The Green Shoots Debate

Earlier today, Simon suggested that “we are out of the panic phase of the crisis.” Bond Girl said in response, “There appears to be some confusion between exiting the panic phase of the crisis and actually recovering.” That is something that I certainly agree with, and I suspect Simon does as well (although he may not agree with her entire comment.) 

There has been a lot of discussion of “green shoots” scattered around the Internet recently. Most of it, I think is premature. A lot of economic indicators seem to show that things are getting worse at a slower rate than before. One major source of optimism was last week’s jobs report, which showed a net loss of “only” 539,000 jobs. Here’s an excerpt from the New York Times coverage:

Yet the deterioration was milder than expected, prompting encouraging talk.

“The most intense spate of weakness is probably behind us,” said Michael T. Darda, chief economist at the research and trading firm MKM Partners. “Less bad is always a prelude to good. It’s going to take some time for this economy to get back on its feet, but we might be closer to the recession ending.”

Investors bought into that message, sending stock prices soaring.

To put this in perspective, I turn to the always-accurate Menzie Chinn (follow the link for a good picture):

Revisions are downward (but getting smaller over time), the growth rate becomes less negative, but hours continue to decline rapidly.

As I’m sure other people have noted, these are second derivatives that are improving: the direction of change is still negative, but the change in the rate of change is positive. This is not too surprising, because some levels of economic simply cannot fall beyond a certain point in the short term. As Calculated Risk pointed out, the turnover rate for autos in the U.S. reached 27 years in February, which is clearly unsustainable; cars just don’t last that long. In the long term, maybe we can adapt to a society with fewer cars, but for now many people need them to survive, so someone will have to buy new cars. And, in fact, auto sales improved slightly in March (though not in April). Given the speed of the descent in Q4 and Q1, the bottom presumably cannot be that far off. 

The four-week average of new unemployment claims is another indicator that the end of the recession (meaning the end of economic contraction) might not be too far off; James Hamilton and Calculated Risk both think this is plausible.

What happens next, however, is another question. Will the economy return to long-term trend growth of about 2.5-3.0% per year? Or will we muddle along with a “jobless recovery” where economic growth is barely sufficient to keep pace with population growth? The important thing to remember is that trend growth is just a long-term statistical average; there’s no magical mechanism that generates growth all by itself. I’ve said before that a lot of 2010 forecasts look like reversion to the mean, which is a valid way of forecasting, say, the expected height of the offspring of two tall people, but not necessarily economic growth.

For one thing, there’s no going back to the economy of 2002-07: a disproportionate share of economic growth then came from finance and real estate, and that isn’t happening again for a while. More fundamentally, as Calculated Risk points out, we have reason to believe that the usual engines of recovery – personal consumption and residential real estate – are likely to be missing in action, in part because the crisis is likely to have caused a long-term increase in household savings.

So what’s with all the optimism? To s0me extent, it reflects people’s personal predilections: optimists see a recovery in the same data where pessimists see a long, flat line. In addition, though, I suspect there’s at least a little marketing at work here. As Peter pointed out, Obama’s “buying stocks is a potentially good deal” remarks on March 3 almost perfectly picked out the bottom of the stock market – a better call than any stock market prognosticator. The man can do anything! Of course, there’s some endogeneity there; the most powerful person on the planet should be able to move the stock market, at least a little. And the administration seems to have nudged up its level of public optimism slightly, no doubt hoping to boost confidence and spending at the margin. If they can do it, more power to them. The economic stimulus package and, more likely, the monetary stimulus provided by the Fed will also have an effect. But they are fighting against millions of foreclosures to work through and a newfound desire to save on the part of the American consumer, and it will be a long battle.

By James Kwak

79 thoughts on “The Green Shoots Debate

  1. Yes we’ve weathered the crisis, but there are still way too many unknowns in this intertwined mess – credit card defaults, skyrocketing world unemployment, commercial real estate, Europe falling off the cliff, China’s wound up steel and aluminum production despite plummeting world demand, etc…

    To me this is just the calm before the next storm front arrive. Of course, I’m crossing my fingers that I’m wrong. Should make for an interesting quarter or two.

  2. While green shoots are certainly lacking in the West, I wonder what’s going on in the Far East. Just looking at Japan, Korea and Taiwan they had much larger declines at the end of last year but now industrial production has been increasing and inventories have been increasing again. I’d like to see what’s going on there, particularly in comparison with the moderate news in the US and the continuing bad news from Europe.

