Roubini: 20 reasons why we're not consuming

When you listen to an 'economist', the first thing you have to do is figure out who's buttering their bread. I'm surprised I have to say this.

'But you can lie with statistics!'

Yeah. You can lie with words, too. What's your point?

You could have found all 20 of Roubini's points on obscure economic blogs two or three years ago.

A lot of economists and savvy market veterans saw this coming. A light went on in the minds of many of these people in the spring of 2005. I remember sitting in my local cafe with friends when I spotted a graph in a discarded copy of the Boston Globe, showing a ratio of 7:1 for median house price to median household income in Eastern Massachusetts. My face went pale and I started to stammer: 'But that's impossible! This is very, very bad juju.' My friends did not appreciate the significance of my concern. They responded with stuff like, 'Well they aren't making any more land. Real estate prices always go up. People need to live somewhere.' I replied with stuff like, 'This kind of price rise could not possibility be attributed to fundamentals. Real estate prices sometimes do go down. Don't confuse the utility value of a house with its market price'. But I may as well have been speaking Swahili.

Anyway, we stunned economists and savvy market veterans managed to search each other out on the internet. You cannot believe how difficult it was for us to find each other! And then we had to battle the naysayers in the comboxes for close to two and a half years. It was like the zombies in The Omega Man; they at us from everywhere questioning our sanity and prescribing anti-depressants. 'Even a stopped watch is right twice a day. Yuck. Yuck.' Damn fools! They wouldn't know a sound economic argument if it bit them in the ass.

Two or three years ago these economists and savvy market veterans would have had to pay you to listen to them. And afterwards you would have avoided eye contact and backed away. Would you have been able to realize the significance of what they were saying? Would you?

Well? Am I not right?

It's part of the job of the political class to remain optimistic. Heck, if anyone says anything negative about America during an election they are an America-hater. Bernanke and Summers are not going to say we are going into a Depression even if they believe such a thing. At any rate, who are these economists who claim we will be out of trouble in 2009? I read 5 or 6 econ blogs every day and scan another 30 or so throughout the week. No one there is claiming any such thing.

The American public. Let us deflate this myth. The public did not see this coming either. Lots of people bought those awful mortgages. Even more spent and borrowed more than they should (remember those negative savings rates?) assuming that their wealth had increased because their house was worth more. Looking at a survey of economists in October of this year would be helpful. I dont remember any offhand (MI might), but off the top of my head I would say the large majority, at that point, thought we were in big trouble.

Economists, as a rule, believe in markets. The dismal science fails for many reasons. Among those is the interaction between politics and markets. Dishonesty and fraud in the markets distorts the ability to make useful conclusions. Lastly emotions really do matter. Markets routinely go too high and too low because of fear or excessive enthusiasm. Vulcans almost never face this problem in their markets. Collusion, insider trading and market manipulation ( hedge funds anyone?) distort.

Who do we believe? First, ourselves. Trust your own observations. Next, beware anyone with a simple solution or extreme partisan agenda. Read multiple sources and look at the numbers directly. Be prepared to accept that your long held cherished beliefs may be wrong. Accept uncertainty and prepare for it. People are still debating the details of the Great Depression. We will debate the cause of this crisis for decades. Lastly, IMHO, when in doubt, read the non-partisan libertarians. They do not have to kowtow to either political party.

Steve

What's to be optimistic about as we continue turn ourselves into a banana republic? The 1965 Immigration Act has been around for 43 years, but we've finally reached the tipping point. Expect the spiralling down to accelerate.

Pyrrho
Where is your blog or your friends blog

And you seem to have a good grasp of history. Are we repeating ourselves? Do you just shake your head and say here we go again

Or is this something new?

I am not an economist. I do not do scientific analysis. I observe and think.

