Saturday, September 22, 2018

Quick News Flash: China Announces Broad Import Tax Cut

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A quick news flash from the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff.

Interesting news on the trade/tariff front.
"China Plans Broad Import Tax Cut as Soon as October"

This could turn out to be just a head fake, but the relative silence from most of the mainstream media suggests that the timing and coincidence with President Trump's recent tariff pressure isn't, well, just a coincidence.

Will be watching to see if this develops further.

Thursday, September 20, 2018

The Obama recovery: How does it compare to America’s previous post-crisis expansions?

10 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff grades former President Obama’s economic recovery on a bell curve against 225 years of other financial crises. You’ll feel like you’ve moved up the bell curve a little after enjoying this in-depth article.

Former President Barack Obama recently re-entered the economic debate forum when he gave a speech taking credit for America’s greatly improved GDP numbers and employment performance of the last 18 months. Addressing the lackluster GDP and employment performance while he was in office, Obama reminded listeners once again that he inherited an economy just emerging from a financial crisis and in recession when he took office in 2009, but that his economic policies produced a strong recovery given the circumstances.

While there’s no question that Obama entered office right on the heels of a major financial crisis and inherited an economy in sharp recession, he wasn’t the first president to deal with such problems. The United States has suffered approximately 19 financial crises since George Washington assumed office in 1789, each followed by sharp recessions which were called “depressions” before economists changed their language after the Great Depression. 

Previous presidents who have been forced to deal with depressed post-crisis economies include George Washington (Panic of 1792), John Adams (1797), James Monroe (1819), Martin van Buren (1837), James Buchanan (1857), Ulysses Grant (1873), Grover Cleveland/William McKinley (1893), Theodore Roosevelt/William Howard Taft (1907), Warren Harding (1921), Franklin Roosevelt (1933) and George H.W. Bush/Bill Clinton (1990) to name some notable examples.

President Obama had a full eight years from 2009 to 2017 to oversee a post-crisis economic reconstruction, and both he and his supporters claim he took a difficult situation and engineered a miraculous recovery. But given what we know historically about how the economy rebounded from other financial crises, just how well does Obama’s miracle stack up?

Before we compare, it’s worth noting that defining a financial crisis is somewhat subjective, but economists generally agree that a crisis is characterized by widespread contraction of bank lending/credit, bank failures, in the pre-Fed era by widespread suspension of banknote/deposit redemption, and in the pre-WWII era by rapid price deflation. 

By those criteria the largest crises are typically viewed as the Panics of 1797, 1819, 1837, 1857, 1873, 1893, 1907, 1920-21, the four Great Depression panics in 1930, 1931, 1933, and 1937 (1933 being the greatest banking panic in U.S. history where thousands of banks failed), the 1990 S&L Crisis, and 2008. There were smaller “incipient” panics during the National Banking System era of 1862-1913 (1884, 1890, 1901) and one at the outbreak of the Civil War (1861) which I ignore here.


If we measure the length of time required from the panic/crisis itself to the point where “full employment” is re-established (defined by most economists as a 5% unemployment rate or lower), the Obama recovery took exactly seven years. The crisis itself struck in September of 2008 and in September of 2015 the Bureau of Labor Services reported America’s official unemployment rate had finally fallen to 5.0%.

The longest recovery from a major crisis to full employment is undoubtedly the Great Depression. Unemployment peaked in the same year as the great 1933 crisis (at 25%) and full employment wasn’t reached until 1942 marking a nine year recovery. However in 1942 the military was in the process of drafting 12 million men to fight overseas so many economists don’t view voluntary full civilian employment materializing until 1946, thus concluding a thirteen year recovery.

Unemployment statistics before 1929 are very hard to pin down since the government didn’t begin collecting such data until the Great Depression. However economic historians such as Stanley Lebergott and Christina Romer have toiled for years trying to calculate estimates based on metrics like bank deposit records, government budgets, and payrolls in industrial centers.

The data conclude that after the Great Depression, the longest employment recoveries occurred during the depressions after the Panics of 1837 and 1893. 

