But looking forward, the Taylor rule says that the Fed should cut rates a lot from here — in fact, to negative 6%. That’s not surprising: we’re clearly opening up a huge output gap, inflation is turning into deflation.

The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should.

He’s been beating this drum pretty regularly since that time, writing many posts on the liquidity trap and zero interest rate policy. This one is long (and, as he says, wonkish) while this one gets to the nitty gritty. What it comes down to is this:

The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem.

Of course, that’s the opposite of what we’ve been doing lately, but that’s beyond the scope of this post. What made me want to write about this today was a graph and two paragraphs in Calculated Risk. First, the graph:

And now, the real meat of this post—thanks for sticking around—the two paragraphs that sum up our situation so well:

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation – and that leads to even more demand for housing units – and more jobs, and more households – a virtuous cycle that usually helps the economy recover.

However this time, with the huge overhang of existing housing units, this key sector hasn’t been participating. This is what I expected when I first posted the above graph two years ago!

The housing bubble really pooched us, as I’m sure you’re aware by now. But we can’t rely on the housing sector to help bring us out of the unemployment slump this time around either, because we can’t lower interests rates like we normally would.

The proposal called for the government to provide $14 billion in emergency “bridge” loans, meant to carry them (notably GM and Chrysler, though Ford was lobbying for the money in the hopes of preventing cascading industry failures) through the winter and alleviate a cash shortage. The money for the loans, as proposed, would have come from a $25 billion fund approved by Congress and and President Bush earlier this year. That fund was already set to be loaned to the domestic carmakers, to help them retool and produce more fuel-effecient vehicles.

Senate Republicans did what they know best: try to screw folk over. They called for autoworkers at the Big Three (mostly union members) to take a huge pay and benefit cut. They called on the carmakers to restructure their operations as a condition of the loans. They called on the firms to also reduce their debt burden by allowing bond holders to take equity in the companies receiving the loans.

And everybody said, “great, fine, just give us the money.” The United Auto Workers wanted to phase the paycuts in over 18-months, rather than the six months required by GOP senators, but otherwise, the Republicans managed to squeeze a huge number of concessions from the autoworkers and the domestic carmakers.

But, because the union guys weren’t ready to throw away their wages and benefits right when the recession is getting really bad, GOP senators balked at the bailout. They killed it, killed it dead. And that’s what I don’t understand.

The carmakers are going to get their money one way or another – either President Bush (struggling to do something, anything, to savlage his reputation) will tap the $700 billion TARP, or a President Obama and a Democratic Congress with larger majorities in the House and Senate will approve a deal. And you know what? The UAW and the carmakers won’t have to make anything near the same kind of concessions.

Now, I don’t know whether the automakers deserve a bailout, nor do I know whether the UAW workers should have the pay and benefits they have now (I’d refer you to this chart though). I don’t understand what  the Republicans in the Senate hoped to accomplish by killing the deal. They have nothing to show for the obstructionism: no concessions from the car makers, no concessions from the UAW, and Democrats will either get a legislative win in 2009 or they’ll get what they wanted all along: President Bush using the Wall Street money to save the Big Three.

Even worse, Republicans have also written off the Rustbelt states for good – they’ll be persona non grata for years come election season. To top it all off, the $25 billion is still there, waiting to be spent on bringing the car makers into the 21st century.

Silver City is a prime example of how the global economic troubles — such as China’s cut in steel production or the domestic auto and housing woes — have hurt small towns across America.

“Copper truly gives a picture of the economy,” Silver City Mayor James Marshall said. “When the price of copper is up, the economy is healthy. When the economy drops, copper follows.”

If there’s any more evidence that the U.S. needs a federally-backed stimulus plan, one centered around infrastructure, I don’t know where you’ll find it. James is right – when you’re building cars and homes and routing cable to new subdivisions or creating SUPERTRAINS, you’re using copper. When the average price drops (according to the Daily Press) by $2 a pound, those things aren’t happening.

In addition, you can imagine copper will figure into a stimulus package that creates green jobs. Sure is reassuring to know we have a president-elect who is committed to that sort of goal.

Regardless, it’s probably going to be rough in Grant County for the foreseeable future. Fortunately, New Mexico’s current (and incoming) congressional delegation is already on the case, seeking federal assistance for affected workers:

The news has prompted Senator Jeff Bingaman, Senator-elect Tom Udall and Representative-elect Harry Teague, all New Mexico Democrats, to send a letter today to Labor Secretary Elaine Chao.

They are asking that the U.S. Department of Labor act quickly to determine whether the workers will be eligible for federal assistance.

On a personal note, it appears as though several members of my family are going to be impacted by this decision. It really hits home, as they say, to realize what the past 8 years have meant for my loved ones.

Surely there’s no connection.

School districts, towns and cities across Florida were cut off from their money after the State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals Nov. 29 to stem a run on the fund. Participants pulled out almost half the pool’s $27 billion in assets after learning it held $1.5 billion of downgraded and defaulted debt tainted by the collapse of the subprime mortgage market.

Thousands of schools, towns and fire departments across the U.S. keep their cash in state- and county-run public accounts. Modeled after private money-market funds, the funds are supposed to invest in safe, liquid, short-term debt.

Via Atrios.

The Marathon station on Fort near Springwells dropped its price to $2.93. That angered Jawad Bazzi, whose regular gas was priced at $2.96.

Bazzi walked across the street with a couple of employees to confront the Marathon owner and his posse.

The groups argued, then began throwing punches. One of Bazzi’s employees hit a Marathon employee with a baseball bat, injuring him.

That’s when the Marathon owner grabbed a handgun and fired three or four times. Bazzi, 45, of Dearborn Heights was shot in the head.

