Measuring Bubbles
Brad DeLong and John Cochrane agree on something. I must dissent.
Delong and Cochrane agree that
“The underlying decline in wealth from the housing bust was … around $400 billion. …”
Indeed, relative to the size of the economy the losses during the crash of the dot-com bubble were four times as large.
I object that the two sums being compared are not comparable at all.
OK so this was a comment on DeLong so when you see “you” read “DeLong”
Why do you compare the losses during the crash of the dot-com bubble to the $400 billion rather than to the $25 trillion ?
The losses during the crash of the housing bubble are, you claim, $25 trillion.
Someone who has forgotten 2000 (or 1999 or 2001 or … well I clearly am that someone) would compare the $400 billion to the decline in the value of shares of corporations with names which ended .com. I don’t think that was $ 1.2 trillion.
For some reason, you and Cochrane count the whole loss around that time as the dot.com shock and only losses on subprime mortgages this time. The former value of the former shares of Lehman isn’t in the sum which equals $ 400 billion.
I think that it is possible to distinguish the shock due to burst bubbles from the total consequences in a meaningful way. I’d say the reasonable comparison is the total decline in share values then to the total decline in the value of housing now. The current bubble loss would be about $ 6 trillion for the USA not $ 400 billion.
It doesn’t make sense to compare total losses then to losses born by banks now and conclude that the losses born by banks now are smaller than total losses then, but a lot of damange was done because all of the losses born by banks now were born by banks.
I’d say that in the US alone, and ignoring commercial real estate, about $ 6 trillion in “wealth” was revealed to be a fantasy.
That’s gotta to hurt. It hurt even more because investment banks shared the rubes delusions this time, but the delusion was huge and the so was the delusione (disappointment)
I think we need a new open topic. Here is something of interest. More money (as if we have too much and don’t know what to do with it) for our pointless empire:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajDFeH4dy2qo&pos=9
The sooner we concede the Western Pacific to China and get out the better for us. Sometimes losing positions need to be liquidated. It won’t finish us off, but rather strengthen us. And Iran isn’t going to threaten anybody but Israel wants to keep us at semi-war with it for its own purposes.
It seems odd to me that the word ‘commensurable’ does not get more use in the field of economics? I see the word ‘comparable’ used instead and in the literal usage anything can be compared to anything. One may compare an elephant to a mouse for example but they are not commensurable in regards to their vast difference in size. They are however comparable in regards to size. (just something that popped up in my head while reading this post)
Robert,
“The underlying decline in wealth from the housing bust was … around $400 billion”
What you left out of the quote with the “……” was important.
Cochrane’s full quote was: “the underlying decline in wealth from the housing bust was not that large…. Most estimates put subprime losses around $400 billion. The stock market absorbs losses like that in days…”
His point was….. well I’ll just Delong say it: “how those losses hit overleveraged and overexuberant banking and shadow banking systems”
Robert,
“The underlying decline in wealth from the housing bust was … around $400 billion”
What you left out of the quote with the “……” was important.
Cochrane’s full quote was: “the underlying decline in wealth from the housing bust was not that large…. Most estimates put subprime losses around $400 billion. The stock market absorbs losses like that in days…”
I think the confusion arises because in first part of his quote, he is calling the “housing bust” just the events around the credit market freeze. So that is imprecise, but his point was….. well I’ll just Delong say it: “how those losses hit overleveraged and overexuberant banking and shadow banking systems”
Obama’s budget is coming out. Here is a funny:
Administration projections show the deficit never dropping below $700 billion, even under assumptions that war costs will drop precipitously to just $50 billion in some years instead of more than three times that this year and next.
How will “war costs drop precipitously” if we don’t throw in the towel and get out of Afghanistan and elsewhere? Are they planning to turn Afghanistan over to the Taliban? Or are we going to withdraw our troops and fight the Taliban by dropping thousands of leaflets with insulting pictures of Mohammad on them? LOL
PS That would be cheaper, for sure.
Our empire is on its last legs, but most are too blind to see and understand that. I think Karzai has an inkling and is pretty jumpy and nervous.
>>Someone who has forgotten 2000 (or 1999 or 2001 or … well I clearly am that someone)<<
I am confused by the period of comparison. What is the period of the dot-com crash? There were a succession of panics/crashes/shocks around the same time: Dot.com, September 11, and Enron. Sometimes, the latter 2 are combined when people write about the period. Sometimes, when I read people writing about the last crash, the “dot.com” crash seems to end with the market lows of the Enron crash and sometimes the period seems to end when the market hit bottom in the run-up to September 11. Which period of dot.com bubble is being used?
