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Looks like Q4 was the bottom for the real economy, and government spending now kicking in strong for quite a while to keep things muddling through.

Housing has been ‘subtracting’ from GDP with exports picking up the slack.

From this point it won’t take much of an upturn in housing to pick up any slack that might be happening with exports.

Also, while unemployment figures lag quite a bit, seems to me GDP is strong enough to see a few unexpected new jobs in time for the elections.

Meanwhile, seems chunks of the financial sector are still hurting due to the reduced demand for financial services, but they’ll figure it out with new and rehashed products and come back strong, but maybe not to the benefit of existing investors.

Been watching a lot of tv lately:

The Democrats really got blindsighted by McCain’s Rambolita as the convention was forgotten within 24 hours, and the Republicans found someone to rally around.

Seems Biden has turned into a big weight around Obama’s neck as the enthusiasm flows away and they become ‘old news’ and another case of peaking too early. And now with the convention pretty much canceled, Bush and Chaney are kept off prime time to McCain’s benefit, and with New Orleans II now a ‘model of federal efficiency’ the Democrats are scrambling for something to say.


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26 Responses

  1. Warren from the demand side you have talked about deficit spending to keep people doing busywork. My republican half clinches in terror on out of control government waste and taxation and regulation. However I rarely if ever hear you talk about the supply side – IE population control, abortion laws, etc etc and on that front my democratic half is writhing in havoc at Palin and her brood of kids. I have tried to seriously broach this subject with policy makers – if the gubbmint can tax me to keep people busyworking so they don’t devolve into criminals, why can’t they also start telling joe six pack he can’t have all the babies he wants like china did to their citizens? It seems unfair to me that some grasshopper family can breed to their hearts content while the ant family pays taxes for those kids and doesn’t have any of their own. If I don’t pay taxes you tell me a thug with a gun will lock me up in a room, but if I overbreed what happens? See what I am getting at?

  2. “Meanwhile, seems chunks of the financial sector are still hurting due to the reduced demand for financial services, but they’ll figure it out with new and rehashed products and come back strong, but maybe not to the benefit of existing investors.”

    not sure what you mean by “maybe not to the benefit of existing investors.” are you referring to fannie and freddie?

  3. “The Democrats really got blindsighted by McCain’s Rambolita as the convention was forgotten within 24 hours, and the Republicans found someone to rally around.”

    While that’s true, I think Rambolita is going to backfire on McCain with independents. And remember a generic democrat wins by 10 pts this year. The more this becomes a debate about McCain and Obama and the less its solely a referendum on Obama, the better for the Democrats and Obama. Also from the perspective of this site, Obama is probably less likely to balance the budget than McCain, since McCain’s proposed tax cuts will never pass a Democratic house, while Obama’s spending most certainly will.

    Hoover said:

    “It seems unfair to me that some grasshopper family can breed to their hearts content while the ant family pays taxes for those kids and doesn’t have any of their own. If I don’t pay taxes you tell me a thug with a gun will lock me up in a room, but if I overbreed what happens? See what I am getting at?”

    I think this is the wrong way to look at it. Those kids are future workers who create real products. Warren proposal here is that if people are doing nothing, yet consuming food, shelter, etc. Why not have them produce something of value to society? The whole tax argument is a red herring to a certain extent, taxes are just establishing value for the dollar, they aren’t supporting those children.

  4. Obama is probably less likely to balance the budget than McCain, since McCain’s proposed tax cuts will never pass a Democratic house, while Obama’s spending most certainly will.

    Or on the flip side of , Obama’s tax increases will pass a democratic congress. And IMHO Obama’s word doesn’t carry too much weight.
    Republican’s (contrary to their platform) have been the big deficit spenders over recent decades. So I think its hard to judge who will create larger deficits.

  5. “I think this is the wrong way to look at it. Those kids are future workers who create real products.”

    Why is it the wrong way to look at it? You are making a HUGE assumption that those kids will add significant value to the rest of the borg in the future. My governator says the jails are too full, the teachers are turning out idiots, too many non-productive citizens who are not adding in the ways you assume.

