Worldwide recession?  The United Nations forecasts that the world economy will contract in 2009, for the first time since the Great Depression of the 1930s (1 Dec. 2008).

• And an NPR report said this morning that Britain's economy is in recession now too, though I couldn't find a corroborating account elsewhere (3 Dec. 2008).  Considering that the U.S. and the Euro Zone are officially in recession now, it would be a shock if Britain were not, however.  British unemployment figures suggest recession, too -- the jobless rate in the third quarter of 2008 was 5.8%, up 0.4% over the previous quarter and up 0.5% from last year.

This just in:  The U.S. recession began a year ago:  The ever-cautious National Bureau of Economic Research (NBER) announced on 1 Dec. 2008 that the U.S. economy went into recession in Dec. 2007 and has been declining ever since.  The link here is to the official NBER press release, which is also worth reading for the FAQ at the end in which the NBER disavows that so-called definition of a recession as two consecutive quarterly declines in real GDP.  In fact, the NBER says, "The committee believes that domestic production and employment are the primary conceptual measures of economic activity"  (emphasis mine).  In the FAQ it adds, "we do not identify economic activity solely with real GDP, but use a range of indicators."

• Aside from the steadily rising unemployment throughout 2008, a strong sign that we were in a recession was the fact that real GDP fell in the last (third) quarter of 2008.  Details here and here.
• James D. Hamilton reminds us that real GDP also fell slightly in the last quarter of 2007 and thinks a recession probably began in that quarter.  He expects to make the date official in early 2009.
• Barry Ritzholz, citing Merrill Lynch's David Rosenberg, says the last quarter of 2007 is when the recession began in per capita terms.

The Federal Reserve and the Treasury Department announce an eye-popping $800 billion new plan for the Fed to purchase more mortgage-backed securities ($500 billion); securities and assets of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks ($100 billion); and consumer-loan-backed securities ($200 billion).  The asset side of the Fed's balance sheet is getting dodgier by the minute (25 Nov. 2008).

• Yves Smith is unimpressed, calling it a case of "persisting in a failed course of action" (NakedCapitalism.com, 25 Nov. 2008)
• Monetary economist and economic historian Charles Calomiris, who has the harshest words I've seen yet for the Paulson plan, would most likely agree (WSJ, 25 Nov. 2008).

Speaking of dodgy assets, the nation's second-largest bank, Citigroup, snagged $306 billion in Treasury Department loan guarantees for some of its most toxic assets (Economist, 24 Nov. 2008).

• Reaction among economists appears to be very, very negative:  as Paul Krugman puts it, "a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more." (24 Nov. 2008)
• Citigroup board member and erstwhile economic savior Robert Rubin tells the WSJ that neither he nor Citigroup bear any responsibility for the shambles that the company is in, and Yves Smith has smoke coming out of his ears (Naked Capitalism, 28 Nov. 2008).

Everybody Loves Tim, at least they did a week before Thanksgiving:  The news that New York Federal Reserve Bank President Timothy Geithner will apparently be the next Secretary of the Treasury was well received, even by the stock markets, it appears (21 Nov. 2008).  I didn't know much about the guy but thought he'd be a good choice because of the New York Fed's uniquely important role of carrying out monetary policy.  Keeping the federal funds rate low in the midst of a credit crunch, for example, seems like a complex task.  Others have pointed out that although he works on Wall Street (where the New York Fed is), he's not of Wall Street, so he might be less conflicted than, say, Henry Paulson of Goldman Sachs.

Michael Lewis, author of the great Liar's Poker, is back with a new book, Panic! The Story of Modern Financial Insanity.  I ordered it so hastily that I did not notice until opening the book itself that, alas, it's not a sequel to Liar's Poker but an edited collection of others' articles, essays, and book excerpts.  Oh well - fewer laughs but maybe more insights.  A long article by Lewis in Conde Nast Portfolio (Dec. 2008) is here.

At the weekend's big economic summit in Washington, G-20 leaders agree not to disagree, or something like that (MSNBC, 15 Nov. 2008)

Hedge funds to be regulated?  And their managers willing to pay taxes like the rest of us?  Too good to be true? (Financial Times, 15 Nov. 2008)

People it's bad (old James Brown song / new video montage) . . .

