That was then, this is now

by on December 20, 2011 at 7:15 am in Economics, Education, History | Permalink

In 2004, I wrote this to Alex:

The United States remains a strong and prosperous country. Our infrastructure, national culture of innovation, human capital, and economic dynamism are unparallelled in world history. The Bush fiscal policies, whatever their irresponsibilities, costs, and drawbacks, haven’t changed those core facts.

So I walked down to Alex’s office and issued him the following challenge: if you think I am wrong, sell all your stocks and go short on U.S. Treasury securities (and long on Brazil, if you wish!). With all the money you will make, you can buy out my half of this blog.

In my own defense, 2004 was the year when the available run of productivity statistics was looking the best, and there was no reason to think the 2001-2004 numbers were biased or misleading.

For the pointer I thank…Alex.

p.s. he didn’t do it.

1 Simon December 20, 2011 at 7:22 am

Prof. Cowen,

Which country is your ‘Brazil 2004’, for 2012?

2 Andrew' December 20, 2011 at 9:04 am

Or as my preschooler asks me periodically “why was I right?” Why Brazil?

3 Rahul December 20, 2011 at 3:34 pm

Turkey? Mexico?

4 Oz Ozzie December 20, 2011 at 7:36 am

Right. but as much as we might despise Bush (I do) or think that the tax cuts were short sighted (I do) the problems are ethical and structural, not fiscal, and he’s not much responsible for them (well, going to war and bailing out the banks had very definite ethical failings, but I think they were are symptoms, not causes)

5 Tom December 20, 2011 at 9:11 am

I agree on the tax cuts, I would have paid off the debt. Bailing out the banks, though was a no brainer – you’d really have to hate the bankers a lot to slit your own throat like that, and from what I’ve read, they are >90% paid back.

Leas me to a question – TARP, I believe, was added to 2008 debt number. Does it get removed as it gets paid back?
How does the accounting go for that?

6 JWatts December 20, 2011 at 9:17 am

Yes, for all the rhetoric about the banks, it’s amazing how many people don’t realize that those were loans and have been mostly repaid. The net cost of the entire bank bailout will probably be less than the net cost of the GM/Chrysler bailout.

7 Eric December 20, 2011 at 10:24 am

Why do people keep peddling this line?

8 Bernard Guerrero December 20, 2011 at 11:41 am

Mostly because it’s basically true.

The remaining monsters, are, by and large, the autos, Freddie & Fannie, none of which are banks.

9 JWatts December 20, 2011 at 11:42 am

I’m not sure what you mean, but the site you linked to doesn’t really contradict what I said.
From the site you linked to:
Banks and other Financial Institutions: Disbursed – $245,155,693,547

Then the site doesn’t actually detail who has returned the money. The majority of the money loaned to the ‘Banking and other Financial Institutions’ has been repaid.

Fannie Mae/Freddie Mae, the auto bailouts, AIG are all still deeply in the red.

10 GiT December 20, 2011 at 2:25 pm

‘The banks are fine, it’s the GSEs’ line all seems a little ridiculous when the GSEs were used to bail out the banks…

11 zbicyclist December 20, 2011 at 10:27 am

Banks, smanks. Europeans are even now inventing new ways to bail out banks. Somehow the AIG, Fannie and Freddie fiascos aren’t counted, because they aren’t quite banks. I think this notion that bailing out the banks was somehow painless is cute PR, but like most cute PR a bit of fact-selection is involved.

12 CBBB December 20, 2011 at 12:29 pm

I’ve said this before but repaying TARP is meaningless. So you give someone a loan at absurdly low interest rates and they can repay it by lending it out at slightly higher rates? Oh man what a shocker. Why not just given them a printing press so they can print up all the bills themselves to repay you with?
The taxpayer was not at all compensated for the risk.

13 msgkings December 20, 2011 at 12:34 pm

What risk? The taxpayer was the lender of last resort. They were quite literally keeping the banks alive to guarantee repayment. The carry trade you mention made the loans essentially riskless.

14 CBBB December 20, 2011 at 12:47 pm

So the taxpayer quite literally keeps the banks alive and all they get is a pathetic rate of interest for it?

15 msgkings December 20, 2011 at 1:10 pm

They got a pretty big say in how those banks are being run, even 3+ years later.

They also got to, y’know, not go back to a barter economy.

16 msgkings December 20, 2011 at 1:11 pm

And you mentioned compensation for risk, not you are changing the argument towards gratitude pay.

If a regular bank lends a dry cleaner money he needs to stay in business and he does so, and pays off the loan, does he owe the bank any more than the interest for ‘saving’ him?

17 CBBB December 20, 2011 at 5:17 pm

“They also got to, y’know, not go back to a barter economy.”
An idle threat with no realistic basis.

