The credit squeeze hit confidence as well. Are you saying that Consumer Confidence is not an indicator of people buying goods, which in turn, allows producers to have higher production needs, hence the need for more employees?

Given that government debt was rising between 2001 and 2007, how does bbauska explain that confidence rose at the same time? This looks to me like a classic case of correlation not proving causation (and indeed, a lack of direct correlation making causation even less likely).

I think we can all understand how consumer (and producer) confidence work. But that was not your thesis.

I posit an alternative. By cutting taxes and deregulating financial services, and by explicitly encouraging spending by consumers, the government helped to create a debt-fueled property bubble. the tax cuts had a side-effect of deficit, but that didn't affect the economy as a whole. When the bubble burst, instead of a normal recession, we had a major banking crisis (lack of regulation of derivatives). That is what killed confidence, and it is also what ratcheted up government debt (because bailouts, recessions and stimuli all affect the fiscal position negatively). Confidence may now be low because the current fiscal position makes it likely that we will see tax rises and or public sector layoffs, but these are current issues, not those of 2007.

You can take 6 year chunks of data and get the result you want Danivon. Look at the trend for 30 years. Our debt has been growing for at least that long, but the last 6 years the debt has been climbing at a much faster rate than before.

If you look at 1973/74 our confidence was doing great! Was that a good time? No, it was not. The Confidence has been trending down, and the debt has been trending up.

Doctor Fate wrote:

Ray Jay wrote:Encouraging people to buy houses they couldn't afford and encouraging people to take out loans to pay for universities that may not provide jobs that will enable them to pay back those loans to name a couple.

I would encourage you to re-read what you wrote and contemplate what more "investments" might mean for our future. This is a complete aside and not an attempt at a hijack, but I don't understand how you can believe that the man who is in favor of government solving everything is going to rein in spending if reelected. He has repeatedly talked about "investing" more in higher education (subsidizing it) and keeping "responsible homeowners" in their homes (subsidizing). And, that's the tip of the iceberg.

/hijack

I guess I'm a puzzlement. Won't Obama have to reign in spending if the House is controlled by Republicans? I've already indicated that I would prefer a Romney economic policy.

bbauska wrote:You can take 6 year chunks of data and get the result you want Danivon. Look at the trend for 30 years. Our debt has been growing for at least that long, but the last 6 years the debt has been climbing at a much faster rate than before.

If you look at 1973/74 our confidence was doing great! Was that a good time? No, it was not. The Confidence has been trending down, and the debt has been trending up.

Hmmm. Given that we are talking about how the recession started, I'd have thought data from that period (the lead up) would be more important that after it. Silly me, I was 'cherrypicking'!

Or, perhaps you theory that the government debt caused the recession by denting market confidence has a bit of a hole in it based on the data and the nature of cause and effect.

danivon wrote:Actually, Doctor Fate's intervention highlights a real problem with Ray Jay's examples. Borrowing to invest is not as bad as borrowing to consume. If you borrow to buy a house, you should end up with a a place to live in, which is of value in itself. If you borrow to go to college, you should end up with more knowledge and qualifications, which are assets in not just the labour market, but in life.
...
So, I was perturbed mildly that Ray Jay chose as examples of bad reasons for debt two that can actually be pretty sound.

I think there are 2 main weaknesses in your argument. The first is that many people used their homes as ATM's. They took out home equity loans, or refinanced an existing mortgage while pulling more equity out, and extending the life of the obligation, and sometime well beyond their retirement age.

The 2nd is that the market responded dramatically to the government incentives. All home prices went up in value; people who wanted to buy rushed in and were willing to pay more on the fear that home prices would go up forever.

When it comes to education, it worries me that too often people take an approach of decrying study that is not designed to make one more employable in the 'market'. Education for its own sake has a place, being able to complete a degree course regardless of the subject does have value (admittedly my experience is of a rigorous science degree in the UK which may not be the same as the stereotype of a course at a liberal arts college in the USA, and I will say that from exchange students I felt you system was about 2 years behind ours), and I'm one of those socialist types who thinks there should be greater subsidy of higher education as a better educated society benefits us all, not just the immediate recipients.

I'm not sure there is much disagreement here on a philosophical level. I do think that education is a public good, and a personal good. That's why it is public up through high school. I can see a place for some subsidies beyond that. At the same time, you have to recognize that the US has created a system whereby education costs continue to increase at a rate much higher than inflation. It's just like health care, and it's just like housing during the bubble years. The commonality is that governments distort markets. (I'm not saying this is the only problem with these markets; however, it is a significant problem.) Universities know that they can increase prices because of the student loan / financial aid structure. They get to ask their customers how much they make, and how much money they have, and then can charge them what they want, more or less. Instead of being cost conscious, the universities try to augment their services by adding better housing, better research, better facilities, more guidance counselors, etc.

