February 10, 2009
The Editorial Staff meant to lob a few digital spitballs at this earlier, had we not been steadfastly determined to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas that for far too long have strangled our politics:
Ms. Pelosi has been rather busy of late conducting a lonely one-woman battle against the politics of fear and the divisive, fear-mongering fear mongers (God love 'em!) who practice that dark art. In furtherance of this effort, her office recently produced the following chart to help bolster consumer confidence and get those stuffy old banks to loosen the heck up:
As Jim Manzi notes, there are a few problems with Ms. Pelosi's use of statistics. As the old saying goes, (liberal mantras about the inefficacy of coercive interrogation notwithstanding) if you torture numbers long enough, eventually you can get them to confess to just about anything:
...there are a couple of odd things about this. First, it shows absolute job numbers, rather than unemployment rate (that is, job losses per capita). This matters, because the U.S. labor force is a lot bigger now than in prior recessions. Second, it ignores the recession of 1981—1982, which was by far the most serious of recent recessions.
How conveeeeeeeeeeeenient. Manzi produces a different chart comparing the rates of unemployment. It shows unemployment increasing at roughly the same rate for all of the postwar recessions....
...all of which helps to place Mr. Obama's cheery, not-fear-mongering pep talk of yester'een into better perspective:
They can't pay their bills. They've stopped spending money. And because they've stopped spending money, more businesses have been forced to lay off more workers. In fact, local TV stations have started running public service announcements to tell people where to find food banks, even as the food banks don't have enough to meet the demand.
As we speak, similar scenes are playing out in cities and towns across America. Last Monday, more than 1,000 men and women stood in line for 35 firefighter jobs in Miami [Florida]. Last month, our economy lost 598,000 jobs, which is nearly the equivalent of losing every single job in the state of Maine.
[deep, cleansing breath]
Hmmm. No waygu steak for the folks in Elkheart, eh? But wait! There's more sunshine and not-fear where this came from!
...we also inherited the most profound economic emergency since the Great Depression..
...deficits that could turn a crisis into a catastrophe...
...Question: Thank you, Mr. President. Earlier today in Indiana, you said something striking. You said that this nation could end up in a crisis without action that we would be unable to reverse.
Can you talk about what you know or what you're hearing that would lead you to say that our recession might be permanent when others in our history have not? And do you think that you risk losing some credibility or even talking down the economy by using dire language like that?
Dear God. I just fell in love with a female reporter from the Associated Press. Obama is right. The apocalypse is at hand.
Obama: No, no, no, no.
Phew! Spoke too soon - we're back to the world I recognize.
Manzi makes an interesting observation here:
What seems to matter in getting to really bad job losses is the duration of the recession. So, speed in passing a stimulus bill is probably a lot less important than getting our countermeasures right. This is, of course, diametrically opposed to the natural conclusion one would reach in looking at the first chart.
I wasn't certain the chart he showed supported his logic. First of all, there's always a lag effect with economic stimulus measures, so the remark about time not being important has to be evaluated in light of what happens when we wait to act and in the mean time things continue to get worse and then continue to get worse while we wait for the inevitable lag between action and reaction? So, I went looking for more information and found another way of looking at the same data here:
we can see the current recession (orange) is very similar to the 1981 recession (light green) in terms of job losses as a percentage of peak employment. But we have had sharper downturns in percentage terms.
If you believe that this recession is not fundamentally different from other demand-driven post-war recessions, then a forecast of job losses continuing for another 6 to 9 months would not be out of line. Furthermore, looking at past cycles, one would expect it will be at least a year (possibly more if the recovery looks more like that after the 2001 recession) before employment reaches the previous peak. Personally, my expectation is that it will take 18 to 24 months (from now) to get back to the previous peak.
Interesting, no es verdad? Viewed this way, the data doesn't exactly support Mr. Obama's cheery 'worst crisis since the Great Depression' mantra now does it? On the other hand, it's not exactly a resounding confirmation of Manzi's take either. Perhaps, as is so often the case, the truth is somewhere in the middle?
