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Economics is, at its base. a social science regardless of the attempts by learned professors to make it a branch of Mathematics. In the social sciences the standards of accuracy of statistical predictions is in the 25% range, at best. Tossing a coin is twice as accurate.

So engineering it ain't. All we really can be sure of in economics is what didn't work well in the past. Like massive government economic stimulus programs based on infrastructure projects, like the Bush cash handouts, spent of buying more chinese junk with a government check instead of a credit card, or like the late lamented Gold Standard - a major recession/depression every 10 to 20 years because of lack of central bank control over the money supply.

Of course this knowledge of the past requires that we be accurate and true in our analysis of history. Looks like the oncoming Obama Administration will ignore that in favor of the mythology of the New Deal. But what the hell, there's a couple of schools of economics based on myths, like the Austrians and the Marxists. Why should they have all the fun avoiding reality?


Fred Barnes, The Weekly Standard

"Barack Obama is an awfully good politician but not much of an economist,"
"His model for lifting America out of its economic slump is President Franklin Roosevelt's New Deal. The trouble with FDR's policy, however, is that it didn't come close to reviving the economy and restoring it to pre-Depression vigor. But FDR did use the New Deal quite successfully in another regard: to build a coalition that kept Democrats in the majority for a half-century. …

"The contrast here — and not only in language — is with President Reagan's economic stimulus in 1981. To generate investment, Reagan relied on a 25 percent, across-the-board tax cut on individual income — including the income of the rich — and accelerated depreciation for business. It worked, aided by monetary easing by the Federal Reserve. By early 1983, both the economy and employment were growing rapidly. …

"That Obama has no interest in the Reagan recovery model is hardly a surprise. He has some unusual ideas about the economy. 'The American economy has worked in large part,' he said last week, 'because we've guided the market's invisible hand with a higher principle: that America prospers when all Americans can prosper.' That's not exactly the way Adam Smith described the invisible hand of free markets.

"When he announced his picks for top energy and environmental posts, Obama praised California for adopting the most stringent emission standards in the country. 'And rather than it being an impediment to economic growth, it has helped to become an engine of economic growth,' he observed.

"At best, it hasn't helped much and more likely has hurt the California economy, which is currently cratering."

Humbled By Our Ignorance

By Robert J. Samuelson
Monday, December 29, 2008; A15 Washington Post

It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best. The great lesson of the past year is how little we understand and can control the economy. This ignorance has bred today's insecurity, which in turn is now a governing reality of the crisis.

Go back to the onset of the crisis in mid-2007. Who then thought that the federal government would rescue Citigroup or the insurance giant AIG; or that the Federal Reserve, striving to prevent a financial collapse, would pump out more than $1 trillion in new credit; or that Congress would allocate $700 billion to the Treasury for the same purpose; or that General Motors would flirt with bankruptcy?

In 2008, much conventional wisdom crashed.

It was once believed that the crisis of "subprime" mortgages -- loans to weaker borrowers -- would be limited, because these loans represent only 12 percent of all home mortgages. Even better, they were widely held, diluting losses to individual banks and investors.

Wrong. Subprime mortgage losses (20 percent are delinquent) triggered a full-blown financial crisis. Confidence evaporated, because subprime loans were embedded in complex securities whose values and ownership were hard to determine. Similar doubts afflicted other bonds. Demand for all these securities shriveled. Lenders hoarded cash and favored safe U.S. Treasuries. Because investment banks and others relied on short-term debt (a.k.a. "leverage"), a loss of confidence and credit threatened failure. Lehman Brothers failed. The financial system had overborrowed and underestimated risk.

It was once believed that American consumers could borrow and spend more, because higher home values and stock prices substituted for annual savings. Consider: From 1985 to 2005, the personal savings rate dropped from 9 percent of disposable income to almost zero. But over the same years, households' net worth (assets minus liabilities) quadrupled, from $14 trillion to $57 trillion.

Wrong. In recent years, consumers increasingly overborrowed, especially against inflated home values. With the housing "bubble" now collapsed, net worth is falling. Homeowners' equity in their homes -- the share not borrowed -- is at a record low of 45 percent, down from 59 percent in 2005. Consumers have responded by retrenching big-time. Retail sales have dropped for five straight months; vehicle sales are a third below 2006 levels.

It was once believed that the rest of the world would "decouple" from the United States. As Europe, Asia and Latin America expanded, their buying would cushion our recession. A better-balanced world would emerge, with smaller U.S. trade deficits and lower surpluses elsewhere.

Wrong. The crisis has gone global; economic growth in 2009 will be the lowest since at least 1980. Even China has slowed; steel output was down 12 percent in November from a year earlier. The crisis has spread through two channels: reduced money flows and reduced trade. Global financial markets are interconnected. Customer redemptions forced U.S. mutual funds and hedge funds to sell in emerging markets (such as Brazil or Korea), whose stocks have dropped about 60 percent from their peak. Credit has tightened, as money flowing into developing countries is expected to shrink 50 percent in 2009 from 2007 levels, estimates the World Bank. The bank expects trade, up 7.5 percent in 2007, to fall in 2009 for the first time since 1982.

So much that has happened was unexpected that the boom and bust's origins are obscured. These lie in the side effects of declining inflation that started in the 1980s and, in the process of reducing interest rates, boosted stock prices and housing values. Recall that in 1981, when inflation was 9 percent, 30-year mortgages averaged 15 percent. As rates fell (mortgages were 10 percent by 1990, 7 percent by 2001), home prices rose. People could afford more. With lower interest rates, stocks became more valuable.

All the bad habits of recent years -- excessive borrowing by consumers and money managers, careless and reckless lending -- grew in a climate when gains seemed ordained. Even after the "tech bubble" burst in 2000, stock prices at year-end 2002 were seven times their year-end 1981 level. Home prices increased steadily; in the 1990s, they rose 45 percent.

Prosperity, apparently forgiving of mistakes, bred the complacency that undid prosperity. On bad mortgages, losses could be recovered by selling the homes at higher values. Thus rationalized, bad loans were made. Some stocks might decline, but over time, most would rise. Risk seemed to recede, so investors and money managers undertook riskier strategies.

What will emerge from these shattered illusions? Will the crash stir social unrest, abroad if not here? Will Americans become so thrifty that they hamper recovery? Will economic nationalism surge? How will capitalism be reshaped? Much depends on whether the frantic policies to combat the recession succeed. Probably they will, but there are no guarantees. Our ignorance is humbling.

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A bubble....

...holds together and keeps on stretchin' until the surface can no longer take the strain of holdin' itself together. Then it bursts. Our economy is going in exactly that direction, as it might be expected to do, and everybody is going to be playing the blame game, this time, instead of digging in to rebuild. I do not expect the US of A to survive as an organized political entity this time. The FedGov is not strong enough to impose a Geheim Staatspolezei on us, nation-wide, and that is the only thing that would have much chance of holding us together as a nation.
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