(What’s Left of) Our Economy: Big New Signs of Re-Bubble-Ization

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2016 elections, Allison Schrager, auto loans, balance sheets, Ben Bernanke, Bloomberg, bubbles, bubbles Federal Reserve, credit, credit cards, debt, Financial Crisis, Fox Business Debate, Goldman Sachs, housing, interest rates, leverage, loans, Matt Phillips, mortgages, quantitative easing, Quartz, revolving credit, Tracy Alloway, zero interest rate policy, ZIRP, {What's Left of) Our Economy

One of the more praiseworthy features of the Fox Business Republican debate was the discussion of the last mega-financial crisis and how to prevent a repeat. Although at their debate on CNN the Democratic presidential candidates were quizzed on the bubble and its bursting and possible remedies, the Milwaukee event marked the first time these subjects came up for the Republicans.

Better late than never, but that’s pretty strange given that the last bubbles inflated and the crisis broke out on the GOP’s watch. In fact, it’s downright disturbing. For a new meltdown remains by far the greatest economic threat to America’s future due to the Federal Reserve’s overly easy money policies – despite the latest reassurances from former Fed Chair Ben Bernanke that such warnings are ludicrous. Maybe not so coincidentally, two important new signs of re-bubble-ization have just appeared.

The first was reported by Quartz’s Matt Phillips, who pointed out that the Federal Reserve’s latest figures on Americans’ borrowing behavior showed that consumers in September took out an all-time record $28.9 billion in new loans in September. In the process, they broke a record set 14 years ago, and increased their credit outstanding by the greatest percentage since 1943 – when these records started to be kept. And even if you adjust for inflation, household borrowing is at lofty levels historically.

Many economists view such increases as a bullish economic sign – signaling that Americans are so confident about their future prospects (and repayment potential) that they’re willing to take on more debt. That may be true, but the data on wages and incomes strongly indicate that this confidence is really overconfidence. And if interest rates really are going to be raised by the Federal Reserve, even gradually, this overconfidence may be tomfoolery.

Also not so bullish – the makeup of these new loans. As economist Allison Schrager has sagely pointed out, not all borrowing decisions are created equal, even for individuals with comparable incomes. Some, like student loans, are arguably sensible investments in one’s own human capital and potential (though signs of diminished returns from a college education seem to be popping up everywhere). Others, like mortgages, are arguably sensible investments in an asset that could well appreciate in value (though the inflation and bursting of the housing bubble should have taught everyone that real estate is no longer a sure thing). And still other loans simply finance consumption – which lacks any capacity to increase one’s wealth.

Unfortunately, much of the September surge in consumer borrowing was in auto and credit card debt – which won’t bring any financial benefits.

The second sign of reb-bubble-ization was reported by Bloomberg News’ Tracy Alloway, who covered a Goldman Sachs study showing that leverage levels in Corporate America are at their highest levels in a decade – during the bubble years. In other words, thanks largely to the super-easy monetary policy pursued by the Federal Reserve since the crisis peaked, even though corporate profits have surged to new records, American business has gone on such a frantic shopping spree that its debt load has grown much faster. Indeed, according to Goldman Sachs, these debts are now at twice the levels they hit in the pre-crisis era.

Just as with consumers, rising interest rates could wreak havoc with the balance sheets of U.S. companies. And just as with consumers, relatively little of this borrowing is being devoted to strengthening these firms in what might be called the old-fashioned way – i.e., through the development of new products and services. Instead, much of this new debt has been used to fund mergers and acquisitions, and stock buybacks.

The Fox Business debate, however, does deserve criticism in one sense. It followed an entirely conventional course in focusing on crisis-proofing American finance by improving Wall Street regulation. Certainly such improvement has been warranted. But the financial crisis was rooted in weaknesses in the real economy. Until presidential candidates start presenting realistic plans for fostering more good jobs and the incomes they generate, and for spurring more production and the earnings they generate – which would reduce the need for binge borrowing in the first place – a new financial crisis looks much more like a matter of “when,” not “if.”

