The article is clear enough to the effect that a "Bubble Watch" group
would be valuable and less clear that the results of its work would
necessarily be reliable. However, some informed guidance would
be better than none and a reasonable outlook would be that at least
now and then its forecasts would be on target. That alone would be
worth the investment.
This leads to a question : Is there some kind of unique forecasting
service
that RC could offer the political world? It is completely unclear at this
time
just what that might be, nonetheless if such a focus of attention could be
identified then RC could claim to be politically useful, not only
politically "forward looking" or the like, and that alone could
make Radical Centrism important like nothing else.
Thought for today
Billy
-----------------------------------
The global financial crisis and American wealth accumulation: The Fed
needs a bubble watch
_John H. Makin_ (http://www.aei.org/scholar/john-h-makin/) | _American
Enterprise Institute_ (javascript:void(0))
August 29, 2013
The global financial crisis destroyed over one-fifth of accumulated
American wealth (real net worth of households and nonprofit organizations) in
just one year: 2008. That huge loss was on top of a far more modest but still
significant 1.62 percent wealth loss in 2007. Both the US stock market
bubble burst in 2000 and the housing bubble implosion of 2008 contributed to
the
current situation, reinforcing the need for a Federal Reserve “bubble watch
” program. If we could recognize patterns that lead to these bubbles, we
could see them coming and adjust policy to protect wealth accumulation and
the economy as a whole.
Key points in this Outlook:
* The 2008 housing bubble burst and the ensuing global financial
crisis destroyed an unprecedented 22 percent of accumulated American wealth.
* This massive destruction of wealth has resulted in a tepid recovery
marked by below-average recovery levels of saving, consumption, and inve
stment.
* The Federal Reserve needs to create a “bubble watch” program to
prevent speculative bubbles from destroying wealth accumulation in the future.
A wealth loss of the magnitude of the one in 2008 is unprecedented in post–
World War II America. The previous record year was 1974, with a 9.14
percent loss, reflecting the extreme disruptions tied to the “oil shock,” when
oil prices quadrupled in just a year. The three years from 2000 to 2002 saw
a total wealth loss of 9.9 percent, less than half the one-year 2008 loss
over a period three times as long.
Americans have enjoyed substantial and persistent wealth accumulation since
1960. Real net worth of American households and nonprofit organizations
grew by 3.47 percent per year from 1960 through 2007. The “golden age” was
1991 to 1999, when wealth grew at a remarkable 5.39 percent, some 50 percent
faster than in the 47-year span from 1960 through 2007. Little wonder, in
view of the unprecedented 2008 wealth loss, that the global financial
crisis produced lasting effects on American consumption, saving, and
investment,
along with record levels of monetary and fiscal stimulus aimed at easing
the pain.
This substantial policy stimulus notwithstanding, the post-2008 recovery of
American wealth, not to mention the American economy, has been gradual
with some setbacks, notably including a 1.26 percent wealth drop in 2011. From
the 2008 low through the first quarter of 2013, real net worth grew by
20.5 percent, or at an average annual rate of 4.23 percent. This outcome
occurred with the help, especially post-2011, of rising equity markets and a
modest recovery in home prices.
The high post-2008 growth rate is a bit misleading since it occurred from a
very low 2008 base that followed the 22 percent 2008 wealth collapse. (See
figure 1.) By the end of the first quarter of 2013, US wealth still stood
8 percent below its 2006 peak. A longer-term perspective on the devastating
impact of the global financial crisis on US wealth arises from the sharply
reduced 1.2 percent annual pace of American wealth growth from 2000 Q1 to
2013 Q1. Over the last 13 years, American wealth has risen at a pace just
above a third of the 1960–2007 pace and just above a fifth of the 5.39
percent pace during the 1991–99 “golden age.” The bursting of the stock bubble
in 2000–02 and of the housing bubble in 2008 have taken their toll on
American wealth.
Wealth Losses Weakened the Recovery
In my May 2008 Economic Outlook, published just after the Bear Stearns
collapse but a few months before the more spectacular Lehman collapse, I
identified “the pace at which Americans restrict spending relative to (falling)
income, first to arrest the drop in accumulated wealth and subsequently to
restore wealth” as a major factor affecting the outlook for the US
economy.[1] My prediction later in the piece of “a long recession” was
disquieting
yet prescient. I continued:
The US economic crisis resulting from a collapse of the housing bubble and
falling stock prices that combine to hammer US household balance sheets is
just beginning. Even the Federal Reserve has acknowledged that US growth
will probably be negative during the first half of 2008. The Fed’s outlook
still looks for a rebound in the second half of the year. While tax rebate
checks may boost growth slightly in the third quarter, the persistent drag
from wealth losses as house prices and stocks fall and households begin
saving again—coupled with bank deleveraging—will undercut the Fed’s forecast
for a sustainable growth rebound. Instead, a prolonged US recession looks
like the more probable outcome.
It is useful to note from reading that last paragraph written in May 2008
that the Fed was still in a business-as-usual mode after the Bear Stearns
crisis. While acknowledging some slowdown, the central bank was still looking
for a second-half recovery as it is doing again, perhaps unwisely, this
year.[2] The Lehman crisis and subsequent economic collapse were nowhere to
be seen in May 2008.
