Bernanke: "[T]he baseline outlook for real activity in 2008 has worsened and [..] the downside risks to growth have become more pronounced."

White House: Intervention necessary to "deal with the softening of the economy."

This bond insurance mess reminds me a bit of the airline-reinsurance disaster that destroyed Fortress Re, but on a much, much larger scale.

Comments

[Jerimee]

Martin Eakes (of Self-Help) said this about Bernanke:

“The proposed rule is worse than I could have ever imagined,” Eakes seethed in his Southern drawl. “I had thought that the Bernanke Fed would be different, [but] it is the most pathetic response to a serious crisis that I have seen from any regulator in my adult career.”

http://bluenc.com/Center_for_Responsible_Lending_Martin_Eakes_Bernanke

[Bubba]

On the other hand, we have this:

"Unless and until we start seeing sharp declines in industrial production growth like during the last two recessions....in 1990-1991 and 2001, there won't be a recession."

[Spag]

I do believe it's all about to come down. The sad situation is that there is no real short term solution that won't have adverse effects elsewhere in the economy, and the candidates from both parties haven't offered anything new.

The Fed is limited in what they can do as is Washington without making matters worse. I sense the market is going to have to fix this one on its own, as well it should.

[Jeffrey Sykes]

Bubba: I'm curious to know what income class you are a member of? Do you see the economy as a good one right now or are housing, energy and food costs beginning to eat away at your disposable income? What about health insurance? Do you have it? Do you buy it or are you part of a corporate plan?

Since I know nothing besides your moniker, it's hard for me to understand you sometimes.

Also, can anyone tell me if current annual federal deficits are less than historic averages or completely off the charts? I'm so confused by the noise machines I can't see straight anymore.

[Doug H]

National debt as percent of GDP:

http://zfacts.com/p/318.html

[Doug H]

National debt analyses:

http://www.cedarcomm.com/~stevelm1/usdebt.htm

An interesting chart down the page indicating the party of pres, house, and senate at the time.

[Dave Ribar]

Jeffrey:

In real terms, current annual federal deficits are relatively modest, amounting to less than 2 percent of the country's total output (see the Economic Report of the President, Table B-79, http://www.gpoaccess.gov/eop/2007/2007_erp.pdf ). In contrast, during World War II, we ran deficits of 14% of GDP in 1942, 30% of GDP in 1943, 23% in 1944, and 22% in 1945. During the Reagan and first Bush presidencies, we ran annual deficits as high as 6% of GDP.

The deficit figures mask our true spending problems because they treat additions to the Social Security and Medicare trust funds as regular income. If these trust fund additions were taken "off budget," we would see that our actual financial position is much worse. However, even with these changes (which would roughly double the deficit), the deficit would still be in the moderate range in historical terms.

[jimcaserta]

Saying that we weren't in a recession in the end of 2007 doesn't say a whole lot about projecting for 2008. Bernanke seems concerned about consumers "In particular, a number of factors, including continuing increases in energy prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008."

Part of the mortgage mess reminds me of dot-com IPO's. The people who managed the IPO's did well on underwriting fees, and got in at good prices for the stocks, and eventually got out, or were able to get out, before things fell apart. That seems similar to those that originated mortgages, packaged them and then sold them off.

[Bubba]

"Bubba: I'm curious to know what income class you are a member of"

I'm totally destitute.

I've been paying too much attention to what Ed Cone and the links he provides on his "Doom and Gloom" and his "Global Warming" posts have been saying.

I invested all my money on a "Get Rich Quick by Hyping How Bad The Economy Is" scheme and a "Algore Bobblehead" manufacturing plant, and I lost everything.

I'm thinking of suing.

Want to contribute to my retirement fund?

[Jeffrey Sykes]

No, sorry. I'm too busy trying to figure out a way to pay upwards of $700 a month for health insurance for my family, $3 some a gallon for gas and more than $4 for a gallon of milk in the face of this recession that's not going to happen.

Good luck with the litigation.

[Ed Cone]

Bob, I don't give investment advice, but certainly an investor would have been much better off reading my posts on the economy than listening to you.

As the storm began, you said the market turmoil was a matter of shorts covering and that this short activity seemed to be abating, and that subprime problems were not a very big deal and would not spread to other sectors. As the storm continued, you said people discussing the problems were overstating the case for political gain.

