Henry Paulson said yesterday:
The market turmoil we are experiencing today poses great risk to US taxpayers. When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.
How true is this? There is some empirical evidence here - the last 12 months. And this seems to undermine the more alarmist senses of Paulson’s claim.
The Fed’s flow of funds data (table 1 of this pdf) show that between Q2 2007 and Q3 2008, net borrowing by the non-financial sector fell by more than half - the biggest annual fall for 50 years. Borrowing by households fell from an annualized $950bn to $197.3bn. Borrowing by non-financial companies fell from $846.5bn to $390.3bn.
The financial system, then, hasn’t been working as it should.
And yet the economy hasn’t collapsed. Real GDP grew 2.2% - low enough to raise unemployment a little but not a catastrophe.
Of course, you could argue that there are lags between collapsing lending and the economy; it‘s quite likely GDP will shrink in Q3 or Q4. But - for what it’s worth - most forecasters, at least before the latest turmoil, were expecting an upswing during 2009.
Now, I’m not coming over all John McCain here. I’m just pointing out that there’s a distinction between a dramatic meltdown in the financial system on the one hand and much less dramatic events in the overall “real” economy on the other. The classical dichotomy has been especially sharp recently.
One reason for this is that the real economy has had other supports: the weakish dollar, looser fiscal policy, reasonable profitability, demand from the Brics and (which is not to be under-estimated) force of habit. All but one and a bit of these is still with us.
Which raises the question. Might Paulson be pulling a rhetorical trick here? It’s hard to sell his plan on the basis of efficiency, necessity or justice. So he’s appealing to fear instead.
The Fed’s flow of funds data (table 1 of this pdf) show that between Q2 2007 and Q3 2008, net borrowing by the non-financial sector fell by more than half - the biggest annual fall for 50 years. Borrowing by households fell from an annualized $950bn to $197.3bn. Borrowing by non-financial companies fell from $846.5bn to $390.3bn.
The financial system, then, hasn’t been working as it should.
And yet the economy hasn’t collapsed. Real GDP grew 2.2% - low enough to raise unemployment a little but not a catastrophe.
Of course, you could argue that there are lags between collapsing lending and the economy; it‘s quite likely GDP will shrink in Q3 or Q4. But - for what it’s worth - most forecasters, at least before the latest turmoil, were expecting an upswing during 2009.
Now, I’m not coming over all John McCain here. I’m just pointing out that there’s a distinction between a dramatic meltdown in the financial system on the one hand and much less dramatic events in the overall “real” economy on the other. The classical dichotomy has been especially sharp recently.
One reason for this is that the real economy has had other supports: the weakish dollar, looser fiscal policy, reasonable profitability, demand from the Brics and (which is not to be under-estimated) force of habit. All but one and a bit of these is still with us.
Which raises the question. Might Paulson be pulling a rhetorical trick here? It’s hard to sell his plan on the basis of efficiency, necessity or justice. So he’s appealing to fear instead.
From this recent interview on video, Greenspan evidently doesn't believe in the classical dichotomy:
http://news.bbc.co.uk/1/hi/world/americas/7616388.stm
Posted by: Bob B | September 24, 2008 at 10:38 AM
As ever, I can't help but feel when governments say " something must be done" it already doesn't need doing.I would be most surprised if the US housing market isn't very near its nadir with the bottom fishers already out in force. And Warren Buffett's bet on Goldman Sachs says more about what's really happening than all the huff and puff on Capitol Hill
Posted by: kinglear | September 24, 2008 at 11:22 AM
All establishments whatever their make up close ranks when the Shit hits the fan. they are never going to admit that some of its finest brains and most prestigious bodies both state and private believed in alchemy, even the press turns a blind eye to that as they have a lot to lose too.
The current excuse is wall street got drunk, and all thats needed is a few billion buckets of water of their heads to sober them up is what the good citizenry should undertake. Leaving them to lift themselves out of their own sick will undermine the assumption that the only great and the good should rule.
Posted by: passer by | September 24, 2008 at 11:59 AM
The US housing price collapse is not near done; just as ours is not.
The BRIC's are struggling as capital is withdrawn from their economies; Russia had to close its markets last week. Domestic demand is still small by comparison with exports.
The numbers for US growth were widely discredited and the downward reviews are expected.
The plan may still have an element of scaremongering, but the real economy will take a steep dive if no deal is done and the banks are effectively left to go under.
You wouldn't start from here, but here we are now....
Posted by: Cityunslicker | September 24, 2008 at 01:41 PM
Have you seen this piece by Martin Wolf in Wednesday's FT?
http://www.ft.com/cms/s/0/a09b317e-898d-11dd-8371-0000779fd18c.html
It's a damning - and worrying - critique of Paulson's plan for rescuing American financial institutions from the consequences of their toxic investments.
In The Times, Jack Welch - former chairman and CEO of General Electric - is reported as saying: "the US economy is facing a deep downturn."
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4821090.ece
I think we can say with confidence now that the Bush administration has been a complete and utter disaster.
Posted by: Bob B | September 24, 2008 at 09:09 PM