Posts Tagged ‘Great Depression’
“It’s the economy, stupid”*…
It’s no secret that economic conditions have political impacts; still the stark, almost mechanical character of that impact can still be surprising– and can raise the question of motive. Consider on the findings of a recent study by analysts at Sveriges Riksbank, Sweden’s central bank…
Using a novel regional database covering over 200 elections in several European countries,
this paper provides new empirical evidence on the political consequences of fiscal consoli-
dations. To identify exogenous reductions in regional public spending, we use a Bartik-type
instrument that combines regional sensitivities to changes in national government expendi-
tures with narrative national consolidation episodes. Fiscal consolidations lead to a signifi-
cant increase in extreme parties’ vote share, lower voter turnout, and a rise in political frag-
mentation. We highlight the close relationship between detrimental economic developments
and voters’ support for extreme parties by showing that austerity induces severe economic
costs through lowering GDP, employment, private investment, and wages. Austerity-driven
recessions amplify the political costs of economic downturns considerably by increasing dis-
trust in the political environment.
Here, Adam Tooze:
With a significant data set, this paper argues that post-2008 austerity clearly increased support for far-right parties by deepening recessions and generating social fragmentation. Note that the authors measure support for “extreme” parties, which risks lumping together fascists and socialists through liberal “horseshoe theory” — the most ostensibly objective, empirical social science has a dose of ideology in it! — but this is nonetheless important in confirming the old Keynesian claim that was so starkly forgotten by Eurozone political elites after the financial crisis. The question that arises, then, is why a truth discovered through much pain in the 1930s (slashing demand only deepens economic and social problems) was set aside: was this a case of foolishness or the pursuit of other, narrower [economic self-serving and/or political] interests?
Why do we keep making the same mistakes: “The Political Costs of Austerity,” from @riksbanken and @adam_tooze.
For a sense that there may be some remedial action afoot, at least in the aid available to troubled economies, see “A reboot of the World Bank and IMF tests US influence” (gift article; source of the image above)… though it’s fueled by geopolitical competition for influence, so may simply be trading one problem for another…
And for a contrary view: “The Economic Anxiety Explanation of Fascism Is Wrong” (though the author’s case begins from the assertion that “there just is little to no evidence that economic hardship leads to fascism,” a claim weakened by the paper above; still his larger argument is worth reading).
* James Carville, while he was serving as a strategist to Bill Clinton’s 1992 presidential campaign (which unfolded during a recession)
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As we wonder if it is, in the end, all about the Benjamins, we might recall that on this date in 1929 Yale economist Irving Fisher wrote in the New York Times that “Stock prices have reached what looks like a permanently high plateau.” Eight days later, on October 24, 1929, the stock market began a four-day implosion on what became known as Black Thursday. This crash cost investors more than World War I and was a main catalyst of the Great Depression.
Fisher’s declaration was in response to Great Britain’s Chancellor of the Exchequer, Philip Snowden, then-recent description of America’s stock market as “a perfect orgy of speculation,” which was quickly followed by U.S. Treasury Secretary Andrew Mellon’s assertion that American investors “acted as if the price of securities would infinitely advance.” Fisher’s prognostication has entered history as the worst stock market prediction of all time.
“It’s very easy for trusted companies to mislead naive customers, and life insurance companies are trusted”*…
Systemic risk in the financial system– the kind that can create devastation like the Crash of 2008— has been the province of regulators for many decades, primarily the SEC and the Federal Reserve. But as our financial system has become more complex and intertwined, that risk may have moved from the stock market and banks to other sectors, sectors less well regulated. As John Ellis explains in his terrific newsletter, News Items, we might do well to turn our attention to the seemingly staid insurance industry…
The Fed exists to oversee banking, but lately it’s been keeping an eye on life insurance, too. Its recent Financial Stability Report flagged some life-insurance practices that might make the system vulnerable. Some insurers invest in assets that “can suffer sudden increases in default risk,” the report said. And some use “nontraditional” funding sources that could dry up “on short notice.”
