Saturday, March 14, 2015

Just a minute, honey. Someone on the internet is wrong.


The other day Paul Krugman compared the post-1981 recovery to the post-2007 recovery.  He links to an earlier post, where he claims to have "predicted this in advance".  From that post:
Post-moderation recessions haven’t been deliberately engineered by the Fed, they just happen when credit bubbles or other things get out of hand.
And while they haven’t been as deep as the older type of recession, they’ve proved hard to end (not officially, but in terms of employment), precisely because housing — which is the main thing that responds to monetary policy — has to rise above normal levels rather than recover from an interest-imposed slump.
The recent years of the 10 year centered moving averages only
include the years to date, so these measures are likely to move
up somewhat if the economy continues to recover.
Of course, this is completely wrong, unless housing, suddenly as of 2008, demands a 2% premium above its 60 year long range.  Krugman can be forgiven for failing, along with practically everyone else, to acquiesce to my view.
Krugman's Chart

But, in the recent post, he includes the following chart, with the following comment:
In practice, Reaganomics was far more Keynesian while Boehnernomics — which is what it ended up being, in practice — was anti-Keynesian.
This seemed strange, since Boehner was not the Speaker of the House until 2011 (quarter 13 in the graph, I think), and since total federal spending has been notoriously high since 2007.  So, I added some information to that graph.

I will leave as an exercise for the reader the questions of whether Krugman is suggesting that House Minority Leader is the new power center in Washington, whether Boehnernomics includes massive increases in transfer payments, whether Krugman is saying that Reaganomics succeeded because it focused on expenditures instead of transfers, or whether the post-2008 recovery was relatively slow because of policies implemented after 1985 and 2011.

Here is a graph of the unemployment rate for these same two periods, with the 2008-2015 period again partitioned into the "Minority Leader Boehnernomics" period and the "House Speaker Boehnernomics" period.


It is interesting to me how tipping points in interpretation can lead to highly divergent points of view.  Here's a short article I came across the other day.  I don't mean to pick on this author.  I am not aware of her other work, and I only reference this because it is so typical.
Lower asset values are a key part of the cure needed to fix global imbalances and restore rational investment math and consumption ability once more for the middle class.  But for bankers…this is a nightmare of their own foolish, greedy design. Rate-cutting powers now gone, and future consumption already spent as demand the past few years, the next global recession is advancing to force a much needed cleansing of reckless policies and players. Couldn't happen to a more deserving bunch of folks…
She, like Krugman, knows the correct price of everything, notes that it differs from the market price, and sees economic pain as the only cure.  Especially pain for bankers.  And, the comments on that article, as they always are for such articles, are very supportive.

Now, I, being a demon speculator, while I don't know the price of everything, I do act as if I know the prices of a few things.  And, as speculators are wont to do, I put my money on the line in a hubristic attempt to profit from my special knowledge.

What is interesting about the overwhelming population of people who seem to know what happened in the 2000's - the banks did this to us -  it is not unusual for them to have purchased homes during the "bubble" period.  These are generally high income households.  (Of course they areThat's who was buying homes.)  And, these people explain to me how the banks did this to us and deserve to be punished.

What is interesting to me is that, while it seems that the Fed policy that actually created much of this mess was responsive to these widespread interpretations, these mal-informed households were still managing to participate in highly efficient markets, even while they did, and continue to, consciously espouse viewpoints that contradict their investing behavior.  It seems to me to be a monumental example of how markets aggregate widely irrational individual participants into an efficient market, and how, in non-market settings (like currency management) subtle biases in interpretation can lead to catastrophic mis-calculations.

I speak to people who are so angry about the crisis.  They are angry at speculators and bankers.  And, how can you blame them?  Who else pushes prices to levels that everyday folks know are wrong, but speculators?

And, they meet so many families who couldn't make ends meet any more.  Truly tragic stories.  And in the middle of every one of those stories is a banker that had approved a home equity line that the family had used to get by for a few years, but which just pushed them further behind.  A banker making demands.  A banker pushing them out of their homes.

And they go to their friends, and they seethe, "These damn bankers."  And their friends say, "You know it.  Devils, they be."  The narrative isn't far fetched.  It is served right there on a platter for us.  All that is required to believe it is a willingness to accept the obvious facts.  And, this subtle whisper that says, "No need to check this one.  We know how they operate."  It takes no effort at all.

Now, if it looked like we should blame the crisis on good, wholesome Americans, like teachers, or farmers, or public servants (pending a review of their allegiances), or "working families" - you know, people that do honest work to make the country better, not profiteers (shudder) - we might say, "Wait a minute.  There must be more to the story."  This is a subtle trigger.  It is understandable that so few bother.  I can understand why they are so upset, even if I think they are so wrong.  There is nothing I can say.

So, I put my money down.  They put their money down, too.  But, then they vote.  And therein lies the problem.

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