Telling the Right Story, or Economists Catching Up Round One
Anyone who was in the MBS market and not working for a primary originator can tell you that the MBS securitization market ended around Halloween 2006. (Those of us who were at places with origination go a few more months, but had no flow by February.)
Only economists were fooled by what I’ve been calling a Xmas Miracle, and even they (via Mark Thoma) are starting to wise up:
The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that red line—which is the sum of all income—is the more reliable measure. In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure.
Focus on the red line, and you’ll see that the recession began in the final quarter of 2006, not the end of 2007.
You can sustain a bubble as long as more funds are coming into the system. Sell the 1BR on the West Side, reinvest the profits on the 2BR in Park Slope while that seller reinvests in 2,600 square feet in Summit or Hasting-on-Hudson who…
Until the incomes stop moving—transaction costs slow the margin, generally just after a few of the easier lenders demonstrate the flaws of their “business model” and the infrastructures have been built up at other firms based on those chimeric profits, when fixed costs and narrowing margins make better and better firms look worse and worse.
Economics has caught up with finance. What will they think of next?
Note: Subtitle added as I realized this may become a series. – klh, 10 June 2011
“In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ.”
So, where does the difference go?
“Economics has caught up with finance. What will they think of next?”
Trust me, I’ve tutored a lot of students in finance. They can make up more things than you can shake a stick at.
But master mathematics? That’s totally another thing.
The flower shop ( and such small businesses) never lies. I noted many times that the peak was July/August 2006. It’s been down hill ever since including this year.
I may have addressed this in your last post concerning the recessionary trend. It is only continuously down hill if you’re selling to the masses. On the other hand, the rich are still very well off, maybe more so. We sell hi line, $50,000 and up, way up, and we’ve had our best two months ever. In fact I was planning to cut back on work time, but business is far too good for that. There’s money out there in large quantities, but its confined to a very small sector of the economy. Those tax cuts go a long way for those who earn enough to enjoy them.
Where are the pols looking to cut back? Think services for the masses. Think payroll and pensions for the working class. Think infrastructure. Have you seen the streets of your city lately. Pot holes are craters. Think school class sizes. Think anything other than the wealthy.
And war profits……………………………..
While the KIA total quietly exceeded 6000.
Wait to we get boots on the ground in Libya! then you will really have something to complain about. And without even getting a vote in Congress like Bush did!
Hope and change at its best.
Islam will change
That’s right, bubbles work by consuming something, and when that something runs out, the bubbles pop. (Actually all trends work this way, but bubbles are the most obvious.) Basically, the housing bubble consumed national leverage in real estate. As long as someone had enough income to convince some lender to give him or her money to buy real estate or any other purpose for that matter, the bubble could continue to grow. (That’s why regulation could have damped it early.) When the bubble ran out of excuses to issue loans, everything collapsed.
That’s why I rely on the US 101 sign between Port Angeles and Sequim. By the time some investment is being advertised out here, it is over.