Some Monday Morning Pessimism Re: Financial Crisis

Reason contributing editor and San Francisco Chronicle reporter Carolyn Lochhead pens an absolutely downbeat story about our current predicament:

If the averages of previous crises hold, Americans can expect unemployment to reach 11 or 12 percent, housing prices nationally to drop 36 percent, stocks to lose more than half their value, and real output per capita to plunge 9.3 percent, according to economists Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard University, who have tracked financial crises back to 14th century England.

"Certainly the averages themselves are pretty discouraging," said Reinhart. "Because this crisis is as bad as they come."

Pessimists observe that Japan's Nikkei stock index peaked around 39,000 in 1989 and two decades later is languishing around 7,500. Japan's real estate market still has not recovered after 17 years. The Dow Jones index did not rebound from the 1929 U.S. stock market crash until 1954.

But just like in a Billy Mays TV pitch, wait—there's more!:

[University of Chicago economist Robert] Aliber thinks the cycle may soon bottom out. Crashes, like bubbles, always end. Rather than a fifth wave [of large-scale crises], he expects the next excess to be over-regulation and too-cautious lending.

Hoo boy. Whole thing here. Sadly, regarding the soaking up of toxic assets, the TARP et al. programs are more likely to work about as well as Mays' Zorbeez, which is to say not at all.

Regarding the Dow Jones index, recall as well that between 1960 and 1980, the thing basically moved sideways. Yet that hardly tells us much about U.S. society or wealth. Over the same period, for instance, the percentage of people going to college grew and so did home ownership rates. Those are two broad indicators of rising wealth. So the DJIA doesn't necessarily tell the whole story.