Very good sentences

by on December 22, 2008 at 11:34 am in Economics | Permalink

Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble.

Here is more, from Paul Krugman.  That is another reason why I think that aid to homeowners will not hit the target and why I think markets are failing to solve an economic calculation problem.  The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty is encouraging a scramble for liquidity and decisions to wait.  We can see the information — about what to do next, economically — disintegrating before our eyes.

1 Finnsense December 22, 2008 at 11:55 am

And a Merry Christmas to you too.

2 Bill Stepp December 22, 2008 at 12:01 pm

Does Krugman think that only the housing market experienced a bubble? That would be news to the private equity/LBO firms and commodity producers that have taken haircuts recently.
The housing industry and mortgage-backed derivatives traders were not from the only people who bought into bubbles.
The effects of Easy Al’s credit machine were wider than housing, so it makes sense that they were more dispersed geographically. It’s economic geogrphy 101 once you’re armed with Hayek.

3 Mercutio.Mont December 22, 2008 at 12:15 pm

Who’s to say another bubble won’t work?

It worked in 2001 and it’ll work again now. The government is going to paper over this downturn and delay it for another two to ten.

We’ll all meet at this same place again in 2013. Ride the bubble early and remember to hop out before the crash!

4 Mark December 22, 2008 at 12:29 pm

I don’t see this as a surprise at all. Much of the south experienced an increase in population, mostly from the northeast and midwest. Unlike places like Washington, DC and San Diego, places where housing supply could not keep up with demand, prices skyrocketed. Here in the south, the increase in demand was not met with an increase in price, but with an increase in housing supply. Once demand abated, the demand for factors fell. I would be interesting to see how much of the unemployment is not auto related, but instead housing related.

5 MattYoung December 22, 2008 at 12:43 pm

We have the typical technology shock. Our knowledge of where valuable goods are has doubled in accuracy over the last ten years. Hence, there will be large changes in utility and substitutability.

These information shocks put strain on transportation of goods as we see better how to arrange goods to minimize scarcity.

The Great Depression was a result of the technology of commercial radio, and we are at that problem again. As in the Great Depression, the solution will come when we find out how to reform the movement of goods to match the web, quite frankly.

6 Anonymous December 22, 2008 at 1:03 pm


Trouble is, the housing bubble is unlikely to fully pop until 2011. See for instance this very long PDF presentation.

7 Bill Stepp December 22, 2008 at 1:37 pm

Bill Stepp: do you contend that PE haircuts and frozen credit would have happened even had the RE bust not occurred?

Not sure what you mean by “frozen credit.” There are 8,500 community banks in the U.S. that sidestepped the derivatives mess, and didn’t do subprime (or at least not like anything as much as the Countrywides and New Centuries) and which continued to lend, as the WSJ pointed out in a big article.
The PE haircuts would have happened even if the real estate bubble had not been as big, but they would have been less in some rough proportion to the diminished bubble/bust in the real estate sector.
Ditto for the commodites bubble/bust.

8 radish December 22, 2008 at 2:55 pm

“We can see the information — about what to do next, economically — disintegrating before our eyes.”

Well this is the gnarly and indigestible core of the problem at hand, isn’t it? Everybody wants a stable equilibrium, but our mechanism for identifying stable equilibria isn’t working. We can be pretty sure of that because somehow we’ve arrived at this extremely unstable state.

If you subscribe to the idea that asset bubbles are a symptom of excess liquidity, then the institution that’s supposed to identify productive (and therefore profitable) uses of capital (Mister Money Market™) has not only failed to identify the correct price of the bubble asset, but failed to identify any alternative uses for that capital. It has, to put it bluntly, failed completely. It is, as the saying goes, an ex-market.

If that’s the scenario then how the hell do we proceed? Forcibly diverting capital toward whatever purposes some central planning institution identifies as productive is, de facto, just creating bubbles to bleed excess liquidity into. That puts Mister Market — our mechanism for discovering costs and risks and identifying innovations — onto life support, gives him a portable oxygen tank and some prosthetics even. But it still doesn’t mean that Mister Market will be able to do his job any time soon, unless Mister Market makes a pretty miraculous recovery.

Unfortunately, if the bubble is big enough and we don’t do anything at all, then the risk is high that collapse will cause Very Very Bad Things to happen during the period between the bubble collapse and the re-emergence of a functional marketplace. Maybe to our currency, maybe to the price of other assets, maybe to productivity, maybe blocking critical innovations or adoptions which are starved for capital, etc… but we don’t have any way of knowing which bad things to expect. (at least not if we’re to believe those highly dangerous complexity folks 😉

JFTR I like the idea of penalizing banks for not lending. It addresses the problem of seized-up capital flows but forces individual agents make the actuarial decisions. If you know that a bunch of banks are going to fail, try to encourage the dumber, less “productive” ones to fail first. The downside being that that might not work either, because all we’ve done then is increased the incentive to identify profitability, not the incentive to identify productivity. The most market-friendly solutions would be the ones that devalue idle capital generally. Selective demurrage, so to speak, but I can’t even think of a plausible way to do that, let alone do it safely. Raising capital gains taxes might have helped if we’d done it when people were still making those gains, but wouldn’t really solve the problem anyway, because in this case taxation is just another way to say “diversion.” Unless the government just takes some of the tax receipts out of circulation. Which ain’t gonna happen.

