The Economic Crisis

[fmtiger124]

You're saying that you think that the economy will be worse in 2015 than it is now? I'm sorry, but unless there's a crisis similar to the mortgage crisis that started this recession, I can't see how that's possible.

I'd say I have to agree with eyeball. blue cobra there is no way that its worse in 2015.

[blue cobra]

That's the thing. There is a chance there will be another mortgage crisis in a few years. Also, keep in mind I'm not an economist.

[eyeball138]

Anything can happen, that's true. In 2015 the economy could be the best that its ever been, or it could crash. It really is unpredictable. I would be very surprised if there were another mortgage crisis. I hope that banks wont give out mortgages like they were, and I don't think they will.

[andrewwski]

That's the thing. There is a chance there will be another mortgage crisis in a few years. Also, keep in mind I'm not an economist.

Highly unlikely. We'd have to be completely and utterly stupid as a society for it to happen again.

The housing market is not going to jump like it was for years. It had such rapid growth that it was impossible to sustain, and it had to crash sometime. However, the abundance of properties now and the reluctance to buy will mean that we'll probably see steady, but not ridiculously rapid, growth in the housing market.

Second, the banks and lenders got burned so badly by all the subprime mortgages that they're not going to offer them again. Right now, it's even harder to find any loan, as banks are weary of lending. They lost so much this time around that they're not going to do it again.

In 2015 I would say the economy is going to be doing well. It's too soon to be experiencing another recession. There will certainly be many more recessions in the future, but I think it'll be unlikely to be that soon, seeing as this economic crisis won't be completely resolved for another few years anyway.

Personally, I think the recession is going to last more than one year from now. I'd be happy if the economy was turning around in 4 years (and happier if I am proven wrong). A big problem is the stimulus. We know long-term it will lower GDP. It was off target and doesn't start soon enough (only 11% of capital spending is in 2009). Way too much money is for sectors that are growing. Then too little money is for sectors that are in serious decline. I think the numbers are 47% focuses on sectors that are growing, 3% focuses on sectors in serious decline, and 38% focuses on sectors that make up 70% of the economy. Too much of it is big, government run projects with a multiplier of less than one. Tax cuts, which it does have some, have a bigger multiplier, hit the economy sooner, and stay helpful longer or even grow in effectiveness. When the Republicans ran their stimulus plan through the models crafted be Pres. Obama's cheif economic advisor, it was cheaper and created roughly double the jobs in only two years, but the Democrats stopped it. The bottom line: it may be bad now, but I'd watch out for 2015
Sorry if I ranted a bit

A recession is two quarters of declining GDP. If you look at the Real GDP for the second quarter of 2009, it fell very little compared to the first quarter of this year and the end of last year. If this trend continues - and it seems as though it will - we could be technically out of the recession by the end of the third quarter, more likely by the end of the year.

The stimulus packages are not going to lower GDP, either nominal or real. GDP can be thought of as Consumption + Investment + Government Spending + Net Exports. Thus any increase in government spending is going to increase GDP, regardless of where its spent. Yes, if the government did something that was really stupid, I suppose they could spend in a way that makes people consume and invest less, but that is highly unlikely.

However, you are incorrect about the tax multipler, it is actually less than the multiplier for consumption, investment, and government spending. In order to calculate the multipliers you need to look at the Marginal Propensity to Consume (MPC), or the change in consumption divided by the change in income. The tax multiplier is -MPS/MPC. MPS is the Marginal Propensity to Save (MPS) or 1-MPC. The multiplier for consumption, investment, or gov't spending is 1/MPC. So let's say MPC is .4 - for additional unit of income that you receive, you spend 40% of it. Then, the tax multiplier is -0.6/0.4, or -1.5. It's negative because taxes are decreased - thus GDP is increased. For purposes of examining multipliers we'll just say it's 1.5. But the other multiplier is 1/0.4, or 2.5. Or let's say the MPC is .6 - tax multiplier is -0.4/0.6 or 0.67 while the other multiplier is 1/0.6 or 1.67.

Now, that means the only multiplier that can be less than one is the tax multiplier. No other multiplier can be less than one because the MPC cannot be greater than one - hence the lowest possible multiplier is one.

So I don't know what you're trying to say - it doesn't make sense to me.

