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« Bonuses at the Banks | Main | Architecture Linkage »

November 04, 2008

A Scary Graph and the X Factor

Friedrich von Blowhard writes:

Dear Blowhards,

When Alan Greenspan said he miscalculated as regulator in chief of the banking system a few weeks ago, he was lying. If he had it to do over again, he would do everything the same way.

This is not to praise old Alan as a particularly responsible, tough-minded, willing-to-take-the-heat-for-the-public-good individual. Clearly, he was never that. What I mean is, given that he wanted his good press, his reputation as a 'maestro' and Republican rule, he really had no choice but to keep interest rates low and mortgage lenders, however sleazy, unregulated. He needed the housing bubble. It was the only game in town.

Take a look at this graph, which was originally published by John Mauldin and Barry Ritholtz in the December 29, 2006 edition of Thoughts from the Frontline, "Real Estate and the Post-Crash Economy" (registration required). It shows how important a factor Mortgage Equity Withdrawal (MEW) was to the economy from the late 1990s through 2006. The blue bars are the reported GDP growth numbers, which of course include the effects of people spending money they were extracting from their homes via refinancings and home equity lines of credit. The red bars are what the GDP growth numbers would have looked like without that juice from MEW.

GDPGrowthWith%26Without%20MortgageEquityWithdrawal.gif

Pretty scary, huh? In that alternative but nearby universe where credit wasn’t kept excessively cheap and where mortgage lending was tightly regulated and option ARMs were outlawed, etc., etc., in other words, in a world without a housing bubble and consumption-boosting MEW, we would have seen five straight years of GDP “growth” at or below one percent. Given that two of those years would have seen negative GDP numbers, the average annual growth rate would have been 0.05%. That is to say, for that five year period, without relying on our real estate credit card to keep up its spending by consumers, the American economy would have stopped growing. It would have flatlined.

Clearly George Bush wouldn’t have been re-elected in 2004. Alan Greenspan would not have gotten a fifth term as Fed Chairman in 2004. No one would have considered him to be the Maestro, or the greatest Fed Chairman ever.

So Easy Al knew what he had to do, and he did it. And I’m betting, with no real regrets.

I don’t have the figures to extend this graph for the past two years, but I’m guessing things didn’t exactly get a whole lot better. And as for MEW in recent months, well, it has cratered along with the fictitious housing prices that, in conjunction with greed-blinded lenders, let people use the 'equity' in their homes as an ATM. And, just about the time the MEW party ended, the whole economy slid into recession. Funny how that worked, isn’t it?

But this raises a huge question, a question moreover that’s not getting a whole lot of airplay these days.

What the heck happened to the American economy in the late 1990s or thereabouts that killed off economic growth, apparently for at least a decade? (I’m including the next two years in no-growth mode, which I think is a pretty safe bet.)

What is the deadly X factor? Was it:

- Y2K (maybe we should have taken it a lot more seriously?)
- Globalization and the loss of manufacturing jobs?
- The inevitable result of paying stagnating (or even falling) wages to the vast majority of the population as a short-sighted way of ensuring high corporate profits?
- The lack of truly game-changing technical changes in the past twenty-five years; that is, maybe the Internet wasn’t quite as big a deal as, say, electricity or the internal combustion engine?
- Long term fallout from the notoriously IQ-lowering hit single, “Ooops, I Did It Again”?

Have you guys got any ideas? Jump right in, it's not as if this conversation is getting hogged by famous economists or anything. They don't seem to want to talk about it, and, anyway, they're too busy trying to prop up the financial sector.

And two more wacky questions that have occurred to me:

Is the notion of perpetual economic growth in capitalist societies (not exactly a natural trend throughout most of human history) in need of revision? Was it just a temporary thing?

How do we intend to handle the distribution of the goodies if the pie isn’t growing?

Hey, you 2Blowhards readers: it’s your world. I'm just an old fart who happens to live in it.

Cheers,

Friedrich

posted by Friedrich at November 4, 2008




Comments

In a technologically complex and highly globalized competitive environment, an average IQ will only get you failure in life. The vast majority of humanity is incapable of doing anything that anyone is willing to pay good money for. The protoplasm is weak, though the desires be strong. Bad times ahead.

Posted by: Don McArthur on November 4, 2008 8:53 AM



Go for the obvious: 9/11.

The U.S. absorbed a massive hit on 9/11. I was there, so I know just how ferocious a hit we took.

