The Dismal Science: Pessimism vs. Optimism for 2008

Who are you going to believe?

On story claims that the US is possibly in for a recession

So says a professor of Economics at Yale:

Losses arising from America’s housing recession could triple over the next few years and they represent the greatest threat to growth in the United States, one of the world’s leading economists has told The Times.

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent.

“Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.

Professor Shiller, author of Irrational Exuberance, a phrase later used by Alan Greenspan, the former Federal Reserve chairman, said: “This is a classic bubble scenario. A few years ago house prices got very high, pushed up because of investor expectations. Americans have fuelled the myth that prices would never fall, that values could only go up. People believed the story. Now there is a very real chance of a big recession.”

On the other hand we have the buoyant Larry Kudlow, enthusing about 2007 and looking forward to 2008:

At his year-end news conference, President Bush stated with optimism that the economy is fundamentally sound, despite the housing downturn and the sub-prime credit crunch. The very next day, that optimism was reinforced with news of the best consumer spending in two years. The prophets of recessionary doom, such as former Fed chair Alan Greenspan, Republican advisor Martin Feldstein, ex-Democratic Treasury secretary Lawrence Summers, and bond-maven Bill Gross have been proven wrong once again.

Calendar year 2007 looks set to produce 3 percent growth in real GDP, nearly 3 percent growth in consumer spending, and over 3 percent growth in after-tax inflation-adjusted incomes. Meanwhile, headline inflation (including food and energy) will have run at 2.5 percent, with only 2 percent core inflation.

Jobs are rising over 100,000 per month and the stock market is set to turn in a respectable year despite enormous headwinds. Low tax rates, modest inflation, and declining interest rates continue to boost Goldilocks, which is still the greatest story never told.

Bush’s optimism is well-earned, in Congress too. He has stopped a lot of bad legislation on higher taxing and spending. He won on S-CHIP and the alternative minimum tax. He mostly prevailed on domestic spending. And he got much of what he wanted on war funding without any pullout dates.

And he’s not yet finished. In the most dramatic statement of his holiday news conference, Bush said he will not stand for the continuing congressional proliferation of pork-barrel earmarks.

“Another thing that’s not responsible is the number of earmarks the Congress included in the massive spending bill,” said Bush. “The bill they just passed includes about 9,800 earmarks. Together with the previously passed defense spending bill, that means Congress has approved about 11,900 earmarks this year. And so I am instructing budget director Jim Nussle to review options for dealing with wasteful spending in the omnibus bill.”

This is huge. The statute of limitations for Republican overspending, over-earmarking, and over-corrupting that caused huge congressional losses in last year’s campaign will not run out until the GOP shows taxpayers that it again can be trusted on the key issues of limited government and lower taxes.

In these matters, Republicans must be holier than the pope. And while President Bush has been doing the Lord’s work with his newfound veto pen, he must continue to wage war on earmarks if the GOP is to cleanse the political memory of Tom DeLay, Jack Abramoff, and Randy “Duke” Cunningham.

So which scenario is more likely? Doom and gloom or Sunshine Kudlow? The latter is often optimistic and often correct. The Yale academic is not familiar to me, but on the other hand he is from the Ivory Tower so I tend to distrust his opinion on principle.

Besides, Kudlow’s writing style is much more entertaining.

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22 thoughts on “The Dismal Science: Pessimism vs. Optimism for 2008

  1. If you want to know why he’s been sounding the alarm for a long time, here’s URL for a graphical view of what’s been going on in housing:

    In short, there’s been a bubble. And the geniuses in the room at Wall Street bet on that bubble in various unwise and heavily leveraged ways. The unwinding of that is going to mean some prolonged pain in the housing markets (especially in areas with steep appreciation) and some prolonged pain for the financial sector (which is why you see folk like Citibank and Washington Mutual scrambling around for new capital — they lost the old capital). How much of this bleeds through to Main Street? Hard to tell, but I think at least some does.

    I’d recommend taking a look at Calculated Risk (a duo of bloggers who explain the ins and outs of the financial and mortgage industry mess) and MaxedOutMama (who tracks freight and imports, and puts things in a bottom-line perspective for the average person). Then decide whether Kudlow or Shiller is closer to the truth.

    I’d like to believe Kudlow, I really would — I work for a capital equipment manufacturer and recessions are death on capital equipment sales. But I think a recession is likely.

  2. Don’t know about the professor but Kudlow looks at the world through rose colored glasses and can’t see red, also, he is wrong on the elections- the amnesty bill sunk them though their dogged efforts at spending us into poverty didn’t help.

