Christina Romer’s Statement on Economic Contraction


Below is a statement from Christina D. Romer, Chair, Council of Economic Advisors on the Fourth Quarter 2008 Advance GDP Estimate:

Real GDP fell at an annual rate of 3.8% in the fourth quarter of 2008. This was the largest one-quarter fall since 1982 and the second consecutive quarter of real GDP decline. A substantial increase in real inventory investment (from a large negative number in 2008Q3 to a small positive number in 2008Q4) mitigated the overall decline somewhat. Real final sales, GDP less the change in private inventories, declined at an annual rate of 5.1%. The large decline confirms the evidence from other indicators, such as payroll employment and the unemployment rate, that the U.S. economy continues to contract severely. Aggressive, well-designed fiscal stimulus is critical to reversing this severe decline and putting the economy on the road to recovery and improved long-run growth.
The decline in GDP was spread throughout the economy. Personal consumption expenditures declined at an annual rate of 3.5%, which was similar to the fall in the third quarter of 2008; these falls were the largest since 1980. Nonresidential fixed investment fell 19.1% and exports fell 19.7%. The decline in motor vehicle output was particularly severe, accounting for 2.0 percentage points of the overall fall in GDP of 3.8%. This widespread decline emphasizes that the problems that began in our housing and financial sector have spread to nearly all areas of the economy. Immediate action to support both the financial sector and overall demand is essential.

— Steve Clemons


9 comments on “Christina Romer’s Statement on Economic Contraction

  1. water meter says:

    “Immediate action to support both the financial sector and overall demand is essential.”


  2. unique_name says:

    The article above by Ian Welsh is disturbing in that solutions involve giving government more power to nationalize. That is against freedom. Government corruption was behind our financial problems. Loss of freedom is no solution to short term economic problems.
    The proper solution is to let institutions fail.


  3. unique_name says:

    Romer’s solution to end the recession is to spend.
    Her fluffy paper never mentions damage caused by Smoot-Hawley tariffs, so it’s not well researched.
    We won’t get any objectivity.


  4. söve says:

    When mortgages aren’t rewritten to make them more affordable, homeowners have to walk away from them. When they do that the cost is much higher than if the default had occurred in the first place – the municipalities lose the tax income, the owners of the mortgage wind up with a property that can’t pay back the loan either, more losses cascade into the system, causing one of the spirals we discussed above.


  5. pauline says:

