Friday, January 06, 2012

Interesting Facts from Today's Employment Report

A few interesting items from today's BLS Employment Report for December:

1. The unemployment rate for workers with a college degree fell to 4.1% in December, which  is the lowest jobless rate for that group since January 2009, almost three years ago.   The number of employed college graduates is at an all-time high of 45.2 million, and more than 1.6 million above the December 2007 level when the recession started.  In contrast, the jobless rate for workers with less than a high school degree jumped to 13.8% in December from 13.3% in November, and the employment level for those workers remains 1.24 million jobs below the December 2007 level. This contrast suggests that educational level might be an important factor in the labor market improvements and the drop in the jobless rate to 8.5%, with college-educated workers being the group that is gaining jobs during the recovery, while the least educated workers are the group finding it hardest to find jobs. 

2. The manufacturing sector added 225,000 jobs in 2011, following an increase of 109,000 factory jobs in 2010, bringing manufacturing employment to 11.79 million at year-end.  That's the first time since 1996-1997 of two consecutive annual increases in employment by U.S. manufacturing companies, and the 225,000 job gain last year was the largest since a 304,000 increase in 1997.  If manufacturing companies continue to add jobs at the current pace, it's likely that manufacturing employment by mid-2012 will exceed the 12 million mark for the first time since early 2009.  

3. Government payrolls fell by 280,000 jobs in 2011, with most of the job losses taking place at the local (-181,000) and state level (-63,000), compared to a much smaller reduction in federal jobs (-36,000).  The decline in government jobs in 2011 follows declines in 2010 (-223,000) and 2009 (-76,000), bringing the three-year loss of government jobs to 589,000, and lowering total government employment to the lowest level since June 2006.

The last time there were three consecutive years of government job losses was back in 1945-1947 following WWII, and the only comparable more recent example was a 300,000 government job loss in 1981 followed by a 92,000 job loss in 1982.  But all of those government job losses were re-gained by late 1985, so it will be interesting to see if the current downsizing to a five and-a-half year low for government jobs remains in effect as the economy continues to recover.  If some of the government jobs are not added back, the Great Recession might be responsible for a permanent reduction in the number of government jobs, or maybe that's just wishful thinking?     

79 Comments:

At 1/06/2012 11:02 AM, Blogger morganovich said...

some other interesting facts:

http://www.calculatedriskblog.com/2012/01/employment-summary-part-time-workers.html

this has been the slowest employment recovery since ww2. there is no other recession that had not fully recovered by this time and only one whose deepest employment drop was lower than our current level (and that was 1948).

unemployed for over 26 weeks remains at an extraordinarily high level as well.

one really interesting takeawy from the wonderful first chart showing job losses centered around the peak drop:

almost all the other recessions look the same save the last 3 which have had increasing durations for recovery.

one might be led to ask what they had in common that others did not.

i would posit that the answer is "alan greenspan" a fed chair who will go down in history as the idiot who undid volcker's good work.

his "loose money at every dip" "greenspan put" policies build up more and more debt and leverage until we got this mess.

he turned the bubble of 2000 which was an easy one to recover from (equity funded, productive resources) into this one, a debt bubble in non productive resources, which will take a decade.

his failure to really believe in bubbles drove us off a cliff and had left his disciple, helicopter ben, inflating and even more pernicious bubble (in federal debt) while not even digging us out of the last one.

for all those who seem to feel that just printing enough money can cure recession and promote real growth, i'd recommend taking a really hard look at this track record. i think you'll find that the opposite has been the case and that while loose money can have (for a time) some short term effects, it ultimately just builds up greater and greater imbalances, like using amphetamines to cure a hangover.

then the bill comes, and paying it is ruinous.

it's ironic that AG, friend to ayn rand, turned out to be so dedicated to central control of the business cycle. (and responsible for the huge failure it created)

 
At 1/06/2012 11:10 AM, Blogger PeakTrader said...

Some economic headwinds include a slowing Chinese economy and a E.U. recession:

Cutting 1 trillion yuan in China taxes
Jan. 5, 2012

"China’s economy is slowing down.

The export sector, about two-fifths of the economy in value added, may be shrinking.

The property sector, about one-tenth of the economy, may be shrinking too.

The auto and infrastructure sectors, about another two-fifths of the economy together, may have slowed to a single-digit growth rate from about 20%.

The retail sector may still maintain a growth rate in the mid-teens.

The economy as a whole could slow by half from the previous two years.

Electricity consumption, for example, may slow to a 7% growth rate, from 13%.

China can’t afford a lost decade. The country’s population will begin to decline in 2020. It would be extremely difficult to accumulate wealth with a declining, old and aging population.

The growth over the past three years has been funded by taxing efficient activities to fund inefficient ones.

Inflation is one manifestation of the rising inefficiency. It may make the economy bigger in the short term but would lead to crisis in the future.

China’s economy has probably gone backward in the past three years despite the growth.

The government sector has gotten very easy money from collecting taxes and fees and borrowing cheap money from banks. The easy money has caused the massive expansion of the government sector.

China needs to immediately cut taxes by one trillion yuan ($158.5 billion) to support economic growth and boost efficiency."

 
At 1/06/2012 11:22 AM, Blogger Buddy R Pacifico said...

For December 2011, almost all job Government employment cuts were at the local level.

From BLS Table B-1(p.33):

Overall government -12%
State government, no change
Federal government +2%
Local government -14%

BTW, the report notes that 42,000 couriers and messengers were added in December. Could this portend an upturn in residential real estate activity (couriers and messengers expediting closings)?

 
At 1/06/2012 11:31 AM, Blogger Benjamin said...

Crickey- the federal government can't cut employment?

Here is a list of federal employees.

Please start cutting, and bring a chain saw:

Defense 3,200,000
Veterans Affairs 240,000 

Homeland Security 200,000
Treasury 162,119 

Justice 124,870 

USDA 100,000 

DOT 100,000
Health and Human Services 62,999 

Interior 57,232 

Commerce 41,711 

NASA 19,198 

EPA 18,879
State 18,000 

Labor 16,818 

Energy 14,000 

GSA 14,000

 
At 1/06/2012 11:34 AM, Blogger PeakTrader said...

Morganovich, says: "alan greenspan" a fed chair who will go down in history as the idiot who undid volcker's good work."

Greenspan, who had a great feel for the economy, was the best Fed Chairman this country had.

Under Greenspan, the country had strong disinflationary growth and a massive increase in real wealth.

Greenspan anticipated and managed a most complex and dynamic economy very well by the "seat-of-his-pants," which boosted the U.S. standard of living to higher levels.

 
At 1/06/2012 11:45 AM, Blogger Buddy R Pacifico said...

"i would posit that the answer is "alan greenspan" a fed chair who will go down in history as the idiot who undid volcker's good work.

his "loose money at every dip" "greenspan put" policies build up more and more debt and leverage until we got this mess."


What if the U.S. money supply had been at a consistent 3-5% growth, for the last twenty years, as recommended by Milton Friedman?

This would have been much more effective in limiting borrowing for financial speculators and federal spenders.

 
At 1/06/2012 11:48 AM, Blogger PeakTrader said...

Morganovich also says: "he (Greenspan) turned the bubble of 2000 which was an easy one to recover from (equity funded, productive resources) into this one, a debt bubble in non productive resources, which will take a decade."

After the quick and massive creative-destruction process mostly from 2000-02, in a mild recession engineered by the Greenspan Fed after the longest expansion in U.S. history, the U.S. economy became much more efficient.

So, U.S. living standards continued to rise at a steep rate even in the structural bear market that began in 2000.

 
At 1/06/2012 11:49 AM, Blogger morganovich said...

buddy-

"BTW, the report notes that 42,000 couriers and messengers were added in December. Could this portend an upturn in residential real estate activity (couriers and messengers expediting closings)?"

i'd guess it has more to do with moving stuff around for/during the holidays than anything else.

i'm not so sure that's going to be durable employment.

 
At 1/06/2012 11:56 AM, Blogger juandos said...

The most interesting fact about yesterday's questionable employment report is the imparted spin for the incumbent...

"If the size of the U.S. labor force was as large as it was when Barack Obama took office, the unemployment rate would be 10.9 percent"...

 
At 1/06/2012 11:57 AM, Blogger morganovich said...

peak-

greenspan was a disaster.

he defined inflation out of existence and thereby upped reported real gdp growth considerably.

comparing his numbers to those from before as though they were apples to apples is incredibly misleading.

using the standards volcker lived under, the US was in recession for 7 of the 10 years from 2000-2010.

alternately, using greenspan's standards, we were seeing 7% growth before.

his "shallow recessions" are based only on accounting changes in CPI and the GDP deflator.

whichever method is correct (and i'm not interested in touching off that long argument again) you simply cannot compare his numbers to those from before.

it's like switching a speedometer from mph to kph and then comparing the numbers directly and saying "wow, we sure are going fast".

greenspan presided over a long period of negative real interest rates and thus, the longest and most violent set of concatenated bubbles in US history.

the US was pretty much either in a bubble or trying to clear one up from 1997 to present. that has NEVER happened like that before. never. the debt accumulation and assets busts are a direct result of this.

greenspan was a one trick pony who only too late realized what he had done, then, right when the poop hit the fan and he had no more rope to play out, quit and handed the bomb to someone else.

real quality guy.

