I am trying not to read any significance into the fact that just as I leave The Economist for this shiny new blog at The Atlantic Monthly, the financial markets melt down. Sure, the timing may be correct . . . the market began tanking about a week before my last day, which is par for insider trading deals. But it would be paranoid to take this as any sort of an omen. Wouldn't it?
Not that this is stopping anyone else in the market from looking for inauspicious auguries. Over the last few weeks, I've heard the situation compared to any number of financial crises that preceded really nasty recessions: the 1929 stock market crash, of course, but also more recent debacles, such as Japan and Sweden in the 1990s. Sweden's economy contracted for years, while Japan is only now, just-maybe-barely-we-hope?, pulling out of a slump that lasted for more than a decade. This was very amusing for anyone who owned a copy of Rising Sun, but somewhat less so for the Japanese people.
But for all the ponderous proclamations, the parallels between those economic disasters and our current situation are less than compelling. Don't get me wrong: what is happening in the markets is bad. Very bad. Now is not a fun time to be either a homeowner, or a hedge-fund manager, and from what I can tell I am the only person left in the United States who isn't at least one of those things. The stock market may fall for a longish time, some people will be thrown out of work, and the economy, which has been flirting with recession for quite some time now, may finally decide to go all the way.
But that does not mean that you should start pricing apple-carts or prime spots beneath bridges to pitch your cardboard box. Having a nasty market contraction does not mean that your economy automatically goes down the tubes. It particularly does not mean this in a large, diversified, fully developed economy such as ours.
The dire economic problems in Sweden and Japan, and America in 1929, were only touched off by financial crises. It was central banking errors that turned them into full-fledged disasters. As private markets were collapsing, the central banks kept money too tight. So what had been a temporary situation in a single market spread out in concentric ripples, until the resulting waves had pretty thoroughly scuttled the entire economy.
There were various reasons that this happened. Sweden was trying to defend its exchange rate; America was trying to stay on the gold standard; and Japan . . . well, Japan had a lot of weird reasons for what it did. But none of them apply in America now. Ben Bernanke is known, among those who follow the Fed, as "Helicopter Ben" for famously saying that he'd drop money out of a helicopter onto Americans if more traditional methods for goosing the money supply failed. He's acted pretty quickly to move liquidity into the markets, and pretty clearly stands ready to deliver more if he thinks it's necessary.
Even less appropriate are comparisons to developing countries. We have robust, deep financial markets; an independent central bank; a (no, seriously) fairly modestly sized debt and budget deficit; and most importantly, we all borrow in our own currency. We are not going to turn into [insert developing country that had a financial panic] even if Helicopter Ben falls asleep at the joystick.
So while I wouldn't say you should be exactly sanguine about the mess in the markets, it's not time to panic yet. Save that for the Yankees' pitching lineup.
Now is not a fun time to be either a homeowner
Er, why? This is affecting me, as a homeowner, how, exactly?
"It particularly does not mean this"
"...looking for inauspicious auguries."
"is only now, just-maybe-barely-we-hope?, pulling out of a slump"
"...ponderous proclamations, the parallels..."
Two paragraphs starting with "But".
Congratulations. You are now the worst writer on the Atlantic's staff - and it's only your first day. Tell Douhat he lost the title.
That is what I have been missing. I hope you do well here. Thanks
Al wrote
....
Now is not a fun time to be either a homeowner
Er, why? This is affecting me, as a homeowner, how, exactly?
....
It would be more accurate to say it's a bad time to be someone looking to sell a home, especially in Florida, Vegas, the Carolinas, and a few other particularly depressed areas. It's also not a great time to be a home builder in any of those spots either. Owning a home is not a problem unless you stretched to get into your current home by latching onto a sub-prime mortgage, in which case you were screwed regardless the current economic climate.
It's a blog and bytes are worth their weight in gold so Megan didn't have space for that kind of clarification. Her editors would have killed her. :)
"So while I wouldn't say you should be exactly sanguine about the mess in the markets, it's not time to panic yet. Save that for the Yankees' pitching lineup."
Since the Yankees have the best record in baseball since the All-Star break, perhaps we should worry more about the credit crunch than their pitching.
I think you're absolutely right that we won't fall into a Depression, absolutely. There are too many safties in place and, in the absence of something absolutely awful happening (I don't know, New York falling into the Hudson in the space of a few hours) I just don't see anything worse than a recession down the pike. Not that I like recessions, but they don't last 10 years and people recover from them.
But I also think the market is cyclical. It has to be. And thus I actually see what is happening more as a market correction as opposed to a bad omen. I sold a whole bunch of stuff the moment the market hit 14K. It was bouncing around all over the place and I have noticed that when ever we hit a historic high number (Nasdaq at 5K anyone) everything just tanks.
So we'll ride out what ever little storm it is, knowing that it won't be a hurricane and plop my money back into some stuff when the market's at 12.5K and we'll see what happens.
And can I just express how bummed I am that I wasn't the first person so I couldn't post "First!"
"Even less appropriate are comparisons to developing countries."
Mugabe will have you jailed for such comparisons!
Tell Douhat he lost the title.
You think he'll surrender without a fight?
Do you really think the Fed is independent? Be serious!!!
Hi Megan, welcome to, er, another blog.