    There are 2 parts to all my basic econ graphs – supply and demand, why only focus on one part of that? Is there any population density level you would think we should seriously look at population control? If not do you then feel the chinese were in grave error to make laws relating to birth and population levels and should only focus on stimulating demand? Why was there such an outcry to the pollution levels in china, giving your set of memes, the more people the more pollution – we need those busy bees breeding more and doing more busywork in more factories making more pollution since we don’t want to tell people how many kids they can and can’t have.

    Is it wise to breed humans to beyond the ability of the environment to continue to sustain them in a happy healthy way? Why? Warren lives on an island, would 20,000 people per square mile on his island change the dynamics of the island life he seems to enjoy? My friend jimmy buffet said the cheeseburgers in paradise would be turned into rice patties. 😉

    “Warren proposal here is that if people are doing nothing, yet consuming food, shelter, etc. Why not have them produce something of value to society?”

    Long term, there would not be a lot of people doing nothing if baby making was not a subsidized market. Why is this such a hard meme for otherwise very scientific and mathematical people to accept – that if you are going to live in society – there should be rules both for supply and demand.

    ” The whole tax argument is a red herring to a certain extent, taxes are just establishing value for the dollar, they aren’t supporting those children.”

    When I go out on the beach at the virgin islands or I stand in line at margaritaville for my cheeseburger – there is a huge quality of life difference if there are 5 people there with me or 15,000 hungry geico cavemen – you do not agree? I do not think warren would like to stand in line 3 hours for a gallon of milk, or have spend 5 hours on the highway to get to the store and back in his mosler supercar on a freeway system that only allows 10mph speed limit – I really want you to convince me population control is a very bad thing that I should rebuke, but try as I might to convince myself how evil it is, I cannot.

  6. I’m not not sure I can convince you to rebuke population control. But at the moment it seems like there is enough food in the world for all the people we do have, and considering the universal decline in birth rates with modernization, I’m not sure we really have to worry instituting a population control system.

    “Republican’s (contrary to their platform) have been the big deficit spenders over recent decades. So I think its hard to judge who will create larger deficits.”

    -Good point. But if what I’ve read here is any indication, won’t either party be forced to run deficits? It seems like as soon as the deficit is decreased the economy slows, and its been pretty clear this year that neither party is willing to let that happen.

  7. This may be an early call on a shift towards Japan’s path, but mortgage rates have fallen ever since Paulson was given the power to make them fall.

    Indicator hit 6.0%, down about 3/4%. Another 1% and the housing market could start, at least, a temporary turn around. At current downward trend, about Oct 7th. Some are hoping Obama would keep Paulson on at Treasury as he swaps Tsy Secs for MBS.

  8. Vipul –

    As Warren has made clear, deficits can come in two ways – the ugly way, with tax receipts falling and unemployment benefits rising until savings desires are met, or the “nice” way, with proactive tax cuts and spending increases (preferably on infrastructure stuff that needs doing anyway, but just mailing checks is plenty good enough). The one good thing Bush did in his 2 terms was his massive shifting of the fiscal balance early in his term after the disastrous Clinton surpluses.

    If Gore had got in, he would have been so concerned with “lockboxes” and preserving what he and his partisans perceived as Clinton’s great legacy of “fiscal responsibility” we would have risked turning a shallow recession into a drawn out depression. As I usually say to friends: the dems and the repubs technically believe in the same silly economic principles, but the repubs are much less responsible about carrying them out, thank God.

  9. Winslow –

    I could have told you that rates were about to fall – I just bought a house, and locked in at 6.75. Look for that be the absolute top for the next 20 years…

  10. Warren, i would still be interested in understanding your comment “but maybe not to the benefit of existing shareholders.” Thanks