That sounds ominous. But not long after that, Jon Gray, the president of private-equity giant Blackstone, turned up in a Financial Times article, saying life insurers had the wherewithal to bolster America’s weakened regional banks.
Gray said private equity firms like Blackstone could get “very low-cost capital” from life insurers and extend it to regional banks, to fund their lending operations. That would be a boon, because the banks’ usual source of funding, customer deposits, has grown more expensive and flighty in the wake of this year’s bank failures. So the life insurers could help ease a credit squeeze.
And once the banks make the loans, Gray said, the insurers might like to acquire some of them as investments. Blackstone manages billions of dollars of insurance investments, and Gray said the firm was already talking with large, unnamed regional banks about such deals.
So, what’s up with life insurance? Is the industry so flush it can send money to shore up America’s weakened banks? If so, then what’s the Fed worried about?
As it happens, a group of Fed economists has some answers. They got under the hood of the life insurance industry and combed through the voluminous regulatory filings of more than a thousand life insurers in the years since the crash of 2008. The U.S. financial system was going through major changes then, and they wanted to understand how the insurers had navigated the changing landscape.
One trend they observed: First, America’s bailed-out banks, seen as having gambled with their depositors’ money, were brought under the broad financial-reform legislation known as Dodd-Frank. It steered them away from making any more loans to big, low-rated borrowers. Then, once the banks had departed that space, life insurers moved in.
As a result, “These insurers have become exponentially more vulnerable to an aggregate corporate sector shock,” wrote the three economists, Nathan Foley-Fisher, Nathan Heinrich, and Stéphane Verani, in a paper first published in February 2020 and updated in April of this year.
Their findings cast the life insurance industry in a very different light from the traditional image of dull, stable companies plodding along under the weight of big, safe, bond-laden investment portfolios.
“Within ten years, the U.S. life insurance industry has grown into one of the largest private debt investors in the world,” the three wrote.
At the end of 2020, life insurers managed one-fourth of all outstanding CLOs, or collateralized loan obligations – bond-like securities backed by pools of loans to large, low-rated borrowers. Because the underlying borrowers have low ratings, CLOs pay a higher yield than the high-grade corporate bonds a conventional life portfolio would hold.
The insurers were also using unusual sources of capital to fuel their growth (funding-agreement-backed repos, anyone?). Not all life insurers, but a certain cohort was doing the kind of business the big banks did before the financial crisis, “but without the corresponding regulation and supervision.”
The economists called it “a new shadow-banking business model that resembles investment banking in the run-up to the 2007-09 financial crisis.”
Their reports describe the trends in detail, but in measured tones. No flashing red lights or alarm bells. But they do tell how things could go south: “A widespread default of risky corporate loans could force life insurers to assume balance sheet losses” from their CLO holdings.
Institutional investors watch life insurers carefully and know where the shadow-banking activity is concentrated; they would presumably see the losses coming and withdraw from the affected insurers in time. That’s what we’ve been seeing in the regional banking sector this spring, where savvy investors have identified potential problem banks and sold or shorted their stocks. The trouble is, such trading can turn a potential problem into a real one.
Upshot: “U.S. life insurers may require government support to prevent shocks from being amplified and transmitted to the household sector,” the three warn…
[Ellis explains how this happened; TLDR: life insurers chased yield; private equity firms obliged.]
The Fed researchers said the private-equity firms appear to be giving their affiliated insurers “some of the riskiest portions” of the CLOs that they package. Since risk and reward go hand in hand, presumably the insurers are getting better returns than they would from safe bonds.
But still, should America’s insurance regulators be allowing this? Remember, America’s banks were told to stop.
The National Association of Insurance Commissioners has, in fact, proposed a change in the post-crisis rule that’s been letting insurers count risky CLOs as if they were safe bonds.
But the NAIC isn’t a regulator; it’s a non-governmental organization that represents America’s 56 insurance regulators (one for each state, five for the territories, and one for the District of Columbia). The regulators often have different priorities and viewpoints, and when the NAIC makes a proposal, it can take years to get the necessary buy-in.
