Monday, September 15, 2008

The Titanic Is Not Sinking

Is the stock market plummeting? Yes. Could it go lower - a lot lower? Yes. Will some businesses close? Yes. Will some jobs be lost? Yes.

Then - is this a real economic crisis? Not exactly. It is a financial crisis, limited so far to the financial sector of the economy. But not an "economic" crisis, not for the whole economy. For example, the transportation, energy, utility, manufacturing and other sectors are not in crisis. Will they be affected? Yes. But not in the same way or as much.

How do we know the rest of the economy is "sound?" Not by guessing or by wishful thinking (nor by making hasty electioneering points), but because the numbers tell us so. Unemployment may be up, but it is still low historically. Productivity - a prime indicator of economic soundness - is at a new peak. Are we in recession? No. Growth in the last quarter was 3.3% - very healthy.

Is this time like the Great Depression? Not even remotely! Rather, this is most like 1987, when another housing bubble burst and there was "Black Monday" when the stock market lost 25% of its value in one day. What were the results?

The financial sector was restructured. Some businesses survived, some didn't. Some government regulations were changed. Some parts of the country were strongly affected, other areas barely affected. The economy as a whole slowed some, but was in recovery within months.

Is that what will happen this time? Not exactly. But what will happen should be closer to 1987 than other scenarios out there right now.

In short, it's time for repairs and adjustments, probably some belt-tightening - but not panic. This ship is not going down. It would take much more than this financial crisis to do that. After we learn some needed lessons, better days will be back. This present crisis will be a fading memory.

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