A gut punch like the attack on the WTC is psychologically devastating. We've all enjoyed kicking Prez Bush. Try to imagine the blow to his psyche and the guilt attached to presiding over the most hellish attack on U.S. soil in history. He probably felt honor bound to avenge this attack. Almost any man in his position would.

War unleashes hedonism. For several years after 9/11, I felt as if I was living in a state of war, just waiting nervously for the next attack. People living in a state of war go for short term rewards... screwing, drinking, vacations in Las Vegas, etc.

In the aftermath of the attack on NYC, we went on a consumer, hedonist binge.

Not far in the background, the attack devastated one of the principle assumptions of the great Diversity Crusade. Race and ethnicity are real and they do matter. Our enemies can be defined by race, ethnicity and religion.

Instead of accepting this lesson, we doubled down. Understanding and talking things out must be the solution. Racism must be the reason that bankers were denying mortgage loans to inner city blacks and immigrant hispanics. Electing a black man will solve all of these problems.

I can't add much to Steve Sailer's analysis of this continued refusal to acknowledge that evil exists, or this blind determination to pretend that race and ethnicity are "social constructs."

We appear to be about to elect Barack Obama president, so we are now tripling down. Sensitivity training will be the answer. Racial and sexual quotas will fix the problem. Electing one of the most extreme prosecutors of the mortgage scam, Obama, will give us the Change We Need.

Look back to the psychological scar of 9/11. We're still struggling to absorb that one. We are still refusing to accept the basic premise of the Lord of the Rings. Evil exists. The evil eye is constantly surveying the universe for the slightest crack.

We're dancing and screwing and trying to have a hell of a good time, and somewhere in the back of our minds we know that the next great war is lurking out there and that it is inevitable.

Posted by: Shouting Thomas on November 4, 2008 8:58 AM



alternative newspaper naughty ad:

Limp, tired men - wow da ladeez with MEW juice

Posted by: playrink on November 4, 2008 9:15 AM



Here's one possible explanation - that concentrating wealth at the top carries the side effect of increasing the risk that investors must take on without increasing the risk premium:

http://distributism.blogspot.com/2007/09/investors-dilemma.html

A few days ago I was just thinking about what has happened and wondering "didn't I read something that described this last year?"

Combine that with your own theory about the New Class shifting risk to the rest of the population while keeping the rewards for themselves, therefore reducing their fear of risk, and it seems like that's all it'll take to create the problems we're seeing today. The scary graph shows that the US was able to disguise the reality for a few years.

I was in the US in the late 1990s and observed how, without the people otherwise getting richer or more productive, it seemed that houses got larger and larger and cars got newer and newer in the space of only a few years. Large numbers of incoming freshmen at a state university were suddenly driving brand-new cars instead of five-year-old ones. A big expansion of consumer spending based on credit is exactly what it looked like on the ground. That was one of the big reasons why I went back home - I figured this kind of expansion could not be sustained indefinitely while Eastern Europe still had plenty of room for "real" economic growth.

Posted by: Martin Regnen on November 4, 2008 9:51 AM



Jeez, ST, I agree that "the great Diversity Crusade" is a problem (as is the blindness some have to the fact that evil exists) but, turning identity politics into vast conspiracy is kinda like losing it over Fluoride in the water sapping our vital fluids. As with all fringe groups, the size of the group who believe in the tenets of identity politics is small, and largely contained to college campuses. Most folks who bump into the real world (and have to get a job) get over that crap eventually.

Posted by: yahmdallah on November 4, 2008 9:53 AM



I think the deadly X factor is a combination of your 2nd, 3rd, and last points. Though "globalization", of course, affects more than manufacturing jobs. (And there are economists and economic writers who have long been examining the long-term ill-effects of de-industrialization and the current globalization regime.)

Is the notion of perpetual economic growth in capitalist societies (not exactly a natural trend throughout most of human history) in need of revision? Was it just a temporary thing?

I've always been puzzled by this apparent belief in "infinite growth", though I'm sure the policy-makers pushing growth as an end in itself aren't thinking in terms of logical endpoints, but narrowly in terms of specific problems they may be responsible for - increasing tax revenues, funding Social Security, etc. - in the short term. Of course, one might think that people incapable of considering the larger, longer-term welfare of a nation ought not to be entrusted with policy-making power, even if we expect a private individual - say, the owner of a home-building corporation - to lobby for GROW GROW GROW GROW GROW!...

Sure, societies are always changing, evolving, hopefully advancing and improving human life. But infinite growth, which seems to be the preferred model for both companies and nation, is an impossibility.

