Did the Bubble Start In 1994? Did the Recession Start In 2006?


Honor the unofficial 31st day of June by reading Volume 1, Number 1 [pdf] of BEACONOMICS A quarterly economic forecast for the U.S. and California, published last month by Christopher Thornberg's Beacon Economics.

Don't expect to like everything you read. Thornberg agrees with the principle that public spending can and should be used to move surplus resources from the private sector, going so far as to say recently that government "should be spending when everyone else is cutting back" and "buying cars when no one else is buying cars." You may also object to his reference to "the myriad of long run issues — healthcare, social insurance, massive public debt, and environmental issues — that need to become a priority of public policy and debate in the coming decade." Finally, I have to say ouch for Reason when Thornberg dismisses "claims that the United States was entering into a 'lost decade' like Japan experienced in the 1990s" as "unwarranted hysteria."

That having been said, the study is the most useful broad view of the recession I've seen in a while. Thornberg has been a reliable realist on housing prices and a skeptic of all efforts to shore up real estate values. I share his disdain for the scapegoating of "mark-to-market" accounting rules and for the subsequent changes to FASB rules, which Thornberg describes as a "delay tactic" that will allow "many a defunct bank to avoid acknowledging their problems and leave the entire system weakened for years." And I am of course totally on board with his indictment of the real criminals:

The largest imbalance in the economy and the primary issue that turned the quasi recession of the first three quarters of 2008 into the full blown downturn of the fourth quarter was not housing or finance, but the American public.

Thornberg is less optimistic than I am about the far future of asset-backed securities (pp 7-9). But he's more optimistic about the recovery, predicting that output will bottom out this fall and growth will remain in a hockey-stick pattern stretching into next year, with house prices hitting bottom in the first half of 2010. That's on the premise that the recession began quite a bit earlier than the December 2007 start date given by the National Bureau of Economic Research. His discussion of the recovery prospects (pp 13-15) is the only green shoots-type talk I know of that is in any way closely argued or persuasive. And page 10 contains an interesting estimate that the 2007 U.S. economy was overvalued by $15 trillion (an idea I've cribbed several times), having begun to super-inflate way back in 1994. But rather than go on cherry-picking the stuff I agree with, I suggest you check out the report for yourself.