February 6, 2018

The Hot Market Raises Questions About Its Upper Limits

A report from BizWest. “Two things struck me at the recent Northern Colorado Economic Forecast, presented by BizWest: Uniform praise for the economy overall, with strong growth in banking, health care, real estate, etc. Strength is apparent both at the national and local levels, as federal tax reform further fuels the U.S. economy. But things can change quickly. As my colleague Neil Westergaard, editor in chief of the Denver Business Journal, noted recently, economic forecasts in 2007 were almost uniformly positive. ‘The consensus view from most public and private economists was full speed ahead for the U.S. economy, despite a weak European market and flagging numbers in many other places in the world,’ Westergaard wrote in a Jan. 5 column.”

“What followed was the Great Recession, the worst economic downturn since the Great Depression. With that in mind, it’s somewhat refreshing to hear economists even hint at a downturn. How helpful would that have been in 2006, when the Weld County housing crash prompted national media to question what was happening? How helpful would it have been in 2007, when national forecasts remained overwhelmingly positive? Or 2008, when the bottom truly fell out of the national economy?”

“Economist Daniel Carter, predicting a downturn, noted in one article that the yield curve of U.S. treasuries, which typically flattens at the end of an economic cycle, might not do so in the future, as low interest rates have negated the effectiveness of the yield curve as a predictor. So, when many pundits spout nothing but optimism, acting as if a downturn is impossible, when daily reports of record-breaking stock-market performance spawn feelings of investment invulnerability, when it seems to make sense to borrow money from your 401(k) to take that Caribbean cruise that you so richly deserve, it might be worthwhile to log onto Google and search for a few archives from 2006, 2007 or 2008.”

The Register Guard in Oregon. “By many measures, 2017 was an eye-opening year in Lane County residential real estate. Fueled by the long-running seller’s market, the average and median sales prices of homes sold in the county last year set all-time records. The same real estate trends are happening in other parts of Oregon and in much of the nation, said Kevin Simrin, owner of ReMax Integrity in Eugene. Last year’s average sales price exceeded the previous record of $265,300, set in 2007 before the real estate bubble burst and the related financial crisis led to the Great Recession. But the hot market raises questions about its upper limits.”

From Builder Online. “Even as underwriting criteria have loosened generally, and credit availability has grown, smaller regional builders have been feeling the pinch when it comes to qualifying for acquisition, development, and construction (AD&C) loans from their local community banks. ‘We are still in a growth cycle,’ says Robert Dietz, chief economist at NAHB. ‘The concern would be if we had two or three quarters where that growth rate continued to slow, or even turned into tightening territory.’”

“‘The situation right now is that the economy is performing quite well,’ says Bert Ely, a banking and monetary policy consultant. ‘But what everybody’s worried about is when do the bubbles start popping, particularly in housing?’”

From the Washington Post. “The Fed isn’t typically a font of Friday night news dumps. But Janet L. Yellen wrapped up her final day on the job leading the central bank by dropping a bombshell: She smacked down Wells Fargo, issuing an order that bars the scandal-plagued, abuse-prone bank from growing until it cleans up its act. The unprecedented move by the Fed represents a shot across the industry’s bow. The policymaking gears in the Trump era have been spinning in sync to relieve pressure on banks. Yellen’s mic drop — as Capital Alpha’s Ian Katz described it in a Sunday note — is a reminder that regulators can still inflict pain on wayward firms.”

“‘Lawmakers make noise and create headlines,’ but don’t pass much, Katz writes. ‘Regulators are the ones that can put the hammer down. The Fed just put the Fear of God into bank boardrooms across the country. And that’s exactly what it wants to do.’ And Jay Powell, Trump’s pick to succeed Yellen, taking the Fed’s helm today, voted with her to impose the penalty on the bank.”

From Fox Business. “As Jerome Powell was sworn in Monday as the new chairman of the Federal Reserve, the pride of the moment may have been tempered by Powell’s recognition of the risks that lie ahead. A ferocious sell-off on Wall Street continued Monday. Yellen was able to oversee a gradual rate policy because inflation posed no threat: It ran below even the Fed’s 2 percent annual target throughout her tenure. The Powell era could be entirely different. The job market is tighter. Wages are up. Federal debt will likely rise. Tax cuts could accelerate growth.”

“The two most recent U.S. recessions were caused by bursting asset bubbles. The pricking of the dot.com bubble led to a brief recession in 2001. And the collapse of the housing bubble ignited the 2007-2009 downturn, the worst since the Great Depression of the 1930s. The current recovery began in June 2009. If it lasts until June 2019, it would tie the longest expansion on record — the one that lasted from March 1991 to March 2001.”

“Powell will be the first Fed leader in three decades without a Ph.D. in economics. But David Jones, the author of several books on the Fed, said that Powell, with his background as an investment banker, reminded him of the longest-serving chairman, William McChesney Martin, who led the Fed from 1951 to 1970. Martin also lacked a doctorate in economics but had extensive knowledge of Wall Street.”

“‘Powell, like Martin, understands markets, and I think he will be as plain-spoken as Martin,’ Jones said, citing Martin’s famous summation of the Fed’s job: ‘To take away the punch bowl just when the party gets going.’”

From Open Democracy. “In recent months, there has been a lively public debate between mainstream economists and its critics. Newspapers such as the Guardian have declared that economics needs a ‘reformation’, while there have been a number of response articles from mainstream economists complaining that the economics profession is misunderstood, and that it has been the victim of ‘dangerous’ and ‘ill-informed expert bashing’ for both failing to predict the 2007/8 financial crisis, and failing to take on new approaches.”

“Economists, and not just those who work for central banks, do regularly make forecasts which have enormous influence over policy makers, the private sector, the public – and therefore the economy. When in 2004 Alan Greenspan responded to suggestions that housing was in a bubble by saying ‘a significant decline in consumer incomes or house prices could quickly alter the outlook; nonetheless, both scenarios appear unlikely’ he was making a forecast that would have a profound effect on the subsequent course of events.”

“The real problem though is not that mainstream economists failed to predict ‘the timing, extent and severity’ (as the London School of Economics put it) of the crisis – economists have never been held to any such standard of forecasting skill, and no one asked for an exact date. It is that they could not have predicted or warned of the crisis, even in principle, because their models didn’t allow for such events. Furthermore, the models directly contributed to the crisis by enabling the financial sector to develop increasingly risky and dangerous products.”

“Finally, there is the oft-repeated claim that criticism is ‘dangerous’ (or even ‘anti-intellectual and dangerous’ as a piece in Times Higher Education said) because it erodes public trust in experts. But how could public criticism of mainstream economics possibly be more dangerous to society than something like the complete failure of orthodox economic tools during the crisis?”

“The problem we believe is not so much that economists are misunderstood by critics or by the public; it is that they have failed to adapt following the crisis, other than to come up with new ways of defending their tired paradigm.”

“Heterodox economists and people from other disciplines, including those working in the media, have already played a useful role by contributing new ideas and advocating for alternative approaches from areas such as biology and complexity theory. But if further progress is to be made, mainstream economists and policy makers need to engage more seriously with alternative viewpoints, and realise – as many in the public and the media have already done – that the days of monoculture neoclassical economics are over.”