The Dow is down 12.7% since August, the S&P 500 is down 13.5%.

Bush himself acknowledges what Paulson and Bernanke have been saying for months -- that we've got some serious problems.

Maybe you should have actually paid attention, huh?

[Dave Ribar]

BTW, even if a recession does not materialize, there are problems with very slow GDP growth (growth near or below 1 percent). At those rates of growth, the economy is growing less than the population and typically failing to produce sufficient jobs, so unemployment goes up.

[Bubba]

"Bob, I don't give investment advice, but certainly an investor would have been much better off reading my posts on the economy than listening to you."

I don't recall giving specific investment advice here on market transactions.

Would you care to elaborate, or is this just another one of directions that our conversation always seems to head that you've been complaining about recently?

[Dave Ribar]

Bubba:

Your reading skills seem to be off (even for the lines you selectively quote). Nowhere in Ed's post (or the quote) did it say that you gave specific investment advice. The gist of the message is that your economic analysis is off, and investors silly enough to follow it would have been led astray.

I disagree with the last part of Ed's statement, however, because any sensible investor would have already discounted your analysis as a pure apology for the Bush administration and recognized that it had little informational value.

[Jim Caserta]

Bernanke:
"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so."

What if the stimulus package was devised 6 months ago, discussed, and hit implementation today?

"Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit."

[Ed Cone]

I was merely citing your observations at the time, Bob.

8/16: "...it's generally being a matter of the shorts covering...When they cover, the market to go up.

"This is exactly what happened in the final hour of trading today."

"Once we work through that, and the excessive hand wringing, the correction will be over."

"Fact: Less than 15 % of mortgages in this country are considered sub-prime

"Fact: Foreclosure rates are up 1/10 of 1 percent this year, from .5 to .6"

"Fact: Foreclosure losses are expected to be no more than 35 billion, which would account for a stock market decline of approximately .2 percent."

"Given all that, how else would you account for the current correction, assuming you don't factor in the hysteria, the hand-wringing, the hysteria..."

[Bubba]

"I don't give investment advice, but certainly an investor would have been much better off reading my posts on the economy than listening to you."

The implication that I was giving investment advice was not accurate, Dave. In addition, he, and those he linked to, didn't give specific investment advice either, so how does "an investor would have been much better off reading my posts on the economy than listening to you" become accurate?

It doesn't, of course.

As far as your last sentence, that's exactly what I would expect from you on this subject.......just some politicicized noise inaccurate statements.

Your last sentence is pure nonsense, but not particularly surprising, given your past history.

[Bubba]

"I was merely citing your observations at the time, Bob."

And I'm glad you don't give investment advice, Ed.

You would never get E+O coverage.

[Fred Gregory]

Well enough of all this speculation on what the economy is or isn't going to do. I want some sound advice based on empirical evidence. It appears my prayers were answered this morning..

GMA's(ABC) Robin Roberts says that " countless Americans " are worried that their jobs may be at risk. We are then treated to a montage of four
economic experts random man-on-the-street interviews of people who are all worried about the economy. Well watch and listen.

ABC Offers Tips to Save the Job You'll Probably Lose Anyway

[Spag]

I don't think Bubba is apologizing for Bush. I don't think the Bush administration is responsible for the economic problems we are facing now, so there is nothing to apologize for. These problems are market based problems aggravated to some degree by the Fed, which is independent from the White House.

Blaming Bush for this bust is like giving Clinton credit for the tech bubble in the 90's. Both are market driven events, not creations of Washington.

[Ged Maheux]

"I don't think the Bush administration is responsible for the economic problems we are facing now, so there is nothing to apologize for."

Yeah, you're right. Over 480 billion in new spending to a war that should never have been fought. That has nothing to do with the current state of the economy. In case you've forgotten that 480 billion, with a "B". At a rough cost of more than a *billion* dollars a week. Almost all of it comes from Social Security and the rest has been borrowed from China. All this, and by some estimates, the total cost could eventually pass 1 trillion dollars.

Tax cuts that helped the richest 2% of the American population and reduce our ability to pay down debt. An unprecedented federal trade deficit. Oh yeah, and let's not forget about the ballooning national debt which has increased faster under Bush and the republican "bridge to nowhere" congress, than any other president in history.

But he has nothing to apologize for.

[Bubba]

In addition, the numbers I quoted were accurate at the time. Some of them still are.

