Day By Day

Monday, November 26, 2007

It's an Election Year, So the Doom-mongers Are Back

It has been said that if you laid all the economists in the world end to end they still wouldn't reach a conclusion. That's certainly the case regarding the current state of the economy.

Larry Summers, a Clinton tool in a year in which Hillary is aspiring to the Oval Office whose opinion is therefore suspect, predicts in the Financial Times an imminent recession unless the Fed takes drastic action to lower interest rates.

The New York Times predicts worse. Americans, they argue, have been living beyond their means for decades, depending on the kindness of other nations to sustain our extravagant policies and lifestyles, and now the chickens are coming home to roost. Get ready for richly deserved hard times. [here]

Noruiel Roubini, over at Global Economic Monitor, predicts that the crisis will worsen regardless of how much liquidity the central banks pump into the system. [here]

Which prompts Mark Thoma to respond that the biggest danger facing us right now is the possibility that people will take Summers' and the other hysterics' advice and stimulate us into a period of inflation. [here]

Thoma is right -- the hysterics and the moralistic tut tutting, however psychologically gratifying or politically useful, are not appropriate. At the most fundamental level, what we are trying to deal with is a crisis of confidence in the lending industry, and predictions of imminent doom are not helping the situation one bit.

Brad DeLong explains [here].
A U.S. recession is probable because sentiment now believes that a U.S. recession is probable.

We seem to be experiencing what George Will [remember him?] calls "The Politics of Economic Hypochondria". Basically, he argues, the welfare state mentality that now permeates our culture leads people to think like spoiled children. He may be right. Whatever the cause, public pronouncements of doom by political tools or smug moralists are not helpful.