LeRoy and I were discussing the election, and I opined that 2008 most strongly resembled 1992 as far as the economy goes, and since Clinton won by 5%, perhaps Obama would win in 2008 by a similar margin. LeRoy thought that the 2008 economy rather resembled 1980 (where Reagan beat Carter by a greater margin), and coincidentally, today's Marketwatch has an article comparing 1980 to 2008.

Arkady, who posts here occasionally, and I have argued which was worse--1992 or 2008. Here is his latest statement on it; he's softened his position somewhat, but still holds that 8 years of Clinton did more to restore America to economic health than 8 years of Bush did to weaken it.

Might be good for a discussion.

The 1992/2008 debate is a fun one, since there are great points to be made on either side. It comes down to whether you pay more attention to the snapshot or the theoretical positioning for the future. The snapshot for 1992 was a lot worse (higher unemployment, higher poverty, lower real incomes, longer negative trends, higher crime rates, worse social conditions, etc.) But 2008 is arguably more poorly positioned for the future, since we have an older demographic (and thus less time to deal with the enormous public and private debt), and since we've squandered so much international goodwill. In 2008 we're also further along towards "peak oil," without meaningful progress towards addressing that crisis, and we're much further along towards environmental catastrpophe without serious moves towards a non-carbon-based economy.

This past June was the worst month for the stock market since 1930, according to Robert Shiller of Yale housing prices have fallen more than they have since the great depression in real terms, oil is setting all time costs in real terms, major financial institutions have required massive intervention to maintain solvency in a solvency crisis of global porportions, (this aint your garden variety s&l crisis). These aren't blips that mean a downturn comparable to something which has occured over the past two or three decades, this economic situation is the 8.0 earthquake in the major urban setting, it is a big one. (Although I still believe delusion may allow for a brief recovery).

Still the saviours are really seen ahead of time. Can new developements in alternative energy make it bigger than the IT revolution? Can new treatments reduce the cost of chronic care for the aging? Aside from simple policy changes that could make life easier such as sane tax, health care, and employment policy.

The problem is that for these things to happen on large scale you need to loosen capital markets and create a growing economy built around real economic activity, this to allow for the support the sane tax policy. Right now we are just bailing water trying to keep the boat afloat, and the previously mentioned issues, things like demographics and issues having to do with global warming and resource shortages are going to make it very difficult to get past that bailing water point. The potential for the good to happen has to buck such a spiral of downturn that it is almost hard to imagine.

I heard something the other day which I found interesting, it was from one of these people arguing for sustainability and I didn't follow up on their arguments to verify the rhetoric, still...They said that the U.S. has a carbon footprint of about five planets, meaning that if everyone lived the way people here do it would take five planets of resources to allow that. O.k. no big surprise for me there, but they also said that Europeans have a carbon footprint of about half that, or two and a half planets. Now that surprises me. And while I am sure some of you out there know enough about such things to argue the real ratios the point for me is what are the implications of this on global economics, particulary growth. Oh sure, alternative "green" indsutries create economic opportunity, but we are still talking about stuff here. Plain stuff. And how there isn't enough stuff to allow for the continuation of the level of consumption which powers the economic models we are pursuing. That stuff may just be potable water, or copper, or wheat, or wood, or cotten, or affordable syringes, but the stuff isn't there. We may learn to live simpler and better, but the economic models have to take a beating in the process.

Earlier issues were just structural, as much as funding entitlement programs may just be structural no matter how daunting they seem. But there are real problems which must be dealth with at a time when capital markets are in tatters, and will remain so unless the miracle of vibrant growth returns.

So while comparisons to earlier scenarios may give us signposts as to what is sane policy now, e.g. how dangerous inflation can be to economic stability, we must be fully aware of what historic porportions our problems now are.

As for how this impacts the election I think a real wild card there is the complete break from previous administrations we see. McCain may be the ideological stepchild of Bush but he is seperated enough from the status quo to strongly appeal to independents. I think the election is wide open at this point, and I don't believe the failures of Bush will weigh too heavily on who gets elected. November is a million years away in political terms, heck Gore squandered all the gains of those Clinton years by simply being smarmy and condescending during debates. All it takes is something simple like that on either side to turn the election.

You had a lot of good observations, but I think you're trying to look at the whole picture: the environment, technology, investment and tax policy, and...politics. I don't deny the importance of these other issues, but restricting your scope to straight economics, which election year most resembles 2008: 1992, 1980, or (God, forbid) 1932? LeRoy mentioned 1973 and 1930, but those were not presidential election years.

Secondly, if you agree with me that this year most resembles 1992, do you think that on balance we are in better or worse shape than we were in 1992? If worse, would you go as far as to compare 2008 with 1980? Why?

