Economy contracts in 4th quarter 2012

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    Jan 30, 2013 1:58 PM GMT
    http://www.cnbc.com/id/100419252
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    Jan 30, 2013 2:28 PM GMT
    http://www.huffingtonpost.com/2013/01/30/us-economy-shrinks-gdp_n_2580897.html
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    Jan 30, 2013 3:24 PM GMT
    And yes, it's all of the above. Government cut defense spending 22.2% last quarter )though not unusual:
    chart_1.png

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/30/yikes-economy-shrinks-in-fourth-quarter-for-first-time-since-09/First, federal defense spending fell at an astounding 22.2 percent annual rate in the quarter, which subtracted 1.28 percentage points from GDP growth. That was in part a reversal from the unusual 12.9 percent gain in the third quarter. But when the two quarters are averaged together, the defense sector was a drag on the economy in the second half of 2012 — and that’s before a “sequester” of automatic defense cuts goes into effect this year if Congress doesn’t act to avert it.

    A drop in business inventories was the second major drag on growth. Firms drew down their inventories by more than $40 billion, which subtracted 1.25 percentage points from GDP growth. With companies focusing on selling goods already sitting on their store shelves and in their warehouses, production in the nation’s farms and factories was not as high as one might expect given consumer and business spending.

    But businesses can’t simply run down their inventories forever, and that bodes well for future growth. Final sales, which add inventories back in, rose at a 1.15 percent rate.

    A third and smaller factor in the contraction was a sharp decline in exports amid a slower world economy. Overall, trade subtracted 0.25 percentage points from the growth rate.


    from the 2nd linkSuperstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify its effects on GDP, it estimated that Sandy destroyed about $36 billion in buildings and other private property and $8.6 billion in government property.


    It would be nice if we can see some more substance from you, SB. The pithy headlines and snarky response are fine, but doesn't really help the discussion.
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    Jan 30, 2013 3:39 PM GMT
    q1w2e3 saidAnd yes, it's all of the above. Government cut defense spending 22.2% last quarter )though not unusual:
    chart_1.png

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/30/yikes-economy-shrinks-in-fourth-quarter-for-first-time-since-09/First, federal defense spending fell at an astounding 22.2 percent annual rate in the quarter, which subtracted 1.28 percentage points from GDP growth. That was in part a reversal from the unusual 12.9 percent gain in the third quarter. But when the two quarters are averaged together, the defense sector was a drag on the economy in the second half of 2012 — and that’s before a “sequester” of automatic defense cuts goes into effect this year if Congress doesn’t act to avert it.

    A drop in business inventories was the second major drag on growth. Firms drew down their inventories by more than $40 billion, which subtracted 1.25 percentage points from GDP growth. With companies focusing on selling goods already sitting on their store shelves and in their warehouses, production in the nation’s farms and factories was not as high as one might expect given consumer and business spending.

    But businesses can’t simply run down their inventories forever, and that bodes well for future growth. Final sales, which add inventories back in, rose at a 1.15 percent rate.

    A third and smaller factor in the contraction was a sharp decline in exports amid a slower world economy. Overall, trade subtracted 0.25 percentage points from the growth rate.


    from the 2nd linkSuperstorm Sandy likely also dragged on growth by closing factories, disrupting shipping and shutting down retail stores. While the department did not specify its effects on GDP, it estimated that Sandy destroyed about $36 billion in buildings and other private property and $8.6 billion in government property.


    It would be nice if we can see some more substance from you, SB. The pithy headlines and snarky response are fine, but doesn't really help the discussion.


    Considering how much the Obama Administration was touting the economy during the campaign this is more than a bit of a surprise. Add to this all the unsustainable level of spending by the US federal government that isn't producing a return means that government will still need to contract in order to let the private economy grow. Pay now or pay later. The Obama Administration and most Democratic Administrations (even Republican ones) have generally opted for the pay later...

    Private spending increased largely because of attempts to avoid the fiscal cliff... meanwhile this year payroll taxes have increased and taxes are increasingly punitive for high income earners. Is it any wonder that entrepreneurs don't want to either hire or build more businesses in the US?
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    Jan 30, 2013 7:30 PM GMT
    mittromney-570x320.jpg
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    Jan 30, 2013 8:19 PM GMT
    Anybody see any big government spending here after the stimulus?

    gdp_q4_components.jpg

    It's exactly this drag from government that is making recovery harder. This year will see whether the underlying private sector can withstand more fiscal austerity.

