December 19, 2007


The Great Perception Gap (ROBERT SAMUELSON, 12/19/07, The Washington Post)

There is a vast gap of perception between the real economy of production and jobs and the financial economy of loans and investments. The real economy, though weakening, is hardly in a state of collapse.

In 2007, it has grown about 2%; payroll jobs are up by 1.3 million. Even economists who expect a recession generally think it will be mild. [...]

What ultimately matters is the connection between the financial economy and the real economy. In housing, that's clear. Subprime losses reduced mortgage lending, housing construction, sales and prices. In some other markets, something similar has occurred. If too many junk bonds were sold at foolishly low interest rates to finance "private equity" deals — buyouts of companies — then the process had to reverse someday through higher rates and fewer bonds being sold. That's not turmoil so much as the distasteful reality of recognizing losses on dubious investments.

Despite all the bluster, evidence of a widespread credit crunch is so far scant. Though credit standards have tightened, bank lending is still increasing. Many U.S.companies have paid down short-term debt, and corporate cash flow is running at a respectable $1.2 trillion annual rate. This insulates many firms from strains in credit markets.

In fact, those economists have been reduced to arguing that, as in '91 and '01, sub-optimal growth is the new "recession."

Posted by Orrin Judd at December 19, 2007 12:00 AM
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