Spring Break
Pop! goes the housing bubble, part 2
John Jose, Columnist, jjose@smu.edu
Issue date: 12/5/08 Section: Opinion
These are sobering numbers when you think that American GDP growth could be cut in half just by the absence of this source of growth. Add in the negative effects occurring in the economy, the loss of job growth and the jobs that will be cut, and it becomes a bleak picture indeed.
"Being the world's largest economy, the United States causes more than a ripple with any change in its economic situation. As aforementioned, spending in America padded the world economy when the rest of the world's consumers were saving. This helped fuel the fantastic GDP growth of China and India, which in turn boosted oil and raw material prices. It also spared the international economy from a harsher recession."
The biggest question now is whether those in Asia and Europe who have been saving will spend some of it, boosting demand in key places like China and India. If they do, it could significantly lessen the severity and duration of the downturn.
"America's economic imbalances do need correction. Consumers need to spend less of their income and save more; the long-term health of the economy depends on it. If house prices slow dramatically, the Fed might be pressured to slash interest rates to support spending; this is what happened earlier this decade when share prices plummeted. To do so now would be a mistake. An economic jolt brought about by a decline in house prices is exactly what the economy needs to regain an even keel of spending and savings."
Yes, Americans need to save more and spend less, and yes, it would be beneficial to future generations if we saved more now, but in the middle of a crisis the view tends to change. It took everyone by surprise how fast things went south. We've received a bit more than a jolt, and to not cut rates now would be the real mistake. With inflationary pressures such as commodity prices significantly reduced, the Federal Reserve and especially European governments have quite a bit of room to boost demand.
"The American consumer will feel a bit of a sting from the slowdown. Much like the initial shot of a vaccine hurts a bit, the economy will take a short term hit. But this is much preferable to a long-term terminal illness that poisons the system and is much harder to cure. A housing shock is a necessary evil that homeowners should reconcile themselves to and start preparing for immediately."
It may be necessary but those who've been laid off or lost their savings will readily agree it is damn evil.
John is a junior finance and economics double major. He can be reached for comment at jjose@smu.edu.
"Being the world's largest economy, the United States causes more than a ripple with any change in its economic situation. As aforementioned, spending in America padded the world economy when the rest of the world's consumers were saving. This helped fuel the fantastic GDP growth of China and India, which in turn boosted oil and raw material prices. It also spared the international economy from a harsher recession."
The biggest question now is whether those in Asia and Europe who have been saving will spend some of it, boosting demand in key places like China and India. If they do, it could significantly lessen the severity and duration of the downturn.
"America's economic imbalances do need correction. Consumers need to spend less of their income and save more; the long-term health of the economy depends on it. If house prices slow dramatically, the Fed might be pressured to slash interest rates to support spending; this is what happened earlier this decade when share prices plummeted. To do so now would be a mistake. An economic jolt brought about by a decline in house prices is exactly what the economy needs to regain an even keel of spending and savings."
Yes, Americans need to save more and spend less, and yes, it would be beneficial to future generations if we saved more now, but in the middle of a crisis the view tends to change. It took everyone by surprise how fast things went south. We've received a bit more than a jolt, and to not cut rates now would be the real mistake. With inflationary pressures such as commodity prices significantly reduced, the Federal Reserve and especially European governments have quite a bit of room to boost demand.
"The American consumer will feel a bit of a sting from the slowdown. Much like the initial shot of a vaccine hurts a bit, the economy will take a short term hit. But this is much preferable to a long-term terminal illness that poisons the system and is much harder to cure. A housing shock is a necessary evil that homeowners should reconcile themselves to and start preparing for immediately."
It may be necessary but those who've been laid off or lost their savings will readily agree it is damn evil.
John is a junior finance and economics double major. He can be reached for comment at jjose@smu.edu.
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