[blue cobra]

It seems I need to clear up a few things

When I said it will lower GDP, I meant projections say a few years out the GDP will be lower than it would be had the stimulus not been passed. I can see how I came off as saying the economy will be worse in 2015, but that's not what I meant. Parts of the stimulus will be felt in 2010, then comes inflation. Interest rates would have to rise, so mortgage rates would rise in a still weak housing market. Then as the stimulus is wearing out, the Bush tax cuts expire. This all brings upon another wave of foreclosures. Not as bad as before, however. The economy will start to go downhill again, probably not very near the rock bottom it was in, but down nonetheless. Andrewwski, I don't know a lot about multipliers, so I won't have a rebuttal to your argument.

Again, I don't have a crystal ball. This is the projections of economists, combined with speculation and opinion.

[gyourkoshaven]

I can see how I came off as saying the economy will be worse in 2015, but that's not what I meant.

How is it not what you meant? :

The bottom line: it may be bad now, but I'd watch out for 2015

Overall I mainly agree with andrewwski, we'll learn from the experience and be smarter next time. Basically banks and lenders just won't hand out subprime mortgages right and left. I don't think we'll ever see construction rates as high as they were. Overall I don't think we'll completely be out of the woods (Where we have job growth, gaining stocks, and a good housing market) for another 2-3 years, and the effects of the 2 trillion dollars the government handed out will probably trouble generations to come. But the key thing is that it didn't and isn't going to turn into a great depression. We got here almost as stupidly, but you see the benefits of being a much richer nation (No Hoovervilles!).

[blue cobra]

How is it not what you meant? :

The bottom line: it may be bad now, but I'd watch out for 2015

That was a bad sentence. I think in a few years the economy will take a downturn again, but I don't think it will get as bad as it has been. Again, I realize now that sentence should have been re-worded.

I must disagree on some of your points. I think the CRA, particularly the 1995 expansion, has a lot to do with subprime mortages. Sure, there was some predatory lending involved, but the CRA authorized, and essentially forced banks to issue subprime mortgages. Then you have securities. Fannie Mae (a GSE), guarantees mortgages, then sells them. So, the more mortgages, the more money Fannie Mae makes. So to make more money, you need to move your mortgages down the income ladder, where you end up giving unqualified people loans.
I agree there was over-construction, and the unprecedented deficit will be a problem for years. As for being a much richer nation now, I'd just like to comment that we don't have this money .
EDIT: Yes, we are much, much richer now.

[gyourkoshaven]

No, we have the highest GDP in the world. And I don't think its debatable that we're incredibly wealthy. Maybe China is slightly richer, but before the depression (Really before WWII), we weren't the world power we are now. We were actually pretty poor when the depression struck, and were totally unprepared for something like that to hit. It had major consequences, i.e. Hoovervilles. But we're much richer now, as the Govenment showed. If we had had this crisis during the depression, the government couldn't have bailed out the banks or auto industry.

And you have to understand we did make mistakes that lead to this. But we've learned from it and won't make the same mistakes again.

[andrewwski]

It seems I need to clear up a few things

When I said it will lower GDP, I meant projections say a few years out the GDP will be lower than it would be had the stimulus not been passed.

Can you provide a link to such projections? It doesn't make sense that a lack of government spending would cause GDP to rise.

I can see how I came off as saying the economy will be worse in 2015, but that's not what I meant. Parts of the stimulus will be felt in 2010, then comes inflation.

Yep. That's the biggest concern right now. If we come out of this too fast and too hard, we're going to see hyperinflation - the opposite extreme, and still not good.

Interest rates would have to rise, so mortgage rates would rise in a still weak housing market.

Yes, the fed would raise the interest rate to attempt to slow down the economy. However, when we look at the entire economy as a whole, raising the interest rate is the correct move, as we'd need to slow down the economy. By that point the housing market would have stabilized. Just because it's not at the boom it was a few years ago doesn't mean it's unstable.

Then as the stimulus is wearing out, the Bush tax cuts expire.

I don't see how this is a bad thing - if we've already established that the economy will be growing rapidly, and high inflation is a concern, we want taxes to increase in order to slow the economy down.

This all brings upon another wave of foreclosures. Not as bad as before, however. The economy will start to go downhill again, probably not very near the rock bottom it was in, but down nonetheless.

I still don't see this happening to a very significant extent. The housing market is only one part of the economy and unlikely to dictate its direction unless it undergoes drastic changes as it had in the past few years. The economy goes in cycles - it's going to go back up, and then eventually back down. The question is how far up, and how far down.

However, to project going into another decline in 2015 seems too soon.