This past June was the worst month for the stock market since 1930, according to Robert Shiller of Yale housing prices have fallen more than they have since the great depression in real terms...

I don't believe that the 17% or so average decline in home prices we've seen since 2006 is worse than the declines we saw in the Great Depression; I think Shiller may have said that prices were falling faster (15%/year) than they did during the Depression. Recall that in some states, such as Florida and California, home prices were cut in half during the Depression, but it took several years.

I said that the stock market had it's worse month since 1930, I should have said it's worst June since 1930. Sorry.

James Howard Kunstler argues that we are entering the first stages of another Depression and furthermore that this one will be worse, since then we still had several million family farms and we had a robust railroad/resource/industrial base for a comeback. Now, we have... what?

So, if we're making historical comparisons, I'd say either 1932 or 1860. We're headed for a crackup!

Back in 1930, we had huge amounts of oil still just waiting to be extracted. [That might be what you meant by saying we "still had...a robust...resource...base for a comeback", but I thought it useful to make it more explicit.]

Back in 1930, the world population was somewhere around 2 billion; today, we are pushing close to 6.8 billion. Carbon dioxide levels in the atmosphere (not to mention methane and other GHGs) are much higher, and rising at a much more rapid rate.

I think we are looking straight down the barrels of a conjoined and systemic ecological/economic crisis, for which there is really no past parallel.

Thus I am not sure this 'game' of trying to figure out what year in the past this year most closely resembles has any practical use at all. It is just a fun political parlor game.

I don't think people yet realize just how much trouble we're in.

On a related note, though, The Wall Street Journal had an editorial today comparing the election of 2008 with that of 1896. The author said that the last time we had a charismatic populist (William Jennings Bryan) running against a moderate conservative (William McKinley), the conservative candidate won, and in fact started a period of Republican dominance that continued until 1932, interrupted only by Woodrow Wilson, whose election the author attributed to the third party impact of Teddy Roosevelt in the 1912 race. This was, of course, a McCain pep-talk puff piece...but it relates to the discussion going on here.

A funny thing in the editorial....it said Bryan was only 36 years old in 1896...which made me wonder...don't Presidents have to be 40 years or older? [Representatives have to be 25, Senators have to be 35, Presidents have to be 40, right?]

I think it's 35 for a president.

I think my question is a little more than a political parlor game, as the 2008 economy will very likely determine the outcome of this race--which may indeed change the way we deal with the issues Gingham and Revrick talked about. Whether an Obama would really get us out of the woods on energy/environment would be a political parlor game. There is no way of knowing, as there are too many variables to consider. But you, yourself, have pondered how different things might be if Al Gore hadn't lost by one vote (5-4) in the Supreme Court and one vote (271-269) in the Electoral College. Most people vote their pocketbook, and Obama wouldn't stand much of a chance were this 2007 instead of 2008. Bush and Bernanke were counting on the economic 'boom'--such as it is--continuing into 2008. Their timing was off by one year.

I still stand by 1992, rather than 1980 or 1932. The Misery Index in 1980 was almost 20%, and the unemployment rate in 1932 was nearly 25%. Don't know much about 1860 or 1896, but Bryan was a true populist and Obama is now running as fast as he can from that position.

In non-economic respects, the 2008 election resembles 1996: an older, curmudgeonly Republican senator facing a younger, more charismatic and optimistic Democrat.

Parallels to history are usually shaky, and this is no exception.

Interesting that nobody shares Arkady's more sanguine view.

The Presidential age requirement is 35, not 40 (and it is 30, not 35, for the Senate). Don't know why I was confused about that; maybe it was because John F. Kennedy was the youngest President ever, being 43 when he was inaugurated, and for some reason, I was thinking that he was 'barely' old enough. Not so.

Genedio says: In non-economic respects, the 2008 election resembles 1996: an older, curmudgeonly Republican senator facing a younger, more charismatic and optimistic Democrat.

LeRoy: With a major difference, though: In 1996, that 'younger, more charismatic and optimistic Democrat' was an incumbent President, with four years of Presidential experience behind him. I think in 1996 a lot of Americans were voting for 'the devil they knew, rather than the devil they didn't know'.

Genedio also says: I still stand by 1992, rather than 1980 or 1932. The Misery Index in 1980 was almost 20%, and the unemployment rate in 1932 was nearly 25%. Don't know much about 1860 or 1896, but Bryan was a true populist and Obama is now running as fast as he can from that position.