So here we are. Countless policyholders and annuitants are diligently paying their premiums to keep their contracts in force, unaware of these trends. The Fed’s economists see undisclosed risk, but the Fed has no legal authority to regulate insurers. The insurance regulators don’t seem in any rush to rein in the risk-takers. Keep in mind: Life-and-annuity is a $9 trillion industry that doesn’t have anything like the FDIC…
Eminently worth reading in full (along with the report and the paper linked above): “Risky Business,” from @EllisItems.
(Image above: source)
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As we whack the mole, we might recall that it was on this date in 1931 that the New York Stock Exchange began regularly reporting short selling data for the first time. The Crash of 1929 had rocked the stock market; the Dow dropped 32.6% in 1930 as the American economy took a nosedive (unemployment doubled to 16.3% by 1931, as the Great Depression set in). But short sellers in the stock market made a killing. Consequently, those short sellers took a lot of heat for the stock market crash of 1929, which led to the enactment of the uptick rule (requiring that short selling orders be filled only during upticks in share prices and meant to mitigate the negative impact of short sales) shortly thereafter. The reporting of short orders/sales was another step toward reining in the phenomenon.
The uptick rule was abolished in 2007, just prior to the market crash of 2008.
“Financial crises are like fireworks: they illuminate the sky even as they go pop”*…
The unpredictable outbreak of the COVID pandemic caught the whole world off guard and brought strong economies to their knees. Has an exogenous shock ever blindsided markets like this before? As Jamie Catherwood explains, of course it has…
On the morning of April 18, 1906, at 5:13 AM, an earthquake registering 8.3 on the Richter scale tore through San Francisco. The earthquake itself only lasted 45-60 seconds, but was followed by massive fires that blazed for four days and nights, destroying entire sections of the city, Making matters worse, the earthquake ruptured the city’s water pipes, leaving firefighters helpless in fighting the flames.
Eventually, the earthquake and ensuing inferno destroyed 490 city blocks, some 25,000 buildings, forced 55–73% of the city’s population into homelessness, and killed almost 3,000 people. In a matter of days, the Pacific West trading hub looked like a war-torn European city in World War II.
The unpredictable nature of San Francisco’s earthquake made it all the more damaging, and had a domino effect in seemingly unrelated areas of the economy…
The stock market fell immediately in the aftermath of the disaster; but more damagingly, British insurers (who covered much of San Francisco) had to ship mountains of gold to the U.S. to cover claims… which led the Bank of England to raise interest rates… which raised them around the world… which squelched speculative stock trading… which led to the collapse of a major Investment Trust (a then-prevalent form of “shadow bank”)…
The fascinating– and cautionary– story of The Panic of 1907, from @InvestorAmnesia.
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As we prioritize preparedness, we might recall that it was on this date in 1933, in the depth on the Depression, that Franklin D. Roosevelt delivered his first inaugural address. Although the speech was short on specifics, Roosevelt identified two immediate objectives: getting people back to work and “strict supervision of all banking and credits and investments.”
The next day, cabinet members joined with Treasury and Federal Reserve officials to lay the groundwork for a national bank holiday, and at 1:00 a.m. on Monday, March 6, President Roosevelt issued a proclamation ordering the suspension of all banking transactions, effective immediately. The nationwide bank holiday was to extend through Thursday, March 9, at which time Congress would convene in extraordinary session to consider emergency legislation aimed at restoring public confidence in the financial system.
It was a last-ditch effort: in the three years leading up to it thousands of banks had failed. But a new round of problems that began in early 1933 placed a severe strain (largely, foreign and domestic holders of US currency rapidly losing faith in paper money and redeeming dollars at an alarming rate) on New York banks, many of which held balances for banks in other parts of the country.
The crisis began to subside on March 9, when Congress passed the Emergency Banking Act. On March 13, only four days after the emergency legislation went into effect, member banks in Federal Reserve cities received permission to reopen. By March 15, banks controlling 90 percent of the country’s banking resources had resumed operations and deposits far exceeded withdrawals. Although some 4,000 banks would remain closed forever and full economic recovery was still years in the future, the worst of the banking crisis seemed to be over.
