-to-fail countries doing so, with no one left to backstop them or bail them out (and no political will for additional bailouts of any kind anyway).
Frankly, I never really understood the optimism of 2010 — it always seemed like the argument for pessimism was detailed and nuanced and well-thought-out, while the argument for optimism was basically “meh, we’ll muddle through, somehow or other.” But I partially supressed my doubts because I recognize my own lack of knowledge in this area, and have little choice but to trust the experts. Yet those experts made a lot of valid-seeming points back in 2008-09 about the depth of the problems broadly underlying the crash, and I’ve never really understood the logic of expecting a lasting recovery, even a weak one, before we make more progress toward solving those problems. To make a college football analogy (P.S. THREE WEEKS TILL KICKOFF!!! WHEE!!!), the “recovery” of 2010 felt like a situation where a team is widely and reasonably expected to struggle, because it lacks a proven QB or a solid defense, but then it pulls a somewhat flukey upset in its first game, and suddenly it’s deemed a national title contender… even though it still lacks a proven QB or a solid defense. The pessimists still have the better of the argument, and will probably be proven right in the end.
All the hand-wringing about corporations hoarding cash, holding onto their record profits instead of investing or hiring, misses the possibility that these companies are just more clear-eyed than the rest of us, and recognize what I increasingly suspect is true: that we’re in for a very rough decade, and building up a rainy-day fund (or a rainy-decade fund) before the s**t hits the fan — again — might not be such a bad idea. Again, I hope I’m wrong.
Yep. Economy to be stinky for many years. Stock market valuations currently reflect strong future earnings growth (S&P P/E ratio ~ 20). That is dumb, and creates room for a market correction.
Worse yet, economy will be indefinitely stinky unless 1) the forces tamping it down (mainly debt + currency manipulation) are relieved, or 2) we get a miraculous positive technology shock. The prudent investor should allocate heavily towards canned food and shotguns. Or something nearly that conservative.
I am inclined to agree with your post, Brendan, but your hindsight-20/20-ism is a bit annoying: “I … [had] little choice but to trust the experts. …[T]hose experts made a lot of valid-seeming points back in 2008-09….” That’s BS. There were plenty of us back then pounding the table that TARP was foolishness, that it was better to let firms go into bankruptcy and to clear out the financial deadweight from the real estate implosion — the sooner we sorted through all the mess, as deep and painful as it’d be, the better, because then we could recover — versus trying to soften the blow by dragging out the clean up over many years. My point is, many of us said what the consequences of our policy reactions to the crisis would be, and now that it has come to pass, you’ve adopted the doom-and-gloom POV without acknowledging the very specific decisions that were made by those in control at the time (i.e. Bush and Dems and then Obama and Dems) which have led to this bounced-cat era. Like I said, annoying.
Stock market valuations currently reflect strong future earnings growth (S&P P/E ratio ~ 20). That is dumb, and creates room for a market correction.
You seem to be operating on the misperception that US company stock evaluations and profits are chained to American economic performance. Many American firms (And European ones! And Japanese ones!) are quite adept at adopting a defensive, cost-cutting position at home while targeting foreign markets for revenue expansion and profit growth. I see no reason why that trend will cease, and this is why most investors do not believe forward-looking P/E rations are out of whack. Globalism is a godsend for investors in multinational corporations.
Seems like it’s time for a prediction – so here goes …
I would bet small amounts of pocket cash that the Dow will continue to emulate our First Yoyo at 1600 Pennsylvania Avenue, and be way back down again on Friday …
In all fairness, we now have to give Carter credit that he, at least, didn’t try to be the second incarnation of Herbert Hoover, that Progressive President …
Which leads to the question … now that Obama’s performance has made Carter look good, WTF does a future President have to do to make our current First Yoyo look Presidential ?
Alasdair, you win the stock market prediction crown. I don’t know what kind of manic depressive crystal ball you’re using, but its see saw predictions are spot on.
@ AML 5 — US corporate profits and stock returns are still domestically procyclical. Globalization = diversification, but the home market is still the biggest and most important (at this point, anyways).
The “forward PE” idea is a bit of a challenge as well. Who is estimating forward earnings? Wall Street analyst consensus doesn’t really do the best job of that.
This is also a global economic stall. Developing countries are where the only real growth is these days, and that’s growth from a relatively small base.
Of course, if you really do think that earnings growth prospects are good, then the market valuation is just fine. It isn’t really that far out of whack from the historical norm, it’s just 20-30% higher. For current valuations to be way too high, you have to believe that future earnings are going to be crappy. The PE multiple on the S&P isn’t even half of what it was in 1999.
