"More Suley than Sully"

From Peggy Noonan's last column in the Wall Street Journal, Is 'Octomom' America's Future? (Hat tip: Doug Kass¹):

It's Sully and Suleman, the pilot and "Octomom," the two great stories that are twinned with the era. Sully, the airline captain who saved 155 lives by landing that plane just right—level wings, nose up, tail down, plant that baby, get everyone out, get them counted, and then, at night, wonder what you could have done better. You know the reaction of the people of our country to Chesley B. Sullenberger III: They shake their heads, and tears come to their eyes. He is cool, modest, competent, tough in the good way. He's the only one who doesn't applaud Sully. He was just doing his job.

This is why people are so moved: We're still making Sullys. We're still making those mythic Americans, those steely-eyed rocket men. Like Alan Shepard in the Mercury rocket: "Come on and light this candle."

But Sully, 58, Air Force Academy '73, was shaped and formed by the old America, and educated in an ethos in which a certain style of manhood—of personhood—was held high.

What we fear we're making more of these days is Nadya Suleman. The dizzy, selfish, self-dramatizing 33-year-old mother who had six small children and then a week ago eight more because, well, she always wanted a big family. "Suley" doubletalks with the best of them, she doubletalks with profound ease. She is like Blago without the charm. She had needs and took proactive steps to meet them, and those who don't approve are limited, which must be sad for them.

[...]

Any great nation would worry at closed-up shops and a professional governing class that doesn't have a clue what to do. But a great nation that fears, deep down, that it may be becoming more Suley than Sully—that nation will enter a true depression.

The image above, by Martin Kozlowski, accompanies Noonan's column on the WSJ website.

¹I hadn't read one of Noonan's columns in a while, but was prompted to do so by Doug Kass's quote from the one above in his new post, "Fear and Loathing on Wall Street". Kass quoted the first part of Noonan's column, which described a shuttering of shops in upscale Manhattan neighborhoods. Kass included it as a sort of contrarian indicator of sentiment in his tentatively bullish post.

"We Don't Need to be Rescued"

The image above is from the website of my local bank, NVE Bank. Incidentally, the reason I initially opened an account at this bank was because it was listed as one of the safer banks in the country in Ravi Batra's book, Surviving the Great Depression of 1990. If memory serves, Batra's thesis was that the big build-up in federal debt during the 1980s had set the stage for catastrophe. I'll have to see if I still have the book somewhere and peruse it again to be sure.

From the Dust Bowl to the Super Bowl

Bruce Springsteen is going to play the halftime show during the Super Bowl today. That, and the recent punditry about the prospects of us heading into a Great Depression 2.0, reminded me of this article from the New York Times Magazine on Springsteen from a dozen years ago, The Pop Populist¹. For those who may not remember, Bruce Springsteen wasn't always overtly political; the article describes what may have been his inflection point in moving in this direction, his participation in a Los Angeles rally against California's anti-preference initiative Prop. 209.

The month the New York Times Magazine article was published (January, 1997) Springsteen's Steinbeck-inspired solo album, The Ghost of Tom Joad was nominated for a Grammy for best folk album. In a triumph of incongruous timing, Springsteen had released an album of haunting songs with lyrics recalling the Dust Bowl era (e.g., freight train-riding hobos) on the eve of the dot-com bubble and economic boom of the late 1990s. Maybe he'll play something more upbeat tonight.


¹If memory serves, that issue featured a cover photo of Sprinsteen in a leather jacket with the caption "A Steinbeck in Leather". Unfortunately, the article I linked to doesn't include that photo, and a brief image search via Google lead to some unfortunate results (mostly likely due to the word "leather"). Hence, the image above (via Amazon.com) from Springsteen's album The Ghost of Tom Joad.

John Hussman's Latest Weekly Market Commentary

In his current market commentary, "Ambiguous Conditions Warrant Moderation", Dr. Hussman gives his opinion on the comparisons of today's economic environment to the Great Depression, finishing with a clever simile:

We continue to hear remarks that the current economic downturn is the worst since the Great Depression. While the prices of stocks and other financial assets have certainly suffered a great deal, by any reasonable measure of output and employment, this isn't even close to being the worst economic downturn since the Depression. Even after November's awful job report, and including all of the downward revisions, the U.S. economy would have to lose twice as many jobs as it has already lost even to be on par with the 1981-82 recession (measuring job losses as a percentage of the labor force).

