Wednesday, February 27, 2008
There it was, right in the middle of the front page of the Wall Street Journal today in the lead story titled "Decline in Home Prices Accelerates" - more evidence that the economy as we know it could be fundamentally flawed, yet you'd never get a hint of that even from reading one of the the world's finest business publication.
Lower home prices threaten the economy's growth by making consumers feel less wealthy and thus less willing to spend. They also curtail homeowners' ability to borrow against the value of their homes to finance other purchases. In addition, lower housing prices erode the value of banks' collateral, prompting them to tighten their lending standards, which further damps economic growth.It is as if life has always been this way:
Writers seem to just keep repeating this "conventional wisdom" over and over in a sort of automatic explanation for why home prices are so important and why consumer spending is vital for the U.S. economy, yet few probably realize just how wrong this conventional wisdom could be.
What if (as seems obvious to some) we are quickly coming to the end of what was a wholly unsustainable system where borrowing money to buy goods and bid up asset prices fails to produce economic growth?
What if this conventional wisdom is wrong?
Never before has the world's most important economy been based on such shaky underpinnings - rising credit and debt, rising consumption, and rising asset prices - yet you have to look far and wide to hear anyone who thinks twice about it anymore.
When the second of three estimates for fourth quarter GDP is released tomorrow, you're likely to hear something like this on the evening news:
The slowing consumer sector was apparent in today's report showing weak economic growth. Consumer spending accounts for more than two-thirds of economic activity and with falling home prices and flagging confidence, continued weakness in this sector could depress growth for some time to come.Just once, it would be nice to hear someone in the mainstream media doubt the conventional wisdom that we, as a nation, can borrow and spend our way to prosperity and expect that prosperity to endure.