Nov

26

Crises sell newspapers, so the press is eager to find them. Here is my "translation" of a recent Associated Press disaster article :

Saturday November 24, 12:02 am ET

AP headline: "New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario"

Reality: New Wave of Mortgage Failures Have Created a Nightmare Economic Reporting Opportunity

AP reports: "…some experts say [the crisis] could spread from those already battered banks into the general economy. … The worst-case scenario is anyone's guess, but some believe it could become very bad."

Reality: Of course the "worse-case scenario" won't actually be "anyone's guess" but "AP's guess" because the AP will only report guesses that ominously predict vast economic disasters (and then call for government intervention).

AP reports: "We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times [well, he seems to be? -GR]– but, as an expert on the global credit crisis, he speaks with authority. … "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Hawley / SmootReality: The Depression wasn't a "downturn" nor caused by a downturn. It was a depression caused by a series of government interventions in the economy. Lawrence Reed's essay "Great Myths of the Great Depression" nicely outlines the Great Depression's various phases. The stock market downturn would not have led to a long term depression without government intervention. Maybe that is what Mr. Gross of PIMCO expects from Congress as it tries to jump into markets to keep them from clearing, or to invalidate loans and other contracts. Mr. Gross warns of the downturn's "effect on future lending attitudes" as a problem. But is was past "lending attitudes" that were the problem (the attitude, for example, of not bothering to check a borrower's ability to make monthly payments). If people have less equity to extract from their homes to buy stuff, they will indeed spend less and probably purchase a different mix of goods and services. Prices, markets, and the economy will adjust. Of course, until the downturn not a week went by without the media complaining that people were buying and consuming too much anyway. Where are the experts the media used to quote who informed us that America's consumer society was bad, bad, bad, and people shouldn't buy so much stuff?

AP reports: "Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy. … The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida."

Reality: If this "crisis" pushes housing prices down and way down, how does that make housing less affordable? Will the banks dismantle repossessed housing, or put it back on the market at lower prices? Will people forced out of homes they couldn't afford stay out on the street, or rent apartments, or move into smaller homes, or maybe move into the same homes once they are 40% less expensive? What other solution is there for "once-hot real estate spots" where housing mania pushed prices rapidly up 40% or more? It was the boom that created the mess. The bust is just the needed clean-up process.

AP reports: "Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute."

Reality: Would it be better for these 3 million people to continue building houses and other goods, and providing services that people don't want or can't afford? Again, the problem was the bubble that led to manic overproduction and over-pricing of housing in some markets.

Millions gambled that housing prices would keep rising, allowing them to quickly gain equity and refinance at lower interest rates. The vast majority of new home-buyers over the last five-ten years won this gamble, gained equity, refinanced, and now live happily in homes they would otherwise have not been able to afford. But some came too late to this particular party, especially in some overheated housing markets. And others, confused by good fortune with early housing purchases, bought more homes hoping to make a killing, or at least to retire early. They may instead retire late.

AP reports: "Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy."

Reality: Many Americans are unaware of a lot of things. Unfortunately, they are likely to be even less aware after reading AP scare stories like this one.


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