  3. I suppose it depends on what you mean by “green shoots” after all. Does it appear that we’ve at least temporarily side-stepped a replay of 1932 where the collapse of the banking system led to a galloping deflationary spiral that stomped on economic activity with hob-nailed boots? Yes. Which is an accomplishment, given that in September of last year I was pretty certain we were going to do 1932 all over again. Are we looking at a Japan-style “Lost Decade” as our economy slowly works out all the bogus financial instruments and insolvent institutions and insolvent individuals and slowly re-tools into something sustainable and long-term viable? Well, if that’s our definition of “green shoots”, we may be there… which is better than 1932 in so many ways I lack the fingers and toes to count them all, but hardly something to be applauding like some of the “green shoots” advocates are doing.

  4. People have pointed to the flat CPI release as a positive sign that we are avoiding deflation, however only the contribution of tobacco rescued us from reporting deflation. In fact, there was deflation in every segment except for medical care, education, and “other goods and services” — the latter dominated by a 9%+ increase in the cost of tobacco — so to say that we have avoided deflation is a stretch.

  5. I think the whole idea of “rates” “rates of rates” aren’t valid in this area. It’s an information system, not a physical system with properties like momentum and energy. Only physical fundamentals have pleasant mathematical properties like continuity and differentiability–there’s a rate at which oil can be pumped, a growing time for crops, and so on. But financial markets proceed in a series of jumps–some up, some down. There does not seem to be any overall central function to which they converge. Sometimes economies are more active, sometimes less. Who knows why? (Well, except for widespread fraud. That we understand.)

    No, I don’t believe in green shoots. Not yet. Besides, we corvids ate the corn.

  6. Indeed, we’ve experienced real deflation in both wages and (most) prices, which is explicitly why I mentioned Japan’s “Lost Decade”, which had deflation on that order too, for many of the same reasons (real estate bust, government reluctance to deal with fundamental economic problems, etc.). Still a long ways away from 1932 — thankfully. But more like tan shoots than green. It’ll take a lot of water and fertilizer — and time — to green them up any, IMHO.

  7. I think the whole green shoots business is a real time demonstration of what the behavioral psychologists call ‘confirmation bias’. Having reached a conclusion (whether through a rigorous analytical process or prayerful delusion), the observer tends to over-emphasize and accept uncritically anything supporting the conclusion already drawn, while dismissing or disregarding evidence to the contrary. If you believe that ‘the worst is behind us’ then you’ll see green shoots in the data. If you’re an uber bear king of the permafrost, you’ll see yellow weeds.

    Also, The Raven has a good point about the requirement for continuity before a function can be differentiated at any given point. I get so tired of the mathematical voodoo thrown around by people who wouldn’t know L’Hopital’s Rule from Euler’s Constant. If the ATM was the most important innovation in finance in the last 25 years, I’m not sure that the replacement of voodoo economics with voodoo mathematics represented any real progress.

  8. With all the talk of second derivatives, could somebody tell me why it is impossible to have the economy following the path of a negative cube instead of a square function. My point is that there are plenty of ways mathematically for the second derivative to go to zero and then turn right back negative again yet no one ever seems to comment on this possibility in economics. I have no doubt if you take a full spectrum of history of the last 2000 years you find plenty of civilizations that follow a further down scenario after the badness gets “less fast”. For example have a gander at Collapse by Jared Diamond. I’m not saying we are on this course, but even pessimistic economists always assume a recovery without a further accelerated down stretch, they just quibble about the timing or the speed of recovery.

  9. I think you are exactly right. Not that I expect the economy to follow any other specific mathematical function. But the general point, I believe, is that there is no reason for the economy to follow any mathematical function to begin with. So the idea that it is locally parabolic (the second derivative will stay constant and positive, so the first derivative will inevitably turn positive at some point) is just a projection from the mind that wants to see a pattern onto a world that has no underlying pattern.

  10. Prof. Kwak —

    You write:

    And the administration seems to have nudged up its level of public optimism slightly, no doubt hoping to boost confidence and spending at the margin.

    If I may be so bold… I believe the other point Bond Girl was trying to make is that it matters not only how much money is spent, but what it is spent on.

    No doubt all those nice Keynesian macro variables are very useful for seeing what is happening in an economy. But it does not follow that any action whatsoever to stabilize, say, “aggregate demand” is actually a good idea. To make an imperfect analogy… If your car’s engine is overheating, you cannot fix the problem just by blowing cold air on the temperature sensor.

    Similarly, “confidence” alone is necessary but not sufficient for a functioning economy. It is true that extreme lack of confidence — i.e., panic — can by itself bring down a fundamentally healthy system. But I do not think that the opposite — call it “irrational exuberance” — can itself repair a fundamentally sick system. In fact I suspect it will make matters worse.