• By now, it's clearly more than just a financial crisis.  The U.S. economy has been shedding jobs in every single month of 2008 (a recession by any reasonable definition), house prices have been falling in every single quarter for nearly two years, and consumer spending is falling and projected to keep on falling.
• Retail sales take a nosedive, dropping for the fourth month in a row and by 2.8%. (Bloomberg, 14 Nov. 2008).
• Compared with a year ago, retail sales look even worse -- a decline of 8% or more (Econbrowser, 14 Nov. 2008)
• The 15-member EuroZone economy, consisting of all the countries that have adopted the euro, is now in recession.  Take their word for it (MSNBC, 14 Nov. 2008).
• Who's in the EuroZone again?  Here's the EuroZone map, and a political map of Europe to compare it against, and here's a surprisingly-easy-to-memorize mnemonic:  BAFFLING PIGS MC'S (Belgium Austria France Finland Luxembourg Ireland Netherlands Germany Portugal Italy Greece Spain Malta Cyprus Slovenia; i.e., northern members, then southern members, then new members).
• Add Japan to the list of countries that are "officially" in recession, by that ever-narrow criterion of "two consecutive quarters of declining real GDP" (MSNBC, 17 Nov. 2008).
• Scary aspects of the news:  The third-quarter shrinkage comes after an annualized drop of nearly 4% in the second quarter.  The drop was mostly from lower business investment; Japan has had a credit crunch of its own since 2007, apparently.  The likely nosedive in Japanese exports from the U.S./EuroZone recession doesn't even show up in these numbers (which show a slight rise in third-quarter exports), so next quarter could be where Japan's export-driven economy really gets hammered.
• Once again, economic literacy will be a pipe dream until more people realize that GDP is not the only economic measure and that declining real GDP should not be a necessary condition for a recession.  (It shouldn't even be a sufficient condition:  There are cases such as the Southern economy after Emancipation, and the U.S. economy after World War II, when economic welfare increased even as measured production decreased.)
• David Leonhardt says a 1% drop in consumer spending in 2009 is plausible, and notes that it would be a drop of $400 billion in U.S. GDP, relative to normal consumption growth (NYT, 12 Nov. 2008).  He further notes that the economic stimulus package being discussed in Congress right now is about $150 billion, way too small to offset such a drop in consumption.
• An open letter to Congress signed by 387 economists, including several Nobel Prize winners (and, um, me), calls for a larger fiscal stimulus package, of around $300 to $400 billion, or 2-3% of GDP.  The letter also suggests that the fiscal measures include aid to cash-strapped states and localities, extensions of unemployment benefits, and support for infrastructure projects and energy-efficiency ("green") projects.  The letter was released on 19 Nov. 2008.
• As the president-elect and Congress shape a stimulus package, the president-elect makes a strange departure from his prepared remarks to a governors conference, telling them that despite his support of a fiscal stimulus, "We are not, as a nation, going to be able to just keep on printing money" (Washington Post, 2 Dec. 2008.  Not surprisingly, conspiracy-minded commenters on a Ron Paul bulletin board were all over this one).  Hello?  Does President-elect Obama believe we currently finance our deficits by printing money, as opposed to selling Treasury bonds?  I sincerely hope that was just a garbled way of saying that we do not intend to let our accumulated national debt become so large that the only way to pay it off is by printing money.
• "America's return to thrift presages a long and deep recession," says The Economist (20 Nov. 2008).  The chart of American household debt as a percentage of disposable income is particularly striking:  household debt was about 75% of income in 1992, rose to almost 90% by 2000, and has been over 120% since 2005.  Debt/income ratios over 100% do not seem sustainable, so belt-tightening appears inevitable, and the transition is likely to be painful.
• Obligatory Great Depression analogy:  Many people think of the Great Depression of the 1930s and the Crash of 1929 as basically the same thing, but the financial crisis was largely over after about three and a half years, bottoming out just before the bank holiday of March 1933, whereas the depression lasted well over a decade.  (Although the stock market did not recover its 1929 peak until decades later, the deflation, the bank failures, and the free fall of stock prices were basically over.)  The Depression continued through 1940, however, thanks to low consumption and business investment spending.
• Even the big New Deal government spending programs, which created millions of jobs, were too small relative to the size of economy, and relative to the offsetting higher taxes and state and local spending cuts, to have much of an impact.  Governments at all levels today need to recognize this:  There's a time to worry about balancing the budget and reining in spending, and that time is not when the economy is in a major recession.  State and local governments should be seeking federal aid right now, not planning spending cuts and tax increases.  (And President-elect Barack Obama has said he favors an economic stimulus packages that includes aid to states; NYT, 7 Nov. 2008.  As Leonhardt implies, however, that may be also too small to have much of an impact.)
• And that $400 billion shortfall in consumption-derived GDP would only be part of the story.  Add on a big drop in business investment, which seems to have begun months ago, and the shortfall in GDP is much larger.  Business investment (business purchases of equipment and structures, plus residential construction) is much more volatile than consumption, and business investment is already weak, keyed by, not surprisingly, a big drop in residential construction.  Calculated Risk said on 31 July 2008, "Investment is usually the key to the economy, and investment is weak," and backed it up with graphs of the past fifty years.  Plummeting business investment, practically to zero, was the driver of the Great Contraction of 1929-33, and the failure of investment to rebound was what prolonged the Great Depression into 1940.  (Why investment failed to rebound is a matter of great debate, which I won't get into right now.)

