The Crash of 2008: Causes and The Aftermath

Here is a great article I heard about at my economics conference today at SCSU. This may help my regular economics class students with their paper regarding the housing crisis.

The economist I am listening to today, Rich MacDonald, from SCSU, is on the Minnesota State Board of Economists, and has a quite dire prediction for the US economy in 2009. In his eyes, the recession will last until at least 2010.

Here is another description about the Credit Crisis, a powerpoint in PDF format.

The Dow Jones: Down 47% in 16 months.

Ouch.

PBS Special: The Financial Meltdown

1980's vs. Today

Unchartered Territory

Cartoon of The Day

Value of Education

According to the BLS, there now over an 8% difference between employment rates of people who have not finished high school (12%) vs. college grads (3.8%).

More on "Buy American" Proposals

Paul Krugman, Princeton economist and Nobel Prize winner has previously written about trade wars. Unfortunately, he claims that a trade war is one where no one can win. Krugman claims that a trade war is one where both countries use their ammunition to shoot themselves in the foot, with the lower standards of living than inevitably result from decline in trade. To put it another way, British Prime Minister recently said that "protectionism protects nobody, least of all the poor."

In todays Wall Street Journal, Princeton Economist Burton Malkiel, writes about the negative, unintended consequences that a trade war would have.

Malkiel writes: "This Buy American momentum is bad economics, and by threatening to destabilize trade and capital flows, it risks turning a global recession into a 1930s-style depression. Asked about Buy American on Tuesday, President Barack Obama told Fox News that "we can't send a protectionist message." He said on ABC News that he doesn't want anything in the stimulus bill that is "going to trigger a trade war." He's right.

Suppose that we did not allow free trade between the 50 American states. Citizens like me in New Jersey would be far worse off if we could not buy pineapples from Hawaii, wine and vegetables from California, wheat from Kansas, and oil from Texas and Louisiana while we sell pharmaceuticals to the rest of the country. The specialization that trade makes possible allows all of us to live better.

The situation is the same with respect to world trade. Both we and the Chinese are better off if we can import inexpensive clothing from China and sell them large-scale computers and data storage equipment.

To be sure, such trade does not make everyone better off, and that is why free trade is often a tough sell, especially during times of hardship.

If I am a textile worker whose job is lost because Chinese imports have caused my factory to close, I feel the pain far more acutely than consumers feel the benefits of cheap clothing. The pain tends to be localized while the benefits are spread broadly. No one person's benefit can compare with the loss felt by the textile worker. But the total benefits do exceed the costs. And competitive markets have spurred the innovation revolution that has made the U.S. the economic powerhouse that it is.

The solution for the displaced worker is job retraining and adjustment assistance, and to improve the safety net available to displaced workers during the transition period. We also need to revamp our educational system so that it prepares workers for the jobs that are available today -- and imparts the flexible skills that make our citizens ready for the future jobs that we cannot even imagine."

Smoot Hawley II? Say It Ain't So.

For those who remember their history, it was the Smoot - Hawley Tariff act that led to a dramatic decline in global trade during the Great Depression in the 1930's (See picture above). Most economists believe that this misguided policy put the "Great" in the Great Depression. In fact, a recession is a time to increase commitment to trade. Unfortunately, as quoted below, our Government not only as called for reduced trade disguised as "Buy American," but also angered our major trading partners as well.

From the New York Times, Monday, May 5th, 1930
From BBC NEWS: "The EU has increased its pressure on the US to reconsider the "Buy American" clause in the $800bn (£567bn) economic recovery package now before Congress.

The clause seeks to ensure that only US iron, steel and manufactured goods are used in projects funded by the bill.

A European Commission spokesman said it was the "worst possible signal" the Obama administration could send out.

The EU will launch a complaint with the World Trade Organisation (WTO) if the clause remains, the spokesman said."
The Cato Institute has even claimed this act to be Smoot - Hawley II. "For all practical purposes there is no difference between the Smoot-Hawley tariff bill of 1930 and the “Buy American” provisions in the $819 billion spending bill that passed the House Wednesday.

Smoot-Hawley was the catalyst for a pandemic of tit-for-tat protectionism around the world, which helped deepen and prolong the global depression in the 1930s. “Buy American” provisions will no doubt inspire similar trade barriers abroad and will have the same effect of reducing global trade—and therefore prospects for economic recovery. It is not unreasonable to say that U.S. policymakers are on the verge of taking us down that same disastrous path."