    The Panic of 2008 has indeed been arrested by the Treasury spending $1 trillion that we do not have and the Fed creating $2 trillion of new money. If that spending is on investment, and that new money can find itself matched by real wealth creation, then all will be well… But if instead the money is frittered away on politically-motivated boondoggles, or if it simply fills the holes on financial firms’ balance sheets (retroactively making their worst bets appear “good”), then I am very concerned about the outcome… No matter what the Keynesian identities say.

    Time will tell.

  11. Well… Is there such a thing as “the business cycle”?

    If so, then a graph of raw economic activity, its first derivative, and its second derivative will all have the same shape, with each led by the next.

    The assumption, I think, is that this is just another cycle. Like the assumption “the sun will rise again tomorrow”, it will be correct every time except for one. :-)

  12. Take a deep breath, and ask yourself “what has fundamentally changed since August of 2008?”
    If something has changed, and for the better, then go ahead and relax because everything will be just fine…

    At least that’s what I do. I’m edgy…

  13. Roughly $4 trillion of liquidity poured into banks is different from August 2008… problem is, we have an $8 trillion hole to fill thanks to the housing crash. But do we need to fill that hole all the way to avoid a 1932 scenario? Answer appears to be “no”… but now we’re in a 1996 Japan scenario. My suspicion is that it’s going to play out over the next four to six years before things start getting back to more “normal” conditions…

  14. What about replacing the word confidence with this, will the monthly payment consumer be able to or want to go further into debt?

  15. Can I ask a question and forgive me if it’s fairly pedestrian, but what’s a “second derivative indicator?” I’ve read about first, second and third derivative indicators and I was wondering what they mean.

    Thanks for helping the ignorant,


  16. “in part because the crisis is likely to have caused a long-term increase in household savings.”

    About that savings rate and from:

    “TrimTabs reported that the personal savings rate in February was much lower than the 4.2% reported by the Bureau of Economic Analysis. “Real-time income tax data indicates that personal income is plummeting and that the savings rate was no more than 0.9% in February,” said Biderman. “The only reason the savings rate was positive was that income tax refunds were up sharply relative to last year.”

    “Finally, TrimTabs reported that real-time income tax data indicates that the personal savings rate was 1.6% in March, well below the 4.2% estimated by the Bureau of Economic Analysis.”

  17. The only green that is shooting is the money injected into the banking system.

    The agricultural analogy is meant to make us think that what is happening is productive and farm friendly.

    When the taxpayers have to cough up the bill – we might see a different type of green shooting.

  18. Err, Pebrd, as Chairman Ben has noted in the past, the Federal Reserve has this great new-fangled technology called the *printing press*. If we have an $8T hole in our economy caused by the housing collapse, it’s quite viable and reasonable to print up a fresh $4T worth of dough to fill that hole, and Chairman Ben has pretty much done that. Why do you think there will ever be a bill for taxpayers to pay? Easy go, easy come (and no, that’s not a porno movie reference :-).

    I just love “analysis” which completely and utterly disregards the fact that the Fed can just *print* money… it’s as if they think we’re still on the gold standard. Huh.

  19. Perhaps there are many unknowns, but let’s have a look at several indicators that actually have given guidance in the past.

    One of the most encouraging signs is the ISM manufacturing data. That data has long been correlated to the GDP growth rate. It has now given us five months of data with which to plot a trend line…
    Should that trend line continue on its current slope, growth will return by late June, early July.

    With respect to employment, early indices like the Monster report, the Challenger job cut report and the ADP reports, show employment on the mend.

    And finally it really is housing we should be focused on. Check those markets that burst first and you will find that not only have prices stabilized, but they are now bouncing.

  20. Do we have any historical examples of times when the second derivative turned positive, only to revert to negative again later in the cycle? I’ve been wondering about this a lot lately as well.

  21. Derivatives are a calculus term to describe “rate of change”. The first-year textbook example is that velocity is the derivative of distance, and acceleration is the derivative of velocity. i.e. if acceleration is positive, velocity is increasing. The faster something is changing, the greater the value of it’s derivative. When a trend is negative (downward or decreasing), the definition of a positive derivative of that trend is that is is getting negative more slowly. Hope this helps.

  22. “Less bad is always a prelude to good.”

    I’m not sure I understand what Mr. Darda means here. If he’s saying that good is always preceded by less bad, well then, isn’t that a given? If he’s saying that good always follows less bad, I don’t know if I buy that. What prevents things from improving, and then dropping back for a time?

  23. James —

    to be pedantic i don’t think that you have the definition of ‘locally parabolic’.

    in any case there is no way to know absolutely that the economy is starting to recover. all we know is that the measured variables are worsening more slowly than they had been. reassuring, no?