Bailout update:

• Five weeks after the passage of that $700 billion financial institutions bailout bill, Treasury Secretary Henry Paulson has decided that spending that money on toxic assets (subprime-mortgage securities, etc.) is, um, not a good idea.  "A foolish consistency is the hobgoblin of little minds," so give him credit for abandoning a plan that was looking more and more like a sure loser.  Where's that $700 billion gone, you ask?  Only half of it is available to the Bush Administration just yet; $250 billion has gone to purchase equity stakes in banks, $40 billion has gone toward further propping up the AIG insurance company, and $60 billion is still to be disbursed.  (Story, MSNBC.com, 12 Nov. 2008)
• A bailout for "Main Street" has been a constant phrase in President-elect Barack Obama's rhetoric, and it appears likely that Congress will pass some kind of stimulus package and/or bailout during the lame-duck session, probably along the lines that Obama has suggested.  (Whether President Bush will break out the veto pen is an open question.)  Talk of a bailout for Detroit's "Big Three" automakers, and the three million workers who depend on them, is getting a mixed response, from "What are you waiting for?" to "Yes, but only with the right strings attached" to "I say, 'Let 'em crash.'"

New president, same old crisis (Kevin G. Hall for McClatchy Newspapers, 4 Nov. 2008)

• Nobel laureate Joseph Stiglitz echoes that assessment (Washington Post, 9 Nov. 2008)

The Fed does the expected and cuts its federal funds rate target by 50 basis points to 1% (29 Oct. 2008)

Talk about a Wall St. - Main St. split:
Consumer confidence hits its lowest level ever (since measurement of it began in 1967), while the stock-market averages soar by 10% (28 Oct. 2008)

Just how bad is it? The Nikkei index of Japan's stock market just hit a 26-year low, and yet the yen shot up to nearly a 13-year high, apparently because investors think Japan is going to be a relative safe haven (27 Oct. 2008)  Much the same pattern is occuring with the U.S. stock market and the dollar.

A rotten week for world stock markets, with the U.S. S&P 500 now at a five-year low and key European, British, and Japanese indexes at five-and-a-half year lows.   The Japanese, Hong Kong, and Korean markets have lost more than half their value this year (24 Oct. 2008).
-- Race to the bottom: The Wilshire 5000 and the S&P 500 plunged more than 5% on 12 Oct. 2008, to their lowest levels since 2003.

Paul Krugman says the global currency gyrations look like "the mother of all currency crises" (26 Oct. 2008)

Ever since the initial $700 billion bailout proposal a few weeks ago, I've tended to think what we need most is some kind of partial-writedowns plan for people who are struggling, but still have a chance, to pay off their mortgages.  In a tough housing market it's better than foreclosure even from the bank's point of view, so it's not surprising that it's already happening in some quarters.  Can the government get more of that going?