    Fiscal austerity is contractionary.
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    Jan 30, 2013 8:33 PM GMT
    q1w2e3 saidAnybody see any big government spending here after the stimulus?

    gdp_q4_components.jpg

    It's exactly this drag from government that is making recovery harder. This year will see whether the underlying private sector can withstand more fiscal austerity.

    Fiscal austerity is contractionary.


    Maybe you should extend the graph out further - given how large the stimulus was in the first place - sure there's a relative dip and decrease for government and private spending respectively but compared to what?

    You seem to think that all spending is equal in an economy. That's why there's a fundamental misunderstanding on the part of many who seem to think that the best way to reduce poverty is through redistribution as opposed to economic growth.

    I would reference :
    http://www.washingtonpost.com/blogs/fact-checker/post/obamas-claim-that-90-percent-of-the-current-deficit-is-due-to-bush-policies/2012/09/26/e9bfbcd0-077e-11e2-a10c-fa5a255a9258_blog.html

    And this graph:
    OBAMAFAILDEFICITSCBO.jpg Some context would have been a bit more honest with your graph. Of course fiscal austerity is contractionary in the short term - it is however a more sustainable fix than thinking government spending especially as it is now is anywhere close to viable.
  • WhoDey

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    Jan 30, 2013 9:17 PM GMT
    Nothing more patriotic than celebrating "bad news"
  • Lincsbear

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    Jan 30, 2013 9:30 PM GMT
    Similar to the UK, only we managed 0.3% drop in the fourth quarter on the way to a 'triple dip' recession!
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    Jan 30, 2013 10:17 PM GMT
    riddler78 said

    Maybe you should extend the graph out further - given how large the stimulus was in the first place - sure there's a relative dip and decrease for government and private spending respectively but compared to what?

    You seem to think that all spending is equal in an economy. That's why there's a fundamental misunderstanding on the part of many who seem to think that the best way to reduce poverty is through redistribution as opposed to economic growth.


    Many economists thought the stimulus was too small, and they were right.

    And overall government spending is down, including city, state and federal. Obsessing about the federal deficit does not make this go away.

    And you're just doing the straw man again--of course not all spending is equal.

    US_Mark_Zandi_multipliers.jpg
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    Jan 30, 2013 10:23 PM GMT
    WhoDey saidNothing more patriotic than celebrating "bad news"

    Yeah, you ever notice how they never say a peep when the economic news under Obama has been good? Like overall the markets and other indicators the best they've been since the Bush Recession plunged us into this mess?

    Taking a while to clean it up, against Congressional Republicans opposing every measure to improve the economy, now that they have a majority in the House, and by procedural obstacles in the Senate when they didn't. They sure earned the title of the Party of No, with the result the recovery has been slowed down.

    But recovery it's been, something you won't hear the conservaposse chorus here talking about. Instead rushing to post about every slight downturn, every bit of potential difficulty, never the overall improving picture. Would they had been so diligent during the Bush years, when the whole economy was tanking on a vast scale. Partisanship, possibly? icon_wink.gif
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    Jan 30, 2013 10:35 PM GMT
    gdp.jpg

    Here's the story when viewed with corticosteroids as an analogy.

    Corticosteroids and mineralocorticoids are typically given in stress situations, and doses have to be increased when you're on chronic steroids (for whatever reason). But their side effects are numerous, and we taper them as soon as possible.

    In 2000, the economy had a bad cold. Bush put it on steroids (tax cuts and spending increases) and never looked back. (note the absence of red in the negative y axis)

    In 2008, the economy went into septic shock. Obama (and government in general) put a smaller than needed amount of stress dose steroids on, saved the patient, but weaned it back way too quickly, and is continuing to do so (all those red bars on the negative y axis). Instead of letting the economy recover first before cutting, we're trying to cut steroids to nil. No wonder the patient is still on pressors.
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    Jan 30, 2013 10:48 PM GMT
    ART_DECO said
    WhoDey saidNothing more patriotic than celebrating "bad news"

    Yeah, you ever notice how they never say a peep when the economic news under Obama has been good? Like overall the markets and other indicators the best they've been since the Bush Recession plunged us into this mess?

