^ immigration is what's fueling our current population growth. Without it, we'd be stagnant. It's the same story across other first-world nations too.

So population growth maybe won't continue exponentially (unless maybe we can start colonizing other planets). I still think though that our economy, even at a linear population growth, still can't sustain us all at the current rate.

2/10/2009 12:31:34 AM

Quote :

"And you have to accept that indefinite population growth is impossible because we do live in a finite country with finite resources."

I accept that whole-heartedly. But I don't see why anyone would waste their time worrying about continuing economic growth in the year 3009 AD. As things currently stand in the year of our lord 2009 AD, a 3% growth rate is well within the realm of possibility.

Quote :

"I am not sure that extra consumption lowered the US growth rate over the past decade. What it did was divert current consumption from Chinese families to US families. To some extent this will result in a reduction in US consumption in the future and an increase in Chinese consumption."

Ah, but it did. Remember we are keeping all else equal: the diversion of consumption from China to America was a policy decision by the Chinese and was independent of America's policy decision to subsidize residential real-estate. As such, had America not diverted a trillion dollars to building ultimately useless houses across the country then that money would have been allocated elsewhere. Maybe medical research, maybe R&D, maybe drilling for oil, maybe expanding internet access, maybe private space exploration. Like I said, we might have used China's money to cure cancer by now. But, instead, the government and Fannie Mae borrowed it and spent it to both kill Iraqis and expand suburbs no one wants to live in.

2/10/2009 12:35:46 AM

Quote :

"instead of saying economies cannot grow at 3% indefinitely, let's say that populations cannot grow at 3% indefinitely. If you accept that as true, then the rationale for the economy continuing to grow is shot."

This ignores productivity growth, which augments labor as to allow output growth to exceed mere population growth.

2/10/2009 7:02:31 AM

^^

Well a couple of things
One the Chinese government is not omnipotent. By some estimates it costs up to 15% of GDP to subsidize the Yuan, given the huge capital account surplus generated by the US. Without that it would have just be beyond the realm of possibility.

Two, at least in terms of statistical accounting building homes not only adds to GDP but is investment. Now, you might argue that its useless investment but this is a different story.

In the beginning of the decade there was a lot of talk about dark fiber. Fiber optic cables that had been laid for a digital revolution that never lived up to its hype. That fiber was still investment whether or not it was being used.



Lastly, I don't know if Fannie Mae had any significant impact on the extent of overall housing investment. Fannie and Freddie do lower the rate at which mortgage funds can be borrowed but the difference between conforming loans and Fannie Freddie loans outside of this crisis was typically around 0.5%

In addition, where we saw the real boom was outside of the type loans that Fannie and Freddie will package.

Moreover, there are some economists who suggest that Fannie and Freddie actually raise the cost of non-conforming loans by diverting investors to conforming loans. To the extent that is true, Fannie and Freddie actually were a mitigating force in the boom.

2/10/2009 11:18:26 AM

TKE-Tegs head just exploded.

2/10/2009 11:27:52 AM

Quote :

"Lastly, I don't know if Fannie Mae had any significant impact on the extent of overall housing investment. Fannie and Freddie do lower the rate at which mortgage funds can be borrowed but the difference between conforming loans and Fannie Freddie loans outside of this crisis was typically around 0.5% In addition, where we saw the real boom was outside of the type loans that Fannie and Freddie will package. Moreover, there are some economists who suggest that Fannie and Freddie actually raise the cost of non-conforming loans by diverting investors to conforming loans. To the extent that is true, Fannie and Freddie actually were a mitigating force in the boom."

More nonsense from kwsmith2 when it comes to Fannie Mae and Freddie Mac. Considering how informed he is on other economic matters, it makes me wonder whether he has some vested interest in FM^2 and he is purposefully burying his head in the sand with respect to the role that they played in this mess.

Both the Clinton and Bush administrations made it a priority to increase home ownership. They did this by leaning on the mortgage industry, particularly the GSE's Fannie Mae and Freddie Mac, to lower lending standards. Specifically, Clinton directed the Department of Housing and Urban Development (HUD) to oversee the 2 GSE's and ensure that a significant portion of their loans were "affordable loans" to "deserving applicants" ie minorities and other disadvantaged groups they targeted. These "affordable loans", to people who otherwise would not have qualified, were supposed to be accompanied by FM^2's higher lending standards, and for a couple of years they were. But ultimately, the GSE's had to lower their lending standards in order to meet the goals of HUD.

