Bubble Bubble Toil and Trouble

Doug Henwood is a well-known left-wing observer of Wall Street and business. He has written a couple of articles on the financial crisis that are worth looking at.

In the first article, written in August 2007, was written just as the current crisis began to blossom. At this point Henwood was willing to downplay it:

Later in the decade, there was the 1987 stock market crash, which occurred just after LBO’s first birthday. Young and naïve, the newsletter delivered prophecies of gloom that never materialized. ... The Internet left is getting all heated up—this is the Big One, the End of the World, the Death Agony of Capitalism. Maybe; that’s always possible. But it’s not likely.

He gets all the elements right, but he -- like the Federal Reserve -- doesn't foresee the double whammy of the CDO collapse in the wake of scandals about mis-rating of AAA bonds and the malfeasance of all the actors in the mortgage market from the NINJA borrower, the mortgage broker, the banks, Wall Street wizards of tranchery, and the rating agencies.

In his second article, written in April 2008, he now has the wisdom granted by observing the scandal unfold. He discusses the turmoil in the market:


And wonders at the alacrity that the US Federal Reserve has run to the rescue:

That latest cut brought the real fed funds rate—the interest rate at which banks lend each other money overnight, the most sensitive indicator of Fed policy, less the inflation rate—firmly below 0. As the graph below shows, sub-zero funds rates are unusual, especially so early in what is presumably a recession.

So far, all the interest rate cuts and extraordinary lending facilities and the rest haven’t turned things around. Although it’s not falling apart, the U.S. economy looks to be weakening steadily. Leading indicators so far do not suggest that it’s going down the drain, but there’s still no bottom in sight either.

His analysis of the problem is conventional despite his left-leaning politics:

All the financial melodrama discussed above is a reflection of the fundamental underlying problem that people took on mortgages that they couldn’t afford to buy houses that are now declining in value. All the Fed’s gyrations cannot really resolve that fundamental problem. And it’s very unlikely that there’s much of anything that the government could do to change that either.

What's really worrying him now is that the ECRI leading indicators are all pointing down and historically that means a severe recession:

As for growth, the leading indicators aren’t looking so good. The Conference Board’s venerable leading index is down five months running and its yearly rate of change is in the neighbhorhood it was in several months before the onset of the recessions of 1990 and 2001. It’s nowhere near as bad as it was, however, in the run-up to the nasty recessions of 1974–75 and 1981–82. A less well known leading index produced by the Economic Cycles Research Institute is telling a similar story, as the nearby graph shows. So while many pundits are forecasting a deep recession, that’s not yet visible in the stats. Who knows; we may get there yet.