The Corporate Debt Stories Show People Still Don’t Understand the Great Recession11th June 2019
The Washington Post had another column telling us about the run-up in corporate debt and how this is going to be 2008 all over again. This is a popular one with the media. William Cohan has a regular feature in the New York Times telling us how a collapse of the debt bubble is imminent, giving us another financial crisis.
While excessive corporate debt can pose problems, nothing we see now, or will plausibly see in the near future, looks anything like 2008. The fact that ostensibly knowledgeable people can say this shows that they not only missed the housing bubble as it was growing, ten years after it burst, they still don’t have a clue as to what happened.
So let’s try our Econ 101 lesson once again.
The reason the economy collapsed in 2008 was that the housing bubble that had been driving the economy collapsed. The financial crisis was lots of fun (always good to see billionaire types sweating), but it was very much secondary. The issue was that the housing bubble created a massive amount of demand in the economy, which disappeared when the bubble collapsed.
Most economists probably didn’t recognize the impact of the bubble because you would need access to GDP data, as in the data that is readily available on the Commerce Department’s website any time anyone cares to look. Those who did think that GDP data are useful in understanding the economy would see that residential construction, which had averaged a bit more than 4.0 percent of GDP in the 1980s and 1990s, soared to a peak of 6.7 percent of GDP in 2005.
This surge in construction spending was not associated with any developments in the fundamentals of the housing market. After all, the baby boomers, the largest demographic group, were seeing their children move away from home and downsizing. Rents were not sharing in the upswing in house prices, moving more or less in line with inflation. And, vacancy rates were hitting record highs.
All of this should have suggested that the surge in residential construction was transitory and likely to end when house prices came back down to earth. In fact, construction was likely to over-correct since the construction boom meant there was a lot of overbuilding. Construction ultimately bottomed out at 2.4 percent of GDP in 2010 and 2011. (It is 3.8 percent in the most recent data.)
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