I posted this comment to a Paul Krugman blog posting noting that this recession was different than most recessions in that with this one interest rates low going into it.
One that that struck me over and over again during the Greenspan years was that GDP was growing at a lackluster rate (around 3%) despite big deficit spending and very low interest rates. It was like seeing a person get a huge doses of amphetamines but still have barely enough energy to drag themselves through the day. It made me think our economy must be on the brink of collapse if the economic equivalent of crystal meth was required to just make it seem normal.
Keynes once said that the long term interest rate is determined by what kind of future profit borrowers expect from capital investment. If borrowers see lots of opportunities to make a lot of money, they will be willing to pay more to borrow, and vice versa. In other words, look at interest rates for what they say about demand for borrowed funds instead of what they say about the supply of money.
Putting this together, maybe the story of this recession is that all through the Greenspan years people saw the prospects for profit from real capital investment (investing in new businesses that generate profits from selling new goods and services) getting dimmer and dimmer so interest rates had to be pushed lower and lower to get them to continue to borrow and invest, until the point was reached where there were no worthwhile real capital investments left to invest in and the recession began.
This model isn't inconsistent with the bubbles we saw. It makes sense to me that when one runs out of worthwhile real capital investments then one would start to put easy money into speculating on assets and commodities. If there were ways to make a solid 10% profit from buying new capital assets and opening new businesses would there have been any market for subprime mortgage backed securities?
2009-05-24
Housing Bubble 2: Rental Properties
Investors are swarming to buy up foreclosed houses in Phoenix to rent out to tenants (Amid Housing Bust, Phoenix Begins a New Frenzy)
I wonder what will happen to monthly rental rates in Phoenix when all those surplus houses are converted to rentals.
I wonder what will happen to housing prices when rental rates start to fall and all the would-be landlords run for the exit?
I wonder what will happen to all the lenders to the would-be landlords?
I wonder what will happen to monthly rental rates in Phoenix when all those surplus houses are converted to rentals.
I wonder what will happen to housing prices when rental rates start to fall and all the would-be landlords run for the exit?
I wonder what will happen to all the lenders to the would-be landlords?
2009-05-20
The NY Times fixes their faux pas in another article
Yesterday I mentioned that the NY Times ran a silly front page story saying that the new credit card legislation would cause the credit card companies to get rid of reward programs and other perks for customers who pay their balance every month. Today, Ron Lieber mocks that notion in a Your Money piece, but doesn't mention that it was his own paper that bought this industry propaganda hook line and sinker the day before.
Your Money: Consumers Are Dealt a New Hand in Credit Cards
Your Money: Consumers Are Dealt a New Hand in Credit Cards
2009-05-19
Why is the NY Times running credit card industry propaganda on the front page?
This front page story in the New York Times today struck me as really weird:
Credit Card Industry Aims to Profit From Sterling Payers
The thrust of the story seems to be that if Congress passes legislation to more tightly regulate credit cards then all the people who pay their balance in full each month are going to get charged higher rates, have to pay annual fees, and lose all perks like cash back plans, etc. To me it seemed like the piece was slanted to generate opposition to the pending legislation by people who would otherwise be neutral about it (the people who pay their balances each month promptly). While I know that seems paranoid, the article completely failed to mention an obvious flaw in the thesis that credit card companies would raise rates and fees on good customers: People who pay their balances every month don't need credit cards at all, and the only reason they have them is because they can get cash back and pay no annual fee. If the credit card industry tries to raise rates on people who don't really need consumer credit they are going to lose those customers in droves. Not to mention that each credit card company is going to have a strong incentive to poach "sterling payers" from its competitors by continuing to offer perks like no annual fees and cash back.
There is a reason that all these perks evolved in the first place: it was the only way to attract and retain these "sterling payers," and new legislation that makes it harder to squeeze the less-than-sterling payers is not going to change that reality. It reminds me of the delusion currently popular with the media that just because they are losing advertising revenue their readers are going to have to pay more for content. There are reasons that free content evolved in the marketplace, and the loss of advertising revenue doesn't change any of the market forces that created free content.
Credit Card Industry Aims to Profit From Sterling Payers
The thrust of the story seems to be that if Congress passes legislation to more tightly regulate credit cards then all the people who pay their balance in full each month are going to get charged higher rates, have to pay annual fees, and lose all perks like cash back plans, etc. To me it seemed like the piece was slanted to generate opposition to the pending legislation by people who would otherwise be neutral about it (the people who pay their balances each month promptly). While I know that seems paranoid, the article completely failed to mention an obvious flaw in the thesis that credit card companies would raise rates and fees on good customers: People who pay their balances every month don't need credit cards at all, and the only reason they have them is because they can get cash back and pay no annual fee. If the credit card industry tries to raise rates on people who don't really need consumer credit they are going to lose those customers in droves. Not to mention that each credit card company is going to have a strong incentive to poach "sterling payers" from its competitors by continuing to offer perks like no annual fees and cash back.
