David Leonhardt can’t find the counterintuitive angle any more, and for that we can only be grateful. Like the rest of us, he sees the great economic and financial unraveling taking place and can only acknowledges on page one of The New York Times that it isn’t likely to end here. It’s a striking—and welcome—change from just two months ago when he tried to convince readers that a counterintuitive angle could be plausibly supported and that the bust could be a good thing for many of us.
In today’s analysis Leonhardt writes of “Worries That the Good Times Were a Mirage,”
positing a long-term economic pinch after a prolonged run of speculation:
The great moderation [of inflation, recession, and risk] now seems to have depended—in part—on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad…
Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.”
Leonhardt can see only bleakness everywhere now. He writes that recession is probable and likely to be worse than the ones of 1990-91 and 2001. That’s because, he says, Wall Street still hasn’t come clean about all its losses, all the air still isn’t out of the real estate and stock bubbles, and consumers are tapped out after sixteen years of spending growth boosted by inflated asset values.
But it’s hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don’t have and investors will become more alert to risk.
Contrast this bout of sobriety with the ill-conceived and thinly supported November column:
“Good News: Housing’s Down, Market’s Off, Oil’s Up.”
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.
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.
We found the column glib, callous and misleading, even as a thought experiment.
In November, Leonhardt argued that the downturn was a good thing for those of us not too old or in need of cash:
Stocks are still more expensive today, relative to corporate earnings over the previous decade, than at any time besides the late 1920s and the dot-com boom.
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.
Regarding consumer spending, Leonhardt said in November the drop in spending would be a good thing:
[A market correction] is 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.
Ten short weeks later, Leonhardt now says these developments may be worse than you and everyone else thought. We must be in that “major meltdown.”
Today he writes:
Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt—as a recent study co-written by the vice chairman of the Fed dryly put it—“is not likely to be repeated.” So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.
In November, we wrote that a more fruitful column would have been the counter-counterintuitive angle, one that fully prepared readers for what’s coming. Leonhardt’s column is a belated step in the right direction.
We’re in a hell of a mess here. There is no clever angle.