The Secret of the Weak Recovery: We Had a F***ing Housing Bubble by Dean Baker

[xchrom]

http://www.commondreams.org/view/2013/05/06



The problem with economics is not that it's too complicated; the problem is that it's too damn simple. This problem is amply demonstrated by all the heroic efforts made by economists to explain the weakness of the current recovery.

We've had economists tell us that the problem is that we are now a service sector economy rather than a manufacturing economy. The story is that inventory fluctuations explain much of the cycle. Since we don't inventory services, we will have a slower bounceback in terms of production and employment. (There is a simple problem, since we don't inventory services, the downturn should also be less severe in a service dominated economy. How does this story fit with the worst downturn since the Great Depression?)

We've also been told that the problem is underwater homeowners who can't spend like the good old days because they are underwater in their mortgages. The problem with this one is that we only have around 10 million underwater homeowners, the vast majority of whom have relatively modest incomes. The emphasis is on "only" because, while 10 million is a lot of people to be underwater, it is not a lot of people to move the economy.

The median income for homeowners is $70,000. (Median is probably appropriate here rather than average, since it is unlikely that many wealthy people are underwater.) Suppose that being above water would increase consumption by each of these homeowners by $5,000 a year. This is a huge jump in consumption for people with income of $70k. (Do we think these homeowners are saving an average of $5,000 a year now?) This would lead to an increase in annual consumption of $50 billion a year or less than 0.3 percent of GDP. This would be a nice boost to output, but it would not qualitatively change the nature of the recovery.

[byeya]

1. Dean Baker is often ahead of Prof Krugman which is saying something. Baker caught the austerity

study's lack of data immediately and called the Harvard authors for violating professional ethics.

We're in a bubble right now: An asset bubble. The Central Banks world wide are following the Fed at suppressing interest rates and have created a situation where junk bonds ("junk" bonds?) now average of yield of only 5.1% and German 10 year bonds less than 2%. You only get a little over 4% on an Italian bond!
Apple has found it cheaper to borrow tons of money than to bring part of their fortune home and pay the taxes owed to the Treasury.

[marmar]

2. Reinflating the same bubble that took out the economy last time.

What's the definition of insanity?

[SoCalDem]

4. The IBGYBG theory in action

Grab all you can now, and then move on..

[byeya]

3. The way I see it is that there is no institutional memory plus enough people made money on the

housing bubble - and getting out before she blew - that a lot of smart money is trying the same again.

[kenny blankenship]

5. He's right about the simple truths being ignored - here's another:

the only response of our government to the crisis brought on by epic malinvestment has been to attempt to reinflate the bubble of epic malinvestment.

It's not just that "there is nothing to fill the gap" or the void left behind by the pricking of the bubble, but worse: all "recovery" efforts of our institutions have been directed towards propping up the distended values of assets that are well outside of their historical norms. So not only is there "nothing to fill the gap", but official policy actually helps ensure that NOTHING CAN ARISE to fill the gap. The dollars created by govt borrowing and central bank printing are being directed straight into a sewer of speculative waste, and without being urged or required to produce anything of value to the rest of society. And there's where you find the mainstream of expert economic thought flowing these days - offering praise to the sewer and baptizing each other in it.

[byeya]

6. You're right. Compare the $$$ Bernacke is spending buying distressed securities - $85Billion

per month - with 0bama's bailout of the automakers. GM is back in business and producing cars and trucks. People are working - although at lower wages than they should get - and spending in the USA building the real economy.

[HiPointDem]

7. +1

[lumberjack_jeff]

8. It's the wages, stupid. n/t

[magical thyme]

9. ^^^this, and lack of investment in ourselves

plus focusing on cutting government costs, lowering the spending further. Too much money is still not circulating; it's sitting in tax havens overseas.

It's more complex than what is put forth in the article; it's not a single issue. People who would prefer owning to renting are unable to qualify for loans. People who need to downsize can't sell, unless they take such a huge loss that they won't have enough to start over.

Low wages mean low spending power and people hanging by a thread, living check to check.

No wages, for the forgotten unemployed who are no longer counted and effectively "unemployable" have been forced out of the economy altogether.

[byeya]

11. NC recently cut unemployment benefits from (approx) $500/wk to $350/wk

[DCBob]

10. The answer is buried in the article.

"Well, it's pretty damn simple, we had a housing bubble driving the economy before the collapse and there is nothing to fill the gap created. The bubble led residential construction to soar to more than 6.0 percent of GDP at the peak of the boom in 2005. It is now a bit over 2 percent of GDP implying a loss in annual demand of more than $600 billion. The $8 trillion in housing wealth created by the bubble led the saving rate to fall to almost zero due to the housing wealth effect (people increase annual spending by 5-7 cents for each dollar in housing wealth). With the saving rate hovering near 4 percent, we have lost close to $400 billion in annual consumption demand.

The cumulative loss of annual demand is more than $1 trillion. What did we think would replace this demand? Investment in equipment and software is actually close to its pre-recession level measured as a share of GDP. Furthermore, this component of investment has never been a much larger share of GDP, even in the Internet bubble years. Why would anyone expect it to expand rapidly at a time when many firms still have large amounts of excess capacity? (Structure investment is depressed because there was a bubble in non-residential construction as well, leading to large amounts of excess capacity in most areas of non-residential construction.)

Do we somehow think that consumers will spend at the same rate after they have lost $8 trillion in housing wealth as when they had this wealth? Why? Net exports could fill the gap, but the dollar has to fall. Net exports could fill the gap, but the dollar has to fall. (I repeated that one in case any economists are reading.) The value of the dollar is the main determinant of our trade deficit, if we want a lower deficit then we will need a sharp decline in the dollar, which has not happened."

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Bingo. I have been saying something similar to this for years and most dont get it I guess because it just too simple as Baker explained so well.