  11. Vipul I used to live in palm beach, and let me tell you mostly true story involving Bowling Alley and change the names to protect innocent. There was this nice bowling alley, I went there with my daughters, I used to see this guy warren and his daugher sada a few lanes over always happy and laughing talking about not enough “score” meme shouldn’t get people excited. We all had fun, ate nice hamburgers, bowled, had a nice drink at the bar, then in 2005 hurricane katrina hit, lots of people were sent to this small community – they were broke and bored and it was hot outside – so it was decided to let them come hang out at the bowling alley for free to help them and enjoy the nice AC. Now warren was still talking to them about not enough “score” and sada was volunteering handing out water bottles, me and my children helped teach them about bowling rules and showed them how to play. For a few weeks this was OK and I was happy, but I never got to bowl anymore and niether did warren, all our time and effort was involved now in managaing the logistics of taking care of many katrina refugees. After a time The owner of the bowling alley said they couldn’t do free bowling anymore, this angered some of the refugees, who got mad and vandalized the bathroom (which was already going downhill from overuse) some of the others got jobs and some got welfare and the price rises at the bowling alley kept out some, so some of the population density subsided from the bowling alley, but what used to take a couple minutes to get a hamburger turned into over an hour or more, what used to take a 10-20 minutes to get a lane to bowl in now took almost 3 to 4 hours. The place was hot because there was too many people for the AC, and it was getting smelly, and warren was still talking about “score” over in the corner but just like me and my family – he wasn’t happily bowling in the bowling lanes anymore or eating a nice well made hamburger or simply enjoying the nice bowling alley that wasn’t too crowded. Perhaps if gubbment had talked less about bowling alley “score” and more about population control, when hurrican katrina hit, these refugees would not have been so vast in number to have overwhelmed the bowling alley resources. It is unfair to my children who didn’t overbreed who now cannot enjoy the bowling alley because other people/communities/societies overbred.

  12. Social Worker,
    Do you have any hard data to support your over breeding thesis?
    I don’t buy into your thesis from an anecdotal perspective and perhaps even common sense perspective. From anecdotal observations people are just not having kids as early or often as previous generations. The middle class ( the majority) just can’t afford it. Watched a report on Brazilian television recently mentioning those trends exactly and how it may become a crisis in the future. So not sure where you a coming from on this one?

  13. MY COMMENTS IN CAPS

    TO HOVER:

    Warren from the demand side you have talked about deficit spending to keep people doing busywork. NO, TO CREATE USEFUL OUTPUT. BUT EVEN IF THAT ASPECT FAILS IT’S BETTER THAN UNEMPLOYMENT.
    However I rarely if ever hear you talk about the supply side. THE SUPPLY SIDE ISN’T THE PLACE FOR DEMAND MANAGEMENT. I TALK ABOUT IT ALL THE TIME REGARDING INCENTIVES AND EFFICIENCIES. If I don’t pay taxes you tell me a thug with a gun will lock me up in a room, TRUE WITH CURRENT TAXES, BUT NOT WITH A REAL ESTATE TAX, THE HOUSE JUST GETS SOLD. but if I overbreed what happens? THE WORLD IS AT OR NEAR 0 POPULATION GROWTH SO YOUR POINT IS CURRENTLY MOOT

    TO RSG:

    not sure what you mean by “maybe not to the benefit of existing investors.” are you referring to fannie and freddie? AND OTHERS WHO HAVE AND WILL DILUTE EXISTING SHAREHOLDS WITHOUT CONCERN

    TO VIPUL:

    Warren proposal here is that if people are doing nothing, yet consuming food, shelter, etc. Why not have them produce something of value to society? AND MORE SO- THEY ARE UNEMPLOYED BECAUSE THE DEFICIT IS TOO SMALL. TAXES FUNCTION TO CREATE UNEMPLOYMENT, AND GOVT SPENDING FUNCTIONS TO TRANSFER THOSE RESOURCES NOW AVAILABLE FOR SALE TO THE PUBLIC SECTOR, AS THE PRIVATE SECTOR SCRAMBLES TO GET THE FUNDS FROM GOVT TO PAY THE TAXES DUE. THERE IS NO SUCH THING AS UNEMPLOYMENT WITHOUT A MONETARY SYSTEM (REMOTE FAMILY FARMS, MONASTARIES, AMERICAN INDIANS BEFORE COLUMBUS, AFRICA BEFORE THE BRITS, ETC.)

    TO SOCIAL WORKER:

    I really want you to convince me population control is a very bad thing that I should rebuke, but try as I might to convince myself how evil it is, I cannot. POPULATION CONTROL IS A POLITICAL DECISION PROVIDED THERE IS SUFFICIENT ‘CRITICAL MASS’ TO SUSTAIN LIFE.