    Cutting the Gordian Knot of Bad Contracts to Save the Economy
    By: Ian Welsh Sunday February 1, 2009 2:20 pm
    One of the main reasons why the financial crisis is not getting significantly better is that governments are not willing to forcefully break contracts.
    This may seem like a good thing. Who wants governments to break contracts? But the problem is that contracts as now written are adding to the crisis. Mortgages, for example, cannot be lowered to costs that homeowners can actually carry because the ownership of the derivatives those mortgages were packaged into makes too many people into owners. Even if you were able to figure out all the owners, getting dozens or even hundreds of people to all agree to modify the contract is effectively impossible. And if you modify it anyway, all it takes is one person to sue for breach of contract. In short, banks can’t modify the terms of most mortgages, because they are only intermediaries servicing the mortgages, they don’t own them.
    When mortgages aren’t rewritten to make them more affordable, homeowners have to walk away from them. When they do that the cost is much higher than if the default had occurred in the first place – the municipalities lose the tax income, the owners of the mortgage wind up with a property that can’t pay back the loan either, more losses cascade into the system, causing one of the spirals we discussed above.
    And it all happens in slow motion-one house at a time, one contract at a time, one family at a time. It drags on and on. No floor is being put under the market, and uncertainty abounds. No one can know how long this will go on or how bad it’s going to be. If a wholesale rewrite was allowed, then the losses could be figured out.
    Even if a retail rewrite was allowed, as in the proposed changes to bankruptcy law, which would allow judges to rewrite the terms of mortgages, estimates could be made. Such rewrites, done properly, would follow the principle of “what can the family manage” and rules of thumb like “30% of earned income typical of the neighborhood”. You can much more easily figure out what the value of collateralized debt obligations are in such a case.
    The problem, though, is larger than this. Fundamentally, most of the instruments at the heart of the financial crisis were sold based on fraud.
    The mortgage backed CDOs were sold based on the assumption that a bubble in housing would continue forever, many of the homeowners’ financials were deliberately not checked, and the mortgages were designed with resets which made higher default rates quite likely, but those high default rates weren’t factored into the returns and risk sold to investors. Meanwhile homeowners were sold mortgages with the implicit assumption that housing prices would go up forever and there would never be another recession so “sure, you’ll always be able to make the payments.”
    This was fraud—it was fraudulent to the investors who bought repackaged securities and it was fraudulent to the homeowners. Yes, caveat emptor, but the fact of the matter is that consumers rely on banks to explain these things to them, and assume that banks won’t sell them loans they can’t service. This assumption was wrong in the bubble years, because unlike banks in prior years the banks issuing the mortgages knew they were going to sell the mortgages on the secondary market and therefore thought that if they went bad they wouldn’t be holding the bag. And if they weren’t going to hold the bag, well why worry about if the homeowners could pay the vig or if the assumptions that underlay the promised earnings were in any way valid?
    In other words banks and other mortgage brokers sold mortgages to homeowners without due diligence and based on fraud, and they then sold the repackaged mortgage revenue streams to investors based on fraudulent promises about due diligence, revenue and risk. And buyers of those revenue streams didn’t look very closely at it either. They wanted, in most cases, bonds with the risk of treasuries, but with higher earnings. They wanted, in effect, free money. What they got, instead, was a pig in the poke.
    This is also true with credit default swaps. Credit default swaps are just insurance. If Fred doesn’t pay up on the money he owes you, Jeanne will make it up. But unlike regular home or life or car insurance, there were no mandated actuarial tables and no mandated reserves. Anybody could write the things, whether they had the money to back it up if large numbers of them went bad, and anyone could use any math they wanted to figure out what the likely risk and premium was. As with the mortgage industry, the assumptions they baked into the formulas were flawed. In essence, most CDS’s assumed that there could never be a time when a lot of defaults all happened at the same time. Of course, the way economies work is that defaults and bankruptcies do tend to cluster. As a friend of mine likes to say “recessions are like death. You may not know when the next one is going to happen, but you do know that it IS going to happen.” The models, in essence, assumed no recession, in many cases not even a mild one.
    All of this was done explicitly in ways intended to avoid regulation. Contracts were sold which stated that they could never, ever be sold on an open traded market – never be sold on something like the Chicago Board of Trade or the New York Stock Exchange. If they had been, regulators could have gotten their dirty hands on them and started to insist on some standards. But writing that into them means that they were in effect designed to make sure that they were illiquid – that there would be no large public market where large numbers of them could be sold and prices could be set in an open way.
    Illiquid, based on fraud and designed specifically to avoid regulators forcing them to be based on proper mathematical principles and assumptions of risk.
    In other words, fraudulent.
