Posted on 09/29/2008 7:18:01 PM PDT by reprobate
September 29, 2008 Brian Wesbury on the Bailout Vote Andrew Roth
When it comes to understanding the economy, it's always smart to find out what economist Brian Wesbury is thinking. Here's his reaction (PDF) to today's vote in the House and the subsequent market decline. I highlighted what I thought were very strong points.
Since the subprime crisis first became evident, we have steadfastly believed the US would avoid a recession. And, at least so far, it has. But with today’s vote, two things have happened. First, Congress finally said enough already with the knee-jerk responses to the crisis by Treasury. Second, any immediate relief (if there was really any coming) to credit problems and confidence has been put off. However, these issues will be short-lived; once the nation is able to focus on the long-term again, all will be well.
Up to this point, economic weakness has been isolated in the housing market or financials exposed to it, and in sectors affected by energy (airlines and autos). The weaknesses in these areas have not dragged down overall GDP. Real GDP grew at a 2.8% annual rate in the second quarter and is up 2.1% in the past year. Excluding home construction, real GDP has grown 3.1%.
Our argument has been that the economy does not experience recessions when productivity is strong, the Fed is easy, and tax rates are relatively low. These things are true today and this has kept the economy from falling into recession.
However, panic is spreading. Forget job security...normally positive and optimistic people are now worried that they will lose their money. President Bush said that that if the Treasury Plan was not passed very bad things could happen. He said, “banks could fail, including some in your community,” further stock market declines could “reduce the value of your retirement account,” “the value of your home could plummet,” and “millions of Americans could lose their jobs.”
From a President, these kinds of statements are unprecedented. In fact, the only parallels we can think of were 1977 and 1979 national TV addresses by Jimmy Carter, talking about energy and a crisis in confidence. Like then, much of our current economic crisis has been caused by government failure, even though conventional wisdom is blaming market failure.
The isolated storms in housing, finance and energy, are now being exaggerated by excessive government intervention (on a knee-jerk basis), mark-to-market accounting and panicky words from political leaders. As a result, consumers are pulling back, credit is being squeezed even to solid, well-run businesses and the economy is being threatened by this spreading panic.
If the economy fell into recession because of this it would be an unprecedented event. Consumer psychology has never caused a recession…never! In fact, there are only three times in history that psychology has impacted the economy in any significant way.
First, at the beginning of the Korean War people worried that goods would be rationed (like WWII), so they spent like crazy. The same was true for the introduction of muscle cars in the mid-1960s, which led to an almost crazy spending spree on autos. And, finally, in 1999 when everyone bought a new computer because they were fearful of Y2K. Each of these spending sprees was followed by an offsetting slowdown in the quarters that followed.
Never in history has a drop in consumer confidence caused a recession. But that does not mean there won’t be a first time. It could happen in the next few months and we would expect to see some very negative data on economic activity. But this would be followed by an offsetting increase in activity following the psychological slowdown.
Productivity is still booming, and so are exports, the Fed is exceedingly accommodative and tax rates have not been hiked. Moreover, oil prices are below $100 per barrel. Finally, all it would take to fix financial market problems today is a temporary suspension of mark-to-market accounting for a targeted set of illiquid assets.
In other words, any economic problems that the US faces in the next few months or quarters is temporary. Financial markets have priced in Armageddon, and as a result still present one of the greatest buying opportunities of our lifetimes.
This article’s entire premise is based on faked government statistics. The market hasn’t begun to price in Armageddon. Dow 7,500 will be a reasonable approximation.
“Real GDP grew at a 2.8% annual rate in the second quarter and is up 2.1% in the past year. Excluding home construction, real GDP has grown 3.1%.”
With all the muck that the state and the lending industry drag our economy through, we are still growing. Can you imagine what Obama, for instance, would be saying if recessions weren’t unusual, and if it wasn’t mundane for us to become more and more productive every year? Even with real growth, we laugh at people who call us whiners and say the economy is fundamentally sound. Let me tell you, socialists, there is much ruin in a nation.
The president (and others) come out and tell us we risk a terrible crisis if we don’t act immediately. When we don’t act immediately, the fear the president helped fuel causes the markets to drop. The media cries about the worst drop ever, even though it was NOT the worst drop ever by percent (but that doesn’t sell papers). This creates more panic and further demands for immediate government action.
People need to calm down! If you kept your debt low and mortgage reasonable, like most conservatives, you can weather this just fine. There are no guarantees, of course, but regular investments in diverse assets are the best way to increase wealth over time. Pulling your money out in panic selling is one of the best ways to lose money.
This will sound as ludicrous a few years hence, as that DOW 30,000 nonsense from 1999 does now.
When most people, businesses and government over extend themselves...
Someday the piper will come calling...And they will be paid...
By totally forgetting the short-term fix (let me re-phrase that “band-aid”) the government, Wall Street and other movers and shakers will just have to knuckle down and do it the right way...It will be a long hard road, but in the long run, the solution is better than me dying many years from now, knowing that this bill would have put us in a near unrecoverable debt situation for many generations...
The government is just going to have to put a few more tighter notches in the “same” old belt for now...