I'll repeat the unoriginal observation that we more and more confuse "the economy" with society, because that confusion promotes lousy (disastrous?) policy. There do seem to be a lot of people out there who don't (or can't) recognize the distinction. (Why is that? Do they mistakenly take "everything else" in civilization as given, or is the scope of their inner lives really that narrow?

Sometimes I really wonder about people. For example, I came across some Australian policy article recently which illustrated this narrowness nicely. (Which of course I've lost track of. Iirc, the group appeared to be some sort of Chamber of Commerce type quango.) On the one hand, they were not happy with a current public policy encouraging reproduction, which had been instituted because families were too small and there weren't going to be enough people of working age to "grow the economy". You see, children are a net liability on the economy, an inefficient cost sink that have to be fed, housed, and educated before they start being economically productive. On the other hand, they were all gaga for turbo-charged immigration, because that way they could get all the good-to-go workers they needed to "grow the economy". Now, one would think that any human being not beset with terminal short-termitis (or maybe autism) would begin to pick out the flaws, both technical and social, in this sort of reasoning. But after you've read enough stuff like this, you stop thinking about the technical and logical flaws and start wondering, "Wtf is wrong with these people?" And after a while you begin wondering if they're not merely blinkered and unwise, but maybe just batshit insane.

How do we intend to handle the distribution of the goodies if the pie isn’t growing?

The current economic model was sold on the premise that it was "growing the pie". Naysayers were (and still are) castigated for foolishly believing that the system is a zero-sum game. Unfortunately, the last decade or so of "globalization" has been a zero-sum game for more and more American (and other First World) workers. (And some proponents have changed arguments in mid-stream, exhorting us that it's good that we've gotten poorer so other people can be richer. Which is fine to argue, honey, but that's not what you were selling when all this started.)

As for the non-growing pie, not sure how best to deal with that. The usual line on most of the left-leaning econo-blogs I read has been that it's a simple matter of making sure all the fabulous gains of globalization are fairly spread via government-controlled redistribution programs. I dunno. Crap wages and crap working conditions ameliorated by national health care seems a lousy exchange, and indicates a much uglier and less free life, than one in which a worker can command humane working conditions, and wages good enough to attend to his and his family's needs as a free man with free choice, and not a government client. But that's just me. I recognize that we were already far down this road before the '90s. But I don't have to like it.

Posted by: Moira Breen on November 4, 2008 10:07 AM



Don: In a technologically complex and highly globalized competitive environment, an average IQ will only get you failure in life. The vast majority of humanity is incapable of doing anything that anyone is willing to pay good money for. The protoplasm is weak, though the desires be strong. Bad times ahead.

Funny, innit, how great technological advancement can end up pushing people toward the living conditions of a feudal shithole. That wasn't the plan, was it?

Posted by: Moira Breen on November 4, 2008 10:17 AM



As the white population declines, the inevitable conflict between have and have not will accelerate and intensify. It began in the sixties and has rapidly gained traction. The shocking reality of a nonwhite president is proof of a change in civilization that is upon us. This is the watershed. The present economic turmoil is simply the trailing event, the tsunami following the underground movement of continental plate shifting. The quick will survive, the confused will perish.

Posted by: Bob Grier on November 4, 2008 10:19 AM



Excellent info, facts, and musings. And can someone please explain to me why Moira isn't a featured op-ed writer at some prominent newspaper?

Now I'm off the polls to try to figure out how to put in a protest vote ...

Posted by: Michael Blowhard on November 4, 2008 10:57 AM



Complicated problems rarely have a single cause, and so it is with the MEW-excluded economic stagnation. Many causes contributed to the problem.

Posted by: Peter on November 4, 2008 11:22 AM



... the size of the group who believe in the tenets of identity politics is small, and largely contained to college campuses...

No, identity politics is the official ideology of corporate American. If you've looked for a job recently, you might have noticed that many job sites now sport the word "diversity" in their titles.

I've written the diversity policy for several different corporations. It's not that I'm an expert on the policy... it's just that in my capacity as a web developer the job of putting that policy up on the splash page, and developing the training material for the policy falls to me.

The other shoe in the great Diversity Recession has has not yet fallen... executive incompetence. Two generations of U.S. executives have been trained in Diversity Policy and not much else. I know, because I read the college management textbooks in order to write the diversity website. Executives in their 30s and 40s were trained that racial and sexual quotas supersede the requirement to manage a business, and produce a product and a profit.

