Cross-posted on Swifteconomics.

Do you have a very sassy New York-born Jewish grandma?  Chances are, she is exactly like Anna Schwartz.  Except in addition to being sassy, Anna Schwartz is also a noted and very knowledgeable American economist, collaborating with Nobel Prize winner Milton Friedman on their seminal work about the Great Depression, A Monetary History of the United States, 1867 – 1960.   The book is very detailed and criticizes government intervention during the Great Depression and its aftermath.   You can  read parts of it as a Google Book here.  This book changed the way many people thought about monetary policy and shifted the viewpoint that looking at money activity was not important to how the economy worked.

Please make me some matzah ball soup. Then school the Fed.

(Source: The Wall Street Journal)

Anna Schwartz is often not mentioned in lieu of Milton Friedman, but she contributed in equal parts to the research they conducted together.  You can see another piece they wrote, specifically focusing on the Great Depression, here. That was in 1963.  Schwartz, at 93,  is still working full-time at the National Bureau of Economic Research where she started her career in 1941.  Marketplace’s Kai Ryssdal recently interviewed her on her thoughts about the Fed’s handling of the current economic crisis.

She brings up some great points, on the transparency of the Fed:

The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don’t believe that it’s lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively.

I remember when we went to the Federal Reserve as part of a field trip with my university Economics Club (where I was the Vice President.  Don’t laugh at me,) and I got to sit in Greenspan’s chair as one of the Federal Reserve governors told us about the Reserve’s plans to become more transparent, primarily by releasing the minutes of their meetings to the public, earlier.  I remember then I was impressed, and defended the Fed’s plans toward transparency all the way to the end.  But, like Schwartz tells it, this isn’t happening.

Ballin' hard in Greenspan's chair

As many economists know, transparency is key to free market functionality, and essentially, the big problem that brought down credit default swaps: no one knew what was going on with them, hence, they couldn’t be valued correctly.

She also is not happy at all with what Bernanke is doing:

Ryssdal: It sounds like you’re frustrated with Chairman Bernanke and the White House, that they maybe haven’t learned the lessons of history that you and Milton Friedman wrote about.

SCHWARTZ: Well, I think that that’s a fair statement. Considering Bernanke’s background, you would have expected a much more, should I say a tidy kind of performance by the Federal Reserve. Seemed to be something that was ad hoc and introduced without considering all the implications.

It’s one thing when TV pundits that don’t know much about economic policy criticize or praise government actions to reverse the recession.  It’s another when you are schooled by someone who could be your grandma, if your grandma had a Ph.D. in economics and was one of the foremost monetary policy analysts in the world.

So, there’s been a lot of media coverage recently about what this crisis means, and how to explain it to the common man.  Terry Gross recently did an interview with Gretchen Morgenson looking at AIG spending and how it’s tied to mortgage-backed securities, and all that fun financial terminology that eventually led to America ending up in the toilet, swirling slowly around the bowl.  And NBC’s Dateline is also looking at how Wall Street and Main Street are linked together.  If I have to hear that phrase one more time, by the way, I’ll scream.  I’m glad that all of this investigative media is going on after the fact. As they say, hindsight is always 20/20 (but only if you still have a vision coverage plan. )

The more I hear and learn about this, the more sleazy I feel. I am looking inside Upton Sinclair’s The Jungle, only about asset-backed securities and the nooks and hideous crannies of capitalism.  I don’t mind capitalism at all.  What I do mind, is the morons who decided to purchase sub-prime loans. A lot of shows treat them like they are the victims of all of this. Oh no, Countrywide gave them too much money and they couldn’t afford the payments on the house.  Well, guess what, dipwad. It’s YOUR responsibility to know how much house you are able to afford.  It should be the first thing you look at. It’s actually something I am looking at right now as my husband and I are beginning to look for a house that we will buy sometime in the fall or spring of 2010.  Do I want this house?

You bet your sweet biddy, I do.  I want to park my fine whip in that two-car garage and relax with a mojito on the second…or third floor while my maid asks me if it’s time to take out the spring Wedgewood china yet. Maybe if I’m feeling bored, I can go out onto the mini-sea that’s behind that house.  Or play polo with the horse I buy to match the siding.  I could do all of that. But, I’m not retarded.  I know, as much as I yearn for open foyers and Pella tempered windows, I cannot afford that house.  Apparently, the owners couldn’t either, because it was one of the houses my husband, mother-in-law, and I saw this weekend as part of our foray into foreclosed homes as a possibility for our first house.  My mother-in-law (and later my mom, online), took one look at the house and said, “But how are you going to wash all those windows?”  That’s because they’re not retarded.  They understand that if we buy that house, no matter the price (because now the bank owns it), we will go into DEBT.  We are not ballin’ as hotshot DC corporate types.  In fact, we are ballin’ on a budget.  If I buy grapes for more than $1.49 a pound, I cry for a couple days softly into my pillow.

