My Amazon Review of George Tavlas' "The Monetarists: The Making of the Chicago.........."

 A Book Only Economics Nerds Would Like

 

Economist George Tavlas has written a very long, deeply researched intellectual history of the Chicago monetary tradition. In the late 1920’s and early 1930’s a group of economists at the University of Chicago outlined a series of policy measures that would become the basis of modern-day monetarism. At its core would be the Fisherian equation of MV=PT, or money times velocity equals price times transactions along with the importance of real interest rates as opposed to nominal rates. The group fully supported a rules-based system over discretionary monetary authorities with the view that discretion can only lead to uncertainty.

 

The thought leader were Frank Knight, Aaron Director, Lloyd Mintes, Harry Simons, Jacob Viner, and Paul Douglas, the first of risk and uncertainty fame and the last the coinventor of the Cobb-Douglas production function and later a distinguished Senator from Illinois. They believed that economic instability was caused by the fractional reserve-based banking system and hence they called for 100% reserves, or in today’s parlance narrow banking. They opposed the gold standard, supported flexible exchange rates, and money financed deficits to jump start the economy out of the depression. They later walked away from 100% reserves because of the end of the gold standard, deposit insurance and allowing the Fed to discount government securities. However, we do note that an over-leveraged banking system loaded with bad paper almost triggered Great Depression 2.0 in 2008.

 

They stood athwart the new Keynesian consensus that money didn’t matter, and only fiscal policy could stabilize the economy. As such they remained in the economic wilderness for over two decades.

 

To me the most interesting member of the group was Paul Douglas. He was a political activist and supported labor unions. At the age of 50 he enlisted in the Marine Corps and saw combat in the Pacific where he was awarded two purple hearts. As a senator, from his perch on the Joint Economic Committee, he led the charge in support of the Treasury-Fed Accord of 1951 and was a firm believer in the role of money in the economy. Indeed, as a New York Times editorial noted at the time, Douglas was the most influential senator on banking policy since the passing of Carter Glass in 1946. As an aside, much of the group in the 1940’s supported progressive income taxation to equalize the distribution of income and strong enforcement of the antitrust laws. Those beliefs would soon go by the wayside.

 

Milton Friedman would come on the scene in 1946 and become the intellectual leader of the new monetarism. His 1956 “Quantity Theory of Money: A Restatement” would establish his as a force in economics where he called for the money supply to grow at a consistent rate to accommodate the growth in real output.  He spread the gospel with his Workshops on Money and Banking bringing in scholars from all over the country. MV would equal PY instead of PT, with Y standing for real output. That along with other research with Anna Schwartz would lead up to his classic “A Monetary History of the United States, 1867-1960” which placed the blame of the Great Depression squarely on the Federal Reserve’s failure to keep the money supply from collapsing. However, I did learn from the book, that a little-known FDIC economist Clark Warburton had much of this figured out in the late 1940’s and early 1950’s.

 

I came into contact with monetarism as an undergraduate at Baruch College in the early 1960’s.  There I had professors Alvin Marty, Eugene Lerner and Robert Weintraub who were all Friedman acolytes. In fact, we used “A Monetary History” as a text. I then went on to graduate school at UCLA in the then business school which was very close to the economics department. At the time the UCLA economics department was known as Chicago west, with professors Robert Clower, Karl Brunner, and Benjamin Klein. In the business school I had Professors Neil Jacoby and But Zwick, both of the Chicago tradition.

 

As a result, when I got involved with the UCLA Anderson Forecast in the 1970’s, monetarism was second nature to me, and it enabled me to better understand that tumultuous era of high inflation. Of course, by the early 80’s the hard fast money growth rule would succumb to monetary innovations that made money hard to define. Soon the Taylor Rule would substitute for the money growth rule.

 

Tavlas has written an important intellectual history, but as I said at the outset, it is not for the lay reader and for economics nerd the book could have used a better editor.

For the full Amazon URL see: A Book Only Economics Nerds would Like (amazon.com)

My Amazon Review of Joanne Lipman's "Next!: The Power of Reinvention in Life and Work"

 Reinventing Yourself

Veteran journalist Joanne Lipman has written an important guide to career change and life. Simply put, change is hard, but in the final analysis, it is necessary. Although personal reinvention is small change relative to statecraft, I would like to quote Niccolò Machiavelli here, “It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in success, than to take the lead in the introduction of a new order of things.”