    Now the fraud here goes all the way around. The banks were fraudulent, the customers were complicit. The people who were least complicit, in my mind, were unsophisticated individuals involved who took out mortgages. That’s not to say there was no complicity, many people took on debts they should never have taken on, a subset lied on the applications (knowing the bank wouldn’t check, since the bank told them it wouldn’t check) and so on. The customers who bought these sophisticated instruments were much more complicit. If you’re buying a CDO, and you’re rich or you represent a large corporation, investment fund, municipality or what have you, you are assumed to have the financial knowledge that ordinary people don’t have, you are expected to do much more due diligence. And if you don’t understand the instrument, the old rule applies: never invest in a business where you can’t figure out how it works.
    The most complicit, the most fraudulent, were the organizations that designed, packaged and sold these instruments. As with so much in the past 8 years the question is “stupid, or evil?” The answer is “why not both?” If they didn’t know that the instruments were based on completely BS assumptions and lack of due diligence then they were incompetent and stupid. If they did and sold them anyway, they were evil.
    Either way an entire financial economy was built up around fraud.
    Modern capitalist civilization, perhaps even older civilizations, may have as one of its most important tasks the enforcement of contracts, but it has long been a principle that a contract entered into which was based on fraud or force is not a valid contract and the government does not have to enforce it.
    Or rather, the government is not required to pay it off. What is happening now, what has been happening, is the government either making good or guaranteeing losses. Not making good the losses of the little people, the people who took out the mortgages or who are losing their jobs as a result of the financial meltdown, but making good the losses of the investing class and the financial sector. The Fed and Treasury together as of November 28 had already spent, loaned, committed, guaranteed and floated 7.36 Trillion dolars. By now we can assume it’s well over 8 trillion.
    Now all of that money isn’t gone forever, some of it will come back. Other reports are now saying that the banking sector is down 2 trillion (I’m pretty sure that’s too low, remembering that we’re in a downward spiral), which as Dean Baker notes, means that the banks are, as a group, bankrupt.
    If the decision is made to pay this stuff off, essentially at close to face value rather than real value, then not only has what amounts to fraud been rewarded, but the full cost must be paid. That money will be borrowed, and in this context, what that means is this: the future will pay for the fraud of the past. For twenty years or more American citizens will pay higher taxes and have lower incomes than they would have otherwise, because they will be paying off bets based on fraud. It will be the most massive transfer of wealth from ordinary Americans to the wealthy in the history of America.
    And the best case scenario is that it will lead to Japanification, which is to say, to a long period of lousy economic growth, where you never, ever seem to get a decent economy for very long and you are constantly slipping back into recession. The reason it will lead to this is that the money which should be used to invest in growth will be used to pay back the money taken out to pay off the bad bets of the financial sector. And proceeds from what growth there is will also have to be used to pay it back, which means there will be less money for reinvesting in the economy.
    The fraud of the past will strangle the prosperity of the future.
    Now this isn’t to say that money isn’t going to have to be spent. It is. The money has been lost. There is an entire bankrupt financial sector, there are houses losing value by the day and there are businesses, municipalites and states which are hurting badly.
    What it does mean, however, is that these contracts are going to have to be broken so that losses can be apportioned fairly and because asking the government to enforce contracts based on fraud is fundamentally unfair. What it also means is that the investing and financial class needs to be forced to take rather more than a haircut, they need to bleed. Every bank that is bankrupt needs to be nationalized and the stockholders need to be wiped out. Every bank that is bankrupt needs to have auditors go over the books and claw back all bonuses paid which were based on fraud. Every financial firm which is bankrupt needs to be nationalized and the creditors need to take a haircut, because if it wasn’t nationalized or subsidized by taxpayers, it’d go bankrupt and at best they’d get cents on the dollar. So cents on the dollar is all they can reasonably expect, but if they cooperate, perhaps they can get a few more cents on the dollar.
    All of this will allow us to take as much of the losses now as possible, so that as few of them are being paid for forever. Get the monkey of debt off the back of both the public and firms, so that they can grow again.
    In this scenario, everyone’s going to take it on the chin. Taxpayers, investors, bank executives, homeowners — everyone. But the people who will take it on the chin the most are people who benefited in the past from the fraud that was committed. Not only is this fair, not only does it mean that they are less likely to do it again thinking they’ll be bailed out again, but it means that as much as possible the mistakes of the past, the debts of the past, will not burden the future.
    But doing this requires cutting a number of Gordian knots. It means invalidating or forcing rewrites of whole classes of contracts. It means wiping out huge numbers of shareholders. It means forcing writedown by bond holders. It means hurting, badly, the financial executive class who have virtually run the US economy for twenty years. It means you’re going to have to hurt a lot of very powerful, very rich people who have bought a lot of influence with both Democrats and Republicans over decades.
    The alternative, however, is for the fraud of the past to strangle the hopes and prosperity of the future, and for ordinary Americans to foot the bill for the fraud and extravagance of the rich, and receive nothing in return.
    If your first goal is the well being of America and the majority of most Americans, this shouldn’t be much of a choice.
    Let us hope that it comes to be seen that way.