I agree, though, it matters that the losses by banks are born by banks, just as it matters that losses from troubled mortgages seem affect a much broader segment of the population than the losses of the value of dot.com shares.
Just wondering, but wouldn’t it make sense to compare the entire 1999-2003 period to the current period?
I’ve deleted all my comments and will keep my mouth shut. OK?
meant to write “all my comments on this and most other recent threads”..
The problem for me with Brad DeLong is that he refuses to recognize the “cost” or wealth loss to the middle and less fortunate classes from his misguided experiment with “free trade”. The man is a one way wrecking crew when it comes to income disparity and the underlying strength of America. What should I expect of one of the principle authors of the NAFTA and assorted plantation capitalist fantasies ? Nothing, except to say that Brad is one of the last so called economists that I care to see involved in the policy process.
Very right. DeLong is a lousy economist. Berkeley should get rid of him. Kudlow would make a good replacement.
Sammy you are right that I botched the quote. I didn’t mean to suggest that Cochrane claimed that the total decline in housing wealth was 400 B. My point was that the total decline in wealth from the housing bust was about 15 times the losses to banks on subprime mortgages. Cochrane (and DeLong) write as if the 400 B not the roughly 6 T are comparable to the total decline in perceived wealth in the stock market decline of 2000.
In the sentence as more fully quoted by you, Cochrane sure seems to equate “the underlying decline in wealth” and “subprime losses.”
I mean I think that JC and JBD are noting that total losses in 2000 were greater than losses born by banks in 2007-8 and then noting that all of losses born by banks in 07-8 were born by banks which is the difference, tautologically, by definition and revealing nothing.
The housing market is highly leveraged (a small loss can be greatly magnified) versus the stock market which has tighter margin requirements. If you put down $1,000 to buy a $100,000 house you are leveraged about 100 to 1.
What made this crisis worse than others, is the fact that the housing market is highly leveraged.
The housing market is highly leveraged (a small loss can be greatly magnified) versus the stock market which has tighter margin requirements. If you put down $1,000 to buy a $100,000 house you are leveraged about 100 to 1.
What made this crisis worse than others, is the fact that the housing market is highly leveraged.
Mayfair. I disagree totally about NAFTA. You are assuming correlation is causation. You don’t even have correlation — the increase in inequality in the USA started in 1979.
If you want to consider Brad’s views on what to do about the income distribution, you should at least note that he supported Clinton’s tax increase for the richest 1-2 % and expansion of the EITC. You should note that his role in the EITC increase is the thing of which he is most proud. He hated the Clinton-Clinton and Magaziner health care plan largely because the funding was too regressive (as in the Obama-Baucus plan by the way) and had hoped that health care reform would be an opportunity to massively transfer wealth down the income distribution.
I know Brad, he is a close friend of mine. He doesn’t give a damn about the rich and cares a lot about the working class and the poor. You may disagree with him about how to help workers, but that doesn’t mean you don’t have the same aims.
Your hostility to NAFTA seems, to me, to be based on ideology.
i wish they had spent their valuable time analyzing where the money went
the real estate bubble was brought about by businesses selling financial products
there were many players selling these financial products
they made alot of money
who were they?, how much did they make?
without characters and drama the story cannot be told or understood
A word about the “loss of wealth”. We can operationally define the value of a house by what it sells for. In normal times we can estimate its value based on comparable sales. If we were to sell it, we have a good idea what it would go for. However, at the height of a bubble, as the crash reveals, the current prices are not good estimates of subsequent prices. Therefore to estimate the value of all houses by top of bubble prices is, to borrow a word from the post, a fantasy. Any “loss of wealth” figures based upon such an estimate is likewise a fantasy.
“ One may compare an elephant to a mouse for example but they are not commensurable in regards to their vast difference in size.”
Actually, comparable means similar. (Illogically, perhaps, but there you are.) 🙂 The elephant and mouse are commensurable, i. e., measurable in the same terms.
Min,
‘comparable’ means similar in the context of its first meaning: adj. 1. “Able to be compared, similar or equivalent. 2. Worthy of comparison.”