We’re f*cked. Pretty much covers it. The European Union is going to disintegrate, the welfare state’s going to run aground, and then we get to find out what happens when you raise multiple generations of losers who feel “entitled” and turn them loose on people who have been quietly seething for the last decade. (I’m betting on the second group–they’re the ones _growing_ the food.) Hopefully nothing really whacky will happen (you know, like someone getting a hold of a nuke or an epidemic), but I think we’re going to have a lot of dead people and a shattered world economy in the next five years.
[T]hen we get to find out what happens when you raise multiple generations of losers who feel “entitled” and turn them loose on people who have been quietly seething for the last decade.
Heh. Funny in a very dark, true way.
Casey #5 – so far, I’m not looking so hot for my prediction – and I’m glad of it … the day, however, is not yet over …
James #6 – So the EU breaks up – and we have the various european countries (and Great Britain) forming some sort of EFTA … what’s the big deal with that ?
The loonies currently rioting are likely to cause similar sort of shifts which tossed out the Labour Party when it-as-government said (paraphrasing) “Do what you want, and, when we are back as the government, we will pardon you !”, which contributed to the election of Margaret Thatcher as Prime Minister back in 1979 …
Dow – +125.71 at Market Close – it looks like my prediction was off … curiouser and curiouser …
Alasdair–Mmmm, really? What’s the big deal with that? You mean other than that _shared currency that would instantly devalue_ and is _held in large sums by our Fed_? Oh, and the immediate bank run which would likely ensue? To coin an analogy, “Nothing’s wrong with that large number of planes that just showed up over the harbor…I think it’s your tee.”
AML–I’m a dark man, sorry.
James #10 – Europe, then the EEC, then the EU – they have all gone through various gyrations due to currency fluctuations … if the EU broke up, it would be by a country (or more) deciding to effectively secede from the EU … and the Eurobigots would hate it, but they can hardly go to war to keep countries in … the remaining EU can threaten sanctions, but, short of armed conflict, if a country is determined to leave, then leave it will … a better analogy is the ‘rebellious’ adult teenager leaving home before the parents can throw him/her out (and the mother doesn’t want to see him/her go) … or possibly a divorce … anyway, Dec 7, it ain’t !
Similarly, the doom and gloom dark viewpoint for the global economy doesn’t *have* to happen – though it’s not helped by the current place-holder for the Leader of the Free World saying things like “I have this wonderful plan to make everything better, that I know is urgently needed – and I’ll tell you all about it in a couple of weeks when I will expect Congress to approve it immediately !” (Yeah, I paraphrased) …
Our current civilisation mix is remarkably self-repairing – especially when (pardon my lese-majesté> our Idiot-in-Chief keeps trying to make things even worse with Hooverian and FDRian policies which are known to have kept the US (and thus the planet) in the Great Depression, at least until the US got to work providing Lend-Lease materials to Great Britain …
Again, if Teh One would deign to look at what North Dakota and Texas are able to do successfully, in these economic conditions, and adopt equivalent policies for the US, things would not look as stark … and the Dow wouldn’t be back below 11K …
I have to wonder how much of the recent minor recovery in the Dow relates to the increased numerical value of stocks due to the devaluing of the $ by Quantative Easement (printing more and more money) …
There are lots of people talking about Texas, and it’s a non-trivial and important conversation (especially with Perry now running). But I wish you would stop going on about North Dakota. Here’s what has made North Dakota “successful”:
1) Economy based on Energy and Agriculture, the price environments for which have been quite strong through the past few years.
2) Population that’s been essentially flat for almost a hundred years. Many young people move out of the state when it’s time to look for a job, which makes it easy to keep the local unemployment rate low.
3) Average tax rate and business climate (according to The Tax Foundation, the state/local tax burden is #26 in the nation). So, nothing special there.
4) Substantial net federal government subsidy.
5) A very low population (only Vermont and Wyoming are less populous), which makes it much easier to be a statistical outlier (and consequently less convincing as a model for the rest of the country).
Mike #12 – you seem to be turning into Brendan more and more …
When I raise the idea of Texas and North Dakota, it’s to see what they are doing *right* that other states and the Fed Govt are not doing … stick with that concept, that those states aren’t necessarily perfect paradises – they are simply managing to get significant stuff right in this terrible economic climate …
So … to answer your points …
1) Energy and Agriculture – California should be able to be doing the same sorta things that North Dakota is doing – not only *not* discouraging Energy and Agriculture, but, more importantly, working *with* businesses to help them get set up and expand …
2) From an article in the NYTimes (not exactly a GOP propaganda tool) , “North Dakota has had the lowest unemployment in the country (or was tied for the lowest unemployment rate in the country) every single month since July 2008.
