Two from the Sunday NYT Business section

Two articles from last Sunday's Business section which are worth reading:

First:

BUSINESS / YOUR MONEY | August 24, 2008
Economic View: Finding the Mess Behind the Mess
By TYLER COWEN
The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings.

This one repeats a lot of themes you may already be tired of reading about, regarding the current economic/financial mess we find ourselves in. But it brings to the fore an underlying reason for this mess--the tagline above, about how Americans have used rising asset prices (stocks and then houses) as a substitute for savings. In fact, let me quote the first part of this article at length:

A BURSTING real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck. If your stocks went up, too, so much the better; don’t forget that the Dow Jones industrial average stood in the 800 range in 1982 and seemed to rise almost nonstop for many years.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

The need to save more sharpens a number of interrelated secondary problems. First, America is aging. More people than ever are entering the years when they stop saving and start spending their nest eggs. That means the transition to higher-than-expected savings may be drawn out and painful.

The second problem is that the American economy is enduring a credit crisis, with many banks trying to raise more capital and make fewer loans. Savings are good for the economy when they lead to investment, but there is no guarantee that financial institutions will be allocating capital efficiently.

The third problem is that lower consumer spending will require the American economy to make some shifts. That may mean fewer Starbucks and fewer new homes but more tractor production for export to foreign markets. In the long run, shifting some consumption to investment is probably beneficial to the economy; in the short run it means job losses and costly readjustments.

In addition, there are still excess homes on the market, and housing prices need to fall further. Of course, such price declines can make banks less solvent and thus worsen the credit crisis. And politicians would like to moderate this fall in prices, again prolonging the adjustment process.

And also a paragraph near the end:

Emerging from the current slowdown isn’t just a matter of political will or smart central banking. If the recipe for success requires smooth adjustment into new growth sectors, more savings from disposable income, cleaning up the housing mess, well-functioning energy markets, and more effective financial intermediation — all in the right combinations and in the right sequences — neither the government nor the Federal Reserve can control this process. The Fed can add regulatory and monetary clarity, but there isn’t any magic bullet. Beware of anyone who tells you there is.

The Japanese failed to break out of their recession quickly because they didn’t promptly close down or clean up their problem banks. So far, the Fed and other regulators show no signs of making this mistake; they have been vigilant in resolving crises as they occur. But that’s not enough to guarantee a successful transition. The American economy will be tested for its deftness — and the test will be difficult precisely because there isn’t a single enemy on which to focus.

Note that the essay begins with allusions to Japan's experience in the 1990s: a long, protracted recession which followed a real estate bubble. That is a comparison that a lot of people are making these days. It's unlikely that the US will also go through a "lost decade" of economic stagnation..but it's not impossible.

In fact, the second article I wanted to point out indicates we've got a ways to go, by looking at Merced, CA as a sort of "canary in the coal mine" for the rest of the nation's housing market:

BUSINESS | August 24, 2008
In the Central Valley, the Ruins of the Housing Bust
By DAVID STREITFELD
The experience of Merced, Calif., suggests that recovery from the national real estate debacle will be painful and protracted.

If you don't have the time, patience, or inclination to read that lengthy article, take a look at least at the accompanying graphics.