This is a bad time to be an economist. If you were fresh from the womb and had no past opinions to defend……………………………… it might be a fine time to be an economist……………………………….. But for the rest of us--looking back at our……… pronouncements of the past 15 years  it is a bad time to be economist? 

Four years ago we economists were writing learned papers about…………………. how ……….(we) had finally learned…..to control…if not completely eliminate the business cycle 

We have been seeing these …… regularly since at least 1825.And ……………….claiming ……………… we licked  (them)………………. since 1825

Yale professor Irving Fisher thought…in the 1920s--that the founding of the Federal Reserve ……………………. winning ……. the war of drugs….the passage of Prohibition had ……… eliminated the business cycle

In the 1960s the Commerce Department… was so convinced …… they changed the title of (the)…….Business Cycle Digest to Business Conditions Digest. (so) they would no longer be tied to this outmoded idea ….there was…….(a)….. business cycle.

They were all wrong.

And now in .the greatest….catastrophe since the Great Depression…(we’re)………………… saying: "what happened?"

Investment bankers calculated …. they could produce ….assets that they could claim were safe without the rating agencies blowing them up…. so they turned their financial alchemists ………………… turning risky-mortgage lead into derivative gold. (The)………. got out the can of gold spray paint and let loose.

Then the salesmen got to work, saying that this time it was different-………. the securities that we are selling you are as good as U.S. Treasury bonds.

We. economists had worries..But. not about systemic risk  from subprime.……….our worries were ………. Glass-Steagall repeal. (and) Fannie Mae.

And Fannie Mae was not the big problem… If we had actually had a Fannie Mae-……crisis... It would have worked out like the savings and loan crisis …..: costly, ….(but) would not have induced any other bank failures

 Alan Greenspan really is……………………………. a follower of Ayn Rand. ………ask him--"do you think there should guardrails on the ledge of the Grand Canyon?"--and he might well say no--.

 important, it is a big political looser for regulators to go before Congress. The Democratic members would whack them: why aren’t you letting my constituents buy the houses they want to buy? The Republican members would whack them: why aren’t you letting my contributors make the loans they want to make?" 

most important, however, was the overall belief on the part of the regulators that they could handle it. Subprime was a small asset class…. The Federal Reserve was powerful. ………(it) could clean  up…so that we would not suffer from …….. a deep recession. The Federal Reserve had handled…..1987 ….. Black Monday,…. 1991 with the Savings and Loan …. 1995 with the Mexican crisis, 1997 with etc .etc………..

 We did worry back in the mid-2000s…………………..? I remember back in 2005 a bunch of us quizzing ………………. Tim Geithner……………….. We asked a lot of questions about the dollar and global imbalances. We asked no questions about subprime-k.

Even in the spring of 2008, when I was a worrywort, the general line was that all the losses in subprime mortgages had a maximum value of $500 billion in a global economy with an $80 trillion asset base………………... And there were .... fancy derivative securities ……………………………… to spread the risks.

But ……………………….. the derivative securities didn’t spread risk, they concentrated it.

There was regulatory arbitrage: banks decided that now that we’ve gotten Moody’s to rate this security as AAA we might as well hold them as if they were AAA. And it turned out that the banks themselves did not have any idea what their risks were. …………………………...

So we had the crisis, and the collapse. We had the subprime losses. We had the general panic as everybody feared that the large highly-leveraged money-center banks' debt was no good because they held a lot of subprime and their subprime losses had eaten through their capital.

It was the story that we have seen over and over again since 1825.

 ……………….But because one person's spending is another person's income, stopping spending stops income too--so there is………………………………….. a fall in demand,………………….. that further increases risk and further increases people's desire to cut back ……………………………………. The result is the deepest downturn in the post World War II era, .

Now, this downturn is not nearly as bad as it could have been

if you could go to Tim Geithner get him to tell you what he thinks, he would say that a 10% unemployment peak is not a good thing but it is not 17%, and it is definitely not 28%. He would say that he and his peers have done a lot better job at handling this than their predecessors 80 years ago did handling their problem.

And he would be right. But now we have a stubbornly persistent slump in the economy

 And there is the problem that Washington DC has degenerated into pure Dingbat Kabuki theater on lots of levels….. (Its) focus on  the long-run fiscal stability of America is keeping it from …………….. any effective steps to……………………boost employment ….. now…………….the way the rescue of the banking system was carried out convinced (it) ………… enrich(ed)  the top 1% of Americans at the expense of everybody else.

…(Now). we face a very long slog……. We will not for a long time ……………get back to the 62 to 64% of the adult population having jobs . that is the depressing overall macroeconomic picture.

I wish I could paint a better one.

But what is, is.

 I can’t look forward and see …………………….immigration fall. Move any Indian engineer with an M.S. degree from Bangalore to the San Francisco Bay and you double their productivity. …………. anybody gutsy enough to crawl through a storm sewer into San Diego from Chiapas to the United States (will) quadruple their productivity. …. And when they get here and attain an American standard of living they will want to buy houses.

That means that the long term picture for………………………….construction has to be bright.

…………………………………………………………………………..

But that will not come until we get full recovery. And each month that passes with no further upward movement in the employment-population ratio makes me extend by two months, my forecast of when that full recovery will come.

http://delong.typepad.com/sdj/2011/05/the-economic-outlook-as-of-may-2011-yes-this-is-called-the-dismal-science-wh