THE BE YOUR OWN ECONOMIST ® BLOG
Is the cat back in the bag? Is the bailout back on track?
Today’s stock-market gains say “yes:” Dow +485, Nasdaq +99, S&P +58.
Perhaps the President can sway enough House Republicans to change their votes. Maybe Nancy Pelosi will convince some Democrats to play along. We’ll see on Thursday.
In any event, let’s hope for the best. And let’s also hope that the Senate agrees as well.
Then what? Then we take the experts at their word that the financial system will not fail.
But does that mean everything is now OK? Not at all. Everything will not be OK even if the bailout works as intended. The economy is going into recession and will remain depressed for some time.
Recent events have probably exacerbated the housing crisis, not alleviated it. The onset of recession, with its rising unemployment and general economic malaise, will also deepen the housing slump. Lower home prices and less construction will accentuate the gloom. It will be years before real estate climbs out of the ditch.
Meanwhile, there’s no savior on the horizon. There’s no incipient hi-tech boom. There’s no upsurge in business investment in plant and equipment. There is nothing out there, not even Federal Reserve policy, that can offset the glut of homes on the market. The real-estate slump must run its course before the economy turns up again.
© 2008 Michael B. Lehmann
Tuesday, September 30, 2008
Monday, September 29, 2008
Today’s Defeat
THE BE YOUR OWN ECONOMIST ® BLOG
Stunning. That’s the only word for it.
We all knew that the House Republicans were against the bailout. But we also thought their leadership had agreed to the deal and that the package would now go forward.
Instead, the House’s Republican leadership could not keep its members in line. They voted “no.” Then the Republican leadership had the audacity to blame Nancy Pelosi for the “no” vote. That’s like blaming the U.S. for Japan’s attack on Pearl Harbor. What chutzpah.
Meanwhile, while the Republicans are fiddling, Rome is burning. The stock market fell off a cliff: Dow -778, Nasdaq -200, S&P -107. And still, the fundamental, underlying issues have not been resolved.
Events seem to be spinning out of control.
© 2008 Michael B. Lehmann
Stunning. That’s the only word for it.
We all knew that the House Republicans were against the bailout. But we also thought their leadership had agreed to the deal and that the package would now go forward.
Instead, the House’s Republican leadership could not keep its members in line. They voted “no.” Then the Republican leadership had the audacity to blame Nancy Pelosi for the “no” vote. That’s like blaming the U.S. for Japan’s attack on Pearl Harbor. What chutzpah.
Meanwhile, while the Republicans are fiddling, Rome is burning. The stock market fell off a cliff: Dow -778, Nasdaq -200, S&P -107. And still, the fundamental, underlying issues have not been resolved.
Events seem to be spinning out of control.
© 2008 Michael B. Lehmann
Friday, September 26, 2008
The Triumph Of Ideology Over Common Sense
THE BE YOUR OWN ECONOMIST ® BLOG
The following op-ed appeared in today’s San Francisco Chronicle:
While congressional leaders continue to struggle to produce an agreement on the $700 billion financial bailout, now is the time to ask: How did we get into this predicament?
The Federal Reserve’s 2001 – 2003 expansionary policy – with its rock-bottom interest rates – triggered the real-estate boom. But lack of market regulation, oversight and supervision lies at the heart of the problem.
President Reagan said, “Government is not the solution to our problems. It is the cause of our problems.” The unarticulated corollary to that doctrine was: Unfettered markets are the best providers of goods and services. That’s true but, as we have seen, there are exceptions.
The Bush Administration and the Federal Reserve bet the ranch – and a lot of peoples’ homes – that the market could deal with all issues. Folks would borrow; firms would lend; houses would be built. No problem.
Federal regulators warned the administration and the Fed that lenders were encouraging borrowers to take on excess debt on terms they could not afford. But the administration and the Fed turned a deaf ear and hoped that rising real-estate values would save everyone.
When defaults and foreclosures began to rise, the administration and the Fed invoked the doctrine of moral hazard and said they did not wish to encourage risky behavior by assisting those that had loaned and borrowed recklessly. When financial institutions began to fail, the administration and the Fed rescued some but refused to help all.
Now we are at the end of the road. No more pretending. The market failed – and failed spectacularly. With the entire financial system on the verge of dysfunction, the administration and the Fed came forward with their rescue plan. Since they refused to provide the ounce of prevention, we now await the efficacy of the pound of cure.
What an irony that the administration and the Fed, whose free-market ideology abhorred regulation and warned against moral hazard, devised a bailout that entailed the greatest moral hazard in our nation’s history. We will, after all, rescue the lenders who brought about this massive crisis for $700,000,000,000. An unbelievable sum of money.
We are in this pickle because, from 2001 through 2008, the administration and the Fed let Ideology triumph over common sense. Government regulation may not always be the answer, but a little more of it would have helped.
© 2008 Michael B. Lehmann
The following op-ed appeared in today’s San Francisco Chronicle:
While congressional leaders continue to struggle to produce an agreement on the $700 billion financial bailout, now is the time to ask: How did we get into this predicament?