So if we can understand it (via our immigrant parents), why can’t Americans that were born in this country?  I don’t mean to completely harangue against all Americans.  But the Americans that bought houses and didn’t understand their obligations are ruining my country for me.  If you are buying a house for $600,000 and you are making $10/hour, it is totally not the company’s responsibility to babysit you and make sure that you are living within your limits.  Maybe in Finland.  But definitely not here.  And now, I am screwed, because of people that failed to do their own homework.  And the government is now bailing out those companies who didn’t do their homework as well and check out these shady borrowers, but instead resold it to Lehman Brothers, AIG, etc, and crashed the economy.  Thanks, fellow subprime Americans.  Now not only will I not be having my mojito, I’ll probably have to grow the mint for it in my new-age Victory Garden in the future, if the government keeps bailing out the companies right and left.  I, for one, am jubilant about the prospect of paying off billions of dollars way into the future.

Since most everyone in my extended family knows that I am an economist, I get frequently asked when the recession will end, as if I am Frodo holding the ring to throw into Mount Doom, where Mount Doom is really a combination of Freddie Mae, Citiman Brothers, and Goldman Ford.

So, here goes:

The economy will hit the bottom in the third quarter of 2009 and start slightly trending upward in the fourth quarter. What does this mean, and how will it come about? The Business Cycle Dating Committee of the National Bureau of Economic Research has predicted that

The most likely duration for this recession is somewhere between 18 and 24 months, with the trough likely at some point in the second half of 2009. The magnitude and the timing of large projected fiscal stimulus from the incoming Obama administration in early 2009 could ultimately have some bearing on the timing of the recovery. However, there is a high probability that this could be the longest postwar recession of all (the previous record was the 16-month recession in 1973–75).

(via my company’s chief economist)

What will it take for the economy to turn around, and how will we be able to tell?

Economic growth, the opposite of recession, depends on GDP (gross domestic product.) The economic equation for GDP is

Y=C+I+G+(X-M)

where

C=Consumption;
I=Investment (as in business investment into new machinery, new methods, etc.);
G=government spending and
(X-M)=exports minus imports.

There are several ways according to classical textbook economics to get out of a recession:

1) More government spending to increase G and therefore make Y bigger

2) More consumer spending (which is what Bush was trying to encourage with the stimulus or

3) More business investment through lowered business taxes, giving them incentives to spend more money spreading their business instead of being more cautionary.

So what has to happen in order to alleviate this recession?

1. The extra supply of houses in the United States must decrease so that demand can catch up and boost the housing sector, the segment most hurt by (and the one most hurting) the economy. This will stimulate consumer spending, as well as business investment. This may happen either through a stimulus package for consumers or friendlier terms on loans by banks. What may also help is the lowered federal funds rate (the rate at which banks loan to each other, which directly translates into the interest that you get in your bank accounts, such as your savings account.)
2. Friendlier terms on loans by banks, which allows consumers and businesses to put more money into savings. Think about it, would you rather save money at a 2.4% interest rate (the current rate on my ING account) or at 4.5% interest rate? While the Federal reserve is trying to stimulate spending by keeping interest rates low, as rates increase, banks will have more money to lend out, resulting in more loans and more business investment. You’ll notice that in the GDP equation, some parts can balance others out.
3. Oil prices need to remain low in order to lower investment prices for businesses. If you’ve been listening to the news, businesses are constantly talking about how operating costs have increased. Transportation costs, of which oil is a part, have had a large role to play in that; however, this may be hard to do given that OPEC is already trying to instate production cuts to hedge its losses.

4.  Consumer demand needs to increase, which may or may not happen with Obama’s proposed stimulus package.  While this helps in the short term, it gets us into more debt in the long term.

The problem is that the economy is not a closed laboratory that can be operated on. It is a living thing with so many millions of moving parts that it must be a nightmare for the Fed, the Treasury, and other regulators.  This is one of the reasons that economics is an imprecise science at best.  Even if you increase consumer confidence, what’s to say that investment will also increase?

Also, are government policies efficient?

These are the questions facing policymakers, as well as academic economists, and one of the reasons it is next to impossible to do anything about a recession right away.   One thing that helps, though, is public sentiment.  So, if you think positive, and your neighbor does, and investment in stocks starts again, which starts a chain reaction, the economy may become healthy again.