The opinions are still accurate as well.

[jimcaserta]

Bubba - what are those opinions, that this 'correction' is short-term? What time-frame is short-term for you? Housing has serious problems, including increased foreclosures, but also falling home prices. Many people had been cashing out equity for many purchases, equity that isn't there anymore.

Bush is not to blame, but the mortgage market could have used more regulation. Regulation of the securitization - making their credit-worthiness more transparent - might have helped avoid the rapid mark-downs.

[jimcaserta]

Foreclosure rates appear to be rising at a significant rate. The foreclosure rates for subprime ARMs is roughly 4X that or subprime fixed loans. I remember hearing that Alan Greenspan recommended ARMs a few years ago. While ARMs are very useful for many, especially those that do not expect to stay in their current home past the reset time, they obviously set up situations where people will have considerable problems.

The total delinquency rate is the highest in the MBA survey since 1986. The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever.

And when they write that the rate of homes entering foreclosure is 0.78% vs. 0.46% a year ago means that 70% more homes are entering foreclosure than a year ago.

[Spag]

Ged, none of what you said has anything to do with the subprime scandals, inflation, or a slow down in economic growth. You could certainly link the devaluing of the dollar to deficits, but Mr. Bush wouldn't be the first president to go into deficit spending and the current deficit is not historically significant as a percentage of GDP. Yes, I'd like for it to go away and no I am not happy with some of Bush's spending, but blaming the devaluation of the dollar on Bush spending is a stretch. Your argument seems to suggest that only Bush borrowed from the Chinese and none of his predecessors did. That is not true. You can make it about Bush if you want, but it looks BDS to me.

The tax cuts as a hindrance to reducing the debt is also ridiculous considering that revenues to the treasury have increased every year since the tax cuts were implemented. That zero sum theory about tax cuts and revenues has been discredited since 1983.

[jimcaserta]

If I were giving financial advice, it would be for people to pay attention to their emergency funds. It might be bad for consumer spending as a whole for people to have an immediately accessible savings, but it is good for individuals.

[jimcaserta]

Sam, the notion that tax cuts increase government revenues is not true. You can say that tax receipts this year are higher than in 2000, but when you factor in inflation, population growth, and general economic growth that would have happened without the tax cuts. Tax cuts funded by debt are really just tax deferrals.

[Bubba]

"......but the mortgage market could have used more regulation"

Problems with subprime and over-extended credit have been known for years. Wall Street has reacted to these when earnings and quarterly statements for the publicly traded companies were announced each quarter.

Where was everybody else on this when it first became known?

Why wasn't "something" done then?

Oh wait, I forgot. Someone DID do "something" then.......Krugman, who predicted nine out of the last zero Bush Recessions.

[jimcaserta]

If you look at some of Ed's other posts today, there were some people who have been showing concern for a while. The nature of ARMs, combined with increasing housing prices, up till recently, served to shade problems that when conditions changed became apparent.

[Bubba]

"Sam, the notion that tax cuts increase government revenues is not true."

Really?

how would you account for this?

Excerpts:

"Had revenues grown at the same rate as the overall economy between 2003 and 2006, federal receipts would have increased by only $373 billion."

"The bulk of the revenue increase was associated
with corporate income taxes: Revenues from corporate income taxes rose from 1.2 percent of GDP in 2003 (their lowest level since 1983) to 2.7 percent in 2006 (their highest level since 1978). That increase of 1.5 percentage points of GDP incorporate income tax revenues accounts for the bulk of the overall 1.9 percentage point
rise in revenues."

Gee, let me think......what changes were made that might have encouraged such an increase to happen?

[Ed Cone]

I don't think it's a matter of Bob (or Kudlow, et al) sticking up for Bush, but of trying to pretend things are OK so that the economy won't be an issue in the upcoming election.

I am not a big fan of some of Bush's economic policies, including much of his tax policy, his willingness to spend without paying for it, and the failure to really begin to address our dependence on oil (which is also a big foreign policy problem, as is the expensive and needless war).

But I don't think the subprime thing is all his by a long shot. Regulation should have been better, and he had weak Treasury Secs before Paulson, and what happens on your watch counts against you, but this has always seemed to me more of a systemic Wall Street/Fed issue.

And yes, it will be an issue in the election, although I'm not sure how much the GOP candidate will carry the taint. What's clear is that the numbers have been awful for months, and that pretending otherwise for whatever reason makes no difference.

