Posts filed under “Taxes and Policy”
Both John McCain and Barack Obama responded quickly to the turn of events on Wall Street this week. Early Monday, McCain said “the fundamentals of our economy are strong” but are threatened by greed on Wall Street. He released a new ad saying “our economy is in crisis” and that “only proven reformers McCain and Palin can fix it.”
On Monday, Obama attributed the crisis to lax regulation, which he linked to President Bush and McCain.
Today, the Obama campaign released a new ad attacking McCain’s assertion that the economy is strong. “How can John McCain fix our economy if he doesn’t understand it’s broken?” the ad asks.
Bloomberg: Excerpt: The U.S. Treasury is considering taking over American International Group Inc. under a conservatorship as one option to address the insurer’s crisis, according to two people briefed on the discussions. Executives from AIG, bankers and Treasury and Federal Reserve officials are meeting today on the company’s situation at the New York Fed. A…Read More
Goldman Sach’s Jon Hatzius just published an interesting Brookings Paper on the inter-relationship between falling home prices, the credit crunch, and real GDP.
I found some interesting theories and arguments worth chewing over in the paper. (A link to the full paper and the abstract are below).
Here are the four main points I took away from his analysis:
1) The "best case scenario" during the the credit downturn would be a "couple of years of stagnation or mild recession in the broader economy;" and that’s only, according to Hatzius, if the GSE’s continue expanding their books of business (i.e., keep buying up mortgages).
2) On the other hand, if the "GSEs were to stop growing their book of business . . . it "would also raise the risk of substantial adverse feedback effects
between the real economy, the housing market, and the financial
Um, news flash: The feedback loop (in a negative direction) between housing, credit and the economy is not a risk, its a reality. That is precisely what we are in the early stages of experiencing. Its here, its now, and it looks to be getting worse.
3) Now’s where things get interesting: "The specter of such a feedback loop was likely an important reason for the Treasury’s decision to take the GSEs into conservatorship on September 7."
I would argue that the adverse loop was already visible to the Treasury (and the Fed), and their concern was a rapid expansion of this negative (duh) inter-relationship between credit, housing and the economy. Its the only half-decent economic explanation I have heard so far to justify the conservatorship.
4) "Macroeconomic policies may need to remain unusually expansionary during the adjustment of the financial system to the housing and credit market downturn."
Um, yeah. At this point, a tighgtening is off the table for the Tuesday Fed meeting. I expect by next Summer’s fishing trip, rates will be down to 1.5%.
A few charts and the ABSTRACT are after the jump . . .
Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn
Brookings Papers, September 10, 2008