August 05, 2011
Morning Edition had a segment on the current turmoil in financial markets in which it asserted that the United States still has not recovered from the effects of the financial crisis. This is not true.
The economy is not in any obvious way suffering from the effects of the financial crisis. Potential homebuyers have little difficulty getting mortgages. We know this because the Mortgage Banker Association’s mortgage application index has not been rising. This index measures applications, not mortgages. If otherwise qualified buyers were being turned down by banks, they would have to put in multiple applications to get a single mortgage. This is not happening.
The real and nominal interest rates on corporate bonds are at extraordinarily low levels indicating that larger firms have no difficulty getting capital. The National Association of Independent Businesses, which consists of smaller businesses, has fielding a monthly survey for more than a quarter century that asks its members what are its biggest problems. Very few cite the availability or cost of finance, indicating that small business does not finance as a problem either.
The economy’s weakness is easily explained by the collapse of the housing bubble. The overbuilding of the bubble years led to enormous oversupply of housing and most type of non-residential structures. Therefore construction is hugely depressed. Similarly, the loss of close to $8 trillion in housing wealth is leading to predictable drop in consumption. The bubble wealth pushed the saving rate close to zero. It is now rising back to its normal level of close to 8 percent.
In short, the fallout from the collapse of the bubble easily explains the economy’s weakness. It is not clear why NPR is telling its listeners that the problem is the financial crisis.
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