[Pen-l] economy talk

["Jim Devine" <jdevine03@xxxxxxxxx>]

Last night, I gave a very-well received talk (to the
Unitarian-Universalist Fellowship in Canejo Valley) on the current
mess, focussed on the housing industry. What follows are my notes.

There was one interesting little dialog. A fellow said that this was a
bunch of socialism. I responded "you say that like it's a bad thing."
I _should_ have added further by paraphrasing Norman Thomas about how
we already have socialism for the rich. (Another guy said I was
proselytizing. My response: what else should I do in a church? which
got laughs since it was a bunch of Unitarians.)

The Current Mess: Historical Background

I am not going to throw statistics at you (except for two graphs),
since I think historical perspective is more important.
> I also can't talk about everything, but I'll answer questions about anything.
> I'm playing down the role of inflation, oil prices, the dollar's exchange rate.

I. What's Happening Now:
A. The housing bubble (from about 2003 until 2007)
1) Led to massive borrowing (not just sub-prime mortgages) based on
hopes that housing prices would continue to rise.
2) This was allowed by laissez-faire finance ("give the money people
what they want"):
(a) bankers and other financiers were allowed to make all sorts of
arcane loans that didn't used to be allowed.
(b) instead of carrying mortgages and taking the risk of mortgage lending,
(i) they made their income from fees from initiating mortgages much
more than from interest on them
(ii) they were able to sell off mortgages to Fannie Mae and Freddie
Mac, who "bundled" them to make securities that could be sold â and
held by a large number of financial institutions.
(c) This encouraged financiers to push loans, not caring about how
risky they were.

B. Starting last year, house prices began to fall as the housing
bubble started deflating.
1) House prices are falling, especially in lower middle class and
poorer communities.
(a) with house prices falling relative to the value of mortgages,
homeowners are strapped.
2) So many banks and other financial institutions are stuck with a
bunch of securities backed by bad mortgage loans
(a) Refusal to lend to each other and to any part of the economy that's shaky.
(b) there's a constant back-and-forth with recovery (due to initiative
by the Federal Reserve) followed by financial crisis.

C. Even if we don't face a serious recession, it's going to be a
disaster for many banks and homeowners.  As graph #1 shows,
1) owner's equity as a percentage of real estate wealth has been
falling precipitously, especially after 2005.
2) And consumer debt has been rising steeply relative to incomes,
especially in the 2000s.
3) This encourages bankruptcies, foreclosures, and (ignoring other
changes) a severe recession.
4) all of this is encouraged by high import prices (including oil) and
the rising inflation that's resulting â because it discourages the Fed
from fighting the recession.

II. My interpretation.
A. The current mess is a matter of the chickens coming home to roost:
1) The consequences of earlier actions are making themselves felt.

B. But there's a "back story": there's a major Rooster involved â and
chicken feed.

III. The "good old days."
A. Before the Rooster.

B. Back in the 1960s, the U.S. economy was mostly
domestically-oriented, producing goods and services for domestic
consumption.
1) By today's standards, the system was egalitarian, since wages were
treated not just as a cost but a source of demand.
2) the economy was stabilized by the dominance of the US in
manufacturing, finance, and the military,
3) along with government programs: the warfare-welfare state.

C. the financial sector â banks â played a largely passive role,
taking deposits and making loans from them (as in textbooks).

D. Though the prosperity was largely due to the Vietnam war, it was prosperity.

IV. In the 1970s, we saw two major economic problems:
A. falling profitability ï upset businesses, encouraging an end to the
old system: seeking
1) more income for business and the rich, including tax breaks
2) less regulation
3) less unionization
4) globalization of business operations, seeking low wages, low
environmental restrictions,
5) and eventually privatization of government functions.

B. serious inflation, which hurt a lot of financial institutions,
especially savings and loan banks.
1) As usual with inflation, creditors lost.
2) And debtors won.
3) there was a push for financial deregulation, the early stages of
laissez-faire finance.
C. all of this combined with backlash against "the 1960s" counterculture.

