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Thread: weekend commentary - Dr. Nouriel Roubini on the future of the US economy ...

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    Default weekend commentary - Dr. Nouriel Roubini on the future of the US economy ...

    (snip)"The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.

    And these MacMansions and the broader sprawl of suburbian/exurban housing are now worth much less – in NPV terms – not only because of the housing bust and the fall in home prices but also because: a) the high oil and energy prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production that are not served by public transportation are burdened with transportation costs that are becoming unsustainable given the high price of gasoline. So on top of the housing bust that will reduce home values by an average of 30% relative to peak high oil/energy prices make the same large homes in the far boonies of suburbia/exurbia worth even less – probably another 10% down – because of the cost of heating palatial MacMansions and because of the cost of traveling dozens of miles to get to work in gas guzzling SUVs. Thus, it is time to stop this destruction of national income and wealth that a cockamamie decades long policy of subsidizing the accumulation of wasteful and unproductive housing capital has caused....

    Will this optimal policy solution - an haircut for [ Fannie Mae & Freddie Mac - sic ]bondholders - be undertaken? Most likely not as the political economy of housing, mortgages and of “privatizing profits and socializing” losses may dominate the policy outcome. Financial institutions love a system where they gamble recklessly, pocket the profits in good times and let the fisc (taxpayer) pay the bill when their reckless behavior triggers a financial crisis; this is socialism for the rich. That is why you already hear the whole Wall Street Greek chorus moaning for a bailout of the GSEs. But the financial costs of this financial crisis – the worst since the Great Depression – are mounting so fast that any bailout will become fiscally extremely expensive.

    Indeed, my initial estimates of $1 to $2 trillion dollars of losses from this financial crisis did not include the bailout of Bear Stearns' creditors, the bailout of the GSEs bondholders, the fiscal costs of the Frank-Dodd bill, the fiscal costs a severe U.S. recession that is mushrooming an already large fiscal deficit, the fiscal cost of bailing out – a' la Bear Stearns - the last four remaining major independent broker dealers (as the time for such independent broker dealers is now gone as – given their wholesale overnite funding - they are subject to bank-like runs much more severe than for banks), the cost of bailing out the Federal Home Loan Bank system (another GSE system that pretends to be private and that has been happily propping up or bailing out – to the tune of hundreds of billions of liquidity support – illiquid and insolvent mortgage lenders). Switching the informal guarantee of GSEs debt to a formal government guarantee would by itself increase the US gross public debt by $5 trillion and effectively double it.

    Thus, soon enough, if we fiscalize all of these losses the U.S. may fast lose its AAA sovereign debt rating and eventually end up like an insolvent banana republic. It is thus time to put a stop to the coming “mother of all bailouts” starting with a firm stop to the fiscal rescue of Fannie and Freddie, institutions that have behaved for the last few years like the “mother of all leveraged hedge funds” with their reckless leverage and reckless financial activities."(snip)

    from

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    Default Re: weekend commentary - Dr. Nouriel Roubini on the future of the US economy ...

    [quote=Melonie;1630783](snip)"The reality is that the U.S. has invested too much – especially in the last eight years – in building its stock of wasteful housing capital (whose effect on the productivity of labor is zero) and has not invested enough in the accumulation of productive physical capital (equipment, machinery, etc.) that leads to an increase in the productivity of labor and increases long run economic growth. This financial crisis is a crisis of accumulation of too much debt – by the household sector, the government and the country – to finance the accumulation of the most useless and unproductive form of capital, housing, that provides only housing services to consumers and has zippo effect on the productivity of labor. So enough of subsidizing the accumulation of even bigger MacMansions through the tax system and the GSEs.

    And these MacMansions and the broader sprawl of suburbian/exurban housing are now worth much less – in NPV terms – not only because of the housing bust and the fall in home prices but also because: a) the high oil and energy prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production<<multisnip, My Highlight>>
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

    The last part about "far from centers of work, business, and production" are almost laughably ironic, because 1 area that epitomizes this is the Washington DC area, where there are a lot of govt./related jobs. I've seen traffic jams that extend well outside "the beltway" of people coming to work inbound & later going from govt. job outbound. At least a fair number of commuters park in the outermost Metro rail stop, and repeat process of drive, ride,walk/walk, ride, drive every day. For many in this area, and others (notably CA), one must go well outside metro area to find "good" affordable house. In CA, it would be to find affordable house, period. A lot of houses "out there" aren't all MacMansions.