 

She highlights among others how James Patterson gave up his successful career as an advertising executive to become a bestselling author, jazz musician Alan Greenspan became the central banker to the world and mild-mannered White House budget analyst Ina Garten, became the “Barefoot Contessa” of cooking fame. She further discusses how the recovery from trauma forces change upon people. Simply put, they have no choice. In the realm of physical reinventions, she notes how a wallpaper cleanser was reinvented as Play-Doh and how a failed heart medication became Viagra.

 

Her formula for career change is search-struggle-stop-solution. To change careers the process begins with search and the use of wide connections, not necessarily close connections, is most helpful. The exception to that is having a mentor really helps, and it was Ina Garten’s husband Jeffrey Garten, who encouraged her all the way. However, in the case of personal trauma, struggle comes first.

 

My own personal experience through numerous reinventions parallel much of what Lipman writes about. To me the most important aspect is to be open to new ideas and be in the flow where you can capitalize on them. However, sometimes one does not have the luxury of James Patterson, where he kept his day job while writing his novels. Circumstances force us into reinvention. Further the existence of a secure day job can become a security blanket. For example, I walked away from a tenured position in academia for the private sector. I wanted to make it work, so I did not want to have the option to retreat and I did that with a young family. In other words, change can be a risky business.

 

As for my own reinventions I have worked in aerospace, was drafted into the army, became a Ph.D. student and later a university professor, was a political activist along the way, did macroeconomic forecasting, became a leading real estate researcher, and left Los Angeles to work on Wall Street where I met the author when she was a cub reporter.  I wasn’t looking to go to Wall Street, but Wall Street came to me. Thus, being in the flow is what counts. With respect to that my leaving academia was the result of helping a friend find a job. In the course of helping him, I ended up being introduced to my new employer.

 

On retiring from Wall Street, I returned to academia with simultaneous posts at Baruch College, UCLA , and the University of Wisconsin. The most rewarding of which was helping to set up a program for Baruch College students for high profile careers in financial services which hitherto were unavailable to them.

 

Joanne Lipman backs up her anecdotes with serious social science research. Although that slows down the pace of the book, it puts her anecdotes on a firm foundation by turning the anecdotes into data. I highly recommend this book for those who are interested in career change and to those who may be too contented with the way things are.

For the full Amazon URL see: Reinventing Yourself (amazon.com)

My Amazon Review of Andrew Lo's and Stephen Foerster's "In Pursuit of the Perfect Portfolio:........."

 

Thinking About Retirement Portfolios

 

Finance professors Andrew Lo and Stephen Foerster have given us a tour or modern finance theory through the lives and ideas of its leading academics and practitioners with the goal of coming with a “perfect” retirement portfolio. He starts his intellectual history with the mean-variance work of Harry Markowitz and then goes on to discuss the “betas” of Bill Sharpe, the efficient market hypothesis of Eugene Fama and the options pricing world Black-Scholes/Merton. We also have Jeremy Siegel who’s “Stocks for the Long Run” became the bible of the 1990’s bull market, yet Siegel did call the top in the NASDAQ in early 2000.

 

His practitioners are index fund founder John Bogle, pension consultant Charles Ellis and bond guru Martin Leibowitz. We also have the behavioral economist Bob Shiller of irrational exuberance fame. In the interests of full disclosure Marty Leibowitz was my boss for a time at Salomon Brothers and I worked with Myron Scholes there as well. I also first met with Bob Shiller at the infamous Fed meeting on the stock market in 1996 where I was a participant.

 

What all of them had in common is that they were math “nerds” as kids. Further something must have been in the water at the University of Chicago and M.I.T. in the late 1960s. It was at those two places along with Sharpe’s UCLA that modern portfolio theory exploded on to the scene. For my perspective I received an MBA from UCLA in January 1966 in finance where modern finance was barely discussed and four years later when I returned for a Ph.D. in finance it was all that was discussed.

 

So, what is an investor contemplating retirement to do? The general consensus is that there is no generic retirement portfolio. It depends on the individual investor’s tolerance for risk and consumption patterns. Within that framework nearly all of them would recommend low-cost index funds and TIPs. There is some support for the traditional 60/40 stock bond portfolio, but Siegel and Ellis are skeptical of bonds when interest rates are extraordinarily low as they have been for the past several years. However, this presents a quandary, if bonds can be over-priced why can’t stocks be and vice versa. This is where Shiller’s cyclically adjusted price earnings ratio might be a tool to be used qualitatively.

