Wikinvest Wire

What if conventional wisdom is wrong?

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:
  1. Economic growth is largely based on consumer spending
  2. Consumer spending is increasingly driven by rising home prices
  3. Banks must continue to expand credit for the system to function
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.

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baddriver said...


Anonymous said...

Conventional wisdom is wrong and has been wrong for decades, however, its much easier to just keep doing what appears to be working until it stops working. Amen is right.

donna said...

Well, those of us who grew up with parents who actually lived through the depression (even if they were just kids then) sorta knew this was coming. And planned accordingly.

But, we "responsible" ones get stuck with the bail out. That sucks.

Tim said...

There's hope! Representative Randy Neugebauer (R-TX) had this to say at the Senate hearings today:

The U.S. economy is based on encouraging the U.S. consumer to consumer as much as he possibly can. In fact the stimulus package we passed the other day - $160 billion - was really, by and large, saying to the American people, "Go out and spend".

This consumption mentality, away from any kind of savings mentality, concerns me because that's always going to make the economy a lot more volatile because there's not much margin. A year ago, people were testifying before us, saying, "Don't worry about the savings rate" because people had huge equity in their home and so that was compensating for the lack of savings in the U.S.

But, now we see some reports that the value of real estate is falling 10-12-15 percent and the savings rate at zero and negative rates. Does that concern you long term - that we're trying to build an economy where people use up every resource that they have?

Fed Chairman Ben Bernanke responded by saying that this was longer-term problem.

tim's fan said...

"..yet you'd never get a hint of that even from reading the world's finest business publication"

The WSJ? I think the FT is a much better source of commentary. They don;t even compare.

it's like comparing Newsweek and the Economist.

Nick said...

Amen to some common sense, although personally I'm more bothered by people accepting the CPI as accurate, when it clearly isn't even remotely accurate, and so many things in our society depend explicitly or implicitly on it being reasonably accurate. The government's ability to essentially ignore inflation while printing money is analogous to banks being able to ignore risk because they were just selling the loans to wall street, where hedge funds bought them without oversight. They both work well in the short-term, and they both are disastrous in the long-term, when the built-up pressure brings down the entire system.

All the financial institutions and hedge funds which ignored risk can go belly-up (and if we were smart, we'd let them), and the economy will recover. The US currency going belly-up would make the housing crisis look like a missed credit card payment.

Tim said...

I inserted "one of the" before the offending statement. I like the FT but haven't read it enough to really be able to compare the two.

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BSR said...

"world's most important economy"

That title will be short lived; and that will prove your suspicion is spot on.

Anonymous said...

I was going to say "amen", but of course someone else has beaten me to the punch. Wonderful, and very sad. We have gotten to the point where debt and consumption are the measure of our individual, and national worth, simultaneously the cause, and the "solution" to our problems.

One step before panic is when people stop thinking and start doing something, anything, because "something must be done". A government that simultaneously provides a bailout and other programs to keep people in homes, and tax forgiveness to encourage them to leave, is not thinking or acting clearly.

See you all on the other side of the crash.

Anonymous said...

The Business of America is Business. And the business of politicians is to promise entitlements so as to get elected. Then the business of government is to tell Americans to be happy and keep spending. The politicians then have more tax monies with which to control behavior and exert power. We "entitled Americans" fell for this foolishenss and over consumed in the false belief that it would bring the happiness that our leaders promised.

Mathlete said...

A fool and his money are soon parted. People want something for nothing and the government gives it to them. Just look at the current crop of candidates, they're all offering something for nothing. One of the two major parties is dedicated to trashing "the rich", i.e. the people who save and invest.

Even if you could convince a majority of Americans that saving and investing is the way to get wealthy, they'll still want the easy way: 12% stock returns to infinity and beyond. said...

"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."

Advertisers don't like to hear that kind of talk. Not good business...

Anonymous said...

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.

Following on boom2bust: The purpose of the mainstream media is to reinforce consensual hallucinations.

Corporate media pretty much shot itself in the foot when it enabled the Idiot Prince's Iraq war marketing campaign. You should never trust any newspaper or magazine produced by an American conglomerate.
-- sglover

pdcreative said...


I completely agree. Those who argue that this is somehow a new paradigm are falling prey to what is known in the trading arena as "the bias of small numbers". In other words, they are drawing conclusions based upon a limited amount of data.

Yes, over the last 15-20 years, we have, for the most part averted the normal business cycle. But those who argue that this new paradigm of the Fed riding to the rescue is both permanent and somehow sustainable are hopelessly misinformed. The Fed is, quite simply, a central planning department. And ask anyone how well central planning has worked out.

How easily we seem to forget - or ignore - history. This is absolutely an unsustainable model. Whether it collapses now or later, it will collapse.

The amount of complacency still out there is remarkable. Many people still seem to feel that the Fed will save the day yet again (as they ignore the fact that it was the Fed, and our buddy Easy Al, who provided the cards on which our flimsy house is currently built). These same people seem to have little idea of the very real and very serious systemic risks to the U.S. economy right now.

This risk is, in my opinion, the greatest we've faced in 80 years. The bad news, losses, writedowns, credit problems, collapse in consumer spending, etc., etc. aren't even close to being done. It's high time people realized this.

staghounds said...

We can only live so long taking in each other's washing and trading two $5000 cats for one $10,000 dog.

This is absolutely nothing new. It's the inevitable result of fiat money, whether it's inflated by a French king to pay for palaces or an American Fed to pay for happy voters.

We only abandoned a gold standard- weak as it was- thirty five years ago, wasn't it? And money has lost how much of its value since then- half? Three quarters?

More like 80 percent. Or 90.

That big new Cadillac was $6168.00

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