IF ONLY EVERY PROBLEM WERE AS EASY TO DEAL WITH...:

The Economic News Isn't All Bleak: We may be in for a long slide. But there are also reasons to think the economy could rebound quickly. (Zachary Karabell, 12/26/08, Wall Street Journal)

First, we haven't seen war, revolution, the collapse of states and governments or massive demonstrations sweeping the globe. Crowds have demonstrated in China, Greece and Thailand -- for reasons sometimes related to the economic crunch and sometimes not. Pakistan is teetering for multiple reasons -- of which economics is only one. But major economic crises in the 20th century almost always led to those types of major breaks, especially during the 1930s. While no one can say whether they will come in the months ahead, for the time being we should be remarking on how relatively stable things are in light of what has happened.

Second, consumers in many parts of the world are in relatively good shape. That statement might strike many as absurd, given the mantra of "consumers have been living beyond their means." But it's not just the third of American households that have no mortgage, or the 50% savings rate in China, or the still massive wealth accumulation in the Gulf region, Brazil and Russia. It's that the credit system, even at its most promiscuous, didn't allow consumers to take on the obscene leverage that financial institutions did. Millions of people who shouldn't have been lent money were, either in mortgages or through credit cards. But they couldn't be levered 40-to-1 as investment banks and funds were.

People have also reacted swiftly to the current problems, paying down debt and paring back purchases out of prudence or necessity. That's a short-term drag on economic activity, but it will leave consumer balance sheets in good shape going forward. Low energy prices and zero inflation will boost spending power. Even if unemployment reaches 9% or more, consumer reserves in the U.S. and world-wide are deeper than commentary would suggest. Household net worth in the U.S. is down from its highs but is still about $45 trillion. As the credit system eases, historically low interest rates also augur debt refinancing and constructive access to credit for those with good histories and for small business creation in the year ahead. Entrepreneurs often thrive when the system is cracking.

In addition, corporations generally have very clean balance sheets with little debt and lots of cash, unlike the downturns in 2002 and in the 1980s.

...as reduced housing demand in a country with millions of people trapped in the underground economy.

Posted by Orrin Judd at December 26, 2008 6:34 PM