    The bottom can fall out of the housing market, during the 80’s oil bust Oklahoma was a fire sale, 3 bed 2 bath in a good neighborhood for 10K – 12K was rather common. What troubles me is the cost relative to wages is pricing too many people out, and all I see being built are McMansions. I realize we now have no child left behind but does that mean we will all live in 8K -10K SQFT homes?

  3. I’m a non-economist and won’t offer an opinion, but I work in the hospitality industry, and business at my job hasn’t been this slow since right after 9/11. The middle-class professionals who travel for business aren’t leaving town as often as they used to. (Reporting from the SF Bay Area.)

  4. Perhaps the Yale prof. lost some money in real estate and is bitter or perhaps he trades in gloom-and-doom.

    Regardless, his dire prediction does not sound so ominous.

    ““Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.”

    These were the most over-inflated markets and so 35% is not that terrible and inline with corrections in overheated markets during the 90s. The thing is, since these markets are also in desirable areas, they tend to recover and then go back up more quickly too. So while some may suffer, overall, even this scenario is not that awful. Moreover, this is not referring to the vast bulk of housing, which is outside of these markets.

    How many examples are there in history of housing price-led recessions, anyway? Usually, it is the other way around. There is plenty of speculation in real estate, and bidding wars when markets are hot, etc. but ultimately a house is a shelter, so it’s not a simple commodity. Movement of individuals is always going to happen, so there will always be demand. It’s not a bottomless thing. It’s not a tulip.

    So eat, drink and be merry. Worry more about Islamists than home values. You can worry about the effect of Islamization on home values if you want, but that will take a long time to play out, unless you happen to live near a little pocket of sharia already.

  5. I laughed when I found the quote I wanted to use to rebut your Professor Schiller. ‘Cause then I continued reading and found that you already had Kudlow in the next graph!

    Anyway, I tried to explain money and monetary policy here. It doesn’t matter what happens to mortgages if you don’t try to remortgage and you’re making more money. It doesn’t matter if the dollar declines if you have a fixed mortgage and are earning more dough than you used to earn. This remains true as long as your relative position vis your debt is attacked by inflation.

    Money is the key. And money supply is the key to money. Just ask Kudlow.

  6. For a pessimistic UK POV see here – ‘Crisis may make 1929 look a ‘walk in the park’

    This is Ambrose Evans-Pritchard in the UK’s Daily Telegraph (old media). On his plus side he has statistics and good contacts. On the minus side, he has been predicting bad news for over 2 years so, as he himself admitted, he got it wrong last year.

    Personally, I am leaning to the pessimistic side. This is a BIG housing hole / bubble we have in the UK and it appears to be the same in USA, Spain, Ireland, possibly Australia.

  7. All this doom and gloom… we’re definitely due for a reset in the property markets, they’ve gone well beyond inflation for years thanks to rather odd policies in the US, UK and other european nations… but a housing bubble doesn’t necessarily mean a recession by itself, or at least not a major one. Obviously I can’t speak for the world but the UK, I reckon, will see house prices in the south-east drop by about 50%. What won’t happen is a similar drop in the north and west, where prices have also been rising. They won’t rise as fast but that’s about it.

    In an ideal world that would be it. But now comes my own doom and gloom… we’re riding a credit wave in government spending this side of the atlantic, on top of the consumer credit thing. Over the last few years Brown became increasingly frantic to close tax loopholes and claw in as much revenue as possible with very harsh inspections on possible evaders because there’s a big hole in the government’s spending plans. They’ve kept putting large spending projects off the books with private finance initiatives – supposedly private, but backed by government money in the end – which has allowed the government to pretend it’s meeting Brown’s arbitrary 2% spending doodad – except when it didn’t meet that Brown changed the percentage and pretended that’s what he’d always meant. And now he’s the PM,a nd out of control of it all. Blair baikled out just in time.

    We’re going to see a few banks go under. Northern Rock was a trial-run for how this country would reaction – and by extension how many other european countries might also react. They screwed up and bailed northern rock out instead of letting the market absorb the hit by buying it up. That’s set a precedent, and now there are going to be a series of bank failures that the government will have to bail out, possibly even by nationalisation. Other european econmies will fllow suit – they really have little choice given the burden of european regulation in the financial sector that prevents banks from purchasing each other too quickly, amongst other things.

    And given the scale of the problem they’ll look to the EU to solve it. The european central bank doesn’t have the Fed’s spending capacity or its mechanisms for dealing with a situation where several member states go into a prolonged recession, the EU doesn’t have the tax revenue to bail out the ECB, and this will be very obvious very soon after the banks start to fail. The Euro will crash in the next three or four years.


    It won’t be as bad as 29, at least for you americans. The dynamics aren’t the same. You’re more reliant on the eastern economies than Europe this time, so if we fall over you’ll still have a major export market to sustain your industrial base.

