stats about the current recession (and what got us into it) and a comparison to Japan (cont'd)

Following the last post, here are some observations from a presentation to a group of economists at a teaching conference at UK last Spring-- by Jim Gwartney of Florida State. (These are to be included in the next edition of his excellent Principles text.)

-Housing prices rose 87% between Jan 2002 and the middle of 2006 and then fell about 25% by the middle of 2008.

-Gwartney points to: "erosion of conventional lending standards"; Fed policy during 2002-06 (including its post-9/11 response!); increased "leverage lending" by banks and others; and increased household debt/income ratios.

-Loans to those with low-moderate incomes rose from 40% in 1996 to 54% in 2008. The proportion of loans to shaky customers (sub-prime, Alt-A) doubled, which was accompanied by a great increase in loans out of (rapidly but temporarily increasing home equity) and adjustable-rate mortgages (especially in FL, So. Cal., NV, and AZ).

-Loans for commercial real estate can be leveraged 12.5 to 1. After an SEC rule change in 2004, this ratio moved to 25-1 in residential and as high as 60-1 if "bundled together and financed with securities".

-Govt expenditures increased much more rapidly under Hoover than FDR. Deficits during the Great Depression peaked at about 3.9% in 1936.

-Growth in Japan averaged 1.6% between 1992-2007. Japan ran budget surpluses until 1991, but then financed its increase in govt spending with considerable debt, averaging about 5.5%. By 2005, their debt was 85% of their GDP-- considerably higher than our current share (although we're moving that direction quickly!). The Japanese stock market lost 80% of its value between 1990 and today.

-Gwartney predicted a relatively quick recovery (this Fall) and then an overshoot by fiscal and monetary policy, resulting in a 1970s-style stagflation for the next decade or so.