• Robert Kuttner says yes, and says FDIC Chair Sheila Bair has led the way with the many distressed mortgages at IndyMac (which is basically in an FDIC receivership now).  In fact, Kuttner touts her for Treasury Secretary (20 Oct. 2008)  Ms. Bair makes the case herself for helping homeowners first in a Wall Street Journal interview (15 Oct. 2008)
• A New York Times article shows, however, that mortgage debt writedowns are hard to do when the mortgage has been securitized and is now owned by a hedge fund.  In fact, two hedge funds are telling the government that they will oppose any renegotiations of delinquent loans if it hurts their investments (23 Oct. 2008)  It must be much harder still when the securitized mortgage has been split up into hundreds of pieces with countless different owners.
• It could get ugly with the hedge funds and the mortgage writedowns, as many hedge funds are facing a "run on the banks" of their own (22 Oct.)

Today's question (23 Oct. 2008):  Do we need more regulation or just more oversight (i.e., better enforcement of the regulations we have)?

• Man bites dog: Alan Greenspan says we need new regulation, specifically that financial institutions that sell loan-backed securities be required to hold some themselves (23 Oct. 2008) 
• Man bites bigger dog: Greenspan admits mistake (23 Oct. 2008), in having assumed that bankers wouldn't do anything that wasn't in the best interests of their shareholders.

• Funny, back in the Gilded Age in 1882, railroad "robber baron" William Henry Vanderbilt took a lot of heat for saying: "The public be damned!  I work for my shareholders."  Today the CEO credo seems to be: "The shareholders be damned!  I work for me."  Until we get out of that mindset, all the sensible regulations and oversight in the world probably won't be enough.
• Greenspan's quote is also mind-boggling coming from someone who would have to be familiar with the principal-agent problem.  Maybe we've been unlearning some of the lessons from the Great Depression, such as the need for financial oversight.  By the time it was way too late, President Herbert Hoover said, "The trouble with capitalists is they're too damned greedy."  (We heard a similar sentiment from a presidential candidate in 2008 -- I won't say who, but you could look it up -- who said he was always for deregulation and then, after the crisis erupted, denounced Wall Street recklessness and greed.)   Greed?  In the financial sector?  You don't say!
• I have to wonder if the world wouldn't be vastly better off if Greenspan had watched and taken to heart this clip from Oliver Stone's Wall Street (which incidentally opened in 1987, the same year Greenspan took the reins at the Fed). Yes, I mean the "greed is good" speech.  It's not quite the straw-man argument one might expect but actually a great illustration (and condemnation) of the principal-agent problem. Check it out.
• Somebody beat me to the punch in making the analogy to a classic line from another movie, Casablanca.  This little clip is a keeper.
• Dean Baker's insightful essay on the housing bubble says the Fed and the Feds had ample powers to nip the subprime scandal in the bud, but didn't bother.  Baker can think of a few new regulations that would make sense, however (May 2008).
• A 1993 Federal Reserve Bank of Dallas report says the last big credit crunch, in 1991-92, had among its causes some burdensome new regulations imposed in reaction to the savings & loan crisis of the late 1980s

Topic: Foreclosures

• The problem of "underwater mortages" (when you owe more on your home than it's worth) is at the root of the whole crisis, according to some.  12 million people now have underwater mortages, nearly four times as many as at the end of 2006 (22 Oct. 2008)
• More than 1 million foreclosures are expected for 2008, and the number of Americans receiving a foreclosure letter in July-Sept. 2008 was 71% higher than for the corresponding quarter of 2007 (23 Oct. 2008)  
• Rather bad, considering that 405,000 families lost their homes in 2007,and Federal Reserve Chairman Ben Bernanke said foreclosure proceedings were started on 1.5 million U.S. homes in 2007 (5 May 2008).

Some economic historians offer perspective on the crisis (20 Oct. 2008)

The U.S. stock market climbs part of the way back with a very good week (17 Oct. 2008), but the bigger news is in the credit markets (above)

[Early recession watch:  I started this blog in mid-October 2008, at which time it seemed obvious enough that we were in a recession but many commentators were saying we weren't.  I can't blame the NBER for taking its time to make the official call -- as NBER's Jeff Frankel put it, "... our job is to be deliberative, authorative, but not fast....  We deliberately get there last."  But here's how it looked it in mid-October:]

• Are we in a recession?  Yes, by any reasonable standard, especially the sustained rise in unemployment (five straight months from April to September 2008, and two million more unemployed people than in September 2007).
  