There’s an update to the story here.

First off, there’s a link (midway through one of Atrios’s excellent posts on the subject) to this chart, showing that the number of subprime borrowers who can expect rate adjustments on their mortgages will peak next spring.

That puts Dean Baker’s prognosis into perspective:

The lesson from the 2001 experience is that cutting interest rates is not necessarily a very effective tool in counteracting the impact of a collapsing asset bubble. My guess is that rate cuts will provide even less effective stimulus now than they did in 2001, primarily because they will not reverse the decline in house prices and the wave of defaults and foreclosures that will follow. In any case, it would have been helpful to note the failure of the Fed’s last effort to prevent a collapsing asset bubble from causing a recession in discussions of the impact of this latest rate cut.
[emphasis mine]

The overwhelming media theme from yesterday’s rate cut was the response in stock prices. But, as Baker writes, a similar jump in 2001 couldn’t prevent a recession. Stock prices are an incredible tool to use when gauging the health of the economy, but they’re only one of many, many indicators. As Atrios notes in his post, new construction has dropped as well:

Builders in the U.S. began work on the fewest homes in 12 years in August, raising the risk the real-estate recession will spread to other parts of the economy.

The 2.6 percent decline to a lower-than-forecast annual rate of 1.331 million followed July’s 1.367 million, the Commerce Department said today in Washington. Building permits dropped 5.9 percent to a 1.307 million pace, also the lowest since 1995.

The housing slump may deepen after borrowing costs rose and lenders shut off access to credit, causing growth to slow even more, economists said. Federal Reserve policy makers yesterday lowered the benchmark rate by a half point to prevent a broader economic slowdown.

Is this just the beginning? Baker seems to think so.

UPDATE: 9/20/07 4:15 p.m. — Speaking of that rate cut:

The Wachovia Economics Group, part of the Charlotte, N.C.-based national bank Wachovia, warned investors Wednesday that “the damage being done to the housing market is more severe than the recent numbers suggest.”

In a special report, Wachovia economists said Fed Chairman Ben Bernanke and five Fed governors met earlier this month with heads of the nation’s major home builders and may have gotten a peek at sales and cancellation data.

“We believe those data showed a significant deterioration in home sales, which may be evident in next week’s new and existing home sales reports,” the report said, predicting a drop in new and existing home sales of 10 percent or more for August. “Such a drop raises the risks that we will see more spillover into related consumer spending and housing-related services than was earlier anticipated.”

Via Kevin Drum, who asks some pointed questions regarding this development:

Obviously, a big rate cut has some substantive effects on the economy (and on equity prices in particular), which is why the stock market rallied and everyone was so happy. But there’s a flip side, isn’t there? If the Fed cuts rates more than expected, doesn’t that also mean that the Fed is more worried than everyone thought it was? And isn’t it possible, as in the case of the housing figures mentioned in the Wachovia report, that this is because they know some bad news the rest of us don’t? Shouldn’t that worry us?

I don’t know. Should it?

In the past, some Americans have planted south of the border to escape spiraling land prices and to ensure year-round deliveries of crops they can produce only seasonally in the United States. But in the last three years, Mr. Nassif and other growers said, labor force uncertainties have become a major reason farmers have shifted to Mexico.

Market realities, of course:

Tramping through one of his first lettuce crops near Celaya, an agribusiness hub in Guanajuato, Mr. Scaroni is more candid than many farmers about his move here. He had made six trips to Washington, he said, to plead with Congress to provide more legal immigrants for agriculture.

“I have a customer base that demands we produce and deliver product every day,” he said. “They don’t want to hear the excuses.” He acknowledges that wages are much lower in Mexico; he pays $11 a day here as opposed to about $9 an hour in California. But without legal workers in California, he said, “I have no choice but to offshore my operation.”

It’s an interesting dynamic: many of these jobs probably weren’t held by Americans anyway, but they did contribute to the economy. Many of them were likely taxed on their wages. But, regardless of the workers’ status, I can’t believe this is anything but a step in the wrong direction.

Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.

Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.

Here’s the good news: I no longer think Richardson is an economic conservative. I was misled by his support for a balanced budget amendment, his attempts to contrast himself with anti-growth politicians, and his constant comments that “The Democratic Party, our first solution is to tax, but I’m not of that school.” In our interview, he shredded the implications of every one of those comments, often to the point of incoherence.

Well,  guess there’s some bad news coming, eh?

Rather, Richardson is an economic opportunist. He’s adopted the conservative’s rhetorical critique of liberal economic thought in order to distinguish himself from the other candidates, most of whom are responding to this moment of mortgage crises and insecurity with a forthrightly progressive vision. Richardson’s vision, which ticks off the same checkboxes as all the other candidates (crumbling infrastructure, rising college debt, 45 million uninsured, Social Security under attack, etc.), comes couched in a superficial critique of anti-growth Democrats he won’t name and a strain of economic thought he won’t specify.

Worse, the policies that Richardson is backing, and the political promises he’s implying, actually are anti-growth. Richardson might want to carve out enough exemptions in his balanced budget amendment to render it essentially meaningless, but his emphasis on an end to red nevertheless narrows his ability to run deficits.

It wasn’t that long ago we were seeing good news about Richardson in the Prospect. In February, if you recall, Matt Yglesias was singing his praises. And though the latest interview isn’t incredibly negative, it’s not a glowing endorsement either:

At the end of the day, I believe that Richardson is pro-growth. After our interview, I even believe that his view of the economy is basically progressive. But his rhetoric isn’t good for the Democrats, progressivism, or even a future Richardson presidency. He could be more pro-growth if he were only willing to be less anti-deficit.