 
At 1/06/2012 12:02 PM, Blogger PeakTrader said...

Buddy says: "What if the U.S. money supply had been at a consistent 3-5% growth, for the last twenty years..."

There are too many shocks to the system (both major and minor and positive and negative) to maintain consistent money growth, e.g. Y2K, 9/11, an oil shock, technology shocks, poor fiscal policy, etc.

Also, targeting anything except price stability, e.g. the money supply or output, will lead to instability.

 
At 1/06/2012 12:10 PM, Blogger geoih said...

Quote from PeakTrader: "Greenspan anticipated and managed a most complex and dynamic economy very well by the "seat-of-his-pants," which boosted the U.S. standard of living to higher levels."

And resulted in the greatest economic downturn since the Great Depression.

Are we all children to think that one man, manipulating interest rates, magically "anticipated and managed" an economy of 300 million people? Only a fool would believe such a thing.

 
At 1/06/2012 12:10 PM, Blogger geoih said...

Quote from PeakTrader: "Greenspan anticipated and managed a most complex and dynamic economy very well by the "seat-of-his-pants," which boosted the U.S. standard of living to higher levels."

And resulted in the greatest economic downturn since the Great Depression.

Are we all children to think that one man, manipulating interest rates, magically "anticipated and managed" an economy of 300 million people? Only a fool would believe such a thing.

 
At 1/06/2012 12:11 PM, Blogger PeakTrader said...

Morganovich, it seems you completely ignored the real economy and focused on a paper economy when Greenspan was Chairman from 1987-06.

From 1982-07 was one of the greatest eras of U.S. prosperity.

And we could've avoided a severe recession in 2008 or could've achieved a V-shaped recovery beginning in 2009.

 
At 1/06/2012 12:13 PM, Blogger PeakTrader said...

Geoih, perhaps I should've said directed rather than manage, because the Fed doesn't micromanage the economy.

 
At 1/06/2012 12:19 PM, Blogger morganovich said...

to further geo's point:

managed? managed? what manner of management are you talking about?

he blathered about "irrational exuberance" in 1996, then presided over a massive bubble, which, by the top, he was denying the existence of and claiming you can never tell if you are in a bubble until afterward.

then he inflated another in housing then another in government debt. consumer debt exploded. growth was punk, even using his lower deflators.

the booms got smaller, the busts bigger, the recoveries slower and then we got a crash which good old alan was happy to bail out on and hand off to someone else to clean up.

"my work here is done!"

if that's "management" i'd hate to see mismanagement.

 
At 1/06/2012 12:28 PM, Blogger morganovich said...

peak-

greenspan came in in 1987, riding the back of what volcker built. that had a ton of momentum that not even AG could harm immediately.

then, in 1992, he changed the numbers. cpi was lowered and so was the GDP delfator. this made growth look higher relative to previous periods.

the period to 2000 was real growth, but it was also a massive bubble. rates were too low.

then to try and clean it up, he slashed rates again and inflated a new bubble.

but this did not create growth.

you seem to be under some misconceptions about that. even with his new gdp calc, 2000+ was all sub trend growth.

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:USA&dl=en&hl=en&q=us+gdp+growth

look it up yourself.

we never really recovered as one would expect from recession. peak growth was about 3.4% in 2004, which was about average for the prior 30 years. the rest was all well below trend (and would have mostly been negative using the deflator volcker did)

so no, i am not focusing just on assets markets.

the economy was punk too, and even to get there required amssive debt accumulation which was about 30% of gdp growth from 2000-8.

a decade of deeply sub par growth (at best) and mostly recession (at worst) with huge debt accumulation and nasty asset bubbles culminating in the worst crash and downturn since the depression is hardly good "direction".

it was the disastrous and inevitable effect of his loose money. run persistently negative real rates, and that will happen every time.

 
At 1/06/2012 12:29 PM, Blogger PeakTrader said...

Morganovich says: "he (Greenspan) blathered about "irrational exuberance" in 1996, then presided over a massive bubble."

"Jawboning" is one of the Fed's "tools."

Greenspan was trying to talk down the economy to achieve sustainable growth, which is optimal growth (because boom/bust cycles are inefficient, both in the boom and bust phases).

And you're confusing economic growth (of goods & services) with asset booms and busts.

The Fed is concerned with sustainable economic growth, not how many booms or busts take place in asset markets.

 
At 1/06/2012 12:32 PM, Blogger PeakTrader said...

Morganovich, I've shown you lots of data that prove you wrong.

Yet, you continue to make the same statements.

 
At 1/06/2012 12:42 PM, Blogger knifecatcher said...

College grads are not working at jobs that use their degree:

Earnings for holders of four-year degrees have actually dropped over the past decade, according to the left-of-center Economic Policy Institute, which also predicts that the pattern will persist for the foreseeable future. In 2008, more than one-third of college graduates worked at occupations such as waiting tables and manning cash registers, traditionally held by non–college graduates.


http://www.city-journal.org/2011/21_4_skilled-labor.html

 
At 1/06/2012 12:44 PM, Blogger morganovich said...

peak-

what data is that? i have no idea what you are talking about.

i have just shown you US gdp growth.

even using the lower new delfator, it is incontestably true that GDP growth from 2000-2008 (much less through the crash) was well below the average for the preceding 20 years, yet you continue to claim it was a period of strong growth.

consumer debt exploded during that period (and remains now).

factor in the change in inflation methodology (another greenspan innovation), and the disparity increases massively.

whatever you believe about correct inflation measurement, the fact that a comparison across 1992 is apples to oranges is undeniable.

you either need to boost real growth pre 1992, or cut it post to get comparable numbers.

much of the greenspan economic boom (and the entirety of the last 12 years) was driven by this change.

 
At 1/06/2012 1:00 PM, Blogger PeakTrader said...

Morganovich, here's part of the data I've shown you before:

US household net wealth rises
But remains below the record level set in Q3 2007.
15 June 2010

At the end of Q1 2010, the value of US household assets amounted to $68.53 trillion.

At the end of Q1 2010, the level of US total household debt was $13.97 trillion.

US net wealth now represents a very respectable 491% of household disposable income. The current ratio is actually exactly in-line with the long-term ratio, which dates back to 1952, although there have been times when the ratio has risen over 600%.

Overall the US consumer remains extremely wealthy by historical and international standards; despite the high level of debt.

******

U.S. Real Per Capita GDP in Business Cycles 1973-82 (long-wave bust period), 1982-90 (expansion), 1991-00 (expansion), 2001-2007 (expansion, and 2001 recession so mild it wasn't a recession based on annual real per capita GDP).

1973 $23,200
1982 $25,280

1982 $25,280
1990 $32,112

1991 $31,614
2000 $39,750

2001 $39,773
2007 $43,482

******

The U.S. created 17.6 million jobs between 1993-98, and created only 3.7 million jobs between 2001-06. However, U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06. So, the U.S. became much more productive in the 2000s, i.e. using fewer inputs to produce more output.

******

Over a five-year period in the 2000s, U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, two million houses a year were built, 16 million autos per year were sold, U.S. real GDP expanded 3% annually, in spite of 6% annual current account deficits (which subtract from GDP).

The U.S. economy was most efficient, while Americans stocked-up on real assets and goods, and capital was built-up. It was one of the greatest periods of U.S. prosperity, and in a structural bear market that began in 2000.

******

I've also explained how the U.S. had increasingly larger gains-in-trade, while its trading partners had increasingly smaller gains-in-trade.

So, the U.S. was able to consume up to $800 billion a year more than produce, through the foreign exchange market, inflation, and interest rates, which raised U.S. living standards.

 
At 1/06/2012 1:01 PM, Blogger morganovich said...

""Jawboning" is one of the Fed's "tools." "

sure, but to jawbone the market down in 1996 then have switched to cheerleading and denying that you can tell if a bubble is forming by 2000 is hardly good "management" or "direction".

it's being a foolish weather-vane.

he saw the problem in 1996, then, by 2000 when it was about to blow, decided it wasn't a problem and that he could not know if it was.

 
At 1/06/2012 1:25 PM, Blogger morganovich said...

peak-

first off, you data is not comparable.

pre 1992 cannot be compared to post.

second, it refutes your own argument.