So the elephant and the mouse are ‘worthy of comparison’ because they are each an animal, and they are ‘able to be compared’ because all things are similar on some level. Marshmallows and planets are each objects for example, and a comparison reveals that one is small and soft, while the other is large and not soft. So all things are ‘comparable’ on some level.
You have ‘commensurable’ about right although it is not ‘terms’ but instead “measurable by the same standards”. My kids have moved away to college and one of them has my usage book so I am forced to rely on some very old memories here. First let me say that my elephant and mouse example is poor at best and if I could take it back I would. So you are correct about the elephant and the mouse being commensurable as presented and I am not able to think of any way to blame you for my stupidity (blogging joke because that is what so frequently occurs), so, because this is complicated, and because I lack my usage book, I will try to make up for involving you in my mess with a ‘two-fer’.
A few months back Krugman compared the US health-care system to that of Switzerland. He compared % of GDP and per capita costs but he ignored injury and illness rates (prevalence rates). But the US has for example about 300% higher prevalence rates of diabetes than what Switzerland does. So it would be correct to say that he compared the two systems, but it would be incorrect to say that his comparison was ‘commensurable’. So the difference between ‘terms’ and ‘standards’ may seem small, but, considering the moral implications involved, it is interesting how the word ‘commensurable’ gets so little use in the field of economics. And I am sorry for not putting more effort into my earlier comment. ~ray
We bounced out of the 2001 recession pretty easily and a lot quicker then in 2007/2008/2009 recession. Its the wealth effect that is killing us and since we are getting whacked worse today than in 2001 I think this means todays problem is worse than in 2001. In 2007 someone might have been riding high with a perceived house value in the 500k to million range. Now there house might be worth 300k. But there still in the house and have not done a transaction that shows up in the statistics. But they know they just lost serveral hundred thousand dollars from their lifetime savings — so they’re cutting back on their spending.
It’s either that or the fact that in 2001 we had a tax cut and today the government is threatening us with massive new accross the board tax increases.
Cantab: “Its the wealth effect that is killing us”
Really? Isn’t it the toxic assets that are killing us? Isn’t that why the banks are hoarding cash?
And — which may be close to what you are driving at –, people are saving more, without sufficient government spending to offset the shift to saving. One reason that people are saving is that their house is not appreciating, but there are others, no?
min,
Isn’t it the toxic assets that are killing us?
No
Isn’t that why the banks are hoarding cash?
No
People are not spending because they are trying to make up for their lost wealth because their house values have fallen. I don’t see how you fix this with infrastructure spending.
Min, Contab,
The banks have tightened standards at a time when many millions of potential borrowers have had their credit ratings lowered due to defaults and foreclosures. The ‘hoarding’ happens naturally as existing debts are paid on. The banks then allow these resulting reserves to increase as dictated by projected failures due to toxic assets.
The problem then is that lending must out-pace debt payments or the economy contracts. If not — adverse feedback loops, or, ‘deleveraging’ occur. ~ray
rl love: “The banks have tightened standards at a time when many millions of potential borrowers have had their credit ratings lowered due to defaults and foreclosures.”
Isn’t the sequence of events important? That is, the banks began hoarding because of their toxic assets. That caused a dramatic drop in the money supply (over 50%), which led to the severe economic slowdown, defaults, foreclosures, and credit tightening. To be sure, there were mortgage foreclosures before, but at a level that could have been handled without the fragile financial superstructure (toxic assets). The financial system seized up, which led to the bailout (“so that the banks can lend again”, said Paulson), but the banks hoarded the cash.
That is not to blame the banks for hoarding. That’s what banks do after a financial panic. The hoarding produces the drop in the money supply, but the stimulus was insufficient to reflate the money supply, and here we are.
Cantab: “People are not spending because they are trying to make up for their lost wealth because their house values have fallen. I don’t see how you fix this with infrastructure spending.”
If people won’t spend, then the government must, to keep the economy moving. It is not like we are chugging along. There is high unemployment and a lot of slack to take up.
Yikes – still mangling there, they’re, and their
Min,
There are about 7,000 banks. Only a small percentage of these are holding a significant amount of toxic assets. These assets are mostly MBSs and it is the ‘uncertainty’ about how many bad mortgages each MBS has in it that makes them ‘toxic’. As Cantab said though it is the loss of value in homes that is the larger problem, that is where the long term damage was done. The MBS losses are now being offset where they are highly concentrated because the big players are getting $$ so cheap, the consumer will eventually pay for the toxic asset cost. The derivatives could be serious but only if asset values continue to fall.
