It is Ben Bernanke’s job to worry about the economy, and later today he will decide whether it needs a boost from lower interest rates.
A bit of advice: Leave the near-term worry to the Fed chairman. Concentrate instead on the longer term, on the question of whether we are in for a long period of economic problems.
In answering that question, remember the extraordinary resilience of the American economy after Islamic terrorists dealt what they thought was a lethal blow to American capitalism.
Their attack brought down the World Trade Center towers, home to many leading financial institutions; the New York Stock Exchange closed. Surely, Osama bin Laden had demonstrated that his version of god trumped Mammon.
Not really. I remember lunching at a reopened stock exchange with Rudy Giuliani, and I still have the souvenir hat emblazoned with “Let Freedom Ring.” Uplifting, but having been to ground zero shortly after Sept. 11 as a guest of New York’s finest, I worried that the American economy might never bounce back.
Since that terrible day, the American economy has demonstrated that a flexible, capitalist economy can survive and then prosper after a blow that makes the current upset in financial markets look trivial by comparison.
Here are some facts to consider, compiled for me by the Hudson Institute’s Andrew Brown. Household employment has grown by about 1 million jobs, or 7 percent. The unemployment rate has dropped from 4.9 percent to 4.6 percent. Some 3 million more families own their own homes, and the current troubles in the mortgage market won’t put much of a dent in that gain.
As for investors, they are far ahead of where they were when their world collapsed along with the twin towers. The day before the attack on the world’s financial center, the Standard & Poor’s index of 500 stocks stood at 1092; when the exchange reopened a mere five days later, the index closed at 1039; six years after the attack, and after this tough summer for markets, it was at 1452, a gain of 40 percent from its low point.
Perhaps most startling, America’s gross domestic product has increased by $2.5 trillion (adjusting for inflation). Look at it this way: In the six years since the attack on America, the U.S. economy has grown by an amount that exceeds the size of the British or French economies.
There are many reasons why an economy so badly shaken as ours was on Sept. 11, 2001, recovered so completely. Certainly, the Bush tax cuts are in line for a share of the credit. Certainly, too, Alan Greenspan’s Fed helped by pumping money into the system when a variety of external and internal financial shocks threatened to cause mayhem in the “real economy.”
And surely the availability of immigrant labor helped by providing Silicon Valley with a crop of imaginative Indian CEOs, and Salinas Valley with hands to pick the artichoke crops for which that part of Southern California is famous.
But there is more than that, which is the lesson to keep in mind when you decide how much worry-time to devote to the ongoing turmoil in financial markets.
The U.S. economy is resilient because it is flexible. When cutbacks in defense spending caused widespread layoffs in California, unemployed workers moved to neighboring states in which jobs were plentiful. Americans go to where the work is, and there are no regulations to stop them.
Then there is American entrepreneurship, the willingness to take risks in the pursuit of very large gains. This has all to do with the current problems in financial markets. One important recent advance has been the development of innovative financial instruments that dice and slice risk to fit the appetites of a variety of risk-takers.
It is fashionable these days to complain about nontransparent “securitization of mortgage risk.” But it is just that securitization that attracted many more players than otherwise would have made their capital available to finance, among other things, the home mortgages that allow 3 million more families to own homes than in 2001. Eliminate these new, exotic instruments totally, and risk-taking will diminish.
Yes, a bit more transparency would be nice. So would some new rules to crack down on shady mortgage brokers and to help borrowers to avoid taking on a nightmarish debt burden when they pursue the American dream of home ownership.
But over-react, and we scare too many lenders away from the mortgage market and stifle the growth of new ways to finance home ownership. That’s something to worry about.
Examiner Columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Policy.