The Depression of 1893 is itself considered the second-worst slump in American history and was dubbed “The Great Depression” by Americans until the real Great Depression struck in 1929. Hundreds of banks failed (an enormous number for the 1890’s), foreign investors pulled their capital out of the country, unemployment reached 12.4% (Romer) after a second, smaller crisis struck in 1896, and the U.S. Treasury itself barely avoided bankruptcy with a bailout loan from J.P. Morgan.

And both the Depressions of 1837 and 1893 are estimated to have required seven years to restore full employment—the same as the Obama recovery. The Panic of 1873 technically required only six years.

Therefore, Obama’s 2008-2015 jobs recovery, when measuring time to full employment after a crisis, places in a three-way tie for second slowest in American history alongside the 1837-1844 and 1893-1900 recoveries.

Economic historians generally consider full employment recoveries to have been achieved in two to three years after most other pre-1929 panics. For example the Depression of 1920-21, which James Grant has appropriately dubbed “America’s last governmentally unmedicated depression,” is considered the second-worst downturn of the 20th century. All economic indicators fell faster in its first two quarters than in either 1929 or 2008, wholesale prices fell by 36.8%, and hundreds of banks failed. 

President Warren Harding’s response was to do absolutely nothing aside from slash the federal budget by one-third. And yet from 1921 to 1923 the unemployment rate fell from a peak of 9% to 4.8% (Romer), full employment being achieved in just two years.

Keep in mind as well that in the modern era, unemployment has been measured using increasingly lax methods designed to understate the jobless rate by leaving out idle workers who have simply stopped filing claims and given up looking for work. By contrast pre-1929 unemployment rate estimates use positive statistics used to extrapolate numbers employed and considering all other labor force members as jobless. If both periods were measured using the same methodology, the Obama period would break out of its tie and claim second place for slowest recovery to full employment all to itself.


What about post-crisis GDP growth? Again, the government only began keeping records during the Great Depression, and again economists have worked for decades to estimate GDP levels going back to the nation’s founding. To properly correlate to Obama’s eight years in office we look here at GDP growth for the eight years following other post-crisis troughs after the Panics of 1797, 1819, 1837, 1873, 1893, 1907, 1920-21, 1990, and 2008. In every case GDP bottoms out in the year of the panic itself or at most the following year (1894, 1907, 2008). We only measure five years after the Panic of 1792 and four years after the Panic of 1857 because the former was followed by the Panic of 1797 and the latter was followed by the 1861 start of the Civil War.

We also include the post-1982 Volcker Recession which, although technically not a banking panic, did shake up the financial system, and also because the more recent 1982-1990 recovery during the Reagan era has been widely contrasted to the 2009-2017 Obama recovery. We exclude the Great Depression which is already acknowledged as the worst depression in American history and which we know places worse than the Obama era.

Based on the compiled GDP figures from the BLS after 1929 and Johnston/Williamston before 1929 (St. Johns University, University of Miami, Northwestern University) who gathered estimates from over a dozen economists including Nobel Laureate Simon Kuznets, Christina Romer, Robert Gordon, Charles Calomiris, et al. we calculate the following eight-year GDP growth rates in constant 2012 dollars:

1792-1797: $5.2B - $7.1B, + 36.5% (five years)
1797-1805: $7.1B - $10.1B, + 42.2%
1819-1827: $15.7B - $21.9B, + 39.5%
1837-1845: $33.3B - $44.4B, +33.3%
1857-1861: $82.6B - $94.8B, +14.8% (four years)
1873-1881: $156.9B - $244.8B, +56.0%
1894-1902: $345.4B - $531.1B, +53.8%
1908-1916: $558.7B - $734.8B, +31.5%
1921-1929: $762.3B - $1.11T, +45.6%
1933-1941: $817.8B - $1.57T, + 92.0%
1982-1990: $6.81T - $9.37T, +37.6%
1991-1999: $9.36T - $12.61T, +34.7%
2009-2017: $15.21T - $18.05T, +18.7%

