Why was the economy so good in 2006-2007 despite weak growth

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

There are people on the finance side who likely know this much better than me, but it probably is accurate that the housing bubble around 2000-2001 did prevent a deeper recession following the dot.com bust.

However, after interest rates were lowered following September 11, 2001, without the housing bubble, the loans/money that went to the housing bubble with better regulations likely would have gone to people with genuine productive ideas that would have led to better longer term growth. However, because those ideas take time to come to fruition whereas house flipping is fairly immediate, the economic recovery would have been slower.

Of course, some of the actual new homes that were built as well as the renovations to existing housing I'm sure were beneficial as well as, for instance, there is now a housing shortage in a good deal of the U.S now.

2.Some economists disagree, but the loss of jobs to China was not mainly the result of China per se but was the result of technology. In economics, there is the concept of capital versus labor. 'Capital' here refers to what accountants call 'property, plant and equipment' so, if it hadn't been for, especially at that time, the low cost labor manufacturing and assembly jobs that went to China, it's almost certain that capital would have replaced the labor but at a, likely, slightly higher cost per unit of production.

We know this because prior to China coming along economically, millions of manufacturing labor jobs had already been lost to capital.

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

1.Oil prices rose from just under $45 a barrel in April 2003 to  $180 a barrel in May 2008 (adjusted for inflation) pretty much straight up, however there was an inflection point starting in 2007 as oil prices had 'only' doubled from April 2003 to around May 2007. The recession had started around 2007 before the worst of the oil spike. Also, a major reason for the rise in oil prices was the decline in value of the U.S $ on the world market (relative to other currencies) and since oil prices are priced in U.S $, even a barrel of oil at a flat price in Euros would still cost more with U.S $.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

I don't know why the U.S $ declined at that time (relative to other currencies.) Again, there are people in finance who know more on these things than I do.

So, that explains the rise in inflation but also, the Fed would have raised its interest rate to support the U.S $, even though many conspiracy theorists believe the Fed wants a weak dollar. However, as said, in hindsight given the level of inflation at the time, the Fed still did not raise its interest rate soon enough or high enough.

2.I don't know because I don't know why the U.S $ declined relative to other currencies at that time. Hopefully somebody with expertise in finance here will answer.

3.One of the things about the Housing bubble collapse is that very few people expected it. What was occurring with these sub prime loans is that they were bundled together and sold off to mutual fund companies and other corporate investors, including other banks, I believe. The reason for this is that due to low interest rates and the rise in stocks, not as much money was being deposited in banks. So, the banks sold off these bundled loans (called 'mortgage backed securities') in exchange for money up front.

The people who bought these mortgage backed securities liked them having as many sub prime loans as possible because those had the highest interest rates. They thought these securities were safe because the ratings agencies like Standard and Poor's gave them top ratings. After the collapse, the ratings agencies stated that their ratings were merely 'opinions' and should not have been trusted as fact. Changing this is one of the things done by Dodd-Frank.

So, the reason the banks and these other institutions froze up after the crash is because they had no idea how much of their loans were bad loans, and in their confusion, they simply stopped lending, even banks that still had plenty of reserves in the Federal Reserve on hand.

So, the first thing the U.S government did was to buy the bad mortgages through the Troubled Asset Relief Program (TARP), but because of the loss of confidence in the banks and in the economy in general, the Federal Reserve engaged in this program called 'quantitative easing' (printing money) to assure depositors, people who wanted loans and the other banks that the banks had money.

However, again unlike what the conspiracy theorists believe, this was not 'free money' to the private banks, but involved the Federal Reserve buying Treasury Bonds held by the banks with the newly printed money.

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

1.Oil prices rose from just under $45 a barrel in April 2003 to  $180 a barrel in May 2008 (adjusted for inflation) pretty much straight up, however there was an inflection point starting in 2007 as oil prices had 'only' doubled from April 2003 to around May 2007. The recession had started around 2007 before the worst of the oil spike. Also, a major reason for the rise in oil prices was the decline in value of the U.S $ on the world market (relative to other currencies) and since oil prices are priced in U.S $, even a barrel of oil at a flat price in Euros would still cost more with U.S $.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

I don't know why the U.S $ declined at that time (relative to other currencies.) Again, there are people in finance who know more on these things than I do.

So, that explains the rise in inflation but also, the Fed would have raised its interest rate to support the U.S $, even though many conspiracy theorists believe the Fed wants a weak dollar. However, as said, in hindsight given the level of inflation at the time, the Fed still did not raise its interest rate soon enough or high enough.