82-90 - 28% growth
91-00 - 25% growth, but at a much easier standard as cpi for any given state of the economy would read lower by several points, inflating real income.
01-07 - 9% growth, a huge drop in growth rate, even using the new standards for cpi, using the old, this was significant contraction.

to go apples to apples, either you get somehting like 40%, 25%, 9% a clear decline, or you get 28%, 15%, -8%. no matter how you slice it, growth from 1990 onward slowed a great deal in any valid comparison.

further, just looking at per capita income leaves out key factors like debt accumulation. household debt in the US went from 7tn in 2001 to 14tn in 2007 accounting for about 30% of growth. that is not the same as income growth driven by productivity. it has a tail and suppresses growth later.

that is the harvest we currently reap.

from from making your point, your data makes mine.

growth slowed, debt soared, and the bursting of the bubbles greenspan piled upon bubbles has left the US in the worst shape since the 30's.

i have no idea how you get superlative economic management from that.

there is no word for it but disaster.

your "double digit earnings growth" is, for a significant fraction, inflation that you are trying to count as growth. use a common CPI to deflate it and the 90's were not better than the 80's in this respect. you are trying to equate nominal with real.

eps cannot tell inflation from growth. such a nominal figure tells you little. loose money looks like productivity if you understate cpi.

and this:

"U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06."

is just a fiction.

1992-2000 averaged about 4%
2001-7 averaged barely over 2%, a 50% reduction.

take the decades as a whole 1991-2000 vs 2001-2010 and the real growth in the latter was not even half the former.

as they man said, you are entitled to your own opinion, but not your own facts.

the jobs recovery from the 2000 recession was the slowest since ww2 (until this one which is breaking all the records by a landslide).

 
At 1/06/2012 1:41 PM, Blogger PeakTrader said...

Morganovich, I stated:

The U.S. created 17.6 million jobs between 1993-98, and created only 3.7 million jobs between 2001-06. However, U.S. real GDP growth was only slightly higher from 1993-98 than from 2001-06.

U.S. real GDP growth

1993-98 3.83%
2001-06 2.69%

http://www.measuringworth.com/growth/

However, U.S. living standards rose at a steeper rate from 2001-06, because the U.S. consumed even more than produced.

China, for example, wasn't too happy about that:

U.S. has plundered world wealth with dollar: China paper
Oct 24, 2008

Plunder: to rob of goods or valuables by open force, as in war; despoil, or fleece; to take wrongfully, as by pillage, robbery, or fraud; loot.

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said.

"The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.

 
At 1/06/2012 1:43 PM, Blogger Benjamin said...

The debate today is between the Market Monetarists, who have a concise and transparent plan for US economic growth, vs. the "Theo-Monetarists" who worship gold and genuflect to an ill-defined and oblique "tight money" policy.

Buddy is getting close with his call for defined and transparent growth in the money supply (hard to define the supply however).

Ergo, the right target is nominal GDP growth.

 
At 1/06/2012 1:44 PM, Blogger Benjamin said...

Buddy---

Actually, Market Monetarism is accessible, and there is a not bad Wikipedia entry on it.

In a nutshell, you target nominal GDP growth through a transparent and explicit monetary policy.

In today's world, the Fed would say, "We are targeting 7.5 percent nominal growth in GDP, and we will buy $100 billion a month in bonds, keep interest rates where they are, and limit interest on reserves until we get to that growth level for three quarters running, Then we will re-assess, and publicly reveal the next course of action."

(I am short-handing much).

There is not threat of "hyper-inflation" as the upper limit targeted would be 7.5 percent. Obviously, with the USA economy currently in deflation (see latest two CPI readings, or declining unit labor costs, or declining real estate values, or a Dow Jones at 1999 levels) the threat is not inflation.

People have been braying about inflation so much they have not recognized the true modern threat to the USA economy and that is Japan-itis.

To be honest, yes Market Monetarists do call for mild inflation to handle something called sticky wages.

I advocate mild inflation now to help deleverage the economy and reflate real estate values (loans are made in nominal dollars). In Japan real estate values have fallen for 20 years counting, resulting in ever-worse bank balance sheets.

What you have now is "theo-monetarism."

Theo-monetarism, as practiced, is resulting in recessionary deflations, and a Japan-like economy.

Japan has an extremely strong yen. japan has had 15 percent deflation in the last 20 years. Japan's manufacturing output has fallen 20 percent in that time period, while stock and equity markets cratered by 80 percent.

You call that theo-monetarism. A faith that tight money works, despite abundant empirical evidence to the contrary.

 
At 1/06/2012 1:47 PM, Blogger PeakTrader said...

Morganovich, and you continue to compare apples to oranges, because you don't make the appropriate adjustments to compare apples to apples, i.e. the pre-Information Age economy (before 1982) is not the same as the Information Age economy (in 1982-07).

 
At 1/06/2012 2:10 PM, Blogger morganovich said...

peak-

no.

you are just cherry picking dates and ignoring the obvious downtrend in the per capita data you cite.

since 1992 is as far as we can go back and get a consistent comparison, let's start there.

1992-2000 averaged 3.86% for 9 years.

now lets look at the next decade.

2001-7 = 2.45% (36% lower) and 1.73% (55% lower) for 2001-10.

to call a 36-55% drop in growth rate "slight" is pretty outlandish.

what would you consider big?

the best year from 2001-10 did not reach the average from 1992-2000.

reported real gdp for the 80's looked like the 90's.

regardless of what the correct way to measure cpi (and deflate gdp) is, the post 1992 method gets you less inflation from any given set of facts that pre. no one argues that. it was the point to the whole thing.

thus, 3.8% in the 80's is actually higher than 3.8% in the 90's as, deflated the same way, it would read more like 5%. for any given set of facts, the new method reads higher real growth.

thus 80's > 90's > 00's.

greenspans tenure presided over a long decline, obscured somewhat by changing the way the numbers were calculated.

this same result is clearly bourne out in the per capita data you yourself cited.

this statement:

"However, U.S. living standards rose at a steeper rate from 2001-06, because the U.S. consumed even more than produced."

is meaningless.

we ran up huge debt to fund current consumption and will have to pay for it later. you argue this is a good thing? your credit card company must love you if you think that is a healthy way to run an economy.

you keep trying to compares apples and oranges: debt funded consumption to productivity and numbers that are not comparable across 1992.

you keep trying to ignore the huge debt bubbles that were the inevitable result of greenspan's policies. they will haunt us for a decade. this is his hole. he dug it.

growth dropped, debt exploded, and we are looking at

 
At 1/06/2012 2:15 PM, Blogger morganovich said...

bunny-

they tried market monatarism in weimar.

remember how well that worked out?

targeting nominal growth just gets you inflation. you wind up with 10% inflation and -2.5 real growth.

it's a crackpot theory that has failed repeatedly.

it's a recipe for bubble upon bubble and wildly negative real interest rates.

moving to such a system would likely make me boatloads of money, but it would devastate the actual economy and promote massive fiscal irresponsibility at the federal government. if the fed is always there to buy bonds, why balance a budget?

 
At 1/06/2012 2:15 PM, Blogger Marko said...

I think the unemployment and manufacturing numbers tend to support my argument that higher than market pay for low education requirement manufacturing jobs, which was caused by labor unions (enabled by the draconian anti management laws that support them), incentivised workers to not get an education and go into jobs they would not have gone into otherwise. When those job disappeared, the labor market was flooded with low skilled, low education workers that were used to high wages.

 
At 1/06/2012 2:22 PM, Blogger morganovich said...

"Morganovich, and you continue to compare apples to oranges, because you don't make the appropriate adjustments to compare apples to apples, i.e. the pre-Information Age economy (before 1982) is not the same as the Information Age economy (in 1982-07)."

this is just speculative boskin nonsense.

first off, we have not even talked about period before 1982, so i think you are misstating your case.

second, 1992 is an arbitrary cut point where reported CPI dropped a great deal without the economy changing at all. this makes it difficult to compare data across the cut quantitatively, but qualitatively, it's easy. the exact same economy would report higher real growth and lower cpi post 1992 as compared to pre.

thus, if the 80's look like the 90's in terms of growth, we know they were really higher.

third, this "productivity jump" you cite does not actually exist. it's an artifact of lower cpi. if you drop cpi, reported productivity goes up. this is a simple mathematical fact.

thus, this whole argument is circular. you use the higher productivity created by reporting a lower cpi to justify a lower cpi.

using constant deflators, there is no evidence of these productivity jumps.

 
At 1/06/2012 2:34 PM, Blogger morganovich said...

stop an think for a minute:

was the information age really a bigger deal from a productivity standpoint that, say, electrification or the railroads? there have been huge innovation cycles for centuries. sure, the internet did a ton for communications, but does it really compare in % terms to the gains from the first telephones or the telegraph? how about to the spread of assembly line manufacturing or the internal combustion engine?

the information age is just one more in a long series of innovations. there is nothing special about it, nor was it, relative to say, assembly lines or electrification, responsible for huge increases in the ability to produce most kinds of goods.