    Taking a while to clean it up, against Congressional Republicans opposing every measure to improve the economy, now that they have a majority in the House, and by procedural obstacles in the Senate when they didn't. They sure earned the title of the Party of No, with the result the recovery has been slowed down.

    But recovery it's been, something you won't hear the conservaposse chorus here talking about. Instead rushing to post about every slight downturn, every bit of potential difficulty, never the overall improving picture. Would they had been so diligent during the Bush years, when the whole economy was tanking on a vast scale. Partisanship, possibly? icon_wink.gif


    Yep, the Bush years = longest uninterrupted expansion in American history with 52 consecutive months of job growth and 26 consecutive quarters of GDP growth. Is that the "tanking" you're talking about?
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    Jan 30, 2013 10:54 PM GMT
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712
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    Jan 31, 2013 12:18 AM GMT
    yourname2000 said
    freedomisntfree saidYep, the Bush years = longest uninterrupted expansion in American history with 52 consecutive months of job growth and 26 consecutive quarters of GDP growth. Is that the "tanking" you're talking about?

    Wrong, of course. icon_rolleyes.gif As usual, you're thinking of Clinton, lol.
    http://clinton5.nara.gov/WH/Accomplishments/eightyears-01.html

    gdp-growth.jpg


    If only Obama were more like Clinton... it's too bad that Obama has effectively repudiated most of Clinton's economic policies.

    http://news.investors.com/080312-620735-obama-is-no-clinton-on-economic-policy.aspx?p=full
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    Jan 31, 2013 12:20 AM GMT
    q1w2e3 said
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712


    Thanks for the opinion pieces from liberal writers. While I'd agree that Bush has made a number of mistakes including the increase in regulation and interference in the markets in his tenure - to say nothing of the massive increases in spending, this has been little compared to the Administration that came after him.
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    Jan 31, 2013 12:23 AM GMT
    And, for anybody touting the great economy under Bush, here's the relevant monthly job gains. We're back to the baseline set by Bush before the recession. Could we be doing better? Of course...if only people will stop obsessing about immediate fiscal austerity.

    adp_bls-e1359578508218.gif
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    Jan 31, 2013 12:27 AM GMT
    riddler78 said
    q1w2e3 said
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712


    Thanks for the opinion pieces from liberal writers. While I'd agree that Bush has made a number of mistakes including the increase in regulation and interference in the markets in his tenure - to say nothing of the massive increases in spending, this has been little compared to the Administration that came after him.


    Read the Stiglitz piece and tell me what you don't like. He also obsesses about the debt/deficit, but emphasizes that Bush squandered the opportunity to stabilize it when it was feasible to do so.
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    Jan 31, 2013 12:39 AM GMT
    q1w2e3 said
    riddler78 said
    q1w2e3 said
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712


    Thanks for the opinion pieces from liberal writers. While I'd agree that Bush has made a number of mistakes including the increase in regulation and interference in the markets in his tenure - to say nothing of the massive increases in spending, this has been little compared to the Administration that came after him.


    Read the Stiglitz piece and tell me what you don't like. He also obsesses about the debt/deficit, but emphasizes that Bush squandered the opportunity to stabilize it when it was feasible to do so.


    Stiglitz is quite well known to be fairly left. I also don't really find his critiques of Bush credible considering how far off the mark he was in his assessment of Fannie Mae and Freddie Mac - "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." http://articles.businessinsider.com/2009-12-01/wall_street/30096172_1_fannie-and-freddie-freddie-mac-fannie-mae

    In fact, his cheerleading for their increased size and roles in what would ultimately be seen as the housing bubble should cloud any attempts by him to place the blame at the hands of anyone.