I believe we all will manage somehow, some way...We always do...
The best thing I can tell anyone who gives a rats...Get yourself out of debt as soon as possible, consentrate on that, and stay heading in that direction regardless of what happens...
Its easier to manage your finances when you are only needing to cover “operating” expences...Debt obviously puts an extra yoke on you you need to get rid of as much as possible...Debt keeps you from being flexible on how you deal with increasing operating expenses and other overhead costs...
Just shooting from the hip I suppose...
And yes, someone told me that on here.
Wall Street wants its government cheese to get it out of one heck of a mess. But credit still exists, even for mortgages and car loans.
I myself bought a vehicle on a day when “THERE IS NO CREDIT!”. Got a great rate also from a local credit union. Two houses up the street just sold very quickly, and I talked with one buyer tonight. They closed Friday, and when he called to see if his loan would go through after the President's speech last Thursday, the bank laughed and said yes.
The key is that at risk people and businesses are going to have a hard time getting credit. For those using credit to “tide them over” cash flow issues while have a shaky credit rating, this will be a big problem. But if you are constantly borrowing for the payroll, you have a problem anyway.
The economy will regroup after Americans from every state EXPELL THEIR CONGRESSIONAL INCUMBANTS BY VOTING THEIR SORRY ASSES OUT.
Putting the blame where blame belongs, it will be Heaven to send nancy Pelousey and dingy Harry and Bawney Fwank packing. don’t forget Dodd. After all these are supposed to be the economists of the congress and there was no problem according to them until a few months ago. And then the problem is something Bush created now that their asses are on the hot seat.
Send em packing. We can deal with the economic re-set without a government fix.
redgolum: “But if you are constantly borrowing for the payroll, you have a problem anyway.”
Conservatives are always talking about being responsible, saving for a rainy day, etc. Like you wrote, if you were responsible up to this point, you are probably well positioned to survive if not take advantage of this. Those who live on debt may have a bit harder time ahead of them (but there’s no guarantee of even that).
How can someone ever learn from the school of hard knocks if we never allow the hard knocks to fall? Remember, it’s conservatives who believe in individual freedom AND responsibility. The two go hand in hand.
When we say we believe in these ideals, it’s because we know they are the best way to produce the greatest good for the greatest number of people. Now we shall see who really is conservative.
I buying man... have you seen the prices? OMG ! We may never get an opportunity like this again and I'm taking advantage of it. I just can't decide if I should buy tomorrow morning or hold out a couple more days for even larger margins.
I don’t doubt there are day/swing traders making (or losing) amazing fortunes off of this. Seriously. There are a lot of stocks moving 25% or more in a day.
There’s even a lot for long term investors like myself. There are really good companies selling at amazingly low PE ratios. If you have the cash to spare and can afford to hold them long term (if necessary), it’s a bargain hunter’s paradise.
I agree. Republicans need to accept the economy is not doing well, and will prob worsen.
the combination of volatility and liquidity on many financial names, low and high-priced, is just unreal.
I find myself consistently wishing my net gut tolerance for trade size was higher, because the liquidity and opportunity is there.
BS! Crowd psychology causes all booms, busts, recessions, manias and depressions. It shows up first in the market price charts, and only months later in the economic statistics.
Stocks started down a year ago, well before there were any worrisome economic statistics. The same is true of every major recession/depression in all of history. So either the markets have ESP, or else group psychological dynamics drive both the markets and the economy.
Thank you, thank you and thank you.
Your last paragragh is correct. People who are credit strapped for whatever reason and are using it to live on are going to have a problem, rich or not.
The less debt and the more you live within your means; the better off you are.
This is about survival pure and simple.
The author is oblivious to what has been going down in commercial real estate. And that is but a glimpse.
No matter how bad it gets, there will be those that simply refuse to see what is right in front of their eyes. Even “experts”.
Unbelievable.
I wish he was right but I dont buy it.
Take a look at Weekly Leading Index from ECRI. -11% or so.
WLI says a recession will happen. It’s at levels you never see except at recessionary starts.
“The author is oblivious to what has been going down in commercial real estate. And that is but a glimpse.”
What is your take on commercial real estate?
I am invested there and interested in your view.
Oh look my economist from Carnegie Mellon disagrees with your economist!
I just parrot what I read. I also have a friend (literally my old high school buddy) that is a commercial real estate investor here in the Seattle area. We sold commercial real estate together in the 1979-1982 timeframe. I moved on, he became quite successful as he bought property after property.
He is “struggling” right now.
To give you an idea of what I read:
http://www.minyanville.com/articles/index.php?a=15332
http://www.soundmoneytips.com/article/57755-implications-of-commercial-real-estate-collapse
http://seekingalpha.com/article/84485-more-on-mall-foreclosures-housing-tracker
http://www.nytimes.com/2005/03/02/business/02prop.html
http://bigpicture.typepad.com/comments/2007/12/coming-soon-com.html
http://seekingalpha.com/article/93684-commercial-real-estate-eye-on-hotels-housing-tracker
I tried to find some of my old favorites, but they are favorites on a different computer. :)
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