  24. as you know, some of that money went to directly cover losses from the credit bust and nearly all of it went to prop up the credit system.

    a lot of the “created” money — maybe 80%-90% of it — will come back to the fed.

    none of this can _create_ productive investments. that happens outside this framework.

  25. The first order of business was to prevent a 1932 scenario. But you are correct that this doesn’t solve the problem of the fundamentals of the economy being inherently unsound. What it does is (hopefully) prevent it from becoming even less sound while the fundamental problems are addressed. An economy based on one asset bubble after another is *not* long-term sustainable. Changing that isn’t going to happen overnight, or due to any bailout of the financial system. All that bailing out the financial system does is prevent a replay of 1932 — quite valid thing to do, but not a be-all and end-all.

    It’s going to be *years* before things are anywhere near “normal” for some definition of “normal”, in my opinion. And that’s only if American business and American politicians make the hard choices necessary to make the U.S. economy viable again rather than a series of bubblicious Ponzi schemes each more audacious than the last (culminating in the real estate Ponzi scheme that was inherently based on flipping your house to the next sucker down the line before your ARM reset) that end up adding no real value to the economy. We must have a viable financial system to have a viable economy, but a viable financial system alone is just one of the requirements for such.

  26. Badtux: “Roughly $4 trillion of liquidity poured into banks is different from August 2008… problem is, we have an $8 trillion hole to fill thanks to the housing crash.”

    Err, correct me if I am wrong, but what $8 trillion? Doesn’t that figure come from this kind of thinking? If some idiot bought a house for a lot more money than it sold for a few years ago, then there must be other idiots who would be willing to buy similar houses for similarly high prices. Uh-oh. We have temporarily run out of idiots to buy houses at such inflated prices. But we have more sensible people who are paying more sensible prices for houses. If we subtract the prices that we project that the idiots would have paid for every house in the country from the more sensible prices that we project that more sensible people would now pay for every house in the country, then we get a difference of $8 trillion.

    It’s funny money, isn’t it?

  27. true, basically, but i do think that there has been a lot of productive activity in the past few years as well. we’re not at the limit of that, but it’s been there nonetheless.

    take the internet for example. in the past half hour, i have been sitting at home while my toddler is sleeping. i have also been reading and writing with really smart people about the world financial system. i have also been corresponding with my high school girlfriend about our band teacher who just died. i have also chatted with some other parents, seen a demo of wolfram alpha, and been part of a virtual group hug congratulating an acquaintance on his recent engagement. after i’m done with this post i am going to make a list of some writing exercises that i have been thinking about offline. this is not an unusual evening for me. how does this evening contribute to gdp? probably 0.01% of a computer plus well under $1 in internet bandwidth plus some micro amount of electricity. in short, there is a lot of value, but not a lot of $$$$.

  28. In my town, frail green shoots are easily destroyed by hungry deer and rabbits. You can wish all you want for the green shoots to grow and flourish, but usually you have to take some sort of action to keep the animals from destroying the greenery – build a fence, lay down repellents, etc.

    Since nothing has changed in how bankers do business – and no penalties have been imposed that would persuade them to change – one can only wonder at what the bulls and bears will do to the tiny buds emerging from the muck that is today’s US economy.

    We can hope they don’t trample the green shoots, but history shows otherwise.

  29. no, i think that bankers have changed quite a bit.

    for instance, read the story in the new york times (i think today’s) written by the new york times finance writer who got himself into trouble with a mortgage that he clearly shouldn’t have been allowed to take out.

    contrast that with the situation today where banks are requiring 20% down and checking credit stringently.

    anecdotally: i haven’t tried to get a mortgage (i am a renter) but my boss just refinanced. he has perfect credit and did a 75% loan to value mortgage on a house worth about 500k. i think he makes about 250k per year, so he should qualify easily. well, he did — but they ran him through the ringer. you wouldn’t have seen that in 2006.

  30. Just wanted to follow up with a link to a Chicago Tribune blog post with the headline: “No Green Shoots Here.”

    According to a Grant Thornton survey, CFOs at financial firms are taking a gloomy view of the near future.

    Have not read the survey myself – the Trib offers this summation:

    “Among those surveyed, 85 percent believe that the U.S. economy will remain in recession for the remainder of 2009, 58 percent do not plan on giving employee raises this year, and 74 percent are concerned about the cost of employee benefits.”

  31. Err, you cough up the bill by either higher taxes or lower money value. If you think Ben’s helicopter drops are going to create more real value – more products and services that people are going to be able to afford with their wages – OK – but my money is bet elsewhere.

