Why This Time Is Different
A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.
And I puzzled about why this wasn’t true of our latest little…event:
We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?
Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.
I think this chart may make that point better than any I’ve seen (click for source):
Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen’s been saying all along.)
We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.
So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.
Cross-posted at Asymptosis.
http://research.stlouisfed.org/fred2/graph/?g=4BL
shows that annual net mortgage debt take-on peaked at $5000 per adult.
Push $5000 per adult straight into the middle-quintile economy now and we’d be flying high again, too.
This stuff is completely obvious to me, but most people haven’t either seen it or internailzed it yet.
industry engineered to pump newly-created bank cash
Not exactly, btw. That “bank cash” was peoples’ savings, and whoever was buying GSE bonds etc.
http://research.stlouisfed.org/fred2/graph/?g=4BL
shows that annual net mortgage debt take-on peaked at $5000 per adult.
Push $5000 per adult straight into the paycheck economy now and we’d be flying high again, too.
This stuff is completely obvious to me, but most people haven’t either seen it or internalized it yet.
—
The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen’s been saying all along.)
We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.
—
At the time I was convinced that this is what was going on; Greenspan’s turning a blind eye to the housing shenanigans gave Bush a nice sugar-high economy for the 2004 campaign. Not that this raw political goal was his intent; he believed it was just free market voodoo doing good things for the US economy. Of course Greenspan erred in thinking that inflation was the only threat he had to consider. He believed increasing household debt was just folks planning rationally for their bright free-market futures. Unfortunately he didn’t spot the large Wall Street vulture peeling flesh from the American body politic
I assumed we were headed for a decade of slow growth (like Japan) while everyone worked off the debt overhang; the part I didn’t understand was how quickly it would all unravel and just how completely the misguided agency issues had rotted out the heartwood of the mortgage issuers.
Except of course for:
http://en.wikipedia.org/wiki/Fractional_reserve_banking
@Troy:
That’s a complete misconception.
1. Banks aren’t reserve constrained, they’re capital constrained.
2. The aggregate banking system doesn’t care if you spend, moving your checking account deposits to somebody else’s checking account, or “save” — leave them sitting in yours. Same quantity, different locations.
“Fractional reserve banking” just means banks can’t lend out ALL of their customers’ money.
It does not mean banks create money out of nothing (like the Fed can).
Same quantity, different locations.
Until that cash goes off into Money Heaven somewhere offshore.
Hmmm. This does seem like Rodger Mitchell’s ( http://rodgermmitchell.wordpress.com/ ) pattern:
1) Reduction in national debt (currency)
2) Increase in private bank lending
3) Bubble
4) Financial crisis and recession
Phases 2 and 3) were prolonged. What is interesting is that the national debt increased during the bubble, but that injection of money did not prevent the crisis. To me that suggests that there is something else going on that is not captured in these graphs.
@Troy:
Changing the starting point of that graph to 1990 seems to give a useful picture. The real rocketship seems to have taken off around 2001, which comports with my surmise here. FWIW…
Viewing the whole series back to ’51 also gives a picture, I think.
“gave Bush a nice sugar-high economy for the 2004 campaign. Not that this raw political goal was his intent; ” I’ve seen data that I have yet to report, gotta dig it up again, that in election years with Republican incumbents, monetary policy is looser than when there are Democratic incumbents. “Intention” and imputing motives is always tricky: on what level of consciousness do we “intend” things?
you oughtta work this into a grand unfied theory on money, “debt”, & the economy…give nick rowe something to sputter about…
Mike here at AB have published on the FED playing favorites.
Could it be that finance having captured more than 30% of our GDP is the difference compared to the Great Depression and other recession going forward?
With finance, the stimulus of loose money only created a pathway for finance to take for their own any increase in GDP/wealth/income. It create a more efficient means for finance to take the rent (efficient for finance but not for the economy). Add to this the global way finance played with the money creating a money system outside the labor/production economy and I think it’s now wonder the increase pumped in did not prevent the crisis.
In other words, non of that real money pumped in ever got to the bottom/base of the economy such that it could create/produce as it move it’s way up the economic pyramid to the finance sector.
I don’t know where you got your MEW data. If you use data from the best study I have seen–by Alan Greenspan, ironically–the picture is worse. There are no years of positive GDP growth in the 2000s. The resulting chart is at p. 7 of my book Debt Spiral. I am traveling and cannot insert it here. Sorry.