2.I don't know because I don't know why the U.S $ declined relative to other currencies at that time. Hopefully somebody with expertise in finance here will answer.

3.One of the things about the Housing bubble collapse is that very few people expected it. What was occurring with these sub prime loans is that they were bundled together and sold off to mutual fund companies and other corporate investors, including other banks, I believe. The reason for this is that due to low interest rates and the rise in stocks, not as much money was being deposited in banks. So, the banks sold off these bundled loans (called 'mortgage backed securities') in exchange for money up front.

The people who bought these mortgage backed securities liked them having as many sub prime loans as possible because those had the highest interest rates. They thought these securities were safe because the ratings agencies like Standard and Poor's gave them top ratings. After the collapse, the ratings agencies stated that their ratings were merely 'opinions' and should not have been trusted as fact. Changing this is one of the things done by Dodd-Frank.

So, the reason the banks and these other institutions froze up after the crash is because they had no idea how much of their loans were bad loans, and in their confusion, they simply stopped lending, even banks that still had plenty of reserves in the Federal Reserve on hand.

So, the first thing the U.S government did was to buy the bad mortgages through the Troubled Asset Relief Program (TARP), but because of the loss of confidence in the banks and in the economy in general, the Federal Reserve engaged in this program called 'quantitative easing' (printing money) to assure depositors, people who wanted loans and the other banks that the banks had money.

However, again unlike what the conspiracy theorists believe, this was not 'free money' to the private banks, but involved the Federal Reserve buying Treasury Bonds held by the banks with the newly printed money.

Ok, I think I got the story right. Correct me if I am wrong

1. After the repeal of Glass-Steagall in 1999, banks engage in risky lending practices (although some started earlier).

Buying homes for people become much easier, even for those who weren't in the best financial situations. These folks are given subprime loans. Many of these subprime loans were given adjustable interest rates. At the time, rates were low after 9/11 and dot.com bust

2. The housing bubble helps the US recover from the dot.com recession quickly and fuels economic growth despite job sourcing to China and other macro economic conditions. The "good times'' that started in the 90s last longer than they should have. Strong growth in 2004 and 2005.

3. At some point, the USD weakens. A weaker dollar means higher gas prices. Higher gas prices mean higher inflation

To fight inflation, the federal reserve raises interest rates

4. The higher interest rates causes house payments to go up and weaker growth in 2006 and 2007, meaning people lose jobs. A double whammy for the poor, the folks most likely to have a subprime loan

To make the situation worst, some banks would bundle up these subprime loans and sell them to other banks. The banks selling these loans would get their money now, the banks buying these loans would make a profit later.

5. People start defaulting on these loans. The panic in late 2008 happens and the government needs to step in to prevent these banks from collapsing from not getting money from these bad loans.

Programs like TARP buy these bad loans, while banks are given bailouts to pay their bills.

6. The sheer panic causes banks to stop lending, killing economic growth from 2009-2014. The "jobless" recovery.

A. Could keeping the dollar strong have prevented all this from happening?
B. Is there a way to strengthen the banks without setting off a panic? Suppose Bush saw the impending disaster and set up TARP sooner

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

1.Oil prices rose from just under $45 a barrel in April 2003 to  $180 a barrel in May 2008 (adjusted for inflation) pretty much straight up, however there was an inflection point starting in 2007 as oil prices had 'only' doubled from April 2003 to around May 2007. The recession had started around 2007 before the worst of the oil spike. Also, a major reason for the rise in oil prices was the decline in value of the U.S $ on the world market (relative to other currencies) and since oil prices are priced in U.S $, even a barrel of oil at a flat price in Euros would still cost more with U.S $.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

I don't know why the U.S $ declined at that time (relative to other currencies.) Again, there are people in finance who know more on these things than I do.

So, that explains the rise in inflation but also, the Fed would have raised its interest rate to support the U.S $, even though many conspiracy theorists believe the Fed wants a weak dollar. However, as said, in hindsight given the level of inflation at the time, the Fed still did not raise its interest rate soon enough or high enough.

2.I don't know because I don't know why the U.S $ declined relative to other currencies at that time. Hopefully somebody with expertise in finance here will answer.

3.One of the things about the Housing bubble collapse is that very few people expected it. What was occurring with these sub prime loans is that they were bundled together and sold off to mutual fund companies and other corporate investors, including other banks, I believe. The reason for this is that due to low interest rates and the rise in stocks, not as much money was being deposited in banks. So, the banks sold off these bundled loans (called 'mortgage backed securities') in exchange for money up front.