Barack Obama is the perfect symbol of this executive imcompetence. His incredible poise and confidence is the result of always being the beneficiary of racial quotas. (I'm not denying his obvious intellectual capacity.) He's never really been required to achieve anything concrete. He clearly has little patience with the realities of administration and governing.

The next step in the massive collapse into which we seem determined to fall is the revelation of the house of cards we built by pushing incompetents armed with nothing but Diversity indoctrination into leadership positions. It's coming!

Posted by: Shouting Thomas on November 4, 2008 11:53 AM



Great comments from Moira, a good point or two from Thomas, esp re 9/11, and others.

I think the dream of "infinite" growth might not be so far off the mark, if it could only be moderated to an idea of "long term" growth; with a bit more sober expectation.

My wild guess; We've been stuck in an imbedded concept of infinite growth at 4% percent or so, when realistically, we're a maturing economy with innate long term growth closer to 2%. Without many of the distributive or diversity ideas involved, this is my half-a-theory: The "dot-com" bubble didn't end with a bust in 2000-01. It was rather a currency bubble, which when slightly interrupted in about 2000, merely morphed from internet stocks to houses, so that what we're looking at is a single bubble-bust cycle from the 90's until now.

The shock from 9/11 and the end of the dot-coms would have been a perfect time to have a "standard" recession, i.e., one which is painful but wrings out imprudence and excess. Greenspan and others, fearing the pain, kept the money taps too far open. So now we WILL wring out some excesses, plus a lot of collateral damage, because we have 6 more years of excess to account for.

I'll make the wild claim that 2 things; forcing Fannie and Freddie to keep reasonable reserve requirements like normal banks (instead of the 25-to-1 leverage they were using), and allowing a more painful recession in 2001-2, through tighter money, would have avoided almost all of today's disaster, leaving just another uncomfortable adjustment.

We really should give up on the infinite 4% rate and look for a steadier 2%.

Posted by: Senator Smoot on November 4, 2008 12:09 PM



Massive increase in size of work force with entry of women. Stagnation of wages. Softening of competitive environment.

Stagnation of harsh, male competition-driven growth in productivity. Allowing everybody to play decreases the guality of the play.

Precautionary principle ("think of the children") leads to refusal to take chances, incur risks, reap big benefits.

America has become feminized. Feminized means stagnant, conformist, dominated by fear. Camille Paglia said that if women ran the world we'd still be living in grass huts.

Women don't run America. But they sure have more influence on its public and economic life than they used to. America's devolving back to grass huts.

You can't live for safety, comity and comfort (the great female values) and have growth, innovation, dynamism, productivity.

America is reaping the girlwind (cf. Roissy) of its collapse into feminization.

Posted by: PatrickH on November 4, 2008 12:55 PM



What if Greenspan and Bush had turned off the money firehose the day after the 2004 election? What if they had insisted on 5% downpayments on all home purchases in 2005 rising to 10% in 2006? That would have popped the housing bubble before it got quite so extravagant.

As for the more fundamental questions, well, I too have had the suspicion that technological change is slowing down. Computers and the Internet have vastly increased my productivity over going to the library to look stuff up, but I'm not sure how many people really benefit much from that, or whether there's all that much need for what I do. (The market's judgment on that has been pretty iffy!)

On the other hand, what people really want is faster transportation. That was a huge, huge part of the growth in wealth from the steam ship (1807) through the jet airliner.

Now, transportation of goods has gotten hugely more efficient over the last view decades, starting with containerized cargo vessels and onto all the information processing innovations introduced by Fed Ex and the like.

But transportation of people hasn't improved at all since the introduction of the 707 around 1960 and the finishing of freeways in the 1970s. I can't get from LA to NYC any faster today than in 1965.

Where's my flying car?

Posted by: Steve Sailer on November 4, 2008 1:27 PM



My explanation above of what's happened is intended only as one reason among many. The other stuff said here works too.

I've been puzzled by the phenomenon Steve Sailer pointed out. It's true that overt technological change, by which I mean big obvious sh*t like cars and trains and steam engines and airplanes, seems to have slowed down. The new stuff seems very difficult to quantify in terms of "change": much of what's changed as a result of the new tech has been the way people think, the way they feel, the way they relate to one another.

Example: television seems to have seriously dented the family dinner--not eliminated, but dented it. That's not a big obvious change like being able to fly across an ocean in hours, but it's as massive a change in social reality as anything airplanes have caused. I still do think we're approaching a "technological singularity", but it may not take the form of some overt physical change--pop into a time machine and come out fifty years from now, maybe the world won't look that different--but the people...we won't understand a single thing they're saying, thinking or feeling.

