CATEGORIES

MORE TOPICS

Where is the economy heading?

As we kick off this new business blog, many in the business community have been debating whether the United States is heading towards a double-dip recession. You’ll hear all sorts of opinions on the matter. Many involve legitimate disagreements among economists, while others just mask the ideological orthodoxy of the writer.

As the debate rages, you can learn quite a bit from smart people on both sides that can help you make decisions for your business and your investment strategy, or you may just decide that both sides have good points and we have to wait and see how this unfolds.

Recently, BusinessWeek offered an interesting contrast between the opinions of Paul Krugman, the pessimist, and John Paulson, the optimist.

History will show that the week before the nation’s 234th birthday, Paul Krugman, Nobel Laureate and professor of economics at Princeton University, went all in on Keynesian orthodoxy. To regular readers of his column in The New York Times, this was not a surprise. Since the financial crisis began, Krugman has been adamant that the federal government must fearlessly run up deficits to compensate for weak private spending and keep the U.S. economy from death-spiraling into deflation.

Now his warnings have taken on an even more dire tone. The threat is not merely the dreaded “double dip.” If the leaders of the developed world hold to pledges they made at the G-20 summit in Toronto and cut government spending, Krugman argues, we face nothing less than a “third depression”—perhaps not as singularly devastating as the Great Depression, which ripped the U.S. economy in half, but comparable to the Long Depression that followed the Panic of 1873, a grinding period of chronic social need and dissension.

If that makes you want to head for the hills with your shotgun and turnip seeds, consider another view, expressed the week prior at the London School of Economics. The speaker was not a decorated academic with visions of 1873, he was a profit seeker, pure and simple: John Paulson, the hedge-fund manager on whose behalf Goldman Sachs (GS) cooked up those killer collateralized debt obligations designed to pay off handsomely in the event of a housing crash. He was right about that one, you’ll recall.

“We’re in the middle of a sustained recovery in the U.S.,” Paulson declared in London. “The risk of a double dip is less than 10 percent.” The housing market is now, he says, an attractive buying opportunity. “It’s the best time to buy a house in America,” he said. “California has been a leading indicator of the housing market, and it turned positive seven months ago. I think we’re about to turn a corner.”

No mention of a third depression.

Paulson’s bullishness is not new. Last spring, when Krugman was arguing that some major U.S. banks ought to be nationalized, wiping out equity holders, Paulson was busy building a massive stake in Bank of America. He and Krugman may not have disagreed about the fundamental health of the banking business—they just disagreed about what it meant. Paulson wasn’t buying banks because he liked their second-lien books; instead, he had grasped that the Swedish-style takeover Krugman advocated was not going to happen, and that a tacit federal backstopping of the banking industry took most of the risk out of going long.

Read the entire article.

Related Posts