[FONT='Times New Roman','serif']
By PAUL KRUGMAN
Published: April 16, 2009
Ben Bernanke, the Federal Reserve chairman, sees “green shoots.”
President Obama sees “glimmers of hope.” And the stock market has been
on a tear.
So is it time to sound the all clear? Here are four reasons to be
cautious about the economic outlook.
1. Things are still getting worse. Industrial production just hit a
10-year low. Housing starts remain incredibly weak. Foreclosures,
which dipped as mortgage companies waited for details of the Obama
administration’s housing plans, are surging again.
The most you can say is that there are scattered signs that things are
getting worse more slowly — that the economy isn’t plunging quite as
fast as it was. And I do mean scattered: the latest edition of the
Beige Book, the Fed’s periodic survey of business conditions, reports
that “five of the twelve Districts noted a moderation in the pace of
decline.” Whoopee.
2. Some of the good news isn’t convincing. The biggest positive news
in recent days has come from banks, which have been announcing
surprisingly good earnings. But some of those earnings reports look a
little ... funny.
Wells Fargo, for example, announced its best quarterly earnings ever.
But a bank’s reported earnings aren’t a hard number, like sales; for
example, they depend a lot on the amount the bank sets aside to cover
expected future losses on its loans. And some analysts expressed
considerable doubt about Wells Fargo’s assumptions, as well as other
accounting issues.
Meanwhile, Goldman Sachs announced a huge jump in profits from
fourth-quarter 2008 to first-quarter 2009. But as analysts quickly
noticed, Goldman changed its definition of “quarter” (in response to a
change in its legal status), so that — I kid you not — the month of
December, which happened to be a bad one for the bank, disappeared
from this comparison.
I don’t want to go overboard here. Maybe the banks really have swung
from deep losses to hefty profits in record time. But skepticism comes
naturally in this age of Madoff.
Oh, and for those expecting the Treasury Department’s “stress tests”
to make everything clear: the White House spokesman, Robert Gibbs,
says that “you will see in a systematic and coordinated way the
transparency of determining and showing to all involved some of the
results of these stress tests.” No, I don’t know what that means,
either.
3. There may be other shoes yet to drop. Even in the Great Depression,
things didn’t head straight down. There was, in particular, a pause in
the plunge about a year and a half in — roughly where we are now. But
then came a series of bank failures on both sides of the Atlantic,
combined with some disastrous policy moves as countries tried to
defend the dying gold standard, and the world economy fell off another
cliff.
Can this happen again? Well, commercial real estate is coming apart at
the seams, credit card losses are surging and nobody knows yet just
how bad things will get in Japan or Eastern Europe. We probably won’t
repeat the disaster of 1931, but it’s far from certain that the worst
is over.
4. Even when it’s over, it won’t be over. The 2001 recession
officially lasted only eight months, ending in November of that year.
But unemployment kept rising for another year and a half. The same
thing happened after the 1990-91 recession. And there’s every reason
to believe that it will happen this time too. Don’t be surprised if
unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back,
take place only when there’s a lot of pent-up demand. In 1982, for
example, housing was crushed by high interest rates, so when the Fed
eased up, home sales surged. That’s not what’s going on this time:
today, the economy is depressed, loosely speaking, because we ran up
too much debt and built too many shopping malls, and nobody is in the
mood for a new burst of spending.
Employment will eventually recover — it always does. But it probably
won’t happen fast.
So now that I’ve got everyone depressed, what’s the answer? Persistence.
History shows that one of the great policy dangers, in the face of a
severe economic slump, is premature optimism. F.D.R. responded to
signs of recovery by cutting the Works Progress Administration in half
and raising taxes; the Great Depression promptly returned in full
force. Japan slackened its efforts halfway through its lost decade,
ensuring another five years of stagnation.
The Obama administration’s economists understand this. They say all
the right things about staying the course. But there’s a real risk
that all the talk of green shoots and glimmers will breed a dangerous
complacency.
So here’s my advice, to the public and policy makers alike: Don’t
count your recoveries before they’re hatched[/font]
By PAUL KRUGMAN
Published: April 16, 2009
Ben Bernanke, the Federal Reserve chairman, sees “green shoots.”