• And economic activity declined in September 2008 in all twelve Federal Reserve districts.
• Consumer confidence plunged by a record amount in Sept.-Oct.; it had already fallen in March to its lowest level since 1992.
• Retail sales fell in Sept. for the third straight month, and America's debt-fueled consumption binge may be coming to a close.
• Housing starts in September 2008 were down 6 percent from August, and down a whopping 31 percent from a year ago (17 Oct. 2008)
• Former Federal Reserve Chairman Paul Volcker says a major recession is almost surely coming.
• Henry Blodget says the next recession will be worse than the past few because consumers won't be able to withdraw much from their home equity (19 Oct. 2008)
• Note:  The supposed definition of a recession as "two consecutive quarters of declining GDP," as precise as that sounds, is actually an unofficial (and increasingly irrelevant) definition.  The official definition of a recession as "a significant decline in economic activity" is vague, but it reflects the fact that "economic activity" has many dimensions.

Anna Schwartz says current policy responses to the crisis might have been appropriate for the Great Depression,
but they're liable to just make the problem worse now, by propping up too many insolvent banks (18 Oct. 2008)

Brad DeLong explains the thinking behind the policy responses to the crisis, i.e., Plans A, B, C, D, E, and now F; ironically, the untried "fire-alarm Plan G" is an old-fashioned Keynesian infrastructure spending program (16 Oct. 2008)

• Paul Krugman likes Plan G, and has some specific suggestions for it (17 Oct. 2008)
• As with partial nationalization of the banks, Britain is about to go there first (17 Oct. 2008)
• And now President Bush and Fed Chair Bernanke are talking fiscal stimulus, too, though they haven't embraced any particular proposal yet (20 Oct. 2008)
• Economy.com's Mark Zandi estimated the bang-per-buck of various fiscal stimuli back in July 2008.  The winners:  temporary increase in food-stamps benefits, extension of unemployment benefits, increased infrastructure spending.  Runners up: general aid to state governments, payroll tax holiday, refundable lump-sum tax rebate.
• This is going to sound self-serving, coming from a SUNY employee, but New York state could really use a big bailout.  Gov. David A. Paterson has not yet asked for one, as far as I know, but he is projecting a state budget deficit of $47 billion over the next three and a half years. Considering that the massive revenue shortfall seems to emanate from Wall Street, New York state and New York City are arguably taking a harder, more direct hit from the financial crisis than are any other places.

What's the matter with Iceland?

• This "Letter from Iceland" by Robert Jackson is the most literary take on Iceland's woes I've seen yet (Financial Times, 14 Nov. 2008)
• Iceland, "The First Casualty of the Crisis" (12 Nov. 2008)
• Iceland raises its policy interest rate to a sky-high 18%, as directed by the International Monetary Fund (IMF).  Despite the IMF bailout, the krona (Iceland's currency) has nosedived and inflation is projected to rise to 75% this year (30 Oct. 2008)
• A general update (16 Oct. 2008)
• A 77% drop in the stock market in one-day?? (14 Oct. 2008)
• A seemingly stable and prosperous country facing the prospect of "national bankruptcy"?? (15 Oct. 2008)
• James Surowiecki's New Yorker column from 21 April 2008 sheds some light.

Governments start buying equity stakes in banks:

• The U.K. got there first, in early October 2008, and the U.S. and Eurozone countries talked about moving in the same direction.  Then the U.S. committed $250 billion toward buying stock in, i.e., partially nationalizing, the big banks (15 Oct. 2008)
• Is this socialism, or just another instance of "privatizing the profits, socializing the losses?"  Or more like a Hail Mary pass without any particular political philosophy in mind?  My former professor Willem Buiter says the recent $125 billion lifeline to nine of the biggest U.S. banks is not nationalization (since it gives the federal government no say at those banks) but a giveaway to the banks and a lousy deal for U.S. taxpayers (21 Oct. 2008)
• Uwe Reinhardt says much the same thing, with equally colorful language (19 Oct. 2008)
• The stock markets love the new U.S. plan, at least for now (13-14 Oct. 2008)
• Economists basically like it, too (14 Oct. 2008)
• George Magnus, invoking the increasingly popular late economist Hyman Minsky, says these moves could avert a financial meltdown (13 Oct. 2008)
• A quick history lesson on "direct injections of equity" into the banking system during the Great Depression

Worst. Week. Ever.  For U.S. stocks, 6-10 October 2008 really was.  And European and Japanese stocks did even worse.

