So much for the great moderation!

I'm tardy in posting this, but this David Leonhardt column should be required reading.

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

33 for MVP!

The Minneapolis Star Tribune is reporting that the Twins have reached a long-term deal with first baseman and 2006 MVP Justin Morneau. No details yet, but this can only be good news for Twins fans.

A financial system gone very, very wrong

They say more money has been lost chasing yield than has been lost at the point of a gun. Paul Krugman, the curmudgeon economist / New York Times columnist, reminds us why in his latest missive:

In other words, the United States was not, in fact, uniquely well-suited to make use of the world’s surplus funds. It was, instead, a place where large sums could be and were invested very badly. Directly or indirectly, capital flowing into America from global investors ended up financing a housing-and-credit bubble that has now burst, with painful consequences.

The good news is that Krugman does not foresee America experiencing an economic recession as severe as Argentina circa 1950 (but only because our debt to foreigners is US Dollar- denominated.) Oh, and he uses the word “sophistry” in describing structured financial assets. Love it!

How We Got Ourselves into This Mess

I thought it was just the capital markets mourning the death of my father. In today’s Wall Street Journal, Mr. Greenspan argues there was more to the story:

On Aug. 9, 2007, and the days immediately following, financial markets in much of the world seized up. Virtually overnight the seemingly insatiable desire for financial risk came to an abrupt halt as the price of risk unexpectedly surged. Interest rates on a wide range of asset classes, especially interbank lending, asset-backed commercial paper and junk bonds, rose sharply relative to riskless U.S. Treasury securities. Over the past five years, risk had become increasingly underpriced as market euphoria, fostered by an unprecedented global growth rate, gained cumulative traction.

The crisis was thus an accident waiting to happen. If it had not been triggered by the mispricing of securitized subprime mortgages, it would have been produced by eruptions in some other market. As I have noted elsewhere, history has not dealt kindly with protracted periods of low risk premiums.

The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.*

It appears retirement has turned the master of opaque into the master of the obvious:

The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.

* He does admit, later in the editorial, that free money following the dot-com crash may have had something to do with this mess.

Bring Back the LaTroy Hawkins Fan Club

Welcome back to the American League, LaTroy Hawkins!

The Spoils of Private Equity

Ever wonder how the Gordon Gecko’s of the current decade are faring? Director Robert Greenwald’s new film, “The War on Greed, Starring the Homes of Henry Kravis,” provides of glimpse of just how well the sultans of leverage have done this decade. New York Times reporter Andrew Ross Sorkin describes the vignette as a “tongue-in-cheek story — think ‘Lifestyles of the Rich and Famous’ meets ‘Roger & Me’ — detailing Mr. Kravis’s homes and lifestyle, juxtaposed against the homes and incomes of working families.

Love Canal, Times Beach, and St. Louis Park

Sometimes, opening your mail can be as treacherous as the backstreets of Minneapolis after a snowfall.

Dear Resident, We regret to inform you that known carcinogens may be seeping into your home. Rest assured, there is no need to panic. With love, Your friends at the EPA