 
At 1/06/2012 3:18 PM, Blogger sethstorm said...


1. The unemployment rate for workers with a college degree fell to 4.1% in December, which is the lowest jobless rate for that group since January 2009, almost three years ago. The number of employed college graduates is at an all-time high of 45.2 million, and more than 1.6 million above the December 2007 level when the recession started. In contrast, the jobless rate for workers with less than a high school degree jumped to 13.8% in December from 13.3% in November, and the employment level for those workers remains 1.24 million jobs below the December 2007 level. This contrast suggests that educational level might be an important factor in the labor market improvements and the drop in the jobless rate to 8.5%, with college-educated workers being the group that is gaining jobs during the recovery, while the least educated workers are the group finding it hardest to find jobs.

That is a bifurcation that must be bridged favorably to all education levels - even at the small detriment of business losing slavery.

The more reason to banish post-secondary education from any job requirements - unless university access is indefinitely made more universal and cost-free to US citizens, along with 100% subsidies for living arrangements during education.

Alongside that, banish the discrimination against the long term unemployed(to bring back the unemployed to good work) as well as the use of temporary work as a benefits and tax dodge(by making it FT equivalent by law).

Finally, end all guest worker programs as a cost-savings measure - where such termination would result in more hired citizens and more tax revenue.



Marko said...

You seem to imply that such work should be performed by slaves.

 
At 1/06/2012 5:23 PM, Blogger seekingtraceevidence said...

As best as I can tell mfg emp has been responding to the gradual implementation of a number of lean mfg efforts which first began in the mid-1980s as companies like DHR and JCI became vendors to Toyota. Boeing, UTX went to lean in the mid-1990s, with CAT, F and GE going lean in 2005. These are just the more prominent names and a host of smaller firms did the same.
Mfg emp fell rapidly from 1998 only to bottom in 2009. Obama actually trimmed excess labor from GM in his govt takeover dropping the level of employees from ~285,000 to ~85,000 with a huge increase in productivity at the same level of production.
Because lean has variable compensation as an aspect, Ford did not layoff a single employee due to the 2008 correction, kept the corp skill set intact nnd now is producing very competitive products. Unions for quite some time prevented this effort, but now the US has the potential to reverse its trade balance. The signs are clear that exports are growing at a faster pace then imports. Horizontal drilling for gas and oil is one aspect of lean.
This is one interesting period in the US!!

 
At 1/06/2012 7:19 PM, Blogger james said...

What type of jobs are we talking about. The unemployment rate for college grads being as low as it is than why is the economy in such bad shape. What sort of jobs does a college grade hold today compared to a few years ago. I really get sick and tired of hearing everybody thats so pro education talk about all the great things that college grades contribute to economic prosperity If you were to exclude the top 20% of college grades with the highest salaries. I believe that the incomes of the other 80% of college grades would be far less impressive. Australia has a far smaller percentage of their population that has a college degree yet the Per capita income of Australia is nearly as high as the united states. Australia also has a high school dropout rate of 50%. Lets get one thing straight here. The fact of the matter is Many of the jobs that college grades are in contribute little or nothing to building an economy. Examples lawyers' accountants marketing consultants' insurance actuaries' financial planners' Just to name a few. The fact of the matter is unfortunately for many of your highly educated men with good jobs these jobs contibute little if anything at all to economic growth and in some cases an example lawyers take away from economic growth.

 
At 1/06/2012 11:27 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 1/07/2012 12:03 AM, Blogger PeakTrader said...

Morganovich says: "...the new method reads higher real growth..."

You're supporting the fact inflation was increasingly overstated, at the height of the Information Revolution from 1982-07, using the old method.

It makes no sense U.S. real GDP growth would be zero or negative in periods of full employment.

 
At 1/07/2012 2:18 AM, OpenID Sprewell said...

morganovich, wow, you really think Greenspan controls a lot! The fact is that we would have had a dot.com bubble regardless of what Greenspan did and likely a debt bubble this decade no matter what, the savings glut and all that. I'm not sure why you think the fed funds rate is the primary or even causal factor in these booms and busts. I've read that the Greenspan/Bernanke policy on these booms and busts is that they can't know enough to decide what's an unsustainable bubble vs what's a valid boom, so they let it play out and try to clean up in a bust as much as possible. That's an extremely wise and humble policy, as opposed to your claims that you know all these things ahead of time. There's no doubt that there was a lot of irrationality in the dot.com and housing bubbles, but one can't know if these things will peter out or not.

If the dot.com guys had ever figured out a good monetization strategy, that bubble might not have led to a bust, though a shake-out of many of the crappy dot.com stocks was probably inevitable at some point. Similarly, the housing bubble might have coincided with a resurgence in tech which might have buoyed incomes enough for it to not have been as bad a bubble as it turned out. Now, don't get me wrong: you don't bid up housing prices by simply assuming that income will rise to match, but the fact is the market might have bailed them out with some positive black swan, such as a real tech boom taking off. You simply can't know enough to predict these things, so trying to prick bubbles is a fool's errand.

 
At 1/07/2012 2:25 AM, OpenID Sprewell said...

Finally, you assert that the information age is not that different from previous innovations like electricity or the telegraph or the combustion engine. But all those were introduced a century ago, when we didn't keep detailed track of inflation stats as we do now. So the computer and the internet would be the first revolutionary innovations to hit since we started keeping such detailed stats in the modern economy, as opposed to all the incremental innovation in between. In the context of the inflation stats you keep going on about, there was something fundamentally different about the recent revolutionary innovations. Also, I haven't looked at precisely how much those industrial age innovations spurred productivity versus the current information age innovations, but I wouldn't be surprised if the recent ones were greater.

Benjie, targeting "nominal GDP growth" means inflating during recessions like today. That means bailing out borrowers from their massive loans by effectively changing the terms of their debt with their lenders, essentially stealing money from bond-holders to help the indebted. Presumably this is supposed to help because all the borrowers will start spending again and that gain is claimed to be greater than all the burned lenders who won't want to lend again. This is an extremely dumb and short-sighted policy and it is only suggested with obtuse and airy terms like "targeting nominal GDP growth" because if you actually said what you're doing, most people would tell you to screw off. As morganovich always schools you, simply printing money is not a solution to any problem and is likely to make things worse, not better. All it is is a bailout to debtors, which I'm guessing you are one of. Arguing from your self-interest of getting out of your loans is a silly way to try and affect policy.

 
At 1/07/2012 4:18 PM, Blogger juandos said...

"Finally, end all guest worker programs as a cost-savings measure - where such termination would result in more hired citizens and more tax revenue"...

Gee! I guess sethstorm does like watching American businesses move offshore...

 
At 1/07/2012 4:28 PM, Blogger juandos said...

"What type of jobs are we talking about. The unemployment rate for college grads being as low as it is than why is the economy in such bad shape. What sort of jobs does a college grade hold today compared to a few years ago"...

Try this james...

Blue Collar vs. White Collar: Where Are Wages Recovering Fastest?

I guess we can always try out what might be supposedly happening in China...

...Associated Press news story last week reported that China now plans to phase out college majors that consistently produce unemployable graduates.

 
At 1/08/2012 12:29 PM, Blogger sethstorm said...


juandos said...
...watching American businesses move offshore...

No I do not. That, and the US is equipped to thwart the worst case departure scenarios. I enjoy seeing offshoring thwarted by government action. I favor things going the way of the failed Huawei, CNOOC, and Dubai Ports bids.

What empowers businesses to move also empowers government to move - even faster than business. They can try to run, but they cannot hide from a superpower.

You sure like to exalt businesses to a divine level. Then smite anyone that tries to ascend as a worker and not a business owner.

 
At 1/08/2012 2:03 PM, Blogger Ron H. said...

Sprewell: "That's an extremely wise and humble policy, as opposed to your claims that you know all these things ahead of time. There's no doubt that there was a lot of irrationality in the dot.com and housing bubbles, but one can't know if these things will peter out or not."

Austrians have a pretty good track record for predicting these things -

1.

2.

3.

- Including the Great Depression., as opposed to Keynesians who believe that economic events "just happen" like unforseen acts of nature, and that government intervention is necessary at every turn.

If people we rely on to smooth out the business cycle, maintain price stability, and maintain high employment - Greenspan and Bernanke - can't predict the harm their policies will cause, perhaps the idea of having a Central Bank should be seriously reconsidered.

 
At 1/08/2012 2:14 PM, Blogger Ron H. said...

"The more reason to banish post-secondary education from any job requirements - unless university access is indefinitely made more universal and cost-free to US citizens, along with 100% subsidies for living arrangements during education."