• Burton Malkiel, author of the great A Random Walk Down Wall Street, says stockholders should ride it out (13 Oct. 2008)
• James Hamilton says much the same thing, and has some semi-specific investment advice that's worth a look (13 Nov. 2008)
• Which is not to say that stocks are necessarily a bargain right now -- they may have a long way to go before they bottom out (David Leonhardt in The New York Times, 29 Oct. 2008)
• The concept in song form:  
• So I'll meet you at the bottom if there really is one
  They always told me when you hit it you'll know it
  But I've been falling so long it's like gravity's gone and I'm just floating
• -- Drive-by Truckers

Central banks around the world cut interest rates on 8 October 2008 to stem global financial and economic crisis.  Stock markets and credit markets had yet to respond favorably to Washington's $700 billion bailout or "troubled asset relief program (TARP)," signed into law five days earlier.

What's in that $700 billion bailout anyway?  Curious masochist that I am, I took a look.  It's 450 pages long, though only the first 100 or so pages are the bailout plan itself; the rest is the so-called "goodies" that Congress threw in, on issues ranging from alternative energy to mental healthcare to rural schools to disaster relief.  Rather remarkable when you consider that the rejected plan by Treasury Secretary Henry Paulson was just 3 pages.

Martin Feldstein says falling housing prices are the problem and propping them up is the solution (4 Oct. 2008),
but re-inflating a bubble does not strike me as a good idea.

• Steven Levitt isn't buying it, either (7 Oct. 2008)
• Note well: Housing prices are plummeting in other rich countries, too, in many cases faster than in the U.S. (14 Oct. 2008)
• And speaking of bubbles . . . the 2008 Nobel laureate in economics says Alan Greenspan has a lot to answer for.

When did the credit crunch begin?

• Possibly as early as 20 June 2007, when Merrill Lynch received lower-than-expected bids on mortgage-backed securities it was holding as collateral from Bear Stearns.  
• Or maybe on 6 August 2007, when the nation's 2nd-largest mortgage company declared bankruptcy;
• NPR's Jim Zarroli agrees with that date.
• Then again, a poster on the Marginal Revolution website said as late as Feb. 2008 that there was no credit crunch outside the real estate market, and even there it was not so much a crunch as higher lending standards.
• But a five-year chart of the "TED Spread" (i.e., the interest rate on bank-to-bank loans, minus the Treasury bill rate suggests that the credit crunch did indeed begin in summer 2007.

Wikipedia has a good overview of the housing bubble and its debris.

Subprime mortgages may be at the root of this crisis, but there is such a thing as good, even noble, subprime loans -- otherwise known as microcredit -- and they've accomplished great things in poor neighborhoods (Daniel Gross, Newsweek, 17 Nov. 2008), not to mention the developing world.  But even Nobel Peace Prize-winning economist and microfinancier Muhammad Yunus thinks regulation is in order.

Were there other causes of the general economic slowdown (call it a recession or what you will) besides the financial crisis? Unemployment started rising a few months before the financial crisis became full blown, but the subprime meltdown came even sooner.  (And for what it's worth, in 1929 output started falling a few months before the Great Crash.)  Clearly, recessions and financial crises reinforce each other, and both have many dimensions.  But what started the ball rolling?  Still looking for answers.

Which came first, the onslaught of mortgage defaults or the plunge in house prices?  (House prices are still a lot higher than they were in 2000, by the way.)  The two reinforce each other, but which came first, and which of the various causes we've heard about were the most important?  

(The Washington Post, 23 Nov. 2008).  The authors argue that cheaper, better, and universal health care is a lot more feasible than most people think.  Emanuel may wield more influence than the typical op-ed writer:  aside from chairing the bioethics department at the National Institutes of Health, he is also the brother of incoming White House Chief of Staff Rahm Emanuel.