P resident Bush stopped off en route to his summer vacation to assure the nation that the economy is in great shape. Unfortunately for him, the last president to do that was Herbert Hoover, and the rest, as they say, is history.
Some people think that Bush’s forecast of a soft landing proves only that he is out of touch with economic reality. After all, the world’s financial markets seem to be in shock, with the stock markets taking a hit on every bit of bad news.
Treasury Secretary Henry Paulson urges us to remain calm while the market reprices risk, which he sees as a healthy development after a period of too-casual lending. Traders prefer to call the current situation a liquidity crunch. Whatever the right name, we are witnessing turmoil in the markets.
Three Bear Stearns’ hedge funds have collapsed, resulting in the firing of the firm’s Chief Executive Officer. The CEO of France’s biggest bank, BNP Paribus, told reporters that his bank’s exposure to the American subprime market was “absolutely negligible” and a few days later had to suspend three of his asset-backed funds. Several private equity deals have been canceled as skittish lenders retreated to the sidelines. Even companies with high-quality credit have had to withdraw projected bond issues.
All of this has rattled some consumers. Tales abound of canceled vacations and deferred home buying, ripples that will become waves and swamp families struggling to keep their heads above water in the age of $3-a-gallon gasoline and “for sale” signs sprouting in their neighborhoods.
A new poll finds that nearly two-thirds of Americans think we are in the midst of a recession or will be in such a downturn in the next year. Of course, that has been their view for as many years as I can remember.
So the Bush administration is struggling to convince voters that the economy is in relatively good shape. And it has a decent story to tell — not a perfect one, and not one that can show an economy without problems.
The U.S. economy is proving to be a resilient, flexible machine. Despite all of the problems in the housing market — and they are real — and despite turmoil on Wall Street, the economy is providing jobs for just about everyone who wants to work.
The unemployment rate remains a low 4.6 percent, the economy created an average of 136,000 new jobs every month this year, and 40 of the 50 states have unemployment rates below the average for the ’80s and ’90s.
The economy grew at the highly satisfactory rate of 3.4 percent in the last quarter. Workers’ compensation has been growing in real terms, and inflation is contained, running at 2 percent or lower, and profits remain satisfactory.
The world economy is growing at something like an annual rate of about 5 percent. David Hale, an economic consultant, points out that the growth rates of 120 countries will exceed 4 percent this year; economist John Makin puts it more colorfully: “Since 2004, the global economy has caught fire.” That development, long in coming, combines with a weaker dollar to stimulate exports and reduce our trade deficit.
The real question is whether the monetary authorities will make the right moves to confine the developments in the credit markets to those needed to make lenders more careful in the future. At the same time, the Federal Reserve Board will have to make sure that creditworthy lenders have access to funds.
The president pointed out that the long-run health of the economy depends on new businesses, started by entrepreneurs willing to “take risks, to try out new ideas.” Those people need to borrow money to get started.
The great economist Joseph Schumpeter referred to “the common saying that in the United States, enterprise developed so well because its banking system was so bad.” Loans were readily available to entrepreneurs who were not, by the usual standards, good credit risks.
That’s why it’s so important that policy-makers figure out how to avoid both a bailout of imprudent lenders and, on the other hand, slamming the credit window on the fingers of those who are responsible for keeping our economy vibrant.
So far, Fed Chairman Ben Bernanke is trying to do just that by accepting banks’ mortgage-backed securities as collateral for hard cash. The economy is clearly at a turning point. Bad policy can propel it over the cliff, but good policy will ensure at least modest growth in the near and medium term.
Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Policy. His column normally appears on Mondays.