LeRoy: The unemployment rate being 25% in 1932 was why I said there was 'no way' the economy would be looking that bad by November, and suggested early 1930 as an alternative. But, if we are going to use the 'Misery Index' to make comparisons, it behooves us to recognize that there have been some pretty marked changes in how both unemployment and inflation are measured since then. The official unemployment rate right now is 5.5%, and may well be closer to 6% by the time November comes around; but some alternative measures of unemployment have it as high as 9% right now. There are a lot of 'discouraged workers' out there, and a lot of underemployment as well, with a lot of part-time workers who are desperate to find full-time employment. Plus, the U.S. currently incarcerates ~1% of its working-age population. As you well know, the inflation that the American public is feeling is certainly higher than the 'core rate' the government is fond of reporting. I think the misery index is probably closer to 16% right now, which I think puts the number closer to 1980 than 1992. In 1992 we were actually coming out of a mild recession. In 1980, we were just going into a very severe recession...and I think that is what the American public is increasingly expecting now. The numbers of people in the polls who think that the country 'is headed in the wrong direction' and that 'the economy will get worse in the next twelve months' would tend, I think, to support that claim.

The rather astonishing fall of Freddie Mac and Fannie Mae in the stock market today (they were down 50% at one point during the day, being both already down by ~85% from their peak) should have disillusioned all the 'optimists' out there who keep saying we are 'almost out of the woods'. This is going to be a financial crisis much worse than the S&L crisis that was a primary cause of the 1992 recession.

Bryan was a 'true populist', as you say, but he was also a very ignorant man, famous for his later involvement in the Scopes Monkey Trial in Tennessee. I am actually glad he did not become President. Not sure what kind of country America would have become in the counter-factual world where Bryan became President in 1896. Something tells me we would not have become the superpower that we became in the 20th century.

I agree with them all, and posted about Fannie and Freddie at KFS and BOTF. (No sense in posting here preaching to the choir on that one). As it happens, Fannie and Freddie subsequently rebounded, but I don't think they're out of the woods by any means, and I think a federal bailout--estimated to cost some $5 trillion--is pretty inevitable. That will finally destroy the dollar, and perhaps the bond market. I don't envy Obama, and hope he becomes a lot less likable before he gets elected so we won't have to feel too sorry for him. Too bad about the Dem Party, but I'm already feeling less sorry for them with the likes of Dodd and other clueless congress members. May have to reassess which party I can wholeheartedly support--but that's another issue for another post. Instead, the economic 'meat' of your reply:

LeRoy: But, if we are going to use the 'Misery Index' to make comparisons, it behooves us to recognize that there have been some pretty marked changes in how both unemployment and inflation are measured since then. The official unemployment rate right now is 5.5% [I believe this is referred to as the U3 number], and may well be closer to 6% by the time November comes around; but some alternative measures of unemployment have it as high as 9% right now [the U6 number]. There are a lot of 'discouraged workers' out there, and a lot of underemployment as well, with a lot of part-time workers who are desperate to find full-time employment.

Plus, the U.S. currently incarcerates ~1% of its working-age population. As you well know [and have pointed out ad nauseum--even more than has Sovereign], the inflation that the American public is feeling is certainly higher than the 'core rate' the government is fond of reporting. I think the misery index is probably closer to 16% right now, which I think puts the number closer to 1980 than 1992.

In 1992 we were actually coming out of a mild recession. In 1980, we were just going into a very severe recession...and I think that is what the American public is increasingly expecting now [a look at the consumer sentiment expectation figures really bolters this argument]. The numbers of people in the polls who think that the country 'is headed in the wrong direction' and that 'the economy will get worse in the next twelve months' would tend, I think, to support that claim.

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I have broken your original paragraph into three. I have a question about the first paragraph, a comment on the second one, and agree with the third--with the proviso that interest rates and (official) inflation were quite high in 1979 and 1980, while rather low in 2007 and 2008. The way we are suddenly going into this recession of consumer sentiment, finances, and expectations is very different from the way we went into the 1981-2 recession, which actually started in 1980. People weren't leveraged to the hilt in 1980 (the savings rate had been still positive for many years), but they are today--and were somewhat in 1992. Recall that housing prices dropped from 1990 to 1992, and the cumulative drop was comparable in many places, 20% or more. What California and Hawaii experienced between 1990 and 1993 is now being experienced by most of the country, as more Americans drank the financial Kool-aid during the 00s.