See this snippet from an article in the NY Times back in 1999:

Quote :

"Fannie Mae Eases Credit To Aid Mortgage Lending NY Times, 1999 Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits. In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans. ''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market. In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. ''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''"

http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260

Not surprisingly, the market shifted soon after Freddie and Fannie relaxed their lending practices in order to buy these securities, and subprime loans were soon dominating the industry. Forced to meet ridiculous affordable housing goals, they bought billions in subprime securities despite warnings of high forclosure rates and concern from HUD. By 2004, the affordable housing goal for Fannie and Freddie was 56%, up from 42% in 1996, and they were the dominant force providing capital to the subprime market. That year Fannie and Freddie bought almost $200 billion in subprime securities, nearly half the total purchased.



Because they were buying mortgage-backed securities rather than subprime loans themselves, they still recieved credit with HUD for meeting their goals while allowing very unregulated private lenders to negotiate ridiculous ARM's, teasers, and other exotic loan vehicles that had incredibly high foreclosure rates once interest rates went up. There were some rules in place to prevent Fannie and Freddie from buying the more outrageous subprime securities, but these rules became more and more relaxed as the GSE's strained to meet the demands of HUD and raked in the early profits associated with the market. Fannie Mae and Freddie Mac created the subprime market with their capital, and HUD refused to regulate them properly even when they knew that these securities were inherently risky. The lack of regulation in private lending was certainly one of the main culprits in the housing boom and subprime mess. But Fannie and Freddie implicitly told the market that it needed to meet it's goals on affordable loans and eased their credit requirements on loans purchased, buying up massive amounts of subprime securities. the mortgage lenders, flush with cash and demand driven by the GSE's, were only so happy to comply by expanding their lending practices and relaxing their standards, and the subprime market was formed.


[Edited on February 10, 2009 at 12:56 PM. Reason : 2]

2/10/2009 12:37:02 PM

Quote :

"There were some rules in place to prevent Fannie and Freddie from buying the more outrageous subprime securities, but these rules became more and more relaxed as the GSE's strained to meet the demands of HUD and raked in the early profits associated with the market."

I thought I read somewhere that in general FM/FM weren't EVER allowed to by some of the more radical products, like negative amort loans, jumbos, etc, and that the default rate on the MBSs that they purchased was much lower than a lot of the tranches produced by the other now imploded or distressed institutions.

2/10/2009 1:07:45 PM

^ From what I understand, that sounds correct. Fannie and Freddie tried to stay away from the exotic loan vehicles, and the subprime securities they bought were supposedly the "least risky" ones out there. But a subprime loan is a subprime loan, and extending credit to those who aren't credit-worthy is inherently risky. Fannie Mae and Freddie Mac created the subprime bubble by investing heavily in these securities, as required by the goals set by HUD. Just look at subprime loans as a percentage of all loans prior to the mid-90's. MBS's have been around for a while, but there was hardly any subprime market to speak of. People with bad credit paid higher interest rates, and those who didn't qualify for loans simply couldn't get them. Once Fannie and Freddie jumped into the fray and started buying subprime securities, the subprime market, flush with capital, exploded and inertia took over.



[Edited on February 10, 2009 at 1:21 PM. Reason : 2]

2/10/2009 1:14:54 PM

I am pretty sure I have seen plenty of analysis regarding the GSEs that doesn't pin them like you (and the right leaning Post) is attempting to do. Yes they had a part, but it was a smaller one in a perfect storm than is implied by the reading and charts above. Anecdotally, myself, 5 of my closest friends, my parents, and a whole host of people that I've seen post in the lounge got "sub prime" loans. None of us have defaulted.

Sub prime covers a lot of ground, and to just take those numbers above in total without really knowing what the underlying make up of the terms and borrower profile looks like doesn't get us too far down the road to knowing just how much was caused by FM/FM. And anyway, others have done this work. I'd post links but I'd get attacked for the writers being partisan hacks.

2/10/2009 1:33:31 PM

The extent to which Fannie and Freddie contributed to the subprime mess can certainly be debated. Saying that they were a "mitigating factor" in the mess, as kwsmith2 did at the top of the page and in other threads, is absolutely wrong. It really makes me wonder how he can miss the boat so thoroughly on the role they played.

