This thread is going away now, but the comments have been brilliant. I appreciate them all.

Nicolai you are unfortunately more correct than even you believe. Strap on your crash helmets, tighten seat belts, assume fetal position this is going to be one heck of a ride AND we don’t know when it will end — unfortunately.

Martin

Try history instead. It’s a hell of a lot more insightful and informative because it gives you a picture of reality (what motivates people, how they act, the forces they react to) and if you’re smart enough you can actually see patterns and begin to apply it to society at large. Unlike economics, which is useful only when you control for all variables and you postulate perfect information, perfect competition, etc, etc.

So as economists reassure us that we’re in a recession and they see it ending sometime in the second half of 2009, maybe early 2010, you should be thinking: BULLSHIT. Sure people will argue and try to point to the contra indicators that say the credit crisis is over, the stock market is stabilized, the USD is still reserve currency of favor, unemployment is in historical normal ranges, people are still buying American cars, Chase had a profit (what a good use of those TARP funds), entrepreneurship thrives in a recession, the housing market has bottomed, mortgage rates are at an all time low, gas is less than $2 a gallon, and so on, and so on.

But all of that is just plain nonsense. A statistician might say it’s all spurious. In reality, the fun (for all you sadists) is just beginning. The post-war American dream of every generation building on the successes of the previous generation is on hold. It’s done. Game over. Time’s up. Music’s stopped. Piper must be paid. Choose your favorite metaphor. But the facts remain, the United States economy is entering an unrecoverable (in the near term 5-10 years…pray tell not longer) slide into massive destabilization. You can forget about doing better than your parents did. And your children can forget about doing better than you did. People need a massive collective reset. Washington needs an even more massive reset.

You can’t print money until the cows come home and expect to sell the guarantees on that money to sovereign wealth funds without them getting mad as hell when they realize they’re holding a bag of shit. Oh but the Fed call that Quantitative Easing. I call it mortgaging our future, or worse.

You can’t sustain consumption when real wages are declining, the savings rate is negative, and the second largest credit issuer in the country is ratejacking. Shouldn’t that be a crime like carjacking? What’s the difference really?

You can’t rebuild an economy laden with $$ trillions in debt, no wage growth, no job growth, extreme concentration of wealth, rampant fraud and mistrust, and no viable long term systemic means of creating long term (100+ years) value. If you subscribe to the labor theory of value instead of marginal utility, look at the facts and quickly you’ll see we’ve created a perfect storm of anti-value creation (is there such a thing? hmm.)

It’s time somebody started listening to historians. So, Martin, I think you’re spot on. While most are still drinking the neo-classical economic Kool-Aid(TM), it’s time for a great economic awakening. But forget about economists leading us to the promised land. They’re hopeless.

And by the way, I’m not a pessimist…I am a realist, but sometimes the truth hurts.

Sorry to be so long in responding — been swamped. Anyway, what I said, or meant, was not that economists predicted this once-in-a-lifetime-financial crisis. But that there was serious concern over unsustainable practices in the US starting with the current account and fiscal deficits, as well as the sub-prime borrowing, and zero-down-borrow-105% value mortgages being offered.

Trying to remember who was saying or writing this two years ago is hard. Here are a couple examples of general concern about the US situation.

http://www.bcbudget.gov.bc.ca/2005_sept_update/bfp/11_tb_The_Economic_Forecast_Council,_2005.htm

http://www.cucbc.com/publications/economics/pdf/interestRateForecast/march%2007.pdf

I should have added before, your question about the state of the Economics field is a good one.

Thinking about the history of the Economics as a field, I’m not sure that the profession and their tools are really designed to be predictive, so much as to offer great tools and ideas for understanding what happened post-facto. Analysis of past events provides great context for understanding current and future ones, but not in a predictive way. But, many have tried to force Economics into a box where it doesn’t fit — soothsayers.

Thanks for the your perspectives and questions you bring through this site. What economists do is too diverse to critique broadly (note the recent article in the The Economist on young economists to watch (Dec 30, 2008.) It showed, in particular, how experimental methods and new behavioral models are weaving their way through multiple subfields. Things change, but sometimes it is a generational process.