The recession that followed the Lehman collapse was intense. Although it
technically ended in June 2009, the subsequent recovery, as is now
well-known, was tepid and disappointing. Understanding the specifics of the
actual
post-2008 paths of consumption, investment, saving, and policy measures is
important to examining both the effect of large wealth losses and the
possible direction of future growth five years into the extended post–
financial-crisis period of the recovery. There are also lessons for other
countries,
but we will not delve into those here.
Before the onset of the 2008 financial crisis, the US personal saving rate
had been on a long-term downward path since the late 1970s. (See figure 2.)
During and after the crisis, in the recession that accompanied its onset
and aftermath, the US personal saving rate rose sharply from about 3 percent
to more than 6 percent and has held at that level at least until the
current year. (See figures 2 and 3.) Shocked by wealth losses, American
households restricted spending even after the recession technically ended in
June
2009. The byproduct was weak growth of aggregate demand, offset in part by
aggressive monetary and fiscal measures.
The personal saving rate spiked late in 2012 given the accelerated
distribution of dividends in anticipation of higher tax rates on such income
that
took effect in early 2013. Since then, the personal saving rate has dropped
somewhat, back to a level of around 4.5 percent, perhaps because of
increasing confidence that rising home prices and equity prices will support
future wealth accumulation. Relative to past cycles, the US personal saving
rate
since 2009 has been low. However, this largely reflects the fact that the
personal saving rate was substantially higher in the 1960 through 1980
period, even relative to the elevated levels after the 2008 global financial
crisis. (See figure 3.)
A look at the path of personal consumption expenditures explains how US
households were able to elevate saving rates even in a period of slow growth.
>From June 2009 to the present, the path of US consumption has been
substantially below that of a typical recovery. (See figure 4.) As consumption
continues to lag, the gap between the path of consumption in this tepid
recovery and the benchmark of weaker recoveries—a standard deviation below
typical
recoveries—has grown wider, proving that consumption during the current
recovery has been especially weak.
The large wealth losses during 2008 prompted American households to
restrict consumption to help restore wealth losses through a higher saving
rate.
The byproduct of this, of course, has been a slow pace of GDP growth and a
subpar recovery. The rationale for high levels of fiscal and monetary
stimulus has been that it is necessary to try to replace the lost demand
growth,
given the restricted spending patterns of American households.
The path of investment before, during, and after the financial crisis is
similar to the path of wealth accumulation because investment, in addition to
the capital stock, is a form of wealth accumulation. Before and during the
crisis, investment fell sharply. (See figure 5.) Thereafter, from a very
low base, the recovery of investment, or capital formation, has proceeded
along the lines of a normal economic recovery. This reflects the desire of
companies conserving on hiring of labor to replace labor with capital. It
also reflects the ongoing need to replace depreciated capital as companies aim
to increase output to keep up with moderate growth of domestic demand and
to help expand exports.
As with wealth accumulation, although the postrecession path of investment
has been average, real capital stock is still probably below its level
before the global financial crisis, largely because of the sharp drop in
investment in the year before and during the crisis. Going forward, sustained
growth will require further capital accumulation and some policy measures,
such as lower tax rates on capital, that encourage that activity.
Of course, the overall result of reduced levels of consumption and
investment growth has been a subpar recovery. (See figure 6.) The growth rate
of
GDP experienced an unprecedented drop during the crisis in 2008 and has been
sharply below the average recovery growth rate. Even now, five years into
the recovery, the pace of GDP growth remains below typical levels, and
accumulated losses of output are substantial.
Going forward, it will be impossible to sustain higher growth without
stronger consumption growth. That, in turn, is made less likely by the fiscal
drag introduced early this year and the tapering of monetary stimulus under
consideration at the Fed. Indeed, we have reached a point, 50 months into a
recovery, where typical postwar recoveries begin to falter. There is a
significant risk of a recession in 2014.[3]
We Need a Fed “Bubble Watch”
Notwithstanding the devastation of American wealth and the modest pace of
the recovery since 2008, Americans are uniquely blessed with wealth
accumulation opportunities. As an excellent place to store wealth, the United
States remains a major exporter of wealth storage facilities. Such facilities
need to provide liquid, mobile, stable, and long-lived assets, all qualities
possessed by a number of American offerings. Between 2006 and 2011, the
Chinese availed themselves of wealth storage facilities in the US Treasury
market, helping support American consumption in the postcrisis period.
However, the two major avenues of American wealth accumulation, financial
assets and owner-occupied housing, have been both a help and harm to
American households over the last half-century. The unique convenience of
wealth
accumulation through homeownership became so compelling after the equity
bubble burst in 2000 that the housing bubble developed with considerable
government encouragement from tax preferences during the decade after 2000.
The
bursting of the stock bubble early in 2000 left American households
searching for another avenue of wealth accumulation, and with considerable
encouragement from banks and brokers, Americans households turned to real
estate
to accumulate wealth.
As history has shown, the financial asset and housing approaches to wealth
accumulation have their drawbacks, particularly manifest in bubbles that,
upon bursting, have set wealth accumulation back a long way. Policymakers’
sensitivity to financial and housing markets and their desire to support
those avenues of wealth accumulation have probably contributed to the bubbles
in both sectors during the last half century. It may be better to allow the
pace of wealth accumulation in those sectors to slow somewhat to avoid the
disruptions that inevitably accompany the bursting of such bubbles.
In any case, the Fed needs to pay more attention to the tricky problem of
identifying speculative bubbles before they burst. Any prospective Fed
chairman needs to step up to the challenge of creating a viable Fed bubble
watch
program
--
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