Credit Crunch and Asset Deflation Recession

I have a question. If we did not have high GDP growth nor normal jobs growth during the 2000 to last year "expansion" (which we did not), why would we use either the lack of job losses which normally accompany a recession or the lack of falling GDP to measure it now? It seems to me like counting Iraqi killed figures as absolute values instead of relative values when we know that a large percentage has already been killed or fled the scene or been segregated into segregated - single type (Shia, Suni or Kurd) communities, and then comparing these values to times before these changes occurred without taking these changes into account to assess whether there is quantitatively less violence there now.

Further, what does it mean when we use a current or assumed value of the dollar when measuring the GDP instead of measuring it from dollar values taken from at the start of the last "expansion"? Surely the dollar's decline means that the same number of dollars equals less GDP, no?

If the answers to these questions are what I think they are, we are in a recession, aren't we?

When my ancestor David (Hudson) Short signed up to fight in the 10th calvary out of Flint Michigan during the Civil War, he, like many, lied about his age just so he could go off and fight against slavary. Perhaps he was more enamored by the uniform than the cause but, nothing in my familys historicals make David Short out to be anything less than a hero and advocate for anti-slavary. Since his time, America has survived everything except the bushliveks. The bushlevieks have been the great enslavers on our planet and the bushleveks are like anti-matter when confronted by heros like David (Hudson) Short.

Max:
We all learn in finance that the value (slippery concept) of an asset (home, share of stock, government bond... etc) is the present-value of the flow of payments associated (in the future) discounted at the alternative rate for competing assets. Simple enough. But during the reign of easy Al Greenspan this market had negative real interest rates. (think about that...in the context of discounting cash flows for the pricing of assets!) So...as one of your commenters stated, Al had the economy on steriods (negative real interest rates) and the assets prices went cluckin' bonkers. That house you bought for $100000 was now worth $300000 and you knew that supply-side economics had arrived. You were even charmed by evanglkl repubs. The complication, of course, was the mispricing of the rates by the feds that had the assets on steroids. Fine for the increase in value for owners, but murder for new entrants who would have to qualify with arithmetic that was out of kilter (in accordance with the invisible hand of the market place).
And look at the Japs with the carry-trade! The Chinese are cheating with the value of the rimimbi. Yet our boys, Snow, Paulson, Bush... they do nothing. Ahhh but they were owners who took the trip up. Well then. It's time to leave before the grownups take away the punch bowl (old joke I know, but appropriate)

Lowering rates assist in bailing out the banks who caused the mess in the first place. And such policy may contribute to another bubble--in alternative energy???--as was recently suggested by a guru in Harpers.
However, the overtly stated purpose is to unfreeze credit so government entities, corporations and others can borrow at a reasonable rate.
But the American economy is under the spell and control of the winners of "free" mercantelistic trade agreements. Our corporations are effete or gone, our workers are underemployed unemployed or working at servant politions. Individuals, governments, corporations are deeply in debt.
In this condition would you lend money to any group within such a declining organization? That's the rub. Vermont government is paying 20% interest on student loans. The Port of New York cannot sell bonds for rehab work. And so on.
An incompetently run organization can print and distribute all the money they wish. That still won't disguise the gross negligence of our President and his dispised, corrupt administration in undermining our national security and economic future. Such incompetence, corruption, and negligence requires that his entire administration be impeached and the guilty parties be tried for treason, high crimes and misdemeanors for placing our Republic on the precipice of destruction and ruin.

BTW--not only have wages not kept up, but the average house in the 50's cost somewhere between one and two times the American worker's wages. In 2006 it was FOUR times yearly wage! Four times! And you read here how little growth there was in real dollars for American labor. That real estate price inflation was a direct response to all that money the Fed churned out. And they knew it was unsustainable. Can anyone spell "collusion?"

