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Stock prices tumbled on Wall Street and across much of the rest of the world yesterday. They were driven sharply lower by worries over slowing economic growth in the United States and worsening borrowing conditions that could make everything from huge corporate buyouts to buying a new home more difficult.
It was the worst one-day decline on Wall Street since markets plunged worldwide in late February after an investing scare in Shanghai, and it occurred amid the biggest volume of trading on the New York Stock Exchange in five years. Losses were comparable throughout Europe, and larger in many developing countries.
-- Floyd Norris and Vikas Bajaj for The New York Times
The stock markets have taken a hit, and since our resident economist, Paul Krugman, has written it up in user-friendly terms, we'll get it down for our own record. His liberal edge also makes the discussion a little pointed.
___ ___ ___
The Sum of Some Fears
By PAUL KRUGMAN
Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but even so, it ended the day higher than its level as recently as mid-May, and well above its levels earlier in the year. This tells us that investors still consider a recession, which would cause the Fed to cut interest rates, fairly unlikely.
So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.
The first is fear of bad credit. Back in March, after another market plunge, I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums — the extra return people demand for holding bonds that aren’t government guaranteed — would soar, and credit would dry up.
Well, some of that happened yesterday. “The risk premium on corporate bonds soared the most in five years,” reported Bloomberg News. “And debt sales faltered as investors shunned all but the safest debt.” Mark Zandi of Moody’s Economy.com said that if another major hedge fund stumbles, “That could elicit a crisis of confidence and a global shock.”
I saw that one coming. But what’s really striking is how much of the current angst in the market is over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.
I’ve written a lot about housing over the past couple of years, so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, however, prices rose — and people began assuming that they would keep on rising. So the boom fed on itself: borrowers began taking out loans they couldn’t really afford and lenders began relaxing their standards.
Eventually the bubble had to burst, and when it did it left us with prices way out of line with reality and a huge overhang of unsold properties. This in turn has caused a plunge in housing construction and a lot of mortgage defaults. And the experience of past boom-and-bust cycles in housing tells us that it should be several years at least before things return to normal.
I’ve written less about oil prices, so let me emphasize two points about the oil situation. First, we’re now in our third year of very high oil prices by historical standards — prices as high, even when adjusted for inflation, as those that prevailed in the early 1980s, after the Islamic revolution in Iran. Second, unlike the energy crises of the past, this price surge has happened even though there hasn’t been any major disruption in world oil supply.
It’s pretty clear what’s happening: economic development is colliding with geology.
The “peak oil” theorists may or may not be right in asserting that world oil production is already as high as it will ever go — anyone who really knows what’s going in Saudi Arabia’s fields, please drop me a line — but finding new oil is getting a lot harder. Meanwhile, emerging economies, especially in Asia, are burning ever more oil as they get richer. With demand soaring and supply growth sluggish at best, high prices are what you get.
So why did people seem so shocked by a few more bad housing and oil numbers? What I guess I didn’t realize was how deep the denial still runs.
Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices.
Each new peak in oil prices was met with declarations that it was all speculation — like the 2005 prediction by Steve Forbes that oil was in a “huge bubble” and that its price would be down to $35 or $40 a barrel within a year. And on the other side, as recently as this January, National Review’s Buzzcharts column declared that we were having a “pop-free” housing slowdown.
I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.
Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.
-- Paul Krugman for The New York Times
xXx
Stock prices tumbled on Wall Street and across much of the rest of the world yesterday. They were driven sharply lower by worries over slowing economic growth in the United States and worsening borrowing conditions that could make everything from huge corporate buyouts to buying a new home more difficult.
It was the worst one-day decline on Wall Street since markets plunged worldwide in late February after an investing scare in Shanghai, and it occurred amid the biggest volume of trading on the New York Stock Exchange in five years. Losses were comparable throughout Europe, and larger in many developing countries.
-- Floyd Norris and Vikas Bajaj for The New York Times
The stock markets have taken a hit, and since our resident economist, Paul Krugman, has written it up in user-friendly terms, we'll get it down for our own record. His liberal edge also makes the discussion a little pointed.