The people who bought these mortgage backed securities liked them having as many sub prime loans as possible because those had the highest interest rates. They thought these securities were safe because the ratings agencies like Standard and Poor's gave them top ratings. After the collapse, the ratings agencies stated that their ratings were merely 'opinions' and should not have been trusted as fact. Changing this is one of the things done by Dodd-Frank.

So, the reason the banks and these other institutions froze up after the crash is because they had no idea how much of their loans were bad loans, and in their confusion, they simply stopped lending, even banks that still had plenty of reserves in the Federal Reserve on hand.

So, the first thing the U.S government did was to buy the bad mortgages through the Troubled Asset Relief Program (TARP), but because of the loss of confidence in the banks and in the economy in general, the Federal Reserve engaged in this program called 'quantitative easing' (printing money) to assure depositors, people who wanted loans and the other banks that the banks had money.

However, again unlike what the conspiracy theorists believe, this was not 'free money' to the private banks, but involved the Federal Reserve buying Treasury Bonds held by the banks with the newly printed money.

Ok, I think I got the story right. Correct me if I am wrong

1. After the repeal of Glass-Steagall in 1999, banks engage in risky lending practices (although some started earlier).

Buying homes for people become much easier, even for those who weren't in the best financial situations. These folks are given subprime loans. Many of these subprime loans were given adjustable interest rates. At the time, rates were low after 9/11 and dot.com bust

2. The housing bubble helps the US recover from the dot.com recession quickly and fuels economic growth despite job sourcing to China and other macro economic conditions. The "good times'' that started in the 90s last longer than they should have. Strong growth in 2004 and 2005.

3. At some point, the USD weakens. A weaker dollar means higher gas prices. Higher gas prices mean higher inflation

To fight inflation, the federal reserve raises interest rates

4. The higher interest rates causes house payments to go up and weaker growth in 2006 and 2007, meaning people lose jobs. A double whammy for the poor, the folks most likely to have a subprime loan

To make the situation worst, some banks would bundle up these subprime loans and sell them to other banks. The banks selling these loans would get their money now, the banks buying these loans would make a profit later.

5. People start defaulting on these loans. The panic in late 2008 happens and the government needs to step in to prevent these banks from collapsing from not getting money from these bad loans.

Programs like TARP buy these bad loans, while banks are given bailouts to pay their bills.

6. The sheer panic causes banks to stop lending, killing economic growth from 2009-2014. The "jobless" recovery.

A. Could keeping the dollar strong have prevented all this from happening?
B. Is there a way to strengthen the banks without setting off a panic? Suppose Bush saw the impending disaster and set up TARP sooner

As a shorthand that's accurate enough:

1.I dispute that the repeal of Glass-Steagall had much to do with this. Those more on the left tend to disagree. Glass-Steagall did not directly prevent these sorts of loans, and, for instance, although not banks, the Savings and Loans debacle back in 1987 occurred (I don't believe Savings and Loans were under Glass-Steagall.)

But, I maintain the reason is the very low interest rates after September 11, 2001 both encouraged lending (and although the Federal Reserve did not engage in 'quantitative easing' back then, they must have printed money to accommodate the easy money policy) and discouraged deposits.

So, because the very low interest rates discouraged deposits in favor of stocks, the banks were looking for ways to raise cash, and bundling and selling these 'mortgage backed securities' was the way they found.

Also, I should have realized this earlier, obviously the U.S $ declined relative to other currencies due to these very low interest rates, which encouraged investors to deposit in other countries instead, which also pushed those nations currencies up.

The reactions to public policies by individuals can not be easily controlled by governments. This is an obvious case of unintended consequences.

So, in answer to your previous question, I would say most likely had the September 11,2001 not occurred, the housing bubble, its bursting and the Great Recession would not have occurred.

At the time, these subprime loans were referred to as 'Ninja Loans') (No Income, No Job, Approved! - the borrowers were encouraged, many would say tricked, to lie on the forms about their job, income and/or wealth status. The bankers who made these loans later said they never thought interest rates would ever increase.

I don't believe them, but those who do (mostly these bankers themselves) argue this was a 'Minsky Moment' a term referring to Heterodox economist Hyman Minsky who theorized that stable good times lead to complacency which then leads to stupid/careless decisions resulting in future problems. I personally think while that can happen, that these bankers were just rationalizing an excuse for their selfishness (and, collectively, their incompetence.)