  32. It would be funny if those people paid cash for their inflated houses. Unfortunately, they paid with debt, which means that either they service the debt or a long drawn out process of debt restructuring. Look like a very drawn out process – even if the government changes bankruptcy rules on the fly.

    Also, there are a ton of projects out there that have never been finished for which there is no demand – that is sunk capital that will never be recovered in full. Lets see who ends up holding that bag – oh look a pension fund – sorry grandma – the joke’s on you.

  33. But do you think this is a long-term change? Or just until they crawl out of the toxic asset pit they dug for themselves? Supposedly, some banks are engaging in the same reckless behaviors that caused them to stockpile toxicity in vast quantities.

    And the FT has an absolutely disturbing story about banks seeking to participate in PPIP as buyers, snapping up those worrisome things known as toxic assets clogging up the banks’ balance sheets (to which all I can say is a befuddled “huh!”)

    Since there have been no penalties posed for the reckless behaviors (but billions in bonuses paid to many at these firms), and no regulatory changes (though some are being discussed), I fear that things will become loosey-goosey once again in the not so distant future.

  34. “We must have a viable financial system to have a viable economy, but a viable financial system alone is just one of the requirements for such.”

    The point I’ve been wanting to make for weeks!!!!!!!

  35. “We must have a viable financial system to have a viable economy, but a viable financial system alone is just one of the requirements for such.”

    Further, why don’t we have a total economy czar and have Geithner & Bernanke et al., report to him or her?

  36. pebird: “It would be funny if those people paid cash for their inflated houses. Unfortunately, they paid with debt, which means that either they service the debt or a long drawn out process of debt restructuring.”

    Yes, there are problems with the mortgages on homes purchased at inflated prices. But that is a far cry from $8 trillion, which is the supposed total loss on every house in the country. Correct me if I am wrong about that.

  37. Grreenshoots? For whom? Giethner gets appointed – Wall Street goes beserk, 500pts as I recall. Pandit and Lewis pimp extraordinary profits. Wall Street goes nuts again – 30% gains since the 666 lows of November triggered by the finance sector alone. What other industry is experience green shoots? The banks and the finance sector has recieved 10-12 trillion bowed taxpayer dollars in direct aid, largess and gaurantees’ from the Fed and Treasury. Is there any wonder there are greenshoots in the finance sector?

    Now add to this sordid spectacle and mass thievery socalled MSM message-force multipliers heaping scorn on Obama for being truthful, or in the wicked eyes of the wicked bankers – “too negative”, so majikally – the message-force mulitipliers in the socalled MSM start conjuring greenshoots here and there. Slowing of a radical decline is not a “greenshoot” even if these numbers and partisan finance sector manipulated caluculus has some semblence of truth, – it is only the predatory class, and the oligarchs in the finance sector, (sorry Steve, but a rose is a rose, a pig a pig, a thief a thief, and a predatorclass oligarch a predatorclass oligarch). There Are NO greenshoots poor and middle class Americans.

  38. green shoots or gangrene?
    I really don’t like to be such a downer but I’m seeing nothing but decay out here…

  39. With all due respect to a previous commentarian who linked this quote a week ago, whom I cannot find and giving all credit to that individual –

    “Here’s what Andrew Jackson had to say to a delegation of bankers in 1832:

    “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.”

  40. In my comment to the article which prompted the current article, I spent a lot of time looking at what “Green Shoots” really are and why they are considered as such. If the real news is that the rate of deterioration has slowed (slightly), I am deeply troubled (and I am). The government has thrown something like 13 trillion in loans, guarantees, and promises at our economy, and we still don’t know how we will survive the upcoming immense deterioration in the toxic assets and the likely substantial failure of the automotive manufacturing sector. Barrack Obama has been spectacular in helping us believe that there is an end coming to our economic morass, but when it comes to Green Shoots, he ain’t no Jack of Beanstalk fame. All I can say is that our politicians need to worry more about pragmatics than political kneejerk reactions or election cycles. Me? I would just like to see our country make it to the next election intact. If we can pull that off, I will worry then about who was pragmatic and courageous in this crisis, not who could spout party or ideological platitudes directed at the altar of power.

    That is the only thing that gives me hope: that our President is, first and foremost, a very intelligent pragmatist. What makes that apparent is how he’s succeeded in frustrating members of both parties on a regular basis. I really appreciate that he seems to be determined to make right decisions, not popular or expediant ones.

    If this country’s and world’s economies recover, we will not know for some time exactly how that term recovery is defined. It is certain that the world will look very much different in 2015 than it looked in 2005!! We are really in the first stage of that great relocation of our relationship with the new world. Get used to the new landscape.

