The Great Recession

From the Financial Times, the slumping economy is causing more trouble for the housing market:

More than one in every eight homeowners with a mortgage was behind on home loan payments or in some stage of foreclosure at the end of the second quarter, as mounting unemployment aggravated the housing crisis, the Mortgage Bankers Association said on Thursday.

The percentage of loans that were in foreclosure or at least one payment past due rose to 13.16 per cent, the highest increase since the MBA began keeping records in 1972 and a jump of more than a percentage point since the first quarter.

Jay Brinkmann, chief economist at the MBA, said signs were growing that mortgage performance is being affected more by unemployment than by the structure of risky home loans, indicating a new stage in the foreclosure crisis that may not be easily addressed by government loan modification programmes.

While the proportion of foreclosures started on borrowers with subprime adjustable-rate mortgages fell dramatically in the second quarter, foreclosure starts on traditional prime fixed-rate loans saw a dramatic increase. Prime fixed-rate loans accounted for one in three foreclosure starts at the end of the second quarter. A year ago they accounted for one in five.

"There has been a shift in the problem from one driven by the types of loans to one driven by macro problems in the economy and drops in house prices," said Mr Brinkmann.

It seems like we still must, as NDN has argued since last September, do more to keep people in their homes.

The Washington Post's Ticker blog reports on new jobless claims:

New jobless claims last week jumped to 576,000, a figure higher than economists expected, the Labor Department reported moments ago.

The new jobless claims number was up 15,000 from the previous week's revised numbers. Economists expected a drop of about 11,000 last week.

The figure wiped out stock futures gains that had been promising a higher market opening today.

It also suggests more job losses to come this month. The official national unemployment rate stands at 9.4 percent, but most economists -- and the White House -- expect the figure to peak at more than 10 percent.

Analysts suggest that the economy needs to see fewer than 500,000 new jobless claims per week for several weeks in a row before an unemployment bottom can be called.

More data suggesting that the underlying economic situation is less sound than many believe. The economy didn't fall off the cliff, but it seems like we're still sliding down that mountain. Also, Nouriel Roubini wants us to stop asking when the recession will end.

John Plender in the Financial Times says that the way global finances look now certainly isn't it:

To escape from the global imbalances that are at the root of this financially induced recession, creditor countries need to stimulate their economies while the mainly Anglophone debtor countries moderate their excesses.

Japan, China and Germany, the biggest surplus countries, have, in the event, embarked on greater domestic stimulus than some had expected. Yet the US stimulus remains disproportionately large, while investors are looking to the already heavily indebted American consumer to do more to drag the world out of recession.

This does not amount to a sustainable exit strategy and in policy terms looks curiously like a re-run of the early 1930s in reverse. Then, countries that adhered to the Gold Bloc matched deflation in the US with their own deflationary response. Today, an exchange rate regime where many Asian currencies are pegged to the dollar means that asset price inflation in the US is being matched by asset price inflation in Asia.
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There is an echo here of the debate at Bretton Woods, where the postwar international financial architecture was thrashed out in 1944. In the negotiations, John Maynard Keynes for the UK tried to secure an international adjustment mechanism that was as tough on countries that ran persistent surpluses as on countries that ran persistent deficits. Such was the weakness of the UK's economic position that Harry Dexter White, the US Treasury secretary, prevailed.

The US was the world’s biggest surplus country and expected to continue that way. So the Bretton Woods agreement incorporated no sanctions on surplus countries and no real incentives for adjustment by countries that persistently piled up reserves. Bretton Woods did not last very long. Current exchange rate regimes look no more durable. Meantime, the risk that mercantilist exchange rate policies will prompt trade retaliation remains high, as does the risk of investor disappointment if US consumers choose to continue to rebuild their savings. They have no obligation, after all, to embark on a further binge purely to justify share prices that have run ahead of events.

The issue of how American consumers were going to act following the Great Recession is one we at NDN have written about quite a bit. For more, take a look at:

• The Housing Crisis and Our National Attititudes Toward Saving by Dr. Robert Shapiro, 4/17/2009 – Shapiro observes that, as a result of the burst of the housing bubble, the Millennial generation will likely be more interested in saving than investing in homes.

• Spend? Save? The debate continues by Simon Rosenberg, 2/11/2009 - Building on a previous post, Rosenberg follows the growing debate about whether American families should be focusing on saving.

In his weekly address, President Obama discusses the impact of the Recovery Act on recent GDP numbers and the New Foundation. He sees innovation as a key piece of that New Foundation. Here's what the President had to say about employment, a lagging economic indicator:

But history shows that you need to have economic growth before you have job growth.  And the report yesterday on our economy is an important sign that we’re headed in the right direction.  Business investment, which had been plummeting in the past few months, is showing signs of stabilizing.  This means that eventually, businesses will start growing and hiring again.  And that’s when it will really feel like a recovery to the American people.

And innovation:

Innovation has been essential to our prosperity in the past, and it will be essential to our prosperity in the future. But it is only by building a new foundation that we will once again harness that incredible generative capacity of the American people. All it takes are the policies to tap that potential – to ignite that spark of creativity and ingenuity – which has always been at the heart of who we are and how we succeed. At a time when folks are experiencing real hardship, after years in which we have seen so many fail to take responsibility for our collective future, it’s important to keep our eyes fixed on that horizon.