After extrapolating these four, five, and eight year growth figures into average annualized GDP growth rates the final tally is:

1792-1797 GDP growth rate: +6.42%
1797-1805 GDP growth rate: +4.50%
1819-1827 GDP growth rate: +4.25%
1837-1845 GDP growth rate: +3.66%
1857-1861 GDP growth rate: +3.51%
1873-1881 GDP growth rate: +5.72%
1894-1902 GDP growth rate: +5.33%
1908-1916 GDP growth rate: +3.48%
1921-1929 GDP growth rate: +4.81%
1933-1941 GDP growth rate:  +8.49%
1982-1990 GDP growth rate: +4.07%
1991-1999 GDP growth rate: +3.79%
2009-2017 GDP growth rate: +2.17%

Therefore the Obama recovery produced the worst post-crisis GDP growth rate in American history, even worse than the Great Depression.

It’s the only recovery that doesn’t achieve annualized growth rates in the mid-3% range or higher, and it even falls dramatically below that standard at a lethargic 2.17%. In fact, the average GDP growth rate of the eleven pre-2008 expansions is 4.50% or more than double that of the 2009-2017 recovery's 2.17%.


Some critics may argue that there are far too many differences between the 19th and early 21st centuries to compare GDP growth between the two. Aside from the fact that the Obama recovery also lagged far behind the very recent post-1982 and post-1991 recoveries, it is true that there are many differences in how government responded to crisis and depression in the pre-Great Depression era. Unfortunately they nearly all reflect even more poorly on the Obama administration.

The most glaring difference between the 19th and early 21st centuries is that before 1929 government countercyclical policies to “medicate” panics and depressions simply didn’t exist. Presidents and Congresses were virtually 100% laissez-faire in their approach when panics and depressions struck. The lack of policy instruments included, but was not limited to:

-No central bank to push down interest rates and engage in quantitative easing (exceptions: 1792 with Hamilton’s Bank of the United States and the 1920-21 Fed)

-No central bank policy to counteract deflation. In fact, pre-WWII crises typically produced rapid price deflation when banks failed or contracted credit.

-No deposit insurance to induce depositors to leave their money in the bank and minimize failures.

-The gold standard limited policymakers’ ability to reinflate the money supply, not that anyone in government had yet thought of reinflating the money supply until Irving Fisher’s work on debt deflation in the 1930’s.

-No Federal Reserve discount (emergency lending) window.

-No unemployment insurance.

-No bank bailouts (TARP).

-No $9 trillion in Keynesian deficit spending. In fact, the federal government typically slashed the budget in depressions to compensate for falling tax revenues.

-No federal stimulus spending packages.

-Federal spending only 3-5% of GDP (versus 21-23% today).

-No “Cash for Clunkers.”

-No green energy subsidies.

-No bailouts for major auto companies or other industrials.

-No FOMC open market purchases of trillions of dollars in lousy mortgage-backed securities.

According to Obama’s economic advisers such as Christina Romer, Austin Goolsbee, Jared Bernstein, and Larry Summers, Democratic congressional leaders like Nancy Pelosi and Harry Reid, virtually all the major newspapers and their economic columnists like Paul Krugman and Matt O’Brien, and Obama himself, depressions/recessions in the pre-1929 era should have been worse—a lot worse—than the post-2008 recession. 

Without all the stimulative magic potions administered by the Obama White House and the Federal Reserve, not only should pre-1929 depressions have taken much longer to reach full employment, they should have produced vastly inferior GDP recoveries and quite frankly each been a Great Depression in and of themselves. Instead they all dramatically outperformed the Obama recovery.

In fact, the only worse recovery in American history was the Great Depression, a slump where the Herbert Hoover and Franklin Roosevelt White Houses applied even more federal stimulus than the Obama administration.

Interesting, the two longest post-crisis unemployment slumps and the two worst GDP recoveries in American history also happened to be the same two where government intervened the most to promote recovery. By contrast every one of the over dozen pre-1929 post-crisis depressions received absolutely no federal government “help” and the leave-it-alone policy produced vastly superior recoveries.