Lower tax rates can increase revenues, but that doesn' t mean there is not an optimal range below which revenues decrease, or else we'd just set the rate at zero and spend all we wanted.

[Bubba]

Let's put the subprime mortgage situation into a little perspective that you wouldn't ordinarily see here:

"Even with about a tenth of all subprime mortgages now in foreclosure, only a small share of all American families -- about 0.3% -- own a home in foreclosure, he said."

"But because only 44.4% of all homes have a mortgages, that means that only about .75% of all American household own a home in foreclosure."

Here's a little more perspective;

"The last chapter of the housing 'bubble' story won't be written until around the first quarter of 2010. The houses involved will still be standing and most of them will still have the same owners, content with their decision to satisfy the need for shelter through purchase. That is in marked contrast to the discontent of purchasers of 100 shares of Vaporware Inc. At the end of the Clinton Bubble all they had was wallpaper. By the spring of 2010 many of the people who lied on mortgage applications will be back to renting and, hopefully, many of the people responsible for accepting the lies will be looking for employment outside the mortgage industry.

In a wholly just world, the credit rating agencies which issued sterling ratings for junk financing backed by liar's mortgages would have new management (and ownership). That's very unlikely to happen but investors have now been fully appraised of the "value" of the service which the rating agencies perform."

......and:

"Having lived through every one of the minor setbacks enumerated above, I have absolutely no fear of what the future may bring under Republican political leadership.

I cannot say the same if another unskilled, unaccomplished and unpromising Democrat were to recapitulate the miserable period of Carter's inept presidency.

If fear is necessary to force you to the polls, then consider that Carter had a better resume in 1976 than any of the three leading Democrat candidates today could produce if they combined their total accomplishments."

[Spag]

I agree with what Ed said in that last comment. That's pretty much what I said about 15 posts ago. This is a market problem with some Fed influence. It has little to do with Washington.

The sad thing is that this really should be a watershed election year with the many issues facing the country such as foreign policy, globalization, hegemony, and illegal immigration. Unfortunately, none of the candidates from either party differ much on those issues.

[jimcaserta]

2003 corresponds to a point where the stock market bottomed. To see that corporate income has increased since then would be obvious. You would also see considerable capital gains tax increases when the markets are going up. How did revenues grow in relation to GDP from 2001 to 2003? It went from 14.8 to 11.6 (for on-budget/non Social Security). There were tax cuts in both 2003 and 2001, and they were different in nature. "The remainder of the increase in individual revenues relative to GDP, measuring 1.1 percentage points, resulted from “real bracket creep” and a variety of potential factors that cannot be evaluated fully until more complete data are available." If the tax cuts really paid for themselves, you'd have people like Greg Mankiw touting that fact.

[Jim Caserta]

Once again, related to housing - "The total delinquency rate is the highest in the MBA survey since 1986. The rate of foreclosure starts and the percent of loans in the process of foreclosure are at the highest levels ever."

[Spag]

Look at the increase in revenues during the Reagan years. Yes there were some tax hikes in the second term, but revenues were increasing dramatically before then.

The correlation between an increase in capital gains not only in terms of greater investment but as the result of a climbing market and tax cuts is obvious. The tax cut is the stimulus to all these things which leads to higher revenues.

There are two kinds of people in this world. Those who believe that taxes should be used for the sole purpose of raising revenue, and those who believe that taxes should be used to change behavior, redistribute wealth, or punish people.

Higher taxes that lead to lower revenues but punish the rich might give some people satisfaction in the short run, but they also leave the government less money to spend on the people that the soak the rich crowd wants to help. Most of them are simply too ignorant about economics to understand how they undermine their own objectives by demanding higher taxes with the mistaken belief that it will raise revenues and only the rich will pay.

[Jim Caserta]

Imagining other's motives is a convenient way to dodge discussion. Tax revenues can increase after a tax cut, but that does not mean that the tax cut caused the increase, or that the increase was as large as it could have been without the cut. Mankiw helped craft Bush's tax cuts, and has written extensively on the effects of cuts, and he has never claimed that they were completely self-funding. But what does he know.

I read Bernanke's recommendation about potential short-term cuts, and they seem pretty reasonable.

[anglico]

There are two kinds of people in this world. Those who believe that taxes should be used for the sole purpose of raising revenue, and those who believe that taxes should be used to change behavior, redistribute wealth, or punish people.