Politicians have been overplaying the importance of the toxic asset fiasco for a few reasons. Most importantly, they must appear to be pro-people and anti-bank as part of a broad effort to instill confidence. But two opposing groups had to be appeased simultaneously. The ‘investing group’ would however regain confidence only if it got its own way. So all of the stimulus efforts had to be crafted to suit whatever they ‘believed’ would fix the problems from their pov. Had they believed that a totem pole on the moon was needed, then a totem pole was the correct solution. This was critical because this group was beyond solvent, not much was made of this but, the largest capital flight flow in human history took place as things were disintegrating and there was never any shortage of ‘off the table funds’.
And globally, trillions and trillions were vanishing from equities and the US was responsible for the cause of these losses. But all that was needed to retrieve these vanishing trillions was ‘confidence’. It is important to understand the global implications as being crucial beyond just money.
That said, then there is the other group in the US. The ‘citizen’ group also must be appeased and so the toxic assets were played up while the global implications were played down. This allowed politicians to distance themselves from the blame while simultaneously giving investors whatever would instill confidence, and, at the citizen’s expense. The important factor though was always that the Empire was at stake, and still is for that matter, so the Empire was being protected with the ‘only a few bad apples’ defense. Another important factor here is that investors know that the politics are just a ploy from beginning to end. They understood the need for their being vilified and some of them even deserved it, but they are getting what they mo$t care about and hence the term ‘money talks’.
Also, the money supply expands every time a loan is made. Loans do not come from the money supply, they add to it. A contraction occurs when debts are being paid down faster than loans are being made. Each loan is eventually zero-sum, although the interest remains as residual growth. The only actual shortage is that of qualified borrowers. So if loans continue to be paid down faster than what loans are made, banks begin to lose $$ because they borrow the money they lend and that is a ‘liquidity trap’. ~ray
ray: “Also, the money supply expands every time a loan is made. Loans do not come from the money supply, they add to it.”
That’s what I was getting at. Hoarding by the banks means that loans are not getting made, and there is not enough money out there.
“A contraction occurs when debts are being paid down faster than loans are being made. Each loan is eventually zero-sum, although the interest remains as residual growth.”
The interest remains? Where, pray tell, does it come from? More and bigger loans? The interest is not there to remain.
“The only actual shortage is that of qualified borrowers.”
What makes a borrower qualified? To be sure, in the sub-prime mortgage market there were plenty of unqualified borrowers. But is the shop owner on the corner less qualified? There is a catch-22. People in general are less credit worthy because of the fact that loans are not being made in general, so that people do not have money to spend at the corner shop.
Where is the bottleneck? I think that there are two bottlenecks. One is at the banks, which are hoarding and not lending. The second is the Federal government, which is not doing enough to stimulate job growth, and, despite the rhetoric, has no plans to do enough.
When I said there was a catch-22, I meant that there was a positive feedback cycle between not making loans and reducing creditworthiness of prospective borrowers. It is a vicious cycle. I think that it works the other way, too. The prospective borrowers cannot enable people to shop at the local store, thus improving creditworthiness in general, but the banks could start lending more, initiating a virtuous feedback cycle. Even though there are thousands of banks, banking is highly concentrated. The decisions of very few people could break the bottleneck. At the same time, it is these people who are holding the toxic assets. That is why the toxic assets are still relevant.
Min: “The interest remains? Where, pray tell, does it come from? More and bigger loans? The interest is not there to remain.”
Growth is always something that did not exist before. This residual interest growth is simply growth. Explaining where it comes from is complicated except to say that it comes from other growth. If you were to try and follow it back to its origins there might be a few pennies that tie back to early civilizations. You do realize of course that this has nothing to do with currency? Mediums of exchange are only added as needed based on usage requirements. Banks exchange ‘ledger money’ for currency with the Fed as dictated by needs.
As for more stimulus and less ‘hoarding’, it leads right back to the same circumstances. The problem has to do with upward mobility on a global scale and the pace of lending. I just explained in part on DOLB’s FLOWER SHOP thread a few days ago although the problem has so many dimensions it is difficult to explain in short spurts. If you read what begins on DOLB’s thread with the ‘watermelon’ explanation, and then want more info just say so, here. What the guv, and msm, and economists’ are selling is the same as ‘run on banks’ in regards to the GD, and there was 71% poverty before the crash. Believe what you will.