Here is more from the Washington Post: "The stimulus bill passed by the House Wednesday contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package. A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas. Opponents, including some of the biggest blue-chip names in American industry, say it amounts to a declaration of war against free trade. That, they say, could spark retaliation from abroad against U.S. companies and exacerbate the global financial crisis. "

UPDATE: Obama backs down on the anti-trade, protectionist "Buy American" clause: Good Move. Read more here.

Where Do Americans NOT Want To Live? See Below (Twin Cities)

According to a new study by the Pew Research Center, not many Americans want to to live in the Twin Cities.

"The Top 10 cities were all in the South or the West, led by Denver. Next were San Diego, Seattle, Orlando, Tampa, San Francisco, Phoenix, Portland, Sacramento and San Antonio.

The Twin Cities area landed 26th in the 30-city metropolis heap, followed by Kansas City, Cincinnati, Cleveland and Detroit.

The survey, conducted in the first half of October, questioned 2,260 adults by telephone.

Of those questioned, 16 percent said they would like to live in the Twin Cities area, 82 percent gave a thumbs down, and 2 percent had no opinion."

Well, at least Minneapolis finished ahead of Detroit.

Unemployment, GDP Data

The current unemployment rate, 7.2% as of December '08, should be expected to rise significantly when the January data arrives next Friday. The 4th Quarter GDP came out and the nation's output fell 3.8%, the worst growth rate since 1982. Expect it to get much worse before it gets better.

Where The Layoffs Are

Click on the chart above for an interactive Look at recent job cuts by industry and company. As you can see, the finance industry has been hit especially hard.

SIGNS OF THE TIMES

For more pictures of unsold cars around the world, click here.

Knoxville, Tennessee (above)

HOT: Family Dollar Stores, Up by +60% over the last 12 months

NOT: Target Corporation, Down by -30% over the last 12 months

THE UNEMPLOYMENT RATE: HOW DOES THIS RECESSION COMPARE?

This is an interesting chart of unemployment rates over the last 60 years (Click to enlarge). The shaded areas are recessions. In 1974 the UE rate reached 9%, and in 1982 reached 11%. So our current 7.2% UE rate has yet to come close to these levels. Or maybe the worst is yet to come?

The Stock Market's Merry X-Mas Card

Economics In Action: People Face Trade-Offs

HT: Greg Mankiw

I.O.U.S.A.: Byte-Sized - The 30 Minute Version

Technological Progress

19872008

Old Hands Free Cell Phone

HT: Carpe Diem

Recession: Already The Longest Since 1981-82

Read more here.

The "Undercover Economist" on Free Lunches

Tim Harford, author of the Undercover Economist, writes here how free lunches always leave a bad taste. This article brings to mind how the Wal-Mart worker who died after being stampeded by shoppers hungry for a shopping deal.

Harford writes: "The more attractive the gift, the more damage people will do to themselves, and each other, trying to get hold of it. If that idea seems counterintuitive, it is nevertheless true, as the managers of Ikea, the furniture giant, can testify. They opened a new London store recently, offering opening night discounts of nearly 90 per cent on a limited number of leather sofas. The store closed 40 minutes later after 6,000 people tried to force their way through the doors; several had to be taken to hospital.

The press immediately blamed either the boorish stupidity of the British public or the hypnotic influence of the wily Swedes. But the ill-tempered scenes are not unique to Britain: at the grand opening of Jeddah’s Ikea last summer, two people died in the crowds queuing to get hold of $150 vouchers. Nor are these incidents the result of some quasi-religious shopping frenzy. The curse of the free lunch is at work…"

Read more here.

It's Official: Recession Is Here: Began in December '07

The Recession that we all knew was happening is now officially here. Many, including Minnesota State Economist Tom Stinson, think this one will be much worse that the two previous ones listed above in '90 - '91 and '01. Predictions are quite grim for the Q4 US GDP.