    FOR A GIVEN POPULATION UTILIZING A MONETARY SYSTEM, HOWEVER, IT MAKES NO ECONOMIC SENSE TO SUSTAIN UNEMPLOYMENT FOR INFLATION CONTROL.

    TO WINSLOW:

    Indicator hit 6.0%, down about 3/4%. Another 1% and the housing market could start, at least, a temporary turn around. At current downward trend, about Oct 7th. Some are hoping Obama would keep Paulson on at Treasury as he swaps Tsy Secs for MBS. SEEMS TO ME HOUSING HAS BOTTOMED, AND THE FISCAL PACKAGE THAT DROVE GDP UP TO 3.3% WILL ALSO SUPPORT THE HOUSING RECOVERY AND EMPLOYMENT INCREASES FOR AT LEAST A COUPLE OF QUARTERS. EVEN WITH HOUSING I LOOK TOWARDS FISCAL BALANCE RATHER THAN INTEREST RATES.

    TO JIM:

    WELL STATED!

    TO SOCIAL WORKER:

    I DID BOWL IN A LEAGUE IN JUPITER FLA ONE SUMMER WITH SOME FRIENDS. FIRST THING I DID WAS ASK ABOUT THE HANDICAP SYSTEM AND THEN QUITELY WENT ON TO ‘GAME’ IT (WIN SMALL, LOSE BIG) AND WE WON THE CHAMPIONSHIP. THE REST OF THE TEAM THOUGHT IT WAS OUR GOOD PLAYING, AND NEVER DID UNDERSTAND WHAT I DID EVEN AFTER EXPLAINING IT SEVERAL TIMES, AND INSTEAD TALKED ABOUT THIS OR THAT GOOD SHOT, ETC.

    AS FOR YOUR STATEMENTS ABOUT THE PLACE GETTING CROWDED, IT’S AN ALLOCATION OF RESOURCES STORY. THE OPTIONS ARE PRICE, RULES, ETC. THESE ARE POLITICAL CHOICES, WITH VARYING OUTCOMES, INCLUDING THE ONE YOU POINTED TO, ESPECIALLY WHEN INCENTIVES AND HUMAN NATURE COME TOGETHER AND CREATE UGLY OUTCOMES.

    FOR ANOTHER EXAMPLE OF USING PRICE TO ALLOCATE FROM THE ‘BOTTOM UP’ CHARGING A TENTH OF A CENT PER EMAIL WOULD PROBABLY CUT OUT MOST MASS SPAM, WHILE COSTING EACH LEGIT USER VERY LITTLE.

    TO JCM:

    WE HAVE MADE CHILDREN AND EXPENSE RATHER THAN AN INVESTMENT, AND ARE WATCHING THE CONSEQUENCES, INCLUDING FALLING BIRTHRATES THAT, IN THEORY,LEFT ALONE, WILL RESULT IN 0 POPULATION

  14. O JCM:

    WE HAVE MADE CHILDREN AND EXPENSE RATHER THAN AN INVESTMENT, AND ARE WATCHING THE CONSEQUENCES, INCLUDING FALLING BIRTHRATES THAT, IN
    THEORY,LEFT ALONE, WILL RESULT IN 0 POPULATION

    Completely agree. Children are a liability rather than an asset. At least McCain has some marginal tax relief proposals for families. You just hope that they will take care of you when you get old.

  15. EVEN WITH HOUSING I LOOK TOWARDS FISCAL BALANCE RATHER THAN INTEREST RATES.

    Agreed, just in Paulson’s case, fiscal balance (deficit spending) would be used to directly drive interest rates on housing so the two are connected this time.

    BTW, For the last 5 years (about the same amount of time I’ve been reading your blog) I’ve followed John Makin at AEI, who has more than a few contacts in government. He is usually 10 days early on his monthly post but this month seems to have other things on his mind (last post should have been out about Aug 25).

    http://www.aei.org/publications/filter.all,contentID.20038142219000216/default.asp

    The financial sector is in much worse shape than you let on. The damage to bank and nonbank sector has been more severe than to the real economy. The export/fiscal deficit driven ‘recovery’ in the real economy is still too tepid to allow the financial component to survive let alone thrive.