Its healthy job market is also reflected in its payroll growth numbers. North Dakota had 19,700 more jobs in July than it did during the same month last year.” – That’s a good trick with a flat population, dontcha think ?
3) Good of you to agree that ND isn’t working to drive away jobs with its tax policies – whereas California is ranked #49 in that same study, right ?
4) I didn’t find anything objective with a quick search – what is “substantial” ? Did ND get more per capita than CA or TX ?
5) Lower population means less people producing … and your point is … ? I haven’t said that ND should be a “model for the rest of the country” – I *have* said that both ND and TX can be used as an inspiration source, a source of ideas, things to try which have worked for both ND and TX …
Again, the important thing is not to clone ND or TX onto other states – it is that other states and the Feds would do well to LEARN from what ND and TX are doing right …ND as to what a small state can do, TX as to what a large state can do …
I don’t give the proverbial rodent’s fundament which party is in control in either of those states – I care that whatever they are doing, it is working in spite of the general economic state of the US as a whole … indeed, if ND and TX were not included in the US economy, the US economy would be a whole lot *worse* off than our current sorry state …
I’m not sure why you’re so hung up on California in particular (perhaps you were at USC with Brendan), but:
1) I know that agriculture is a big part of California’s economy, but I haven’t been paying close enough attention to know what they’ve been doing to discourage it. If I were to speculate (but I probably shouldn’t), I would guess that the agricultural productivity in many parts of California is constrained by availability of fresh water.
As for Energy, the last time I was there, I saw lots of operating oil wells, even in highly-populated areas. Their main hang-ups are on the consumption side (LA used to have smog you could cut with a knife), and with off-shore drilling, because of the risks to the tourism, fishing, and other industries that rely on the oceans and shorelines. In North Dakota, if there is an oil spill, maybe you mess up a few acres of wheat fields.
I personally live in Connecticut, which has no known recoverable fossil fuels (unless you count landfills). Agriculture here has been decreasing steadily, because people are able find more profitable uses for land than farming (even with the preferable property tax treatment given to farmland). So, obviously ND is not an example for this part of the country.
2) The article goes on to say that it’s because of oil. When oil prices are high, oil companies hire more people (to extract oil faster, or to extract from reserves that were previously not worth exploiting due to cost). The long term trend for the ND population (since about 1920) has been awfully flat: growth of about 4% (*total*, not annual). That makes it relatively easy to have enough jobs for the people that don’t leave. Since we’re looking at California, in the same time period (1920-2010), California’s population grew by more than 1000% (ie. a factor of 10). Even if many of those people are unemployed, it’s still a much larger job growth.
3) Here’s the data, using 2009 numbers (most recent I could find): http://www.taxfoundation.org/taxdata/show/335.html
California is #6 (lower numbers = more taxes). The higher tax states were #4 Wisconsin (don’t know if that’s changed with the new administration there), and some states in the Northeast: #1 NJ, #2 NY, #3 CT, and #5 RI.
My point was, if you have average taxes, and extreme results (consistently low unemployment), then it doesn’t make for a strong case study one way or the other on the influence of state/local taxes on employment (not to say that there isn’t a relationship, just that it’s not demonstrated by ND).
4) The most recent data I could find was 2005: http://www.taxfoundation.org/research/show/22685.html (The Economist also had data 1990-2009 averaged together, but not broken out by year). At the time, ND got back from Washington about $1.68 for each dollar it sent, for a subsidy of about $4k per person. This put it at #6 on the list, behind Alaska (which perennially has very high per capita federal spending), Mississippi and Louisiana (which got big bumps in the 2005 hurricane season), New Mexico and West Virginia. NM, WV, LA, and MS were 46, 48, 49, and 50 for federal taxes paid per capita respectively – I’m not sure what #47 Arkansas did to piss off the Feds.
For Texas, Politifact has some more recent and thorough analysis: http://www.politifact.com/texas/statements/2011/apr/22/rachel-maddow/msnbc-host-rachel-maddow-says-texas-routinely-rece/ , which shows that they get more in spending than what they pay in taxes. However, if you scale up the tax burden to account for the deficit (assuming Ricardian equivalence, as The Tax Foundation appears to), Texas gets back a few percent less than it pays (at least, as of 2005).
NJ, NY, CT and CA (1,2,3, and 6 of the states that tax themselves the most) were among the 10 states with the least advantageous ratio of federal taxes to federal spending. There’s been an awful lot written about the irony that “red states” tend to be subsidized by the “blue states” in federal spending, but that’s a discussion which is both too large for this comments section and has already been pretty thoroughly hashed out elsewhere. Plus, you “don’t give the proverbial rodent’s fundament which party is in control” of the states for purposes of today’s discussion.
