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Politics : Politics for Pros- moderated

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From: LindyBill	12/31/2008 7:14:55 AM
	2 Recommendations Read Replies (1) of 793909

NYT Wrongly Focuses on Credit Crunch, Not Economy BEAT THE PRESS By Dean Baker The NYT was better than almost everyone else in occasionally noting the housing bubble on the way up, but it still is having difficulty coming to grips with the implications of its collapse. It told readers that the economy's prospects in 2009 will depend on the unlocking of credit. Really? Do they expect consumption to rebound to its pre-crisis levels if credit is unfrozen? What theory of consumption do they have where spending is unaffected by the loss of $6 trillion in housing wealth and $8 trillion in stock market wealth? Every economic model I know predicts that this loss of wealth would lower annual consumption by between $480 billion and $740 billion (3.3 percent to 4.9 percent of GDP) even if the financial system was fully solvent. If consumption would not return to its pre-crisis level, what would make up the gap? Does the NYT think that investment would soar if only the financial system were straightened out? The massive overbuilding in commercial real estate over the last few years makes such a boom especially unlikely. Furthermore investment is only 1/7th as large as consumption, which makes it almost impossible for higher investment to offset large declines in consumption. Presumably, an end to the credit crunch will not cause foreigners to suddenly start buying our exports in huge quantities. Nor will it lead to a flood of spending by state and local governments. In short, there is literally no coherent story that can be told under which ending the credit crunch will lead to a rebound in 2009. The economy will have to replace a huge amount of consumption spending (also lost spending on commercial construction) with spending by the federal government in the short-term and increased net exports in the longer term. The credit crunch is a side bar. In fact, given the destruction of wealth over the last two years, most economic models would predict that the economy is pretty much in its current state assuming no problems in the financial sector whatsoever. --Dean Baker

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