Im-Politic: Jeb Bush’s Bubbly Florida Economy

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2016 elections, construction, Financial Crisis, Florida, Great Recession, growth, housing bubble, Im-Politic, Jeb Bush, Jobs, mortgages, real estate

To lay my cards on the table right away, I’m not a Jeb Bush fan. I don’t like the former Florida Governor’s stances on trade and immigration policy. I don’t find him at all impressive on any major domestic economic issues or on foreign policy. And I would be troubled by the (further) triumph of nepotism his election as president would signal. (And yes, a Hillary Clinton victory would create much the same problem.)

At the same time, except for the dynasticism angle, I have many of those above problems with many of this year’s other Republican presidential hopefuls. So the following isn’t meant to sway your political preferences – just to remind you how looking under the hood is every bit as important in evaluating office-seekers as in analyzing economic data. And more specifically, why your antenna should have been set off today by Bush’s claims about his economic record in the Tallahassee statehouse.

According to Bush, during his 1999-2007 tenure as governor, “We made Florida number one in job creation and number one in small business creation. 1.3 million new jobs, 4.4 percent growth, higher family income, eight balanced budgets, and tax cuts eight years in a row that saved our people and businesses 19 billion dollars.”

But the dates of his term represent a broad hint that these economic achievements amounted to a pyrrhic victory for the state. For Bush’s governorship occurred during the interlocking housing and credit bubble that marked the whole U.S. economy during the previous decade. And anyone who’s been following housing in recent years knows that few mortgage markets were more bloated than Florida’s, and that few states have suffered more from the bubble’s bursting.

The official U.S. government data bear out this claim. Between 1999 and 2007, Florida’s economy strongly outgrew the nation’s as a whole, expanding by 35.63 percent after inflation versus 21.86 percent for the United States overall. But the housing bubble was a major reason. The real estate sector fueled 22.33 percent of the state’s real growth during that period, and construction contributed another 6.51 percent. Nation-wide, real estate generated 14.44 percent of real growth from 1999 to 2007, and construction actually shrank, as building activity began losing steam before the financial crisis struck full blown.

Largely as a result, during the two years after Bush left office, Florida’s economy contracted by just over 10 percent after inflation – a much deeper downturn than the 3.22 percent nation-wide slump. So Florida during the Jeb Bush years paid even less attention to the quality of growth than did America as a whole during the comparable George W. Bush years, and paid the price.

Jeb Bush is technically correct in touting Florida job creation during his governorship. From 1997 to 2008, total non-farm employment increased by 1.35 million – a 20.28 percent gain that was nearly double the 10.76 percent rise in jobs nationally. But the housing bubble, again, was a major contributor. During the 1999-2007 Bush years, construction and real estate produced 12.90 percent of those Florida job gains, versus 12.61 percent nationally. (All these and the following employment data are not seasonally adjusted.)

Even more revealingly, this job-creation mix resulted in Florida faring much worse than the rest of the nation during the recession in employment terms as well. From the recession’s December, 2007 onset (just when Jeb Bush’s second term was ending), through the nation’s employment nadir in absolute terms (January, 2010), the state lost 11.67 percent of its total non-farm jobs. The overall economy lost 8.26 percent of its jobs. This Florida out-performance was led by a stunning loss of more than 40 percent of its construction jobs (versus 28.81 percent nation-wide) and 16.52 percent of its real estate jobs (versus 10.92 percent nation-wide).

Jeb Bush can by no means be blamed for the housing bubble. But by the same token, that bubble deserves considerable credit for the Sunshine State’s apparent economic success during his governorship. Sadly for Floridians, their bubble left them even less well prepared for its bursting than most of the rest of their fellow Americans. Would Jeb Bush perform any better as president? No one can know for sure. What is certain is that his experience in state office can’t possibly provide any clues.

Following Up: More on Delusions of Immigrants Saving the Economy

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amnesty, bubbles, executive amnesty, Following Up, Goldman Sachs, home ownership, housing, illegal immigration, Immigration, mortgages, Obama, Open Borders, The Wall Street Journal, Urban Institute

Since I’m kind of (understandably!) fast tracked and trade policy’d out, I thought I’d shift this afternoon to another way the U.S. bipartisan political establishment is shafting Main Street America: Open Borders- and amnesty-friendly immigration policies.

