Tuesday, September 30, 2008

Do Falling Share Prices Cause a Depression?

In A Gallup Poll, published today 33% of Americans think the US is in a depression.

It is a reflection of the turmoil gripping the financial markets and housing markets that people have such a pessimistic outlook. Amidst tumbling share prices, falling house prices, collapsing banks and growing unemployment. It almost seems churlish to point out that, unbelievably, the US economy is still actually expanding.

The US is not in a depression. A depression would have to involve significant periods of negative growth and a much higher unemployment figure. But, whilst economists may argue over semantics and what actually constitutes a recession / depression, the salient point is that the US and global economy faces a real crisis. One of the worrying things about the current crisis is that it is all unchartered territory. We have had recessions before, but, they have been relatively predictable changes in the business cycle. The current crisis is unprecedented because the financial system is collapsing in a way never seen before. No one is exactly certain how it will develop. There is a lot of panic in financial markets and this panic is contagious. The outcome could be ugly.

In a way I am pleased the $700bn bailout got rejected by the house of representatives. The plan was ill thought out, based on tenuous economics. Wall Street deserves a bloody nose, but, whilst it is easy to knock a plan it is more difficult to suggest a solution.


James said...

Apologies if this has already been covered, but could you expand on your point that "The [$700bn bailout] plan was ill thought out, based on tenuous economics"?

I understand there would be various potential drawbacks and practical difficulties in implementing this plan, but I at least felt it was a respectable idea produced by a competent group of economists!

James Cormack

Tejvan Pettinger said...

HI James,

Thanks for comment. Maybe 'tenuous economics' was a little dramatic. I feel the plan was flawed see:
Questions about Bailout

The people proposing the bailout are the same people who told us a few months ago, there was nothing to worry about. (But, to be fair, they weren't alone in thinking things were fine.)

In particular many economists worry about the precedent of moral hazard.

Yet, not withstanding problems, I do feel there is a good case for some form of intervention, just not in the way Paulson proposed.

Tejvan Pettinger said...

Also - arguments against bailing out banks

Basudeb Sen said...

Two points are intellectually challening:
1. If opinion polls decides whether the economy is in depression or not, there is no use of economic statistics any longer. Whether we are in the midst of depression or not is nowadays a matter of opinion or perception!A new kind of empiricism as a scientific method to know where we are!
2. The bail-out is any more ill thought out plan than the monetary and macro-economic policies pusued in the last few years. If legislators, administration and the regulators were more powerful than the market forces, there would not have been any need for bail out plans. If legislators and govt. could take decisions that were ill thought out during the last 5 years, why should another of their decision like bail out plan or no bail out plan be expected to be not ill conceived? w
What is more important to economic policy making - cold economic logic or political majority expediency? American dream of home ownership is a political slogan which when forced to be implemented by legislators and Govts. gets shattered as it has happened now. Shelter for everyone is an economic objective: ownership of homes is a wishful political objective : you can make the best education facilities available to all - you can make all people to own a decent education.