Wednesday, October 15, 2008

Biggest Economic Nonsense Since Great Depression

Graph update (in reponse to a comment):

An otherwise interesting Washington Post front-pager on “What Went Wrong” claims the current situation “has erupted into the biggest economic crisis since the Great Depression.” On the contrary, that honor surely goes to 1980-82, with 1973-75 as a close runner-up.

This may indeed be the biggest postwar financial crisis, but that is a very different thing.

The biggest postwar financial crisis so far was the S&L collapse of the late 1980s, when nearly 3000 financial institutions were closed (see chart above). But the impact of the S&L debacle on the real economy was minor at best (the economy grew by 2.9% a year during that “crisis”). The stock market crash of 1987 inspired many hysterical predictions but no recession at all.

An economic crisis implies a deep and prolonged drop in real output and employment, not just another routine recession. To describe current conditions as a worse economic crisis than 1980-82 is fanciful nonsense.

Cato Institute's Alan Reynolds

20 Comments:

At 10/15/2008 4:57 PM, Anonymous Anonymous said...

Just wait, crisis not over yet.

 
At 10/15/2008 5:38 PM, Anonymous Anonymous said...

This crisis is being brought to you by a corrupt administration, a treasury secretary with very intimate ties to the banking industry, the Federal reserve which caused the whole mess to begin with, a Congress who are in panic mode and throwing OPM out the window and into the hands of the very same banks that are more then likely shorting the heck out of US equities with the money. Have a good day and thanks for your support.

 
At 10/15/2008 5:45 PM, Anonymous Anonymous said...

Prof Perry, can you please normalize this for % of banks outstanding? Hasn't there been substantial consolidation in the past 20 years? Is there surviorship bias? Is there any way to look at % of deposits/assets affected in the various periods? Thanks.

 
At 10/15/2008 5:47 PM, Anonymous Anonymous said...

I guess the loss of our retirement accounts is just my imagination, I should look at graphs to tell me how much money I have lost and the prospect of me finding new clients for my consulting business.

 
At 10/15/2008 5:52 PM, Anonymous Anonymous said...

Why doesn't Professor Mark Perry show us a graph of what a great job George Bush and the Wall Street free markets have been for us and our country.

I guess a huge national defecit, $800 billion bailouts are a few examples of how great our economy is...silly me for not undersatnding. I need an advanced economics degree to understand these complex economic theories.

 
At 10/15/2008 10:27 PM, Anonymous Anonymous said...

Could the fact that the Fed is propping up the banks with hundreds of billions in loans against questionable (at best) collateral have anything to do with the lack of failures so far?

Also I've noticed that the "Where's the Crisis?" type posts have replaced the "Where's the Recession?" posts.

I guess the retail sales and consumer spending data of late dashed those hopes!

That worries me on the bank failure front...

 
At 10/16/2008 11:10 AM, Blogger notnidiot said...

Why do we continue to 'count the number' of bank failures as a meaningful number (granted it is an indicator).

With branch banking and consolidation, surely (yes this is acknowledged presumption) the 'number' of banks is not comparable historically. Why not look at assets at risk?

 
At 10/16/2008 11:17 AM, Blogger Mark J. Perry said...

NOTNIDIOT: See updated post, with new graph of "Problem Bank Assets, as a percent of total bank assets," through the second quarter of 2008.

 
At 10/16/2008 11:27 AM, Blogger notnidiot said...

Thanks MP!
Far more meaningful (and less
scary!).

 
At 10/16/2008 12:07 PM, Anonymous Anonymous said...

Hmmm. I guess Washington Mutual and Wachovia don't count as problem banks. Whatever notnidiot!

WAMU is the largest thrift ever thrusted by the FDIC to JPMorgan and WB was the fifth largest commercial bank thrusted by the Treasury to Wells Fargo.

I do believe that Carpe Diem is a complete ivory tower moron if he continues to post this kind of economic nonsense.

 
At 10/16/2008 5:34 PM, Blogger OBloodyHell said...

> Why doesn't Professor Mark Perry show us a graph of what a great job George Bush and the Wall Street free markets have been for us and our country.

What you mean the one with the USA responsible for 1/4th (until recently, 1/3rd) of the entire world's production of wealth?

In a room full of 20 people, one guy is responsible for 25-33% of all the money made. Two more make up another 33%. Then the other 17 make the last 33%.


Yeah, I see what you mean. It sucks to be American.


You're an idiot.

 
At 10/16/2008 5:48 PM, Blogger OBloodyHell said...

> Hmmm. I guess Washington Mutual and Wachovia don't count as problem banks.

Gosh, your grasp of terminology is so incredible. I think it would be hard to find anyone quite as densely incapable of reading who actually imagines themselves capable of contributing worthwhile value to any conversation.

The assets owned by a bank are not all problem assets. Nor is the sale value of the bank necessarily tied to that actual value of the bank, given Mark-to-Market requirements which force a bank to be valued at fire-sale prices.

I seem to recall reading that Wachovia (Trust me, I've dealt with them. Thieves and ripoff artists all, everyone above the Head Teller position deserved to die. Literally.) had assets likely to be worth on the order of 150 billion. They got sold for something like 18. Good buy for Wells Fargo, donchathink?