I live in Brooklyn, NY. Starting from 2003 thousands of condoes were sold in Brooklyn. An average price of a small two bedrooms condo was around $500K in my neighbourhood. Under a regular fixed mortgage rule a family would have had to pay a downpayment and closing costs of approximately $120K. There are calculators how much you can afford to buy. To afford such a mortgage a family income should be at least $150K. So in addition to paying $120K in cash a family must have had an income of $150K. According to statistic only 1.5% of families in my neibourhood have this income. So, who were the buyers? They were people with less income taking exotic mortgages with a fixed mortgage rate of 1.5% a year for 3-5 years. After that there will be a mortgage rate adjustment. I have two clients who purchased their houses in 2002 and they had this rate adjustment in 2007. Their mortgage interest paid in 2007 was around $45K each. Think about this number:$45K! For how long will they last? And a number of such home owners will grow every year. I see properties for sale which were purchased 2-3 years ago. There will be thousands of forclosures. This is what economists call a prime problem. We are not in that stage yet but we are getting there because every year there will be an increasing number of mortgages rates subject to adjustment. My friends in LA have a house and they are scared to death with next year mortgage rate adjustment.

I see abandoned constructions. Some prices are going down but yesterday I saw a regular two bedroom condo for sale in my regular neighbourhood for $550K. Give me a break.

I see only one solution. Let the real estate prices to go in a free fall. When the prices drop, there will be new buyers.

"[B]arring egregious errors, this is not going to be anything like the pictures people saw of the 1930s."

Lawrence Summers presumably said that before the auto-industry bailout apparently fell apart. Let one of the big three go down, especially GM, are we'll see a tsunami of business failures beginning in the Midwest -- everything from automakers' suppliers to retailers and service firms in affected communities -- and subsequently swamping the economy in the rest of the country.

The usual libertarian suspects are saying, "Let 'em fail." That's the most "egregious error" imaginable at this time.

When is it going to sink in on people that the U.S. economy is intricately interconnected, that anybody with a job, bank account and 401(k) has a stake in it, and that's in in a perilously fragile state right now?

Any failure of any large company or institution is going to have a compounded effect on the economy. If you think you are somehow immune, you are deluded. And your delusion is going to cost the rest of us big time

"...we're broke, we can't get credit, we're in hock up to our eyeballs, and we have no confidence things are going to get better anytime soon."

Even individuals/families for whom the first three are not true in their personal lives are in agreement with the "no confidence" vote. Which means that we are holding on to every dollar as long as possible, too.

"[B]arring egregious errors, this is not going to be anything like the pictures people saw of the 1930s."

No. It might be much worse. In the 30s, a huge percentage of the population still lived in rural areas and so were able to feed themselves. Even if we all keep chickens and turn our lawns into gardens, urban dwellers will only be able to grow a small percentage of their own food.

And still there is the reluctance to mention "Free Trade". Hah. What a recipe for success it is. Move manufacturing offshore. Feel good about the Chicoms' factories turning out trinkets at low prices--and how many of those trinkets over the past decade have already been junked as obsolescent or broken? "Invest" and refinance to your hearts desire to buy even more Chicom electronic beads and whistles. Watch the entire house then collapse, literally and figuratively. But don't mention "Free Trade". After Free Trade is goooood; it's what turned the British Empire into what it is today. What we'll be tomorrow.

Can someone really an argument that none of that matters?

It matters to some degree. I think we'll escape a 'runaway' deflationary contraction through debt monetization and currency devaluation, but at a heavy price.

The epic policy blunders this time were committed before the downturn: deindustrialization, huge trade and current accound deficits, and massive public and private debt. In 1930, the US was the world's greatest creditor nation and the Federal Government was essentially debt free. Not this time. Congress is going to have a hell of a time finding 'investors' willing to finance the massive financial stimulus package that will be needed to avert a depression.

Another correction: massive fiscal stimulus package

Re: The epic policy blunders this time were committed before the downturn: deindustrialization, huge trade and current accound deficits, and massive public and private debt.

None of those are policy blunders in the manner that Smoot-Hawley was: specific actions taken when the economy is already doing poorly that accelerate its collapse.

Re: Congress is going to have a hell of a time finding 'investors' willing to finance the massive financial stimulus package that will be needed to avert a depression.

My argument is that we will avoid a depression absent any momumentally stupid actions, and do not need a stimulus package to do so. A stimulus package would soften the recession, and get us out of it quicker but even in its complete absence we will not be looking at 1932 again, only 1980-1982.