    You should see Nassim Taleb's critiques of Stiglitz which are scathing in this regard. As for Stiglitz's more substantive points, while Bush may indeed have squandered an opportunity to deal with entitlements and the debt - this wasn't alone his either. And if you claim that the Bush Administration bungled them, you can also say that the Obama Administration has doubled down on those policies and spent even more money on things that will never see a return and squandered the wealth of future Americans for little to no short term gain and absolutely no sustainable gains.
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    Jan 31, 2013 12:55 AM GMT
    riddler78 said
    q1w2e3 said
    riddler78 said
    q1w2e3 said
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712


    Thanks for the opinion pieces from liberal writers. While I'd agree that Bush has made a number of mistakes including the increase in regulation and interference in the markets in his tenure - to say nothing of the massive increases in spending, this has been little compared to the Administration that came after him.


    Read the Stiglitz piece and tell me what you don't like. He also obsesses about the debt/deficit, but emphasizes that Bush squandered the opportunity to stabilize it when it was feasible to do so.


    Stiglitz is quite well known to be fairly left. I also don't really find his critiques of Bush credible considering how far off the mark he was in his assessment of Fannie Mae and Freddie Mac - "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." In fact, his cheerleading for their increased size and roles in what would ultimately be seen as the housing bubble should cloud any attempts by him to place the blame at the hands of anyone.

    You should see Nassim Taleb's critiques of Stiglitz which are scathing in this regard. As for Stiglitz's more substantive points, while Bush may indeed have squandered an opportunity to deal with entitlements and the debt - this wasn't alone his either. And if you claim that the Bush Administration bungled them, you can also say that the Obama Administration has doubled down on those policies and spent even more money on things that will never see a return and squandered the wealth of future Americans for little to no short term gain and absolutely no sustainable gains.


    I rather subscribe to the inadequate stress dose steroid view (see above).

    On the Stiglitz paper, if you read beyond the summary, it assumes that the OFHEO was doing its job in regulating the GSE's capital requirements. OFHEO was not doing its job. And the infamous assumption, that rare things don't happen, is clearly wrong in retrospect (a la Taleb), but that is stated in their discussion on the limitation of their analysis:
    2002 Stiglitz/OrszagThe first potential shortcoming is that the risk-based capital
    standard, while based on a hypothetical economic shock
    significantly more severe than anything that the economy
    has actually experienced over the past forty years, may fail
    to reflect the probability of another Great Depression-like
    scenario. Fundamentally, the extremely rare events located
    in the tail of a distribution are often quite difficult to
    analyze accurately....
    A second concern is that while it is extremely unlikely that
    the risk-based capital scenario would occur, if the risk-based
    capital regulation is not implemented properly the results of
    the test may not be robust. Model risk, the likelihood that
    the model omits or mischaracterizes important elements of
    the real economy, is always a potential problem. The model
    depends on a large number of data inputs and parameters,
    each of which is subject to error. To a large extent, the
    mitigation of this risk requires that OFHEO accurately
    model the true risks that the companies face in the event of a
    catastrophic scenario.


    They conclude:

    2002 Stiglitz/OrszagTwo other points are worth noting. First, analysis of the
    risks posed by Fannie Mae and Freddie Mac must
    carefully consider the alternatives. In the absence of
    Fannie Mae and Freddie Mac, mortgage risk would likely
    be held by large banks and other types of financial
    institutions, which themselves benefit from the perception
    that they are “too big to fail.” Fannie Mae and Freddie
    Mac are among the largest financial institutions in the
    country. Even in the absence of a GSE charter it is likely
    that they would continue to benefit from their size, since
    the government has intervened on behalf of other large
    institutions in the past.21
    Secondly, and more broadly, Fannie Mae and Freddie
    Mac would likely require government assistance only in a
    severe housing market downturn. Such a severe housing
    downturn would, in turn, likely occur only in the presence
    of a substantial economic shock. Regardless of the
    structure of the mortgage market, the government would
    almost surely be forced to intervene in a variety of
    markets — including the mortgage market — in such a
    scenario. Fundamentally, given the public’s aspirations to
    homeownership and the myriad ways in which government
    subsidies are channeled to homeownership, the
    government is indirectly exposed to risks from the
    mortgage market regardless of the existence of the GSEs.