This has pluses or minuses, but it is certainly a reason for greater inflation in the college marketplace; I do think that the buyer needs to beware. (Caveat Emptor as I learned in grad school ;) ) If you are running debts of $60,000 for a degree in sociology from a 3rd rate school without a clear sense of what you are going to do, you are probably making a bad investment decision. Often people end up with these debts without the degree because they run out of money after a few semesters. Hey, if you really want to know more sociology, that's fine with me. I'm just explaining one reason why median wealth has gone down.

Frankly, housing is the headline story and from what I understand that is the primary driver of these stats.

P.S. Capitalism is essentially about the market setting prices so that we have a constant feedback system to best (albeit imperfectly) ensure that resources are devoted appropriately based on consumer value.

I think it's important to remember that the collapse in net wealth that took place is largely illusory. That wealth represents falling house prices, but since we know that house prices were artificially high in the first place thanks to the speculative bubble that took place then it's hardly surprising.

I'f I had to pick out a particular action taken by government to cause this collapse in 'wealth' then it would be the policy of maintaining artificially low interest rates for a decade in order to deliberately stoke up the fires of the credit boom. It wasn't just American governments that did this of course, the same kind of policies have been followed across the developed world. If we were to take a look at figures for European net wealth, which must surely have seena similar collapse recently, then I'd say the biggest mistake was the creation of the Euro, which had a similar effect.

Yes, we are talking about the "Great" recession of Bush/Obama. I am bringing a theory of why I thought this occurred. You bring the six years in question, and I look to a larger trend. We both have a way of looking at things. I think the debt increasing since Ike if a concern, that has effects. You do not. Fine. I am not talking about specific recessions and boom times. I am talking about the trend of consumer confidence since 1966.

Is the trend line down?
Is the debt line up?

I think they are relational.

Ray Jay wrote:I think there are 2 main weaknesses in your argument. The first is that many people used their homes as ATM's. They took out home equity loans, or refinanced an existing mortgage while pulling more equity out, and extending the life of the obligation, and sometime well beyond their retirement age.

Well yes, they did. Because of overconfidence in the future.

The 2nd is that the market responded dramatically to the government incentives. All home prices went up in value; people who wanted to buy rushed in and were willing to pay more on the fear that home prices would go up forever.

Indeed. And when the government said, after 9/11 "keep buying stuff", the market responded to that.

Frankly, housing is the headline story and from what I understand that is the primary driver of these stats.

Indeed. In the past 30-40 years we have moved from seeing a house as what it actually is (a place for people to live) to being an investment that will magically always appreciate in value, and as such a way to get 'free' money.

Another bit of 'free money' - the Bush tax cuts. Millions of people got a cheque from the government - one that was sold as being a rebate, but in reality was being borrowed from the future taxpayer. When people get the idea that money can arrive for nothing, all kinds of odd stuff happen to markets.

P.S. Capitalism is essentially about the market setting prices so that we have a constant feedback system to best (albeit imperfectly) ensure that resources are devoted appropriately based on consumer value.

Ah. No. That's 'market economics'. Often people use the two terms interchangeably as if they are the same thing. They are not.

You can have capitalism with market economics, which we call 'free market capitalism' and is the ideal of the economic conservative [US definition] or liberal [European definition].

You can have capitalism without it, what is often called 'mercantilism', or 'state capitalism', which is often where European conservatives are coming from and where American liberals are going.

You can have also socialism with markets - 'market socialism' is a viable, if not particularly popular theory but it tends to be where I would move towards if I had a choice.

And of course you can haev socialism without markets - the more common view of what socialism or communism would end up being).

What we really have is not a pure variant of the options above, but it seems to be largely a capitalist economic system, with a largely free market. Given that the USSR was attempting to be a socialist system without market mechanisms, it's not a surprise that the two terms have become synonymous, but in reality they are not.

The clue as to the defnition of 'capitalism' is in the name. That name says nothing whatsoever about markets (or lack thereof).