I decided to take another look at his rate graph, overlaying the current rate of increase (aqua) over each of the other time series graphs to make visually comparison of their slopes a bit easier (I work with a lot of log-log graphs in my job, so I know graphs can be visually deceptive):
1. The rates of increase are not the same. It doesn't matter where the current trend is overlaid - the beginning points coincide but the end point for the current recession is always higher than the endpoint for the one it's being compared to.
2. Of the three recessions, the current rate of increase most closely resembles that experienced during the most severe (the 1982) recession.
This dovetails neatly with Polley's cumulative job loss view. I tend to have more confidence in an observation when I see the same thing regardless of how I look at the data (assuming of course that I'm not looking at meaningless or dimensionless numbers).
The other interesting observation? I'm always interested in patterns (remember the Presidential approval ratings?). I see two possible shapes here and I'd like to suggest a possible thesis.
The more common shape is a sharp increase in unemployment that bottoms out and then is followed by a sharp rise in employment. I couldn't help but think of homeopathy here (OK - try not to let your heads explode here - I'm not trying to score partisan points or prove anything. I'm just exploring ideas.) Maybe when things get bad enough in the economy, an equally strong response is stimulated that triggers recovery - sort of a 'no pain, no gain'? (shut up, Jimmy :p)
These "sharper" troughs don't last as long but they're painful in terms of magnitude. Then there a second type (2001, 1990) that is gentle and prolonged. Anyway, fascinating stuff if you're not one of the folks without a job.
Posted by Cassandra at February 10, 2009 09:45 PM
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Actually pretty clever, lady, but I don't think it's going to help us much for the next four years. Now if we start exchanging recipes for really great cocktails,to make us all comfortably numb, that might be worthwhile.
Because I think its going to get worse before it gets better.
Posted by: Don Brouhaha, sleepless in the wastelands at February 11, 2009 01:38 AM
"Now if we start exchanging recipes for really great cocktails,to make us all comfortably numb, that might be worthwhile."Ya, eider dat or I vil haff to drag out de kerosene, torches, undt pitchforks. Undt ve all know dat a riot is an ungly thing...
undt, I tink, that it is chust about time ve had vun!
Or lots undt lots of Jägermeister undt ale.
Den we can turn de charts upside down...
Posted by: Inspector Kemp at February 11, 2009 06:27 AM
Actually pretty clever, lady, but I don't think it's going to help us much for the next four years. ...Because I think its going to get worse before it gets better.
This is how I think it's helpful, Don:
1. Perspective: there's been a lot of careless "AIEEEE!!!! Worst crisis since the Great Depression" rhetoric flung about lately.
Without some rational basis for comparison (and admittedly this is only one view but unemployment is a pretty darned good metric) how can anyone evaluate that claim?
Visually seeing this recession side by side with other recessions of the modern era does a few things. First, it offers helpful perspective on the notion that this is the "worst".
Clearly, it's not - at least so far (and now is when that pronouncement is being made).
No matter how you define worst (duration or magnitude), we don't have evidence that this recession is as bad as the one in 1957 in either magnitude or the speed of job losses. One could argue (and I would be tempted to agree) that the latest acceleration in job losses actually matches the '57 recession better than it does the the '90 recession.
To see this, visually cut the brown line where it begins to bend sharply downwards - about halfway - and slide it to the left until it lies just next to the 1957 line. The slopes are quite similar.
So it the current accelerated job losses continue, yes - this could be as bad as '57. But it's too early to tell.
2. If in fact this recession is trending towards the either the '57 or '82 model, past experience suggests the duration will be less (20 months for '57 and 28 for '82) than if it followed the "kinder, gentler" pattern of the 2001 and 1990 troughs.
Of course all this is just conjecture.
Posted by: Cassandra at February 11, 2009 07:21 AM
One final point. Manzi says:
What seems to matter in getting to really bad job losses is the duration of the recession. So, speed in passing a stimulus bill is probably a lot less important than getting our countermeasures right.
Does the data above really support that statement? I don't think so.
If stimulus (to avoid the danger of inflation) should be 'timely, targeted, and temporary' and if the current recession is trending towards, let's say, the "acute but short-lived" model, whatever we do needs to be done in a timely manner in order to be effective and avoid dumping a boatload of stimulus on an already recovering economy. Let's not forget lag time.