So I think we’re mostly screwed. The present political cost of implementing a controlled devaluation of idle concentrations of capital is greater than the political cost of accepting uncontrolled devaluation or diverting capital into new bubbles. We (presently) have no mechanism available with which to fix or replace the mechanism that’s broken. We’re basically gonna have to hold our breath for a few years and hope for the best.

9 Stan Greer December 22, 2008 at 3:15 pm

Census Bureau data out today show that, from July 1, 2007 to July 1, 2008, South Carolina had a net domestic in-migration of nearly 50,000 people. Nearly all the Southeastern states imported people from other states, on balance. Even with its terrible housing bubble collapse, Florida had a net domestic out-migration of less than 10,000.

In contrast, New York had a net domestic out-migration of 126,000. New Jersey had a net domestic out-migration of 56,000. Out west, California had a net domestic out-migration of 144,000.

It seems pretty obvious to me that the reason unemployment is relatively low in the Northeasst and on the West Coast is because they are exporting the problem to other states. That’s where Krugman’s analysis really falls on its face.

10 Barkley Rosserr December 22, 2008 at 5:06 pm

Amazing how no commentators here get what the issue is. No, it is not Texas where the lack of restrictions on building houses kept a bubble from emerging. It is states like Ohio and Michigan where the recession is hitting the hardest, but which also have been recessed/depressed for a long time. Their long term low level of economic activity kept them from having a housing bubble, but now their housing prices are going down. That is not happening as much in those southern states that built housing and had robust economies.

11 Alan Brown December 23, 2008 at 12:11 am

Oh, you don’t have to be sympathetic, Rusty. The costs will be dumped upon thee whether there is sympathy or not.

But have no fear. The coming collapse of state budgets will hit those states like a ton of bricks delivered by a freight train rolling across an asteroid.

12 Greg Ransom December 23, 2008 at 3:42 am

Except that once again Krugman has his facts wrong.

California, Nevada, Florida — ground zero of the subprime mess, and among the leading states in unemployment.

Orange County, CA has been in a deep downturn for 2 years and counting.

Krugman wrote:

“Anyway, it’s striking that the worst of the crisis is hitting states that largely didn’t experience a housing bubble.”

If Krugman just stupid. Is he simply deeply dishonest?


I’m going with BOTH.

13 Greg Ransom December 23, 2008 at 3:53 am

Note well: Orange County has the highest foreclosure rate in the state of California:

14 Barkley Rosser December 23, 2008 at 7:45 am

Well, it is both.

Michigan has the highest unemployment rate in the nation at 9.6. CA is at 8.4; NV is at 8.0,
and both FL and OH are at 7.3%.

On foreclosure rates, the top six states in order are NV, FL, MI, CA, CO, and OH.

In any case, it is as I said. The states getting hammerred the most are of two sorts:
either the very bubble states, or the states long in recession/depression in the rust belt
that did not have housing bubbles.

15 aaron December 23, 2008 at 3:01 pm

Feedback between two bubbles.

The fact that oil is an exhaustible resource means that not extracting it is a form of investment. And it is an investment that might look attractive to a national government when oil prices are high. If a country does not want to spend all of the massive flow of cash generated by a sudden price increase on consumption, it must do one of three things: engage in real investment at home, which is subject to diminishing returns; invest abroad; or “invest” by cutting oil extraction, and hence reducing supply.

Investing abroad was done by buying debt on increasing housing values rise, expectations of future income rise. This incentived more housing production infrastructure (like big trucks and suvs). Consumption increases based on expectation of future income. Borrowing increases. Interest expense rises, but incomes do not. Smaller returns are generated by larger liabilities. Eventually risk is no longer worth the tiny returns. Housing values fall. Incomes become tiny relative to liabilities held.

16 Steve Sailer December 24, 2008 at 5:10 am

When I last checked two months ago, 50% of foreclosures were in the four sand states (CA, AZ, NV, FL), and probably 70% or more of defaulted mortgage dollars (due to very high CA home prices).

Krugman’s nuts if he thinks California isn’t getting hit hard. Giant deficit, high unemployment, people leaving the state. Really, the underreported story is how much this is California’s fault.

The other concentration of high foreclosure rates was in Greater Detroit. There are various miscellaneous states with high foreclosure rates, like MO, TN, and NJ, But the sand states are the big part of the story.

17 John Dewey December 24, 2008 at 9:54 am

Steve Sailer: “50% of foreclosures were in the four sand states (CA, AZ, NV, FL)”

That shouldn’t be surprising, should it? Housing starts by state are hard to come by, but my guess is that over 50% of 2002-2006 housing starts were in those states plus TX, VA, and MD. Texas was insulated from the bubble/bust for a number of factors, especially low land costs, low construction costs, and the energy industry. VA and MD have been relatively immune due to the growth of Leviathan.

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