 

Several of them recommend adding international stocks through a low-cost index fund, small cap stocks and value stocks to the mix. Although this was certainly theoretically sound around the turn of the century, over the past two decades those substitutions within an equity portfolio would have severely detracted from investing the S&P 500 alone.

 

My criticism of the book is that it gives to great a weight to the concept of efficient markets. While the markets are efficient most of the time, that is always not the case. Witness the recent collapse of high value-money losing companies as an example. The authors mention the term “black swan,” in passing, but they do not mention Nicholas Nassim Taleb who popularized the term a decade ago. This omission is unfortunate because Taleb is one of the keenest critics of modern finance theory. Simply put the tails of return distributions are much fatter than in a normal distribution and the probability distributions are not stable over time. Moreover, we know our lives are path dependent, why shouldn’t markets be path dependent, at least, in some cases and especially when the economic regime changes.

 

Although cited, the 1900 dissertation by Louis Bachelier in Paris, should have been given more emphasis. As mentioned, Bachelier anticipated Einstein by five years on the idea of Brownian Motion, he also had a well-developed idea on the pricing of stock options that pre-dated Black-Scholes by 70 years. Specifically, he defined the notion of put-call parity which is essential for modern options theory to work.

 

Nevertheless, Lo and Foerster have written a very helpful book for investors seeking sensible guidelines for retirement planning and who also would benefit from modern finance theory.

For the full amazon URL see: Thinking About Retirement Portfolios (amazon.com)

My Amazon Review of Diana B. Henriques' " A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History

The Sorcerer’s Apprentice

On October 19, 1987, the very day of the crash that brought stocks down by 22%, I was flying to Colorado Springs to present a paper at the annual Q Group conference. Many of those in attendance were in up to their eyeballs in the quantitative finance that was putting the market decline into overdrive. New York Times reporter Diana Henriques has written an intriguing story about the plumbing of the financial markets where conflicting regulators, the rivalry between the cash market in New York and futures market in Chicago, and the emergence of quantitative finance in the form of portfolio insurance/dynamic hedging forced the stock market to turn in on itself much like the sorcerer in the Hall of the Mountain King.

She tells a very good story about the personalities that fueled the rivalry between the SEC and the Commodity Futures Trading Commission and its parallel rivalry between the New York Stock Exchange and the two Chicago futures exchanges, the “Merc” and the Board of Trade. The upshot driving the controversies was that, contrary to what most people expected, the futures market drove the cash market, a phenomenon that the regulators were not ready for.

She also is very good describing the academic and business origins of portfolio insurance where the theories of two Berkeley business school professors, Hayne Leland and Mark Rubinstein merged with the business smarts of John O’Brien to form Leland O’Brien Rubinstein & Associates (LOR) to market their new product. By the way, I overlapped with Rubinstein in the UCLA finance Ph.D. program in the early 1970’s. At its core the problem with portfolio insurance is that it required a continuous trading in the cash, futures and options markets. A breakdown in anyone of these markets would trigger a massive dislocation. None of this mattered when only a few investors were engaging in the dynamic hedging necessary to insure a stock portfolio, but once it became popular among pension managers the assumption of continuous markets became questionable. By way of example when all is calm, fire insurance is readily obtainable, but when the whole city is burning down, there are very few sellers of fire insurance. That is precisely what happened on October 19^th.

Henriques rightly notes that the real risk to the system occurred a day later when trading halts in both the cash and futures markets occurred. The markets were rescued by the newly installed Fed Chairman Alan Greenspan acting as lender of last resort and the timely buying of an obscure index product by traders Stanley Shopkorn (a friend) of Salomon Brothers and Bob Mnuchin of Goldman Sachs.

Although Henriques is very good at describing the drama of the minute by minute trading on the exchanges she glosses over the big macroeconomic causes of the crash.  It was part and parcel of the great 1980s bull market that took the Dow Jones Industrial Average up from 776 in August 1982 to 2722 just five years later.
In fact the Dow Stood at 1890 as 1986 drew to a close and then skyrocketed to 2722 in less than eight months, a gain of 44%. So no one should be surprised that a correction occurred. Indeed if you were in a coma for most of the year and you woke and saw that the market closed at 1739 on October 19^th it would have been logical to surmise that not a whole lot happened in 1987.

