Where is the US economy headed?

Surely one as well versed in physics and economics as you understands the problems attendant to discrete sampling of continuous variables and the aliasing and other distortions that can result. They are indeed dependent on the sampling interval, despite your assertion to the contrary.

The trouble is that the quality of the assets is virtually unknown to many of the players involved thanks to complex packaging and the veneer of safety provided by credit-rating agencies. High-risk, subprime mortgages are routinely blended with better credits, and sold and rated as one, making the lemons virtually indistinguishable from the quality assets.

"In the context of structured credit, we have buyers who ... have used credit-rating agencies as a substitute for analysis of the complex structure of the securities," economist John Ryding of Bear Stearns pointed out in a recent report.

So buyers assume the seller has better information and a strong incentive to sell them junk. Murkiness has bred dysfunction, just as Mr. Akerlof postulated. And now no one wants to touch this tainted commercial paper.


"As a result of the lack of information, which is a product of as yet unfolding economic developments and the complex structure of many products, good securities are dragged down along with bad ones," Mr. Ryding wrote.

And now it isn't only the SIVs that are in trouble. It's the banks who created them, the investors who bought in, the homeowners who need credit and the investors who are sitting with stocks in these banks, unable to discern which one may, or may not, have dark investment secrets.

Last week, the major Wall Street banks announced the creation of $100-billion superfund that would be a buyer of last resort for SIV commercial paper.

But the workings of the superfund look as opaque as the leaky SIVs they're designed to rescue.

Next week, the focus will shift to Ben Bernanke and his U.S. Federal Reserve Board colleagues, who must assess the credit market problem as they weigh whether to cut rates again.

It isn't obvious how lower interest rates will resolve the dilemma of asymmetric information. Indeed, a rate cut could prove costly to large swaths of the U.S. economy if the move accelerates the dollar's decline.

Regulators and financial institutions might instead want to look at the used car market, where vehicle history reports, the Internet and dealer warranty programs have brought considerable sunlight to the deal-making process.

The bottom line is that the banks need to come clean on their exposure to asset-backed commercial paper and open up the books of their SIVs.

Until they do, investors will assume there are a lot more lemons out there.

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georgeob1 wrote:

Surely one as well versed in physics and economics as you understands the problems attendant to discrete sampling of continuous variables and the aliasing and other distortions that can result. They are indeed dependent on the sampling interval, despite your assertion to the contrary.

That wasn't my point. I'm not disputing that it depends on the sampling in principle. I'm disputing that this makes a big difference in practice. Nyquist's sampling theorem tells us that when you sample a continuous function in discrete intervals, you can reconstruct the function from the samples with a precision of twice the sampling interval. Almost all recessions, and certainly all business cycles, last longer than twice any sampling interval the BEA might realistically use.

At the risk of disappointing you, George, I think your talk about sampling intervals is a big red herring. The BEA's definition of recessions is sound.

Man, I'm feeling so feebleminded right now. I guess I am so old that the only operational definition I have for "recession" is a declining GDP for 2 quarters. But, anyhow, I was thinking today's discussion on this thread was about Miller's post re recession Most of those in the know are saying we're in one right now...
While my comprehension of things intellectual has drastically declined over the years I waas somewhat agast reading this because as i do try to keep up with current thoughts this was new to me and I was hoping for clarification from Miller as to who "those in the know" are so that I could imporove my knowledge base.
Pardon my interruption. Carry on please.

Not at all Dys. You have an unerring eye for BS and that is the core of intelligence - at least in my experience. Thomas and I are merely snorting at each other because he jumped on my statements out of context. (I have no right to be sore sore - I do that all the time.)

Indeed your own statement about two continuous quarters of decline itself refers to the threshold of detectability of a recession, using quarterly data.

I guess my problem is that I don't see much point in the discussion. The real issue is do we believe markets will decline, unemployment will rise or that there will be excessive (or deficient) reactive adjustments to monetary policy. I certainly don't know the answers, but I believe that the next government has a good prospect of making things far worse.

This is in no small part a result of the tax cuts that already gave us a very softy landing from the 2000 recession.

That's because you live in Bezerkeley.

There is little doubt that the marginal effect of the tax cuts was to stimulate economic activity (although it is even possible that Cyclo will argue to the contrary on that point as well).

Hence my observation that recessions and other like economic "phases" are identifiable and useful mostly in retrospect.

Man, I'm feeling so feebleminded right now. I guess I am so old that the only operational definition I have for "recession" is a declining GDP for 2 quarters. But, anyhow, I was thinking today's discussion on this thread was about Miller's post re recession Most of those in the know are saying we're in one right now...
While my comprehension of things intellectual has drastically declined over the years I waas somewhat agast reading this because as i do try to keep up with current thoughts this was new to me and I was hoping for clarification from Miller as to who "those in the know" are so that I could imporove my knowledge base.
Pardon my interruption. Carry on please.

I propose that there is no evidence that tax cuts A) stimulate the economy in any meaningful or direct way, or B) generate additional revenue for the gov't in any way, which is not what you are specifically arguing but it is a common argument amongst Conservatives and the underpinning of the Laffer, voodoo economic theory.