Sunday, October 12, 2008

What Kind of Crisis Is This?

I've been through a few severe economic crises while I lived in Brazil. I remember for example the effects of the Brazilian debt crisis of 1982. For a while, we couldn't afford to have beef in our diet (that was before I became a vegetarian). We had to carpool or take the bus to school or work. Credit went the way of dinosaurs. Many people I knew lost most of their savings due to wrong financial bets.

I've been expecting something similar to be observed during this crisis, given the state of economic chaos portrayed in the news. Reality insists however on showing me a much rosier face.

I'll give a few recent examples. I asked the regional Midwest bank with which I have an account to double one of my credit lines a couple of days ago. The request was approved in less than three minutes. I also know that this bank is in great financial shape.

I went with my family to dine out at one of our favorite restaurants on Saturday, and there was a one hour waiting time to be seated.

Price of gas, heating, international traveling and interest rates are down, so we're having some unexpected budgetary relief.

What kind of crisis is this?

I don't believe that the bailout plan has anything to do with it. It's too soon for it to have produced any real effect on the economy, and for sure it didn't have any positive effect on expectations.

Yes, I know that crackheads, ex-cons and real estate gamblers have lost their credit lines. I know that overpaid yuppies in Wall Street are sweating blood. I know that some CEOs have been able to avoid deserved market discipline with the help of the taxpayer. I know that my retirement accounts are taking a beating. I know that it may get worse before it gets better.

It appears to me however that Mulligan has hit the bull's-eye in this NYT article (HT Mankiw):

Bear with me. I know that most everyone has been saying for a couple of weeks that something has to be done; a banking crisis could quickly become a wider crisis, pulling the rest of us down. For this reason, the Wall Street bailout is supposed to be better than no plan at all.

Too bad this line of thinking is seriously flawed. The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated. ...

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

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