“They got a pretty big say in how those banks are being run, even 3+ years later.”
Hardly any say at all – they got some new “regulations” written by the banking lobby itself

18 Floccina December 21, 2011 at 10:30 am

Why not just given them a printing press so they can print up all the bills themselves to repay you with?

That is the way that I think it should be. They should print money with their own trade mark on it.

19 Floccina December 21, 2011 at 10:35 am

I was against the bail outs and would have liked to the banks that took the most risk fail and their management, creditors, stock holders held accountable but that is not the system that we have and to be honest you should consider that they have been paying the corporate tax for years to get that protection from liability.

20 anon December 20, 2011 at 7:39 am

So are you selling stocks and shorting US Treasuries now? If yes, what are you buying?

Lead and gold? Canned food? Putting cash in mattresses?

21 Loren F. File December 20, 2011 at 7:44 am

Hmmmmmmmmmm “…go short on U.S. Treasury securities (and long on Brazil…”. His short Treasuries would have considerably reduced his Bovespa gains. No?


22 John Hall December 20, 2011 at 7:53 am

I was going to echo Loren. Just because you think that the outlook for the U.S. was poor doesn’t mean you should short Treasuries. What you really meant was long U.S. CDS in order to capture a rising default spread on U.S. debt. Alternately if your outlook was just on inflation, then you would have wanted to buy TIPs and short Treasuries. However, that is only the fiscal policy side. A second bet (long Brazil stocks/short U.S. stocks) is required to make the more general point about the outlook for the U.S. economy

23 Jacob December 20, 2011 at 10:55 am

I’d add that shorting US stocks (assuming you held the whole time and didn’t cover in 2009) since 2004 hasn’t even been that great a bet. The S&P 500 has been basically flat since 2004. I’m left wondering what the point of this article was.

24 the spam robots are getting better and better December 20, 2011 at 7:20 pm

to illustrate that PhD in economist + stock market tips = bad idea?

There is a reason these guys stepped out of the free market and entered the sweet sweet embrace of a guild like structure that is academia.

25 Chris D December 20, 2011 at 7:56 am

You didn’t think Bush’s beggaring the realm with massive fiscal irresponsibility would be a drag on things, or signaled anything broken about the system?

Why not? Krugman’s _Great Unraveling_ was 2003: what kept you from being more judgmental?

26 Maxxxx December 20, 2011 at 7:58 am

This just shows that economists are not very good at assessing an economy’s health. Otherwise you should have noticed somewhere in your data that the economy was getting into big trouble soon.

27 CBBB December 20, 2011 at 12:26 pm

Oh you just figured out now that economists aren’t very good at assessing the economy?

28 Maxxxx December 20, 2011 at 7:48 pm

Well, they still are being listened to.

29 Mark December 20, 2011 at 8:41 am

Your defense is ‘some of the softest macro stats we had at the time said I was right’? That’s pretty weak.

30 Pavel December 20, 2011 at 8:43 am

Wouldn’t buying out your half of the blog reduce the blog’s value by half making market price 0?

31 NN December 20, 2011 at 9:57 am


32 J Storrs Hall December 20, 2011 at 8:47 am

Your pick wasn’t as bad as it looks now. In 04 we had come off the latter-90s bubble and resumed the growth mode that we had had since about ’80:

… and it lasted 3 more years. Then, of course, kablooie.

33 SE December 20, 2011 at 9:17 am

You might be interested in this article: Though hardly a rigorous treatment of the subject, the headline and lede are certainly striking.

34 Ted Craig December 20, 2011 at 9:19 am

And commodity prices had nothing to do with any of this, of course. It was all just government policy.

35 Bill December 20, 2011 at 9:20 am

That’s a good post.

I say the same thing to persons who claim inflation is just around the corner (go buy TIPS), that the stock market will crash (go short it), that America is in decline (buy a foreign stock index), etc.

The truth is that the market presents us with a number of financial instruments to act on our beliefs and not be damaged by policies we claim are or will be catastrophic..

When we don’t act, that tells you something.

36 Maxxxx December 20, 2011 at 9:30 am

I think it’s not that easy because there are a lot of forces that will try prop up things for as long as possible. Fundamentally it would have been correct to believe in 2006 that some big banks will go down soon. But you couldn’t have predicted the bailouts so you still would have been wrong.

37 msgkings December 20, 2011 at 12:38 pm

The bailouts hardly ruined anyone’s short trade on the banks. You’d have made a killing shorting them even with the bailouts. All the bailouts did was keep them alive and the system functioning. They are nowhere near the prices they were in 2006.

The trick would have been sticking with your short while losing a ton on it in 2007. John Paulson did exactly that, he was early and almost ran out of funds before his big payday in 2008 made him king of hedgies, for a year. 2011 has not been kind to that one.