As for North Dakota specifically, I expect the subsidies have mainly been in the areas of agriculture and transportation.
5) The point about the lower population is that, when you’re looking at such a small bit of the picture, especially when you’ve selected it as the most unusual case, you might be able to figure out what makes it different, but that doesn’t necessarily suggest what you learn will be applicable to the rest of the nation.
“look at what North Dakota … [is] able to do successfully … and adopt equivalent policies for the US” sounds to me to be pretty similar to “model for the rest of the country”. If there’s a difference, it seems to me like splitting hairs. Anyway, North Dakota has basically taken the course (whether by local design, inertia, federal influence, chance, or whatever) of “if you want to do anything other than farming or extracting fossil fuels, look elsewhere.” The result is that its long-term growth has been extremely small, its fortunes basically rise and fall with the prices of food and energy, and generations of people who wanted to pursue other industries have emigrated from the state (I guess the upside is that they haven’t hung around home with false hope of finding a job in another sector). Yes, in the past few years, they’ve added some energy jobs, but over the long run, they’ve basically missed out on the rise (and fall) of all sorts of manufacturing, technology, and service sector industries. Essentially, their low unemployment rate (which they have indeed maintained over many years) isn’t usually due to putting people to work, it’s due to exporting potentially-unemployed people to other states. In my book, the long term is much more important than the recent 19,700 job uptick.
Consider, for example, the worst-off state, Michigan. If it had never had the automotive industry, then today it wouldn’t be in such poor shape with losing jobs and rising unemployment. But I don’t think that America (or even Michigan) today would actually be a better place if it had never bothered making cars.
As for the argument of “if ND…were not included…the US economy would be a whole lot *worse* off”: Yes, the average statistics for the economy (unemployment in particular) would be worse if ND were not included, but it’s not at all clear that the rest of the country would actually be worse off. It’s sort of like, if the tallest person in the room leaves, then the average height of the people in the room would be becomes less. But, that doesn’t actually make the remaining people shorter than they were before.
As I said above, the Texas case is complex and lots of smart people on both sides are discussing it. My issue here is with your holding up ND as some sort of shining example of economics/jobs success (“what a small state can do”), when I think it’s actually a rather useless example.
Seems I am less hung up on CA than you are on ND !
Any special reason you are pulling an Ed Schultz on us, by editing out a could of significant words ? I have pretty consistently been saying “ND and TX” (or “North Dakota and Texas“) most places since each has some good stuff going for it from which our First Occupant could theoretically learn … (I added the emphasis in case it was a selective vision problem) …
(grin) Anyway – I haven’t intended this to be a discussion of ND and TX as a case study … it would be nice to see ’em used as a rational basis for discussion as to how to adopt, adapt, and improve upon what each state has been doing successfully …
I’ve edited out the “and TX” because I think that Texas is an interesting case, and North Dakota is not, and the thesis of my last two posts is all about ND. I think that the two parts of your quotes are separable. I don’t think that including TX makes me disagree with the parts about ND any less. I suppose that I could have included the whole quote each time, and then replied with “I think this argument has merit in the case of Texas, but not in the case of North Dakota. I will now proceed to discuss the case of North Dakota, which I think is fundamentally different than the case of Texas.” But I found it shorter to repeat the part of each quote about ND.
As another analogy (I perhaps rely on analogies too much): if I had said “I think that vomit and steak are each delicious to eat”, and you had said that you disagree that “vomit…[is] delicious to eat”, I wouldn’t accuse you of misquoting me by failing to address the steak.
I don’t buy into your theory that ND and TX are complementary (or something) examples of a low-pop. state and a high-pop. state that together can teach a more cohesive or comprehensive lesson than either one can separately. Indeed, if you look at the parts of the country that are like ND, ie. the Great Plains, they’ve all been doing just fine (map here: http://www.washingtonpost.com/wp-srv/special/nation/unemployment-by-county/ ). If Obama tried to apply the ND lessons to low-pop. states like Rhode Island or Delaware, it would be silly, and if he tried to apply it to SD or Nebraska, it would be redundant. On the other hand, there are lots of places (in states small and large) that could indeed learn from examining (not necessarily emulating, but maybe) the broad-based economic development in Texas.
Hey – I would be more than happy to see the Obama/Reid/Pelosi axis learn from the Texas example …
Given that they have yet to learn from the examples of Hoover and what led us into the Great Depression, I ain’t holding my breath …
I know that agriculture is a big part of California’s economy, but I haven’t been paying close enough attention to know what they’ve been doing to discourage it. If I were to speculate (but I probably shouldn’t), I would guess that the agricultural productivity in many parts of California is constrained by availability of fresh water.
