“Two in one”

That´s two posts in one! First, Seattle is in the news:

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune — economically diversified cities where the boom was relatively restrained.

Not so. Seattle house prices went up for longer than and by as much as “bubble champions” such as San Diego.

At some point reality set in. Although classified as a “well behaved” city, Seattle was not immune from the recession (which was “great”). But that´s not reason enough because neither was Houston, but house prices in Houston have not dropped (actually are still slowly rising).

The figure below shows a positive and significant correlation between initial (end 2005) Price-Rental ratios and the size of the subsequent price fall from peak to through for several metro areas. It appears that Seattle house prices have still some way to go before they stop falling!

The “second post” takes up again Plosser´s interview in the WSJ. As a “fundamentalist” RBCTheorist, he firmly believes economic shifts are “structural”. So he feels pretty comfortable saying:

Mr. Plosser doesn’t see a deflation risk for the U.S. economy right now. Even those who were worried about deflation six months ago, he says, have begun to change their tune. That means that, with moderate GDP growth and low inflation in the mix, the only thing left as an excuse for QE2 is high unemployment. Can lax monetary policy change that picture?

Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.”

It´s outside his purview to consider the impact monetary policy had on the severity of the recession, so monetary policy cannot help “fix those problems”. Those people are so into “calibrating” that it is surprising Plosser doesn´t check the data before pontificating! And the story told by the data does not support him at all. The figures below show that for a very broad category of sectors, unemployment about doubled for most of them after the start of the recession in December 2007.

The second figure shows that construction has noticeable seasonality (hard to dig foundations in winter) but what pops out is the fact that unemployment for all categories really got going only after mid 2008, at exactly the same time that the floor dropped from underneath aggregate spending! Construction workers do not stand out at all. The “hole” dug by bad policy was deep and everyone fell into it!

But there are those in the extreme opposite camp that think monetary policy is playing the role of the “lone hero” and lacking help from the other “canons” at the hands of policy authorities. As usual, both extremes are VERY WRONG!

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