I like this cartoon (h/t Kedrosky) for perspective on the past year, though I would perhaps swap a few of the roles around. To me, it’s the regulators that lacked the courage to prick this bubble, and the investors that lacked a brain. I never expected the lenders to have a heart.
The Wizard of Oz was originally written around the turn of the century (last one) as a populist allegory railing against the banks and railroads and Yip Harburg, the lyricist for the 1939 movie, specifically stuck to that intention. I believe the tin man was the factory worker, the straw man the farmer, the cowardly lion was William Jennings Bryan, the fake wizard was Wall Street (as today) and the witches the monopoly trusts. The munchkins were the “little people”. Dorothy was you and me.
Plus ca change…
GDP for Q407 was revised to a negative 0.25%, Q108 to 0.9%, but Q208 was reported at 1.9%. The big story in the data was net exports. Dean Baker (via DeLong):
Exports grew at a 9.2 percent annual rate. More importantly, imports fell at a 6.6 percent annual rate. Together, the change in net exports added 2.42 percentage points to GDP growth for the quarter…
Nonfarm payrolls fell for the seventh straight month in July, while the nation’s unemployment jumped to 5.7%, a four-year high, according to the Labor Department. Underemployment, a more comprehensive measure of the extent of labor market weakness, rose to 10.3%, its highest level since 2003 and two points above its July 2007 level. Since December, 463,000 jobs have been lost, the strongest signal yet that the economy is in a recession.
Tourism is not responding as strongly as one would hope to the weak dollar.
The world’s long-haul international travelers have jumped by 35 million since 2000, yet America has been largely overlooked by those new travelers, despite favorable exchange rates resulting from a weak dollar and attractions like Disney World and the Grand Canyon. In fact, the annual number of foreign visitors to the US is about 2 million lower than in 2000, leading travel-industry experts to figure that from 2000 to 2007, the US economy took a hit of about $150 billion… Foreign visitors to Orlando, Fla., dropped by one-third from 2000 to 2006; by nearly 40 percent over the same period to Anaheim, Calif. (read Disneyland); and by 22 percent to Las Vegas, a frequent entry point for foreigners to the Southwest… in all 50 states, travel and tourism figure somewhere among the top four industries by economic impact.
New York may go broke (again).
Costs are rising and revenues are falling fast. In June 2007 the 16 banks that pay the most taxes on their profits remitted $173m to the state treasury. Last month this dropped to $5m, a 97% decrease. This is a frightening fall given how much the state’s coffers rely on Wall Street taxes: 20% of all state revenues come from financial companies… Wall Street lost 4,300 jobs during the month of June alone… In less than 90 days, the projected deficit over the next three years has jumped 22% to $26.2 billion.
Peter Bernstein has added his voice to the chorus, waxing apocalyptic.
In 2007, as if some kind of secret signal went out among them, housing prices accelerated their decline while the prices of oil and food rocketed higher… the most unusual feature of our current problems: the primary impact of all of them has been on consumers, not on businesses… Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly… To sit back and let nature take its course is to risk the end of a civil society.
Too many developed economies got addicted to asset inflation – the increasing valuations were the only source of yield to service the debt incurred in their purchase – a Ponzi scheme in the Minsky sense. Now that bubble has burst. Houses are a non-productive asset, a consumption good. Values have to fall to where they can be serviced from current incomes – whether via a mortgage payment or rent – or incomes have got to rise via wage inflation. I still don’t see any other way out. The first decimates (many) banks, the second decimates the dollar.
(Paul Davis at Technology Investment Dot Info.