You appear to be a victim of the Tyranny of Or

[Spag]

"Imagining other's motives is a convenient way to dodge discussion."

I don't think I did that. That last bit was an observation. I didn't assign you to either category, nor was it meant to imply you belonged to one instead of the other.

[Jim Caserta]

Bernanke

To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed. Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit.

[Spag]

I'll take the Or in this case. Conservatives believe in A, where the operative word is "sole". By definition, it is an "or" choice. It can't be the "sole" objective along with several others, now can it?

[Ed Cone]

There's something funny about the unironic use of "There are two kinds of people in this world" and "Most [people]are simply too ignorant about economics" as part of the same argument.

Is there anyone in modern US politics who discusses taxation in terms of punishment?

Again, lower tax rates can increase revenues, but that doesn't mean there is not an optimal range below which revenues decrease, or else we'd just set the rate at zero and spend all we wanted.

[Jim Caserta]

I believe that you should generally keep a balanced budget, both on a household and national level. Some debt is good. My wife has a good 100k in student loans, but payments should be a small fraction of her earnings once she completes her training. I think our taxes should be used to pay for the things that the USA, through legislation, decides to spend money on.

[anglico]

Engaging in arguments that force "or" choices in the way you describe is the root of the issue I'm raising. It may be rhetorically interesting, but is nonetheless unproductive.

[Spag]

"Is there anyone in modern US politics who discusses taxation in terms of punishment?"

Answer: Yes. It's called the "soak the rich" and it is often employed by progressives.

Anglico, some things are "either/or", and in this case as a conservative, I can tell you that by far and large, most conservatives believe that taxes should only be used to raise revenues. That means that anyone who doesn't believe that is in the "or" category regardless of their justification. There are no games here, it's pretty straightforward.

There are two kinds of people in this world, men or women. There are two kinds of women in this world, pregnant ones and ones that aren't. There are two kinds of people in this world, single people and married people. Etc... sometimes if you accept A, then by definition B must be a completely opposite and mutually exclusive argument.

[Anthony]

"Those who believe that taxes should be used for the sole purpose of raising revenue"

Impossible. "Raising revenue" does not happen in a vacuum. That revenue gets spent somewhere - a redistribution of wealth. People react to the tax code, whatever it may be - changing their behavior. You can't just magically "raise revenue" without doing some of those other things that you decry.

[Jim Caserta]

You can however, believe taxes should be solely for revenue, and also believe that total revenue raised should meet expenses - except in certain circumstances. To say that people advocating higher taxes, especially in the higher brackets have "soaking the rich" as a main goal will be inaccurate in many cases. I don't want to 'soak the rich', I want to be the rich...

[Ed Cone]

I'm sorry, Sam, I should have been clearer -- I was hoping for meaningful examples of the use of "taxation as punishment" by politicans, not just asking if you could restate your claim in different words.

How odd that you say there are two kinds of people in this world, but then you list many more possibilities than two -- on your list alone there are married pregnant women and unmarried pregnant women and married men and unmarried men and married non-pregnant women and unmarried non-pregnant women. One supposes there are differences of many sorts among the married men, and among each of the other groups as well.

Perhaps you mean that it's possible to divide the world into two groups by limiting the defining attributes to a simplistic binary choice?

That is so, but it probably isn't going to tell us much about optimal tax policy.

[Jim Caserta]

The examples of punishment-type taxes - cigarettes would be one. To the extent that cigarette taxes were used exclusively to treat cigarette related illnesses, they could be viewed more like the gas tax going towards road construction. One tax deduction I would say is extremely distortionary is the mortgage interest deduction - you're subsidizing one type of borrowing over another. The deduction also does not promote home ownership, it promotes carrying a mortgage, and probably encourages people to take out home equity loans.

[Bubba]

"The examples of punishment-type taxes - cigarettes would be one. To the extent that cigarette taxes were used exclusively to treat cigarette related illnesses, they could be viewed more like the gas tax going towards road construction."

You mean like the extortion case/greed grab disguised as a public service a few years ago against the tobacco companies, and the resulting mis-use of the settlement funds from the intended purposes?

"'Very little of the tobacco settlement money has gone for health measures generally, and an even smaller amount has gone into anti-smoking measures specifically,' said John Banzhaf, a public law professor at George Washington University."