A combination of over regulation, over taxation and cutting off most of the water to the central valley. The water was cut off because of some obscure fish……
Alasdair #11–At some point you could argue nothing with man _has to happen_. Unfortunately, Jack Ryan is a fictional character, Clark Kent a comic book creation, and inertia is not just a concept for physics. So, yes, it is possible that we could avert a financial crisis by completely reversing policies that have survived under Presidents of both parties (because, sorry, President Obama in many ways = Bush Term #3 & ‘globalization’ is shorthand for “and you blue collar dimwits continue to support the party that slit your economic throats why?”), but that would probably violate several laws and require a dictatorship.
In the “most likely course of action” category, we have the problem that the Fed and other banks loaned a crapload of money to their European counterparts. After all, up until relatively recently the Euro seemed relatively stable. Then everyone found out that the Greeks (actually, most of the EU countries) have been lying through their collective teeth about compliance with their monetary treaties. Ooops. Which means that call it “doom and gloom” or whatever you want, the simple fact of the matter is that _the money isn’t there_ and everyone’s over committed. So, much like a ship which is past its tipping point, this baby’s heading over…the question is whether it’s going to be USS Oklahoma (bad) or IJNS Yamato (really bad), not whether there’s going to be a crack up.
James #19 – for your Obama = Bush 3 analogy, you have to make it more specific … where Bush 2 is like having the water in which you are scuba diving suddenly go from 80 deg F to 72 deg F – and Obama is like having the water in which you are scuba diving go from 80 deg F to 20 deg F … yup, just a matter of degree, right ?
This planet managed to weather the 1930s, in spite of Hoover and FDR … we’ll manage to
weatherclimate change the 2010s even with Obama-as-(Carter*Hoover) … especially once Obama joins Carter and Bush I as single-term Presidents …Alasdair–here are your degrees:
1.) The Treasury Department continues to be run by gentlemen whose last non-government job was in one of the major Wall Street trading houses. President Obama should have brought in some new blood for no other reason than “He/she had nothing to do with that farm animal fornication in late 2008.”
2.) The country continues to have the same head of the Fed. As with above, when a person was anywhere near the barn when things went awry, you don’t have them responsible for clean up or future decision making.
3.) No one has put into place any structural brakes to make sure we don’t have a repeat of “I’m, uh, gonna need a TARP for this…”. Dodd-Frank’s a joke, but even within that framework has the President given the regulators a deadline to come up with new regs? You know, something like, “In 90 days these regulations will be written or you will all be contributing to the 9.2% unemployment rate.” Nope–which was a large part of the problem with President Bush insomuch that he basically let Wall Street run itself until suddenly the place was on fire. I mean, I sorta thought the Dems were supposed to be the party of regulation? I’m not saying I necessarily agree with that one way or the other, but I am thinking that you notice safety boards got really strict about how many lifeboats should be on a luxury liner after half the Titanic’s passengers became floating popsicles / North Atlantic fish food.
I could go on, but I see you’re one of those “Well because we survived the last time obviously everything will be fine this time around”-folks. I’m sure there were people like you saying the same thing about the time a bunch of angry Goths, Huns, and other associated barbarians showed up outside of Rome’s gates as well. 😉
James – isn’t Obama an employee of Goldman Sachs ? I thought that was one of the requirements that a certain percentage of his administration had to be from Goldman Sachs ?
I’m actually one of those “How about we learn from History ?” folk … and, historically, Obama wasn’t going to be a Good President … the fact that he’s half-white isn’t relevant … President Present! is the *wrong* President for these times … and the only one who seems to think himself unsinkable at the moment is Teh One …
I am astonished that you can be so naive as to have expected the Dems to actually regulate usefully ! The Dems are the party of regulation of everyone else – the Nanny State uber alles … and then, when they have control of Congressional oversight, their cronies get waivers, they tell regulators to keep away from their contributors …
I would really like to see the government fund a study that examines the wealth of federal officials and officeholders. For those who had a career before serving in the government, we could start with comparing their wealth before, during and after service. We could examine how successful such people are in the stock market as compared to everyone else. (Including Wall Street funds) We could examine those who have done nothing all their lives but serve in government, and still manage to become millionaires.
One of the few things I liked about President Clinton was how poor he was when he became president. (of course he cashed in while in office and afterwards just like all the rest)
gahrie – there are studies about Congress and the Stock Market … this paper discusses two of them …
The STOCK Act was initially proposed in 2006 … is there any need to wonder why, now, in 2011, no version of it has been passed yet ?