The mid-1980’s bull market was fueled by the 1985 Plaza Accord that was designed to lower the value of the dollars by dramatically increasing global liquidity, a Fed easing cycle in 1986 caused by a collapse in the price of oil, and the emergence of leveraged buyouts. By October of 1987 all three of these factors were called into question as the Fed began a tightening cycle in early 1987, a very public currency dispute between the U.S. and Germany broke out into the open thereby questioning the Plaza Accord and Congress was considering proposals to limit the tax deductibility of interest deductions associated with leveraged buyouts. Thus the stock market had every reason to go down. What portfolio insurance and the regulatory cacophony did was put the decline into overdrive.

Thus I wish Henriques would have devoted her writing talents to place what happened in 1987 into a broader macroeconomic context. But make no mistake much of the regulatory issues she discussed remain with us today and were partially responsible for the 2008 meltdown.

The Full Amazon URL appears at: https://www.amazon.com/review/R3QEZXTEFCWZQ0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

The Balance Sheet Recession, UCLA Anderson Forecast, Dec. 08

“The year under review has been one of dramatic occurrences in the whole field
of international finance, credit, monetary stability and capital movements, both
public and private.”

Bank for International Settlements, Second Annual Report, May 1932

The news from the economy is bad. The recession that we had previously hoped to avoid is now with us in full gale force. We now expect that real GDP will decline by 4.1% in the current quarter and decline by another 3.4% and 0.8% in the first and second quarters of 2009, respectively. (See Figures 1 and 2) Because Europe and Japan are already in recession and China and India are suffering from a significant slowdown in growth, the export boom of the past few years will wane. Make no mistake the global economy is in its first synchronized recession since the early 1990s. Moreover with tepid post-recession growth of around 3% the unemployment rate is forecast to rise from October’s 6.5% to 8.5% by late 2009 or early 2010. (See Figure 2) Concomitant with the rise in the unemployment rate will be the loss of an additional two million jobs over the next year.


Figure 1. Real GDP Growth, 2000:Q1 – 2010:Q4F

Source: Global Insight and UCLA Anderson Forecast

Figure 2. Unemployment Rate, 2000:Q1 – 2010:Q4F
Source: Global Insight and UCLA Anderson Forecast




The Financial Crisis of 2007-08

Unlike most recessions whose origins arise from the impact of Federal Reserve tightening on consumer and business spending, this downturn has its origins in a severe asset price deflation that has imperiled the balance sheets of consumers, financial institutions and over-leveraged business entities. The deflation which first manifested itself as a liquidity crisis in the short term money market in August 2007 quickly metastasized into a full-fledged financial panic.

The asset price deflation was triggered by a collapse in the housing market that triggered increased defaults in the mortgage market which in turn threatened first the liquidity and then the solvency of a financial system that grew increasingly dependent upon the easy flow of mortgage credit. From there it enveloped the high yield corporate bond market shooting up credit spreads to an unprecedented 1800 basis points over treasuries (See figure 3) Later investment grade corporate bonds fell under its sway where credit spreads rose to their highest levels since the early 1930s. (See Figure 4) With credit seizing up the $800 billion commercial mortgage securities market ground to a halt further imperiling the value of all commercial real estate, a market that has already declined by 30%. A contributing factor to the mortgage meltdown was Secretary of the Treasury Paulson’s remark on November 12th that the Troubled Asset Recovery Program (TARP) would not buy illiquid mortgage securities as originally contemplated. Within eight days the value of a key commercial mortgage derivative dropped by 24% implying a 17% yield for the “super” AAA tranche.[i]

Figure 3. High Yield Bond Spread vs. Treasuries, Daily Data, Aug 15, 2000 – Nov. 21, 2008
Source: Barclays Capital Markets
Figure 4. Moody’s Baa Bond Spread vs. Treasuries, 1925-Nov 2008, Monthly Data
Source: Federal Reserve Board

In the wake of the financial crisis such hitherto stalwarts as Fannie Mae, Freddie Mac, AIG, Washington Mutual, and Lehman Brothers have either failed or are under Federal supervision. Investment banker Merrill Lynch was forced into a merger agreement with Bank of America and both Goldman Sachs and Morgan Stanley became bank holding companies. Indeed bank shares lead by Citicorp plunged to multi-year lows. Indeed Citicorp had to be rescued by a $27 billion capital infusion by the Treasury and the creation of a “good bank-bad bank structure accompanied with a $306 billion federal guarantee the purpose of which was to keep “bad” assets from coming on to the market.