  41. So, the message is that in nearly 200 years, human nature hasn’t changed!! I knew that!! Didn’t you?

  42. Actually, based on the underlying issues, in this case less bad may precede much worse or horrible. The fundamental issues (problems), so far as I can see, haven’t really changed in the last nine months. Oh, there’s lots been thrown at them, but the assets still seem to be just as toxic, and the downward spiral has only slowed because so much private capital has nothing to do but churn markets hoping to pick off profits before a further collapse. I really don’t think we’ve seen bottom yet, although we may be less than six months from a larger tsunami.

  43. Yeah, that’s pretty basic math. It makes possible to argue for progress during a period of deterioration if you understand that your audience is not so sophisticated (e.g. “the rate of decline has slowed” sounds good, but, if the decline continues ad infinitum….). It’s part of the old saying about two handed economists. In this case, “on the one hand we have Green Shoots” but “on the other hand we have a deep, dark scary abyss” (check out the remarks of the most respected economists when they really get pinned down after they add “probably” to every effemeral forecast — they are really terrified in a visceral sense).

  44. Twisting turning commentary Bayard. From my pedestrian perspective, the simple math relates to whose interests exactly Obama is favoring and advancing. If it is the oligarchs and the predatorclass, – than woe to us all – for there will be a tumult, blood, a reckoning, and a balancing. If it is the American poor and middle class Obama is supporting and advancing – then there may be some audacious hope for stability and recovery. From what I see now – its the predators and the over.

    Hopefully Obama’s grand pragmatism is not trumped by by corporatism and overt bribery by the predatorclass. The signs and Oracles however are disturbing.

    We are at war. The predatorclass seeks to dominate and subdue the poor and middle class. We either go like sheep to the slaughter, or moths into the flame, – or we stand up and demand justice, redress, and an end to the wanton abuse and thievery.

    Whose side is Obama on, who does Obama really support and advance? That is the critical issue that will define what will be the future of America, and poor and middleclass Americans.

  45. inurement

    Main Entry:
    in·ure Listen to the pronunciation of inure
    \i-ˈnu̇r, -ˈnyu̇r\
    Inflected Form(s):
    in·ured; in·ur·ing
    Middle English enuren, from in ure customary, from putten in ure to use, put into practice, part translation of Anglo-French mettre en ovre, en uevre
    15th century

    transitive verb : to accustom to accept something undesirable

  46. Nemo: “Well… Is there such a thing as “the business cycle”?”

    I have my doubts. There is a metaphor I read about some years ago that may apply. Consider a pendulum. If you set it swinging, you will get a damped oscillation. When it swings so far in one direction, it will reverse course and swing back the other way, in a regular fashion. You can keep time by it. Now suppose that you have a number of small boys throwing rocks at it. ;) It still tends to oscillate, but the oscillations are no longer damped, nor are they so regular. That is a metaphor for the “business cycle”.

  47. Nothing like a crisis to bring the focus back to the basics.

    My concern is that since there are no penalties for the kind of reckless behavior that led to the accumulation of toxic assets – and no regulatory changes have been implemented since the crash (though there is discussion of this!), the focus on responsible lending will last only a short time.

    And then we’ll be off to the races once again.

  48. HAS the rate of change in unemployment slowed? All this talk of first and second derivatives, and yet the monthly job loss numbers quoted are absolute numbers, not jobs lost as a percentage of the workforce. If jobs are lost at a constant rate every month (say 5% lost a month), you would expect the raw number of jobs lost every month to decrease, no? Is that what is happening?

  49. Of the $8 trillion authorized for various bailouts (8.5 trillion to be a little more precise), note that around $3.1 trillion has actually been allocated, and it involves more than mortgages – the Commercial Paper Facility is 1.8 trillion by itself (around 300BB in use).

    The Fed is on the hook for around $5.3 trillion of the total and the government (treasury, FDIC) the other $3.1 trillion.

    This is more than a mortgage crisis – there is around $11 trillion in outstanding residential mortgage debt in the US. The mortgage problem was the catalyst for the financial crisis. Remember the multiplier effect that losses have on loan facilities. For every real dollar loss, there is a multi-dollar reduction in amount that can be loaned. So a realized loss of “mere” hundreds of billions can result in a reduction of trillions in loan capacity.

    The programs are designed to address both the mortgage problem directly (which is going to take a long time) and the loss of loan capacity.