Dan B–Brilliant explanation. Not only that, but also you supply a bar graph even I can understand. Thanks. NancyO
The real Ophelia killed Claudius in a duel. http://makefoil.com <- awesom rational hamlet fanfic.
Whoops! Steve’s the graph provider. Apologies. NancyO
Daniel B
i think you are on to something. you can’t stimulate your way out of a recession you stimulated your way into.
It looks to me that households transformed property equity (wealth, however ephemeral) into cash, which felt to them like income.
And spent it.
This is totally cosistent with my idea that spending is an income-dependent much more than a wealth-dependent phenomenon.
If it had been predominantly wealth-dependent, there would have been no need to withdraw mortgage equity to boost spending.
If my reasoning is messed up, somebody please tell me how and why, I want to be very sure I am reasoning this correctly.
Cheers!
JzB
A few years ago on AB there were some deep and heated debates as to whether the “home” should be cnsidered as a financial asset and thus money sitting idle or that a “home/house” is something else.
Too many were lead to believe it was idle money. Combined with the conditioned thought that as long as you could pay the monthly nut, there was no problem, that idle money was opportunity lost. I found a study that noted all the debt spending by the home owner did not go to improve one’s life (that is rise up the ladder of income class as is prejoratively suggested) but just to keep the standard of living we all had.
People are now realizing that their home/house has a greater value than that value of the real estate market. They are relearning that the house is a risk adversion asset, not a financial asset.
I knew from 2002 that it was HELOC $$ making the US economy work. Yet I am no one at all & no one wanted my commentary…
I knew from 2002 that it was HELOC $$ making the US economy work. Yet I am no one at all & no one wanted my commentary…
I knew from 2002 that it was HELOC $$ making the US economy work. Yet I am no one at all & no one wanted my commentary…
Shit, please delete two of my redundents. Your commenting system is fucked up.
Shit, please delete two of my redundents. Your commenting system is fucked up.
The FED can’t either. Wow, you didn’t know that!!!
coberly: “you can’t stimulate your way out of a recession you stimulated your way into.”
I think that Dan’s point was that the infusion of money went to the wrong people. If it had been injected at the bottom instead of the top, things would have been different.
Daniel Becker: “People are now realizing that their home/house has a greater value than that value of the real estate market. They are relearning that the house is a risk adversion asset, not a financial asset.”
Value is not one-dimensional. So sorry, utilitarians.
When a bank makes a loan of x dollars the deposits in the banking system increase by x dollars. So yes banks create money out of thin air
and they don’t need any customer money to do it.
It was more than just mortgage debt.
In the period from `1998-2008 the private sector assed $25 trillion on debt, for total peak debt of $45 trillion in 2008
In 2007 the private sector added $4.3 trillion to their debt load
That was 30% of GDP, but only 800 billion was mortgage debt.
I actually agree with you that a frightening amount of GDP over the past decade or more has been purely the unsustainable result of debt fueled consumption. But I think there is some confusion in your post. Simply put, (1) while it may be true that every depression is preceded by a decrease in nominal federal debt, the reverse (that every decrease in nominal federal debt leads to a depression) does not HAVE to be true; and (2) Not only does the reverse not have to be true, from your chart, it appears it very much isn’t true. If you look at your chart, nominal federal debt seems to have declined consistently over the 1945-1980 period, when obviously there was no depression.
The FED can too create money out of nothing. That’s how they “expand” their balance sheet.
When a bank makes a loan of x dollars the deposits in the banking system increase by x dollars.
yes, of course.
So yes banks create money out of thin air and they don’t need any customer money to do it.
AFAICT, that is not true. A bank can’t lend out deposits / capital it doesn’t have.
AFAICT, that is not true. A bank can’t lend out deposits / capital it doesn’t have.
*****************************************************
You just agreed that they can.
Hyman Minsky: “Anyone can create money; the problem lies in getting it accepted”
@Martin, I’d love to see that data/chart when you have a chance.
@mark t: “while it may be true that every depression is preceded by a decrease in nominal federal debt, the reverse (that every decrease in nominal federal debt leads to a depression) does not HAVE to be true; and (2) Not only does the reverse not have to be true, from your chart, it appears it very much isn’t true.”
I’ve said repeatedly (including in the post, in this comment thread, and in the linked articles) that fed surpluses are not a sufficient condition to cause a depression. There have obviously been surplus periods not followed by depressions. But they certainly seem to constitute a necessary condition.