38 Claudia Sahm December 20, 2011 at 9:31 am

Typical economists…not putting their money where their mouth is. Typical non-economists…asking economists for investment advice. Beware of any economist who answers an individual with anything but a diversified portfolio. See economists are boring, really (and none of have crystal balls).

39 Ted Craig December 20, 2011 at 9:53 am

But many act like they do.

40 libert December 20, 2011 at 10:19 am

True, but I think economists are less guilty of this than non-economists.

As a personal anecdote: I get those wacky emails from relatives talking about how they *know* the system will crash tomorrow. None of those emails come from economists.

41 Ted Craig December 20, 2011 at 10:26 am

How often does your relative’s column run in a major newspaper?

42 anon December 20, 2011 at 11:14 am


43 msgkings December 20, 2011 at 12:42 pm

When I get those emails they are never so specific as to say ‘tomorrow’. Too easy to be wrong.

They just claim we are heading for some big apocalypse of some kind (hyperinflation/hyperdeflation/New World Order/whatever)…sometime ‘soon’.

You can be heading for an apocalypse ‘sometime soon’ forever. If you keep it up, you’ll be right once every 20 years or so. And then you’ll be Nouriel Roubini.

44 Steven Kopits December 20, 2011 at 10:25 am

Brazil is a China play. Most of its commodity exports go to China. While the deepwater, pre- and sub-salt plays were not known in 2004, Brazil as a major commodit exporter was reasonably visible. Timing also matters.

The oil supply stalled out in Q4 2004. Ken Deffeyes called it almost perfectly, but most of us were slower to catch on, so Tyler can be forgiven for that. And just to digress a bit, consider that Shell sanctioned the massive, $20 bn, Pearl GTL (natural gas-to- petroleum liquids) plant, as I recall, just about the same time, when neither the stalling of the oil supply nor the shale gas revolution was apparent to most people. That was a gutsy, and ultimately correct call. If you want a visionary integrated oil company, do a little research, and you’ll come back to Shell.

In any event, the notion that China’s comparative advantage in manufactures would be mirrored by the comparative advantage of the commodity producers in supplying China was not really a hard call if one sat down and worked through the market analysis.

45 anon December 20, 2011 at 11:18 am

And the coming implosion of China’s real estate bubble will also ripple through to the commodity producers:

46 gil December 20, 2011 at 11:37 am

The broker is a quiet man
who wields not sword nor pistol,
but he must walk carefully
because his balls are crystal.

47 CBBB December 20, 2011 at 12:23 pm

A Mea Culpa?
Tyler if you’re going to start looking back to your mistakes you’re going to have to put up a post for every other post you’ve ever written.

48 msgkings December 20, 2011 at 12:44 pm

You’re such a child. You LOVE this blog, you practically live here.

You’re like my dad, he watches Fox News because he disagrees violently with everyone on it and loves the righteous anger and yelling back at the TV.

49 CBBB December 20, 2011 at 12:50 pm

Hahaha, yeah. But Tyler Cowen is still wrong about many things.

50 msgkings December 20, 2011 at 1:12 pm

And you are wrong about more things.

51 CBBB December 20, 2011 at 5:18 pm

I get a lot more right then Tyler Cowen

52 msgkings December 20, 2011 at 5:41 pm

Just typing it on your keyboard doesn’t make it so. Especially with spelling errors.

53 Very Serious Sam December 20, 2011 at 12:23 pm

This chart apparently ends in 2008. How did it continue since then?

54 Ted Craig December 20, 2011 at 12:51 pm

Compare UST and EWZ as stand ins for each and you’ll find Brazil has lagged by a lot for the past year.

55 Renato December 20, 2011 at 3:40 pm

The market has been fluctuating between 50K and 60K for almost the entire year. If a crisis in europe blows up expect to go much lower – 40K.

What Tyler showed was the very peak of the market (~72K). just after it went crashing more than 30% due to Lehman et al. It is not a mature market, it moves wildly often.

56 anonymous December 21, 2011 at 12:34 am

Here is the Bovespa chart (be sure click on the “5Y” button to see the past five years). Bear in mind that the y-axis is denominated in Brazilian reais.

And here is the Brazilian real vs. the US dollar for the past five years.

You will see the tail end of the above graph, and the cliff dive that soon followed; this was drastically amplified for the US-based investor by the fact that the Brazilian real was plunging sharply at the same time. Both have since recovered for the most part, although 2011 has brought fresh challenges.

Armed with a crystal ball, you would have done very well to buy Brazilian stocks in late 2008 to early 2009, and then sell them around the beginning of this year.

57 *daniel December 20, 2011 at 1:08 pm

Ah, the follies of prediction.

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