    Here is a good breakdown of the various programs, amounts available (authorized), and currently in use:

  50. At what point will people finally stop paying on their debt? The Titanic is sinking. We’re headed for a world where a credit rating is irrelevant. Don’t people see this? Think of all those things that you think you need credit for–a house, a car, a college education and luxury items at the shopping mall and ask yourself, is there any other way that you can get these items without credit?

    A house could easily be replaced by a rented apartment or a mobile home that you could save money for. They could say that people who don’t pay their bills on time would find it hard to find an apartment. So, we’re just going to have people who have money to pay for rent and are working just live out on the street because they didn’t pay their light bill five years ago? Right.

    What’s wrong with moving closer to work, walking, a bicycle or public transportation?

    I happen to think that I shouldn’t have to pay for a college education. I think that should paid for with tax dollars.

    And do you REALLY need to buy luxury items at the shopping mall?

    So you see….we don’t need credit to survive. All of this credit was introduced into the economy as a means to help facilitate globalization. The long credit-fueled consumer binge in the United States has helped to give billions of jobs to third world countries, but it has also perpetuated the stagnant wages that has existed in the American economy since the 1970’s. We now have people in Walmart making low wages helping to sell items that are made by people…making low wages. You only get what you give. This is the future.

    So consumers should stop worrying about the fine china. The Titanic is sinking and it’s only a matter of time before the rumors are confirmed. Consumers should stop trying to save their credit record because we’re headed for a world where a credit rating is irrelevant.

  51. About that increase in household savings: not unless Congress actually does something effective about the costs of health care, which at present appears doubtful. Insurance premiums increasing at rates in double digits while incomes are stagnant or falling could produce a crisis like nothing we’ve seen yet. Most of the people still insured can’t afford to see their costs double over the course of a few years. Their coping mechanisms may be diverse, but I doubt any will be good for the economy.

  52. I initially celebrated Obama’s “pragmatism” as well. No longer. Though I was a supporter of his (tepid, but a supporter over the opposition, a position I still think was the right one), I am now highly alarmed by what Obama has done. His ability to give a good speech now scares the hell out of me. He is smart. I have no doubt of that. But looking at what his policies are actually doing compared to what his speeches say (e.g. “We need to be careful about deficits” while exploding our deficits beyond even what Bush – whom I also loathe – did), I am now scared to death. Similarly, regardless of the ends (which are debatable), the means of overturning contract law to achieve his purposes with the unions are setting off major bells in my world. Obama is not the savior. That is sure. I only hope he doesn’t destroy too much.

  53. Endogeneity cuts both ways. If you accept Obama and Geither’s ability to move markets, they’ve simply managed to undo the damage they did two months ago. Of course, the premise is total nonsense, and trying to explain market movements from headlines is a fool’s game.

  54. well put Tony. lots of truth and great phraseology in your post! Thanks~

  55. I still want to know why American Express raised the ARP interest on my travel acct balance from 12.99% last year to 27.25% this year. Cardmember since 1980. Huh? Sadly, my monthly finance charge alone is now $400.

  56. Many things strike me as very ironic about the current conversation. Let me give you MY VERSION of hard reality. First of all, the banks are still weak. I think if we had a true picture of capital ratios (or the true % of capital on the books) we would be surprised how weak it is. Also, with a high level of unemployment and many housing foreclosures, I think it is amazingly, incredibly, confoundedly ridiculous ANYONE would even whisper the word recovery. And on top of that some conservative pundits are talking about inflation??? We should PRAY that the THREAT of inflation occurs before the end of 2009.

  57. Ummm, yes I think these are greenshots.

    So what if the ISM is pointing up. Considering we just dumped over 3 million workers you would eventually expect inventories to finish correcting and production to begin again. The problem though is that we’re re-starting at a lower overall consumption level.

    I don’t really consider any unemployment number over 500,000 to be a good number. Yes it’s way better that 600,000+, but come on. A year ago if he had lost 500,000 workers we’d be freaking out.

    Also, last I knew the housing market was in the toilet, but still existed. I would expect the markets with the most foreclosures to be selling a ton of homes. Someone’s buying them. #3 – Las Vegas, 1 in 56 homes is in foreclosure. Yeah, that’s great news (not).

    Most greenshots are really just improvements over the panic. It’s likely Q2 will still be negative by 3.5% or so. Not a happy number.

  58. “Think of all those things that you think you need credit for–a house, a car, a college education and luxury items at the shopping mall and ask yourself, is there any other way that you can get these items without credit?”

    Yes, more income and/or lower prices.

  59. “What’s wrong with moving closer to work, walking, a bicycle or public transportation?”

    The oil companies will NOT like it.

    Also, the trade deficit would go down and that would leave less currency for the oil trade-surplus countries (excess savers) to recycle into debt on the lower and middle class of the USA.