    You lot in the US will weather this one quite well I reckon. your economy is still growing at a fair whack and you’re flexible enough to be able to absorb the impact so long as people aren’t panicked into withdrawing savings by doom and gloom merchants like me. 😀

  8. It doesn’t matter if the dollar declines if you have a fixed mortgage and are earning more dough than you used to earn.

    That’s the thing.

    I work in IT and used to work in north VA.

    During the run up to the dot com bust salaries skyrocketed as did housing. I watched condos in the Tyson’s area go from $250K to $750K in two years time.

    My peers bought larger houses and fancy cars thinking the gravy train wouldn’t stop. I found a small place in the mountains I could pay off quickly.

    Then the dot com bust came. I don’t recall the exact sequence but at one point after Worldcom and a few others went belly up there were around 10K people looking for IT jobs in the DC metro area.

    Here’s the thing though: salaries dropped anywhere from 30-50% after 2002 but housing/renting cost the same. When I was researching a move to NC, relocation calculators were indicating that north VA had the same cost of living in 2005 as 1999-2001.

    So what use are good economic indicators when local salaries don’t cover the cost of living? They are good for people like me who moved to states that didn’t go insane with the housing bubble. But what about people that carry a large debt load who can’t move?

    I had naively hoped that in moving to NC I could enter semi-retirement as the proceeds of my VA home allowed me to buy outright in NC. However, property tax and cost of living has killed that idea.

    It’s not like I’m living the high life – we drive ten year old cars, don’t go to movies, and eat out maybe once a month. It’s just that the cost of living has not dropped down in step with salaries.

  9. Damn Southern Fried…
    I lived in N.C./Greensboro for 25 years and moved back to NJ to retrain myself. After ten years,I am pondering moving back; however, I still remember the high taxes and rents equivalent to NJ. And I remember Northerners moving to NC when AT&T reorganized: they were soon laid off as the company (and other such companies)hired cheaper local labor: there are several universities and colleges that can provide a labor pool. The result was a body of Northerners stuck in NC unable to move because of the cost of living disparity.

    That being said with half of NJ residents wanting to move. I have met waitresses and hairdressers who have purchased or are building nice homes in NC. Several months ago, I was driven to and from the auto repair shop by two different workers who were planning to move to NC if their union could transfer them – whatever that meant. A skilled tradesman, being better trained than the Southerner, could do very well.

    I am also in IT – tech writer – and was hoping I could earn a decent living in NC; but, from what you’re writing, I can only have doubts. On top of that put my being an artist: I know G’boro is a dead zone with its Arts Council controlled prfessional gallery run by insiders.

  10. I have to side with the pessimists. I am not knowledgeable about economics but I know what I see. To most folks that I know it seems like a recession has already been in place for a couple of years now. I know of at least a half dozen people who have been out of work for over a year now. Most of whom have had to take two crap jobs (in the service sector) to make ends meet. Some of those wonderful 100,000 “new jobs created”. Thank you outsourcing. These people are no slouches either. Most of them have college degrees. Then you have everyone buying on credit with huge debt. As to the housing market. Prices in my neck of the woods have been hyper-inflated since 9/11 and have barley dropped since. So the greedy side of me wants that bubble to burst. I have been wanting to buy since 02 with no hope in sight.

  11. I expect the chance for recession is fair because of all the new property owners who will go bung-up because they can’t pay their mortgages. Flow-on effect applies. Wish there was a way we could go back onto the gold standard. Yet another thing to thank the French for (that we are off the gold standard. /sarcasm off)

  12. A skilled tradesman, being better trained than the Southerner, could do very well.

    Your statement assumes a few things –

    First and second: humph!

    Third: that there are no Southerners of equivalent skill (see first and second points)

    Fourth: the market is willing/able to bare his desired rate.

    Fifth: that there aren’t a huge number of illegals here that will do the work for a quarter of his rate.

    Regarding tech work in NC and I suspect nationwide – nuts and bolts work is being heavily outsourced. I’ve been informed at my shop that we’re to better match the Indian model. Meaning that we are to gear up getting them setup very quickly because they tend to be employed for 2-3 months. We may or may not employ them again at some future date. Further we’re to find ways of shutting down all access to their accounts across all platforms near instantaneously as culturally they don’t observe our proprieties regarding private/confidential property.


    Back to topic —

    Gold hit $861.10 today. Previous high of $850 was back in Jan 1980. Gold seems to go up when people are worried about the US. Like in Nov of 1979.

