Is There an End Game to the Recession?

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

It doesn’t look good for the consumer. Inflation is coming down sharply, but real wages are still lower than a year ago. The loss in housing and stock market wealth will restrain spending, all else equal. Tight credit isn’t helping. The weak job market is not good. Beyond these impacts, consumer spending habits may be undergoing a sea change as they begin to save more.

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The biggest driver of consumer spending is income growth. Adjusted for inflation, year-over-year wage growth turned negative earlier this year. Higher energy prices pushed real wages even lower through the summer. Since mid-July, energy prices have retreated significantly. Gasoline prices are about half of what they were at the peak. The drop in gasoline prices leaves consumers with more money to spend on other things. However, the impact arrives with a lag.

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erhaps the greatest concern is that consumers may be adjusting their spending habits too sharply. It’s good that people save, but it’s bad when everybody tries to save more at the same time. In saving more, households would be spending less – and, since consumer spending accounts for 70% of GDP, overall economic activity would be a lot lower. There are signs that households not directly effected by job losses or tighter credit are cutting back, reducing discretionary spending. Whether this is a short, transitional phase or a deeper and longer-lasting trend remains to be seen.

So what will it take to get out of this mess? When times are bad, many assume that they will never get better. First, oil prices must remain low or fall further. Banks must begin to relax terms and standards for consumer loans. The adjustment in consumer spending habits (that is, increased saving) needs to be spread out more gradually over time. The Fed and other central banks appear likely to cut interest rates further. We should see further large-scale government efforts to stimulate the economy, either in the lame duck session or under the new administration and Congress.

Comments

[Smarty_Pants:]

Keynesian theory is dead. The author's advice is based on its application.

Best way back to a sound economy are:

Pay off debt, save more, cut spending to necessities, let money losing firms go under.

Direct economic activities and resources to consumers' "must have" items and let others be reduced to levels of activity that can be afforded without credit.

You don't fix the problem of too much debt by borrowing even more.

2008 Nov 19 12:02 PM

[moonbat1775:]

Things NOT to do in a recession/depession according to Rothbard:

1. Prevent or delay liquidation.
2. Inflate further.
3. Keep wages up.
4. Keep prices up.
5. Stimulate consumption and discourage saving.


This recession will not go away till the malinvestments that occurred during the boom are liquidated. Government/Fed intervention will either slow or prevent the recession from ending.

Great comment Smarty.

2008 Nov 19 12:25 PM

[Seth Chalnick:]

Along with everyone else, I sure hope there is an end in sight to our current crisis, and the points you mentioned are good ones. I can’t speak so much to the asset side of the balance sheet, but I see an issue on the “interest rates” front, at least as it pertains to the real estate world. I would image the gist of my comment may apply to non-real estate markets in some way too, but even if it doesn’t, I believe the real estate spiral is enough to single-handedly curtail consumer spending… more so because the next wave of the spiral is coming to a theatre near you… where the higher priced homes of small business owners will be affected. If less spending by sub-prime folks can shake things up, less spending by the real economic stimulators won’t be pretty.

I am afraid the Fed can lower rates all they want, but ultimately supply equals demand. An investor who would otherwise look to lend out, say $50m in new mortgages right now sees 6% returns on conforming loan amounts. Why invest at 6%, when you can buy the underlying asset, trading at or below its intrinsic value, and get 5-10% net ROI by renting out the asset, while positioning for long term appreciation? On loans limits greater than conforming, say $700k-$2m (there are some agency jumbo programs that exceed $417k), an investor can get around 8%, but on the one hand, there is no demand for these loans when consumers have to pay it against inflated prices, and on the other hand the investors know… well… the prices are inflated. Nobody wants to touch a mortgage back security until debt-to-income ratios get back to <40%. We are nowhere near these levels in the upper middle class pricing tiers.

Regarding our liquidity crisis, even if everyone has their hearts set in the right place in our attempt to “bailout” the economy, lenders first need to cover their reserve requirements before they can lend money. If they lend out in a ratio of 12 :1, and then the asset of the 1 goes down to .9, then they need more money to preserve the ratio. By allocating more money to preserve the ratio, they are not lending, and this also contributes to downward pressure on the underlying asset value. Fact is, the time for action was when banks were leveraging profits by 30:1. Now we are experiencing the de-leveraging process... and it is just not as fun.