“The basic underlying problem does not entail misbehavior or incompetence but rather stems from the nature of the provision of labor-intensive services”*…
Why is it that stuff– clothing, electronics, toys– keep getting cheaper, while services– healthcare, education, child care– continue to rise on price?
Agatha Christie’s autobiography, published posthumously in 1977, provides a fascinating window into the economic life of middle-class Britons a century ago. The year was 1919, the Great War had just ended, and Christie’s husband Archie had just been demobilized as an officer in the British military.
The couple’s annual income was around around £700 ($50,000 in today’s dollars)—£500 ($36,000) from his salary and another £200 ($14,000) in passive income.
hey rented a fourth-floor walk-up apartment in London with four bedrooms, two sitting rooms, and a “nice outlook on green.” The rent was £90 for a year ($530 per month in today’s dollars). To keep it tidy, they hired a live-in maid for £36 ($2,600) per year, which Christie described as “an enormous sum in those days.”
The couple was expecting their first child, a girl, and they hired a nurse to look after her. Still, Christie didn’t consider herself wealthy.
“Looking back, it seems to me extraordinary that we should have contemplated having both a nurse and a servant,” Christie wrote. “But they were considered essentials of life in those days, and were the last things we would have thought of dispensing with. To have committed the extravagance of a car, for instance, would never have entered our minds. Only the rich had cars.”…
By modern standards, these numbers seem totally out of whack. An American family today with a household income of $50,000 might have one or even two cars. But they definitely wouldn’t have a live-in maid or nanny. Even if it were legal today to offer someone a job that paid $2,600 per year, nobody would take it.
The price shifts Christie observed during her lifetime continued to widen after her death…
As you can see, cars aren’t the only things that get cheaper over time. In the last 30 years, clothing, children’s toys, and televisions have all gotten steadily cheaper as well—as have lots of other products not on the chart.
It’s one of the most important economic mysteries of the modern world. While the material things in life are cheaper than ever, labor-intensive services are getting more and more expensive. Middle-class Americans today have little trouble affording a car, but they struggle to afford a spot in day care. Only the rich have nannies.
Who is to blame? Some paint the government as the villain, blaming excessive regulations and poorly targeted subsidies. They aren’t entirely wrong. But the main cause is something more fundamental—and not actually sinister at all.
Back in the 1960s, the economist William Baumol observed that it took exactly as much labor to play a string quartet in 1965 as it did in 1865—in economics jargon, violinists hadn’t gotten any more productive. Yet the wages of a professional violinist in 1965 were a lot higher than in 1865.
The basic reason for this is that workers in other industries were getting more productive, and that gave musicians bargaining power. If an orchestra didn’t pay musicians in line with economy-wide norms, it would constantly lose talent as its musicians decided to become plumbers or accountants instead. So over time, the incomes of professional musicians have risen.
Today economists call this phenomenon “Baumol’s cost disease,” and they see it as one of the most important forces driving the price trends in my chart above. I think it’s unfortunate that this bit of economics jargon is framed in negative terms. From my perspective as a parent, it might be a bummer that child care costs are rising. But my daughter’s nanny probably doesn’t see it that way—the Baumol effect means her income goes up…
A thoughtful consideration of a counterintuitive phenomenon: “Why Agatha Christie could afford a maid and a nanny but not a car,” from Timothy B. Lee (@binarybits) in Full Stack Economics (@fullstackecon).
From Baumol himself…
Briefly, the book’s central arguments are these:
1. Rapid productivity growth in the modern economy has led to cost trends that divide its output into two sectors, which I call “the stagnant sector” and “the progressive sector.” In this book, productivity growth is defined as a labor-saving change in a production process so that the output supplied by an hour of labor increases, presumably significantly (Chapter 2).
2. Over time, the goods and services supplied by the stagnant sector will grow increasingly unaffordable relative to those supplied by the progressive sector. The rapidly increasing cost of a hospital stay and rising college tuition fees are prime examples of persistently rising costs in two key stagnant-sector services, health care and education (Chapters 2 and 3).