That's real change.

Posted by: PatrickH on November 4, 2008 2:48 PM



"it's just that in my capacity as a web developer the job of putting that policy up on the splash page, and developing the training material for the policy falls to me."

Ha, no kidding, huh? You and I have something in common, then! I can't tell you how many extremely important legal documents I've written solely because they need to go on online and I'm the web guy. Kind of scary.

As for the topic at hand, well, you got me.

Posted by: JV on November 4, 2008 3:45 PM



Well, with respect to that last "x factor", it could have been ameliorated if only this:
http://www.youtube.com/watch?v=rAS4ltt7DzI

had come out a bit sooner and gained some momentum. The studio version is on "1,000 Years of Popular Music" by RT.

Posted by: mdmnm on November 4, 2008 3:46 PM



We outsourced our manufacturing and aerospace jobs. They are the engines of growth and the basis for a decent middle-class lifestyle for blue collar folks. No manufacturing, no real growth without the smoke and mirrors of "equity extraction". Is that so hard?

Posted by: JP on November 4, 2008 3:47 PM



Some activities have become unproductive. Physics has been stuck for at least a generation. The development of pharmaceuticals seems to have hit a dead end. Genetics is thriving, though. Anyway, perhaps we need some great breakthrough, and here's a problem. It seems very unlikely that it will come from the US. To adapt a point I made on another blog:-

It is striking that the USA has contributed massively to human wealth without ever producing a genuine copper-bottomed genius. Otherwise you've made do with fine scientists, excellent engineers, prodigious industrialists, practical Constitution-writers, innovative inventors and so on. But no Newton, Einstein or Clerk Maxwell. No Darwin or Euler. No Lavoisier, no Gauss. No Rembrandt, Shakespeare, Beethoven, Mozart. No Smith or Ricardo or Hume. Not one from the genuine top drawer. All very odd.

Observe: it's been some time since any land had anyone from the genuine top drawer.

Posted by: dearieme on November 4, 2008 7:12 PM



x factor= cultural failure.

The type of people that made America what it was aren't bred any more. If they were, they would be stoned.

Remember Curtis Le May.

Posted by: slumlord. on November 5, 2008 6:08 AM



Observe: it's been some time since any land had anyone from the genuine top drawer.

No one really wants a top drawer genius, especially in first world areas where 'all men are created equal' has changed from being about 'all men deserve equal protection under the law' to 'those with great gifts, must have great flaws, because all men are equal'. We want our superheroes confined to children's media.

It boils down to self-image and risk aversion:

When you're in the presence of genius, you realize how inadequate your skills are. That is anathemic to the 'everyone must feel good about themselves' crowd.

When the world has heroes, it also has villains. One popular solution to that is to remove the heroes. After all, if there are no heroes, there will be no villains, right? Right? Someone told the villains about this rule, and they've agreed to follow it, right? And villains and geniuses are both renowned for following the rules...

If you want to look for genius, look at the folks prospering at an obscene level right now. No one said genius had to be good, or creative, or productive. There is such a thing as evil genius, after all.

Posted by: KennyC on November 5, 2008 7:55 AM



One of the things that has greatly expanded our knowledge during the past 20 years is astronomy. The Hubble space telescope and other instruments are turning our concepts of the universe upside down. We are truly living in the Golden Age of astronomy.

Posted by: Charlton Griffin on November 5, 2008 8:32 AM



JP: We outsourced our manufacturing and aerospace jobs. They are the engines of growth and the basis for a decent middle-class lifestyle for blue collar folks. No manufacturing, no real growth without the smoke and mirrors of "equity extraction". Is that so hard?

That about covers it, JP, though I'd extend it to the traditionally white-collar engineering and science jobs, too. The destruction of these as viable careers means the end of the engineering base of the nation - no matter how many press releases our innovative business geniuses put out telling us how offshoring and insourcing keep "America" competitive. (I've been going through the archives of the excellent Citizen Carrie blog, the author of which researches and details this ongoing heedless gutting, and the indifference of the academy, politicos, and business. A Detroiter, she covers a lot more in manufacturing and engineering than just the automotive industry, as well as pharma and IT. It's a real labor of love, so give it a look if the topic interests you.)