These policies’ leading edges – consisting of President Obama’s recent executive immigration orders – are of course presently stuck in the courts, similarly to how the offshoring-friendly trade strategies also backed by the White House and Congress’ Republican leaders are now stuck on Capitol Hill. But “stuck” is hardly the same as “dead,” and therefore ongoing vigilance is needed – especially since most of the president’s liberal Democratic critics on trade policy are wholeheartedly with him on immigration.

A stout pillar of the liberal case for boosting immigration levels and amnesty-ing the illegal population already in the country (or otherwise creating a “path to citizenship”) is the idea that the youth and energy of newcomers is crucial to American hopes to solving any number of major economic problems – from slow growth to the entitlements crisis. This post from last September presents a sample of these claims.

As I pointed out, liberals’ optimism regarding immigrants’ prospects for attaining the American Dream clashes violently with their decided pessimism that it’s within reach of anyone not to the manor born. And now The Wall Street Journal has reinforced the case for bearishness. Earlier this week, correspondent Nick Timiraos reported on this conclusion of a recent study on the likely future of American home ownership:

“Last decade’s housing crisis could give way to a new one in which many families lack the incomes or savings needed to buy homes, creating a surge of renters and a shortage of affordable housing….Demographics tell the story. Urban Institute researchers predict that more than 3 in 4 new households this decade, and 7 of 8 in the next, will be formed by minorities. These new households—nearly half of which will be Hispanic—have lower incomes, less wealth and lower homeownership rates than the U.S. average.”

Note in particular the timeframe: through “the next decade.” Also of interest is the attempt by some Goldman Sachs economists to find a silver lining in the numbers: “They noted in an April report that even though Hispanics, for example, have lower homeownership rates than non-Hispanic whites, those rates have been rising for the past four decades.”

This point is of interest because the reckless extension of mortgages to low-income Hispanics during the bubble decade was a major source of that period’s housing insanity. In other words, their rising home ownership rates were part of the problem with which the nation is still struggling.

The lesson remains the same. If you want to increase greatly the ranks of low-income Americans, and/or if you want new justifications (and new voters?) for more and bigger government welfare programs, you’ll keep favoring Open Borders-style immigration policies. If you want national prosperity to be built on a sustainable foundation, you’ll favor sensible restrictions.

(What’s Left of) Our Economy: If You Think U.S. Households are Financially Healthier, Think Again

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auto loans, consumers, debt, deleveraging, household finances, housing, mortgages, student loans, {What's Left of) Our Economy

How I wish I’d written Allison Schrager’s new BusinessWeek post on trends in U.S. consumer debt! This economist performs the invaluable service of reminding us that all forms of borrowing decidedly are not created equal, especially when it comes to judging the state of Americans’ household finances and whether it really is improving.

The conventional wisdom has concluded that, by most standard measures – like absolute levels of debt, debt as a share of incomes, and delinquencies on mortgages and other kinds of loans – U.S. consumers on average are financially healthier than they’ve been in many years. But Schrager shows that the mix of U.S. household borrowing is strongly suggesting the opposite.

As she points out, since the recession broke out, and especially since the housing bust reached historic proportions, Americans have been borrowing less to finance purchases that arguably could increase their long-term wealth and financial health, and borrowing more to finance purchases with no conceivable investment value whatever.

Think of it this way, Schrager writes: Although Americans clearly got wildly overoptimistic about mortgages, buying a home has been a good investment throughout most of American history and even today (depending on the actual transaction) at worst could well hold a family’s housing costs stable for decades. In many ways, Americans still seem to be overestimating the economic value of a college education, but most research indicates that, all else equal, college graduates still out-earn their non-graduate peers.

But mortgage debt is coming down steadily, and student loan growth – though enormous – has been pretty constant year on year. These developments have helped slow down the growth of overall consumer credit. But overall borrowing has begun increasing again and today stands at a new all-time high. What gives?

Schrager’s article shows that the increase has been fueled mainly by a resurgence of credit card debt and auto loans. Many of these purchases may be necessary for day-to-day living, she acknowledges. But from a financial standpoint, she notes, such spending goes to assets that can only fall in value.

Continued gushing by the business media and even many economists about how plucky American consumers remain reveals that, even having suffered an historic financial crisis, the nation as a whole still hasn’t learned that all forms of growth aren’t necessarily good. Schrager’s post shows that crucial lessons about consumer de-leveraging are being ignored as well.