Wednesday 26 September 2018

"At long last, economists appreciate that private debt was the catalyst for the crisis"

Paul Ormerod in City AM:

A particularly interesting paper in the journal is by Atif Mian of Princeton and Amir Sufi of Chicago. Their focus is considerably wider than the crisis of the late 2000s in the United States. They quote empirical studies across some 50 countries with data going back to the 1960s. They found that a rise in household debt relative to the size of the economy is a good predictor of whether GDP growth will slow down.

Rickard Nyman, a computer scientist at UCL, and I applied machine learning algorithms to data on both public and private (households and commercial companies) sector debt in both the UK and America. We find that the recession of 2008 could have been predicted in the middle of 2007.


This is news? People have known about the 18-year credit/land price bubble cycle for over a century. Fred Harrison predicted the 2007-08 credit crunch in 1997. The Neo-Libs and Homeys like to airbrush this out of history and pretend that economic depressions are somehow random events.

Perhaps the most striking result is that public sector debt played little role in causing the crisis. The driving force was the very high levels of private sector debt.

Again, this ought to have been clear to anybody with half a brain. Labour's deficit spending was A Bad Thing, but clearly not the cause of the credit crunch. I can understand why Tory politicians claim that it was, but I am baffled why so many Labour politicians go along with the lie (a particularly twisted kind of Indian Bicycle Marketing).

A critic might say that this is simply a case of generals fighting the last war. True, we don’t know whether a completely different nasty event lies around the corner. But at long last, economists appreciate the fundamental importance of debt and finance in Western economies.

There'll be another credit crunch in 2025-26, full stop. That is the next 'war' and we haven't properly won the last one yet.

16 comments:

Lola said...

Oh, the seeds are already being laid. I can see them. Large mortgages based on ludicrous 'affordability' criteria and exponential growth in the equity release market.

Lola said...

Just expanding the 'private debt' answer for the nonce, the only reason that happened was down to government and bureaucratic failure. Government - Blair Brown and Co. here - egged on the credit expansion as they judged it was the way to electoral Nirvana (and they weren't far wrong - until it all went tits up). They loosened bank capital requirements. They set interest rates too low. The expanded the money supply. They skewed taxation away from land and onto production. They did all sorts of subsidies. And so on.

In other words it is right to accept that private debt was the problem but wrong to blame it on a citizenry who were encouraged in taking on debt by the polices of the government and its bureaucrats.

Mark Wadsworth said...

L, yup, bubbling up nicely, house prices are in the mid-cycle dip at present, so government will ramp up Help To Sell etc to keep things moving until the next GE.

Were Blair-Brown complicit? Yes of course, they encouraged it because they know to be re-elected you have to bribe Homeys with ever rising house prices.

But the 18-year cycle transcends that, it transcends everything short of an actual world war, which interrupts it for a few years.

Bayard said...

"I am baffled why so many Labour politicians go along with the lie"

Are they really Labour politicians or are they Red Tories (i.e. Blairites)?

Mark Wadsworth said...

B, I don't know. All I know us, they want to be elected and then take bungs. But I can't see why slagging off your own team gets you elected.

Sobers said...

I don't think anyone was saying that Labours deficit spending during the boom years CAUSED the crash, how could it, it started in the US. More that the fact they were already in a deficit during a boom meant that when the crash came and tax receipts dropped through the floor the deficit ballooned massively. Hence the 'Failed to fix the roof in the good times' jibe - they weren't to blame for the rain that poured in through the roof, just for not fixing it when they could have.

Mark Wadsworth said...

S, lots of people are saying it.

And no, tax receipts did not fall particularly, down a couple of per cent. What happened was a massive increase in govt spending to keep the bubble inflated (otherwise people like you wouldn't re-elect them).

L fairfax said...

Why do you think the crash in 2007/8 in the UK was worse than before? After all we didn't have a bank run in the 20th century.
Many countries didn't even exist the last time the UK had one. (Poland, Norway etc)

Lola said...

MW. How far does the '18 year cycle' go back? I suspect only until about 1918. Any facts?

Mark Wadsworth said...

LF, because until about 1990 the uk govt kept a lid on house/land prices and speculative lending with Georgism Lite.

L, I found an article from early 1900s that traced it back to 18th century.

L fairfax said...

@Mark Wadsworth
Do you think that the FSA had anything to do with it?
They didn't seem to do as good a job as checking the banks as the bank of England did.

Mark Wadsworth said...

LF, see Lola's comment above. FSA and BoE were in on the scam. Their job was to inflate lending and hence land prices.

Lola said...

MW and LF. The problem is the FSMA 2000. That Act proto nationalised financial services generally and the Banks in particular to make them tools of New Labour. That regulationism had nothing whatsoever to do with 'making markets work better' (wut?), 'consumer protection' or similar tripe but everything to do with moving power over money and finance from the Bank of England and the markets and the rule of law, to New Labour cronies in quangos. The whole thing was modeled on the illegal drugs trade. First deal with the police (in this case the Bank of England, the Law and the actual police), then get your pushers hooked ( - on debt in this case), i.e. the Banks. Then set them going finding more addicts - us. All fuelled by the state sanctioned and encouraged over production of the narcotic of cash - Brown expanded the money supply by about 3 times, cut the price of money and cut the quality. And all this was egged on by the EU especially their rules on bank capital adequacy and what could count as 'tier 1' capital, Greek sovereign bonds say (really!).

Sobers said...

Tax receipts dropped by 9% in cash terms from 2007/8 (456bn) to 2009/10 (415bn). This is unprecedented in recent UK history - since 1980 there has only been three years when tax receipts dropped on the previous year, and that is those two years plus a drop of 0.5% in the early 90s. Even in the recession of the early 80s receipts rose year on year.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/539194/Jun16_Receipts_NS_Bulletin_Final.pdf

So to say the drop in revenue was 'not particularly great' and fell 'a couple of percent' is to ignore the facts. It was an unprecedented drop in revenue.

Mark Wadsworth said...

S, two can play at that game.

2007-08 £456 bn
2010-11 £453 bn

The intervening two years were a brief downward blip.

Skip another two years

2013-14 £493 bn.


benj said...

So why the slow down in GDP?