Saturday, September 1, 2007

where next?

Lawrence Summers (a very famous economist who seems to have a problem with arrogance) writes:

>Over the past 20 years major financial disruptions have taken place roughly every three years, starting with the 1987 stock market crash; the Savings & Loans collapse and credit crunch of the early 1990s; the 1994 Mexican crisis; the Asian financial crises of 1997 with the Russian and Long-Term Capital Management events of 1998; the bursting of the technology bubble in 2000; the potential disruptions of the payments system after the events of September 11 2001 and the deflationary scare in the credit markets in 2002 after the collapse of Enron.<

... and now we see the housing/credit crunch.

But where's the next financial "disruption" going to hit? Suppose that the Fed reduces rates and eases credit further either (1) to prevent the spread of the financial mess to the rest of the economy or (2) to moderate the recession that hits when the financial mess does spread. Suppose further that the Fed succeeds, so that all the US sees is a mild recession of the sort seen in 2001. (Of course, as wotj that one, it's likely to be less "mild" for those of us who have to find jobs in labor markets.)

So a "soft landing" is achieved (even though that phrase should make our backbones go into
frigid overdrive).

But in the previous financial crunches that Summers mentions, the Fed's response simply caused a delayed reaction in other sectors. For example, the Fed's response to the "Asian financial crises of 1997 with the Russian and Long-Term Capital Management events of 1998" helped to cause the "the technology bubble" which burst in 2000. Then the 2001 "save" sparked the housing bubble that's currently pulling the U.S. economy down.

So what sector is most likely to be hit if the Fed succeeds now?

My crystal ball is on the fritz, so I'm stopping there. And this is not a rhetorical question.

12 comments:

abb1 said...

Isn't it gold this time?

Too bad, though, gold is boring. Tulips. Yeah, I think what we need now to get out of the housing crunch is a new tulip bubble.

sporadic said...

Maybe there will a "green" bubble.

Sandwichman said...

Baths and gum. A bubble bath and bubble gum bubble.

rosserjb@jmu.edu said...

Gold has already done a major runup. It looks passe already.

It is a good question. Maybe assets in India. We have already had a major bubble and collapse in China. The green suggestion is not bad either.

Barkley

juan said...

old regulated banking sector v. flashy new, essentially unregulated, global non-bank banking sector -- ben may be 'a decider' but a 'decider' with much less power over outcomes so, imo, is left to try to deal with events on an ad hoc basis.

the 'delayed reaction' must await, especially since 'the' problem is not bordered and, as an AP article mentioned, 'impossible to track' even within the U.S. -- or, i might say that we are in the delayed reaction that will continue unfolding in uneven fashion.

hard to believe that lowering the fed funds rate will accomplish very much when interbank price of money is less the problem than uncertainty and price of risk. i believe keynes have a few things to say about this but i can't look since i lent my copies to a leninist who has never returned them.

rosserjb@jmu.edu said...

It is pretty clear that Bernanke et al are trying to deal with this in unexpected and non-standard ways. They are clearly not going to do a Greenspan-style round of major rate cutting. That signal has been sent very loudly, although I would not be surprised a quarter percent cut in the next month or two followed by a hold, with the ffr at an even 5%. That would get the politicians off their backs, mostly. Major rate cutting would come if the real economy tanks, which it has not yet done so far, all the predictions by Dean Baker and Nouriel Roubini to the contrary.

Instead we have seen unexpected moves, notably the cut in the discount rates, and now some less surprising moves on the regulatory and insurance sides, which in and of themselves amount to not much. But then, as has been noted, this is all about perceptions of risk, with some of the European markets, especially in London, showing bigger risk spreads than were seen in 1998 at the time of the LTCM crash.

juan said...

Barkley,

Yes, the real ('U.S.') economy has not 'tanked' but do you actually think that it's been doing well rather than near stagnation? (If I can trust Paul Kasriel, 'the profit boom' peaked nearly a year ago. If I can trust the BEA, nonres fixed investment has not been particularly good. If I can trust BLS, weekly jobless claims have been on a sequential rise. Retail sales data has been anything but strong. Etc)

And then, going forwards (and since so much weight seems given to 'the consumer'), would you not expect that declining ability to use houses as ATMs + associated job losses will intensify contractionary pressures.

PS - Much of the trouble in European markets relates to purchases of U.S. 'structured products' and uncertainty surrounding these.

But, aside from that, last quarter's growth in Germany, France, also I believe Japan, came in low.

rosserjb@jmu.edu said...

Growth has decelerated, but I do not yet see actual negative GDP growth, that is actual recession, in any of the major economies.

OTOH, as long as housing prices continue to slide in the US, pretty much anything is possible.

Brenda Rosser said...

What will happen if there is a 'soft landing' with the Fed helping to sustain 'normal' economic activity?

Hmmm...Let me think.

'Normal' (these days) is:
Dodgy accounting principles to hide the US (and other national) deficits etc. Large international trade imbalances. Higher cost of almost everything (peak oil, peak food. Generalised inflation..). Opaque financial balance sheets and 'assets'. Highly-rewarded speculation whilst holding toxic debt securities. Legalised insider trading. Laughable credit ratings/distorted perceptions of risk. Over and under-valued exchange rates. Rising international hostilities/continuous warfare. Ever-widening gap between rich and poor. Badly deteriorated domestic infrastructure. Urbanised populations. Corporate takeover of (now overpriced) rural land. Outsourcing of workers. Heavily concentrated industries. Corporate mainstream press. Privatised public services...

I think we can expect more of the same until a complete collapse occurs on many fronts.

juan said...

Brenda,

One word: Uncontrollability.

(a word which tends to bother all those who imagine themselves living within some permanent status quo with the 'all powerful' central bank and/or supranational institution coming to their rescue should deviations develop.
systemic anarchy was never a meaningless phrase but so many decades of mitigation made it seem to be.
got to go, there's a going out of business sale on equilibrium pillows at my favorite neolib shop)

Brenda Rosser said...

Juan: "..got to go, there's a going out of business sale on equilibrium pillows at my favorite neolib shop"

That's the first time I've sensed you feeling perturbed by all these perturbations. I hope we can all find some comfortable pillows.

The latest: ".."What is happening right now suggests that the moves by the Fed and ECB just haven't worked as we hoped," admits one senior international policymaker. Or as UniCredit analysts say: "The interbank lending business has broken down almost completely . . . it is a global phenonema and not restricted to just the euro and dollar markets." If this situation continues, it could potentially have very serious implications.
One of the most important functions of the money markets is to channel liquidity in the banking system to where it is most needed. If these markets seize up for any lengthy period, there is a risk that individual institutions may discover they no longer have access to the funds they need. This danger has already materialised for vehicles that depend on the asset- backed commercial paper sector ..


Growing sense of crisis over interbank deals. By Gillian Tett
Published: September 5 2007
http://www.ft.com/cms/s/0/d269d25a-5b49-11dc-8c32-0000779fd2ac.html

juan said...

Hi Brenda,

I'm less 'perturbed about these perturbations' than the way they have been mispresented ('subprime') by most media and apparently misunderstood by many who, by now, I had hoped would have understood that they are no 'run of the mill' problem amenable to central bank(s) policy decisions.

Gillian Tett is not one of the above, nor is Yves Smith, who's long experience in finance has not been a hindrance but the contrary.

You may find this from 5 September of interest, nicely dovetails with Gillian's article while pointing out fallacies in the normal 'bank-centric' beliefs/analyses:

Brad DeLong Argues That Central Banks Should Cut Interest Rates
http://www.nakedcapitalism.com/2007/09/brad-delong-argues-that-central-banks.html