Recently in Recession Category

Well, that was quick. David Leonhardt steadies his cannon, aims at optimists, and fires:

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage.

No, no, no -- not a mirage because (we've been told) the successes were built upon overpriced assets, used as collateral for low-interest loans which people had little ability to repay. Instead, Leonhardt seems to say that the problem is that we've apparently learned our lesson, and that moderation -- tight money and higher rates -- will doom us to a long, long period of decline.

While I would love to use "a basic fear" that we've been deceiving ourselves as a macroeconomic variable, I would first surely want to know what social experience and historical data we used to convince ourselves that economic swings have dampened, and second, why I should overturn that settled judgment on the basis of a (pretty) large number of folks who gamed credit markets from both the supply and demand sides, while ignoring the FAR larger number of people who honestly and sensibly used those same markets.

Leonhardt next climbs on top of his cannon, and surveys the battlefield.

Martin Feldstein and Barack Obama worry that we'll be plunged into a deep recession, or that we're already face to face with the abyss. He notes that many financial firms haven't tallied up their losses yet, plus

The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.

Will somebody remind me to assemble on the same time-series chart the monthly averages of S&P500, median housing prices, and avg. mortgage interest rates, so we can get a crude look at actual affordablity? Anyway, as I wrote above, consumer spending is propping the whole thing up?:

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.... So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.

Yes, this includes me. I remortgaged my home to take advantage of lower rates, while extracting a modest amount of equity. Why would I do this believing that housing prices might decline? Because my wife doesn't work now, but when she starts sometime next (or pray, this) year, our family income will likely rise by 60%. As an economist would put it, I used the mortgage as an instrument to get and spend tomorrow's income today -- validating the permanent income hypothesis. I took on more debt because I expect to easily repay it, not because I'm shortsighted or dishonest or stupid.

Anyway, the moral is, shouldn't the ability to repay debt be the criterion in our macroeconomic judgment, not just the size of that debt?

And if we can repay that debt, I'm damn sure the next generation will be just as immoderate as the last.

[Post edited for clarity.]


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