Dearieme: Interesting point about the copper-bottoms. Re Steve's remark about decline in innovation: assuming that is so, and putting aside the points about the U.S. losing the infrastructure that supports innovation, I wonder if the organization of the current Giant Globocorp by its nature works against innovation. "Big" has always been the enemy of innovation to some degree, but one gets the impression from reading some industry-related blogs in a variety of technical fields that Drone-ville is extending its borders into all working environments. Or maybe I'm just drawn to the writings of bitter, disgruntled workers.

KennyC: If you want to look for genius, look at the folks prospering at an obscene level right now. No one said genius had to be good, or creative, or productive. There is such a thing as evil genius, after all.

Good point. When the only prestigious and remunerative fields left for clever people to go into are the essentially non-productive fields, they're bound to go bad and make trouble.

PatrickH: ...pop into a time machine and come out fifty years from now, maybe the world won't look that different--but the people...we won't understand a single thing they're saying, thinking or feeling.

Maybe they won't be thinking or feeling anything. We would perhaps be able to interpret a bit of their monosyllabic droog-speak.

Michael: Aw, shucks.

Posted by: Moira Breen on November 5, 2008 10:33 AM



Moira,

You inta a bit o' the ol' in-out?

(Woof?)

Posted by: Patrick deLarge on November 5, 2008 12:24 PM



What the heck happened to the American economy in the late 1990s or thereabouts that killed off economic growth, apparently for at least a decade?

A very interesting graph. However, to meaningfully support your claim that economy more or less dies in the late 1990's, you'd need to see it extended at least 20 years previous to see that we weren't consistently adding 1% to the economy using MEW before then. My suspicion is that MEW has always been a significant contributor to our economy (1/2% - 1% level)

The real change is of course 2001+. And at that time, you are dealing with a president (and a substantial part of the populace) who believes that we are in an existential war with terrorism and, shortly thereafter, a vital war to prosecute. Under such assumptions (massively incorrect in my opinion, but I believe GWB believed), high growth policies make perfect sense, even if there will be a some 'price' to pay later on.

Note, the 'price' need not be catastrophic. Financial adjustments occur all the time, and most are merely painful.

Of course, while there were a few informed people who predicted something close to what happened, it should be noted that they could not make a compelling enough case to even persuade the consenus of economists. And, if we're into heeding doom-sayers, we'd better start moving massively into trying to stop global-warming. After all, there's a lot more well-informed people predicting that.

Posted by: Tom West on November 6, 2008 6:18 AM



Paul Krugman wrote a book in 1995 called Peddling Prosperity: Economic Sense and Nonsense in an Age of Diminished Expectations where he asked a similar question about growth having slowed to an anemic 2.5%. Can't remember what he had to say about it, though.

Posted by: Noumenon on November 6, 2008 11:30 AM



And, if we're into heeding doom-sayers, we'd better start moving massively into trying to stop global-warming. After all, there's a lot more well-informed people predicting that.

Wow. You really are clueless. Here's the real scoop on the "Green" environmental scam:

http://www.petitionproject.org/

http://www.green-agenda.com/

Posted by: BIOH on November 6, 2008 2:15 PM



The election of George W. Bush signaled a willingness to put up with escalating federal spending.

As it turned out, it also led to a willingness to expand the defense budget and even military adventurism.

Posted by: robert nagle on November 7, 2008 10:27 AM



Suppose in year n people increase their mortgage debt by $1,000,000 and have MEW of $0.

Then in year n+1 people increase their mortgage debt by $2,000,000 and have MEW of $1,000,000.

Then in year n+2 people increase their mortgage debt by $2,000,000 and have MEW of $0, but increase their credit-card balances by $1,000,000.

Are you so sure it makes a difference how banks increase their net lending? Or how households increase their net borrowing? The first thing that maybe you should try to think about is, if there hadn't been all this MEW, where would that money have gone? I mean, if the banks don't lend the money to MEWers, who do they lend it to instead?

I would guess that Ritholz was not suggesting that GDP would have followed the red path in the absence of MEWs. I could be wrong - I'm frequently off base - but I think the reason why "this conversation is [not] getting hogged by famous economists" is because proper identification of the "juice" or scary "X factor" is not MEW, but the trade deficit or "global imbalances." Try (e.g.) this:

http://www.newyorkfed.org/newsevents/speeches/2005/gei051019.html

Posted by: anon/portly on November 9, 2008 3:00 AM



The reason that link is from 2005, anon, is that the global imbalances dog never barked. As Brad DeLong says, this is not the recession we were expecting..

It sounds like I'm saying you're wrong. I actually liked your post, I just wanted you to have this bit of data to add to your theory.

Posted by: Noumenon on November 10, 2008 6:51 AM






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