    Both sound points which were borne out by reality.
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    Jan 31, 2013 2:40 AM GMT
    q1w2e3 said
    riddler78 said
    q1w2e3 said
    riddler78 said
    q1w2e3 said
    http://www.washingtonpost.com/wp-dyn/content/story/2009/01/12/ST2009011200359.html The number of jobs in the nation increased by about 2 percent during Bush's tenure, the most tepid growth over any eight-year span since data collection began seven decades ago. Gross domestic product, a broad measure of economic output, grew at the slowest pace for a period of that length since the Truman administration. And Americans' incomes grew more slowly than in any presidency since the 1960s, other than that of Bush's father.

    Bush and his aides are quick to point out that they oversaw 52 straight months of job growth in the middle of this decade, and that the economy expanded at a steady clip from 2003 to 2007. But economists, including some former advisers to Bush, say it increasingly looks as if the nation's economic expansion was driven to a large degree by the interrelated booms in the housing market, consumer spending and financial markets. Those booms, which the Bush administration encouraged with the idea of an "ownership society," have proved unsustainable.


    More here (published in 2007)--very prescient article by Joe Stiglitz:
    http://www.vanityfair.com/politics/features/2007/12/bush200712


    Thanks for the opinion pieces from liberal writers. While I'd agree that Bush has made a number of mistakes including the increase in regulation and interference in the markets in his tenure - to say nothing of the massive increases in spending, this has been little compared to the Administration that came after him.


    Read the Stiglitz piece and tell me what you don't like. He also obsesses about the debt/deficit, but emphasizes that Bush squandered the opportunity to stabilize it when it was feasible to do so.


    Stiglitz is quite well known to be fairly left. I also don't really find his critiques of Bush credible considering how far off the mark he was in his assessment of Fannie Mae and Freddie Mac - "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." In fact, his cheerleading for their increased size and roles in what would ultimately be seen as the housing bubble should cloud any attempts by him to place the blame at the hands of anyone.

    You should see Nassim Taleb's critiques of Stiglitz which are scathing in this regard. As for Stiglitz's more substantive points, while Bush may indeed have squandered an opportunity to deal with entitlements and the debt - this wasn't alone his either. And if you claim that the Bush Administration bungled them, you can also say that the Obama Administration has doubled down on those policies and spent even more money on things that will never see a return and squandered the wealth of future Americans for little to no short term gain and absolutely no sustainable gains.


    I rather subscribe to the inadequate stress dose steroid view (see above).

    On the Stiglitz paper, if you read beyond the summary, it assumes that the OFHEO was doing its job in regulating the GSE's capital requirements. OFHEO was not doing its job. And the infamous assumption, that rare things don't happen, is clearly wrong in retrospect (a la Taleb), but that is stated in their discussion on the limitation of their analysis:
    2002 Stiglitz/OrszagThe first potential shortcoming is that the risk-based capital
    standard, while based on a hypothetical economic shock
    significantly more severe than anything that the economy
    has actually experienced over the past forty years, may fail
    to reflect the probability of another Great Depression-like
    scenario. Fundamentally, the extremely rare events located
    in the tail of a distribution are often quite difficult to
    analyze accurately....
    A second concern is that while it is extremely unlikely that
    the risk-based capital scenario would occur, if the risk-based
    capital regulation is not implemented properly the results of
    the test may not be robust. Model risk, the likelihood that
    the model omits or mischaracterizes important elements of
    the real economy, is always a potential problem. The model
    depends on a large number of data inputs and parameters,
    each of which is subject to error. To a large extent, the
    mitigation of this risk requires that OFHEO accurately
    model the true risks that the companies face in the event of a
    catastrophic scenario.


    They conclude:

    2002 Stiglitz/OrszagTwo other points are worth noting. First, analysis of the
    risks posed by Fannie Mae and Freddie Mac must
    carefully consider the alternatives. In the absence of
    Fannie Mae and Freddie Mac, mortgage risk would likely
    be held by large banks and other types of financial
    institutions, which themselves benefit from the perception
    that they are “too big to fail.” Fannie Mae and Freddie
    Mac are among the largest financial institutions in the
    country. Even in the absence of a GSE charter it is likely
    that they would continue to benefit from their size, since
    the government has intervened on behalf of other large
    institutions in the past.21
    Secondly, and more broadly, Fannie Mae and Freddie
    Mac would likely require government assistance only in a
    severe housing market downturn. Such a severe housing
    downturn would, in turn, likely occur only in the presence
    of a substantial economic shock. Regardless of the
    structure of the mortgage market, the government would
    almost surely be forced to intervene in a variety of
    markets — including the mortgage market — in such a
    scenario. Fundamentally, given the public’s aspirations to
    homeownership and the myriad ways in which government
    subsidies are channeled to homeownership, the
    government is indirectly exposed to risks from the
    mortgage market regardless of the existence of the GSEs.


