Realism is Medicine
One way to characterize 2008’s sequence of economic and operational convulsions is shock.
Now, news can continue to be bad, and the series of negative headlines can continue, but, collectively, we’ve begun to shield ourselves from shock taking over.
Nobel Prize winning Princeton economist and New York Times business columnist Paul Krugman ties the dynamic disequilibrium of the moment to the econo-scape of our parents, grandparents, and great-grandparents to draw helpful analogy.
To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.
What, then, will actually end the slump?
Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
Krugman and the greatest economic minds of the present day are calling for nationalization of the banking system, at least for a brief, pre-privatizing moment. The Big Picture’s Barry Ritholtz observes yet another eloquent call for a bank take-over, despite banks themselves and the Obama Administration’s current insistance this is not the way to go.
The list of pros vs. cons on bank nationalization make the kicker refrain — you like it when your Nobel laureate economists can quote from Credence Clearwater Rivival — doubly poignant.
Here’s The Big Picture’s tally to date of those in favor, and those against.
Aside from myself [Barry Ritholtz], here are the folks who are in favor of temporarily Nationalizing the banks, and then spinning them back out:
Alan Greenspan
Gordon Brown, UK PM
Senate Banking Committee Chairman Christopher Dodd
Senator Chuck Schumer
Sen. Lindsey Graham
House Speaker Nancy Pelosi
Republicans (some)
Joseph Stiglitz
Paul Krugman
Alan S. Blinder, Princeton
Nassim Taleb
Nouriel Roubini
Greg Mankiw
J. Bradford DeLong
Elizabeth Warren, TARP Oversight Panel
Dennis Gartman
Chris Whalen
Josh Rosner
Jeff Matthews
John Mauldin
Jack McHugh
Bill King
Matthew Richardson
Dylan Ratigan (CNBC, Daily Beast)
Jesse Eisinger, Conde Nast Portfolio
Martin Wolf, FT
Aaron Task (Yahoo Tech Ticker)
Paul Kedrosky (Infectious Greed, CNBC)
Nicholas Kristof (New York Times)
Mark Gongloff (WSJ)
Richard Parker (Newsweek)
Michael Hirsh (Newsweek)
David Reilly (Bloomberg)
Paul Vigna (Dow Jones)
Henry Blodget (Silicon Alley)
Willem Buiter (FT)
Adam Posen (Peterson Institute for International Economics)
Jeff Macke
Todd Harrison
Calculated Risk (Preprivatize the Banks)Mark Thoma (Economistsview)
Karl Denninger
naked capitalism
Eddy Elfenbein (Crossing Wall Street)
Bronte Capital
Aaron Krowne Mortgage Lender Implode-O-Meter
Prieur du Plessis (investmentpostcards)
Roger Ehrenberg, Information Arbitrage
Felix Salmon
Interfluidity (Nationalize Like Real Capitalists)
Urban DigsAnd those opposed:
Ben Bernanke
President Obama
Tim Geithner
Lawrence H. Summers
Financial Services Committee Chairman Barney Frank
Republican Senator Jon Kyl
George Soros
Meredith Whitney, Oppenheimer
Deroy Murdock (NRO)
Larry Kudlow
James Cramer
Hale Stewart
Tyler CowenIf the administration ever gets to the point where its housing initiatives — i.e. foreclosure mitigation can actually target principal reduction, nationalization would be a way to go.
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