Arnold Kling  

Financial Crises and Real Growth

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Alex Tabarrok writes,


Forget the talk of recession. The world is about to enter a new era in which miracle drugs will conquer cancer and other killer diseases and technological and scientific advances will trigger unprecedented economic growth and global prosperity.

When I think about it, I can remember a lot of financial crises in my lifetime.

--The Penn Central Railroad bankruptcy, which froze the commercial paper market
--The Savings and Loan Crisis
--The stock market crash of August 1987
--The Long-Term Capital Management collapse
--The dotcom collapse
--The post 9/11 crash
--Enron

None of these turned out as badly as doomsayers predicted. Keep that in mind when you read the bearish forecasts about the impact of the subprime crisis.

Long term, my money's on Alex.


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COMMENTS (6 to date)
Gary Rogers writes:

In every case, the Federal Reserve flooded the market with money then later borrowed to keep the monetary infusions from creating inflation. The government also stepped in with programs to promote consumption that quickly brought the economy back to full force. With these measures, you are correct that things did not turn out badly. The problem is that it is just like paying your bills with a credit card and the balance keeps growing. As long as you do not reach your credit limit, financial shocks can be easily shrugged off.

The United States has now reached a point where we do not just have a problem with the sub-prime mortgage sector of the financial markets, we have a population that is nearly insolvent. The problem showed up first in the sub-prime market, is now spreading to other mortgages, will soon include credit card debt, and will quickly continue to spread if things slow down and people start losing their jobs. There is simply no savings cushion for most consumers and their credit has been used up. The underlying problem is that our past borrowing has not only devastated our exports and wiped out our savings, it has created a huge pool of foreign dollars that could trigger a run on the currency if the dollar starts losing its value too fast. At the same time our consumers have overspent, taking away our ability to use stimulative policies to promote consumer spending as a means to bring us out of a downturn.

There is still good news, though. We have not yet reached our credit limit so we may be able to borrow our way out of another downturn. If we do, we must learn to be more fiscally responsible and get a handle on our debt. We have an unbeleivable economy that gives us a tremendous advantage. We just need to tread very carefully, recognize what our situation is and do not ignore inflation.

Me writes:

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dearieme writes:

"miracle drugs will conquer cancer and other killer diseases": are you pair perhaps the people who can explain to me the strange American obsession with cancer? Didn't Nixon declare a "War on Cancer"? Was he mocked for being as silly as he who declared War on Terror? If not, why not? Does a War on Cancer serve as a religion for the secular? (I mean an obsession that goes beyond the obvious point that as your population ages, there will be more deaths from cancers.)

Bob writes:

I would add the Asian Currency Crisis and Russian Debt Crisis in 1997 and 1998. I suppose that they don't make the list because they were not in the US, but the US markets reacted sharply. But briefly, so the additional examples are consistent with the thesis.

Snark writes:

There is an 85% chance of a recession occurring in 2008 according to the Superbowl Theory.

Long term, my money’s on the New England Patriots!

black swan writes:

You forgot to mention the Japanese stock market and real estate collapse. Oh,wait, lowering interest rates and major domestic stimulus never did solve that one.

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