A few words of wisdom fromn Gregg Easterbrook. Full article here:
"Financial chaos is sweeping the world," a New York Times lead story said last week. I didn't notice any chaos in my part of the world -- every business was open, ATMs were working, goods and services were plentiful. There are economic problems to be sure. But chaos? Collapse? Next Depression? Please, media and political worlds, let's stop hyperventilating and show some perspective.
What is going on is a financial panic, not an economic collapse. Financial panics are no fun, especially for anyone who needs to cash out an asset right now for retirement, college and so on. But financial panics occur cyclically and are not necessarily devastating. The most recent financial panic was 1987, when the stock market fell 23 percent in a single day. Pundits and politicians instantly began talking about another Depression, about the "end of Wall Street." The 1987 panic had zero lasting economic consequences -- no recession began, and in less than two years, stocks had recouped all losses. Perhaps a recession will be triggered by the current financial panic, but it may not necessarily be severe.
. . . . Why has a credit-market problem expanded into a panic? One reason is the media and political systems are now programmed for panic mode. Everything's a crisis! Crises, after all, keep people's eyes glued to cable news shows, so the media have an interest in proclaiming crises. Crises make Washington seem more important, and can be used to justify giveaways to favored constituent groups, so Washington influence-peddlers have an interest in proclaiming crises.
An example of the exaggerated crisis claim is the assertion that Americans "lost" $2 trillion from their pension savings in the past month, while equities "lost" $8 trillion in value. This confuses a loss with a decline. Unless you cashed out stocks or a 401(k) in the past month, you haven't "lost" anything. . . . People who because of financial need have no choice but to cash out stocks right now are really harmed. Anyone who simply holds his or her ground with stocks takes no loss and is likely, although of course not certain, to come out ahead in the end. . . .
We've also fallen into panic because we pay way too much attention to stock prices. Ronald Reagan said, "Never confuse the stock market with the economy." Almost everyone is now making exactly that mistake. The stock market is not a barometer of the economy; it is a barometer of what people think stocks are worth. . . .
Consider this. On Black Monday in 1987, the market fell 23 percent. If you had invested $100 in a Dow Jones Index fund the following day, it would be $460 now, a 275 percent increase adjusting for inflation. That's after the big slide of the past month, and still excellent. So don't panic, just hold your stocks. And if you'd invested $100 in real estate in 1987, it would be $240 today, a 30 percent increase adjusting for inflation. That's after the housing price bubble burst. A 30 percent real gain in 20 years isn't a great investment -- until you consider that you lived in the house or condo during this time. To purchase and live in a dwelling, then come out ahead when you sell, is everyone's dream. . . .
Want to worry? Worry about the fact that the United States is borrowing, mainly from foreign investors and China, the money being used to fix our banks. . . . Peter Orszag, now director of the Congressional Budget Office, was on "Newshour" last week talking about the panic:
PETER ORSZAG: One thing we need to remember is we're lucky that we have the maneuvering room now to issue lots of additional Treasury securities and intervene aggressively to address this crisis.
JEFFREY BROWN: Wait a minute. Explain that. Lucky in what sense?
PETER ORSZAG: That people are still willing to lend to us. If in 20 or 30 years we continue on the same path, with rising health-care costs and rising budget deficits, we would reach a point where we wouldn't have that ability.