While we do expect fourth-quarter GDP to come in at a loss of -4% to -6%, it is important to recognize that this is a quarterly change at an annual rate. The overall contraction in U.S. output will be somewhere about 1-1.5% in the fourth quarter. In the Great Depression, actual GDP dropped by 30%. Ben Bernanke was correct in remarks he made last week that there is “an order of magnitude” (10 fold) difference between the current downturn and the Great Depression. For the record, the worst overall drawdowns in GDP since the Depression – not just bad quarterly growth rates – were in 1954 (-2.65%), 1958 (-3.75%), 1975 (-3.10%), and 1982 (-2.87%).

This is not to minimize the prospects for a further economic downturn, but to say that this is “the worst economy since the Great Depression” is like blowing up a crate of dynamite on the Nevada Proving Grounds and saying it is the worst explosion since the detonation of the atomic bomb there. Even if the statement is accurate, the comparison is absurd.

Unlike Bill Gross and John Authers (see "Bill Gross on Stock Valuations"), Hussman does not believe corporate bonds are more attractive than equities at this point:

Corporate yields have increased significantly, but default rates tend to pick up in the later stages of recessions, and there isn't much historical evidence to suggest that corporate bonds reach their lows any earlier than stocks do. For that reason, corporate bonds are essentially equity-equivalents here, and the same considerations about quality apply as well here as they do for stocks. Generally speaking, corporate bonds are currently priced to deliver both lower long-term returns than stocks, but as a group, will probably have lower volatility than stocks as well. Our inclination to invest in corporates for the Total Return Fund will likely increase at about the same time as our willingness to hold stocks on an unhedged basis for Strategic Growth (which is not yet).

Tyler Cowen's New Deal 'Crib Sheet'

In his column in yesterday's New York Times, George Mason economist (and blogger) Tyler Cowen offered a 'crib sheet' of lessons from the New Deal, "Economic View: The New Deal Didn't Always Work Either". Excerpt:

As Milton Friedman and Anna Jacobson Schwartz argued in a classic book, “A Monetary History of the United States,” the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis. Roosevelt’s best policies were those designed to increase the money supply, get the banking system back on its feet and restore trust in financial institutions.

A study of the 1930s by Christina D. Romer, a professor at the University of California, Berkeley (“What Ended the Great Depression?,” Journal of Economic History, 1992), confirmed that expansionary monetary policy was the key to the partial recovery of the 1930s. The worst years of the New Deal were 1937 and 1938, right after the Fed increased reserve requirements for banks, thereby curbing lending and moving the economy back to dangerous deflationary pressures.

The rest of the short column is worth reading. Incidentally, President-elect Obama has chosen Christina Romer to head his Council of Economic Advisers.

"Neither the Great Depression nor Japan"

Morgan Stanley economist Joachim Fels explains why he believes the global economy is not facing a multi-year deflationary contraction along the lines of the Great Depression or Japan's 'lost decade' in the 1990s in this essay: "Neither the Great Depression nor Japan". Below are few excerpts.

On the policy mistakes that lead to the Great Depression:

- First, the Fed (and other central banks) stood by watching as one bank after another collapsed, and allowed a major contraction of the money supply.

- Second, fiscal policy was passive as governments tried to adhere to the balanced budget doctrine. Falling tax receipts thus led to cuts in government spending, aggravating the downturn in private sector demand. This only ended when Franklin Roosevelt took office as US President in 1933 and created the New Deal.

- Third, starting with the US Smoot-Hawley Tariff Act in 1930, a trade war began between the US and Europe, with governments raising import tariffs and thus choking off world trade.

On why the current situation is different:

Today, policymakers are acting very differently, thanks to the lessons drawn from the Great Depression. Following the collapse of Lehman Brothers, the regulators have made it clear that no systematically important banks will be allowed to fail. Central banks have resorted to major monetary easing, consisting of a combination of much lower official rates and massive quantitative easing [...]. Governments around the world are busy devising and enacting large fiscal stimulus packages. And, it appears unlikely that the world will see another trade war.

On the policy mistakes made in Japan:

- After the equity and real estate bubble burst in 1989-90 and the economy entered recession, for many years banks were allowed to carry bad loans on their books without having to write them down.

- The government only started to inject capital into banks in 1997, seven years into the lost decade.

- Fiscal policy was stimulative, but the direct impact on effective demand was relatively small (less than 1% of GDP in most years), according to our Japan team.

- The Bank of Japan only resorted to quantitative easing (QE) in 2001, more than 10 years after the crisis started.

Why the current situation is different:

By contrast, US and European banks over the past year have been busy writing down bad assets, governments have started to recapitalise banks, major fiscal stimulus is on its way and central banks are not only cutting interest rates but have started QE. The monetary base (consisting of cash in circulation and banks’ reserves at the central bank) is currently growing at rates of 30-40% in the US, the euro area and the UK, and thus faster than in Japan in summer 2001 when the Bank of Japan started QE. And importantly, as David Greenlaw explains in the note that follows¹, M1 growth (cash and sight deposits held by the public) has been surging in the US recently. We take this as an early sign that the monetary policy transmission process is starting to work again.