3. Despite their ever increasing costs, stagnant-sector services will never become unaffordable to society. This is because the economy’s constantly growing productivity simultaneously increases the community’s overall purchasing power and makes for ever improving overall living standards (Chapter 4).
4. The other side of the coin is the increasing affordability and the declining relative costs of the products of the progressive sector, including some products we may wish were less affordable and therefore less prevalent, such as weapons of all kinds, automobiles, and other mass-manufactured products that contribute to environmental pollution (Chapter 5).
5. The declining affordability of stagnant-sector products makes them politically contentious and a source of disquiet for average citizens. But paradoxically, it is the developments in the progressive sector that pose the greater threat to the general welfare by stimulating such threatening problems as terrorism and climate change. This book will argue that some of the gravest threats to humanity’s future stem from the falling costs of these products, rather than from the rising costs of services like health care and education (Chapter 5).
The central purpose of this book is to explain why the costs of some labor-intensive services—notably health care and education—increase at persistently above-average rates. As long as productivity continues to increase, these cost increases will persist. But even more important, as the economist Joan Robinson rightly pointed out so many years ago, as productivity grows, so too will our ability to pay for all of these ever more expensive services.
William J. Baumol, from the Introduction to The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t
* William J. Baumol
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As we interrogate inflation, we might recall that it was in this date in 1933 that United Artists released the animated short “Three Little Pigs,” part of the Silly Symphonies series produced by Walt Disney (though some film historians give the date as May 25). A hit, it won the Academy Award for Best Animated Short Film. In 1994 a poll of 1,000 animators voted it #11 of the 50 Greatest Cartoons of all time.
Its song, “Who’s Afraid of the Big Bad Wolf,” written by Frank Churchill, was a huge hit and was often used as an anthem during the Great Depression.
“When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist.”*…
Staying yesterday’s agribusiness theme: George Monbiot on the extraordinary challenges facing the world’s food system…
For the past few years, scientists have been frantically sounding an alarm that governments refuse to hear: the global food system is beginning to look like the global financial system in the run-up to 2008.
While financial collapse would have been devastating to human welfare, food system collapse doesn’t bear thinking about. Yet the evidence that something is going badly wrong has been escalating rapidly. The current surge in food prices looks like the latest sign of systemic instability.
Many people assume that the food crisis was caused by a combination of the pandemic and the invasion of Ukraine. While these are important factors, they aggravate an underlying problem. For years, it looked as if hunger was heading for extinction. The number of undernourished people fell from 811 million in 2005 to 607 million in 2014. But in 2015, the trend began to turn. Hunger has been rising ever since: to 650 million in 2019, and back to 811 million in 2020. This year is likely to be much worse.
Now brace yourself for the really bad news: this has happened at a time of great abundance. Global food production has been rising steadily for more than half a century, comfortably beating population growth. Last year, the global wheat harvest was bigger than ever. Astoundingly, the number of undernourished people began to rise just as world food prices began to fall. In 2014, when fewer people were hungry than at any time since, the global food price index stood at 115 points. In 2015, it fell to 93, and remained below 100 until 2021.
Only in the past two years has it surged. The rise in food prices is now a major driver of inflation, which reached 9% in the UK last month. [Current estimates are that it will be 9% in the U.S. as well.] Food is becoming unaffordable even to many people in rich nations. The impact in poorer countries is much worse.
So what has been going on?…
Spoiler alert: massive food producers hold too much power – and regulators scarcely understand what is happening. Sound familiar? “The banks collapsed in 2008 – and our food system is about to do the same,” from @GeorgeMonbiot in @guardian. Eminently worth reading in full.
Then iris out and consider how agricultural land is used: “Half of the world’s habitable land is used for agriculture.”
… and consider the balance between agriculture aimed at producing food directly and agriculture aimed at producing feed and fuel: “Redefining agricultural yields: from tonnes to people nourished per hectare.”
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As we secure sustenance, we might send carefully-observed birthday greetings to Dorothea Lange; she was born on this date in 1885. A photographer and photojournalist, she is best known for her Depression-era work for the Farm Security Administration (FSA). Lange’s photographs influenced the development of documentary photography and humanized the consequences of the Great Depression.
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