NCPA - National Center for Policy Analysis

ECONOMIC HYSTERIA

April 17, 2008

The U.S. economy is likely in recession.  Yet even that conclusion may be premature, says Alan Reynolds, a senior fellow with the Cato Institute, because it rests on a short sample of slim evidence. Industrial production has fallen for only one month.  First-time claims for unemployment insurance touched recession levels for just one week.

The focus of the gloomy economic news is on a "credit crisis" or "financial crisis."  Yet postwar U.S. financial crises have never resulted in economic disaster:

  • Think of the savings & loan (S&L) crisis of 1986-1995 -- a period that also saw Black Monday (Oct. 19, 1987), when Dow stocks fell 22.6 percent.
  • The S&L crisis lasted from 1986 to 1995, and was undoubtedly the worst U.S. financial crisis since World War II.
  • Yet the real economy grew by 2.9 percent a year over that period.

Some papers can't get anything right, says Reynolds.  An April 6 New York Times piece ("Almost as if The Sky Were Falling," on stock prices) claimed that the "focal point for the stock market's difficulties" is that "banks have been reluctant to lend money to one another, or to anyone else."  However:

  • If banks have been reluctant to lend money to one another, then interest rates on such loans wouldn't have fallen to 2.6 percent from 5.3 percent a year earlier.
  • And if banks were reluctant to lend to "anyone else," then bank loans wouldn't have increased by 8 percent (as Fed data say they have) since last August, when the mortgage crisis first emerged.

Source: Alan Reynolds, "Economic Hysteria," New York Post, April 11, 2008.

For text:

http://www.cato.org/pub_display.php?pub_id=9330 

 

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