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Recession?

  1. "When you are not buying name-brand cough syrup, something is going on."
  2. Dean Baker:
    The news articles today all report on how the country's leading economists now believe that we currently are in, or soon will be in, a recession. This is big news, in fact it's bigger news than the reports suggest. As I've written in the past, economists have an enormous bias against seeing recessions. Virtually no economist saw the recession coming in 2001, even after the stock bubble was already well on its way to deflating (okay, none of them saw the bubble either). This includes all the official forecasters, CBO and OMB both projected solid growth in 2001.

    Economists don't predict recession. Economists don't predict recessions. (I'm not in the fraternity.) Say it one thousand times until it sinks in. Economists, when we are lucky, recognize recessions after we are already in them. The fact that so many economists are now willing to say that we are facing recessions should be viewed as a lagging indicator of a recession. It is very reliable -- I am fairly certain that there has never been a period in which a sizable share of economists forecast a recession (the WSJ puts the aggregate probability at 43 percent) and we have not actually been in a recession.



  3. Paul Krugman:

    Monetary policy mainly exerts its influence through housing: high interest rates squeeze home construction, low rates encourage it. Interest rates have much less direct effect on business investment. The reason? Housing lasts much longer.

    Suppose you take out a loan to buy a machine whose economic life is only 5 years - which is highly likely, given both physical wear and tear and technological obsolescence. How much difference does it make whether the interest rate on the loan is 4 percent or 6 percent? Not much: the monthly payment on a 5-year loan at 4% is less than 5% lower than the monthly payment on a loan at 6%. So interest rates don't have much effect on business investment.

    On the other hand, suppose you buy a house with a 30-year mortgage. The monthly payment on a 4% mortgage is more than 20 percent lower than on a 6% mortgage. So interest rates make a lot of difference to housing.

    So here's what normally happens in a recession: the Fed cuts rates, housing demand picks up, and the economy recovers.

    But this time the source of the economy's problems is a bursting housing bubble.

    ...
    So: is it even possible for the Fed to cut interest rates enough to create a renewed housing boom? (The Fed can cut the overnight rate all the way to zero, but even large changes in the overnight rate can have only modest effects on mortgage interest rates, if the market perceives those changes as temporary.) If it can't, how much can the Fed really do to help the economy?

By fnord12 | January 14, 2008, 7:20 PM | Liberal Outrage


Comments

My brother never buys name brand cough syrup. At least, not name's I've ever heard of. Tussin V, for example; which I presume is a rip off of Robitussin.

As for me, my cough syrup comes in 1.75 liter bottles and is manufactured by Seagrams. I think it works well, better than Nyquil. It even has other, non-medicinal uses. Talk about a multi-tasker.

But what do I know, I don't have any money even when the economy is good.