Repricing Risk and our Economy

From Morgan Stanley’s Richard Berner:

In our view, housing activity is clearly at risk, and we see no real recovery until 2009.  We believe that the economic costs of subprime loan defaults largely will be borne by lenders rather than borrowers because such borrowers have scant equity in their home.  Thus, the spillover risk to the economy depends on whether lenders tighten lending standards significantly further.  We do expect that the tightening in lending standards will crimp demand; indeed, the downdraft in June home sales to new lows suggests that the tightening in mortgage credit is already starting to bite.  The ongoing buildup in inventories of unsold new and existing homes points to a mismatch between supply and demand that will require at least a 20% decline in 1-family housing starts to correct; that drop is already built in to our forecasts.  In addition, we estimate that foreclosures over the coming year could add 7% to the inventory of homes available for sale and put further downward pressure on home prices and thus, potentially, on consumer spending.  Likewise, the increase in the cost of capital and tighter standards for business borrowers means that the sluggish capex expansion is also at risk. 

But there are also several reasons to be suspicious that such forces will materially weaken the economy.  First, magnitude and duration both matter for assessing the extent to which any such credit tightening will affect growth; this episode has been modest and recent — so far.  Second, other dimensions of financial conditions are moving in the opposite direction.  Third, and contrary to the pessimists’ claims that the US economy’s sole source of fuel is a high-octane credit market, we continue to think that strong overseas growth and hearty domestic income gains will support overall US growth in general, and consumer spending in particular.  Indeed, while market participants are ignoring past economic data on the theory that they don’t reflect the recent changes in financial conditions, initial economic conditions do matter.  In particular, net exports have added 0.4% to overall US growth over the past year for the first time in a decade, and prospects for global growth remain strong.  And US real disposable income rose by 3.2% over the past year — faster than the pace of spending. 

Exactly.  The economy needs one year’s grace for housing and consumer spending to get back in line.  That is what it needs, and happily, that is what it will have.  And the dollar will help.

In the long run though, government spending, especially in huge apportionment programs like social security, must be resolved to some semblance of sanity.  And there’s one other spending spree that’s really being hidden in the numbers; the politicization of the military.  What proportion of the military budget is really just politics finding a way to get a local income stream?  Put another way, if you were king for a year, how much could you shrink military spending and actually increase the effectiveness of the best men and women in the country while providing in capital and research and wages for their future?  Is it as high as 50%?  There’s some smart military folks around who could make a pretty good guess.

Tags: Economics, Globalization, Taxes

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Economy

Econbrowser has a great graph on the latest economics numbers.  Perhaps more impressive, his Recession Probability Index graph is purporting a great track record in predicting recessions.  It’s not predicting one right now.  Remember my earlier post.

Tags: GDP, Economics, Recession

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SHORT BOOKS

Posted by Donald L. Luskin at 7/23/2007 11:39:00 AM | link 

THINGS I LOVE ABOUT MY COUNTRY
by Jane Fonda & Cindy Sheehan
Illustrated by Michael Moore

MY CHRISTIAN ACCOMPLISHMENTS & HOW I HELPED AFTER KATRINA
by Rev Jesse Jackson & Rev Al Sharpton

THINGS I LOVE ABOUT BILL
by Hillary Clinton

Sequel: THINGS I LOVE ABOUT HILLARY
By Bill Clinton

MY LITTLE BOOK OF PERSONAL HYGIENE
by Osama Bin Laden

THINGS I KNOW TO BE TRUE
by Al Gore & John Kerry

AMELIA EARHART’S GUIDE TO THE PACIFIC

A COLLECTION OF MOTIVATIONAL SPEECHES
by Dr. J. Kevorkian

ALL THE MEN I HAVE LOVED BEFORE
by Ellen de Generes & Rosie O’Donnell

GUIDE TO DATING ETIQUETTE
by Mike Tyson

THE AMISH PHONE DIRECTORY

MY PLAN TO FIND THE REAL KILLERS
by O.J. Simpson

Luskin is the man. Tags: Joke

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IF GORE IS THE LEFT’S INTELLECTUAL, THEY’RE IN TROUBLE

I just finished reading “Assault on Reason” by Al Gore.  Wow.

I can usually read a book in about 4 hours.  I say this because I almost couldn’t bring myself to spend the time.  The good news is that I now understand Al Gore’s argument for global warming; he’s generally living on another planet with a whole sort of alternate reality evolved from a different set of facts and history than here on earth.  That single revelation helps me rest easier, and somehow makes the 4 hours less of a waste.

Here’s a pretty good review, since I am too frustrated to write one.  I also like this one by Michael Moynihan, “Free Speech for People Who Think Like Me.”  That is half our country now.  Scares the crap out of me.

Here’s some more thoughts by Henry Miller.

Just before we head back into the Dark Ages if we start listening to nitwits like Gore, read this.

Even a lefty moon bat can’t quite swallow all of it.  The funny thing is, the whole assault on democracy thing was fine, as well as the argument that the press (?) is all controlled by the right.  You have got to be kidding.  Oh never mind.

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LIBERALS GOING AFTER FOX ADVERTISERS

Don’t ask me why I was reading AP articles. 

But it seems that liberal activists are trying to organize a campaign to pressure advertisers not to use the network.  And they’ve got Moveon.org behind them, so there’s plenty of money there to spread around.

I don’t understand this kind of thinking.  Freedom of speech is by now so ingrained in our culture and an integral part of our constitution, that I am left somewhat flabbergasted by such a move.  I mean, you are your own censor, right?

Jeez, we reserve the right of Nazi sympathizers to spill their crap all over themselves.  It’s moves like this that mystify me.