If education is cost free to US citizens, along with the 100% subsidies for living arrangements, who will pay for it?

 
At 1/08/2012 2:32 PM, Blogger Ron H. said...

"The fact of the matter is Many of the jobs that college grades are in contribute little or nothing to building an economy. Examples lawyers' accountants marketing consultants' insurance actuaries' financial planners' Just to name a few. The fact of the matter is unfortunately for many of your highly educated men with good jobs these jobs contibute little if anything at all to economic growth and in some cases an example lawyers take away from economic growth."

My goodness! If these people don't produce anything of value, why are they paid such big bucks? Are their employers really that stupid?

I agree that there are a lot of resources wasted complying with regulations and tax codes, but I don't think that's your point.

Lawyers don't really subtract from economic growth, they just redirect it in unintended and perhaps undesirable directions.

 
At 1/08/2012 4:26 PM, Blogger juandos said...

sethstorm with his usual socialist bent says: "What empowers businesses to move also empowers government to move - even faster than business. They can try to run, but they cannot hide from a superpower"....

Well the businesses don't have to hide sethstorm, all they have to do is go out of business since they have no further incentive to stay in business...

Yeah, that's another great idea sethstorm!!

 
At 1/08/2012 4:39 PM, OpenID Sprewell said...

Ron, your first link contains no predictions, only an after-the-fact analysis of why the housing bubble went wrong. We can all construct such analyses with hindsight, that's not a prediction. Your second link contains something approaching a prediction, but is very tentative and phrased as a question. He even says stuff like "No one can foretell the future, including Fed chairmen" and "The world is highly complex; cause and effect are not easily discerned where a confluence of forces operates simultaneously," highlighting the uncertainty involved, as he should. I was telling friends about that same Helbling data a couple years later and warning everyone not to buy a house during the 2004-6 timeframe, when prices were peaking, so I completely agree with him that housing was overvalued and that govt forces helped make it so. But pointing out that there were irrational prices during certain times and wanting to get rid of the govt forces that help make the market irrational is not the same as being certain that the Fed should do more to prick a "bubble," that you somehow know for certain is going to happen.

As for your third link with video of Schiff, I think Peter was dead on for a long time about the housing bubble and it is ridiculous to see the dumbos on those financial shows laughing at him, which is why I have never watched those shows. But to see him at the same time hyping the coming gold bubble only undermines his own credibility, as gold is a horrible and antiquated investment in even more ways, essentially even more retrograde than housing. I don't deny its limited viability as a hedge, but even that will disappear soon. As for your last link, it is easy to predict doom every time there is any sort of boom, as I bet most of those people linked there do, then only cite the times you were right after the fact, ie you predict a bust ten times and then only cite the one time you were right later on. There is always some kind of shake-out after any normal boom, as there will always be a mass of stupid people using the boom as an excuse to put money in dumb things, but that's different from a bubble and bust, which inflate much higher and fall harder. To be viable, those prognosticators from your last link would have had to have only made such negative predictions during the actual bubbles, not the smaller booms, and have had viable reasons why. Do that analysis and I bet you find none of them did very well at predicting at all.

 
At 1/08/2012 4:53 PM, OpenID Sprewell said...

I don't think Greenspan and Bernanke ever thought they could "smooth out the business cycle, maintain price stability, and maintain high employment," because the Fed just isn't that powerful. But you seem to think that they not only caused all the supposed gains from the '80s onwards but the busts in between, or perhaps you blame them only for the busts, which is even more perverse. I have two points about the Fed: their role is minor and even then, there's not much they can know to do ahead of time. Considering the remarkably laissez-faire policies of Greenspan and Bernanke, I'm not sure what you'd rather they did. It's not as though the Fed does nothing, here's a long-term chart of the Fed Funds rate, a nominally market rate that the Fed puts its finger on by adding to or removing monetary reserves, and which is essentially their main influence on the market. What would you have had them do differently? Notice that the FF rate was at almost 6% from 1994-2000, which if you take out the inflationary period in the late '70s and early '80s, was on the high end for the rest of that 50-year era, yet the dot.com bubble inflated anyway.

You can try to blame the housing bubble on their low rates during the dot.com bust, but I wouldn't: I'd blame the dumb bankers who could have invested that money anywhere yet chose housing, the govt agencies that pushed them into housing, and the worldwide savings glut that led to housing bubbles all over the world. In fact, it is remarkable that you claim to want the market to work, yet you blame the Fed simply for making more money available to the market, as though it's the Fed's fault that the bankers then misspent it on housing or that the govt encouraged them to. Finally, I actually agree with you that we don't need a central bank today and I think technology is about to obsolete all the central banks, as private digital currencies/barter are about to take off and obsolete national currencies. But you will always need shock-absorbers like the central bank: we'll just have completely private replacements to do so, instead of the Fed which is nominally private but has some govt appointments.

 
At 1/09/2012 3:51 AM, Blogger Ron H. said...

"I don't think Greenspan and Bernanke ever thought they could "smooth out the business cycle, maintain price stability, and maintain high employment," because the Fed just isn't that powerful."

Jeez, what then do you think the purpose of the Fed is?

"But you seem to think that they not only caused all the supposed gains from the '80s onwards but the busts in between, or perhaps you blame them only for the busts, which is even more perverse."

My point is that the Fed, by "Putting its finger on", as you put it, and leaving it on for too long, causes money supply to increase faster than GDP growth, so that the excess money must go somewhere, and most recently, the path of least resistance was housing. Before that it was equities.

"I'm not sure what you'd rather they did."

I would rather that the Fed board of governors held a news conference to announce that they had come to believe that central planning of interest rates and money supply can never work, in fact does more harm than good, and that they were going to clear out their desks and turn out the lights at the Fed.

"Notice that the FF rate was at almost 6% from 1994-2000..."

Actually if you look at the actual data, instead of that chart, you will find that the rate was mostly in a range of 3-5%, and at 6% only during 2 short periods in that range.

"You can try to blame the housing bubble on their low rates during the dot.com bust..."

And I do. There are many reasons for the meltdown, but again, the problem of too much money and easy credit allowed a real estate bubble to inflate.

"...the bankers then misspent it on housing or that the govt encouraged them to."

The bankers loaned money to people who bought overpriced houses. Government incentives encouraged banks to lend at low rates to anyone and everyone, without risk, and so they did.

By the way, my first link above is to a report written in 2006, using data through 2005. The bubble hadn't burst at that time, and most pundits were talking about eternal prosperity.

 
At 1/09/2012 3:52 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 1/09/2012 8:04 AM, Blogger Zachriel said...

Ron H: Actually if you look at the actual data, instead of that chart, you will find that the rate was mostly in a range of 3-5%, and at 6% only during 2 short periods in that range.

The data shows the effective rate being 5-6% from 1994-2000.
http://research.stlouisfed.org/fred2/data/DFF.txt

Ron H: There are many reasons for the meltdown, but again, the problem of too much money and easy credit allowed a real estate bubble to inflate.

As you said, there were many reasons. Too easy credit. Expansionary government fiscal policy. Over-reliance on market forces to self-regulate. Irrational exuberance.

 
At 1/09/2012 3:43 PM, Blogger Ron H. said...

Z: "As you said, there were many reasons. Too easy credit. Expansionary government fiscal policy. Over-reliance on market forces to self-regulate. Irrational exuberance."

Over reliance on Market forces? We haven't blamed that one, as we haven't seen it. Perhaps you could provide some clarifying examples.

Incentives matter - one of the immutable laws of human nature. Government policy makers, relying on their understanding or misunderstanding of Keynes, and using mathematical models miss this truth, and attempt to steer the activities of 300 million people, usually with unintended and disastrous results, as is the case of the housing bubble.

 
At 1/09/2012 4:42 PM, Blogger Zachriel said...

Ron H: Over reliance on Market forces? We haven't blamed that one, as we haven't seen it.

Well, according to one free market economist, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity — myself especially — are in a state of shocked disbelief." — Alan Greenspan

Ron H: ... as is the case of the housing bubble.

The financial meltdown was primarily caused by people gaming the markets. This led to a bubble in the securities shadow market, which then led to a run-up in real estate valuations.

 
At 1/09/2012 6:28 PM, OpenID Sprewell said...

Ron, whatever the Fed may put in its press releases, my point was that Greenspan and Bernanke, as two economists who are well aware of the wonders of free markets, are not dumb enough to think the Fed can really do all those things. The goal of the Fed is low and predictable inflation, that's about it. Bernanke's recent moves are unprecedented are not really monetary in nature, though some of the Fed-bashers keep trying to scare others who know less by saying that, more like he wants to help the federal govt out fiscally by taking risky assets off their balance sheet. If you think "excess money" was at all important in the housing bubble, I think you are ignorant of how the money supply works, which isn't unusual because most people are.