    Without fiscal bailouts of the financial sector we will likely follow Japan’s path towards monetary policy obsolesce, which you think is a good thing.

    I agree but only until monetary policy goes through major reform.

    Japan bailed out out banks through nationalization and lost the monetary policy tool. The U.S. treasury looks to bailout banks by indirectly lowering interest rates. With one more cycle of the housing market, housing loans will be transferred to the U.S. treasury enabled by a large amount of deficit spending.

    What gets interesting is what will replace the credit driven asset cycles as the new economic driver. Japan has chosen to use fiscal policy, but there is another choice.

    I’d prefer the venture/vulture capitalists of the 90’s model expanded for the 00’s by giving citizen capitalists direct access to the Fed. Smaller/more numerous investors held accountable through citizenship. Citizen investors with possibly unlimited access to the Fed window, as so few would take advantage of the opportunity.

    If the treasury starts buying the mortgages of every citizen Bernanke may be too late to save monetary policy as interest rates will fall to zero. Bernanke has already opened the window to more than just a few commercial banks, demonstrating the ability for monetary policy to start from the ground up.

    Opening the Fed window to citizens is the logical next step for Ben (and Japan) as it will save monetary policy from the trash bin of history.

  16. Makin just put up his September post, looking for a redesign……

    “Maybe the shared stake of the global economic system and financial stability will aid in the design of a superior financial and regulatory framework. Be assured, however, that such a framework is not yet in place, nor is its outline very clear.

    Risk is always with us. In modern times, so, too, is intensified systemic risk. We are just more aware of both than we have been for a while. Maybe that is a good thing.”

    Pimco’s McCulley is looking for a monetary redesign…..

    “Therefore, I do. Specifically, Mr. Bernanke put squarely on the table the need for “macroprudential” regulatory arrangements, designed to temper the inherent pro-cyclicality of existing regulatory/capital requirement arrangements. If established and successful in implementation, a macroprudential approach would temper the Minsky-esque boom-bust tendencies of banking and the capital markets.

    Such an outcome would, in turn, have direct implications for monetary policy. More specifically, if the transmission mechanism between the Fed funds rate, financial conditions and aggregate demand could be made more tightly bound, it would reduce the overall cyclical range the Fed would need to pursue for the Fed funds rate. ”

    http://www.pimco.com/LeftNav/Featured+Market+Commentary/FF/2008/Global+Central+Bank+Focus+McCulley+Sept+2008+In+the+Fullness+of+Time.htm

    ….while Pimco’s Gross is looking for a fiscal bailout.

    “The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise. ”

    http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/Investment+Outlook+Bill+Gross+Sept+2008+Bull+Market.htm

  17. dieoff.org has lots of of hard data on population dieoff.

    “From anecdotal observations people are just not having kids as early or often as previous generations.”

    My doctor told me many women in our community was waiting til 30’s to have kids if at all, and the incident of down’s syndrome, ADD, etc was going up and he believes it was because the older you wait to have children, the more complications, but he provided me no journal research articles. He said he was going to have to close his medical practice soon because there were fewer and fewer people seeing him.

    “The middle class ( the majority) just can’t afford it.”

    You can’t afford NOT to have kids, who will take care of you when you get sick, infirm, old? You aren’t counting on a stranger in a nursing home are you? Warren as you get old and forgetful are you counting on Sada to help out or have you made arrangements to be put into a nursing home to spend the last years of your life?

    In many 3rd world nations they breed 10 kids so that a few will make it to adulthood to help take care of the parents in these times. I talk to many single people and couples who are 40+ years in age without kids and ask them what happens as they get older and weaker in their 60’s and 70’s and most have thrown caution to the wind and say it won’t matter to them at that point, they will be too forgetful and senile to care – this is no way to continue the borg rule of the universe is it?

  18. Hoover,
    You can’t afford NOT to have kids, who will take care of you when you get sick, infirm, old? You aren’t counting on a stranger in a nursing home are you? Warren as you get old and forgetful are you counting on Sada to help out or have you made arrangements to be put into a nursing home to spend the last years of your life?

    You are dead right about this. I have two kids.

