Greg Mankiw writes in the New York Times today:
The question on the minds of many in Congress and in the White House is this: What they should be doing now to keep the economy on track? The right answer: absolutely nothing.
This advice isn’t easy for politicians to follow. Because economic downturns mean fewer jobs and falling incomes, they are painful for many families. Voters can confuse inaction with nonchalance and send incumbents packing. But just as patients should avoid doctors who recommend radical surgery for every ailment, voters should be wary of politicians eager to treat every economic ill. Sometimes, bed rest and wait-and-see are the best we can do.
Indeed it is true that the incumbent party does poorly, as Mankiw shows on his blog today (via Statistical Modeling).
Thus, Mankiw has a point, and later on in the article when he puts more faith in the Fed's ability to cope with the business cycle than Congress and the White House, I would also agree to a great extent. Whether the Fed is able to stave off a recession remains to be seen. If indeed a recession is to begin this quarter or the next (I wouldn't bet an awful lot of money on it, but it is a non-trivial probability), then what the Fed did in December or what they do in January will matter little. Likewise, if the economy rebounds in 2008 it probably wasn't the extra quarter point this month that saved us. Iacta alea est.
Mankiw for once is on the money. We really didn't know we were in the last recession until it was over and from what I see economists still disagree over the start, stop, depth and cause. That the NBER ultimately makes the final call doesn't reduce the ultimate uncertainty. Congress is probably the last place to try to handle a problem that is happening in real time without solid real time metrics. I track GDP and productivity for my own purposes and quarter to quarter the series are simply too noisy for immediate use. From the perspective of the average employer or worker was the economy really performing so much worse in Q1 than Q3? Well no, there simply does not seem to be a near term correlation between quarterly growth and wages or profits, there are lags and surges that only average out over time. We know to a reasonable degree of certainty what happened in 2005 and 2006, we just didn't know that in real time. And I don't see that we know what is happening right now.
The current economic noise is simply swamping the signal, and a lot of it seems driven more by anxiety than fundamentals (assuming we even understand what the fundamentals are). Are foreclosures driving the current squeeze on credit? Or is the squeeze on credit driving the current surge in foreclosures? Hard to say, but I had a front row seat when the smaller mortgage companies and then the larger ones started being shut down overnight last winter and spring. Funding for perfectly good loans simply disappeared, the spigot just stopped, well before you had any real reporting on foreclosures.
Was it just a Wile E Coyote moment? Was the underlying mortgage market so distorted at the time? Or did people simply not understand that higher returns imply a higher risk? There is a reason why sub-prime loans carry higher returns, there is a reason why people with poor credit have 27% rates on their credit cards, default is built into the business model.
My current view is that the current crisis is the fault of financial people who simply did not understand the mortgage business. A mortgage is not the equivalent of a 1000 shares of stock, it doesn't part out well or indeed at all. Slicing them into dozens of parts simply means no way to exit your position. When they realized that she just slammed down on liquidity. I don't have a lot of pity for flippers and speculators in general, but a lot of them had rational exit strategies ready that were negated by people changing the rules in the middle of the game. I still don't think we have a good understanding about how many of these foreclosures are just the result of speculators being upside down only because they were not able to refinance as the investment time table assumed.
If history is any guide action by Congress will simply bail out the wrong people. The number of Americans who were actually under any financial exposure during the S&L crisis was relatively tiny, insured deposits could have been covered at a fraction of the ultimate taxpayer costs. But a lot of S&L operators and a certain slice of very wealthy advisors would have taken a bath. Which of course is the very definition of 'financial crisis', i.e 'rich people losing money'.
A lot of smart people are predicting near term collapse. On the other hand a good number of people have been predicting near term collapse since 2004. That is Roubini will be fully vindicated when we hit a hard landing if and when it comes. He will be right on the money in terms of outcome. But not so much when it comes to timing. If you predict a bubble and exit two years before the peek are you prescient? Or someone who passed up two years of gains? Shorts and goldbugs are always right to one degree or another at point. What does go up does come down, if you can identify the trough and peaks.
(I had some guy suggest that if we had taken the Social Security surplus in 1983 and beyond and invest it in gold instead of sticking it in Special Treasuries that we wouldn't be in crisis. Which kind of ignores the fact that gold peaked in 1983 and didn't get back to that level until 2005, and with foregone interest is probably not there even now. Goldbugs are crazy anyway, they take peak prices as buy signals. At least penny stock people have a theoretical point.)
i recall my high school latin and thought the phrase is "alea iacta est".........JJJ
It is often written that way, but after checking around I find that the way I wrote it is the way it was in the original. Here is a link to the Latin version.
http://www.thelatinlibrary.com/suetonius/suet.caesar.html
Of course in Latin, word order is not important. As long as you get the declension and conjugation right, it is grammatically correct. In English we are used to starting our sentences with the noun (subject). Classical Latin writings often begin sentences with the verb.