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Dow Hits Record High, But Housing Foreclosures Rise

July 20, 2007 at 6:20 PM EDT
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TRANSCRIPT

RAY SUAREZ: Hi, we’re back. I’m joined by David Leonhardt, an economics columnist for the New York Times. David, are you with us?

DAVID LEONHARDT, Economics Columnist, New York Times: I think I am this time, aren’t I?

RAY SUAREZ: OK, great. We’ve had some mixed numbers in the past week. How do they square with a stock market that’s risen so strong, so fast?

DAVID LEONHARDT: The stock market really has risen strongly in the last few years, but the problem with all this talk about record-high stock markets is that the stock market isn’t really, in a real sense, at a record high. The main reasons the Dow Jones Industrial Average and the Standard and Poor have reached these so-called records is inflation.

And every year, the government prints more money, and so every year the price of cars and bread and stocks go up. And that’s really the only reason that we have the stock market now at a record. If you look at it in inflation-adjusted terms, the Standard and Poor 500 index, which is a much better measure than the Dow of what the market’s doing, is still about 18 percent or so off of its real high from the year 2000.

And even when you include things like dividends, it’s 8 percent or 9 percent lower than it was in early 2000. So there’s really no meaningful way in which the stock market is at a record high, although it’s had a good few years.

Housing market presents risks

RAY SUAREZ: But even the S&P, which as you point out is a much broader market measure, it's higher than it was three months ago, six months ago, 12 months ago. Isn't that a marketplace deciding that a small piece of companies is a good thing to own?

DAVID LEONHARDT: Absolutely. And over the long term, there's no question that the stock market has always been a good investment. And the odds are overwhelming that it will be over the next 20, 30 years.

I think the issue is that all this discussion of record highs and this idea that we're always hitting new records gives people an impression that the stock market is a can't-miss investment. And the stock market is not a can't-miss investment. There's really no such thing as a can't-miss investment. And so, although we've had a really good few years, we still haven't completely worked off the bubble of the late '90s.

RAY SUAREZ: Ben Bernanke, the Fed chairman, reported to Congress this week. He talked about a great many factors affecting the economy. What was the headline for you?

DAVID LEONHARDT: I think the headline is still the housing market, because I think the housing market still presents the biggest risks for the economy. And he said that the problems in the subprime mortgage market are likely to get worse before they get better, and that's clearly the case.

The big question there is whether this is ever going to spread and this is going to become a macroeconomic event. I think the overwhelmingly likelihood is that we're going to have more mortgage problems, that, unfortunately, more people are going to lose their homes, that some investors who thought these investments were risk-free are going to find out they're not, and that we're going to have house sales and house prices be disappointing in most of the market for a number of years.

It's still not clear, however, whether these mortgage problems are going to spread and, say, bring down a big hedge fund or in any way interrupt this economic cycle.

A market correction on housing

RAY SUAREZ: But if credit is tightening up and people who were on the bubble are losing their homes, isn't that a kind of market correction, where perhaps the over-lending and some of the excesses of earlier are being squeezed out now?

DAVID LEONHARDT: Absolutely. And I think it's really good that these excesses are being squeezed out, because we had a crazy situation in the last couple of years, in which people were getting mortgages for homes they couldn't afford without really having to prove that they could afford them. And sometimes they were just being foolhardy, and in other cases they were being tricked by lenders. And so I think it is really good to have the excesses wrung out.

The problem is, is that there is going to be some significant collateral damage in terms of people losing their homes and in terms of some other things. What's not clear yet -- and Bernanke's remarks got at this -- is that it's not clear yet that this is going to in some way derail the economy.

RAY SUAREZ: Well, how would that work? When someone with as much clout as the chairman of the Federal Reserve gets up before a congressional panel and says, "Inflation is still a danger, and I'm really concerned by what I'm seeing in the housing market," what are the ripples that that sends out into the wider economy?

DAVID LEONHARDT: Well, clearly, a big reason that the economy has remained so strong in the wake of the 2001 recession, and that it bounced back so quickly from September 11, 2001 -- people forget that the recession was already six, eight months old on September 11th. And within a couple of months, we were out of recession. The reason it's done that well is because of consumer spending.

So there is this concern that, in some ways, that the American consumer could have some sort of psychological breaking point. The problem with that is that we've been worried about some sort of psychological breaking point with the American consumer for something approaching 200 years, and it rarely happens.

And so this housing correction is really serious. And to some extent, we can't know what's going to happen, because we never had a housing run-up like we had between 2000 and 2005. But at this point, it's really tough to figure out whether it spreads beyond housing.

Inequality in the economy

RAY SUAREZ: Well, this week, the House Banking Committee Chairman Barney Frank brought up a topic that Ben Bernanke has also discussed, inequality. When a new dollar of wealth comes into the economy, is it disproportionately being earned by one part of the economy rather than another?

DAVID LEONHARDT: Well, I guess disproportionate is a subjective judgment, but I think one of the things that Congressman Frank was trying to argue, quite strongly, is that we thought of inequality for many years -- roughly from the '70s to the mid- or late-'90s -- as this widening of the gap between college graduates and high school graduates or high school dropouts.

And Barney Frank was pointing out that, in the last few years, in fact, the group of people that have done really well have gotten smaller and smaller and smaller. So, in fact, over the last four or five years, even those college graduates haven't gotten raises that are that much better than inflation. It's only been the people at the real, real top of the economic ladder, people with PhDs and law degrees.

And so the question becomes, in some way, has this highly technological globalized economy we have made it much, much harder for ordinary people, for 80 percent or even 90 percent of the workforce, to get good raises? And if you look at just the last few years, that's certainly seems like it's possible, in which case that requires a much more aggressive and serious policy intervention than we've had so far.

RAY SUAREZ: David Leonhardt of the New York Times, thanks for joining us.

DAVID LEONHARDT: Thanks for having me.