The Federal Reserve’s 2001 – 2003 expansionary policy – with its rock-bottom interest rates – triggered the real-estate boom. But lack of market regulation, oversight and supervision lies at the heart of the problem.
President Reagan said, “Government is not the solution to our problems. It is the cause of our problems.” The unarticulated corollary to that doctrine was: Unfettered markets are the best providers of goods and services. That’s true but, as we have seen, there are exceptions.
The Bush Administration and the Federal Reserve bet the ranch – and a lot of peoples’ homes – that the market could deal with all issues. Folks would borrow; firms would lend; houses would be built. No problem.
Federal regulators warned the administration and the Fed that lenders were encouraging borrowers to take on excess debt on terms they could not afford. But the administration and the Fed turned a deaf ear and hoped that rising real-estate values would save everyone.
When defaults and foreclosures began to rise, the administration and the Fed invoked the doctrine of moral hazard and said they did not wish to encourage risky behavior by assisting those that had loaned and borrowed recklessly. When financial institutions began to fail, the administration and the Fed rescued some but refused to help all.
Now we are at the end of the road. No more pretending. The market failed – and failed spectacularly. With the entire financial system on the verge of dysfunction, the administration and the Fed came forward with their rescue plan. Since they refused to provide the ounce of prevention, we now await the efficacy of the pound of cure.
What an irony that the administration and the Fed, whose free-market ideology abhorred regulation and warned against moral hazard, devised a bailout that entailed the greatest moral hazard in our nation’s history. We will, after all, rescue the lenders who brought about this massive crisis for $700,000,000,000. An unbelievable sum of money.
We are in this pickle because, from 2001 through 2008, the administration and the Fed let Ideology triumph over common sense. Government regulation may not always be the answer, but a little more of it would have helped.
© 2008 Michael B. Lehmann
Thursday, September 25, 2008
$100 Oil
THE BE YOUR OWN ECONOMIST ® BLOG
Today was a good day. Congress reached – or is close to reaching – agreement on the financial-rescue package. Most observers believe implementation of the package will have a salutary effect on the credit markets.
Better still, oil closed at $108 a barrel. That’s above a recent low of around $90, but well below its all-time high of about $140. Say we’re in the $100 range. That’s good news, too.
Maybe and maybe not. Oil fell because recession is systematically and systemically reducing demand for most goods and services. This is especially true for industrial commodities such as oil. Demand for and the prices of materials such as ferrous and nonferrous metals, cement, chemicals, wood products, textiles and oil surge during business-cycle expansions and drop during the follow-up recessions. The prices of these goods, which have relatively little value added, fluctuate dramatically.
(The prices of raw materials, with little value added, fluctuate more than the prices of finished goods, with a great deal of value added, because the value added – chiefly wages – fluctuates little. Therefore, price volatility varies inversely the degree of processing.)
Oil’s decline is a good sign that inflation will abate. But it also signals a weaker economy ahead.
© 2008 Michael B. Lehmann
Today was a good day. Congress reached – or is close to reaching – agreement on the financial-rescue package. Most observers believe implementation of the package will have a salutary effect on the credit markets.
Better still, oil closed at $108 a barrel. That’s above a recent low of around $90, but well below its all-time high of about $140. Say we’re in the $100 range. That’s good news, too.
Maybe and maybe not. Oil fell because recession is systematically and systemically reducing demand for most goods and services. This is especially true for industrial commodities such as oil. Demand for and the prices of materials such as ferrous and nonferrous metals, cement, chemicals, wood products, textiles and oil surge during business-cycle expansions and drop during the follow-up recessions. The prices of these goods, which have relatively little value added, fluctuate dramatically.
(The prices of raw materials, with little value added, fluctuate more than the prices of finished goods, with a great deal of value added, because the value added – chiefly wages – fluctuates little. Therefore, price volatility varies inversely the degree of processing.)
Oil’s decline is a good sign that inflation will abate. But it also signals a weaker economy ahead.
© 2008 Michael B. Lehmann
Wednesday, September 24, 2008
Ideology Has Its Price
THE BE YOUR OWN ECONOMIST ® BLOG
Many of us remember President Reagan’s favorite line: “Government isn’t the solution to our problems. It is the cause of our problems.”
There was an unarticulated corollary to that doctrine: Unfettered markets are the best providers of goods and services.
By and large that’s true. Markets do a good job with soda pop and software and many other goods and services.
But markets can’t supply us with public goods such as fire and police protection or Golden Gate Park. And markets often operate to give us things we don’t want, such as air pollution and global warming. Moreover, some markets require regulation and supervision, such as the production and dispensing of pharmaceuticals.
Yet the Reagan acolytes won the day: Less regulation triumphed over more regulation, and that included mortgage markets.
Now we are left with the $700 billion tab for their free-market ideology.
© 2008 Michael B. Lehmann
Many of us remember President Reagan’s favorite line: “Government isn’t the solution to our problems. It is the cause of our problems.”