___ ___ ___
The Sum of Some Fears
By PAUL KRUGMAN
Yesterday’s scary ride in the markets wasn’t a full-fledged panic. The interest rate on 10-year U.S. government bonds — a much better indicator than stock prices of what investors think will happen to the economy — fell sharply, but even so, it ended the day higher than its level as recently as mid-May, and well above its levels earlier in the year. This tells us that investors still consider a recession, which would cause the Fed to cut interest rates, fairly unlikely.
So it wasn’t the sum of all fears. But it was the sum of some fears — three, in particular.
The first is fear of bad credit. Back in March, after another market plunge, I spun a fantasy about how a global financial meltdown could take place: people would suddenly remember that bad stuff sometimes happens, risk premiums — the extra return people demand for holding bonds that aren’t government guaranteed — would soar, and credit would dry up.
Well, some of that happened yesterday. “The risk premium on corporate bonds soared the most in five years,” reported Bloomberg News. “And debt sales faltered as investors shunned all but the safest debt.” Mark Zandi of Moody’s Economy.com said that if another major hedge fund stumbles, “That could elicit a crisis of confidence and a global shock.”
I saw that one coming. But what’s really striking is how much of the current angst in the market is over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices.
I’ve written a lot about housing over the past couple of years, so let me just repeat the basics. Back in 2002 and 2003, low interest rates made buying a house look like a very good deal. As people piled into housing, however, prices rose — and people began assuming that they would keep on rising. So the boom fed on itself: borrowers began taking out loans they couldn’t really afford and lenders began relaxing their standards.
Eventually the bubble had to burst, and when it did it left us with prices way out of line with reality and a huge overhang of unsold properties. This in turn has caused a plunge in housing construction and a lot of mortgage defaults. And the experience of past boom-and-bust cycles in housing tells us that it should be several years at least before things return to normal.
I’ve written less about oil prices, so let me emphasize two points about the oil situation. First, we’re now in our third year of very high oil prices by historical standards — prices as high, even when adjusted for inflation, as those that prevailed in the early 1980s, after the Islamic revolution in Iran. Second, unlike the energy crises of the past, this price surge has happened even though there hasn’t been any major disruption in world oil supply.
It’s pretty clear what’s happening: economic development is colliding with geology.
The “peak oil” theorists may or may not be right in asserting that world oil production is already as high as it will ever go — anyone who really knows what’s going in Saudi Arabia’s fields, please drop me a line — but finding new oil is getting a lot harder. Meanwhile, emerging economies, especially in Asia, are burning ever more oil as they get richer. With demand soaring and supply growth sluggish at best, high prices are what you get.
So why did people seem so shocked by a few more bad housing and oil numbers? What I guess I didn’t realize was how deep the denial still runs.
Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices.
Each new peak in oil prices was met with declarations that it was all speculation — like the 2005 prediction by Steve Forbes that oil was in a “huge bubble” and that its price would be down to $35 or $40 a barrel within a year. And on the other side, as recently as this January, National Review’s Buzzcharts column declared that we were having a “pop-free” housing slowdown.
I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.
Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.
-- Paul Krugman for The New York Times
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no subject
Date: 2007-07-27 04:46 pm (UTC)From:Just the other day stocks hit an all-time high, now they're down. Today the report is of good growth while the paper also had a piece about how the housing slump is really worrying analysts.
For what it's worth, I think the true sign of the times is your average joe and how they feel. And that pretty much is the same sad story it has been for a number of years. Prices are rising, wages aren't keeping up, homes and rents are increasing too fast, gas prices aren't sustainable, health care and bad credit are looming long-term problems. Education prices are soaring. We may have better periods here and there, but the bigger graph would show a steady downtown in the financial situation of most Americans. And that is the most disturbing because I'm not sure anyone has any clue how to fix it.
no subject
Date: 2007-07-29 04:22 am (UTC)From:Market corrections are good, but we can have too much of a good thing - or at least too much of the doubtful speculation and business moves that have led to the corrections. And we would like the corrections to be fairly short-term and unpainful - definitely worth keeping an eye on it. Now, for instance, people are talking about the worst week in some years, I think I recall from the morning news. It is perhaps worth a wary concern.
Your point is well taken about how strong the economy has been, which is striking considering the new geo-political situation and its threat to stability, not to mention what we are paying in war costs in Iraq. Another good statistic is that all income classes have been rising, which had been a concern, that the lower classes were getting zilched.