Copied and Pasted by Jennifer Ng
Investors have lately embraced the possibility that just maybe the economy is improving. If that’s right — and given the economy’s tendency to bounce back after hard falls it just might me — it will be welcome news. But a respite may not be the same as a lasting recovery.
There is, of course, the matter of the banks and their balance sheets. Japan saw growth rebound several times throughout the 1990s, but that didn’t mean its problems were over. Indeed, those fitful false starts were problematic, because they helped sap the government’s political will to make the hard decisions it needed to on the banking system.
Beyond the bank balance-sheet problems, there are structural problems to consider. In recent years, the finance sector grew far larger than economic fundamentals said it should be. Thomas Philippon, an economist at New York University’s Stern School of Business, estimates that it was 8.3% of GDP in 2006. He thinks that a more natural level would be around 7%. What’s more, he and University of Virginia economist Ariell Reshef estimate that, controlling for education and employment risk, finance workers were paid about 40% too much in 2006.
One thing the outsized finance sector was doing was helping underwrite a lot of consumer spending. Last year, household liabilities came to 35% of household financial assets, according to the Federal Reserve, compared to 22% in 2000. That jump in debt levels coincided with a jump in consumer expenditures as a share of GDP — it averaged about 71% last year, compared with 67% in the 1990s.
Click here to read more.
There is, of course, the matter of the banks and their balance sheets. Japan saw growth rebound several times throughout the 1990s, but that didn’t mean its problems were over. Indeed, those fitful false starts were problematic, because they helped sap the government’s political will to make the hard decisions it needed to on the banking system.
Beyond the bank balance-sheet problems, there are structural problems to consider. In recent years, the finance sector grew far larger than economic fundamentals said it should be. Thomas Philippon, an economist at New York University’s Stern School of Business, estimates that it was 8.3% of GDP in 2006. He thinks that a more natural level would be around 7%. What’s more, he and University of Virginia economist Ariell Reshef estimate that, controlling for education and employment risk, finance workers were paid about 40% too much in 2006.
One thing the outsized finance sector was doing was helping underwrite a lot of consumer spending. Last year, household liabilities came to 35% of household financial assets, according to the Federal Reserve, compared to 22% in 2000. That jump in debt levels coincided with a jump in consumer expenditures as a share of GDP — it averaged about 71% last year, compared with 67% in the 1990s.
Click here to read more.
No comments:
Post a Comment