2/10/2009 1:52:13 PM

random anonymous internet guy >>>>>>>>> university economics professor

FTMFW






[Edited on February 10, 2009 at 3:55 PM. Reason : ]

2/10/2009 3:53:48 PM

Quote :

"TKE-Tegs head just exploded."

...the hell? I haven't posted in this thread in months, if ever!

2/10/2009 3:56:20 PM

^^^ perhaps he just made a simple semantic error? Maybe he meant "contributing" or "aggravating" factor. "Mitigating" is just the completely wrong word.

If Freddie and Fannie had never existed, this issue could have still played out exactly as it did though.

I think the abuse of naked short selling, and general instability with the way CDOs/MBSes are innately structured play a bigger role than the mere bad practices of Freddie and Fannie.

[Edited on February 10, 2009 at 4:02 PM. Reason : ]

2/10/2009 3:56:50 PM

Quote :

"I think the abuse of naked short selling, and general instability with the way CDOs/MBSes are innately structured play a bigger role than the mere bad practices of Freddie and Fannie."

How so?

2/11/2009 7:17:00 AM

Quote :

"...the hell? I haven't posted in this thread in months, if ever!"

Aren't you the one that thinks Barney Frank is the anti-christ?

2/11/2009 8:50:28 AM

http://www.youtube.com/results?search_type=&search_query=ascent+of+money+safe+as+houses

2/11/2009 2:43:10 PM

also, this series:

http://www.youtube.com/watch?v=QmLNV8WYAO0&feature=PlayList&p=AB1E505CF53E7A4F&index=0&playnext=1

2/11/2009 2:51:47 PM

Quote :

"random anonymous internet guy >>>>>>>>> university economics professor"

Random internet guys can be pretty smart.

Quote :

"The extent to which Fannie and Freddie contributed to the subprime mess can certainly be debated. Saying that they were a "mitigating factor" in the mess, as kwsmith2 did at the top of the page and in other threads, is absolutely wrong. It really makes me wonder how he can miss the boat so thoroughly on the role they played."

If you mean through their purchases of securitized debt then this is a topic of serious debate. My stance is that inflow of capital from Fannie and Freddie purchases (1) displaced other investment in subprime and (2) was small in comparison to their total debt holdings.

My point was that their primary business was packaging prime MBS and the discount offered by agency debt caused capital to flow there rather than subprime. In that sense they were mitigating. In addition, the fact that agency debt is still packaged and sold regularly, while the Jumbo Prime market is in the toilet makes them a current mitigating factor.

Ask, this question: if Fannie and Freddie were not doing business today and their business was instead taken up by traditional banks would we be in a better or worse position?

The explosion in subprime debt was, in my estimation, caused by the development of the CDO model and the securitzation efforts of Investment Banks.

2/14/2009 1:45:46 AM

Quote :

"My stance is that inflow of capital from Fannie and Freddie purchases (1) displaced other investment in subprime and (2) was small in comparison to their total debt holdings."

If they had very little exposure to subprime, as it seems you are suggesting, then why did they go bust?

2/14/2009 12:00:25 PM

Well a couple of things -

One they were taken into convsevatorship. So, they never really went bust in the traditional sense that they could make their payments. The government effectively revoked their charter as private companies.

The reason is that there was some questions as to whether or not they were going to have trouble meeting their service requirements on the loans they package. Fannie and Freddie, had a total of somewhere around $5 Trillion in loans which they had securitzed into Prime MBS.

However, the way Fannie / Freddie MBS (agency debt) works is that they insure the buyers against default. So, if a borrower ever misses a payment Fannie / Freddie make that payment for them and then try and collect it later.

Well the capital base they were using to insure these mortgage was tiny in comparison to the $5 Trillion were effectively underwriting. They did have some investments in subprime which went bad and reduced that capital base even more.

On top of that prime mortgages were also starting to go bad at higher and higher rates.

So this put a lot of risk that Fannie / Freddie might not be able to cover all the payments of late borrowers.


Under no conditions could agency debt be allowed to default. This would simply send the world into a tailspin. So the government took in and officially backed Fannie and Freddie

One of the issues that was in finance before all of this is whether Agency debt was "officially" backed by the US government. Guys like Greg Mankiw warned that it was not and that investors were mistakenly accepting too low interest rates on Agencies because of this belief.

My argument is that they were. It short because no matter what the law says the US government is not now, nor in any foreseeable future would be in a position to allow a default on Agency debt. Therefore, you might as well treat it as if there is an explicit government guarantee. Indeed, I think the way this played out showed that to be true.