Fels's bottom line:

Again, it is important to emphasise that the G3 are in a severe recession that will last at least until mid-2009, possibly longer, and headline inflation will likely become negative at some stage next year in the US and Japan and drop below target in the euro area. However, the early and massive policy reaction will, in our view, prevent a replay of Japan in the 1990s or, worse, another Great Depression.

¹The link above takes you to both Fels's essay and Greenlaw's.

The image above, of a comic book cover featuring Japanese Manga character Kosaku Shima, was borrowed from John Richardson's Asian Chemical Connections blog.

"Dow'd but not Out"

Just got an e-mail from Seattle restaurant company Chow Foods, advertising the promotion below. I've only been to one of their restaurants, The Five Spot, but it was excellent: great breakfast, and some of the strongest coffee I've ever had.

Dow'd But Not Out

As a token of our appreciation to our loyal customers, on Thursday, October 16^th, between 5-10pm, CHOW Foods is executing a short term Main Street bailout plan far more delicious than the one the goofs in congress passed last week.

To make sure the Dow doesn't get you down, on Thursday night only, we're pricing our menu based on the close of the market on the 16th. The lower the Dow closes on Thursday, the less your entrée costs--no food on the menu will be priced more than the Dow. If it closes at 8300 (gulp!) then you won’t pay any more than $8.30 for any item on our food menus.

If Chowin’ on the DOW isn’t enough to whet your appetite, keep in mind that our house red & white wine, draft beers and well drinks will be priced at the NASDAQ close for the day.  If it dips to 1250, then our depression era pricing on these libations will be just a buck twenty five!

Stop by for dinner and drinks between 5 p.m. and 10 p.m. at any of our joints as we match the economy cent for cent. Menu prices will be set according to the markets close, so for one night, forget about the size of your 401k and CHOW down on our nickel.

Get your wallet off your mind and join us on October 16^th at your local CHOW restaurant and enjoy a taste of the good life for a little bit less. For a full list of restaurants or to browse our menus see www.chowfoods.com

Contingency and Causation

On his Atlantic blog yesterday, Ross Douthat posted an excerpt from an article by Princeton professor Larry Bartels in The Wilson Quarterly ("The Irrational Electorate"). In his article, Bartels argues that sea changes in politics are often driven not by changes in ideology or political philosophy but instead are contingent on other factors, e.g., economic conditions. Surveying the political realignments of the Depression era, Bartels writes,

Considering America's Depression-era politics in comparative perspective reinforces the impression that there may have been a good deal less real policy content to "throwing the bums out" than meets the eye. In the U.S., voters replaced Republicans with Democrats and the economy improved. In Britain and Australia, voters replaced Labor governments with conservatives and the economy improved. In Britain and Australia, voters replaced Labor governments with conservatives and the economy improved. In Sweden, voters replaced Conservatives with Liberals, then with Social Democrats, and the economy improved. In the Canadian agricultural province of Saskatchewan, voters replaced Conservatives with Socialists and the economy improved. In the adjacent agricultural province of Alberta, voters replaced a socialist party with a right-leaning funny-money party created from scratch by a charismatic radio preacher, and the economy improved. In Weimar Germany, where economic distress was deeper and longer-lasting, voters rejected all of the mainstream parties, the Nazis seized power, and the economy improved. In every case, the party that happened to be in power when the Depression eased dominated politics for a decade or more thereafter. It seems farfetched to imagine that all these contradictory shifts represented well-considered ideological conversions. A more parsimonious interpretation is that voters simply--and simple-mindedly--rewarded whoever happened to be in power when things got better.

U. of Chicago Economist: The Real Economy is in Good Shape

In an op/ed in the New York Times today ("An Economy You Can Bank On"), University of Chicago economics professor Casey Mulligan challenges claims that the financial crisis threatens to lead to a crisis of similar proportions in the real economy. Below is an excerpt, but it's worth reading the whole thing.

We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.

How do we know? Well, the economy outside the financial sector is healthier than it seems.

One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. It’s a measure of how much profit that each dollar of capital invested in the economy is producing during, say, a year. Some investments earn more than others, of course, but the marginal product of capital is a composite of all of them — a macroeconomic version of the price-to-earnings ratio followed in the financial markets.

When the profit per dollar of capital invested in the economy is higher than average, future rates of economic growth also tend to be above average. The same cannot be said about rates of return on the S.& P. 500, or any another measurement that commands attention on Wall Street.

Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year. (In other words, each dollar of capital invested in the economy earns, on average, 7 cents to 8 cents annually.) And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year, far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money.