  60. “I happen to think that I shouldn’t have to pay for a college education. I think that should paid for with tax dollars.”

    I am going to partially disagree. It could be paid for with savings.

    I believe that younger people or others should be “employment-ready” and have NO EDUCATION DEBT so that they can start saving from day one of work!

  61. “So you see….we don’t need credit to survive. All of this credit was introduced into the economy as a means to help facilitate globalization. The long credit-fueled consumer binge in the United States has helped to give billions of jobs to third world countries, but it has also perpetuated the stagnant wages that has existed in the American economy since the 1970’s. We now have people in Walmart making low wages helping to sell items that are made by people…making low wages. You only get what you give. This is the future.”

    So, does cheap labor globalization lead to cheap debt, too much debt, wealth/income inequality, and asset prices being too high?

  62. Katharine, what other things have gone up in price more than wages?

    But, don’t worry I’m sure the fed can come up with some alphabet soup program so that people can pay their health premiums and health costs with debt as long as they promise to work 60 to 90 hours a week and never retire ~some sarcasm intended~.

    If most people have negative real earnings growth based on a middle class person’s budget, is the fed trying to “trick” people into going into more and more debt to maintain their standard of living?

  63. Ted K, I recommend these 2 articles.

    “A depression, unlike a recession, is not induced by government raising interest rates to combat inflation. On the contrary, a depression occurs in spite of all efforts by government to expand credit; interest rates are cut to zero yet the debt deflation goes on.

    Debt deflation cannot be stopped by government credit expansion because that effort only increases debt levels that are already excessive as a result of decades of previous interventions to re-start the already over-indebted economy. As the economy shrinks, there is even less income available to repay debt, and a vicious cycle sets in. The wheel not only stops, it begins to run backwards and pumps money out of the economy.

    Debt deflation at first withdraws household purchasing power from credit. Later households experience a decline purchasing power from loss of wage income as layoffs increase and savings are consumed in debt repayment. Government, by pouring vast sums of government money into the economy in an attempt to restart the virtuous credit cycle can produce a small “bounce” in the decline in aggregate demand that shows up as consumer spending, but cannot restart the wheel as it can during a recession. Debt levels continue to fall, and soon consumer expenditures as well.”

    “Note: Any recovery will probably be sluggish, because household balance sheets still need repair (more savings), and any rebound in residential investment will probably be small because of the huge overhang of existing inventory. As I noted in Temporal Order, at least we know what to watch: Residential Investment (RI) and PCE. The increasingly severe slump in CRE / non-residential investment in structures will be interesting, but that is a lagging indicator for the economy.”

    In my opinion, RI and PCE depend on being able to create more consumer debt.

  64. because American Express wants to make more money off of you to make up for other credit card members’ losses?

  65. TonyForesta, you might like this link:

    Some parts of it.

    “What’s true for Iceland, holds everywhere Wall Street and the IMF target, and here’s the scheme:

    – shrink economies;

    – shift wealth and property upwards to a financial oligarchy; and

    – price “labor and industry out of world markets as a result of the heavy financial charges built into (the) pricing system.””

    “In her latest quarterly review, she predicts that “Obama will do more to help bankers achieve centralized control and one world government than any (previous) US politician.” In less than three months in office, he’s shown bankers they can count on him – to the tune of trillions of dollars, further open-ended checkbook amounts on request, and global “diplomatic” pressure on targeted nations to surrender. It’s for public rage, tiny Iceland, and other over-indebted nations to demand “no more.” Hopefully enough of them have backbone to do it.”

  66. “Whose side is Obama on, who does Obama really support and advance?”

    I think having bernanke, summers, and geithner “running the economy” should answer that question.

  67. From Mish Shedlock and Davidowitz and Associates:

    The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was “preposterous” to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

    “We’re in a complete mess and the consumer is smart enough to know it,” says Davidowitz, whose firm does consulting for the retail industry. “If the consumer isn’t petrified, he or she is a damn fool.”

    Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: “The worst is yet to come with consumers and banks,” he says. “This country is going into a 10-year decline. Living standards will never be the same.”

  68. Any green shoots in the US will be withered if the USD depreciates significantly. Fed/Treasury strategy would be voided if USD is no longer the reserve currency for international settlements. If such a thing occurred, the US would face an extended period of (downward) structural adjustment. Something we’d prefer to avoid.

  69. Yes, Obama has made some moves that I don’t like. But most of this deficit belongs to Bush. As for the auto industry bailout – I favor providing enough funds to move into bankruptcy court. But keep the government out of running the car companies. You want green cars? Then tax carbon.

Comments are closed.