2008 Nov 19 12:54 PM

[closed:]

I think China might be able to help us. China's government is so concerned about the impact of the global breakdown crisis on its economy, that the Ministry of Human Resources and Social Security has enacted measures to "help protect social stability." Ministry official Liu Junsheng told the China Daily yesterday that social stability is now "more important than economic development."

In a directive issued on November 17, the Ministry announced that China's provincial and local governments must give "top priority" to keeping workers on the job. Not only the cheap-export-oriented industries, but also China's steel, aluminum, auto, and other basic industries, are laying off masses of workers. The Ministry is demanding not only measures to control the layoffs, but also emergency plans to prevent, or deal with, large groups of unemployed workers. In the export sector, bankrupt foreign factory owners are shutting down and fleeing China, leaving unpaid workers on the streets.

The Ministry wants the local emergency plans to be reported as soon as possible, and called for an "efficient" channel to deal with labor disputes, China Daily reported. Steps must be taken to guarantee unemployment insurance, try to get workers reemployed, and support migrant workers.

Both Shandong and Hubei provinces are now requiring companies to get prior approval for any layoffs of more than 40 workers, a stricter amendment of the national labor contract law, which came into effect in January. This year so far, almost 700,000 workers have lost their jobs in Shandong, a center of export production. China's state-owned companies in finance, oil, power, and telecommunications, have been told to cut wages, not jobs.

2008 Nov 19 05:44 PM

[Steven Hansen:]

"We should see further large-scale government efforts to stimulate the economy, either in the lame duck session or under the new administration and Congress."

Dr. Brown, i am from the keynesian camp but unfortunately smarty_pants is correct. we used keynes theories when the economy was running hot and we created some very big bubbles. there is no consumer credit left, and the government is up to its a$$ in debt. we will not be able to stimulate ourselves out of this mess without getting deeper bogged down.

So all we have left is some variation of the austrian school to work our way out. go with moonbat's solutions.

2008 Nov 20 12:22 AM

[rdr4:]

Unlike physics, math, chemistry, and other physical sciences, ECONOMICS is not a precise science or discipline. ( Economics appears to be more like Sociology or Psychology, an imprecise science.)
Just as Aristotle, Plato, Euclid, and other mathmeticians only viewed limited landscape associated with their discipline, economists are also limited in understanding, experience, and handicapped by the worldwide statistical deception and the profit motive.
While China has taken steps to protect the population from depression related problems, the US has spent billions in attempts to discredit them.
Since our biggest produce appears to be bullshit, why not attach a device to Washington and NY which collects the bullshit and converts it to methane based fuel?

2008 Nov 20 10:14 AM

[closed:]

On this occasion we should be reminded that there are no tragic figures in real world history; there are, rather, tragic nations and peoples, such as those described by the Homeric Iliad, and the tragedies presented by Shakespeare and Friedrich Schiller, a virtual Comedie Humaine, whose leaders have incurred the misfortune of being what the people of that culture had, like the citizens of our U.S.A., chosen to place positions of leadership.

This is not to say that all such misleaders were bad people. Some, like both George Bush administrations, were, admittedly, malicious. The fault of others, is that they gave the people the administration which it seemed that popular opinion desired; but, perhaps, they lacked the will to do better, since they lacked the stuff of which a President George Washington, a John Quincy Adams, an Abraham Lincoln, and a Franklin Delano Roosevelt were made.

A qualified leader of a great republic, especially one with that special quality of Constitution such as our own United States, is to know what the destiny of the nation and its people require, as Presidents Abraham Lincoln and Franklin Roosevelt did, and to deliver the effort needed to bring the nation to safety, and, also, to contribute to the well-being of the community of nations generally.

I must concede the point, even as I must note the failures of the performance of recent Presidents, since Franklin Roosevelt, who were not bad, but who intended good, but lacked the standard of leadership. Leadership, especially in times of grave crisis - - and this is now the greatest crisis in the history of all modern civilization - - must be a commitment to provide that mission which is required at that time, and, more than that, the destiny of coming generations.

For this reason, while there is a hopeful escape from the present general breakdown-crisis of the planet as a whole, there is only one course of action which could plausibly enable the planet to escape a global catastrophe now. (see other comments I have added esp. under

(i) Is Hyperinflation on the Horizon? (ii) Bretton Woods Redux: The Real Bridge to Nowhere

2008 Nov 20 07:13 PM