Friday, November 28, 2008

Summary of My Work on the Financial Crisis

Currently available papers and articles are:

Based on these analyses, I have made a number of predictions including, but not limited to:

    Banking Sector

  • Treasury purchases of banks’ preferred equity will crowd out private capital, for example, by facilitating acquisitions of one bank by another

  • Funds will be available for starting new investment projects – if not from banks, from other institutions. Whether people want to borrow is another story

  • Banks will begin to forgive collateralized loans. The amount of forgiveness will decline with borrower income.

    Residential Sector

  • Housing prices will continue to fall after the summer of 2008, by 10s of percentage points

    Nonresidential Nonfinancial Business

  • Nonresidential investment goods are cheap, and this increases nonresidential investment, especially in structures

  • Cheap investment goods = cheap stock market

  • U.S. GDP will not fall below $11 trillion (chained 2000 $)

    Labor Market

  • U.S. employment will not fall below 134 million.

  • Baby boomers will delay retirement

  • Loan forgiveness programs, such as the FDIC's Loan Modification Program, will dramatically reduce the incentive of affected borrowers to earn income


Tino said...

A difficult question but I think central is what people expect in future productivity/wage growth.
Productivity and income grew roughly an extra percent per year in the 90s. By the end of the decade the representative American gave a high probability that this represented was a permanent increase in income growth, so households and government decreased their savings. Assets that capture future income growth, houses and stocks, went up in value.

Income did grow during the 2000s, but not as fast. The subprime explosion itself was due to a specific problem (my pet theory is the gov and financial sector made the mistake of relaxing rational discrimination), but the larger movements are due to deeper causes. Oil took 1-2 years of wage growth, but now it’s back. People are downgrading future productivity growth and adjusting behavior, they think the 90s was just an isolated example, and that some of the growth even in the 2000s was the bubble.

Instead of the typical downturn when business investment is driving the decline in demand this time it’s households increasing savings. The current account deficit will close if people have stopped expecting future high income. The export and import substitution sectors will have to grow, by about 5-8% point of GDP.

Global interests rates will be even lower, without the American demand for loans, although lower oil prices will reduce the supply of savings.

Labour supply goes up, in a period when labour demand is going down. The question is as always why the economy doesn’t just absorb this trough lower wages. Keynesian theory is incoherent junk, but I don’t feel neoclassical economics has answered us the adjustment is so darn hard.

What I would be curious to to know is what happens a few years from now if people find out productivity growth actually was be as high as initially expected, and that the grim prospects was due to idiosyncratic shocks (war, oil, missinvestment in housing, health care cost inflation).

Don said...

I'm keeping track, Mulligan. You and Justin Fox are keeping me sane. You'd better turn out to be right about all this Ricardian Mumbo Jumbo and Supply and Bl... Demand stuff.

I just bought a raft of tickets from an arcade fortune teller, so you'd better at least beat him.

Don the libertarian Democrat