Posted by: Cassandra at February 11, 2009 07:27 AM
Caveat: I am not sure what Manzi means by "speed". If he means a few weeks, I am in full and hearty agreement - let's spend the time and get it right.
This isn't an emergency, now. Not at all the same situation as with the first effort to keep the market itself from collapsing.
If he means 6 months (and Congress could easily take that long) I'm not sure I agree at all.
Sadly, I think it's a foregone conclusion that they *will* do something and that it *will* be bigger than anyone wants or what we actually need. The only question in my mind at this point is one of timeliness. Shame to add all the money to the deficit and on top of everything else, have it hit at the wrong time.
That was my point.
Posted by: Cassandra at February 11, 2009 07:31 AM
"Shame to add all the money to the deficit and on top of everything else, have it hit at the wrong time.That and hit unnecessary targets to boot.
That was my point."
Posted by: bt-dey-vil-rue-de-day-dey-vus-burn_hun at February 11, 2009 07:52 AM
Ummm...as a padawan learner of the dark art of reading charts, I would like to point out that in the first chart, the economy is tanking. Fast. I am now scared. I wasn't when we red-lined, or blue-lined, but I also has to ax the question:
Where is Obama going to get the money? We can't tax ourselves into prosperity; we can't borrow ourselves into prosperity; and that is exactly what the Admin of O is doing; borrowing money from the future earnings of taxpayers. Wouldn't we call that 'slavery?'
Why not *let* the economy recover on its own? Isn't that what a free market/capitalist would do?
Or am I needing that course in economics NOW?
Posted by: Cricket at February 11, 2009 08:16 AM
Which leads to my second point: Isn't the Admin of O doing the fear-mongering here?
Posted by: Cricket at February 11, 2009 08:20 AM
Isn't the Admin of O doing the fear-mongering here?
I don't think there's much doubt of that, La Femme Crickita. Again, the parallels to Bush and the post-9/11 period are almost too delicious for words.
Posted by: Cassandra at February 11, 2009 08:24 AM
re: the free market. I have some thoughts on that coming up.
Posted by: Cassandra at February 11, 2009 08:27 AM
Which Free Market is that? The one in Singapore? :)
Tigerhawk has an interesting graph up this moring, showing the schedule of "reset rates" of sub prime and ARM mortgages over the next three years.
That's why I think things are going to get worse before they get better. There are a rash of foreclosures coming down the pike. What we have seen in the last year or so, that has triggered the "crisis" that we are in, is just the beginning.
And that's why I don't understand (well, I do actually) why Obama and Co. want this "stimulus", when the real problem is:
1) Macro: banks are holding mortgage assets of dubious value. Mark to market is killing them. Hence, the DJIA, S&P, etc., went down yesterday after Geithner's tepid little presentation
2) Micro: Too many people are holding too many mortgages that are underwater. Why doesn't the Administration get on the stick and start to work through this with re-financing or buybacks or something! Instead of throwing good money after bad. McCain actually suggested this last fall as part of a solution. And it would be a good part of an overall solution, IMHO.
Unless the Obama Administration gets its act together in the next 60 -90 days, we could be in for a really rough ride the next three or four years. Nothing that he and his administration have proposed so far is the right remedy. By summer, the next wave will be washing over us, meaning higher un-employment, another stock market hit, down the slippery slope.
Posted by: Don Brouhaha, back in the saddle at February 11, 2009 09:02 AM
Which Free Market is that? The one in Singapore? :)
Oh fine, Don! Steal my thoughts right outta my brain!
re: mark to market. Let me "ax" a few questions:
1. I thought that the intent of mark to market was to make the value of assets more transparent to investors at any given point in time. IOW, it was instituted to solve a problem: namely that there was no requirement to adjust the value of assets if their present value (and to an investor, selling price is the best proxy I can think of for present value) changed.
Now arguably since no firm is divest all its assets at once, mark to market makes that present value estimate unduly volatile and perhaps oversensitive to day to day fluctuations in trading (aka, Wall Street hissy fits - and they say *women* are emotional! Sheesh.)
So.... the argument for suspending mark to market is that this will... do what?
Make it easier for investors to determine the correct value of potential investments? How? By telling firms that when the present value of these investments changes they don't have to let potential investors/stockholders in on the big secret?