  13. Southern Fried

    I base my statement on my conversations with a machinist I knew in the ’70s. I also base it on observing the education of the average southerner: just enough to work in the mills. Anyone more intelligent is left under-employed: Kinko’s anyone? I met many over intelligent individuals at a G’boro company that graded the various states’ high school standardized exams.

    However, the training for hairdressers is superior than New Jersey’s.

    No, the southern market is unwilling to bear his rate.

    I did not assume there to be a shortage of illegals. Everything is being outsourced — including “citizenship”.

  14. This –

    And I remember Northerners moving to NC when AT&T reorganized: they were soon laid off as the company (and other such companies)hired cheaper local labor

    And this –

    Kinko’s anyone?

    Contradict each other.

    Hmm, where are BB&T, Wachovia, and Bank of America headquartered? Where do Cisco, NetApp, Dell, and GSK have tech centers?

    They are equivalent to Kinko’s?

  15. In the 80s & 90s, Kinko’s near UNC-G employed a Sci-Fi writer and a Gothic novel writer, who was also a general’s daughter. No contradiction.

    North Carolina during the time I was there was a mill state.

  16. I find your narrowing of focus rather fascinating. That and the moving time frame.

    Was the general’s daughter a superior hairdresser with a millworker’s education?

    North Carolina during the time I was there was a mill state.
    As I didn’t live in the state before 2005 I spoke with an old timer at the office. Seems anyone with a clue saw that the mills were dying in the late 70s and moved/commuted to where the work was in the state. Anyone that still worked in the mills by the mid 80s were unemployable anywhere else.

    I lived near Newark NJ for a couple years in the early 90s. Should I assume the folks I encountered there represent the average northerner? No. That would be ignorant.

    Funny you mention First Union buying out Wachovia in the 90s. Wachovia was headquartered in W-S. Are you suggesting that the best and brightest in Greensboro wouldn’t commute to Winston-Salem? Or to Charlotte to work at FU’s headquarters before the “merger”? Or after?

    I just do not buy “Anyone more intelligent is left under-employed”. IBM was in Charlotte in the mid 80s. RJ Reynolds and BB&T were in W-S. I can hunt down all of the major employers that were in the state in the mid 80s if you’d like.

  17. Good stuff, I’ll go with Kudlow.
    We will work through the housing thing. Some people will get some great deals on houses.

    Things will go down and things will go up. Some people will lose their jobs, but while most won’t, many will worry that they might. Just like many people do anyway.

    We will survive, we will get by.

    absurd thought –
    God of the Universe hates

    the study of entities
    interacting in markets

    absurd thought –
    God of the Universe says
    probably this should happen

    however that could happen
    if only this would happen

  18. People need nitty gritty facts and a much broader scope.
    It’s not just about housing.

    I find moneyandmarkets to be rather enlightening.

    Fed Feeding Food Inflation! What to do … by Larry Edelson
    Double-Digit Price Inflation Returns! by Martin D. Weiss Ph.D.
    Inflation Brainwashing Starting to Backfire by Larry Edelson
    Ratings Collapse by Martin D. Weiss Ph.D.
    Oil at $150 a Barrel in 2008 by Sean Brodrick
    Five Mega-Trends Unfolding In 2008 by Mike Larson
    The Epic Battle of a Lifetime by Martin D. Weiss Ph.D.
    Word Of Gold Rush Spreading … by Sean Brodrick

    Whatever you may think of their opinions, they back them up with interesting facts, and they stick their necks out, making lots of specific predictions.

    One disagreement I have with them, is their bullishness about China.
    If their predictions about the US economy plays out, China will be hit hard.
    China doesn’t have a domestic market big enough to support a fraction of their current activity.
    To make matters worse, they have tied much of past trade surplusses up in cheap dollar loans to the US. That’s only wise as long as the dollar keeps it’s value and the US consumers use the borrowed money to buy Chinese products.
    This pyramid scheme is coming to an end, and I believe China will be left holding a good chunk of the bag.

    Another thing, lots of people think the US recession won’t hit Europe as hard as it have in the past. They conveniently forget that the trade between US and EU is approximately 50% of global international trade.

    The Fed and various central banks, in Europe in particular, are fighting an already lost battle – costing the EU billions.
    As a result, the EU central banks will have little dry powder left to fight the coming European recession.

    Another aspect I don’t see anyone touch upon, is what happens to the foreign uneducated hordes during a recession ? The illegals in the US and the muslims in Europe ?
    Menial jobs and jobs in the service sector will be the first to disappear.
    They will have to “live off the land”, and what isn’t given to them willingly (EU) they will take by force (US).

    Also, it’s a matter of time before the US will have to cut their losses in Iraq and Afghanistan.
    If not by political decision, then because of economic realities.
    Downsizing of the military and withdrawal from bases in Europe will be next.

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