To give a little fairness to the bankers, most of them didn't even realize that other bankers were doing the same thing making NINJA loans. There is a term for this that I never remember (economists have a term for everything) but it's related to the 'Tragedy of the Commons.' If one person does something harmful, like overfishing, it's not a problem. When everybody overfishes, it's a harmful problem.

3.Higher oil prices, not just higher gas prices. That's the most visible manifestation, but higher oil prices raise the price of pretty much everything.

4.It wasn't mostly to banks I don't think that these mortgages were bundled it was mostly to corporate financial investors (mutual funds and the like I think), but also to banks.

I've answered the question up above that in my opinion that the Great Recession would most likely not have occurred if interest rates hadn't gone to 1%, and interest rates would not have gone that low if not for September 11, 2001.

I think it is likely that had the Federal Reserve kept the banks solvent (through quantitative easing) that the immediate collapse could have been prevented and the decline would likely have been more gradual and easier to handle.

What immediately preceded the collapse was the Bush Administration refusing to bail out some large investment banking firm arguing an ideological position that since investment banks weren't covered by loan loss guarantees that the investment bank was on its own.

To be fair, I don't think the Treasury Secretary at the time, Paul O'Neill fully appreciated how dire the situation was, and, as I stated above, government policies can have negative unintended consequences, and in this case, there was a rational reason to fear the negative consequences of such a bailout leading to what economists call 'moral hazard.'

'Moral hazard' was a term thrown out at the time which refers to the change in behavior people have when they know they can do something without having to face the negative consequences. So, if an investment bank made stupid decisions, the bankers could simply say "it doesn't matter anyway, the government will bail us out." This also ties into the notion that banks realize this because they are 'too big to fail.'

As we saw, this is the case as occurred here as well, because even at least some of the smaller regional banks engaged in these practices either by selling or buying from other banks 'mortgage backed securities.' So, even the regional banks are interconnected with the big banks which means they're all 'too big to fail' lest their be another of these cascades.

I think you followed my explanations quite well. As I've said before, macro economics really is little more than 'following the money.'

[Pres Mike]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

1.Oil prices rose from just under $45 a barrel in April 2003 to  $180 a barrel in May 2008 (adjusted for inflation) pretty much straight up, however there was an inflection point starting in 2007 as oil prices had 'only' doubled from April 2003 to around May 2007. The recession had started around 2007 before the worst of the oil spike. Also, a major reason for the rise in oil prices was the decline in value of the U.S $ on the world market (relative to other currencies) and since oil prices are priced in U.S $, even a barrel of oil at a flat price in Euros would still cost more with U.S $.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

I don't know why the U.S $ declined at that time (relative to other currencies.) Again, there are people in finance who know more on these things than I do.

So, that explains the rise in inflation but also, the Fed would have raised its interest rate to support the U.S $, even though many conspiracy theorists believe the Fed wants a weak dollar. However, as said, in hindsight given the level of inflation at the time, the Fed still did not raise its interest rate soon enough or high enough.

2.I don't know because I don't know why the U.S $ declined relative to other currencies at that time. Hopefully somebody with expertise in finance here will answer.

3.One of the things about the Housing bubble collapse is that very few people expected it. What was occurring with these sub prime loans is that they were bundled together and sold off to mutual fund companies and other corporate investors, including other banks, I believe. The reason for this is that due to low interest rates and the rise in stocks, not as much money was being deposited in banks. So, the banks sold off these bundled loans (called 'mortgage backed securities') in exchange for money up front.

The people who bought these mortgage backed securities liked them having as many sub prime loans as possible because those had the highest interest rates. They thought these securities were safe because the ratings agencies like Standard and Poor's gave them top ratings. After the collapse, the ratings agencies stated that their ratings were merely 'opinions' and should not have been trusted as fact. Changing this is one of the things done by Dodd-Frank.

So, the reason the banks and these other institutions froze up after the crash is because they had no idea how much of their loans were bad loans, and in their confusion, they simply stopped lending, even banks that still had plenty of reserves in the Federal Reserve on hand.

So, the first thing the U.S government did was to buy the bad mortgages through the Troubled Asset Relief Program (TARP), but because of the loss of confidence in the banks and in the economy in general, the Federal Reserve engaged in this program called 'quantitative easing' (printing money) to assure depositors, people who wanted loans and the other banks that the banks had money.

However, again unlike what the conspiracy theorists believe, this was not 'free money' to the private banks, but involved the Federal Reserve buying Treasury Bonds held by the banks with the newly printed money.