Low interest rates and financial innovation allowed greater profitability and opportunity to corporations, particular those engaged in the booming credit and housing markets.
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In other words, an artificially low Fed rate encouraged Central banks and their regional systems to take this newly minted, nearly free money and find suckers to rent it from them (debt) at a higher rate. This coupled with illegal loans created right from the top down and also encouraged by Greenspan, created a dragon of dollars chasing its own tail through the marketplace. Fractional lending demands ever more debt to satisfy the top feeders and keep the system functioning. With the artificially low mortgage rates being shoved down our throats, plus the predatory loan agreement practices, millions of marginal home buyers were set up and then knocked down.

I heard on the radio today that even with the Fed's twice lowering of their rate, that home interest rates have not come down correspondingly...? Even those stuck with usurious and immoral loans cannot take advantage of this even cheaper money, which along with about $70 Billion from Bush's so called rebate, is being funneled directly into the accounts of the very financial companies that created this entire scam!

It is predicted that as many 20 million Americans may lose their homes before this is over. A one per cent adjustment on a loan could save millions of them, but it is not being made available. Rather that money is being put to work helping the Banks build up their reserves. To say this was not your father's expansion is too kind. Why not say that the Fed and its corporate masters saw the greatest swindle opportunity yet--one that even surpassed the so called Tech Bubble, which was also engineered--that allowed incredible debt to be turned into assets on their books, accompanied by the bonus of driving millions of Americans from their homes and causing even more social dislocation, which this administration seems to thrive upon!

The investment market bets on the appreciation of assets 'in the future.' Exactly how far into the future is anyone's guess. So long as inflation can be manipulated to cover long-range bets, it doesn't much seem to matter.

With our exploding population (have you noticed how the US has switched from being one of the low birthrate nations to one of the high ones?) it's a pretty safe bet that folks growing up will need the assets we grownups now own. Exactly what the dollar worth of that long-term view amounts to is determined by those borrowers betting on it and those lenders willing to cover those bets.

The FED has said many times that it is interested in keeping inflation under control. What it has not said is, "But as we all know if push comes to shove we can cover all bets by printing money and running up the government debt."

So we operate with the FED as umpire. Unfortunately, everyone on the FED board has all their bets well-covered. They will have to take hits along with the rest of us, but none would exchange places with me. I may lose $250,000 and so will the FED board members. That's all I have. For them, it's pocket money. We have not figured out a way to even the ods. So we depend on the integrity of financial managers. LOL. Our empire umpire is the one taking steroids, not the players.

Another great post Max, Thanks. Your statement that the post 2001 economic boom is based on consumer credit and asset inflation hits the mark.

Private financial and housing markets have been obvious failures in this era of deregulation and pipe dreams of a failing middle class. People ignored or were shielded from news about the laws elected officials were passing that deregulated finance. Housing has become too expensive for many families. The idea that every American could live in a suburban, multi-thousand sq foot home arose in a previous era when the middle class was prosperous. The rise of corporate power over the past 30 years has taken away that middle class prosperity but people still want the goods. That gives finance an opening for their debt products and other hustles.

The fact that I and many of my friends, complete lay-persons in terms of understanding such complexities, could see this debacle coming as early as 2003, while the so-called 'experts' in government and the FED couldn't, means this had to have been planned. Why? IMO to impoverish the middle-class and to enrich the Decider's base. Someone should be going to jail. I won't hold my breath!

I very frankly feel that analysis like this deals far too much "in the abstract." Let's get boots on the ground and look at what sort of conditions are facing the actual you-and-me.

The single most important thing facing "us" right now is: (1) bank usury, and (2) bank fraud. Neither one of which is being addressed.

Usury, of course, is the charging of excessive interest rates. The rate on your loan can increase from 8% to 38% overnight with no reason and no recourse. It used to be that in some countries usury would get your hand chopped off. Maybe there's a reason for that.

Bank fraud is more insidious, but when a single national bank "earns" $14 Billion in one year from "fees and penalties," you know you smell and see a big rat. People have no choice but to do business with banks, but they juggle the transaction processing to their own singular advantage. Illegally.

Asset deflation ("leprechaun gold") and other matters are simply the just-result of human foolishness and sheer greed, but usury and fraud are not.