Anyway, you may recall we had a conversation about the state of the US economy about three weeks ago, and we sort of agreed that the economy wasn't doing that badly. Now - had either of us thought that the Fed would inject many billions into the market, cut its discount rate, change its rate outlook, and see the S&P tip over... well, we might not have been so sanguine.
Does the Fed know something the rest of the world doesn't? If so, what?
Megan,
Two points: 1)Congrats on the moves, both geographic and blogospheric!
2) You are not the only person who is neither a homeowner nor a hedge-fund manager. Three weeks ago, I was bemoaning my similar fate. Today, um, not so much!
Uhhhmmm...they are the #2 economy with the world's largest trade surplus. I must agree with those who say that Japan's "depression" is almost entirely of their own manufacture.
It's not 1929.
But it does look like it may be 1966, which was the watershed for a 17 year mild bear market. The apocalypse is not a crash, it's merely the market failing to keep up with inflation.
Check out the chart. 1966.
It particularly does not mean this"
"...looking for inauspicious auguries."
"is only now, just-maybe-barely-we-hope?, pulling out of a slump"
"...ponderous proclamations, the parallels..."
Two paragraphs starting with "But".
Congratulations. You are now the worst writer on the Atlantic's staff - and it's only your first day. Tell Douhat he lost the title.
Posted by HeavyJ | August 20, 2007 3:36 PM
************************************************
Ross and Megan can at least spell. Matt has issues in that area. AG Gonzalez?????
The other view is that it's not central banking errors after the crash that cause these problems. Instead, the damage is done in the boom, when people invest money in worthless projects, or overpriced housing. All the central bank can do is stretch out the time it takes to mark down the value of all this bad debt.
Easy money from the Fed might prevent panic and allow the process to be more orderly. A cynic would say it provides time for financial types to dump their bad debts on someone less sophisticated.
In any case, nothing the Fed does is going to change the fact that millions of Americans have houses that are now worth less than their mortgage. Counting realtor costs, they were upside down the day they bought. When ARM's reset, they are stuck. No one wants to refinance that house, not because of "panic" or "credit crunch", but because it's not worth the value of the loan. So it goes into foreclosure, further increasing supply and dropping prices, in a vicious cycle.
I prefer the analogy that the country got drunk and went on a spree. Now the hangover starts, where we sit with head in hand and say "I lent $500,000 to someone with no credit, no cash and uncertain income! What was I thinking?" Another drink is not going to erase the spree.
I have to admit that I woke up this morning worried not one whit about this, and reading this piece left me somewhat uneasy. Maybe it's that all those same people assuring us how we couldn't screw up Iraq because we had such a professional, high-tech army, are now pointing out how we can't screw this up because we've got such a whiz-bang capital market.
Suffice it to say that, the best possible way to screw this up is to believe that we can't screw this up. Now, what the average econoblogger thinks isn't really the issue, since there are smart people whose job it is to worry themselves over precisely this problem. OTOH, if those people decide to pull a Rumsfeld (or McArdle) on us, then we really could be screwed.
It would be more accurate to say it's a bad time to be someone looking to sell a home
That's more like it. Those of us who simply want to own and live in our homes and who have a fixed rate mortgage are doing just fine. Sellers might have a different story. Although, not here in Manhattan, where the RE market is doing great.
I always find it funny when people are predicting recession or some other economic disaster based on a little blip. It's like Paul Krugman, who is continually predicting some catastrophe or another for the economy for the past 7 years, exactly none of which have come to pass (recall when he predicted deflation 5 years ago? And then stagflation a couple of years ago? What's Krugman's batting average on economic predictions, .000?).
So who told the Atlantic the way to internet supremacy was to hire the absolute worst bloggers they could find?
This fascistic Ayn Rand wanna-be is certainly top of the heap. I love this little piece of hers from a couple of days ago:
You really oughtta expand that one here, lady. Give it the full airing it so richly deserves. I'm sure your new bosses will be just thrilled.
Wow, this blog really seems to have brought out the commentards en masse. This should make for an interesting ride.
Citizen (World) said:
"It would be more accurate to say it's a bad time to be someone looking to sell a home, especially in Florida, Vegas, the Carolinas"
Florida and Vegas definitely have housing woes in terms of a collapsing bubble, but the Carolinas? Aside from a few coastal markets like Myrtle Beach, SC, the Carolinas are either holding their own in terms of historically steady annual appreciation rates (like Columbia, SC at around 3-4%) or are even hitting relatively high, though non-bubble, rates of appreciation (like Charlotte and Raleigh at around 8-9%). Those markets across the country that were in the ridiculous 15-25% range of annual appreciation, are now suffering from a glut of properties. I would not want to be putting a condo on the market in San Diego or Miami, for example.
"Japan is only now, just-maybe-barely-we-hope?, pulling out of a slump that lasted for more than a decade".
Uhhhmmm...they are the #2 economy with the world's largest trade surplus.
Actually, they aren't. According to our friends in Langley, in 2006 Japan's trade surplus was $ 66 billion, compared with Germany's $ 216 billion and China's $ 196 billion.
Now, their curent account surplus of $ 174 billion was second to China's with $ 179 billion, while Germany was on the third place with § 135 billion.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2087rank.html
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2078rank.html
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html