Ok, I think I got the story right. Correct me if I am wrong

1. After the repeal of Glass-Steagall in 1999, banks engage in risky lending practices (although some started earlier).

Buying homes for people become much easier, even for those who weren't in the best financial situations. These folks are given subprime loans. Many of these subprime loans were given adjustable interest rates. At the time, rates were low after 9/11 and dot.com bust

2. The housing bubble helps the US recover from the dot.com recession quickly and fuels economic growth despite job sourcing to China and other macro economic conditions. The "good times'' that started in the 90s last longer than they should have. Strong growth in 2004 and 2005.

3. At some point, the USD weakens. A weaker dollar means higher gas prices. Higher gas prices mean higher inflation

To fight inflation, the federal reserve raises interest rates

4. The higher interest rates causes house payments to go up and weaker growth in 2006 and 2007, meaning people lose jobs. A double whammy for the poor, the folks most likely to have a subprime loan

To make the situation worst, some banks would bundle up these subprime loans and sell them to other banks. The banks selling these loans would get their money now, the banks buying these loans would make a profit later.

5. People start defaulting on these loans. The panic in late 2008 happens and the government needs to step in to prevent these banks from collapsing from not getting money from these bad loans.

Programs like TARP buy these bad loans, while banks are given bailouts to pay their bills.

6. The sheer panic causes banks to stop lending, killing economic growth from 2009-2014. The "jobless" recovery.

A. Could keeping the dollar strong have prevented all this from happening?
B. Is there a way to strengthen the banks without setting off a panic? Suppose Bush saw the impending disaster and set up TARP sooner

As a shorthand that's accurate enough:

I see now

As long as there was immense risky behavior from the banking and insurance industry from 1996-2006, there was going to be a bubble and it was going to pop. Unless you somehow manage to have low inflation and low interest rates indefinitely. And prevent both the War on Terror AND China entering the WTO destroying half of all American manufacturing jobs. And the trade deficit caused by America's addiction to cheap Chinese goods.

In hindsight, the risky behavior should never have been allowed. A slightly more painful dot.com recession and weaker growth in the 2000s would have been much better long term. No Great Recession means no jobless recovery, which means no Trump.

In roughly 3 years, the US made several key mistakes

-Allowing China to enter the WTO (2000)
-Allowing 9/11 to occur (2000)
-Allowing risky lending (2000-)
-No Child Left Behind (2002)
-Bush Tax Cuts (2001/2003)

[Benjamin Frank 2.0]

All figures are pre housing crash FYI

Unemployment peaked in 2004 than started going down at 5.7%. By 2007, it was at 4.4% basically at historic lows for the time.

The deficit peaked at 2004 at 450 billion. In 2006, it was at 250 billion. In 2007 it was at 160 billion! Some news articles at the time predicated the deficit could disappear all together despite the Bush tax cuts and troop surge in Iraq.

The odd thing is, growth was actually quite weak at the time. Growth peaked in 2004 at 3.85%. In 2006, it was 2.78%. In 2007, it was 2.01%.

Also, gas prices were on the rise. Gas prices in late 2006 was 2.99 on average In June 2007 was 3.10 on average. Thats equal to 4.59 today, or 3.75 in 2019 prices. This is odd because

Thoughts?

I think it was mostly the result of the housing bubble. That generated a lot of economic activity even if not necessarily a lot of additional productive potential (capacity.)

From wiki
It is widely believed that the increased degree of economic activity produced by the expanding housing bubble in 2001–2003 was partly responsible for averting a full-scale recession in the U.S. economy following the dot-com bust and offshoring to China. Analysts believed that with the downturn in the two sectors, the economy from the early 2000s to 2007 evaded what would have been stagnant growth with a booming housing market creating jobs, economic demand along with a consumer boom that came from home value withdraws until the housing market began a correction.
https://en.wikipedia.org/wiki/2000s_United_States_housing_bubble

Why do you think George W Bush Administration didn't want to do anything to regulate sub prime mortgages? (in addition to being free market absolutists.)

I disagree that in the long run offshoring to China had a negative economic impact on the U.S economy, but in the short term there were certainly negative effects in the transition (and at the micro level obviously negative effects for those who lose their jobs.)

I can tell you one thing that didn't effect the unemployment rate was the Labor Force Participation Rate, which remained quite flat from approximately 2001-2007 (I.E did not decline.) You can find a graph of it by looking for 'labor force participation rate 2000s.' I don't want to post it here because the graphs I've seen of it don't start with a zero at the X axis and that's a peeve of mine.