President Obama sees “glimmers of hope.” And the stock market has been
on a tear.
So is it time to sound the all clear? Here are four reasons to be
cautious about the economic outlook.
1. Things are still getting worse. Industrial production just hit a
10-year low. Housing starts remain incredibly weak. Foreclosures,
which dipped as mortgage companies waited for details of the Obama
administration’s housing plans, are surging again.
The most you can say is that there are scattered signs that things are
getting worse more slowly — that the economy isn’t plunging quite as
fast as it was. And I do mean scattered: the latest edition of the
Beige Book, the Fed’s periodic survey of business conditions, reports
that “five of the twelve Districts noted a moderation in the pace of
decline.” Whoopee.
2. Some of the good news isn’t convincing. The biggest positive news
in recent days has come from banks, which have been announcing
surprisingly good earnings. But some of those earnings reports look a
little ... funny.
Wells Fargo, for example, announced its best quarterly earnings ever.
But a bank’s reported earnings aren’t a hard number, like sales; for
example, they depend a lot on the amount the bank sets aside to cover
expected future losses on its loans. And some analysts expressed
considerable doubt about Wells Fargo’s assumptions, as well as other
accounting issues.
Meanwhile, Goldman Sachs announced a huge jump in profits from
fourth-quarter 2008 to first-quarter 2009. But as analysts quickly
noticed, Goldman changed its definition of “quarter” (in response to a
change in its legal status), so that — I kid you not — the month of
December, which happened to be a bad one for the bank, disappeared
from this comparison.
I don’t want to go overboard here. Maybe the banks really have swung
from deep losses to hefty profits in record time. But skepticism comes
naturally in this age of Madoff.
Oh, and for those expecting the Treasury Department’s “stress tests”
to make everything clear: the White House spokesman, Robert Gibbs,
says that “you will see in a systematic and coordinated way the
transparency of determining and showing to all involved some of the
results of these stress tests.” No, I don’t know what that means,
either.
3. There may be other shoes yet to drop. Even in the Great Depression,
things didn’t head straight down. There was, in particular, a pause in
the plunge about a year and a half in — roughly where we are now. But
then came a series of bank failures on both sides of the Atlantic,
combined with some disastrous policy moves as countries tried to
defend the dying gold standard, and the world economy fell off another
cliff.
Can this happen again? Well, commercial real estate is coming apart at
the seams, credit card losses are surging and nobody knows yet just
how bad things will get in Japan or Eastern Europe. We probably won’t
repeat the disaster of 1931, but it’s far from certain that the worst
is over.
4. Even when it’s over, it won’t be over. The 2001 recession
officially lasted only eight months, ending in November of that year.
But unemployment kept rising for another year and a half. The same
thing happened after the 1990-91 recession. And there’s every reason
to believe that it will happen this time too. Don’t be surprised if
unemployment keeps rising right through 2010.
Why? “V-shaped” recoveries, in which employment comes roaring back,
take place only when there’s a lot of pent-up demand. In 1982, for
example, housing was crushed by high interest rates, so when the Fed
eased up, home sales surged. That’s not what’s going on this time:
today, the economy is depressed, loosely speaking, because we ran up
too much debt and built too many shopping malls, and nobody is in the
mood for a new burst of spending.
Employment will eventually recover — it always does. But it probably
won’t happen fast.
So now that I’ve got everyone depressed, what’s the answer? Persistence.
History shows that one of the great policy dangers, in the face of a
severe economic slump, is premature optimism. F.D.R. responded to
signs of recovery by cutting the Works Progress Administration in half
and raising taxes; the Great Depression promptly returned in full
force. Japan slackened its efforts halfway through its lost decade,
ensuring another five years of stagnation.
The Obama administration’s economists understand this. They say all
the right things about staying the course. But there’s a real risk
that all the talk of green shoots and glimmers will breed a dangerous
complacency.
So here’s my advice, to the public and policy makers alike: Don’t
count your recoveries before they’re hatched[/font]