Re: incarceration rates, have they really risen that much since 1992? I suspect that the premature-- but in some cases perhaps elective retirements of many Baby-boomers has artificially raised the unemployment rate more than the increased incarceration rate has lowered it. Did Jimmy Carter's official unemployment rate use U3 or U6, or yet a different measure? I'm familiar with John Williams' arguments, but I've never really looked at his methodology (you have to subscribe to his site in order to do this, I think). One counter-argument to Williams: if inflation were really as high as he says it is, real GDP would be several points in the red, and moreover, we would have been living in a deep recession for several years. We wouldn't have seen corporate profitability or employment remain at these levels. You can only fool people for so long. That they have been fooling people to some extent is shown by the NYT poll you alluded to, which showed that 81% of respondents think we're on the wrong track. But I don't things are quite as bad as Williams believes.

Genedio: As it happens, Fannie and Freddie subsequently rebounded, but I don't think they're out of the woods by any means, and I think a federal bailout--estimated to cost some $5 trillion--is pretty inevitable. That will finally destroy the dollar, and perhaps the bond market.

LeRoy: Between the two of them, Fannie Mae and Freddie Mac are sitting on $5 trillion worth of home mortgages...but to say that a bailout would cost $5 trillion would imply that all of those mortgages had gone completely belly-up. Surely that is a serious exaggeration of the risks we face...which are real enough. If a bailout really does become necessary (and Fannie Mae and Freddie Mac probably are 'too big to fail'), I would guess that it would be more in the neighborhood of hundreds of billions, rather than trillions. Still bad enough, and it could still be enough to be 'the straw that broke the camel's back', as far as the U.S. financial system is concerned. Some people are saying a long-term loan from the Fed to the two GSEs is more likely than an out-and-out bailout...which would be very unpopular with U.S. taxpayers. [There was a recent posting in Moneybox that gives some indication of how upset many Americans would be by that...I think it was titled 'Hell No!! This Means War!'...or words to that effect.]

On the other hand, I just saw a posting which claimed that the United States has seized IndyMac, the big Countrywide spinoff that was a major player in the home mortgage market. They have suffered a major bank run in the last week. If true, this is just another thing that is really going to roil the financial markets. Haven't verified that posting yet, though.

Genedio: Too bad about the Dem Party, but I'm already feeling less sorry for them with the likes of Dodd and other clueless congress members. May have to reassess which party I can wholeheartedly support-

LeRoy: I think Dodd is nothing but a shill for the FIRE sector of the economy. I was amazed that some people actually suggested him as a possible running mate for Obama--I think that would be a huge mistake. Plenty of other Democrats I don't like, either...so I have never been a wholehearted supporter of the Democratic Party. But I have been pretty consistently voting Democratic for the last quarter century, given the alternative of the Republican party. I did vote for the renegade Republican John Anderson in the 1980 Presidential election, though I now realize that I 'should' have voted for Jimmy Carter, as I did in 1976.

Genedio: The way we are suddenly going into this recession of consumer sentiment, finances, and expectations is very different from the way we went into the 1981-2 recession, which actually started in 1980. People weren't leveraged to the hilt in 1980 (the savings rate had been still positive for many years), but they are today-

LeRoy: Well, and that is exactly why I find the current economic situation so worrying, much more so than 1992, and perhaps even more than 1980. That is why, with plummeting home prices and a crashing financial sector, there is a real possibility of an ugly debt/deflation spiral. Must give Ben Bernanke nightmares, I would think. Probably is why he hasn't raised interest rates, despite the energy/food inflation that is terrifying Americans. And I would add that the government is much more 'leveraged', as well; there is really no more room for further fiscal 'stimuli', or, if it is done, it will be done with more and more 'funny money'. This is a real ugly situation, and it reveals just how much damage Bush II has done to the American economy (and, by extension, the world economy). And it is why I cannot agree with Arkady if he really thinks that we are in better shape in 2008 than we were in 1992...

The seizure of IndyMac has been on the local (southern California) news all evening. It is true enough. The speculation has been that the government doesn't favor running businesses and will try to find a buyer soon. Actually, I would go further and say that this government doesn't favor running anything.

Phil: I would go further and say that this government doesn't favor running anything.

LeRoy: They seem to 'favor' running America into the ditch. They have been trying very hard to do that, and the latest indications would tend to suggest that they have succeeded.

Thanks for the update on IndyMac. Hadn't seen anything on the MSN home page on it yet, so didn't know if it was true.

I bet it is going to be a very interesting day in the markets on Monday.

From the New York Times:

<link>

What Are the Consequences of a Government Bailout?

A bailout would potentially put taxpayers on the hook for billions to offset Fannie's and Freddie's losses.

It would most likely make it more expensive for the United States government to borrow money in the future, since the government's potential obligations, which currently stand at about $9 trillion, would rise by an additional $5 trillion.

Is this in effect a nationalization of the real estate market? The govt. gets the houses after borrowing $5 trillion to settle Fannie and Freddie's debt?