|The New York Times / November 14, 2007
Good News: Housing's Down, Market's Off, Oil's Up
By DAVID LEONHARDT
Until yesterday's rally on Wall Street, the news on the business pages
has sounded pretty grim lately. Stocks are still down 6 percent from
their peak this year, and oil is near a record high. The dollar,
incredibly, is worth only 96 Canadian cents. And house prices will be
falling for a long time to come.
So in an effort to cheer everyone up before Thanksgiving, this column
is going to focus today on some good news. Here it is:
Stocks are still down 6 percent from their peak, and oil is near a
record high. The dollar, incredibly, is worth only 96 Canadian cents.
And house prices will be falling for a long time to come.
[I admire this willingness to be contrarian! There's no reason to
accept the conventional wisdom at face value. -- JD]
As long as the financial system doesn't have a major meltdown, none of
these developments will turn out to be as bad as you think. Some of
them are downright welcome.
["as long as the financial system doesn't have a major meltdown..."
what a clause! (a veritable Santa Clause!) Can we rely on the Fed to
prevent such a meltdown? do they have the power to do or will they
have to mobilize the big banks to save the day? (can the big banks
afford to do so?) will the taxpayers foot the bill, as with the
bail-out of the Savings & Loan industry? or is the financial mess
smaller and milder than most think? there are no answers in this
Too often, we think about the economy without nuance. We treat it as a
local sports team that is either winning or losing, up or down. We're
always supposed to be rooting for stocks and homes to become more
valuable and for oil and overseas vacations to become more affordable.
But that's not quite right. There are real downsides to an economy
full of expensive assets and inexpensive resources. There are also a
lot of people who are better off because of the recent turmoil. You
may well be one of them.
The best place to start is the stock market, because it's the most
counterintuitive. The notion that anybody but a sophisticated Wall
Street short-seller should be hoping that stocks fall sounds, frankly,
bizarre. But it's true: a huge chunk of the population — including
most people under the age of 50 — has benefited from this year's
My favorite explanation of this idea is still a column that Peter Coy
of Business Week wrote in 1999, during the dot-com mania. He said he
was thinking of forming a club called Stockholders Who Wish the Stock
Market Would Stop Going Up So Fast. It would be meant for people who
were at least two decades from retirement and who weren't active
investors. They instead owned 401(k)'s and individual retirement
They were, in other words, typical. Only 21 percent of families owned
stocks outright in 2004, the most recent year for which the Federal
Reserve has released data. Almost 50 percent of families owned a
retirement account, by contrast. The typical retirement account
(median value of $35,200) was also a lot bigger than the typical stock
These long-term, buy-and-hold investors, as Mr. Coy pointed out, are
actually hurt by a market that rises too quickly. When stocks get so
expensive, returns over the next few decades are usually mediocre. And
only a small chunk of a typical person's investments will have been
made before the run-up.
It would be much better — tens or even hundreds of thousands of
dollars better — if the market rose more steadily and the bulk of the
401(k) contributions could then rise along with it. Buy low and sell
[alas, a lot of people don't get this. I still remember friends asking
me for advice when they were leaping into the stock market in the late
1990s. My advice that they "stay out until prices fall" wasn't
A true crash would take care of this problem. But the market's big
fall from 2000 through 2002 doesn't fit the definition, because it
didn't come close to erasing the effects of the bubble. Stocks are
still more expensive today, relative to corporate earnings over the
previous decade, than at any time besides the late 1920s and the
So unless you're about to retire or sell stock for some other reason,
you shouldn't get too upset about the market's fall. As long as you
are planning on more buying than selling over the next decade or two,
a market correction is your friend.
[the problem with this is that a "true crash" creates other problems.
Suddenly the ability to use stocks as collateral for loans is severely
undermined. If you are already heavily indebted, perhaps if you
borrowed to put money into stocks, falling asset values represent a
[further, the wealth effect of a true stock market crash depresses
consumer spending, especially that of stock-owners (mostly, the rich).
Corporations have a harder time raising funds to finance real (fixed)
investment by selling new stock. Expectations of future profitability
are hurt. All of these spell recession, all else constant. This
usually hurts corporate dividends and returns, and the stock market.]
It's also likely to improve the nation's long-term economic prospects.
The bull market of 1990s, combined with the housing boom, fooled many
people into thinking they didn't need to save money. They evidently
figured that their existing assets would continue to soar in value and
could serve as their nest egg. Last year, Americans saved only 0.4
percent of their disposable income, down from 7 percent in 1990.
This decline in personal savings has set the stage for all kinds of
problems. The biggest may be that less savings, by definition, equals
a smaller pool of capital available for overall investment. Less
investment — be it in medical technology or software — will mean
slower economic growth and lower standards of living down the road.
[this is illusion. As Keynes pointed out, it's not saving that drives
investment. Increased saving, all else equal, encourages a _fall_ in
total spending on GDP, i.e., recession. A recession -- or even a
slow-down in the economy -- can, via the famous accelerator effect,
_stop_ private fixed investment (the real stuff, not the financial
investment in the stock market).
[in any event, domestic saving is not needed to finance real
investment. Funds can -- and have been -- coming from outside the
country. This is where many get upset: an inflow of funds is the same
thing as a trade deficit (or, more accurately, a current-account
deficit), where the country is spending more on foreign goods and
services than it sells exports.
[But there is nothing wrong with that kind of deficit if the funds go
to productive investment. The US did very well during most of the 19th
century despite trade deficits, since it used the borrowed funds to
build up industry and rise toward the top of the pack.
[The problem is that nowadays these imported funds (capital inflows)
go to pay for wasteful activities, such as tax cuts for the rich and
the war in Iraq. They are mostly going to current consumption and
waste rather than to fixed investment.
[In sum, it's fixed investment that deserves our attention, not saving.]
Fortunately, the savings rate has begun to climb, especially since the
housing market turned. So far this year, Americans have saved 0.8
percent of their income, and the number should continue to rise. As
Joe Davis, an economist at the Vanguard Group, the investment company,
said, "This will be a slow-moving and ongoing process, but I think a
[yes, if we want a recession. Now, it _is_ true that rising (net)
exports due to the falling dollar can help avoid a recession. But that
falling dollar imposes a loss of real living standards on all of us
who import or rely on others to import -- i.e., all people in the US.
It also encourages inflation, for example in oil prices (in US dollar
[it is also true that a rising government deficit can avoid recession.
But, as mentioned, currently that's going mostly as rewards to Bush's
rich supporters or down the sink holes of Iraq and Afghanistan. That
hardly helps the economic health of the Average American!]
The other ostensible pieces of bad news have their own silver linings.
As the cost of gas has soared to $3 a gallon, from an
inflation-adjusted low of about $1.20 in 1999, Americans have finally
started buying more efficient cars and trucks. For the first time
since the mid-1980s, the fuel economy of new vehicles has increased
for two straight years, the Environment Protection Agency recently
reported. This will slow global warming and make life a little less
comfortable for oil-rich autocrats (though not nearly as much as a
carbon tax would).
[yes, but the rising oil price also creates an inflationary impulse
that prevents the Fed from using monetary policy to moderate recession
and/or solve the big financial mess that Wall Street faces. ]
The fall of the dollar, meanwhile, may be precisely what the world
economy needs right now, as James Paulsen of Wells Capital Management
points out. It provides a lift to the sagging American economy, by
allowing companies in the United States to export more, while
encouraging consumers to spend less on imports and save more.
It's not even clear that falling house prices are such a bad thing.
They don't really matter for families who aren't planning to move.
They don't even matter much for families moving to a similar house in
a similar market. The house they are buying will have gotten cheaper,
Families hoping to buy their first house, on the other hand, clearly
benefit. (Easy for me to say, though. As my boss pointed out when he
heard about this column, I'm a renter and still decades from
There is no question that people have gotten hurt this year. Many
families have struggled to pay their bills. Others have had to delay
retirement, and thousands have lost their homes to foreclosure. In an
ideal world, the imbalances in the economy would never have become so
[note that the housing crunch, like a "true" stock market crash,
encourages recession by dampening consumer spending -- and also by
hurting fixed investment in the housing industry (and related, like
But once they did, what, really, was the alternative to the recent
turmoil? An ever-higher stock market, ever-cheaper oil or an ever more
insane mortgage market wouldn't have solved the problems of the
American economy. It would have made them worse.
[this shows lack of perspective. Since the end of the Keynesian age
(in the 1970s or so) and the rise of the neoliberal one, we've seen a
rise in the business cycle pattern that prevailed in the 1920s and
before. There are speculative booms in GDP like that of the late
1990s, followed by speculative crashes as in 2001 (moderated by the
Fed). The boom creates the conditions that create the crash, which
then creates the next speculative boom. Just as then, the
self-generating cycle is changed by the US involvement in wars (World
War I back then, the Gulf War I and II now), which stimulate the
[The only complication is that nowadays (unlike under the gold
standard) the Fed moderates (or tries to moderate) the fluctuations.
Sometimes, it seems, it creates the basis for new speculative booms,
as with the currently-ended housing bubble.
[Using perfect 19th century logic, Leonhardt is arguing that because
of the speculative boom, we need the speculative crash. But what about
changing the policy regime? the government could increase the role of
the automatic stabilizers, while increasing the amount of investment
in (needed!) infrastructure, basic research & development, education,
and public health, while actually making an effort to clean up the
aftermath of Katrina. That would get us back to the 1950s & 1960s. Of
course there would be problems, but that's another topic.]
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