You can't mark to a future value (the exit price when you *plan* to divest) because in most cases both the planned divestment date and trading price are unknown unknowns.
So we're left with what? Pegging present value to ...an adjusted notion of "fair value" as in FSB 157? Who gets to decide what price an asset would hypothetically fetch in an active market when the present market, isn't?
I understand the impulse in a dysfunctional market. But how does restricting the flow of information that directly pertains to the reality on the ground at a given point in time and replacing that with a non-transparent model rife with assumptions bolster investor confidence? I agree that it might prevent massive write-downs.
And I agree that sometimes these write-downs are deceptively pessimistic under present rules. But it seems to me we may be building in incentives to err in the opposite direction if we get rid of mark to market.
If you're feeling masochistic today, read this:
I will admit I don't entirely understand this and really haven't been paying attention. What am I missing?
Posted by: Cassandra at February 11, 2009 12:28 PM
My understanding is that mark to market only works in one direction.
That is, one only marks to market when one has attempted to sell an asset and is unwilling to do so at the market price (if I sell I don't have the asset anymore). An asset I do not intend to sell that goes up in value does not marked to market.
So we have
Attempt to sell: Market Value goes down, but I sell: Nothing
Attempt to sell: Market Value goes down, refuse sale: Mark to Market
No attempt to sell: Market Value goes down: Nothing
No attempt to sell: Market Value goes up: Nothing
In normal times this may be acceptable. But when it is widely known that the market is FUBAR and operating on panic rather than rational information M2M may not be such a good idea.
Posted by: Yu-Ain Gonnano at February 11, 2009 01:24 PM
That wasn't my understanding at all.
My understanding was this:
Mark to market required banks to peg the value of marketable securities (like mortgage-backed securities) to their current market price regardless of whether they intended to sell them or not.
The purpose of the rule was to disclose the exit value of assets at a point in time. The alternative was using the purchase price (entry value), which might not be relevant any longer. The problem arises when a market stops functioning or there's investor panic.
When the market for assets is artificially depressed (i.e., otherwise valuable assets rapidly lose value b/c no one's buying), pegging the current value to the current sale price means you're artificially lowering the price of an asset you may not be meaning to sell for years (at which point it will have a price that better reflects the "real" value) to the current price (which reflects a risk-averse market rather than any problem with the value of the asset).
To make matters worse, when write-downs are large enough, they subject large trading firms to margin calls because they used their assets as collateral for trading. This is akin to a situation where you've paid every mortgage payment but because the sale price of your house just dropped through the floor, the bank calls in your entire note.
When this happens to enough banks, you get a domino effect and the system collapses.
But maybe I'm still missing something.
Posted by: Cassandra at February 11, 2009 01:42 PM
Either way, your example was very easy to follow, unlike most of what I've read on this topic!
Posted by: Cassandra at February 11, 2009 01:45 PM
I think this is a fairly easy to follow summary of the pros and cons of suspending mark to market rules:
Posted by: Cassandra at February 11, 2009 01:49 PM
Not having read your links (I've got a day job!), the problem I have read with mark to market (especially mortgaged backed securities!) is that no one really knows WHAT they are worth, so the tendency "at this moment" is to UNDERVALUE them, rather than overvalue them (over-valuing is part of what got us into this pickle).
The result is that people are selling bank stocks SHORT, in anticipation of the banks stocks going down, because those darned bank mortgage securities are constantly falling (see Tigerhawk's graphic today on expected rollover loan problems through 2012).
The bear market in bank stocks is driving banks out of business (literally). This happened in the Great Depression with a lot of companies, as the big traders (such as Joseph Kennedy, Sr.) DROVE the stock market way down because they were agressive bear buyers (buying short, betting that the stock would go down). SEC reforms later in the 30's were supposed to halt that practice. Well.
And that's the problem with the "mark to market" daily valuation, as I see it.
Suspend it for 90 days, then start issuing a 90 day rolling average of market valuation. But the daily mark-downs are literally killing banks. I have even read a few places that it is suspected that even bank executives are selling their own company "short" because they know that their securities are going down the tubes, partly due to mark to market.
Posted by: Don Brouhaha at February 11, 2009 02:17 PM
This is akin to a situation where you've paid every mortgage payment but because the sale price of your house just dropped through the floor, the bank calls in your entire note.