2/14/2009 12:42:57 PM

NOTHING TO SEE HERE PEOPLE - THIS IS JUST A NORMAL BUSINESS CYCLE RECESSION.
MOVE ALONG PLEASE



http://www.youtube.com/watch?v=tUO0j3BiAMQ

http://www.denverpost.com/headlines/ci_11703023

Quote :

"nearly 400 of the S&P's 500 companies have weighed in and reported a collective loss, even excluding the financial sector. "This is the worst; after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst at Standard & Poor's. The S&P 500 is a value-weighted index of the prices of 500 large-cap common stocks actively traded in the United States. A sixth quarter of negative growth ties the record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952. "Next quarter, we're expecting a new record of seven quarters of negative growth," Silver blatt added."

2/17/2009 1:17:22 PM

Thread should now be called "The Impressive Cliff Diving U.S."

2/17/2009 1:48:01 PM

http://tinyurl.com/chg3ry

2/19/2009 10:48:08 AM

don't hold your breath on that.

2/19/2009 10:54:25 PM

lots of good quotes here:
http://www.ritholtz.com/blog/2009/02/paul-volcker/

Quote :

"This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. It has the makings of something much more serious than an ordinary recession where you go down for a while and then you bounce up and it’s partly a monetary – but a self-correcting – phenomenon. The ordinary recession does not bring into question the stability and the solidity of the whole financial system. Why is it that this is so much more profound a crisis? I’m not saying it’s going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either. This phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending – consumption, investment, government — was running about 5% or more above our production, even though we were more or less at full employment. ...... There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have “once every hundred years” events happening every year or two, which tells me something is the matter with the analysis. So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I’m not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go. "

2/22/2009 9:58:41 PM

So the answer is to be more like Canada? Fuck.

2/22/2009 10:17:06 PM

^^ Sounds like some good fear mongering. Or maybe he hasn't thought through everything he's saying:

Quote :

"This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. ... I’m not saying it’s going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either. ... You know, they all said these events only happen once every hundred years. But we have “once every hundred years” events happening every year or two, which tells me something is the matter with the analysis."

So, he's never seen a problem like this in his lifetime, but it's not as bad as the great depression, but these problems (which he's never seen before in his life time, which included the great depression) are occurring every 2 years?

What is it? Is it something we've never seen before, or something that happens every 2 years? It is some huge crisis, or is it not "anywhere as serious" as the Great Depression?

2/22/2009 10:47:33 PM

Are you kidding? Your reading comprehension is terrible. The "every two years" comment is regarding the asset bubbles. The "nothing like this comment" is regarding the mother of all asset bubbles.

That you are even questioning is this something we've never seen before shows just how far out in left field you are.

2/23/2009 8:34:27 AM

I don't ever recall hearing someone say that bubbles in the economy only happen every hundred years. Anyone who looks at our economy over the last hundred could tell you that was wrong without even trying. So if he's talking about mere bubbles, then he's lying.

2/23/2009 8:42:23 AM

Quote :

"So if he's talking about mere bubbles, then he's lying."

I guess I was right, your reading comprehension is terrible.

2/23/2009 8:48:53 AM

So then enlighten me oh great wise one. What is he talking about that "they all said" only happen every hundred years or so, but has been happening every 1 or 2 years? Is he talking about bubbles? Financial recessions? Crises which shake our belief in the stability of the financial system? What? What are these "events" that "they all said" would occur every hundred years that have been occurring every 1 or 2 years? It seems to me he's talking about big financial shake downs, you seem to think he's talking about something else, so what is it?

2/23/2009 9:17:02 AM

Look, you took issue because it was a Democrat and called it fear mongering right up front. I'm not doing you the favor of explaining that which you don't understand when your mind is closed already. What he has said is pretty simple and plain if you don't try and make what he is saying more than he has said.

2/23/2009 9:47:42 AM

I know it will scar your little brain to believe this, but I'm not some partisan hack and I don't just throw things out the window because of the letter next to a person's name. I took issue because the statements made are inconsistent with themselves at worst and horribly ambiguous at best leading me to think (as you will note I stated in my first post, without any reference to party or politics) that it was either fear mongering or a poorly thought out statement. So unless you can point out what you can substitute for the word "events" in his statement that makes sense, I'm sticking by that initial interpretation.