Even the credit worthiness of the finance-intensive General Electric Company has been questioned. It seems that everything that was once thought of as solid is now a liquid. As we have argued in prior forecasts we believe that out of the current crisis, as in past crises, a new financial architecture will evolve. Whether the reforms will be accomplished formally with the creation of a new national monetary commission or on an ad hoc basis by legislation and rule making remains to be seen. To be sure there will be an international component to any new financial architecture.


Having never declined since the early 1930s, house prices according to the Case-Shiller Index have fallen by about 22% since their 2006 peak accounting for about a $4.5 trillion wealth loss. Perhaps more astonishingly stock prices are on track to either having their biggest decline in history or, if not that, their worst performance since either 1931 or 1937. As of November 21st the S&P 500 was off 45.5%, worse than the 41.9% decline of 1931 and the 38.6% in 1937. In dollar terms stock prices have declined by $7.4 trillion since their historic high in December 2007. Thus it should surprise no one that consumer spending under the weight of a $12 trillion loss in asset values is now in the tank and will likely to remain soft for quite some time to come.

The carnage in the stock market has been amplified by the fact that real stock never really fully recovered from the bull market euphoria of the late 1990s. In real terms stocks did not make a new high in 2007 and the S&P 500 has now fallen back to where it was trading in August 1995! (See Figure 5)

Figure 5. S&P 500 Stock Index, Nominal vs. Real, 1980 –Nov. 2008, Monthly Data

Source: Global Insight and UCLA Anderson Forecast

Thus it is no accident that the industries linked to the two most durable and most tied to wealth and credit of consumer assets, houses and cars, are suffering. Housing starts are forecast to drop to below a 700,000 unit annual rate, the lowest in the postwar history and automobile sales are now running at a 25 year low. (See Figures 6 and 7)Figure 6. Housing Starts, 2000:Q1 – 2010Q4F
Source: Global Insight and UCLA Anderson Forecast

Figure 7. Light Vehicle Sales, 1990-2010F, Annual Data

Source: Global Insight and UCLA Anderson Forecast.

A Whiff of Price Deflation

Where only last quarter we were worried about inflation, we are now worried about its very rare opposite, deflation. The record collapse in oil prices has brought with it welcome relief to motorists throughout the country and an effective tax cut of $440 billion in the form of a lower oil import bill. (See Figure 8) Nevertheless the swift fall in oil prices is now lowering the absolute level of consumer prices and bringing with it likely declines in nominal GDP over the next three quarters. (See Figures 9 and 10) Because nominal GDP rarely declines, it conjures up the image of price deflation where the dollar flow in the economy makes it extremely difficult for workers and firms to earn higher nominal wages and profits. It brings to mind the Japan of the 1990s, not a pretty picture.

Figure 8. Oil Prices, WTI, 2000-Nov 2008, $/barrel, monthly Data
Source: Global Insight
Figure 9. Consumer Price Index, 2000:Q1-2010:Q4F
Source: Global Insight and UCLA Anderson Forecast

Figure 10. Nominal GDP, 1959:Q1-2010:Q4F
Sources: Global Insight, UCLA Anderson Forecast

The Monetary and Fiscal Response

The Federal Reserve moved swiftly to save the payments system in September by increasing bank deposit insurance and offering to insure money market mutual funds. Those actions prevented a repetition of the 1930s where a cascade of failing banks crippled the economy for a decade. Well before that the Fed embarked on a record setting easing process in terms of timing by lowering the Fed Funds rate by a total of 425 basis points to 1% within a year. We expect another rate cut to a modern era low of 0.5% in December. Indeed the effective rate where Fed Funds are currently trading is already at 0.5%. In all likelihood that will be the floor because at rates below that the nearly four trillion money market mutual fund industry would cease to function. By dramatically cutting rates the Fed has engendered an upwardly sloped yield curve conducive to recovery. (See Figure 11) Of course, if the credit channel remains blocks and banks refuse to lend then the Fed could find itself pushing on the proverbial string.

Figure 11. 3-Month U.S. Treasury Bills vs. 10 Year Treasuries, 2000:Q1 – 2010:Q4F
Source: Global Insight and UCLA Anderson Forecast

Thus rate cutting is only part of the story. The Fed has also created a host of new lending facilities for banks, nonbank banks (i.e. GE Capital) and broker-dealers that more than doubled its balance sheet in two months from $900 billion to $2.2 trillion. (See Figure 12) Perhaps more striking was the Fed’s late November move to make unsterilized (i.e. printing money) purchases of up to $500 billion of agency backed mortgage securities. That action by itself lowered mortgage rates by 50 basis points to 5.5%, thereby breaking the logjam in the mortgage market. The Fed not only holds treasury securities, but it now owns or lends on all kinds of asset-backed securities and commercial paper. The Fed has certainly taken to heart the central bank playbook of lending aggressively in a crisis. Nevertheless the question remains what is to become of these assets, once the crisis has past and what are the long run inflationary consequences of these very aggressive monetary moves?