Watch the whole thing for yourself:

Michael Pettis, a Peking University professor who I had the good fortune to meet as part of a college program in Beijing, writes in the Financial Times that it's time to get ready for lower Chinese growth. Pettis spells out the change that is likely to occur and hints at ramifications for policymaking in China and beyond:

For 20 years, and especially in the past decade, rapidly rising debt has allowed America’s consumption growth to exceed economic growth, with a concomitant rise in the country’s trade deficit. One consequence of this too-rapid growth in American consumption has been that the non-US global economy was able to grow faster than non-US global consumption. This was especially true for Asia, the main beneficiary of the US consumption boom, and for China in particular.

While Chinese consumption was growing at an impressive 9 per cent a year over the past few years, Chinese gross domestic product growth substantially outpaced it, clocking in at 10 per cent to 13 per cent annually. China was able to do this in large part because as it poured resources and cheap financing into manufacturing, and in so doing produced many more goods than Chinese households and businesses were able to consume, the balance was exported abroad, where much of it was absorbed by US consumers.

But everything has changed. Whether America likes it or not, US debt levels will decline over the next several years. As a result American consumption will grow substantially slower than the US economy, and so the trade deficit will decline. For the rest of the world, even ignoring the possibility of a decline in global investment, a contraction in the US trade deficit will bring with it a period in which economic growth will be less than consumption growth.
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Over the next five years or more Chinese economic growth will necessarily be lower than growth in Chinese consumption. The massive but unsustainable investment in infrastructure and new production facilities that characterises the Chinese fiscal stimulus package will not be able to change this fact. From its dizzying heights during the past two decades, the world needs to prepare itself for a decade during which, if all goes well, China grows at a still respectable but much lower rate of 5-7 per cent. If the current fiscal stimulus package retards China’s adjustment process, as many analysts argue that it does, growth rates may be much lower.

The Council of Economic Advisors, the National Economic Council, and many others have told us that the American economic recovery will export driven. It seems that, for the sake of the economic future of both the U.S. and China, policymakers need to thing about getting as many of China's 1.3 billion people into the (low-carbon, sustainable) consumption game as possible. For more on China and the U.S.-China Strategic and Economic Dialogue, take a look at pieces from Michael Moynihan and Robert Shapiro this week.

Oh, and you should certainly buy the newly released, paperback version of Shapiro's Futurecast, which focuses a great deal on China.

Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee yesterday and Senate Banking today. There are varying takes on his testimony, but there seem to be three important themes that many have picked out for policy going forward:

1) The Fed has an exit strategy – Bernanke chose to not only testify about this, but also to write a reassuringly worded op-ed in the Wall Street Journal:

My colleagues and I believe that accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road. The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner.

As the New York Times' Catherine Rampell writes, the question, more then just the how, is the when. James Kwak at the Baseline Scenario agrees that the "when" is important and has a solid take on the Fed's actions and Bernanke's words to this point.

2) The Fed should retain it’s independence – amidst Ron Paul led efforts to audit the Fed, Bernanke defended the Fed’s actions to this point and pointed out a number of concerns about Paul's proposal noting that:

The Congress, however, purposefully--and for good reason--excluded from the scope of potential GAO reviews some highly sensitive areas, notably monetary policy deliberations and operations, including open market and discount window operations.

With the profile of the Fed's activities at a high level of public attention, it’s not particularly surprising that the Fed's independence is being challenged. The creation of independent commissions is always politically difficult – who likes to give up their power? (Part of the reason the IMAC development on healthcare is fairly impressive.)

In Mark Thoma's view, the Fed's independence should not be diminished, but the district banks' presidents should be selected differently. He also brings in some good history on the topic.

3) Lawmakers should reign in long-run deficits – Not too much to expound on this point (Bernanke didn't go into too much detail, aside from touching healthcare costs), but the point is that fiscal policy gone awry in the long-run can create tremendous problems in the conduct of sound monetary policy – not something a Fed chair is particularly interested in seeing. Noam Scheiber writes that Republicans either don't know or don't care about the difference between the long-run and the short-run.

Of course, this testimony comes amidst the beginnings of the discussion about whether Bernanke is to remain Fed Chair (his term ends in January). The coming months will tell how the head of the nation's independent central bank plays his politics. Apparently he's got solid instincts on the retail side.

In an article leading with Larry Summers' call on banks to increase lending, President Obama's National Economics Advisor gives Bloomberg reporters an update on the status of the economy:

Summers said the U.S. economy is "no longer in freefall," and poised for recovery starting this year. The former Treasury secretary and Harvard University president cited recent increases in exports, and said fiscal-stimulus and foreclosure- relief programs will create a "gathering force" in the coming months.

Even so, income growth may not "resume in the near term," he told Bloomberg editors and reporters.

"The pace of growth next year, I think, is very much in doubt and difficult to predict," Summers said. That "will depend crucially on our effectiveness in implementing the programs that have been legislated" and what Congress may do on health care, financial regulation and energy, he said.