From that time until now, the Labor Force Participation Rate in the U.S has dropped from about 66% to 62-63%. The Labor Force Participation Rate is defined as anybody from age 15 or 16 up with some small exceptions (I forget the details on this) who either has a job or is actively looking for one out of the (near) total population of people 15 or 16 up. Most of the decrease is related to either older retirees who have left the labor force or younger people delaying getting into the labor force.

I see, the housing bubble kept things afloat. It prevented a full scale recession after the dot.com bust. The housing bubble actually helped with a minor recovery only for it to cause a much worst recession in 2008

In your opinion, would it have been better to have prevented the housing bubble while causing a more painful dot com bust? I know the housing crisis was caused by several factors, some going back to the 1980s. But the majority of it seems to have been caused by reckless lending from 1996-2006.

Second question. Most of the jobs lost to China seemed to be after China entered the WTO in 2000. Would preventing that have saved those jobs?

1.The reckless lending especially started shortly after September 11, 2001 when the Federal Funds rate was dropped to 1.75% and was dropped down to 1% from June 25 2003 to June 30, 2004 when it was raised back to 1.25%.

It was the rise back to 5.25% by June 29 2006 that led to the bursting of the housing bubble as the people who had received the 'sub prime' loans suddenly had to pay much higher interest rates as their loans rolled over.

If the interest rates didn't go up, would the bubble not pop?

It says 20% of home loans given in 2005 and 2006 were to people who would not have normally qualified. These were subprime loans.

75% of subprime loans were adjustable rates, meaning the rates would go up every 2-3 years

So, had rates stayed low could the recession had been avoided? Could the government than change the borrowing standards to avoid future subprime loans?

1.Yes, but it's not possible for the rates to have not gone up because, although it was the rise in the price of oil that directly led to the higher inflation starting around September of 2007, (the inflation rate peaked at 5.6% in July 2008) the inflation rate went from 2.3 to 3.1 to 3.3% starting in April 2004 and thereafter stayed above 3% nearly every month until August 2006.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/

However, I don't know the degree to which the rise in oil prices contributed to the bursting of the housing bubble though, because the reason inflation fell fairly dramatically in August 2006 is the economy was beginning to significantly slow by then. So, even without the dramatic increase in oil prices, many of those who had received the sub-prime loans had lost their jobs and weren't able to pay their loans, especially with the higher interest rate.

Again, I'm sure there are people with a much better expertise in finance here who can better answer how much the rise in interest rates that led to the slowing of the economy before 2007 vs. the rise in oil prices starting around October 2007 led to the bursting of the housing bubble.

Since as you mentioned there was weak GDP growth from around 2002-2005, in hindsight this housing bubble is a classic case of the application of Keynesian economics during a non recession: an increase in demand (loans) without a sufficient increase in supply resulting not ultimately in economic growth but in higher prices. And by 'supply' I'm not referring to an increase in housing supply so much as an increase in productive capacity.

As Milton Friedman put it: "too much money chasing too few goods."  
This is more evidence that focusing on the supply side (increasing productive capacity, or as we economists say 'increasing potential output') is the only way to sustain long run economic growth.

The only way ultimately for people to have more is for people to make more, and the only way people can ultimately make more is to expand productive property, plant or equipment (of course in the short term people can work more hours.)

In times like these, one way to think of money being lent from the bank as the same as any other good: when there is too much demand for loans, the bank raises its prices (interest rates) so, the Federal Reserve did not even need to raise its rate in order for interest rates to increase, but clearly the Fed actually should have risen higher, faster, but there must still have been demand to not do so due to the memory of September 11, 2001.

I'm sure most older people remember that after September 11, 2001 the country shut down for a few days and many people were afraid to go out after that, but President Bush told people to please go out, that it was their 'patriotic duty' to go shopping to keep the economy afloat.

The notion that became known as Keynesian Economics is that increasing demand leads to additional spending, and then as the same dollar is spent over and over again, that 'money multiplies.' (Money is broader than actual physical currency.) This is called 'the multiplier effect' or 'the long run multiplier' and is the core concept of 'demand side economics.'

1.As an aide, Keynes himself only argued for this during times of recession when there is obviously unused productive capacity (shuttered plants) and not during times of normal economic growth. Keynes never commented on that as he died shortly after World War II. So, the irony is that Keynes himself was never a Keynesian.