There is a reason that all these perks evolved in the first place: it was the only way to attract and retain these "sterling payers," and new legislation that makes it harder to squeeze the less-than-sterling payers is not going to change that reality. It reminds me of the delusion currently popular with the media that just because they are losing advertising revenue their readers are going to have to pay more for content. There are reasons that free content evolved in the marketplace, and the loss of advertising revenue doesn't change any of the market forces that created free content.
2009-04-24
Restricting credit card rates and fees is not a good idea during a financial crisis
In today's New York Times it was reported that the Obama administration is supporting legislation to limit the fees and rates credit card companies can charge people (Obama Pressures Credit Card Issuers on Rates, NY Times 2009-04-24). This seems to me to be a really dumb move.
What are banks going to do if they can't raise rates and fees on their higher risk credit customers enough to cover their default risk? That's right: The banks are going to get out of the business of offering credit cards to higher risk borrowers. Which is probably for the best for the people who get cut off (borrowing on credit cards to finance consumption is always and everywhere a poor financial strategy). And it would be a great idea if we weren't in a recession. But isn't reducing the availability of consumer credit during a recession attributed to a credit crunch kind of a dumb move?
On a related front, what is going to happen if banks are not allowed to raise rates and fees on existing credit card balances as the risk of default on those existing loan balances increases? That's right: The banks are going to lose even more money and they are going to need an even bigger bailout from the government to survive. In effect, the costs will be shifted from the higher risk borrowers to the taxpayer. Which makes me feel like a chump for being a taxpayer but not a borrower.
What are banks going to do if they can't raise rates and fees on their higher risk credit customers enough to cover their default risk? That's right: The banks are going to get out of the business of offering credit cards to higher risk borrowers. Which is probably for the best for the people who get cut off (borrowing on credit cards to finance consumption is always and everywhere a poor financial strategy). And it would be a great idea if we weren't in a recession. But isn't reducing the availability of consumer credit during a recession attributed to a credit crunch kind of a dumb move?
On a related front, what is going to happen if banks are not allowed to raise rates and fees on existing credit card balances as the risk of default on those existing loan balances increases? That's right: The banks are going to lose even more money and they are going to need an even bigger bailout from the government to survive. In effect, the costs will be shifted from the higher risk borrowers to the taxpayer. Which makes me feel like a chump for being a taxpayer but not a borrower.
2009-04-23
The price of oil and the recession
An article today in the New York times talks about the fact that the price of oil has been holding up remarkably well despite weakening demand and swelling inventories. Oil Prices Resist the World’s Recession Trend (NY Times 2009-04-22). The author credits the resiliance of the price of oil to OPEC supply cuts and people investing in oil futures as a hedge against the USD and inflation.
To me this dynamic risks worsening the global recession. As one economist once said, a recession is a deflation trying to happen, i.e. when demand drops, but prices don't drop enough to keep pace, then a recession happens as people buy less. As long as the price of oil is artificially propped up by hot money and OPEC the world will continue to consume less and less energy. That doesn't sound so bad on it face. Isn't saving energy good? But the energy will be saved because people are consuming fewer goods and services and because whole businesses will go under because high energy prices cause them to lose money.
The way I see this playing out is that either:
To me this dynamic risks worsening the global recession. As one economist once said, a recession is a deflation trying to happen, i.e. when demand drops, but prices don't drop enough to keep pace, then a recession happens as people buy less. As long as the price of oil is artificially propped up by hot money and OPEC the world will continue to consume less and less energy. That doesn't sound so bad on it face. Isn't saving energy good? But the energy will be saved because people are consuming fewer goods and services and because whole businesses will go under because high energy prices cause them to lose money.
The way I see this playing out is that either:
- The price of oil will collapse in the near term, which will provide a stimulus to the economy which will help shorten the recession, or
- The price of oil will continue to be propped up by speculators and OPEC, which will prolong and deepen the recession, which will in turn cause an even deeper collapse in the price of oil later.
2009-04-16
Maybe genes don't determine many diseases after all
This article in today's New York Times:
Genes show limited value in predicting diseases
Supports my longstanding suspicion of claims that certain diseases (depression, autism, schizophrenia, etc) were caused by genetic defects. It always seemed to me that if a disease truly was caused by a genetic variation then the expression of the disease would follow simple Mendelian rules, like is the case with Huntington's Disease or Tay Sachs disease. And my skepticism increased when the years and decades went by without indentifying the specific culprit genes for various diseases that were attributed to genetics.
Genes show limited value in predicting diseases
Supports my longstanding suspicion of claims that certain diseases (depression, autism, schizophrenia, etc) were caused by genetic defects. It always seemed to me that if a disease truly was caused by a genetic variation then the expression of the disease would follow simple Mendelian rules, like is the case with Huntington's Disease or Tay Sachs disease. And my skepticism increased when the years and decades went by without indentifying the specific culprit genes for various diseases that were attributed to genetics.
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