Manufacturing & Technology

EYE ON THE PIE: This may not be beginning of the end

October 15, 2007

"The sky is falling, the sun may not rise tomorrow, the eternal verities are in doubt."

So said the Prophet standing in the public park. Lunch-hour office workers and shoppers strolled past or relaxed on benches. The speaker was seen as a nut, an unfortunate member of the homeless class, driven by drugs to disgrace and dissolute dialogue.

But I knew better. This was Phil Prophet, formerly one of the leading mortgage lenders in the state, a regular Rotarian, a generous contributor to worthy social causes.

I approached him as he was urging all to consider "the termination of the golden era in American history and the commencement of economic shadows that inevitably will be followed by the darkness of social decay."

"What gives, Phil?" I asked.

"The mortgage market," Phil moaned, "has crashed and with it housing prices, followed by home construction, which leads to falling furniture sales and massive economic calamity as the credit crunch squeezes the very life out of American commerce."

"Is that so?" I said.

"It is a national disaster that will leave no business and no household without the scars of recessionary carnage," he proclaimed.

"Sounds serious," I said, "but it's not consistent with some data I've seen. Seems to me we have pockets of problems, not the pervasive peril you describe."

"What data can be more real than people losing jobs?" Phil asked.

"Yes," I agreed, "there were national losses in September in construction, manufacturing and financial services totaling 46,000 jobs, but the gains in other industries gave us a net increase of 110,000 jobs in the month. Further, I have figures that show housing prices are declining in only selected places."

I reached into my pocket and pulled out several dirty, folded pages on which virtually unreadable numbers and words were written.

"Here they are," I said.

"In the second quarter of this year," I read from my notes, "prices of previously sold homes fell in only 67 of 381 metropolitan areas. In Indiana, only the Kokomo area had lower prices than a year earlier (down 1.1 percent). The Bloomington, Gary and Columbus areas had increases in excess of 4 percent, which was about the national average.

"Indiana as a whole saw home prices climb 3 percent during that period, which put us 35th among the states. That's a long way from the 15.3-percent increase in Utah, but then we were not one of the five states with falling prices. Of those losers, the worst (Nevada) was down only 1.5 percent."

"Well," Phil said, lowering his voice, "then what is the crisis? What have I been worried about?"

"To put it bluntly," I said, "we've been living on Viagra in the housing market and that's not sustainable. We've had false expectations and misleading perceptions based on a temporary reality."

"Perception is reality," Phil pontificated again.

"No," I replied. "That's a lie we tell each other to mask our observational deficiencies. If you need glasses to see properly, it is evident that what you see without glasses is not reality. If your hearing is impaired, you are not in a position to judge how loud the music is being played. Objective reality does exist."

"Forget the philosophy," Phil said. "What about the economic crisis?"

"Remember what FDR told the nation?" I asked. "'The only thing we have to fear is fear itself.' Today, it is fear running wild through financial markets that is our greatest economic concern."

"Wanna get a cup of coffee?" Phil asked. "I'll buy."



Marcus taught economics for more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, send e-mail to mmarcus@ibj.com.
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