Classifying the entirety of a banks assets as "problem assets" because the bank is in trouble just shows that you have not the slightest clue what might be referred to as a "problem asset", what causes a bank to "go under", or even what the worth of a company might actually refer to.

Only a fraction of Wachovia's or WaMu's assets were "problem assets". It was enough to create *liquidity* problems regardless of how good their other assets were, which ties to their inability to function and subsequent failure.

Since there are a lot of hidden risks tied to banks as a result of all the collateralized crap floating around, all the other banks were unwilling to help them bull through it, since there was a failure of *trust* between the banks, and they couldn't be sure who was holding what.

In short, there's a massive difference between that which causes a bank to fail and possession of failing assets. They are certainly related, but a bank could easily fail but have a fraction of its wealth in bad assets. Hence the numbers Dr. Perry produced.

And the fact that few banks are themselves having problems with credit says a lot in support of that. It's when they have to depend on each other that problems occur.

 
At 10/16/2008 6:54 PM, Anonymous djaces said...

All we have to do is elect Obama. On inauguration day the NYT, NBC, CBS, ABC, et.al. will suddenly discover all the data that contradicts the crisis story and announce we have been saved by "The One", the crisis will be over, and Barry and the Dems wil get down to spreading the wealth around. Of course most of the wealth will be spread to their fat cat liberal sponsors.

 
At 10/16/2008 10:45 PM, Blogger OBloodyHell said...

> This crisis is being brought to you by corrupt Democrats in Congress, who ignored warnings inb 2003, 2004, 2005, and 2006 from:
The Bush Administration
OFHEO
McCain and other Republicans
And
Alan Greenspan

Let's hear what the Democrats said to OFHEO, Regarding Fannie Mae, Freddie Mac, and particularly Frank Raines, who, for a large chunk of the last 15 years, was busy cuddling with someone by the name of Barney Frank. Yes, *THAT* Barney Frank... The one who led the Democrats on the committee charged with oversight of... Fannie Mae.

Are the Republicans free of all culpability? Nope. But the vast majority of it comes from the Dems and their "Defy Bush and the GOP at ALL costs!!" attitude, and from their "Support our ideas no matter the evidence that they are causing serious problems!" attitude.

But then, FACTS never matter to the anonymous one...

Go on back to your mindless, idiotic babbling.

 
At 10/16/2008 10:48 PM, Blogger OBloodyHell said...

> the prospect of me finding new clients for my consulting business.


Hey, I never thought of that!

That's one bright side to all this, everyone!!


Think of all the people saved from anonymous' halfwit consulting!

 
At 10/16/2008 10:54 PM, Blogger OBloodyHell said...

> Barry and the Dems wil get down to spreading the wealth around. Of course most of the wealth will be spread to their fat cat liberal sponsors.

Unfortunately, the damage to the economy done by an Obama presidency is not to be underestimated.

In addition to the substantial market downturn you can COUNT on for Nov 5 if Obama gets elected, you can look to the following happening in the next 4 years:

Stagnation as taxes get raised
Stagnation as energy prices go through the roof
Stagnation as idiotic pro-Global Warming regulations get put onto the books
Stagnation as Gas Prices go above $5 per gallon
Stagnation as the US gets attacked more than once by international terrorists
International humiliation as we get laughed at by dictators and thugs all around the world
And then a collapse when we get nuked by terrorists using a nuke from Iran.

And "The Fairness Doctrine" to make sure you never hear anything about why and how it's happening.

Go ahead. Let Obama win. You'll lose, but you won't have any coins left to insert.

 
At 10/17/2008 7:17 AM, Anonymous Anonymous said...

Hence the numbers Dr. Perry produced

It is difficult to discern kernels of wisdom in your incoherent ramblings OBH, but Perry's numbers are 4.5 months out of date. That is what makes them nonsense.

The facts are:


1.Washington Mutual was the largest bank failure in U.S. history.

2.Wachovia would have been another big failure for the FDIC, if not for a hastily enacted income tax loophole, to benefit Wells Fargo and cost the Treasury.

 
At 10/17/2008 11:12 AM, Blogger notnidiot said...

Anonymous said...
Hmmm. I guess Washington Mutual and Wachovia don't count as problem banks. Whatever notnidiot!

Did you grow up so unloved that you must pick a fight where there is none?

I asked for a presentation of dollars, in addition to a 'count of banks'.

I don't think anybody in this universe disputes that both Wachovia and WaMu have issue.

For the other blogites...I heard the chief economist for Wachovia describe the sub prime mess a year ago, this November. He didn't seem to miss the concept of what financial institutions had done...but he clearly didn't recognize (publicly) the straits that Wachovia was about to enter!

 
At 10/24/2008 8:30 AM, Anonymous Anonymous said...

Sigh. You do realize there are less banks now?

 
At 11/03/2008 12:17 AM, Blogger kristin said...

Bank failures had been steadily growing over the 1920s, especially small rural unit banks though there's no important relation between the 1929's stock market crash and the trend of banking crises...

FYI: I found this survey about the current economic downturn and I think it’s helpful to get involved.
http://spreadsheets.google.com/viewform?key=p-XlwgJysoV-gV-D6-1d_XQ

 

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