    As for "productive physical capital"(equipment, machinery, etc.), I assume author means manufacturing. Does he not realize that USA has outsourced more & more of that sector overseas???

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    Default Re: weekend commentary - Dr. Nouriel Roubini on the future of the US economy ...

    As for "productive physical capital"(equipment, machinery, etc.), I assume author means manufacturing. Does he not realize that USA has outsourced more & more of that sector overseas???
    Actually Prof. Roubini is probably more aware than most economists of the outsourcing that has taken place, and the reasons that US businesses have chosen / been forced to do so ...

    Is a report on the Prof's personal trip to China, which includes discussion of such factors as Chinese gov't subsidized return on investment for foreign companies investing in China, Chinese gov't subsidized energy prices, Chinese gov't subsidized corporate tax rates, Chinese gov't subsidized below market rates on loans through Chinese banks, Chinese gov't subsidized low prices for land, and a host of other stuff ... the cost of which winds up being borne by Chinese workers in one form or another.

    Granted that Prof. Roubini has gone public in regard to his strong opposition to a gov't bailout of Fannie Mae and Freddie Mac - presumably based on the dire future consequences Dr. Roubini sees occurring as a result of such a bailout. However, as a Prof. at a publicly funded institution of higher education in an extremely liberal city, I would imagine that Dr. Roubini chooses to temper his public statements in regard to the consequences of US gov't policies which create large disparaties in costs for businesses located in the USA versus China i.e. US corporate tax rate policy, US energy policy, US labor policy, US foreign trade policy etc. However, he is often cited by others, as is the case on this report that directly addresses the subject matter ...



    (snip)"Real wages for U.S. workers are flat or declining; jobs now available in U.S. economy of lesser pay and few benefits. U.S. real median wages have scarcely risen above 1970 level (about 9 percent), while productivity has soared over 80 percent over the same period,19 resulting in declining or stagnant standards of living for the nearly 70 percent of the U.S. population that does not have a college degree.20
    �� U.S. real median income has actually fallen between 2000 and 200421 – roughly the period following China’s accession to the WTO.
    �� Between 1995 and 2005, productivity grew a remarkable 33.4 percent. Had pay followed, the wages for most working people would have risen correspondingly. But instead there has been basically no wage improvement for typical workers since 2001, even though half the productivity growth from 1995 to 2005 occurred since then.22
    �� The type and quality of jobs available for U.S. workers has dramatically shifted during the WTO-NAFTA decade, with workers losing to imports or off-shoring their higher wage manufacturing jobs (which often also provided health care and other benefits) and finding reemployment in lower wage jobs. The average worker displaced from manufacturing goes from having annual wages of $40,154 before being laid off to $32,123 after being laid off and then re-employed; for the service sector, the comparable figure is $45,479 to $39,567; and for those workers employed in the service sectors most targeted for off-shore outsourcing, the figures are from $60,535 to $52,060.23 Labor Department data shows that such workers on average lose up to 24 percent of their earnings in such shifts.24
    3
    �� Average U.S. salaries for application developers, database engineers and system administrators – positions identified by Business Week as vulnerable to off-shoring – fell by 17.5 percent, 14.7 percent and 5.4 percent between 2002 and 2004.25 The engineering sector (also generally identified as at risk for increased off-shoring) faces unusually high levels of unemployment, with electrical engineers facing 7 percent and software engineers facing 7.5 percent unemployment in 2003.26"(snip)


    I don't want to put words in Dr. Roubini's mouth, but in the context of my first link the Prof. is pointing out that there is a difference in result between going heavily into debt for something which increases productivity / output / GDP as a result of said investment of capital, as opposed to going heavily into debt for something which increases nothing other than consumptive demand.

    ~
    Last edited by Melonie; 07-20-2008 at 02:40 PM.

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