Thursday, September 6, 2018

Ten Years After Fannie Mae and Freddie Mac's Conservatorships

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4 MIN READ - A Deep Fannie dive courtesy of the Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff.

It was ten years ago on September 6th that taxpayer-backed GSE’s Fannie Mae and Freddie Mac—which owned or guaranteed over half of the $12 trillion U.S. residential mortgage market at the time—were taken into conservatorship by the U.S. Treasury and Federal Housing Finance Agency. The distressed financial positions and effective failures of the two housing giants served as a prelude to the major financial crisis that would climax in the month starting a little over one week later. 

Here are some statutes, briefing passages, and quotes from the years before Fannie and Freddie’s demise that have already nearly disappeared from the media, and academic/policy record.

1) "The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation have an affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families in a manner consistent with their overall public purposes, while maintaining a strong financial condition and a reasonable economic return"

-Housing and Community Development Act of 1992, Title XIII

2) "Low- and moderate-income goal. At least 50 percent of the dwelling units financed by each GSE’s mortgage purchases should be for families with incomes no greater than area median income (AMI), defined as median income for the metropolitan area or nonmetropolitan county. The corresponding goal was 42 percent for 1997-2000.”

“Special affordable goal. At least 20 percent of the dwelling units financed by each GSE’s mortgage purchases should be for very low-income families (those with incomes no greater than 60 percent of AMI) or for low-income families (those with incomes no greater than 80 percent of AMI) in low income areas. The corresponding goal was 14 percent for 1997-2000."

-2001 Department of Housing and Urban Development Issue Brief

3) “GSE Low-and-Moderate Income Housing Goals:

“Current [2004]: 50%
“2005: 52%
“2006: 53%
“2007: 55%
“2008: 56%”

-HUD Archives: News Release November 1, 2004

4) "Fannie Mae and Freddie Mac will have to increase their funding of mortgages for low- and moderate-income home buyers, under a new rule the Department of Housing and Urban Development announced yesterday."

"To meet the new goals, Fannie and Freddie will need to buy over the next four years an estimated 400,000 more qualifying loans than the 10 million loans they otherwise would have bought."

-"HUD Sets New Goals for Fannie, Freddie," Washington Post, Nov 2, 2004

5) "In this report on Community Reinvestment Act (CRA) agreements, the National Community Reinvestment Coalition (NCRC) finds that $4.2 trillion dollars have been infused into minority and lower income neighborhoods since CRA passed in 1977.  Banks have committed to 430 CRA agreements, instituting multi-year programs covering loans, investments and banking services to communities in need. "

-National Community Reinvestment Coalition (NCRC) news release, Sep 19, 2005

6) "We will take CRA loans off your hands–we will buy them from your portfolios, or package them into securities–so you have fresh cash to make more CRA loans. Some people have assumed we don’t buy tough loans. Let me correct that misimpression right now. We want your CRA loans because they help us meet our housing goals.”

-Jamie Gorelick, Vice Chairman Fannie Mae, 2000 American Bankers Association conference speech

7) "Fannie Mae will buy CRA loans from lenders’ portfolios; we’ll package them into securities; we’ll purchase CRA mortgages at the point of origination; and we’ll create customized CRA-targeted securities. This expanded approach has improved liquidity in the secondary market for CRA product, and has helped our lenders leverage even more CRA lending."

-Jamie Gorelick, Vice Chairman Fannie Mae, public statement 2001

8.) "Countrywide's goal is to meet the Six Hundred Billion Dollar challenge, funding $600 billion in home loans to minorities and lower-income borrowers, and to borrowers in lower-income communities, between 2001 and 2010. As of July 31, 2004, the company had funded nearly $301 billion toward this goal."

"The result of these efforts is an enormous pipeline of mortgages to low- and moderate-income buyers. With this pipeline, Countrywide Securities Corporation (CSC) can potentially help you meet your Community Reinvestment Act (CRA) goals by offering both whole loan and mortgage-backed securities that are eligible for CRA credit."