2.When Friedman showed that increasing demand without increasing productive capacity merely results in higher inflation, he commented 'the long run multiplier is dead.' This was a play on Keynes' phrase 'in the long run, we are all dead' but what Friedman actually meant is 'the long run multiplier is zero.'


2.Yes, the government can easily control loans for homes as was done in Canada by requiring banks to use a 'stress test.' So, if the lending rate is 5% for a home loan for a person, the government says to the bank 'add 2 or 3% to that and if they can't pay the home loan with the higher interest rate then they can't get the loan.

So, here's my understanding. The Iraq War causes gas prices to go up. The Fed raises interest rates to fight potential inflation caused by higher gas prices? Thus leading to housing bubble popping when subprime borrowers can no longer afford the higher interest rates from their adjustable loans?

The economy grew in 2004 and 2005, which Americans saw the fruits of that growth in 2006 and 2007. But growth was weakning in 2006 and 2007, so it was a double attack in 2008. Both job losses and rising interest rates.

1. Why did the economy slow down in 2006? Did banks finally stop giving sub prime loans?

2. Had the Iraq invasion never occured (say a Gore victory) could it have been possible for gas prices to stay low, thus keeping interest rates low? Thus preventing the recession?

My logic, the home loans adjusted every 2-3 years. So in 2008, folks who got loans in 2005-2006 were the ones getting the higher rates. Possibly those who bought homes earlier. Lower interest rates mean buying the US a few extra years.

3. Could the US government, with a few extra years, had prepreemptively fortified the banks? They could force them to do stress tests like what happened in real life. Than give them money in case the home loans went bust. They could have also required the banks to move the adjustable rate loans to fixed rate loans.

Of course, a recession was inevitable. At some point, a portion of the American people would be unable to pay their loans. Especially lower income Americans, the ones most likely to get a subprime loan

1.Oil prices rose from just under $45 a barrel in April 2003 to  $180 a barrel in May 2008 (adjusted for inflation) pretty much straight up, however there was an inflection point starting in 2007 as oil prices had 'only' doubled from April 2003 to around May 2007. The recession had started around 2007 before the worst of the oil spike. Also, a major reason for the rise in oil prices was the decline in value of the U.S $ on the world market (relative to other currencies) and since oil prices are priced in U.S $, even a barrel of oil at a flat price in Euros would still cost more with U.S $.

https://www.macrotrends.net/1369/crude-oil-price-history-chart

I don't know why the U.S $ declined at that time (relative to other currencies.) Again, there are people in finance who know more on these things than I do.

So, that explains the rise in inflation but also, the Fed would have raised its interest rate to support the U.S $, even though many conspiracy theorists believe the Fed wants a weak dollar. However, as said, in hindsight given the level of inflation at the time, the Fed still did not raise its interest rate soon enough or high enough.

2.I don't know because I don't know why the U.S $ declined relative to other currencies at that time. Hopefully somebody with expertise in finance here will answer.

3.One of the things about the Housing bubble collapse is that very few people expected it. What was occurring with these sub prime loans is that they were bundled together and sold off to mutual fund companies and other corporate investors, including other banks, I believe. The reason for this is that due to low interest rates and the rise in stocks, not as much money was being deposited in banks. So, the banks sold off these bundled loans (called 'mortgage backed securities') in exchange for money up front.

The people who bought these mortgage backed securities liked them having as many sub prime loans as possible because those had the highest interest rates. They thought these securities were safe because the ratings agencies like Standard and Poor's gave them top ratings. After the collapse, the ratings agencies stated that their ratings were merely 'opinions' and should not have been trusted as fact. Changing this is one of the things done by Dodd-Frank.

So, the reason the banks and these other institutions froze up after the crash is because they had no idea how much of their loans were bad loans, and in their confusion, they simply stopped lending, even banks that still had plenty of reserves in the Federal Reserve on hand.

So, the first thing the U.S government did was to buy the bad mortgages through the Troubled Asset Relief Program (TARP), but because of the loss of confidence in the banks and in the economy in general, the Federal Reserve engaged in this program called 'quantitative easing' (printing money) to assure depositors, people who wanted loans and the other banks that the banks had money.

However, again unlike what the conspiracy theorists believe, this was not 'free money' to the private banks, but involved the Federal Reserve buying Treasury Bonds held by the banks with the newly printed money.

Ok, I think I got the story right. Correct me if I am wrong

1. After the repeal of Glass-Steagall in 1999, banks engage in risky lending practices (although some started earlier).

Buying homes for people become much easier, even for those who weren't in the best financial situations. These folks are given subprime loans. Many of these subprime loans were given adjustable interest rates. At the time, rates were low after 9/11 and dot.com bust

2. The housing bubble helps the US recover from the dot.com recession quickly and fuels economic growth despite job sourcing to China and other macro economic conditions. The "good times'' that started in the 90s last longer than they should have. Strong growth in 2004 and 2005.

