Monday, October 30, 2006

Paul Krugman: Bursting Bubble Blues - New York Times

David Seaton's News Links
The US dollar, which is the universal measure of value, could be compared to a house delicately balanced on the edge of a cliff... Just running to the kitchen for ice could send the whole thing plunging into the abyss. The bursting of the US housing bubble could set off a chain of events that could shake the world. DS

Abstract: Over the last few years, ... the housing boom became a bubble, fueled by a surge of irresponsible bank lending, which continues even now. ... The question now is how much pain the bursting bubble will inflict. Last week’s report on G.D.P. showed the first signs of serious economic damage. According to the “advance” estimates (which are often subject to major revisions), growth in the third quarter of 2006 slowed to its worst level since early 2003. A plunge in spending on residential construction, which fell at an annual rate of 17 percent, was the main culprit. ... Some say the worst is already over. Mr. Greenspan, who’s been an optimist all the way, now argues that the latest data on new-home sales and mortgage applications suggest that housing has already bottomed out. Business investment is still growing briskly, and so far consumers haven’t cut their spending. So maybe this is as bad as it gets. But I think the pessimists have a stronger case. There’s a lot of evidence that home prices, although they’ve started to decline, are still way out of line. Spending on home construction remains abnormally high as a percentage of G.D.P., because banks are still lending freely in spite of rapidly rising foreclosure rates. This means that home sales probably still have a long way to fall. ... Moreover, much of the good news in the latest economic report is unsustainable at best, suspect at worst. Almost half of last quarter’s estimated growth was the result of a reported surge in automobile output, which some observers think was a statistical illusion... So this is probably just the beginning. ... READ MORE

No comments: