Gretchen Morgenson, a New York Times Wall Street reporter with a Pulitzer under her belt, is one of the shrewder financial minds in the business press, so it’s always surprising to see her stumble.
But stumble she did in a Sunday piece (subscription required) pegged to the fears of one source, Paul Kasriel, chief economist at the Northern Trust Co., a piece that gets right to the point with this breathless lede:
“Does a financial train wreck lie dead ahead for American consumers and investors?”
Morgenson tells us that “over the last five years, American households have spent more than they earned. In contrast, for almost 30 years beginning in 1970, the opposite was true: households earned more than they spent.” She also reveals what she calls “a stunning figure”: Kasriel calculates that in the third quarter of this year, “households spent a record $531 billion more than their after-tax earnings, on an annualized basis.”
But what exactly does that mean? Is that $531 billion, say, 20 percent more than last quarter’s annualized after-tax earnings, in which case we should all be scared out of our wits? Or is it, perhaps, two percent — or two-tenths of one percent? We never learn.
But we do learn that these same “non-stop shoppers have propelled consumer spending to a record high as a share of gross domestic product.”
And how high would that be? Well, 76 percent in the third quarter. And how does that compare to saner times? Hmmm. Record high or not, it seems that consumer spending as a share of GDP has barely moved off the 73 percent recorded five years ago, in 2000.
Okay, we’ll still give Morgenson (and Kasriel, her sole source here) the benefit of the doubt. They must have some other, more alarming number up their sleeves to justify that “train wreck” in the lede. Well, no. For what we learn next — written in a tone of disapproval — is that the value of residential real estate across the country is now “a record 204 percent of disposable personal income,” up from 150 percent five years ago.
The presumption seems to be that it’s bad to own property that appreciates. The further presumption seems to be said appreciation is entirely out of hand and bound to evaporate. But is a one-third increase in the value of any asset class over five years really a firestorm out of control? Or is it actually a compounded rate of return of about 6.5 percent? Hint: This fire seems to be burning at nothing more than a pleasantly warm sputter. Or so we are left to guess from Morgenson’s choice of numbers, which strangely measure property prices against personal income, rather than give us a true picture of how much home prices have actually moved.
Next, Kasriel, Morgenson’s beard, tells us that these days 61.7 percent of banks’ total earning assets consist of “mortgage-related holdings,” whereas 10 years ago it was 48 percent, and back in 1987 it was only one-third. Again, the presumption seems to be that banks should limit their mortgage loans to one-third of total loans and investments. But we never learn why that might be, or what they should be investing in instead. T-bills? Casino stocks? Currency futures? Nor are we reminded that the last time banks did shirk on property loans as a percentage of total loans, there ensued a housing slump that in most of the country lasted from 1988 through 1996.