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AL GORE – September 23, 2002

On September 23, 2002 Al Gore gave a speech at The Commonwealth Club of California laying out his differences between Bush 43 and himself in regards to entering Iraq, which Bush was proposing at the time.  Following are major parts of that speech.  Gore was in favor of going after Hussein; he just wanted to make sure our friends didn’t mind if we did, and he felt that Bush was moving too fast.  As can be seen below, he found much more to agree on with Bush, than disagree:

I believe that we are perfectly capable of staying the course in our war against Osama Bin Laden and his terrorist network, while simultaneously taking those steps necessary to build an international coalition to join us in taking on Saddam Hussein in a timely fashion. If you’re going after Jesse James, you ought to organize the posse first. Especially if you’re in the middle of a gunfight with somebody who’s out after you.

Nevertheless, all Americans should acknowledge that Iraq does indeed pose a serious threat to the stability of the Persian Gulf region, and we should be about the business of organizing an international coalition to eliminate his access to weapons of mass destruction. Iraq’s search for weapons of mass destruction has proven impossible to completely deter, and we should assume that it will continue for as long as Saddam is in power. Now, let’s be clear, there’s no international law that can prevent the United States from taking action to protect our vital interests when it is manifestly clear that there is a choice to be made between law and our survival. Indeed, international law itself recognizes that such choices stay within the purview of all nations. I believe, however, that such a choice is not presented in the case of Iraq. Indeed, should we decide to proceed, our action can be justified within the framework of international law rather than requiring us to go outside the framework of international law. In fact, even though a new United Nations resolution might be helpful in the effort to forge an international consensus, I think it’s abundantly clear that the existing U.N. resolutions passed 11 years ago are completely sufficient from a legal standpoint so long as it is clear that Saddam Hussein is in breach of the agreements made at the conclusion of the Persian Gulf War.

I just think that if we end the war in Iraq the way we ended the war in Afghanistan, we could very well be worse off than we are today. When you ask the administration about this, what’s their intention in the aftermath of a war, Secretary Rumsfeld was asked recently about what our responsibility would be for re-stabilizing Iraq in the aftermath of an invasion, and his answer was, “That’s for the Iraqis to come together and decide.” On the surface you can understand the logic behind that, and this is not an afterthought. This is based on administration policy. I vividly remember that during one of the campaign debates in 2000, Jim Lehrer asked then-Governor Bush whether or not America, after being involved with military action, should engage in any form of nation building. The answer was, “I don’t think so. I think what we need to do is convince people who live in the lands they live in to build the nations. Maybe I’m missing something here. We’re going to have kind of a nation-building corps in America? Absolutely not.” My point is, this is a Bush doctrine. This is administration policy. Given that it is administration policy, we have to take that into account as a nation in looking at the likely consequences of an overwhelming American military victory against the government of Iraq. If we go in there and dismantle them – and they deserve to be dismantled – but then we wash our hands of it and walk away and leave it in a situation of chaos, and say, “That’s for y’all to decide how to put things back together now,” that hurts us.

As you can see, Bush ended up getting very serious about nation building, which is what Gore counciled him to do.  We’re looking forward to Gore defending the Administration in this hour of need.

One thing further; I find it intensely interesting that as the years go on, the G8 is moving ever closer to Bush’s position, not the Left.

WHERE DOES THE MONEY GO?

Via the Washington Post.  This is a great diagram.  Absolutely OUT OF CONTROL.

Iraqi News

From Mr. Michael J. Totten.  If you’re not reading Totten, you should.

“This was all purely defensive. The battalion I’m embedded with here in Baghdad hasn’t suffered a single casualty – not even one soldier wounded – since they arrived in the Red Zone in January. The surge in this part of the city could not possibly be going better than it already is. Most of Graya’at’s insurgents and terrorists who haven’t yet fled are either captured, dormant, or dead.”

Read the whole thing.

And may God bless our soldiers, each and every one.

Towards a More Constructive Political Debate

I like the way Arnold Kling thinks: let’s focus on the assumptions in political debate.  It might actually raise the level of discussion, which is very low.

June 2007 Economic data

These are strong numbers for the quarter and June:

Unemployment Rate	4.5
Change in Payroll	132,000
CPI	2.0
PPI	-.2

We’re hearing mixed signals regarding the economy despite the rather strong showing of GDP at 3.4% for the second quarter; a lot of folks are antsy regarding the looming sub-prime issue which hasn’t totally come home to roost yet, and personal consumption is a concern at only .89% of GDP growth.  Meanwhile, Greenspan is warning that the cost of capital won’t stay low forever and oh by the way, it’s already masking the effects of a slumping dollar.

That analysis may be correct, but I’m not sure it necessarily means we’re headed for trouble in the next 12 months.  First, government spending isn’t going to let up any time soon.  The war and Katrina will take care of that, ready to fill in any vacuum that personal consumption leaves behind.  And by the time it does settle down, the dust will be settling with everyone’s personal finances, and who knows where personal consumption will be.   Second, until countries like China untie their currencies from the American dollar, I don’t exactly see how the slumping dollar is going to affect us as much as the graphs show.  The not so dirty little secret is that even in many countries with free floating currencies, where theoretically we expose ourselves to inflation as our dollar gets cheaper, often the dollar is the predominant currency on the street anyway.  So what happens to us happens to them. 

Incidentally, I believe everyone who is bashing Greenspan for his easy money strategy for the last decade tends to miss a point that has a significant dampening effect: many of those dollars are ending up in fallen iron curtain countries and other parts of the ‘third world’ acting as their actual national currency.  This tends to minimize the effects in the US; those dollars just aren’t here.  Now there’s a brain twister for you.

I’m a Greenspan fan by the way.  But he never was a very great forecaster.  If you’re going to pay him $150,000 for his next presentation, you may want to remember that when you’re discussing topics with him.