It would be sad if a big market crash, or catastrophic climate climate change, would be overlooked just because of empirical confidence that we haven't seen things going that badly, or that skeptics had been too hasty with their doom predictions.
How are you supposed to foresee a catastrophe, if at any moment you can say "Things generally allways go up in the long term", or "Doomsayers have been wrong so many times"? Can the National Association of Realtors be the most reliable forecaster of the housing market?
Now comes a Fortune interview that surprisingly reveals Lereah to have had doubts and fears about the housing market as far back as two years ago (when he says he knew the subprime market was "in trouble"). On a normal day, we would make some effort to track down Lereah's public statements at the time and see if he shared any of that insight with the general public. But this is no normal day.
You have focused on the second part of my diary which points out that while many on this website began forecasting a housing crash that would lead to a US recession more than one year ago, not only has there not been such as crash, but though unit sales have fallen, prices have not. Jerome and others may yet be correct, that there will be a housing crash leading to a US recession, but let's just highlight right now that so far those projections are absolutely wrong, and I, amongst others, would forecast that there will be no US recession in 2006 or 2007 (what I've said all along, btw).
The main question of my comment remains: Do unfulfilled (as yet) forecasts disqualify Krugman's concerns?
I went into economic details in other post, below. The situation of falling volumes but steady prices is a predictable stage of a crisis. Are you optimistic of what will follow?
I think WC should read this differently. It would be reasonable to take this article as a nailing of colours to the mast. I assume most (all ?) previous articles were suggesting a future (date unspecified) recession. In effect, this article offers a time-limit. If there is no serious recession within the next year, then Krugman's predictions were incorrect.
the problem with economists like Krugman is that some people are actually modifying their investment decisions based on what he says. Not just the "fat cats" either, but the smaller guys that are putting their earnings into 401k plans for retirement. Krugman's "the sky is falling" approach has likely kept a lot of small investors in bonds over the last 4 years. the S&P 500 closed at 830 the week of March 3, 2003. Last Friday's close was 1387. that is a 67% increase foregone, if you are a Krugman follower. Luckily there are other economists who write regularly and with reasoned economic thought. so we can all pick our own guru, or set of gurus, to influence our choices.
Does Krugman tend to get into the doom-and-gloom bit a lot? Yes. But he was also warning us about irrational exuberance long before Greenspan decided it was time to pay attention. (Recall now that Greenspan is, once again, following Krugman -- this time on housing. Krugman has not become one of the most highly regarded economists on the planet by being stupid. People listen to him because history shows that he tends to know what he's talking about.) Anyone who invests based upon the words of a series of columns belongs at McDonald's, not on Wall Street. What Krugman can give people is a good description of big-picture issues.
It's the difference between macroeconomics and finance. Finance guys are great, if you need to open a college fund for your kids, or need a plan for retirement, but they don't, in my experience, know much about macroeconomics. (Note that finance guys tend to be Supply-Siders while economists tend to be Keynesians with a little Neoclassicalism mixed in. Finance guys also tend to speak in absolutes with regard to the macroeconomy, while economists are, as always, two-handed in their analyses -- hence Krugman's ending.) If you want short-term advice, talk to AG Edwards. But if you want serious discussion of what problems we may face, on the national and global levels, talk to Krugman.
If we make it through this downturn without a recession, and get back up to the trend or higher with consistency, I think it will be fair to say Krugman was wrong. Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
I'm reading an economics textbook that claims that the business cycle consists of recession and expansion, and that "expansion is the normal state of the economy" while recession is abnormal. In other words, the economy normally grows strongly, except when it doesn't, but you can discount that. "It's the statue, man, The Statue."
I'm reading an economics textbook that claims that the business cycle consists of recession and expansion, and that "expansion is the normal state of the economy" while recession is abnormal.
I think I would enjoy having a drink with migeru, but I think as we toasted each other my glass might be half full, and his half empty. Which reminds me Migeru, you are obviously an economist at heart.
Regarding the "normal state of the economy" and cycles, we had a discussion here of cycles in the UK housing market, and made the point that measuring growth rates "peak-to-peak", "trough-to-trough" and "trough-to-peak" give so widely different results that one has to be very careful in reasoning about these things. But the point is that what's "normal" is the business cycle, not any part of it. And if the latest US recession was minor, the recovery has been slow and "jobless". So maybe the business cycle is getting less pronounced, but that also means slower growth on the expansion side. [By the way, my "prediction" in that thread has already failed, in that the price index we had been discussing is growing again after plateauing for about 2 years, breaking any possibility of extrapolating past behaviour beyond the plateau]
And that is assuming that, long-term, the 3% growth rate is not an expansion phase of a very long business cycle with a pronounced collapse at either end. When people say complete collapse of our economic system cannot happen, I cannot but think of the end of the Roman Empire, or the 14th century in Europe. It has happened before and it could happen again.
As for the bit I paraphrase from the economics text I'm reading, I was reminded of reading Goldstein's classic Mechanics book, where he discusses phase diagrams of the harmonic oscillator and bifurcations, and he has the howler that "fortunately, bifurcations are rare in practice". That was one of the biggest blind spots of classical mechanics, as was discovered in the 1960's and 70's, shortly after the book was published. "It's the statue, man, The Statue."
Well, if you're ever in London...
So maybe the business cycle is getting less pronounced, but that also means slower growth on the expansion side.
But that's not what has occurred, in truth. The Clinton expansion was the fastest (and longest) peacetime expansion in history. The Reagan expansion comes in at No. 2 or 3 -- its competitor being the Kennedy/Johnson one. Despite the moderation in business cycles that we've seen since the Depression, growth rates have generally been a bit faster, with the exception of (I can only assume) the '70s.
Even taking the Bush II expansion, growth has not been very weak. Job growth really blows compared with the Clinton years, but, to be fair, comparing those two expansions is a bit like comparing Mike Tyson with Muhammed Ali.
(Write your own Tyson-Bush joke.) Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin
That's why you're not an academic economist any longer ;-) "It's the statue, man, The Statue."
One of the more amusing aspects of the Global Financial Market is the bewilderment of the participants when they discover markets go down as well as up.
I went on with economic points in a subsequent long post, below.
