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Krugman on the Need for More Stimulus

On August 31, 2010, in Economy, by Tim

Princeton economics professor and Nobel Laureate Paul Krugman laments the smallish $800 billion stimulus of last year and says we should now double down with another $800 billion.

On what’s going through the mind of fixed income investors, Krugman says:

The bond market is telling us not to worry about the current deficits. They’re happy to lend the federal government money at very low rates. What the bond market is telling us is they’re terrified of deflation and of a weak economy for a very long time.

They’re also terrified of the stock market…

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Economists on the Economy

On August 30, 2010, in Economy, by Tim

Given their mostly dismal forecasting track record in recent years and their continuing inability to reconcile what happens in the real world with what passes for economic theory, it’s not clear why economists continue to be asked for their opinions on these matters or why their views continue to be published in the financial media, but they are and they do. This CNN/Money report examines the results from the latest survey of business economists.

The air is quickly coming out of the recovery balloon, and economists have mixed views on how to pump it back up.

The National Association of Business Economists said Monday that three-quarters of its members believe that promoting economic growth should be a higher priority than reducing the national deficit, according to an August survey of the nation’s economic policy.

However, nearly the same number of NABE economists said they do not think another stimulus package is necessary to halt the economic slowdown and get the economy back on track. At the same time, a majority believe that policymakers should do more to boost job growth.

The survey, based on responses from 84 NABE economists who work for private-sector firms and industry trade associations, comes as economic growth in the United States has slowed significantly after rebounding from a deep recession. Economists have been reducing their growth forecasts, and some are worried the economy could slip back into a downturn.

Part of the problem is that it pays to be positive, that is, if you want to make a living in this field. Unless you’re one of the select few bearish economists who have been able to make a name for themselves over the years (e.g., Rosenberg, Roubini, etc.), you’ve pretty much got to have the curves on your charts going from the  lower left to the upper right.

Why would anyone hire you if you had a dim view of the U.S. economy?

(more…)

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Economists Incapable of Spotting Bubbles

On August 17, 2010, in Housing, by Tim

Fortunately, today’s Future of Housing Finance conference has only one economist on the panel, Moody’s Mark Zandi, so, while slim to begin with, their chances of doing something productive are better than they might otherwise be given that economists continues to shirk any responsibility for the housing bubble, the latest evidence coming in this paper from the Boston Fed in which they claim they don’t have the tools to spot asset bubbles.

Understanding the evolution of real-time beliefs about house price appreciation is central to understanding the U.S. housing crisis. At the peak of the recent housing cycle, both borrowers and lenders appealed to optimistic house price forecasts to justify undertaking increasingly risky loans. Many observers have argued that these rosy forecasts ignored basic theoretical and empirical evidence that pointed to a massive overvaluation of housing and thus to an inevitable and severe price decline. We revisit the boom years and show that the economics profession provided little such countervailing evidence at the time. Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility…

Apparently, common sense isn’t part of most economists’ toolkit because, that’s all it took back in 2005 to understand that the only way borrowers were going to be able to service their monstrous new mortgage debt was if home prices continued to rise. The paper argues that,  from an economic theory standpoint, the correct levels for asset prices are, basically, unknowable and that, while their generally rosy view of the world back then turned out to be wrong, it wasn’t unreasonable. Pretty pathetic if you ask me…

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Shiller Now Sees Double Double-Dip

On August 11, 2010, in Economy, by Tim

For months now, Robert Shiller, Yale University Economics Professor and co-creator of the Case-Shiller Home Price Index, has been calling for a double-dip for home prices. Now he’s doubled up on that forecast, citing 50-50 or better odds of  a double-dip recession for the U.S. economy as detailed in this report at Marketwatch.

The U.S. economy has a “significant likelihood” of entering a double-dip recession if the government doesn’t step in to help the unemployed, economist Robert Shiller told MarketWatch News Break on Wednesday.

The Yale University professor and author of the best-selling book “Irrational Exuberance” pinned the probability of a double-dip recession at more than a 50-50.

Shiller pointed to the nation’s stubbornly-high unemployment as a root cause of lingering economic woes. And with the Federal Reserve running out of bullets to fight a second recession, he urged Congress to join the battle and focus on putting people back to work.

“Beyond the Fed, I’d like to see the government take a renewed stimulus package focused on creating jobs [and] on activities that involve a lot of people,” Shiller said.
…
“The Fed’s latest statement shows they’re on this, but I’m not so sure Congress is on this,” said Shiller. “There is significant likelihood of [a second recession] if the government doesn’t do something. I’m worried [unemployment] is not going to self-correct.”

It will certainly be an interesting period ahead in the run-up to the November elections, now less than three months away. Recall that the entire nation appeared to be in limbo in late-2008 while markets tanked and economic indicators took a decided turn for the worse before and after the huddled masses went to the polls.

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On the Soft Jobs Market…

On August 1, 2010, in Economy, by Tim

It seems that everybody is taking shots at economists these days, though, it only seems fair given how poorly their forecasts have matched up with reality in recent years.

From the Tom Toles archive and blog at the Washington Post.

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The Economic Outlook Dims

On July 29, 2010, in Economy, by Tim

Following the dismal set’s lowered expectations for the U.S. economy from a USA Today poll noted here on Monday comes another survey of economists by the Associated Press with similar results as detailed in this report earlier today.

The U.S. economic recovery will remain slow deep into next year, held back by shoppers reluctant to spend and employers hesitant to hire, according to an Associated Press survey of leading economists.

The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months.
…
The AP survey compiles forecasts of leading private, corporate and academic economists on a range of indicators, including employment, consumer spending and inflation. Among their forecasts:

– Economic growth the rest of this year and early next year will weaken, to less than 3 percent. From January through May, the economy grew at roughly a 3.5 percent pace.

– The unemployment rate will be no lower at the end of the year than it is now — 9.5 percent. A majority think it will be 2015 or later before the rate falls to a historically normal 5 percent.

– State budget shortfalls pose a “significant” or “severe” risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.

It looks as though the U.S. stock market may have just seen this report…

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