That aside, the reason for my post was to offer up a very local perspective. We focus on the Dallas city and MSA economies for the municipal government. We don’t do national forecasts, but try to understand what broader trends mean for us. I reviewed what our office was saying about housing and economic implications in recent years. I found two articles in our newsletter, one from May 2005 and one from November 2006 (www.dallas-ecodev.org) The essence of those was that there appeared to be serious regional bubbles in housing (Southwest, Florida and Northeast), but since Dallas had not experienced rapid appreciation we were not likely to see major declines when/if the bubbles burst. We were interested in the revenue impact of a correction and we did not address or hint at the international chain reaction that would follow. Honestly, I don’t know if we would have been able to take it much further. (Fortunately, our housing market has performed as predicted with level prices or small declines so far, but our developers are facing the same credit restrictions felt nationally.)

Still, if our humble team of meatball economists saw enough to entertain the idea of bubbles and collapse shouldn’t there have been others, in their local economic spheres of influence to see the same and identify what it meant for their stakeholders? I bet even if all the regional economists were on the ball for their markets, collectively we could have missed the big picture.

Perhaps in the case of real estate forecasting (and the links to other parts of the system) it might be another example of how important it is to take a bottom up approach. There may be an analytical disconnect between the regions where the real economy happens and the abstract we call the national economy. The Fed with a regional network didn’t appear to catch this either. They had all the data in the world, but maybe they lacked the system and focus to put together the pieces (their purview was national monetary policy afterall.) A system that networked local teams of analysts and tried to synthesize a roll-up might help in the future. We wouldn’t need a complete, integrated theory, just a good analytical framework, a little technology and some common sense.

I agree completely. I also agree about allowing “creative destruction” to happen.

One economic theory about why recessions happen is that, over an economic cycle, certain sectors get overbuilt. The economy needs time to realocate the resources from the overbuilt sectors to the ones with increasing demand.

Seems to me that this explanation explains our current economic difficulties. Because of low interest rates, many, many sectors of our economy became overbuilt earlier in the decade: homebuilding, finance, automaking, casual dining , etc. These sectors need to cut back, and other sectors need to take the lead.

Targeting the overbuilt sectors with incentives and subsidies does nothing to get them rightsized. Perhaps the government could provide funds to retrain people (which they already do), but other than that, there’s not a lot they should be doing for the homebuilders, automakers, brokers, etc.

Hayden none of this bailout money is going to entrepreneurs. I agree we need to encourage entrepreneurship.

As for the banks, the bank executives need to fired, the equity and bond holders wiped out if the bank has negative value, and those with loans to the banks need haircuts. Only by creative DESTRUCTION can the old corrupt and incompetent be wiped away so that the process of growth can start again.

As a Leftist I find that I believe in capitalism more than the mainstream supporters of the current system of crony capitalism.

Crackpot capitalism in my book is when people believe that a debt crisis can be solved by massive issuance of even more debt without writing off the old stuff. Good after bad!

Let’s look at Apple as a case study. Apple is run much more like a privately held company than a publicly traded one. It’s CEO founded the company and is committed to product development and a vision, Jobs is not making decisions based on stock prices and options. We need more companies like Apple and Google who are founded by visionary entrepreneurs and grown via vision and passion. There are plenty of other less sexy examples as well. We need less wheeler-dealers making money on transactions and more visionaries creating innovative products and services; or new conceptual designs. Better mouse-traps.

In addition, I believe that the run from bubble to bubble is indicative of excess capital seeking safe havens in the world. There is always a need for investment in the world, but the creation of value is difficult and risky work. Most money does not want to go there. While the last 6 years saw an expansion, the fall has been deep because so much of the creation of value existed no where except on the balance sheet.

Well, there is one more bubble, already existing, and it is in US Treasuries.

The Chinese and Japanese governments have made a killing over the last year as their massive holdings of existing T-bills have become much more valuable. The Chinese could easily fund their stimulus just from the profits of their T-bill holdings.

Of course, then they couldn’t hold the value of the yuan artificially low, and their mercantile trade policy would fall apart.

The bubble in T-bills is good in that the feds can borrow at some stupid low interest rates. It is bad in that, when it pops, it is going to make borrowing costs much, much higher in the future.

He has been writing for years about how unsustainable the boom years were.

His blog is at:

http://www.thegodsthatfailed.co.uk/