Figure 12. Federal Reserve Assets, 10 Sept 2008-19 Nov 2008, In Billions, Weekly Data


Source: Federal Reserve Board

On the fiscal side Congress passed a $168 billion stimulus package last winter. The bulk of the package came in the form of $108 billion in refundable tax credits to consumers. It was not effective as much of it was used to pay for higher gasoline prices and reducing debt. What was spent gave a “sugar high” to consumption in the second quarter and was quickly dissipated. For the purposes of our forecast we are assuming a new $200 billion package to pass in the first quarter that would include increased unemployment insurance benefits, food stamps, rebates, aid to state and local governments and infrastructure spending. Of course this could very well be on the low side and a package two or three times higher than what we are now envisioning should not be ruled out. It is also looking more likely that President-Elect Obama’s campaign promise to increase income tax rates to high earning individuals will be deferred until 2010. Remember the economy will already be benefitting to the tune of $440 billion coming from cheaper oil imports. In any event expect that the deficit will exceed $1 trillion in FY 2009. (See Figure 13) Moreover with $7.4 trillion of asset purchases and loan guarantees the deficit represents only the tip of the iceberg.

Figure 13. Federal Surplus/Deficit, FY 2000-2010F
Sources: Global Insight and UCLA Anderson Forecast


After much consternation Congress passed the Treasury’s $700 billion TARP program which was initially designed to purchase illiquid assets from the banking system. That plan quickly metamorphed into the purchase of preferred stock and equity warrants in the largest banking institutions in the country. In essence the banking system was partially nationalized. Whether or not the TARP funding will be sufficient and in what form it will take in the future remain open questions. After all Secretary Paulson has bequeathed $350 billion (subject to Congressional veto) to the new administration.

Not to be outdone by the banking system Detroit appeared on Capitol Hill in search of loan guarantees to fund their massive losses to enable the auto industry to retool. Although bankruptcy maybe the preferred solution and cannot be ruled out, we suspect that given the fragility of the financial system and the politics involved some form of aid will be granted. Remember the domestic auto companies are huge debtors to the financial system and to a host of suppliers.

Although the financial markets have been encouraged by President-Elect Obama’s appointments to his economics team, there are other issues the new administration is pursuing that will affect the economy next year. Two non-fiscal issues loom large over the economy as well. The first is the new Administration’s plan to impose a cap and trade system for carbon emissions which is effectively a large tax on carbon intensive production. The political process alone could create enough investment uncertainty to delay any economic recovery, much less the impact of a new tax burden on the order of $100 billion.

Second is the prospect of new labor legislation that would eliminate the secret ballot in union organizing elections. Under the proposed “Employee Free Choice Act” a union can be formed a given work site with a majority of employees signing cards affirming their desire to join a union. Needless to say this is a major rewrite of existing labor law and, if enacted, it could lead to widespread labor strife. Going back to another 1930s analogy we note that labor strife in 1937-38 after the passage of the National Labor Relations Act of 1935 was one of causes of the industrial collapse of 1937 that practically wrecked the New Deal.

Conclusion

To summarize, we are forecasting a nasty recession that will be characterized by four quarters of declining real GDP and unemployment rising to 8.5% by late 2009. Because of the severe stress on consumer balance sheets, the savings rate will have to increase and by definition consumption growth will be sluggish. Although we are not forecasting that the savings rate will return from the 0.6% in 2007 to a more normal 4-7%, we can see a return to a level of 3-4%. (See Figure 13) As a result trend growth of 3% with very sluggish job growth won’t resume until 2010. Remember both the 1990-91 and 2000-02 recessions were partially based on balance sheet issues and both times subsequent job growth was very sluggish. Furthermore it will take quite some time for the financial system to heal and as we have argued a new financial architecture will emerge out of the current crisis.
[i] Mulholland Sarah and Jody Shen, “Commercial Mortgage Securities Holders Blame Paulson,” Bloomberg News, November 21, 2008.