  19. to wins:

    Agreed, just in Paulson’s case, fiscal balance (deficit spending) would be used to directly drive interest rates on housing so the two are connected this time. THE FED CAN SET THE TERM STRUCTURE OF RATES WHERE EVER THEY WANT IT TO BE.

    WE’VE DISCUSSED YOUR CITIZEN LOAN IDEA BEFORE. WE ALREADY HAVE LOTS OF GOVT LOAN PROGRAMS FOR HOMEHOWNERS, BUSINESSES, STUDENTS, ETC. AND IF YOU WANT TO LOWER CREDIT STANDARDS AND INTEREST RATES IT’S ALL OPERATIONALLY POSSIBLE, THOUGH NOT MY FIRST CHOICE REGARDING POLICY

    TO HOOVER:

    REGARDING MY OLD AGE, WHICH IS ARGUABLY ALREADY HERE, LET ME QUOTE THAT SENATOR FROM MASS: I’LL CROSS THAT BRIDGE WHEN I COME TO IT…

  20. Hi Warren,

    What do you think will be the near term and long term effects of the GSE ‘bailout?’

    So glad you are up and at ’em!

    Thanks,

    DK

  21. Looks like Bill Gross got his bailout.

    “WE’VE DISCUSSED YOUR CITIZEN LOAN IDEA BEFORE. WE ALREADY HAVE LOTS OF GOVT LOAN PROGRAMS FOR HOMEHOWNERS, BUSINESSES, STUDENTS, ETC. AND IF YOU WANT TO LOWER CREDIT STANDARDS AND INTEREST RATES IT’S ALL OPERATIONALLY POSSIBLE, THOUGH NOT MY FIRST CHOICE REGARDING POLICY”

    Yes, we’ve discussed this, Thanks!

    I see this as a typical private vs. public debate.

    Should the financial sector, which is currently just an extension of public government due to its special relationship, be determining which private investments get funding?

    I don’t mind the government deciding how to spend money on public projects that will be owned by the public. Decisions on which privately owned projects should be funded should be determined by private investors. Decisions on which private investors should have access to funding should be based on citizenship.

    Both public/private funding will likely create deficit spending. Public investment creates way more public deficits than private investment.

    If you don’t want a deficit, with the private investment you just raise interest rates instead of taxes. Much easier politically. Any power hungry official at the Fed should be all over this.

  22. to dkpa:

    most likely the main effect will mean there will be no effect and it will be business as usual but more attention to avoiding fraudulent applications and fraudulent loans.

    The agencies support private sector deficit spending for homes, which is what congress wants, presumably to stay in office. That force remains.

    If the agencies do instead tighten up considerably, that will cut demand from lower income earners and keep agg demand at lower levels. All else equal, this would require more govt deficit spending to support a similar level of gdp.

    meanwhile banks, who always have unlimited access to govt funding via insured deposits, are increasing market share and supporting the deficit spending for housing through that channel.

    between the two housing will soon be back to previous levels. in the early 70’s we got up to 2.6 million housing starts with mostly bank lending by simple savings and loans. we’ve yet to re achieve that peak even with a population 40% higher.

  23. Wins,

    Someone has to determine ‘creditworthiness’ of some sort for lending.

    your suggestion that people approve their own loans as a right of citizenship raises all sorts of control issues with agg demand and the value of the currency. in a sense, fraudulent loan apps that lead to the housing boom/bust is an example of citizens approving their own credit, except your plan doesn’t even bother with the application. It’s control is a limit on the amount of how much each citizen can borrow, and as it’s pretty much non recourse, it’s functionally a tax rebate.

    banks, the bulk of the financial sector, get govt funding and make loan decisions that are highly regulated by govt.

    only entities with private funding can make independent lending decisions, and often these decisions are regulated as well.

    let’s take this back off line if you want to continue it, thanks

  24. “except your plan doesn’t even bother with the application.”

    Just the 18 years, and $250,000 your parents spend to turn you into an adult U.S. citizen 🙂

    “let’s take this back off line if you want to continue it, thanks”

    Right, still thinking. Thanks.

  25. I’m in favor of turning children back into investments rather than expenses as we do today. Just not by your method.

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