Your theory is reasonably sounding RJ, that the government is a significant cause of why college costs have gone up so much since 1980, but there were government financial aid programs prior to 1980. The GI bill was another program that should have dramatically increased costs. I think the primary reason that costs have gone up so much since 1980 is based on simple supply and demand theory-- people realized that the economy has changed, that there are only so many good jobs, and those good jobs require a college degree at as prestigious a college as possible. When you're running a college and you start getting 10 applications for every opening, well, you stop worrying that an increase in fees will turn students away. There is a correlation between where only 20% have seen their incomes increase in the past 30 years (particularly the top 10% or 5% of earners) and the resultant increased demand for college degrees (at least at those colleges that are prestigious enough), resulting in the colleges being able to increase their tuition rates at will.

Brad, increasing levels of government debt are clearly a concern, but it's a bit of a reach to suggest that this is what caused the recession. That was obviously caused by unsustainable levels of personal debt. Government debt continued to increase throughout the boom years without having any noticeable effect on consumer or business confidence.

To my mind what happened was that successive governments of both political persuasions encouraged the growth in home ownership and expansion of cheap credit as a way of pleasing the middle classes. This continued to the extent that it became political suicide to take any measures to correct the overheating market because so much of almost every family's prosperity was tied up in their homes. Any government which decided to try and rein back the runaway housing market would have been inflicting a massive hit to their voter base and would have suffered accordingly in the polls. That political calculus still applies today. It explains why governments have been so reluctant to allow banks to fail, why we've seen hundreds of billions injected into the economy through QE, why interest rates are being maintained at historically low levels. No government can allow the housing market so subside to it's natural level because to do so would spell surefire defeat at the next election.

bbauska wrote:Yes, we are talking about the "Great" recession of Bush/Obama. I am bringing a theory of why I thought this occurred. You bring the six years in question, and I look to a larger trend. We both have a way of looking at things.

So, you are saying that the 2008-9 recession was caused by a general long term trend that predates the 2001 dotcom blip, the early-90s recession, the early 80s recession, the ills of the 1970s...?

Perhaps, but is it not more likely that the major causes are a little closer to the times that things happened?

I think the debt increasing since Ike if a concern, that has effects. You do not. Fine.

Please don't do that, it's annoying. I did not say it was not a concern. I said that the link between the debt and consumer/producer confidence in the lead up to the recession we are talking about does not suggest as close a relationship as you suggest.

Now, of course sovereign debt is a concern. However for large parts of that period, it wasn't really that big an issue as debt/GDP was falling until the mid 70s and also fell in the late 1990s.

But what appears to be a major issue is actually private debt - that built up by individuals and companies (including banks). Because that private debt is essentially what caused the credit crunch - concern that people would not be able to repay their loans to banks led to concerns that banks would not be able to fulfil their obligations to each other, which brought the financial system to a deadlock, causing a massive strain on an already overheated economy (which was being bouyed up by the very same debt), so the whole house of cards fell down.

I am not talking about specific recessions and boom times. I am talking about the trend of consumer confidence since 1966.

Ok, but we were talking about the 2008-9 recession which seems to be anomalous to those earlier in this trend.

Is the trend line down?
Is the debt line up?

I think they are relational.

There may be a relationship, but any decent scientist or logician will tell you that correlation is not the same thing as causation. It could just as easily be that falling confidence has led to policies that increase the debt. How could you show which direction the relationship goes?

Sassenach wrote:Any government which decided to try and rein back the runaway housing market would have been inflicting a massive hit to their voter base and would have suffered accordingly in the polls. That political calculus still applies today. It explains why governments have been so reluctant to allow banks to fail, why we've seen hundreds of billions injected into the economy through QE, why interest rates are being maintained at historically low levels. No government can allow the housing market so subside to it's natural level because to do so would spell surefire defeat at the next election.

This is very important. When a government does not act, or maintains the same policy, that can be just as significant as it changing tack or making a dramatic intervention.

Of course, bailing out banks was about more than the housing market. If banks fail, then it will cripple the rest of the economy. Companies rely on banks for credit and payments. Most people are paid electronically through banks. Even though governments underwrite the savings in bank accounts to a limit, that would only apply retrospectively to a bank crash, and in the meantime the cash flows of many people and organisations would be gummed up.

ray

At the same time, you have to recognize that the US has created a system whereby education costs continue to increase at a rate much higher than inflation. It's just like health care, and it's just like housing during the bubble years. The commonality is that governments distort markets. (I'm not saying this is the only problem with these markets; however, it is a significant problem

.

Government distorts markets? And thats why health costs in the US are running way ahead of inflation and are substantially more on an absolute basis than ....countries where government is way way more involved in managing health care?
When an appendectommy procedure that costs $6,600 in Canada costs $13,000 in the US, maybe that distortion is a good thing?
http://www.ritholtz.com/blog/2012/03/co ... -overseas/