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