    Both sound points which were borne out by reality.


    Your rationalization of the colossal mess that Stiglitz supported is similar to suggesting that the dog at his homework. They dubbed the latter probability "extremely unlikely". On the first - they actually acknowledge that the GSE benefited from the implicit guarantee of the government.

    They argue that if the GSEs had not taken on the risk others in the market would have - except for the fact that no, others in the market relied on the government guarantees. This is more than a fundamental flaw in the paper - particularly in light of what's happened.

    The problem however if you actually understand what drove the GSEs into being taken over by the government, was not that OFHEO wasn't properly regulating capital requirements. It was the fact that the GSEs were encouraging increasingly greater risks in purchasing loans for repackaging in this game of musical chairs that encouraged the credit bubble that fuelled the asset bubble. It was this underlying assumption that real estate prices wouldn't fall - let alone as fast as they did (ie the supposed low risk of the modelling blowing out - when many in the market could see that a bubble was building from the outset).
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    Jan 31, 2013 2:56 AM GMT
    Off topic, but the GSEs jumped into the repackaging of risky subprime mortgages late in the game to preserve their market share, and much of the risk was indeed created by private funds. Others in the market, so to speak, indeed took up the risk way earlier than the GSEs--this was known by 2008. It wasn't GSEs who financed the bubble.

    ffdelta.PNG

    And guess who denied the bubble while it was happening?
    http://economicsofcontempt.blogspot.com/2008/07/official-list-of-punditsexperts-who.html
    Guess what, some of these pundits probably denied it because, well, Krugman.
    http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=0
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    Jan 31, 2013 3:15 AM GMT
    [quote][cite]southbeach1500 said[/cite]
    ART_DECO said
    WhoDey saidNothing more patriotic than celebrating "bad news"

    Yeah, you ever notice how they never say a peep when the economic news under Obama has been good?

    There hasn't been any good economic news under the Obama administration.

    OK, if you're just gonna be delusional and stick to your Fox talking points, fine. I thought this thread was for thinking adults. We should have known better when it comes to anything you post. icon_rolleyes.gif
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    Jan 31, 2013 3:19 AM GMT
    freedomisntfree said
    Yep, the Bush years = longest uninterrupted expansion in American history with 52 consecutive months of job growth and 26 consecutive quarters of GDP growth. Is that the "tanking" you're talking about?

    Yep, I gotta agree, yah got me there. The end of the Bush Administration saw the US economy in the best shape it had been in decades. Full employment, booming stock market, great real estate market, sound banking and financial markets, expanding US industry that included a thriving automotive segment, and insignificant national debt. Yep, it wasn't until 2 weeks after Obama took office in 2009 that it all went to shit. icon_rolleyes.gif
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    Jan 31, 2013 3:28 AM GMT
    yourname2000 said
    freedomisntfree saidYep, the Bush years = longest uninterrupted expansion in American history with 52 consecutive months of job growth and 26 consecutive quarters of GDP growth. Is that the "tanking" you're talking about?

    Wrong, of course. icon_rolleyes.gif As usual, you're thinking of Clinton, lol.
    http://clinton5.nara.gov/WH/Accomplishments/eightyears-01.html

    gdp-growth.jpg


    "Yep, the Bush years = longest uninterrupted expansion in American history with 52 consecutive months of job growth and 26 consecutive quarters of GDP growth. Is that the "tanking" you're talking about? "

    Blinded by your Bush hatred, you're wrong as usual.

    http://meetthefacts.com/2010/07/14/fact-check-ed-gillspie-after-the-bush-tax-cuts-there-were-52-months-of-continuous-job-creation/