  6. Donald Foster says:

    I’m glad some Americans see this for what it is! The shame, most are like sheep being led around! Ms. Romer on TV was a slap in the face how most Americans are truly walking around without using their brain. They recently “took” 750 billion tax dollars and made things worse. This 820 has no real plan with a great level of abuse.. She was bouncing around with a huge smile on her face saying this is all we need! Insulting!


  7. arthurdecco says:

    “Immediate action to support both the financial sector and overall demand is essential.” Christina Romer
    Nonsense, Ms. Romer.
    Check out what Chris Floyd has to say about the millions of French citizens from all walks of life who have put their foot down by furiously refusing to allow their government use their country’s money to line the pockets of the thieves and mountebanks that are greedily engorging themselves on this deliberately created, ongoing, world-wide economic tsunami.
    “Paris When it Sizzles: The French Say No to Fat-Cat Bailouts
    Written by Chris Floyd
    You have to admire the French. The ordinary people there know how to stick up for themselves – instead of meekly bowing down and accepting whatever bitter gruel the elite tries to cram down their throats. And they don’t just write a few angry letters (or blog posts!), or send checks to some worthy progressive organization to organize a few mildly admonishing ads or press releases on their behalf. Hell no, they take to the streets, by the millions, they shut things down, they make some noise, they put their time, their jobs, and their bodies on the line.
    Yesterday saw another remarkable display of this national trait, as an astonishingly broad spectrum of the French citizenry surged through the streets of Paris to express their outrage at the government’s response to the economic crisis. This response has been the usual doling out of billions in public money for the fat cats who caused the crisis, coupled with increasing demands for “sacrifice” from the hoi polloi: less pay, longer hours, fewer benefits, a bleaker life for you and your children while the elite party on.
    But on Thursday, an estimated 2.5 million people – blue-collar workers and white-collar professionals, educators and students, doctors and train drivers, native-born and immigrants – came out to tell the government: “We are not going to pay for the greed and corruption of the elite! Find another way!” The contrast to the stunned, herd-like reaction of the American and British publics to their governments’ gorging of corrupt oligarchs with no-strings largess could not be more striking.
    story continues:
    And here’s a gem I picked up from some poster somewhere that applies to this subject:
    “We do not call serial killers the hunting elite. We do not call psychopathic rapists the sexual elite. So why call these crooks the financial elite?
    These pirates rigged the system so that they could use your money to buy your industries, leaving you a husk of wildly inflated debt, while they bled out all the value in bonuses.
    Why should they feel shame? It’s what criminals do.
    They stopped themselves being regulated and taxed, secured massive leverage for what paltry assets they had, and even dragged your bank accounts to their investment banks.
    How could this produce a legitimate result…? It was designed for one purpose only: to grab the baby boomers’ retirement funds, just as they reached their maximum size.
    The system collapsed because there was no productive investment in it, and no thought for the future. Why should they pay the piper? It’s not as if they were spending their own money.
    They are pirates. They are crooks. They will carry on until they are stopped, or until the system grinds to a halt.
    They will never feel shame. They’re proud of what they’re doing. While you’re worrying about your mortgage, they’re laying bets you’ll be chucked out by March.
    So long as you call them the financial elite, you are doomed, because you’re putting yourself down.
    Wealth is created by the sweat of your brow, not by a pinstripe betting the next desk’s portfolio will drop a point.
    We have to sweep the money-changers out of the Temple, not plead for a change of heart.” Bob Jackson 01.27.09
    To which I would add only the point that anyone who could type the quote I excerpted from Ms. Romer’s post is as much our common enemy as those who actually are destroying our collective, progressive future. Ms. Romer is either a fool or a collaborator – and neither deserves our attention.


  8. Mr.Murder says:

    The Bush recession- worse than Reagan(tm).


  9. ... says:

    make bubbles in the financial sector and housing market, and look what happens when the air gets let out… it is called a false economy and every effort will be made to “inflate”… if you are stupid enough to believe anything that comes out of a bankers mouth, when they say they are keeping an eye on “inflation”, that is code for we are screwing the monetary system over and their is nothing you can do about it… we’re devaluing the money in your pocket, so you would be better off borrowing today and paying back tomorrow.. a system that favours spenders and borrowers over savers is screwed, but that is what it is with the federal reserve and our present banking system…


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