The currency component of M1, which is basically the only mechanism that the Fed has to influence the FF rate, went from $400 to $700 billion during the 1998-2006 housing boom. If you think that added $300 billion, or whatever multiple you attribute to the banks under the fractional-reserve system, drove a land bubble of $10 trillion dollars or more, you don't know much about how this stuff works. With easy electronic and other forms of payment, I don't believe the money supply has been a limiting factor on transactions for many decades now, so saying a tighter or non-existent Fed would have helped avert the bubble is just silly. The driving factor was the trillions in the savings glut, which financial and political elites pushed into housing. And it is amazing how you seemingly exculpate the bankers and Fannie/Freddie by serving up this whopper instead, "the path of least resistance was housing," as though everybody other than the Fed was an unwilling participant with no mind of their own. As for equities in the '90s, what rate would you rather have had? I've already pointed out that rates were on the high end during the '90s, meaning you would've wanted the Fed to raise them higher to avoid the dot.com bubble.

I agree with you that the Fed should not monkey with interest rates. But I do believe that they've largely figured out how to do it with minimal harm over the last three decades, and I know that they will soon be rendered defunct, whether they like it or not. :)

 
At 1/09/2012 6:36 PM, OpenID Sprewell said...

As for the data on the FF rate, Zach correctly points out that I'm closer to the right numbers than you are. ;) I disagree that the Fed and monetary policy had almost anything to with the real estate bubble we just went through. The only blame that could be allotted is that the Fed supposedly has some regulatory power over the banks, so maybe they should have snooped into the fairly widespread mortgage fraud going on, whether from borrowers lying about their income or banks misstating what the payments were. As to when that first link was written, I wasn't sure so I assumed it was recent, since some of the references were from 2005, but you may be right, it appears to have been written at or right after the peak, though there is no date. I knew there was likely a bubble at the same time because I was reading the excellent analyses in The Economist, which is why I told my friends not to buy in at those inflated prices. But the topic isn't whether housing prices were irrational at the time, some of us knew they were, the topic is whether the Fed helped make that happen and whether they could know enough to prick it.

My point is that the Fed's role in the runup was minimal and that one can't ever know if one of those homeowners wouldn't have cashed in his house, began a tech startup with that money and started another tech boom, causing rising incomes that helped everyone pay off their mortgages. That does not excuse the rampant market irrationality of putting people in houses they couldn't afford, but it is a defense against the Fed or govt interfering even in potential market irrationality, because the market is too complex for them to predict. The best the govt can do is remove agencies like Fannie/Freddie that were actively contributing to the irrationality, but the idiot politicians were mostly pushing Fannie/Freddie to lend more!

 
At 1/10/2012 1:50 AM, Blogger Ron H. said...

Sprewell: "If you think "excess money" was at all important in the housing bubble, I think you are ignorant of how the money supply works, which isn't unusual because most people are."

Gee, Sprewell, why don't you educate me then? You seem to know a lot about it. Please cite references.

Sprewell: "The currency component of M1, which is basically the only mechanism that the Fed has to influence the FF rate, went from $400 to $700 billion during the 1998-2006 housing boom. If you think that added $300 billion, or whatever multiple you attribute to the banks under the fractional-reserve system, drove a land bubble of $10 trillion dollars or more, you don't know much about how this stuff works."

Currency? Oh wait a minute. I was wrong. It seems you DON'T know a lot about it, and are missing something important here, if you think the money supply is directly related to the amount of currency in circulation, as I must presume, since your reference is to the currency component of M1, which we aren't actually interested in.

The link I gave you previously explains the functions of the Federal reserve. None of those include taking toxic assets off the hands of whoever you are referring to when you wrote "federal government". Perhaps you meant the GSEs Fannie & Freddie.

If you don't like the Federal Reserve reference I supplied, why don't you provide one you DO like that explains the function of the Fed?

"Bernanke's recent moves are unprecedented are not really monetary in nature..."

The Fed has no tools other than monetary ones. Don't you think creating many hundreds of billions of dollars out of thin air is monetary in nature?

"With easy electronic and other forms of payment, I don't believe the money supply has been a limiting factor on transactions for many decades now, so saying a tighter or non-existent Fed would have helped avert the bubble is just silly. "

You are confusing money with currency again.

"And it is amazing how you seemingly exculpate the bankers and Fannie/Freddie by serving up this whopper instead, "the path of least resistance was housing," as though everybody other than the Fed was an unwilling participant with no mind of their own."

I haven't exculpated anyone. As I pointed out, there are many causes of the meltdown, and I referred you to an excellent book that pretty well covers it all. There is plenty of blame to spread, including to bankers and F&F, but one of the initial problems was excess credit (money)due to incorrect Fed interest rate policies. Then, the pressure on banks to increase lending to people who shouldn't be homeowners, and removing risk from those loans by purchasing them through F&F, caused predictable results. Incentives matter.



#1: "If you think "excess money" was at all important in the housing bubble, I think you are ignorant of how the money supply works, which isn't unusual because most people are."

#2: "The driving factor was the trillions in the savings glut, which financial and political elites pushed into housing."

It's really not clear what you believe the difference is between "excess money", and a "savings glut". can you explain?

 
At 1/10/2012 2:08 AM, Blogger Ron H. said...

Sprewell: "The goal of the Fed is low and predictable inflation, that's about it. "

And inflation results from increasing the money supply, which the Fed does primarily by "monkeying with interest rates".

"The currency component of M1, which is basically the only mechanism that the Fed has to influence the FF rate"

There are several monetary policy tools available to a central bank to expand the money supply of a country: decreasing interest rates by fiat; increasing the monetary base; and decreasing reserve requirements. All have the effect of expanding the money supply.

"I wasn't sure so I assumed it was recent, since some of the references were from 2005, but you may be right,"

Austrian Predictions: Thornton, Mark. 2006. "The Economics of Housing Bubbles."

 
At 1/10/2012 2:31 AM, Blogger Ron H. said...

Z: "Well, according to one free market economist, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity — myself especially — are in a state of shocked disbelief." — Alan Greenspan"

Alan Greenspan, a free marketeer? that's a good one. He may have started out that way, but by the time he became Fed Chairman Greenspan his tune had changed. In fact, referring to the Federal reserve and free market in the same sentence is an oxymoron.

You have quoted him trying desperately to cover his ass during hostile Congressional hearings.

He also conceded that he has "found a flaw" in his ideology and said he was "distressed by that." Yet Mr. Greenspan maintained that no regulator was smart enough to foresee the "once-in-a-century credit tsunami."

"Poor little me." he says.

And this is the man entrusted with protecting the largest economy in the world from just the kinds of problems he can't possibly foresee.

Is he just incompetent, or is the Fed really a detriment to prosperity?

His successor seems just as clueless.

Z: "The financial meltdown was primarily caused by people gaming the markets. This led to a bubble in the securities shadow market, which then led to a run-up in real estate valuations."

People will always game the system. If they are provided with perverse incentives, undesirable outcomes can be expected.

The particular combination of perverse incentives that existed after the dot-com bubble burst, combined with Fed attempts to soften the blow of the necessary correction, caused an even more serious mis-allocation of capital.

 
At 1/10/2012 5:45 AM, OpenID Sprewell said...

Ron, I assumed you were familiar with at least the basics of how the Fed and the money supply work, I see that I was wrong to assume that. I'm not going to sit here and write a primer for you on how it all works: I suggest you actually read and digest all the links you keep posting, plus I've answered your questions to point you in the right direction. Actually, "the money supply is directly related to the amount of currency in circulation," as the rest of the money supply must always be a multiple of the monetary base, ie currency and reserves. Who cares what you were "interested" in or not? My point was that currency and reserves are the only factors the Fed can control, so those are the only measures that matter when we're talking about Fed policy.

No shit the Fed has no explicit role of "taking toxic assets off the hands" of the govt, which is why I anticipated your complaint by referring to Bernanke's recent and "unprecedented" moves. Since the federal govt has taken over the GSEs, it is the federal govt that they are helping out, or did you not know that? I didn't realize I'd have to inform you of simple facts like the federal govt taking Freddie/Frannie into conservatorship. The references you supplied about basic issues like what the Fed does should be fine, the only problem is your seeming ignorance of what they actually say. :)

"The Fed has no tools other than monetary ones."

Nope, not quite true. What the Fed has effectively done with the explosion of reserves is print a trillion dollars and buy mortgage-backed securities from Frannie/Freddie with that money. They then ensure that that money is kept in a vault someplace and is never spent. This is not "monetary in nature," it is a mere balance sheet transaction to make the federal govt's balance sheet look better than it is. It is risky because Bernanke might get fired and some future idiot put in charge of the Fed might let that money enter the economy. But as long as it never enters the economy, it is not monetary in nature. Of course, it is even better because I simplified and no money was ever printed, it's all just electronic numbers in computers right now, which is why the Fed can control whether it's let out or not.