3. At some point, the USD weakens. A weaker dollar means higher gas prices. Higher gas prices mean higher inflation

To fight inflation, the federal reserve raises interest rates

4. The higher interest rates causes house payments to go up and weaker growth in 2006 and 2007, meaning people lose jobs. A double whammy for the poor, the folks most likely to have a subprime loan

To make the situation worst, some banks would bundle up these subprime loans and sell them to other banks. The banks selling these loans would get their money now, the banks buying these loans would make a profit later.

5. People start defaulting on these loans. The panic in late 2008 happens and the government needs to step in to prevent these banks from collapsing from not getting money from these bad loans.

Programs like TARP buy these bad loans, while banks are given bailouts to pay their bills.

6. The sheer panic causes banks to stop lending, killing economic growth from 2009-2014. The "jobless" recovery.

A. Could keeping the dollar strong have prevented all this from happening?
B. Is there a way to strengthen the banks without setting off a panic? Suppose Bush saw the impending disaster and set up TARP sooner

As a shorthand that's accurate enough:

I see now

As long as there was immense risky behavior from the banking and insurance industry from 1996-2006, there was going to be a bubble and it was going to pop. Unless you somehow manage to have low inflation and low interest rates indefinitely. And prevent both the War on Terror AND China entering the WTO destroying half of all American manufacturing jobs. And the trade deficit caused by America's addiction to cheap Chinese goods.

In hindsight, the risky behavior should never have been allowed. A slightly more painful dot.com recession and weaker growth in the 2000s would have been much better long term. No Great Recession means no jobless recovery, which means no Trump.

In roughly 3 years, the US made several key mistakes

-Allowing China to enter the WTO (2000)
-Allowing 9/11 to occur (2000)
-Allowing risky lending (2000-)
-No Child Left Behind (2002)
-Bush Tax Cuts (2001/2003)

I disagree with the part on China and you left out there would have been no very low interest rates which weakened the U.S $ relative to other currencies and helped cause the spike in oil prices.

The cheap Chinese goods also kept prices lower at the time (and up until Covid anyway) - although I know Paul Krugman doesn't agree with that, as essentially the United States 'imported' the productivity gains (expanding and more efficient property, plant and equipment - and workers- from China.) So, inflation would have been even higher than it was without Chinese imports.

Part of the whole 'supply chain' breakdown that led to the more current inflation was the decline of imports from China.

I've mentioned this before, but I'm always happy to do so again. Although free trade costs obviously identifiable jobs (and claims of other job losses), free trade also creates jobs in four ways:

1.Free trade means other nations reduce their tariffs and other non tariff barriers to trade (standardizing regulations for instance) which increases American exports.

2.The American rising trade deficit (current account) is offset by an investment surplus (capital account.) Again, simply follow the money. When an American buys a foreign good they sell American $ to do so (except for goods priced in American $ like most commodities)  and buy foreign currency to then buy the good. The intermediary who now has the American  $ can't buy foreign goods with it, so unless they buy commodities sold in American $ or buy something from the handful of countries that use the American $ as their currency (or buy something with the American $ on the black market) the only things they can do with the money are
1.Buy American goods (and services) which increases exports
2.Invest the American $ in the United States.

When it comes to all these things that keep the American $ from coming back into the United States, of course it isn't the total of that money that is outside the U.S that matters as much as it is the change in that total over a given period of time (the Delta.)

So, given this, it's a truism that a deficit in the current account (trade) must equal a surplus in the capital account (investment) plus this Delta adjustment (which is usually a very small amount.)

So, in terms of jobs, the investment, if its direct investment, results in new property, plant or equipment being made in the U.S, and if its indirect investment creates economic activity that creates jobs as well.

3.Free trade creates jobs at ports and other jobs required for exports.

4.Free trade means lower prices for goods which means people have more money to spend on other things.

All of these things are referred to as 'gains from trade' so the NET loss of jobs from free trade is, at worst, somewhere around zero.

I know some people dismiss this is propaganda from the national chamber of commerce, but it is mainstream economics and I can't see where the logic fails by 'following the money.'

I think it's clear that the logic of following the money is lost on those who oppose free trade in that they incorrectly believe that American $ that leave the United States never comes back.