To keep with this analogy: How did the bank find out the house had dropped in price?
Without M2M that wouldn't happen.
Posted by: Yu-Ain Gonnano at February 11, 2009 02:19 PM
I have even read a few places that it is suspected that even bank executives are selling their own company "short" because they know that their securities are going down the tubes, partly due to mark to market.
Stronger banks are also intentionally trying to drive their competitors out of business by short selling :p
Suspend it for 90 days, then start issuing a 90 day rolling average of market valuation. But the daily mark-downs are literally killing banks.
That would help ameliorate volatility. It seems sensible.
Yu-Ain, it's not hard in a dysfunctional market to see that stock prices have dropped. Same applies to housing prices.
I realize that without M2M no one would know. But the point of M2M was to allow investors more transparency.
Suspend for 90 days? Ok. That's akin to closing down a bank during a run. I understand that and as a temporary measure it's rational. Hopefully the market recovers during the 90 days and then Don's rolling average keeps it from crashing again in anticipation of the temporary suspension lifting, in which case you're back where you started from.
But changing the rule permanently?
Posted by: Cassandra at February 11, 2009 02:36 PM
I've never said it should be changed permanently. Maybe it should and maybe it shouldn't. I don't know enough about the "why" yet to form an informed opinion on that.
Just that given my understanding of the "what" that perhaps it's not so good in the present level of instability.
Posted by: Yu-Ain Gonnano at February 11, 2009 03:15 PM
Interesting conversation regarding M2M. I had a nagging feeling that I'd read something fairly recently about M2M as it related to the Great Depression and then Don mentioned,
"This happened in the Great Depression with a lot of companies, as the big traders (such as Joseph Kennedy, Sr.) DROVE the stock market way down because they were agressive bear buyers (buying short, betting that the stock would go down). SEC reforms later in the 30's were supposed to halt that practice."So I poked around and found it here.
And Steve Forbes made his case to get rid of M2M here.
With all the comparisons to the Great Depression that are tossed about by the politico's, you'd think that BO would follow FDR's lead and suspend M2M while trying to get a handle on the economy.
Posted by: bthun at February 11, 2009 04:38 PM
Holy crap, she's got charts and graphs.
Look, I'm willing to go on gut check level that Speaker Pelosi might well be the single worst House leader EVER, be it Republican, Democrat, Whig, Moose, Duck, Squirrel or Lizard. The woman has been an unqualified disaster since she claimed the throne as the most powerful grandma in the country. The positions she stakes out are nothing less than deeply unthought political favoritism, and she is already drawing the ire of those (few) cognitive individuals on the D side on the aisle as being a politically inept harpy and whacko. Seriously, it's almost as if she is just begging for Obama to turn the Big Blue Bus just far enough to the right to finally jump the curb, run her over, and turn the Democratic Party over to... (fill in blank). Nancy Pelosi, may be the first woman Speaker of the House, but in all other respects (deep breath.) SHE. IS. A. LOSER. And the longer she's at the *cough* helm of the Democratically controlled House, the worse that its all going to go for Mr. Hope and Change. Oh sure, she'll hang on until the next Congressional election, but in an ever increasingly diminished diminished capacity. As soon as Mr. Hope realizes that he's being rolled, and in public, lights out Nancy.
Couldn't happen to a nicer gal.
Posted by: spd rdr at February 11, 2009 05:30 PM
O'Reilly had Dennis Miller on while I was eating dinner with my parents. We were discussing Obama announcing that GITMO would be closed without a plan for what to do with the terrorists being held there. After dinner, I commented to my mom that I thought, by 2010 - if not before - many Americans who voted for Obama just for "change" or whatever were going to be experiencing "buyer's remorse". She then commented that someone at church (my mom goes to Mass daily and is active there) mentioned to her that (and this information doesn't violate the sanctity of confession) that many people have gone to confession asking forgiven for having voted for Obama, and asking for guidance on what to do now. The American people need to understand that elections have consequences. I don't trust Obama - or the Democrat-controlled House & Senate - to do the right thing WRT the economy or national security/The Long War.
Posted by: Miss Ladybug at February 11, 2009 10:16 PM