There was an unarticulated corollary to that doctrine: Unfettered markets are the best providers of goods and services.
By and large that’s true. Markets do a good job with soda pop and software and many other goods and services.
But markets can’t supply us with public goods such as fire and police protection or Golden Gate Park. And markets often operate to give us things we don’t want, such as air pollution and global warming. Moreover, some markets require regulation and supervision, such as the production and dispensing of pharmaceuticals.
Yet the Reagan acolytes won the day: Less regulation triumphed over more regulation, and that included mortgage markets.
Now we are left with the $700 billion tab for their free-market ideology.
© 2008 Michael B. Lehmann
Tuesday, September 23, 2008
Bad Bet
THE BE YOUR OWN ECONOMIST ® BLOG
The Bush Administration bet the ranch – and a lot of peoples’ homes – that the market could deal with all problems. Folks would borrow; firms would lend; houses would be built. No problem.
Now we know that the market failed – and failed spectacularly.
But every step of the way – even when some called for more regulation – the party line was: “No regulation.”
Instead, as the crisis loomed, the administration doubled down and let the situation run: Bear Stearns, Merrill, Fannie & Freddie, Lehmann, AIG.
Now we’re at the end of the road. No more pretending. It’s bailout or bust.
Government regulation may not always be the answer, but a little more of it would have helped this time.
© 2008 Michael B. Lehmann
The Bush Administration bet the ranch – and a lot of peoples’ homes – that the market could deal with all problems. Folks would borrow; firms would lend; houses would be built. No problem.
Now we know that the market failed – and failed spectacularly.
But every step of the way – even when some called for more regulation – the party line was: “No regulation.”
Instead, as the crisis loomed, the administration doubled down and let the situation run: Bear Stearns, Merrill, Fannie & Freddie, Lehmann, AIG.
Now we’re at the end of the road. No more pretending. It’s bailout or bust.
Government regulation may not always be the answer, but a little more of it would have helped this time.
© 2008 Michael B. Lehmann
Monday, September 22, 2008
Ounce of Prevention vs. Pound of Cure
THE BE YOUR OWN ECONOMIST ® BLOG
The residential-mortgage market failed when millions of homeowners began having difficulty paying their mortgages, thereby imperiling mortgage lenders. That, in turn, imperiled our nation’s financial system because of the lenders’ important place in the system. Financial institutions grew reluctant to do business with one another because they mistrusted each others’ credit worthiness.
As financial markets began to freeze up, the federal government proposed that it borrow $700 billion and use those funds to purchase distressed mortgages from the lenders at prices that would preserve the lenders’ solvency. The federal government – already operating in a deficit – would go deeper in debt in order to purchase mortgages from lenders who could no longer collect on the debts owed them.
What an irony that an administration whose free-market ideology abhorred regulation and warned against moral hazard has now brought on the greatest moral hazard in our nation’s history by turning its back on the very regulation that could have prevented the mortgage-market’s failure.
Federal regulators warned the Bush administration that lenders were encouraging borrowers to take on excess debt on terms they could not afford. But the administration turned a deaf ear and hoped that rising real-estate values would save everyone harmless.
When defaults and foreclosures began to rise, the administration invoked the doctrine of moral hazard and said it did not wish to encourage risky behavior by assisting those that had borrowed recklessly. When financial institutions began to fail, the administration was forced to assist some but refused to help all.
Finally, when the entire financial system verged on dysfunction, the administration came forward with its rescue plan. Since the administration refused to provide the ounce of prevention, we now await the efficacy of the pound of cure.
© 2008 Michael B. Lehmann
The residential-mortgage market failed when millions of homeowners began having difficulty paying their mortgages, thereby imperiling mortgage lenders. That, in turn, imperiled our nation’s financial system because of the lenders’ important place in the system. Financial institutions grew reluctant to do business with one another because they mistrusted each others’ credit worthiness.
As financial markets began to freeze up, the federal government proposed that it borrow $700 billion and use those funds to purchase distressed mortgages from the lenders at prices that would preserve the lenders’ solvency. The federal government – already operating in a deficit – would go deeper in debt in order to purchase mortgages from lenders who could no longer collect on the debts owed them.
What an irony that an administration whose free-market ideology abhorred regulation and warned against moral hazard has now brought on the greatest moral hazard in our nation’s history by turning its back on the very regulation that could have prevented the mortgage-market’s failure.
Federal regulators warned the Bush administration that lenders were encouraging borrowers to take on excess debt on terms they could not afford. But the administration turned a deaf ear and hoped that rising real-estate values would save everyone harmless.
When defaults and foreclosures began to rise, the administration invoked the doctrine of moral hazard and said it did not wish to encourage risky behavior by assisting those that had borrowed recklessly. When financial institutions began to fail, the administration was forced to assist some but refused to help all.
Finally, when the entire financial system verged on dysfunction, the administration came forward with its rescue plan. Since the administration refused to provide the ounce of prevention, we now await the efficacy of the pound of cure.
© 2008 Michael B. Lehmann
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