-Countrywide website (now defunct) marketing CRA packaged securities to CRA-regulated banks as a vehicle to satisfy their CRA federal regulatory requirements.

9) "Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) in the secondary mortgage market, are the two largest sources of housing finance in the United States. They fund these mortgages by purchasing loans directly from primary market mortgage originators, such as mortgage bankers and depository institutions, and holding these loans in portfolio, or by acting as a conduit and issuing mortgage-backed securities (MBS), which are then sold in the capital markets to a wide variety of investors. HUD has estimated that 11.7 million dwelling units were financed by conventional conforming mortgages in 1998, and that the GSEs provided financing for 55 percent of these units."

-Introduction, 2001 Department of Housing and Urban Development Issue Brief

(some sources)

Saturday, September 1, 2018

Zambian Economist Dambisa Moyo: Does Africa Really Need More Government Aid, or More Capital Investment?

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3 MIN READ - An offering from the Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff

“A friend of mine had a great quote: ‘Africa is to the development industry what Mars is to NASA.’ NASA spends billions on a MARS project, but they don’t really think we’re going there. Same with aid. Billions are spent, but no one really thinks it’s going to develop Africa.” 
            -Dambisa Moyo

As billions of people on the Asian continent rise from poverty in human history’s greatest economic emergence, Africa remains the world’s economic basketcase. The West’s unwavering prescription for the continent’s routine famines, epidemics, hyperinflations, and civil wars has been aid: well beyond a trillion dollars over the last seventy years to people who have largely lived on less than a dollar a day. 

Politicians, movie stars, and academics have forcefully appealed to public sympathy and governments to “give, give, give.” So-called Glamour-Aid musicians like Bob Geldof, Sting, and U2’s Bono started their own celebrity movement in the 1980’s with Band-Aid and U.S. and Canadian artists soon followed suit. Throwing more and more money at the problem seems to have no end.

But in this fascinating interview, Zambian-born Harvard and Oxford-educated economist Dambisa Moyo argues seventy years of atrocious results demands a new solution: the seventy-year old aid model should be scrapped and replaced with a focus towards capital markets and foreign investment. In fact, she says, aid—particularly large government-to-government aid transfers—is keeping Africa in a perpetual state of dependence and underdevelopment.

Read Moyo's Guernica interview at:

Moyo’s 2009 conversation is getting a bit dated, but her message remains relevant and was keenly prescient too. Relevant because the West continues to hold Africa to a different standard from the rest of the developing world, and prescient because China is the only major power willing to invest in Africa’s development.

When China was clawing from the ruins of Maoist communism, when the Berlin Wall fell, and when today’s Asian Tigers were recovering from devastating wars or beginning as newly freed but poor former British colonies, Western politicians and musicians weren’t clamoring for an aid tsunami. Instead the West encouraged Eastern Europe and Asia to tap into global capital markets and accept foreign investment to develop their own markets and commerce.

And China is investing in Africa today while the West continues to flood the continent with aid. China does not place human rights contingencies on its contributions and it expects a return on its investment—just as Western firms expected to profit from their investments in Singapore, South Korea, or Eastern Europe—but it’s actually building factories, infrastructure, and offering jobs to unskilled African laborers that pay many times the prevailing domestic wage.

Moyo differentiates between private emergency aid, which she views as a humanitarian stopgap measure, and enormous aid transfers from western governments to corrupt African ones—most of which winds up in African politicians’ overseas bank accounts after they’ve paid their armies and allotted a few crumbs to their people. Unfortunately her critics—most of whom haven’t read her book or closely examined her message—attack her for allegedly trying to eliminate all emergency aid when in fact she goes out of her way to specifically target government-to-government transfers.

Since writing her book “Dead Aid,” Moyo has branched out, writing about worldwide competition for natural resources and the decline of the Western welfare state. She serves on the Board of Directors for Chevron, Barclays, and formerly Barrick Gold and Seagate. But criticizing the debilitating effects of aid addiction put her on the map and ruffled the feathers of celebrities and aid champions like Bill Gates and her former teacher Jeffrey Sachs.