Paul Krugman: The Sum of Some Fears

Paul Krugman discusses three fears about the economy:

The Sum of Some Fears, by Paul Krugman, Commentary, NY Times: Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but ... ended the day ... well above its levels earlier in the year. This tells us that investors still consider a recession ... fairly unlikely.

So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.

The first is fear of bad credit. Back in March, ... I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums ... would soar, and credit would dry up.

Well, some of that happened yesterday. “The risk premium on corporate bonds soared...,” reported Bloomberg... “And debt sales faltered...” Mark Zandi of Moody’s ... said ... another major hedge fund stumble..., “...could elicit a crisis of confidence and a global shock.”...

But what’s really striking is ... the current angst ... over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.

I’ve written a lot about housing..., so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, ... prices rose ... and ... the boom fed on itself...

Eventually the bubble had to burst, and ... it did... And ... past boom-and-bust cycles in housing tells us that it should be several years ... before things return to normal.

I’ve written less about oil prices, so let me emphasize ... we’re now in our third year of very high oil prices..., even though there hasn’t been any major disruption in world oil supply.

It’s pretty clear what’s happening: ...finding new oil is getting a lot harder. Meanwhile, emerging economies, especially in Asia, are burning ever more oil... With demand soaring and supply growth sluggish at best, high prices are what you get.

So why did people seem so shocked by a few more bad housing and oil numbers? What I guess I didn’t realize was how deep the denial still runs.

Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices.

Each new peak in oil prices was met with declarations that it was all speculation — like the 2005 prediction by Steve Forbes that oil was in a “huge bubble” and that its price would be down to $35 or $40 a barrel within a year. And on the other side, as recently as this January, National Review’s Buzzcharts column declared that we were having a “pop-free” housing slowdown.

I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.

Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

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