2/23/2009 2:44:01 PM

The reason you think they are inconsistent is you are conflating 100 yr events with an economic disaster akin to the Great Depression (ie, you are thinking in terms of 100 yr natural disasters), and my interpretation is Volcker isn't saying that at all. He is saying that financial engineering is producing events you'd expect to see once in a blue moon more and more frequently as the math alchemist behind the scenes are finding holes in regulation quicker than they can be filled. And shocker, every so often (like now) one of these events is going to do more than just correct, it's going to be an outright explosion in our face. It isn't fear mongering, it isn't ambiguity, it's your lack of comprehension as to what he is saying.

2/23/2009 3:00:40 PM

Compare the decline in real GDP over the past 4 quarters (from The Economist):
U.S. -0.2%
France -1.0
Germany -1.6
Britain -1.8
Italy -2.6
Japan -4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline? If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter). If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP. But falling exports subtracted 2.84 percentage points from fourth quarter GDP. Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.
http://www.cato-at-liberty.org/2009/02/22/the-us-didnt-cause-the-world-recession/

2/23/2009 4:03:46 PM

The saying has always been that when Wall Street coughs, the rest of the world catches a cold.

This downturn has certainly showed that to be true.

[Edited on February 23, 2009 at 4:14 PM. Reason : 2]

2/23/2009 4:10:09 PM

Where did the 2.93% import growth come from? That makes no sense to me.

2/23/2009 4:32:41 PM

Try to predict shifts in relative prices!
"In Agatha Christie's autobiography, she mentioned how she never thought she would ever be wealthy enough to own a car - nor so poor that she wouldn't have servants..."

2/26/2009 10:03:10 AM

Are you drunk?

2/26/2009 10:26:06 AM

-6.2%

http://www.cnbc.com/id/29426821

2/27/2009 8:51:22 AM

Bleed Until Bankruptcy

2/27/2009 9:19:17 AM

jesus, that is a huge revision downward.....

2/27/2009 9:53:51 AM

Quote :

""The problem is us. The problem is not the banks, greedy though they may be, overpaid though they may be. The problem is us... We've been living very high on the hog. Our living standard has been rising dramatically in the last 25 years. And we have been borrowing much of the money to make that prosperity happen.""

http://www.npr.org/blogs/money/2009/02/household_debt_vs_gdp.html

2/27/2009 4:33:10 PM

Bullshit. The problem is not us, per-se. The problem is the rest of the planet:

Quote :

"Exports, until recently one of the few pillars supporting the distressed economy, tumbled at a 23.6 percent annual rate,"

Consumer spending is falling because all of us working in export related industries are being laid off.

2/27/2009 4:43:16 PM

yeah, yeah, it's never our fault. mhum.... there's no way American's have been living far beyond our means for 40 years now.

Right - we've been living just fine, and it's everybody else's fault for not buying our shit. Forget that we went into a negative trade balance in the 60's because American's decided it was easier, and more profitable (at least in the short term) to just push money around and let the rest of the world actually make shit.

2/27/2009 5:06:22 PM

Quote :

"Right - we've been living just fine, and it's everybody else's fault for not buying our shit"

Exactly. That was my assertion. I have evidence on my side of the argument (the rest of the world is in a worse recession than we are and what recession we have is mostly due to falling exports), what evidence do you have that our debts were "beyond our means"? What would that even mean? And if we assume you are right, then how do you explain the recession? Paying the interest on our debts should mean booming exports, but the opposite is occuring... So? Anything?

2/27/2009 5:24:23 PM

Sure, use the revised number and were worse than all those listed there besides Japan.

What now?

2/27/2009 5:34:08 PM

Quote :

"the rest of the world is in a worse recession than we are and what recession we have is mostly due to falling exports)"

btw, you care to revise the numbers you posted earlier, or do you think Cato will revise them, with the revised Q4 GDP data?
And then you want to restate your argument?

2/27/2009 5:34:24 PM

Quote :

"what evidence do you have that our debts were "beyond our means""

well, for one - the ballooning household debt:income ratio which was largely fueled by the false assumption that the equity in our homes would rise forever, therefore leading people to take on more and more debt because "hey, we'll just pay it off with our equity". And now millions of people are left with zero equity and a shitload of debt that they have no way to pay.

2/27/2009 5:37:20 PM

crickets

2/27/2009 6:30:24 PM