"You are confusing money with currency again."

Nope, you are the only one confused by such silly semantics. I was referring to the fact that banks settle their accounts with all kinds of securities these days and can do so quickly and easily because of recent electronic systems like Fedwire and CHIPS.

 
At 1/10/2012 5:49 AM, OpenID Sprewell said...

"I haven't exculpated anyone."

By blaming the Fed so much and overrating their importance, you take away blame from where it really belongs. As I've said already, the Fed's faults may have been regulatory in nature, ie maybe they should have looked into mortgage fraud more, but they were not monetary, as currency and reserves contributed almost nothing to the bubble.

"It's really not clear what you believe the difference is between 'excess money', and a 'savings glut'. can you explain?"

If you're unfamiliar with the phenomenon of the worldwide savings glut, I suggest you google it. The point is that there were trillions of dollars in excess savings that needed to be invested. Money is merely the medium of exchange for those investments to take place. The amount of money is never the bottleneck these days, it's how much savings people have to invest. And those savings can be stored in many different ways before investing, so the money itself is only relevant at the moment of transaction. If I go into any more detail, I'd have to explain the nature of money and investment to you, so I'll stop here. ;)

"And inflation results from increasing the money supply, which the Fed does primarily by 'monkeying with interest rates'."

Usually true but not necessarily. The money supply can be completely flat or even declining, but a growth in velocity can cause inflation. This happens in irrational, bubble times when people have unusual expectations of heightened income so they bid prices up, particularly for long-term goods like housing which they may not be able to pay off later on.

"There are several monetary policy tools available to a central bank to expand the money supply of a country: decreasing interest rates by fiat; increasing the monetary base; and decreasing reserve requirements. All have the effect of expanding the money supply."

This quote shows your ignorance of how the Fed and money supply work in the US. While it is true that other countries may change interest rates by fiat, the only monetary lever the Fed has here in the US is market operations. So they print more money to increase the monetary base and then inject it into the economy by buying securities to affect the FF rate. So in the US, the first two mechanisms you list are actually combined into a single lever, the one I mentioned. :) As for decreasing reserve requirements, it is true that that is another option but it almost never happens.

Also, your quoted explanation is simplistic because all those moves can be counteracted by the actions of private banks. For example, simply because reserve requirements are lowered doesn't mean the banks will lower their reserves. They can choose not to and so not expand the money supply. :) I'm really not sure why you're inquiring about these basic issues, but my overall point is that many who blame the Fed don't really understand the minimal impact of what the Fed usually does. That's not to say there aren't dangers if they go nuts, print a bunch of money, and let it enter the economy, but that's not happening under Bernanke.

 
At 1/10/2012 7:58 AM, Blogger Zachriel said...

Ron H: {Greenspan} also conceded that he has "found a flaw" in his ideology and said he was "distressed by that."

What ideology?

 
At 1/10/2012 12:28 PM, Blogger morganovich said...

sprewell-

i think you are overstating my claims.

the .com bubble may well have been inevitable. what was not inevitable were the bubbles that followed right afterward. i doubt you can find in all of history such a set of linked bubbles flowing into one another.

they were the direct result of greenspan driving real interest rates to negative values and trying to "reflate".

absent negative real rates, you likely did not get a housing bubble and a federal debt bubble (exacerbated by direct fed buying).

sure, bubbles happen, but they have historically been isolated events. to see 3 in a decade takes some seriously bad monetary policy.

 
At 1/10/2012 2:08 PM, Blogger Ron H. said...

Z: "What ideology?"

He blamed his naive belief in the free market and the saintly behavior of self interested bankers for his errors.

As if there were actually a free market in banking.

He was *shocked* that guarantees against risk would cause risky behavior.

How could anyone who regulates the economy predict what effect his actions might have?

But it's all OK, because he's VERY sorry.

 
At 1/10/2012 2:47 PM, Blogger Ron H. said...

Sprewell,

It seems obvious that you plan to argue needlessly about minor points and definitions rather than anything of substance.

It's also obvious that, as in the past, you don't read well, as you keep misstating my positions.

I recall a lengthy and pointless exchange with you in the past, and I don't plan to repeat it now, as I have better uses for my time.

I can only say that for someone who I believe has, in past comments, described themselves as an anarchocapitalist, you seem remarkably reliant on the theories of Lord Keynes.

 
At 1/11/2012 12:34 AM, OpenID Sprewell said...

morganovich, I'm highly skeptical that the FF rate had anything to do with the subsequent bubbles. A couple hundred billion in extra money is nowhere near enough to drive the trillions in the real estate bubble, that's the savings glut that supplied that ammo. And wherever the ammo came from, it took dumb bankers and govt bureaucrats to pull the trigger. I place most of the blame on those who pulled the trigger and maybe a smaller part on the credulous savers who just gave the bankers their money/ammo to invest, without much oversight, but only a little blame goes to the Fed. As opposed to monetary policy, capital now speeds all over the globe at the speed of light: I think that was much more of a causal factor in these bubbles. One sees emerging markets booming and within seconds any retail investor can buy into that sector without a second thought. Such easy access, while mostly a good thing, also has the downside of allowing the herding that causes bubbles to take place much quicker. I'd blame that technological change long before I'd ever blame the mild moves by the Fed.

Ron, I'm not "needlessly" arguing, merely showing you that I know what I'm talking about and pointing out the ways that I was right all along. ;) As for "misstating" your positions, I directly quote you, so I'm not sure how I'm doing that. :) I'm sure we agree a lot more than we disagree, but on the point of the Fed, I think it's held up as a bogeyman by some far more than warranted, so I skewer those who do that. You seem confused about "the theories of Lord Keynes" also, as he mostly dealt with fiscal matters, not monetary. I agree with you that the Fed needs to go, but instead of looking backwards to the gold standard, as you seemingly do, I look forward to completely new forms of "money" online. I'm fairly certain that gold has no place in what's coming, but if you and the gold bugs think otherwise, e-gold is always there for you. ;)

 
At 1/11/2012 7:56 AM, Blogger Zachriel said...

Ron H: It seems obvious that you plan to argue needlessly about minor points and definitions rather than anything of substance.

Actually, he seems to be arguing substance, in particular, the limited role of the Fed in the market bubble. Certainly, low interest rates, and expansionary fiscal policy of the government, threw fuel on the fire, but the fire had its source elsewhere.

Ron H: I can only say that for someone who I believe has, in past comments, described themselves as an anarchocapitalist, you seem remarkably reliant on the theories of Lord Keynes.

Understanding and being able to accurately and rationally discuss Keynesian Theory doesn't make one a Keynesian.

Sprewell: As opposed to monetary policy, capital now speeds all over the globe at the speed of light: I think that was much more of a causal factor in these bubbles.

The savings glut combined with highly-rated but toxic securities were primary factors. The market was gamed by securitizers.

 
At 1/11/2012 11:21 AM, OpenID Sprewell said...

Zach, you say "The savings glut combined with highly-rated but toxic securities were primary factors. The market was gamed by securitizers." There is some truth to this notion that Wall Street was creating worthless "innovation" in their increasing securitization, which is why Warren Buffet got out of Wall Street in 2002 as he wrote in a public letter. But one has to dig deeper to see why Wall Street did this. By creating such securities they were able to create AAA-rated securities out of lower-quality ones, which they were greatly incented to do because of unnecessary govt regulations that force many institutions to only buy AAA. So it was a way to get around dumb regulations, but that raises the question of whether they knew they were junk?

And the answer seems to be no, why else would they have so many crappy MBS's on their books when the market plunged? People seem to think the bankers were conning everybody else, but there's a good case to be made that many on Wall Street deluded themselves into the belief that slicing and dicing mortgages made the whole operation safer and that housing prices magically couldn't fall. Combined with how much Fannie/Freddie egged the whole market on with their guarantees backed by an implicit govt guarantee, it was a recipe for disaster, as Buffett realized early on but almost none of the bankers and politicians would acknowledge till it was too late. All the more reason to take power away from DC, by selling off Fannie/Freddie in chunks to the private markets and removing their regulatory powers, and from Wall Street, as new internet operations will soon put the big banks out of business.

 
At 1/11/2012 1:53 PM, Blogger Ron H. said...

Z: "Actually, he seems to be arguing substance, in particular, the limited role of the Fed in the market bubble. Certainly, low interest rates, and expansionary fiscal policy of the government, threw fuel on the fire, but the fire had its source elsewhere."

That is not in question, but we would expect an entity charged with steering the US economy to recognize when a fire exists, or when conditions that might lead to a fire exist, and to understand the result of adding fuel to that fire. Instead we get attempts by the Fed to soften the landing after the dot-com bubble burst.