V. this gave way to the Reagan Revolution and its aftermath
A. Enter the Rooster.

B. business largely got its way.
1) Nowadays, it's often called neoliberalism or free-market
fundamentalism, the free-the-market campaign.
2) It was what the UAW's Doug Frasier called a "one-sided class war"
3) With increasingly polarized income distribution.
(a) See graph #2, showing one measure of income inequality (the Gini
coefficient) between households.
(b) all of this continued to this day, including during the Bill Clinton years.
4) Short history.
(a) tax cuts for the rich.
(b) Destruction of blue-collar jobs during the 1980s, especially in
unionized sector
(c) Destruction of white-collar jobs during the 1990s
(d) increasingly, jobs were casual, more part-timers, fewer benefits
or real pensions. More insecurity.
(e) Cut-back in government benefits and programs for the majority and
minorities.
(f) greater reliance on foreign supplies of goods (now: China).
(g) often brutal competition to cut costs (Wal-Mart)

C. The Problem with the Rooster.
1) Mass consumption had been the basis for prosperity, but no longer
could play this role: wages seen primarily as a cost.
2) Private fixed investment (machines, etc.) can lead to booms, but
they are temporary, since this kind of investment is notoriously
unstable. It needs to generally grow in step with consumption.
3) Slow-growing consumer demand (the mass market) created an
underconsumption undertow, which keeps on pulling the economy down.

D. The solution: the Rooster needed the Chicken & Chicken Feed.
1) the Chicken: the rise of the bubble economy as a source of economic
prosperity.
(a) the 1980s prequel: the S&L boom & bust based on laissez-faire finance.
(b) in the 1990s & 2000s: bubbles combined with a major spending boom,
working together.
2) financial bubbles encouraged private fixed investment and
consumption by the rich.
(a) Having high-valued assets encouraged both kinds of spending
(wealth effect).
(b) encourage fixed investment too.
3) See the bubble diagram, chart #3.
4) Chicken feed provided by foreign lenders.
(a) Much of the boom and the bubble were financed by borrowing
(b) increasing private indebtedness to the rest of the world.

VI. The New Bubble Economy, 1990s â present.
A. For the 1990s, the main story was the shaded squares & arrows.
1) The High-Tech Bubble & Boom.
2) The bubble was focused on high-tech: dot.com & fiber optic cable, etc.
(a) A bubble can be recognized by its psychology: there's no place to go but up!
(b) It was financed by expansion of credit, made easier by
laissez-faire finance.
3) The richer part of the population got into the stock market,
driving up prices and encouraging
(a) increased spending by the rich, on luxuries and
(b) spending on fixed investment (structures and equipment), as part
of the same bubble.
4) Middle & working class helped,
(a) Not mostly by getting involved in Wall Street or speculation.
(b) But by borrowing and spending on consumption goods
5) Not helping the 1990s boom: government and exports. Both slowed the boom.
6) The bubble & boom ended with the 2001 recession
(a) and was followed by the Fed's effort to fight it by cutting interest rates
(b) which sparked the next bubble and boom.

B. In the 2000s, especially after 2003,
1) the middle class joined the main force behind the bubble.
(a) The Middle Class Bubble & Boom.
(b) The nonsense became "democratized."
2) the boom combined
(a) the kind of laissez-faire finance that characterized the 1980s
(i.e., irresponsible) and
(b) an asset boom akin to that of the 1990s.
3) The bubble focused not on the stock market but on Housing, the key
asset which almost defines the "middle class."
4) laissez-faire financing and foreign-supplied chicken feed helped
fund the expansion.
5) government contributed to the boom, but not exports (which hurt).
6) Now: the whole thing is falling apart.
(a) finance people are being bailed out (Bear Stearns, Freddie & Fannie)
(b) but there have been major moves toward re-regulation, at least in words.
7) The chicken is coughing, feeling weak. key reasons for stability:
(a) exports (due to the falling dollar) and
(b) the government deficit.
8) but the Rooster still persists.

VII. How about the future?
A. with major re-regulation of finance, how will booms occur?

B. the Fed can't do it:
1) interest rates are too low for them to go much further.
2) fears of inflation.

C. the Federal Government: deficit spending on public investment:
1) infrastructure
2) education
3) basic scientific research
4) public health, etc.

None of this seems possible without a major change in the political
balance of power.
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.

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