Louis CK On Technological Advancements and Quality of Life

View the video at Sangent

World Series of Poker: The Second Place Winner Won Twice As Much Cash

The World Series of Poker ended this week at the Rio Hotel and Casino in Las Vegas, and Denmark's Peter Eastgate (pictured above) became the youngest-ever winner of the world title. He is very much the new breed of player: 22 years old, Danish, mathematically brilliant, who gave up a fledgling career in accounting to "turn pro."

As the winner of the main event Peter won about $9.2 million, but would he actually end up with all that money?

Denmark's tax rate is 45% on the first 4 million Danish Kroners (about $680,000) and 75% on income above that. Mr. Eastgate will owe about $6.7 million in Danish taxes, and will get to keep only $2.5 million of his winnings—just 27.23% of his prize. In other words, he faces an effective tax rate of 72.77%. Ouch.

Ivan Demidov of Moscow finished second and won $5.8 million. Russia has a 13% flat tax rate, so Mr. Demidov will owe about $755,247 to the State Taxation Service of Russia. After taxes, Ivan will still have more than $5 million, more than twice as much as the first place Danish winner.

Read more here.

H/T: Carpe Diem

In A Slowing Economy, SPAM Thrives

It may be "Crazy Tasty," as the can says, but the increasing demand for SPAM is not crazy to economists. SPAM is an inferior good, where as income falls, demand rises for an inferior good. In the following article from the NY Times, demand is also rising for other inferior goods, such as rice, beans, among others. Here is more from the NYT:

"The economy is in tatters and, for millions of people, the future is uncertain. But for some employees at the Hormel Foods Corporation in Austin, MN, times have never been better. They are working at a furious pace and piling up all the overtime they want.

The workers make Spam, perhaps the emblematic hard-times food in the American pantry....

Even as consumers are cutting back on all sorts of goods, Spam is among a select group of thrifty grocery items that are selling steadily.

Pancake mixes and instant potatoes are booming. So are vitamins, fruit and vegetable preservatives and beer, according to data from October compiled by Information Resources, a market research firm.

“We’ve seen a double-digit increase in the sale of rice and beans,” said Teena Massingill, spokeswoman for the Safeway grocery chain, in an e-mail message. “They’re real belly fillers.”

The Worst Economy Since When?

Above you can see the US Unemployment Rate since the 1930's. So comparisons to the 1930's seem quite overblown. It is likely that the unemployment rate will continue to rise, but more likely to levels seen in 1992, when the rate was 7.8%, or in the early 1980's when the rate hit 10.8%. So perspective is needed when analyzing the current situation.

Markets At Work: Presidental Inaugration Tickets Going For $40,000.

Markets at work, Presidential style. It looks like some tickets to the Presidential Inauguration may sell for as much as $40,000 (tickets are handed out for free by Congressional offices and other connected politicians, donors, etc.) What recession? Anyway, some Senators are trying to ban the resale of these tickets on sites like E-bay, Craigslist, etc. I highly doubt this will stop those who place a high value on tickets from getting them. Whenever you have many people after scarce goods, the price will rise. Read more here.

Happy Halloween

The first cartoon reflects the Stock Market in October, that was definitely scary. The worst month since 1987.

Now That's Some Serious Inflation

Check out these pictures from Zimbabwe:
Headed to the grocery store.

The 1.243 Billion dinner bill (I hope that tasted good)
Paying the tab.
See more pics here.

The World's Most Expensive Cars

Read here from Forbes to see the World's most expensive cars. It will be interesting to see how these sell with the economic slowdown. Photo: The Saleen S7 ($395,000)

Poor Warren: Buffett is Down $9.6 Billion This Year, Only Has $52.1 Billion Left

Here's an interesting article in todays Wall Street Journal regarding how much today's chief executives have lost in the stock market this year. Here's a sampling: (Photo: Warren Buffet)

1. Warren Buffett (Berhshire Hathaway): Down $9.6 Billion (Value of remaining equity: $52.1 Billion)
2. Larry Ellison (Oracle): Down $6.6 Billion (Value of remaining equity: $19.8 Billion)
3. Steve Ballmer (Microsoft): Down $4.8 Billion (Value of remaining equity: $9.8 Billion)
4. Jeff Bezoz (Amazon.com): Down $4.2 Billion (Value of remaining equity:$5 Billion)

Overall, The top CEO's at 175 of the U.S's biggest companies have lost $42.3 billion dollars from the beginning of the year.