Without that fuel, market interest rates couldd have kept many of those overpriced properties out of the hands of those who couldn't afford them, and through lower demand, held prices down.

And then of course we have Greenspan saying: "Gee, I didn't know the gun was loaded."

Simply inexcusable.

The market gamed by securitizers? Who could have known that incentives matter? They did exactly what a reasonabe observer would expect, and that certainly should have included the Greenspan Fed.

The AAA rating of toxic assets was accurate, as they were backed by the good faith and credit of the American taxpayer. What could be more secure than that?

"Understanding and being able to accurately and rationally discuss Keynesian Theory doesn't make one a Keynesian."

That would be absolutely true if, in fact, that were the case, but it's nothing like that, as you would realize if you read more carefully.

Accurately and rationally? That's funny.

 
At 1/11/2012 4:22 PM, Blogger sethstorm said...


Well the businesses don't have to hide, all they have to do is go out of business since they have no further incentive to stay in business...

While other businesses will take their place.

 
At 1/11/2012 5:30 PM, Blogger Zachriel said...

Sprewell: But one has to dig deeper to see why Wall Street did this. By creating such securities they were able to create AAA-rated securities out of lower-quality ones, which they were greatly incented to do because of unnecessary govt regulations that force many institutions to only buy AAA.

Fund managers may buy a mix of securities, but the proper labeling of securities is essential for assessing risk. Once the ratings were gamed, then those fund managers that relied on the credit agencies were blinded. Funds, such as held by municipalities and pensions funds typically choose safer investments regardless of regulations.

Sprewell: And the answer seems to be no, why else would they have so many crappy MBS's on their books when the market plunged?

Because they were the greater fools.

 
At 1/11/2012 7:08 PM, OpenID Sprewell said...

Ron, if you think the Fed is "steering the US economy," you greatly overestimate the role of the money supply and the Fed's limited control of it. "Market interest rates" would have had minimal impact and would not have slowed down the housing bubble almost at all, that is my point. Nobody rated those securities AAA just because of the implicit govt guarantee for Fannie/Freddie, though that may have been factored in a bit, and ultimately that's the only thing that saved those securities somewhat.

Zach, the point is that a rating guarantees nothing, yet the govt required it so the market obliged. The problem is that those running those pension and other investment funds who took the biggest losses are clueless, no amount of ratings will fix that. If you think only "the greater fools" were left holding the bag, please tell me who all the rest were who were smart enough to get out early. Other than a few contrarians like Paulson, Buffett, or Schiff, almost everyone else had these securities on their books or lent money to those who did. Even JP Morgan, who got out relatively early and came out of this entire mess looking the best, took some losses because they weren't immune to the same delusions.

 
At 1/11/2012 8:08 PM, Blogger Zachriel said...

Sprewell: the point is that a rating guarantees nothing, ...

No, but many fund managers rely upon ratings to balance their risk.

Sprewell: ... yet the govt required it so the market obliged.

Of course most government pensions should be placed in secure investments. Above, you argued the 'Wall Street' thought the securities were AAA—which no doubt, many did—, yet you expect the average municipal fund manager to know better.

 
At 1/11/2012 10:57 PM, OpenID Sprewell said...

"many fund managers rely upon ratings to balance their risk."

Then why do we need them? Let's just fire them and let the ratings agencies pick investments then. ;)

"Of course most government pensions should be placed in secure investments."

Then why do most of them invest in the riskiest sectors like venture capital? Govt pensions are some of the worst-run funds, hoping to better that with regulation is just silly.

"Above, you argued the 'Wall Street' thought the securities were AAA—which no doubt, many did—, yet you expect the average municipal fund manager to know better."

Nope, I argued Wall St. carved up crappy securities into AAA, by applying risk models and using tranches, then fell for their own hype. But they certainly didn't fall for it as bad as those outside the sausage factory. I was surprised that the Wall St. banks had so many of the crappiest securities on their books, as we all assumed that they found some greater fool to offload them to. Turns out nobody wanted to touch the worst ones, so Wall St. banks would sell the better MBS's and keep the worst ones on their own books, cuz nobody else wanted them. What they thought would save them when the shit hit the fan and those securities tanked, who knows.

 
At 1/12/2012 8:22 AM, Blogger Zachriel said...

Sprewell: Then why do we need them? Let's just fire them and let the ratings agencies pick investments then. ;)

Ratings are linear. Investments are multidimensional, that is, they form a mix of various types of investments in order to maximize profits while minimizing risk.

Sprewell: Then why do most of them invest in the riskiest sectors like venture capital?

Corporate pension funds are under the "prudent man rule", and are generally a mix of various types of investments in order to maximize profits while minimizing risk.

Sprewell: But they certainly didn't fall for it as bad as those outside the sausage factory.

Yes, the greater fools.

 
At 1/12/2012 4:44 PM, OpenID Sprewell said...

"Ratings are linear. Investments are multidimensional, that is, they form a mix of various types of investments in order to maximize profits while minimizing risk."

This does not answer the question at all. The difficult part is determining what is an investment's real risk/return profile. Once you know that any fool with some software can mix them together for himself. If you're saying those fund managers are there simply to mix together securities already rated for them, then you admit their irrelevance. :)

"Corporate pension funds are under the "prudent man rule", and are generally a mix of various types of investments in order to maximize profits while minimizing risk."

OK, so you admit that pension funds are already not "placed in secure investments" alone, which you called for earlier. Venture capital has underperformed for more than a decade now, so the pensions were the dumb money yet again.

"Sprewell: But they certainly didn't fall for it as bad as those outside the sausage factory.

Zach: Yes, the greater fools."

Earlier you claimed that those on Wall Street who kept MBS's on their books were the greater fools, now you say it's those on the outside. My point was different: that those outside Wall Street bought a bunch of crappy MBS's and so lost money but the Wall Street banks kept the worst ones on their books, apparently because they couldn't offload them and didn't think they were that risky either. So all lost money, but they lost it in different ways. Considering that almost everyone who had money in this market, other than a few contrarians who I listed earlier and who weren't the ones creating the securities, were irrationally confident about the real estate market, it is tough to make a case for "gaming the markets," as you did. At best they gamed the silly regulations, but if they were gaming the markets, they also gamed themselves. ;)

 
At 1/13/2012 4:21 PM, Blogger Zachriel said...

Several examples of black-and-white thinking.

Sprewell: If you're saying those fund managers are there simply to mix together securities already rated for them, then you admit their irrelevance. :)

Fund managers have reduced their reliance on ratings agencies, and how to do so is an important issue in the industry, including reducing regulation requiring minimal ratings, which you alluded to above.

Sprewell: OK, so you admit that pension funds are already not "placed in secure investments" alone, which you called for earlier.

Notice you added "alone" and dropped "most government pensions". Prudence is the rule. It's a balancing provision. Requiring a minimal rating for investment allowed fund managers to make mechanical decisions, but certainly didn't force them to.

Sprewell: Earlier you claimed that those on Wall Street who kept MBS's on their books were the greater fools, now you say it's those on the outside.

Apparently, you're not aware of the meaning of "greater fool".
http://en.wikipedia.org/wiki/Greater_fool_theory

 
At 1/13/2012 10:05 PM, OpenID Sprewell said...

Zach, not only could they get rid of those dumb regulations about minimum ratings but they could remove the ratings agency oligopoly, forced on us by yet more dumb govt regulations. I added the word "alone" because that's certainly the implication from your full quote, "Of course most government pensions should be placed in secure investments." There will always be dummies making mechanical decisions, but presumably the regulators hoped that by forcing them to buy AAA only, the damage done by bad decisions could be limited. This was proven incredibly wrong, as Wall Street will always find ways around the regulations and there are always dummies, whether the politicians pushing Fannie/Freddie to lend more or banks around the country who bought MBS's or the Wall Street bank CEOs themselves, who want to believe they've magically "solved" the problem. All the regulations do is handcuff those who want to do something innovative and would rather not push the legal limits.

Apparently you're not aware that precisely because I'm well aware of what a "greater fool" is is why I find your claims nonsensical. Your first claim that Wall Street banks were the greater fools was rendered incoherent by your subsequent claim that those outside Wall Street who bought securities were also the greater fools. Everybody can't be the greater fool, which is why your notions of "gaming the markets," as though there was some big con going on, don't make much sense.

 
At 1/14/2012 9:08 AM, Blogger Zachriel said...

Sprewell: Apparently you're not aware that precisely because I'm well aware of what a "greater fool" is is why I find your claims nonsensical. Your first claim that Wall Street banks were the greater fools was rendered incoherent by your subsequent claim that those outside Wall Street who bought securities were also the greater fools.

Gee whiz, Sprewell. Some people became very rich on toxic securities. And yes, sometimes they burned their own companies to do it.

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity – myself especially – are in a state of shocked disbelief." — Alan Greenspan

 

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